LAW QUESTION BANK

CA Arun Anbu

CA FOUNDATION
www.youtube.com/@CA_Arunanbu

Sensitivity: Internal
 1

TABLE OF CONTENT:

Case law Direct

Chapters Units Page
questions questions
The Indian Contract Act, 1872 Unit 1: Nature of Contracts 2 13 8
Unit 2: Consideration 24 1 6
Unit 3: Other Essential Elements of a
34 14 10
Contract
Unit 4: Performance of a Contract 56 16 4
Unit 5: Breach of Contract and Its Remedies 77 6 6
Unit 6: Contingent and Quasi Contracts 90 4 5
Unit 7: Contract of Indemnity and Guarantee 98 9
Unit 8: Bailment and Pledge 106 8 3
Unit 9: Agency 114 8 2
The Sale of Goods Act, 1930 Unit 1: Formation of the Contract of Sale 123 4 10
Unit 2: Conditions & Warranties 132 18 6
Unit 3: Transfer of Ownership and Delivery of
155 12 7
Goods
Unit 4: Unpaid Seller 174 7 3
The Partnership Act, 1932 Unit 1: General Nature of Partnership 181 5 22
Unit 2: Relations of Partners 200 24 12
Unit 3: Registration and Dissolution of a Firm 238 6 12
The Limited Liability
256 20
Partnership Act, 2008
The Companies Act, 2013 270 33 20
The Negotiable Instruments
327 36 7
Act, 1881

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 2

Chapter 1 – The Indian Contract Act, 1872

UNIT 1: NATURE OF CONTRACTS

Part – 1 CASE LAW QUESTIONS

Q1. Nov 22 RTP

Question:
Mr. Y, a devotee, wishes to donate an elephant to a temple as part of ritual worship. He contacts Mr. X, who is
willing to sell his elephant. They agree on a sale price of ₹20 Lakhs. However, both were unaware that the
elephant had died a day before the agreement. Referring to the provisions of the Indian Contract Act, 1872,
determine whether this is a void, voidable, or valid contract.

Provision under the Law:

1. Section 2(j) of the Indian Contract Act, 1872:

o A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

2. Impossibility Ab Initio:

o If the performance of an agreement is impossible from the beginning, such an agreement is void. The
impossibility may be known or unknown to the promisor or promisee.

3. Clarification on the Term "Contract":

o For the purpose of this analysis, "contract" refers to an "agreement." When the subject matter of an
agreement does not exist or is incapable of existence at the time of the agreement, the contract becomes
void.

Analysis of the Given Case:

• Mr. X and Mr. Y entered into an agreement for the sale of an elephant for ₹20 Lakhs.

• At the time of the agreement, both parties were unaware that the elephant had died a day earlier, making
it impossible to perform the agreement.

• Since the subject matter of the agreement (the elephant) did not exist at the time the contract was formed,
the performance was impossible ab initio (from the beginning).

• As per Section 2(j) and the principle of impossibility, such agreements are void because they are
unenforceable by law.

Conclusion:

The agreement between Mr. X and Mr. Y to sell the elephant is void. This is because the performance of the
contract was impossible from the outset due to the death of the elephant, and hence it is not enforceable
under the law.

Q2. Nov 22 RTP

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 3

Question:
Mr. Aseem, a learned advocate, advertised in a newspaper offering a reward of ₹10,000 to anyone who
provides information about his stolen car. Mr. Vikram, after reading the advertisement, located the car and
informed Mr. Aseem. Despite recovering the car, Mr. Aseem refused to pay the reward, claiming the
advertisement was merely an invitation to offer and not an actual offer. Examine whether Mr. Vikram can
claim the reward under the Indian Contract Act, 1872.

Provision under the Law:

1. Invitation to Offer vs. Offer:

o Invitation to Offer:
Quotations, menu cards, price tags, and advertisements for sale are not offers but merely invitations to the
public to make an offer. Acceptance of an invitation to offer does not form a contract; it only initiates the
process of negotiation.

o General Offer:
An advertisement for a reward constitutes a general offer. A general offer is an offer made to the public at
large and can be accepted by anyone who fulfills the conditions mentioned in the offer.

2. Binding Nature of General Offer:

o When a person acts upon a general offer by performing the conditions specified, it results in a valid
acceptance and forms a binding contract.

Analysis of the Given Case:

• Nature of Advertisement:
Mr. Aseem advertised a reward of ₹10,000 for information about his stolen car. This advertisement qualifies
as a general offer because it was open to the public and specified a reward for fulfilling a condition.

• Action by Mr. Vikram:

Mr. Vikram read the advertisement, acted upon it by locating the car, and informed Mr. Aseem. By doing so,
Mr. Vikram accepted the general offer through performance of the required condition.

• Liability of Mr. Aseem:

Mr. Aseem's claim that the advertisement is merely an invitation to offer is incorrect in the context of a
reward. Advertisements for rewards are considered general offers, and once the condition is fulfilled, the
offeror is bound to pay the reward.

Conclusion:

Mr. Vikram is entitled to claim the reward of ₹10,000. The advertisement for the reward constitutes a general
offer, and Mr. Vikram's performance of the required condition resulted in a valid acceptance. Therefore, Mr.
Aseem is legally bound to fulfill his promise under the Indian Contract Act, 1872

Q3. Nov 21 RTP

Question:
Mr. Pratham applied for a job as a principal of a school. The school management decided to appoint him,

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 4

and a member of the management committee privately informed him about his selection. However, the
school did not issue an official communication, and later, the management appointed someone else as the
principal. Mr. Pratham filed a suit against the school for cancellation of his appointment and claimed
damages for loss of salary. Will Mr. Pratham succeed in his suit under the Indian Contract Act, 1872?

Provision under the Law:

1. Rules of Acceptance:

o Acceptance to be Communicated:
For an acceptance to be valid, it must be communicated to the offeror by the offeree or their authorized
agent.

o Communication by Third Person Invalid:

Communication of acceptance by a third person who is not authorized by the offeree does not result in a
valid acceptance.

2. Formation of a Contract:

o A contract is formed only when the acceptance is effectively communicated to the offeror. Until then, there
is no valid agreement enforceable by law.

Analysis of the Given Case:

• Private Communication by Third Person:

In this case, a member of the school management committee privately informed Mr. Pratham about his
appointment. However, this member was not acting as an authorized agent of the school management, and
the communication was unofficial.

• No Communication from the School Management:

The school management did not officially communicate the appointment to Mr. Pratham. According to the
rules of acceptance, communication must come from the offeree (in this case, the school) or their
authorized agent.

• Lack of Valid Acceptance:

Since there was no official communication of acceptance from the school, no valid contract was formed
between Mr. Pratham and the school.

Conclusion:

Mr. Pratham will not succeed in his suit against the school. The private communication by a member of the
management committee does not constitute valid acceptance under the Indian Contract Act, 1872. As no
contract was formed, Mr. Pratham cannot claim damages for cancellation of his appointment or loss of
salary.

Q4. Nov 19 RTP

Question:
A sends an offer to B to sell his second-hand car for ₹1,40,000 with a condition that if B does not reply within

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 5

a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be the position if B
communicates his acceptance after one week?

Provision under the Law:

1. Acceptance and Silence:

o As per general principles of contract law, acceptance of an offer cannot be implied merely from the silence
of the offeree.

o Silence can only amount to acceptance if the offeree's previous conduct clearly indicates that silence
implies consent.

2. Acceptance within Prescribed Time:

o Acceptance must be made within the time limit prescribed in the offer.

o If acceptance is communicated after the time limit specified by the offeror, it does not create a valid
contract unless the offeror agrees to the late acceptance.

Analysis of the Given Case:

1. Regarding Silence as Acceptance:

o A's proposition that B’s silence within a week will amount to acceptance is not valid under the law.

o For acceptance to be valid, there must be an express or implied communication of assent from B. In the
absence of prior conduct indicating that silence implies acceptance, B’s silence cannot be construed as
agreement to A’s offer.

2. Acceptance after One Week:

o If B communicates his acceptance after the one-week period prescribed in the offer, it will not result in a
valid contract.

o The offer lapses after the stipulated time, and any acceptance after this period would be treated as a
counter-offer, requiring fresh acceptance by A to form a contract.

Conclusion:

1. On Silence as Acceptance:
A is incorrect in his proposition that B’s silence within the stipulated week constitutes acceptance. Silence
does not amount to valid acceptance unless B’s previous conduct supports such an interpretation.

2. On Late Communication of Acceptance:

If B communicates his acceptance after the one-week period, the offer would have lapsed, and the
acceptance would not bind A unless A agrees to treat it as a fresh offer and accepts it.

Q5. May 19 RTP

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 6

Question:
P sells by auction to Q a horse which P knows to be unsound. The horse appears to be sound, but P is aware
of its unsoundness. Is this contract valid in the following circumstances:
a) If P says nothing about the unsoundness of the horse to Q.
b) If P says nothing about it to Q, who is P’s daughter and has just come of age.
c) If Q says to P, "If you do not deny it, I shall assume that the horse is sound," and P remains silent.

Provision under the Law:

According to Section 17 of the Indian Contract Act, 1872,

• Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud,
unless:
a) The circumstances impose a duty on the person keeping silent to disclose the facts.
b) Silence itself is equivalent to speech in the context of the situation.

Analysis of the Given Case:

a) P says nothing about the unsoundness of the horse to Q:

• As per Section 17, mere silence regarding the unsoundness of the horse does not amount to fraud.

• There is no duty on P to disclose the defect to Q in the absence of a fiduciary relationship or special
circumstances.

• Hence, the contract is valid.

b) P says nothing about it to Q, who is P’s daughter and has just come of age:

• Here, a fiduciary relationship exists between P and Q (as Q is P's daughter).

• In such cases, it becomes P’s duty to disclose the defect, and silence is equivalent to speech under
Section 17.

• Hence, the contract is not valid, as P's silence amounts to fraud.

c) Q says to P, "If you do not deny it, I shall assume that the horse is sound," and P remains silent:

• In this situation, P's silence amounts to affirmation, making it equivalent to speech as per Section 17.

• P's failure to deny Q's assumption is treated as fraudulent concealment of the fact.

• Hence, the contract is not valid, as it amounts to fraud.

Conclusion:

1. In case (a): The contract is valid as mere silence does not constitute fraud under Section 17.

2. In case (b): The contract is not valid due to the fiduciary relationship, making P's silence fraudulent.

3. In case (c): The contract is not valid as P’s silence in response to Q’s assumption amounts to fraud.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 7

Q6. Nov 18 RTP

Question:
Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. The next
day, Ramanathan sent a telegram withdrawing his acceptance. Examine the validity of the acceptance
according to the Indian Contract Act, 1872, in the following cases:
a) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance.
b) The telegram of revocation and the letter of acceptance both reached together.

Provision under the Law:

As per Section 4 of the Indian Contract Act, 1872,

• The communication of acceptance is complete:

a) As against the proposer, when it is put in a course of transmission to him so as to be out of the power of
the acceptor.
b) As against the acceptor, when it comes to the knowledge of the proposer.

Further, an acceptance may be revoked at any time before the communication of acceptance is complete
as against the acceptor but not afterwards.

Analysis of the Given Case:

a) The telegram of revocation of acceptance was received by Ramaswami before the letter of
acceptance:

• In this case, the revocation of acceptance by Ramanathan is valid, as per Section 4, since the acceptance
can be revoked before it comes to the knowledge of the proposer (Ramaswami).

• Here, the telegram reached Ramaswami before the letter of acceptance, so the acceptance is effectively
revoked.

b) The telegram of revocation and the letter of acceptance both reached together:

• If Ramaswami opens and reads the telegram first, the acceptance stands revoked, and no contract is
formed.

• However, if Ramaswami opens and reads the letter of acceptance first, the acceptance is considered
complete, and the revocation is not valid since the contract has already been concluded.

• In such a case, the sequence of reading the telegram and the letter determines whether the acceptance
stands or is revoked.

Conclusion:

1. Case (a): The revocation of acceptance by Ramanathan is valid, as the telegram of revocation was received
by Ramaswami before the letter of acceptance.

2. Case (b):

o If Ramaswami reads the telegram first, the acceptance is revoked, and no contract is formed.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 8

o If Ramaswami reads the letter of acceptance first, the acceptance is valid, and the revocation is not
effective.

Q7. Nov 18 RTP

Question:

(i) Mr. Balwant, an old man, by a registered deed of gift, granted certain landed property to Ms. Reema, his
daughter. By the terms of the deed, it was stipulated that an annuity of ₹20,000 should be paid every year to
Mr. Sawant, the brother of Mr. Balwant. On the same day, Ms. Reema made a promise to Mr. Sawant and
executed an agreement in his favor to give effect to the stipulation. Ms. Reema failed to pay the stipulated
sum. Mr. Sawant filed a suit against her, but she contended that since Mr. Sawant had not furnished any
consideration, he has no right of action. Examine the validity of Ms. Reema's contention.

(ii) A coolie in uniform picks up the luggage of R to carry it out of the railway station without being asked by R,
and R allows him to do so. Is the coolie entitled to receive money from R under the Indian Contract Act,
1872?

(i) Provision under the Law:

As per Section 2(d) of the Indian Contract Act, 1872, consideration may proceed from the promisee or any
other person who is not a party to the contract. This means that while a stranger to a contract cannot
enforce it, a stranger to the consideration may enforce the promise.

Furthermore, when an act is done or a promise is made at the desire of the promisor, it is valid consideration
under the law, even if it comes from a third party.

(i) Analysis of the Given Case:

• In this case, Mr. Balwant entered into a contract with Ms. Reema and included a stipulation to pay an annuity
to Mr. Sawant.

• Although Mr. Sawant did not furnish any direct consideration to Ms. Reema, the consideration flowed from
Mr. Balwant to Ms. Reema, as the gift deed and the promise to pay the annuity were executed
simultaneously.

• The two agreements must be treated as one transaction, ensuring there was sufficient consideration for the
promise made by Ms. Reema.

• Therefore, Mr. Sawant, though a stranger to the contract, can enforce the promise since he is not a stranger
to the consideration.

(i) Conclusion:

The contention of Ms. Reema is not valid, as the law allows enforcement of promises by a stranger to the
contract when consideration has flowed from a third party. Ms. Reema is bound to pay the annuity to Mr.
Sawant.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 9

(ii) Provision under the Law:

As per Section 9 of the Indian Contract Act, 1872, implied contracts arise from the actions or conduct of
parties rather than expressed words. When a person accepts services offered to them, even without formal
agreement, an implied contract is formed, and compensation may be owed for those services.

(ii) Analysis of the Given Case:

• In this situation, the coolie picked up R's luggage without being asked, but R allowed him to do so.

• By permitting the coolie to carry the luggage, R implicitly accepted the coolie's services.

• This forms an implied contract under Section 9, making R liable to compensate the coolie for his services.

(ii) Conclusion:

The coolie is entitled to receive money from R as an implied contract has been formed between them based
on R's acceptance of the service.

Q8. Nov 22 MTP (4 Marks)

Question:
Explain the type of contracts in the following agreements under the Indian Contract Act, 1872:
a) A coolie in uniform picks up the luggage of A to be carried out of the railway station without being asked by
A, and A allows him to do so.
b) Obligation of the finder of lost goods to return them to the true owner.
c) A contract with B (owner of a factory) for the supply of 10 tons of sugar, but before the supply is affected,
the factory catches fire, and everything is destroyed.

Provision under the Law:

1. Implied Contracts:
According to Section 9 of the Indian Contract Act, 1872, an implied contract arises when a proposal or
acceptance is made otherwise than in words (e.g., through actions or conduct).

2. Quasi-Contracts:
A quasi-contract is not an actual contract but is enforced by law under specific circumstances. It arises in
situations where no contract exists, but the law imposes obligations to prevent unjust enrichment.

3. Void Contracts:
As per Section 2(j) of the Indian Contract Act, 1872, a void contract is a valid contract that ceases to be
enforceable by law due to circumstances rendering it unenforceable.

Analysis of the Given Case:

(a) Implied Contract:

• When a coolie picks up A’s luggage and A allows him to carry it, this is an implied contract.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 10

• By permitting the coolie to perform the service, A implicitly agrees to pay for the service rendered.

(b) Quasi-Contract:

• The obligation of the finder of lost goods to return them to the true owner is not a traditional contract
because there is no offer, acceptance, or consent.

• This obligation is treated as a quasi-contract, where the law imposes a duty to return the goods to prevent
unjust enrichment.

(c) Void Contract:

• In the case of the contract for the supply of sugar, the fire in the factory makes it impossible to fulfill the
agreement.

• This renders the contract void, as it has become unenforceable due to the destruction of the subject matter.

Conclusion:

• (a): Implied Contract: A is liable to pay the coolie for his services.

• (b): Quasi-Contract: The finder of lost goods has a legal obligation to return them to the true owner, even in
the absence of a traditional contract.

• (c): Void Contract: The contract ceases to be enforceable due to the destruction of the factory, making
performance impossible.

Q9. Jun 22 MTP (4 Marks)

Question:
Mr. Joy owns two flats in a building. He wanted to sell flat no. 101 to Mr. Roy. Mr. Joy offered to sell his flat no.
101 to Mr. Roy, but Mr. Roy thought that Mr. Joy wanted to sell flat no. 102 and said yes to the agreement.
Considering the provisions of the Indian Contract Act, 1872, discuss the validity of such a contract.

Provision under the Law:

1. Essentials of a Valid Contract (Section 10):

According to Section 10 of the Indian Contract Act, 1872, one of the essential elements of a valid contract is
free consent.

2. Definition of Consent (Section 13):

As per Section 13, "Two or more persons are said to consent when they agree upon the same thing in the
same sense." This concept is referred to as consensus ad idem, which means agreement on the same
subject matter in the same sense.

3. Effect of Lack of Mutual Consent:

If the parties do not agree upon the same thing in the same sense, the contract is considered void from the
inception due to the absence of mutual consent.

Analysis of the Given Case:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 11

• In the present case, Mr. Joy offered to sell flat no. 101, but Mr. Roy agreed to purchase the flat under the
mistaken belief that the offer was for flat no. 102.

• While both parties freely consented to the agreement, their understanding of the subject matter (the specific
flat being sold) differed. This means there was no mutual consent or consensus ad idem.

• Since Mr. Joy and Mr. Roy did not agree upon the same thing in the same sense, the agreement is invalid.

Conclusion:

The agreement between Mr. Joy and Mr. Roy is not a valid contract because there is no mutual consent. The
contract is void at the inception stage due to the lack of agreement on the same subject matter in the same
sense.

Q10. Oct 21 MTP (4 Marks)

Question:
Rahul goes to a supermarket to buy a washing machine. He selects a branded washing machine with a price
tag of ₹15,000 after a discount of ₹3,000. Rahul reaches the cash counter to make the payment, but the
cashier says, “Sorry sir, the discount was up to yesterday. There is no discount from today. Hence, you have
to pay ₹18,000.” Rahul gets angry and insists on paying ₹15,000. State with reasons whether, under the
Indian Contract Act, 1872, Rahul can enforce the cashier to sell at the discounted price of ₹15,000.

Provision under the Law:

1. Invitation to Offer vs. Offer:

According to the Indian Contract Act, 1872, an invitation to offer is different from an offer. An invitation to
offer is a communication that indicates a willingness to negotiate but is not a binding offer itself.
Price tags, quotations, advertisements, and menu cards are generally considered invitations to offer, not
offers. The actual offer is made by the person who expresses an intention to buy (the customer in this case).

2. Offer and Acceptance:

The process of forming a contract begins with the offer made by one party and the acceptance of that offer
by the other party. The acceptance of an invitation to offer does not create a contract; it is only when the
offer is accepted that a binding agreement arises.

Analysis of the Given Case:

• In this case, the price tag of ₹15,000 with a discount is an invitation to offer, not an offer. This means the
supermarket is inviting Rahul to make an offer to buy the washing machine at the price shown.

• Rahul, by selecting the washing machine and going to the cashier, is making an offer to purchase the
washing machine for ₹15,000.

• However, the cashier has the right to reject Rahul's offer and insist on the price of ₹18,000. Since the
discount was no longer applicable, the cashier's communication indicates that the terms of the sale have
changed.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 12

• Therefore, Rahul cannot enforce the sale at the discounted price of ₹15,000, as the supermarket is not
bound to accept his offer at that price.

Conclusion:

Rahul cannot enforce the cashier to sell the washing machine at the discounted price of ₹15,000 because
the price tag was an invitation to offer, not an offer. The cashier has the right to reject Rahul's offer and insist
on the new price of ₹18,000.

Q11. Apr 21 MTP (4 Marks)

Question:
Shambhu Dayal started a “self-service” system in his shop. Smt. Prakash entered the shop, took a basket,
and after selecting articles of her choice, reached the cashier for payment. The cashier refuses to accept the
price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide as per the
provisions of the Indian Contract Act, 1872.

Provision under the Law:

1. Invitation to Offer vs. Offer:

Under the Indian Contract Act, 1872, invitation to offer and offer are distinct concepts.

o Offer: A final expression of willingness by the offeror to be bound by the offer if the other party chooses to
accept it.

o Invitation to Offer: A proposal that invites others to make an offer but is not binding on the party making the
invitation. In this case, the display of goods is not an offer but an invitation for customers to make an offer to
buy.

2. Acceptance of Offer:
For a contract to be formed, the offer must be accepted by the other party. In retail scenarios, a displayed
item with a price tag is considered an invitation to offer. The customer then makes an offer to purchase when
they attempt to pay at the counter. The seller is not bound to accept this offer.

Analysis of the Given Case:

• In a self-service shop, when Smt. Prakash selects items and takes them to the cashier, she is making an
offer to buy those articles at the specified price.

• The items in the shop, along with their price tags, represent an invitation to offer, not an offer. The
shopkeeper is not bound to sell the goods merely because the customer has selected them.

• If the cashier refuses to accept the price or does not wish to sell, Shambhu Dayal cannot be compelled to
sell the articles, as there is no contract unless the shopkeeper agrees to the offer made by the customer.

Conclusion:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 13

Shambhu Dayal cannot be compelled to sell the articles to Smt. Prakash because the display of goods in a
self-service shop is an invitation to offer, not an offer. The cashier has the right to refuse the transaction, and
the customer cannot enforce the sale.

Q12. Mar 21 MTP (3 Marks)

Question:
P sells by auction to Q a horse which P knows to be unsound. The horse appears to be sound, but P knows
about the unsoundness of the horse. Is this contract valid in the following circumstances under the Indian
Contract Act, 1872?

1. If P says nothing about the unsoundness of the horse to Q.

2. If P says nothing about it to Q who is P’s daughter who has just come of age.

3. If Q says to P, "If you do not deny it, I shall assume that the horse is sound." P says nothing.

Provision under the Law:

• Section 17 of the Indian Contract Act, 1872 defines fraud and provides that mere silence as to facts likely
to affect the willingness of a person to enter into a contract is not fraud, unless:

o The circumstances are such that it is the duty of the person keeping silence to speak, or

o The silence is equivalent to speech.

In other words, if one party is silent about a material fact (such as the unsoundness of the horse) when they
have a duty to disclose it, their silence can amount to fraud.

Analysis of the Given Case:

1. (i) If P says nothing about the unsoundness of the horse to Q:

o In this case, P is not obliged to disclose the defect unless there is a duty to do so.

o Since P is not under a specific duty to inform Q about the horse’s condition in an auction, silence is not
fraud.

o Conclusion: The contract is valid as per Section 17 because mere silence about the unsoundness does not
constitute fraud here.

2. (ii) If P says nothing about it to Q who is P’s daughter who has just come of age:

o A fiduciary relationship exists between P (the father) and Q (the daughter), and in such relationships, there
is a duty of disclosure.

o P's silence in this case is equivalent to fraud, as P is expected to disclose the condition of the horse to Q.

o Conclusion: The contract is not valid because P’s silence constitutes fraud due to the fiduciary
relationship.

3. (iii) If Q says to P, "If you do not deny it, I shall assume that the horse is sound." P says nothing:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 14

o In this situation, Q's statement makes P's silence equivalent to acceptance of the fact that the horse is
sound.

o Since P remains silent and the statement by Q implies an assumption, P’s silence is equivalent to speech
and amounts to fraud.

o Conclusion: The contract is not valid because P’s silence in this context is treated as fraudulent.

Summary of Answers:

• (i) The contract is valid since P's silence does not amount to fraud.

• (ii) The contract is not valid because of the fiduciary relationship between P and Q.

• (iii) The contract is not valid because P's silence constitutes fraud in this context.

Q13. Jan 21 Exam (4 marks)

Mr. B makes a proposal to Mr. S by post to sell his house for ₹10 lakhs and posted the letter on 10th April
2020 and the letter reaches to Mr. S on 12th April 2020. He reads the letter on 13th April 2020. Mr. S sends
his letter of acceptance on 16th April 2020 and the letter reaches Mr. B on 20th April 2020. On 17th April Mr.
S changed his mind and sends a telegram withdrawing his acceptance. Telegram reaches to Mr. B on 19th
April 2020. Examine with reference to the Indian Contract Act, 1872:

i. On which date, the offer made by Mr. B will complete?

ii. Discuss the validity of acceptance.
iii. iii. What would be validity of acceptance if letter of revocation and letter of acceptance reached together?

Provision under the Law:

Section 4 of the Indian Contract Act, 1872:

1. Communication of Offer:

o The communication of an offer is complete when it comes to the knowledge of the person to whom it is
made.

o For offers sent by post, communication is complete when the letter containing the proposal reaches the
person to whom it is made.

2. Communication of Acceptance:

o The communication of acceptance is complete:

▪ As against the proposer: When the letter of acceptance is posted.

▪ As against the acceptor: When the letter of acceptance reaches the proposer.

3. Revocation of Acceptance:

o Acceptance can be revoked any time before the letter of acceptance reaches the proposer.

o If the revocation reaches the proposer before or at the same time as the letter of acceptance, the revocation
is absolute.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 15

Analysis of the Given Case:

(i) On which date will the offer made by Mr. B be complete?

• Mr. B posted the letter of offer on 10th April 2020, and it reached Mr. S on 12th April 2020.

• However, as per Section 4, communication of an offer is complete only when the letter is read by Mr. S.

• Mr. S read the letter on 13th April 2020, so the offer is complete on 13th April 2020.

(ii) Validity of Acceptance:

• Mr. S posted his letter of acceptance on 16th April 2020, making the communication of acceptance
complete as against Mr. B on this date.

• The letter reached Mr. B on 20th April 2020, making the communication of acceptance complete as against
Mr. S on this date.

• However, Mr. S sent a telegram revoking his acceptance on 17th April 2020, and it reached Mr. B on 19th
April 2020, which is before the acceptance letter reached Mr. B on 20th April 2020.

• As per Section 4, revocation of acceptance is valid if it reaches before or at the same time as the letter of
acceptance. Therefore, the revocation is valid, and the acceptance is invalid.

(iii) What if the letter of revocation and letter of acceptance reached together?

• If both the telegram of revocation and the letter of acceptance reached Mr. B on the same day (e.g., 20th
April 2020), the revocation would still be absolute.

• As per Section 4, revocation is valid if it reaches before or at the same time as the acceptance. Since the
communication of acceptance can only be completed when the letter reaches the proposer, the revocation
nullifies the acceptance.

Conclusion:

1. Offer Completion Date: The offer made by Mr. B was complete on 13th April 2020 when Mr. S read the
letter.

2. Validity of Acceptance: The acceptance sent by Mr. S on 16th April 2020 is invalid because the revocation,
sent on 17th April 2020, reached Mr. B before the acceptance letter (i.e., on 19th April 2020).

3. Simultaneous Arrival of Revocation and Acceptance: If both the letter of revocation and acceptance
reached Mr. B on the same day, the revocation would still prevail, making the acceptance invalid.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 16

PART 2 – DIRECT QUESTIONS

Q1. Jan 21 Exam (7 Marks)

Define the term acceptance under the Indian Contract Act, 1872. Explain the legal rules regarding a
valid acceptance.

Definition of Acceptance:

In terms of Section 2(b) of the Indian Contract Act, 1872, acceptance is defined as:

“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. The proposal, when accepted, becomes a promise.”

Legal Rules Regarding a Valid Acceptance:

1. Acceptance can be given only by the person to whom the offer is made:

o In the case of a specific offer, it can be accepted only by the person to whom it is made.

o In the case of a general offer, it can be accepted by any person who has knowledge of the offer.

2. Acceptance must be absolute and unqualified:

o As per Section 7 of the Act, acceptance is valid only when it is absolute and unqualified.

o It must be expressed in a usual and reasonable manner, unless the proposal specifies a particular manner
of acceptance, in which case it must be accepted accordingly.

3. The acceptance must be communicated:

o To conclude a contract, acceptance must be communicated in a perceptible form.

o The offeree must have knowledge of the offer, and acceptance must relate specifically to the offer made.

4. Acceptance must be in the prescribed mode:

o If the mode of acceptance is prescribed, it must be accepted in that manner.

o If acceptance is made in a different manner and the proposer does not object, it is presumed that the
proposer has consented to the acceptance.

5. Time:

o Acceptance must be given within the specified time limit, if any.

o If no time is specified, it must be given within a reasonable time and before the offer lapses.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 17

6. Mere silence is not acceptance:

o Acceptance cannot be implied from the silence or failure of the offeree to respond, unless there is prior
conduct indicating that silence will constitute acceptance.

7. Acceptance by conduct (Implied Acceptance):

o As per Section 8 of the Act:

"The performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal
promise, constitutes acceptance of the proposal."

o When the offeree performs the act intended by the proposer as consideration for the promise, it amounts to
acceptance by conduct.

Q2. Nov 20 RTP

Define the term “Acceptance”. Discuss the legal provisions relating to communication of acceptance.

ANSWER:

According to Section 2(b), the term ‘acceptance’ is defined as follows:

“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted, becomes a promise.”

For acceptance to be valid, it must meet the following criteria:

• Absolute and unqualified

• Accepted within a reasonable time

• Communicated to the offeror

• May be made by conduct

Legal Provisions Relating to Communication of Acceptance (Section 4)

The communication of acceptance is considered complete under the following conditions:

1. Against the proposer: When it is put in the course of transmission, so that it is beyond the power of the
acceptor.

2. Against the acceptor: When it comes to the knowledge of the proposer.

Section 3 of the Act outlines two general modes of communication:

• By any act

• By omission, intending to communicate to the other party, or having the effect of communicating to the
other.

Modes of Communication of Acceptance:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 18

• Written words: Letters, telegrams, advertisements, etc.

• Oral words: Telephone messages.

• Conduct: Any positive acts or signs that clearly communicate the intention to the other party.

• Omission: Not merely silence, but conduct or forbearance that the other party interprets as willingness or
assent.

Other examples of communication include:

• Acceptance by act or conduct: For instance, delivering goods at an agreed price without any further
indication to the contrary.

Effect of Communication:

The phrase “which has the effect of communicating it” in Section 3 refers to an indirect act or omission
that communicates acceptance or non-acceptance. However, a mere mental assent (unilateral thought in
one’s mind) does not constitute communication, as it cannot convey the intent to the other party.

Q3. Nov 19 RTP

Define an offer. Explain the essentials of a valid offer. How is an offer different from an invitation to
offer?

ANSWER:

Definition of an Offer:

The terms proposal and offer are used interchangeably. According to Section 2(a) of the Indian Contract
Act, 1872:

"When one person signifies to another his willingness to do or to abstain from doing anything with a
view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal."

Essentials of a Valid Offer:

The following are the key essentials of an offer:

1. Must be capable of creating legal relations: The offer should have legal consequences.

2. Must be certain, definite, and not vague: The terms of the offer must be clear and unambiguous.

3. Must be communicated: The offer must be communicated to the offeree.

4. Must be made with a view to obtaining the assent of the other party: The intention is to get acceptance
from the other party.

5. May be conditional: An offer can be conditional, subject to certain terms being met.

6. Offer should not contain a term where non-compliance amounts to acceptance: Terms should not be
structured in a way that silence or failure to act constitutes acceptance.

7. May be general or specific: The offer can be made to a specific person or to the public at large.

8. May be expressed or implied: Offers can be made explicitly or inferred from conduct.

9. A statement of price is not an offer: A mere statement of price (e.g., in a quotation) is not an offer.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 19

Difference Between an Offer and an Invitation to Offer:

• According to Section 2(a) of the Act, an offer is the final expression of willingness by the offeror to be
bound by the offer if the other party accepts it.

• An invitation to offer refers to an offer made with the intention to negotiate or an invitation to receive
offers. In this case, the party is not expressing final willingness to be bound, but is merely inviting others to
make offers.

In simple terms:

• Offer: A clear expression of willingness to enter into a contract, awaiting acceptance.

• Invitation to offer: A request for offers or an indication of willingness to negotiate, without any intention to
be immediately bound by a contract.

Thus, when a party proposes certain terms on which they are willing to negotiate, they are not making an
offer but inviting the other party to make an offer.

Q4. May 19 RTP

(ii) Comment on the following statements:

1. Acceptance must be absolute and unqualified.

2. Acceptance must be in the prescribed mode.

(a) Acceptance must be absolute and unqualified:

As per Section 7 of the Indian Contract Act, 1872, acceptance is valid only when it is:

1. Absolute and unqualified: There should be no modifications or conditions attached.

2. Expressed in some usual and reasonable manner, unless the proposal specifies the manner in which it
must be accepted.

If the proposal specifies a mode of acceptance, it must be accepted in that manner.

Example:

• ‘A’ enquires from ‘B’, “Will you purchase my car for ₹2 lakhs?”

o If ‘B’ replies, “I shall purchase your car for ₹2 lakhs if you buy my motorcycle for ₹50,000,” this is not valid
acceptance because it is conditional.

o However, if ‘B’ replies, “I agree to purchase the car subject to the availability of a valid Registration
Certificate (R.C.),” this is valid acceptance. Although the offer does not mention the R.C., expecting a valid
title for the car is considered reasonable and does not make the acceptance conditional.

(b) Acceptance must be in the prescribed mode:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 20

If the mode of acceptance is prescribed in the proposal, it must be accepted in that specific manner.
However, if the acceptance is not in the prescribed mode but is otherwise valid, the proposer:

• Must inform the offeree that the acceptance is not in the prescribed mode.

• If the proposer does not object, it will be presumed that they have consented to the alternate mode of
acceptance.

Example:

• If the offeror specifies that acceptance must be sent via a messenger and the offeree sends acceptance via
email, the offeror can reject the acceptance as it is not in the prescribed mode.

• However, if the offeror does not raise an objection, it will be presumed that they have accepted the mode of
communication, and a valid contract will arise.

Q5. Jun 22 MTP (4 Marks)

“All contracts are agreements, but all agreements are not contracts.”
Comment.

Explanation

An agreement comes into existence when:

• One party makes a proposal or offer, and

• The other party accepts it.

A contract, on the other hand, is an agreement that is enforceable by law.

Key Points

1. Agreements vs. Contracts:

o To become a contract, an agreement must give rise to a legal obligation (i.e., it must be enforceable by law).

o Agreements that are not enforceable by law, such as social, moral, or religious agreements, are not
contracts.

2. All agreements are not contracts:

o If the parties to an agreement do not intend to create legal obligations, it cannot become a contract.

3. All contracts are agreements:

o For a contract to exist, two essential elements are required:

a) Agreement
b) Enforceability by law

o Therefore, the existence of an agreement is a pre-requisite for a contract.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 21

Thus, while all contracts are agreements (since a contract cannot exist without an agreement), not all
agreements are contracts (as not all agreements are legally enforceable).

This highlights the relationship between agreements and contracts, emphasizing that while all contracts are
agreements, the reverse is not true.

Q6. July 21 Exam (4 Marks)

State with reason(s) whether the following agreements are valid or void:

(i) A clause in a contract provided that no action should be brought upon in case of breach.

• Answer: The given agreement is void.

• Reason: As per Section 28 of the Indian Contract Act, 1872, this clause is in restraint of legal
proceedings, as it restricts both parties from enforcing their legal rights.

o Note: Alternatively, as per Section 23 of the Indian Contract Act, 1872, this clause defeats the provisions
of law and, being unlawful, is treated as void.

(ii) Where two courts have jurisdiction to try a suit, an agreement between the parties that the suit
should be filed in one of those courts alone and not in the other.

• Answer: The given agreement is valid.

• Reason: An agreement in restraint of legal proceedings is one by which any party is absolutely restricted
from enforcing their rights under a contract through a court, making such contracts void.

o However, in this case, there is no absolute restriction, as the suit can be filed in one of the courts having
jurisdiction, which is permissible under the law.

(iii) X offers to sell his Maruti car to Y. Y believes that X has only Wagon R car but agrees to buy it.

• Answer: The said agreement is void.

• Reason: This agreement is void because the two parties are thinking about different subject matters,
resulting in a lack of real consent.

o It is treated as void due to a mistake of fact and an absence of consensus ad idem (meeting of minds).

(iv) X, a physician and surgeon, employs Y as an assistant on a salary of ₹75,000 per month for a term of
two years, and Y agrees not to practice as a surgeon and physician during these two years.

• Answer: The said agreement is valid.

• Reason: An agreement by which any person is restrained from exercising a lawful profession, trade, or
business is generally void.

o However, as an exception, an agreement of service whereby an employee binds himself not to compete
with the employer during the term of the agreement is not considered a restraint of trade.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 22

Q7. May 20 RTP

Explain the type of contracts in the following agreements under the Indian Contract Act, 1872:

1. A coolie in uniform picks up the luggage of A to be carried out of the railway station without being
asked by A, and A allows him to do so.

2. Obligation of the finder of lost goods to return them to the true owner.

3. A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is
effected, a fire caught in the factory and everything was destroyed.

ANSWER:

(i) Implied Contract:

The situation described is an implied contract. In this case, the coolie’s action of picking up the luggage and
A's allowance of the service creates an obligation. A must pay for the services rendered by the coolie, even
though there was no explicit agreement between them.

Implied Contracts: These come into existence by implication—either by law or through the actions of the
parties. As per Section 9 of the Indian Contract Act, 1872, if a proposal or acceptance is made other than in
words, it is considered an implied promise.

(ii) Quasi-Contract:

The obligation of the finder of lost goods to return them to the true owner does not arise out of a contract in
the traditional sense (there is no offer and acceptance). Instead, it is a quasi-contract.

Quasi-Contract: A quasi-contract is not an actual contract but is imposed by law under specific
circumstances. The law creates legal rights and obligations in the absence of a real contract. In essence, the
law imposes a contract where no intention to create one exists between the parties.

(iii) Void Contract:

The contract between A and B (factory owner) for the supply of 10 tons of sugar is a void contract because
the fire that destroyed everything in the factory makes the contract unenforceable.

Void Contract: As per Section 2(j) of the Indian Contract Act, a void contract is one that ceases to be
enforceable by law when it cannot be executed. Once the sugar is destroyed due to unforeseen
circumstances, the contract becomes void.

Q8. Nov 18 RTP

Point out with reason whether the following agreements are valid or void:

(a) Kamala promises Ramesh to lend ₹500,000 in lieu of consideration that Ramesh gets Kamala’s
marriage dissolved and he himself marries her.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 23

• Answer: Void Agreement

o As per Section 23 of the Indian Contract Act, 1872, an agreement is void if the object or consideration is
against public policy.

o In this case, dissolving a marriage for personal gain violates public policy.

(b) Sohan agrees with Mohan to sell his black horse. Unknown to both parties, the horse was dead at
the time of the agreement.

• Answer: Void Agreement

o As per Section 20 of the Indian Contract Act, 1872, a contract is void if it is caused by a mutual mistake of
fact.

o Here, the mistake relates to the existence of the subject matter (the horse), rendering the agreement void.

(c) Ram sells the goodwill of his shop to Shyam for ₹4,00,000 and promises not to carry on such
business forever and anywhere in India.

• Answer: Void Agreement

o As per Section 27 of the Indian Contract Act, 1872, an agreement that places an absolute restraint on
trade is void.

o However, a buyer of goodwill can impose restrictions on the seller not to carry on the same business. These
restrictions must be reasonable in terms of duration and location.

o In this case, the condition of "forever and anywhere in India" is unreasonable, making the agreement void.

(d) In an agreement between Prakash and Girish, there is a condition that they will not institute legal
proceedings against each other without consent.

• Answer: Void Agreement

o As per Section 28 of the Indian Contract Act, 1872, an agreement that imposes a restraint on legal
proceedings is void.

o Here, the condition prevents the parties from seeking legal recourse, making the agreement void.

(e) Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.

• Answer: Valid Agreement

o An agreement with an alien friend is valid.

o However, an agreement with an alien enemy (a citizen of a country at war with India) is void.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 24

Chapter 1 – The Indian Contract Act, 1872

UNIT 2 : CONSIDERATION

PART 1 – CASE LAW QUESTIONS

Q1. May 19 Exam (4 Marks)

Question:

Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 for ₹25 Lakhs.
The property papers mentioned a condition, amongst other details, that whosoever purchases the land is
free to use 9 acres as per his choice but the remaining 1 acre has to be allowed to be used by Mr. Chotelal,
son of the seller, for carrying out farming or other activities of his choice. On 12th October 2018, Mr. Sohanlal
died leaving behind his son and wife. On 15th October 2018, the purchaser started construction of an
auditorium on the whole 10 acres of land and denied any land to the son.

Now Mr. Chotelal wants to file a case against the purchaser and get a suitable redress. Discuss the above in
light of the provisions of the Indian Contract Act, 1872 and decide upon Mr. Chotelal's plan of action.

Provision under the law

As per the Indian Contract Act, 1872, though consideration for an agreement may proceed from a third
party, a third party cannot ordinarily sue on the contract. This principle is based on the rule of privity of
contract, which states that only the parties to the contract can sue or be sued under it. However,
exceptions exist where a covenant runs with the land. In such cases, if the purchaser of the land has
notice of the covenant, the successor to the original seller may be bound by and enforce the covenant
affecting the land.

According to Section 2(d) of the Act, consideration is defined as a legal detriment or benefit that moves
from the promisee or any other person. It is not mandatory for the consideration to flow directly from the
promisee. A promise supported by valid consideration, even if it originates from a third party, is enforceable.
The Chinnaya v. Ramayya case is a leading authority that supports the idea that consideration may flow
from a third party and the promise can still be enforced by the third party, if applicable.

Analysis of the given case

In the given case, Mr. Sohanlal (the seller) sold the property to Mr. Mohanlal (the purchaser) with a specific
condition that the 1 acre of land would be used by Mr. Chotelal, the son of Mr. Sohanlal, for farming or
other purposes. This condition was a part of the sale deed.

When Mr. Sohanlal passed away, Mr. Chotelal, as the son and successor, has the right to enforce the
covenant. The sale deed and the promise to allow Mr. Chotelal to use the 1 acre of land were executed
simultaneously, and thus should be treated as one transaction. Even though Mr. Chotelal did not provide
direct consideration to Mr. Mohanlal, the consideration for the contract moved from Mr. Sohanlal on
behalf of Mr. Chotelal. The covenant running with the land binds the purchaser, Mr. Mohanlal, to allow Mr.
Chotelal to use the land as promised by Mr. Sohanlal.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 25

The principle that a covenant affecting land may be enforced by the successor of the seller is applicable in
this case. Therefore, Mr. Chotelal has a legitimate claim to enforce the promise made to him, even though he
was not a party to the contract.

Conclusion

Based on the provisions of the Indian Contract Act, 1872, Mr. Chotelal can file a petition against Mr.
Mohanlal to enforce the promise made in the sale deed. The covenant runs with the land, and Mr.
Chotelal, as the successor of Mr. Sohanlal, has the right to demand the enforcement of the agreement to
allow him to use 1 acre of land as per the original condition.

PART 2 – DIRECT QUESTIONS

Q1. July 22 Exam (7 Marks), May 19 RTP

Question:
"The general rule is that an agreement made without consideration is void." State the exceptions to this
general rule as per the Indian Contract Act, 1872.

Answer:

Under Section 25 of the Indian Contract Act, 1872, the general rule is that a contract made without
consideration is void. However, the Act provides several exceptions to this rule where an agreement made
without consideration can still be valid and enforceable. These exceptions are as follows:

Exceptions to the Rule of No Consideration, No Contract:

1. Natural Love and Affection (Section 25(1)):

o An agreement made out of natural love and affection between parties standing in a near relationship (e.g.,
husband and wife, parent and child) will be valid even if made without consideration.

o Conditions for enforceability:

▪ The agreement must be made out of natural love and affection.

▪ The parties must be in a near relationship.

▪ The agreement must be in writing.

▪ The agreement must be registered under the law.

2. Compensation for Past Voluntary Services (Section 25(2)):

o A promise to compensate, wholly or partly, for voluntary services already rendered is enforceable even
without consideration.

o Conditions for enforceability:

▪ The services must have been rendered voluntarily.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 26

▪ The services must have been rendered for the promisor.

▪ The promisor must have existed at the time the services were rendered.

▪ The promisor must have intended to compensate the promisee for the services.

3. Promise to Pay a Time-Barred Debt (Section 25(3)):

o A promise made in writing and signed by the person making it (or their authorized agent) to pay a debt
barred by limitation is valid even without consideration.

4. Agency (Section 185):

o No consideration is required to create an agency. Therefore, an agreement to create an agency can be valid
without consideration.

5. Completed Gift (Explanation to Section 25):

o A gift made by the donor to the donee does not require consideration to be valid. The contract of gift is
enforceable even without consideration once the gift is completed.

6. Bailment (Section 148):

o Bailment involves the delivery of goods from one person to another for a specific purpose, and no
consideration is required to affect a contract of bailment. For example, if a person delivers goods to a bailee
to keep or use, no consideration is necessary for the contract to be enforceable.

7. Charity:

o A promise made by a person to contribute to charity is enforceable even without consideration. This
principle was upheld in the case of Kadarnath v. Gorie Mohammad, where the promise to contribute to
charity was considered valid without consideration.

Q2. Nov 19 Exam (7 Marks)

Define consideration. What are the legal rules regarding consideration under the Indian Contract Act,
1872?

Definition of Consideration

As per Section 2(d) of the Indian Contract Act, 1872:

"When at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing or promises to do or abstain from doing something, such an act
or abstinence or promise is called consideration for the promise."

Legal Rules Regarding Consideration

1. Consideration must move at the desire of the promisor

o Consideration must be offered by the promisee or a third party at the request or desire of the promisor.

o This implies the "return" element of consideration.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 27

2. Consideration may move from the promisee or any other person

o In India, consideration can proceed from the promisee or even from a third party who is not directly a party
to the contract.

o A stranger to the consideration is allowed, but a stranger to the contract is not.

3. Executed and Executory Consideration

o Executed Consideration: Involves the performance of an act (e.g., completing a task).

o Executory Consideration: Involves a promise to perform an act (e.g., a promise to complete a task in the
future).

o One party’s promise may serve as consideration for the other party’s act, and vice versa.

4. Consideration may be past, present, or future

o Past Consideration: Given before the promise is made; it is generally not valid unless the past act was
performed at the request of the promisor.

o Present or Future Consideration: Valid as long as it is in exchange for the promise.

5. Consideration need not be adequate

o Consideration does not have to be equally valuable to the promise.

o It must be something that the law recognizes as having value, even if it’s not equal to the promised act.

6. Performance of what one is legally bound to perform is not consideration

o Legal duty: If a person is already legally bound to perform an act, doing that act is not valid consideration.

o However, if a person does more than what they are legally obligated to do, it can be valid consideration.

o Example: A promise to pay a witness is void because it lacks valid consideration, but promising to do more
than required is enforceable.

7. Consideration must be real and not illusory

o The consideration must be real and must have actual value attached to it.

o Illusory consideration (e.g., a promise with no substance) is not valid.

8. Consideration must not be unlawful, immoral, or opposed to public policy

o The consideration must be lawful.

o Immoral or unlawful actions cannot form valid consideration.

o Anything against public policy is also not considered valid.

Q3. May 20 RTP

“Only a person who is party to a contract can sue on it”. Explain this statement and describe its
exceptions, if any.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 28

Explanation of the Statement

Under the Indian Contract Act, 1872, the principle of Privity of Contract states that only the parties to a
contract can sue to enforce the contract. This means that a third party (someone not a party to the contract)
generally does not have the right to enforce the terms of the contract, even if the contract confers a benefit
upon them.

In other words, while consideration for the contract may move from a third party (stranger to consideration),
such a third party cannot directly enforce the contract. This ensures that only those who are part of the
agreement and have legal obligations under it can bring a suit to enforce or challenge it.

Exceptions to the Doctrine of Privity of Contract

Although the general rule is that only parties to a contract can sue on it, there are certain exceptions where
a third party may be able to enforce a contract:

1. Trusts:

o In the case of a trust, a beneficiary who is not a party to the contract between the settlor (the person who
creates the trust) and the trustee can enforce the contract.

o The beneficiary's right is enforceable under the trust arrangement.

2. Family Settlements:

o In the context of a family settlement, if the terms are reduced to writing, family members who were not
originally parties to the settlement may still enforce the agreement.

3. Marriage Contracts:

o In certain marriage contracts, a female member (such as a wife) can enforce provisions related to
marriage expenses that were made in a contract, such as during a partition of a Hindu Undivided Family
(HUF).

4. Assignment of Contract:

o If the benefit of a contract is assigned to a third party, the assignee (the third party to whom the benefit is
transferred) can enforce the contract.

5. Acknowledgment or Estoppel:

o If the promisor, by his conduct, acknowledges himself as an agent of the third party, it creates a binding
obligation toward the third party, allowing them to enforce the contract.

6. Covenants Running with the Land:

o In the case of a covenant running with the land, the buyer of land, who has notice of certain obligations
affecting the land, can enforce those covenants, even though they were not a party to the original
agreement.

7. Contracts through an Agent:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 29

o A principal can enforce a contract made by their agent, provided the agent acted within the scope of their
authority and in the name of the principal. The principal is considered a party to the contract in this case,
despite not being physically present in the contract formation.

Conclusion

While the general rule under the doctrine of privity of contract is that only parties to a contract can enforce
it, exceptions allow certain third parties to enforce the contract under specific conditions such as in cases of
trust, family settlements, assignments, and more. These exceptions recognize that, in some instances, third
parties can be granted rights under a contract even if they were not directly involved in the agreement.

Q4. May 19 RTP

"No consideration, no contract" – Comment.

Explanation of the Statement

The principle of "No consideration, no contract" is a foundational concept in contract law. According to
Section 2(d) of the Indian Contract Act, 1872, for an agreement to be legally enforceable, it must be
supported by consideration. Consideration is something of value that is exchanged between the parties to
a contract, and without it, an agreement cannot be legally binding.

In simple terms, if there is no consideration—meaning no exchange of something of value—there is no

contract. A gratuitous promise, made without consideration, may have moral or ethical obligations, but it
does not create legal responsibility. This means that a promise made without consideration cannot be
enforced by law.

Exceptions to the Rule of "No Consideration, No Contract"

Despite the general rule that no consideration means no contract, Section 25 of the Indian Contract Act,
1872 provides certain exceptions where agreements made without consideration are still valid and binding:

1. Agreement Made on Account of Natural Love and Affection (Section 25(1)):

o If an agreement is made in writing and registered, and it is based on natural love and affection between
parties who are in a near relation to each other, it will be valid even without consideration.

o Example: A father promises to give his son ₹10,000 out of natural love and affection, and the agreement is
made in writing and registered. This is a valid contract despite the lack of consideration.

2. Compensation for Voluntary Services (Section 25(2)):

o If a person voluntarily provides a service and the promisor later promises to compensate them, the
agreement is enforceable.

o Essential factors:

▪ The services should be voluntary.

▪ The services must be provided to the promisor.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 30

▪ The promisor must agree to compensate the promisee.

o Example: If A finds B's purse and returns it to him, and B promises to pay ₹50 as a reward, this is a valid
contract.

3. Promise to Pay Time-Barred Debts (Section 25(3)):

o If a debtor makes a written and signed promise to pay a time-barred debt (a debt whose recovery is barred
by the statute of limitations), it is enforceable despite the lack of consideration.

o Example: If A owes B ₹1,000 but the debt is time-barred, and A promises in writing to pay ₹500, this
becomes a valid contract.

4. Contract of Agency (Section 185):

o No consideration is required to create a contract of agency. An agreement where one person acts as an
agent for another can exist even without consideration.

5. Completed Gift (Explanation 1 to Section 25):

o A gift is valid without consideration once it has been completed. A gift transfer of property, done through a
written and registered deed, is a valid contract even without consideration, and the donor cannot reclaim
the property based on the absence of consideration.

6. Bailment:

o According to Section 148, no consideration is required for a contract of bailment, where goods are
delivered by one person to another for a specific purpose, with the understanding that they will be returned
or disposed of according to the owner's instructions.

7. Charitable Promises:

o If a person makes a promise to contribute to a charity, the promise is enforceable. Even if there is no formal
consideration, such promises can create a binding contract.

Conclusion

While the general rule in contract law is that no consideration equals no contract, there are notable
exceptions under Section 25 of the Indian Contract Act, 1872, where agreements made without
consideration are still enforceable. These exceptions reflect the understanding that not all promises require
consideration to be binding in law, especially in cases involving natural love and affection, voluntary
services, time-barred debts, and charitable contributions.

Q5. Nov 22 MTP

"To form a valid contract, consideration must be adequate". Comment.

Explanation

The statement that "consideration must be adequate" implies that the value of the consideration exchanged
in a contract should be equal or comparable to the promise made. However, under the Indian Contract Act,
1872, the adequacy of consideration is not a legal requirement for the formation of a valid contract.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 31

Key Points:

1. Consideration must exist, but its adequacy is not a concern for courts:

o The law only requires that consideration exists; it does not mandate that the consideration must be
adequate or equal in value to the promise. As long as consideration is of some value, the court will not
interfere with the parties' agreement regarding the exchange.

o The courts are not concerned with the adequacy of the consideration at the time of enforcement, unless
there is a question of free consent.

o Example: If someone agrees to sell a car worth ₹50,000 for ₹5,000, the contract is valid as long as the
agreement is made voluntarily, even though the consideration is inadequate.

2. Adequacy of consideration is for the parties to decide:

o The adequacy of the consideration is left to the parties at the time of making the agreement. It is not the role
of the court to assess whether the price paid or the consideration exchanged is fair or balanced.

o Case reference: Bolton v. Modden – The court emphasized that as long as consideration exists, the court
will not judge its adequacy.

3. Consideration must be something of value:

o Though consideration need not be equivalent to the promise in value, it must be something that the law
recognizes as having value. For example, an agreement to exchange goods or services for a nominal sum
(e.g., ₹1) is still a valid contract if both parties intend to be bound by it.

4. Inadequacy may affect free consent:

o While inadequacy of consideration alone does not invalidate a contract, it could be relevant in determining
whether the consent of the promisor was freely given. If one party claims that they were coerced or
deceived into accepting an unfair deal, the court may examine the adequacy of consideration to assess
whether consent was given without undue influence.

o Explanation 2 to Section 25 of the Indian Contract Act states that an agreement with inadequate
consideration is not void simply for that reason, but it could be taken into account when assessing the free
consent of the promisor.

Conclusion

To form a valid contract, consideration must be present, but it does not have to be adequate in terms of its
value. The parties involved decide the value of the consideration, and courts do not typically intervene
unless there is an issue with free consent. However, if the consideration is grossly inadequate, it could raise
concerns regarding the fairness of the agreement and the voluntariness of consent.

Q6. Apr 21 MTP

Define consideration. State the characteristics of a valid consideration.

Definition of Consideration (Section 2(d) of the Indian Contract Act, 1872)

Consideration is defined as:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 32

“When, at the desire of the promisor, the promisee or any other person has done, or does or abstains from
doing, or promises to do or abstain from doing something, such an act or abstinence or promise is called
consideration for the promise.”

In simple terms, consideration refers to something of value that is exchanged between parties in a contract,
and it is a prerequisite for forming a legally binding agreement.

Characteristics of a Valid Consideration:

1. Consideration must move at the desire of the promisor:

o Consideration must be given in response to the request or desire of the promisor. The act, abstinence, or
promise from the promisee must be motivated by the desire of the person making the promise.

2. Consideration may proceed from the promisee or any other person:

o Consideration can come from the promisee themselves or from a third party. This is consistent with the
principle of "stranger to a contract," where a third party may provide consideration even if they are not
directly part of the contract.

3. It may be executed or executory:

o Executed consideration is when an act is performed immediately or already performed by the promisee.

o Executory consideration is when a promise to perform an act or abstain from it is made, to be carried out in
the future.

4. Consideration must be real and have some value in the eyes of the law:

o The consideration must be something that has real value and is legally recognized. It cannot be illusory or
something that does not have value, such as a mere token that is legally irrelevant.

5. It must not be something which the promisor is already legally bound to do:

o If a person is already legally obligated to perform a task, performing that task cannot serve as valid
consideration for a new contract. For example, a police officer cannot demand payment for apprehending a
criminal, as it is part of their legal duty.

6. It must not be unlawful, immoral, or opposed to public policy:

o Consideration must not be illegal or immoral. If the consideration involves illegal activities or goes against
public policy (e.g., an agreement for illegal drugs), it is void.

7. Inadequacy of consideration does not invalidate the contract:

o The courts do not concern themselves with whether the consideration is adequate or proportionate to the
value of the promise made. Even if the consideration is far less than the value of the promise, the contract
will still be valid, provided other requirements are met.

8. It may comprise a benefit or a detriment:

o The consideration can either result in a benefit to one party or a detriment (e.g., loss, obligation) to the other.
The key is that there must be an exchange, and each party should bear some responsibility or gain.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 33

Conclusion

For a consideration to be valid, it must meet several essential criteria, including being desired by the
promisor, real, valuable, and legal. Additionally, while the adequacy of the consideration is not typically
scrutinized, it must not be something the promisor is already legally bound to do.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 34

Chapter 1 – The Indian Contract Act, 1872

UNIT 3 : Other Essentials Elements of a Contract

PART – 1 CASE LAW QUESTIONS

Q1. Jun 22 Exam (6 Marks)

Question:

Srishti, a minor, falsely representing her age, enters into an agreement with an authorised laptop dealer, Mr.
Gupta, owner of SP Laptops, for the purchase of a laptop on credit amounting to ₹60,000/- on 1st August
2021. She promised to pay back the outstanding amount with interest @ 16% p.a. by 31st July 2022. She told
him that in case she won’t be able to pay the outstanding amount, her father, Mr. Ram, will pay back on her
behalf. After one year, when Srishti was asked to pay the outstanding amount with interest, she refused to
pay and told the owner that she is a minor and now he can't recover a single penny from her. She will be an
adult on 1st January 2024, only after which the agreement can be ratified.

Explain by which of the following ways Mr. Gupta will succeed in recovering the outstanding amount with
reference to the Indian Contract Act, 1872:

(i) By filing a case against Srishti, a minor, for recovery of the outstanding amount with interest?

(ii) By filing a case against Mr. Ram, the father of Srishti, for recovery of the outstanding amount?

(iii) By filing a case against Srishti, a minor, for recovery of the outstanding amount after she attains
maturity?

Provision under the law

As per Section 11 of the Indian Contract Act, 1872, a minor is not competent to contract, and any contract
with or by a minor is void ab initio (void from the very beginning). This means that an agreement entered into
by a minor is not legally enforceable.

Further, under Section 68 of the Indian Contract Act, a minor's contract for necessaries can be enforced by
the minor, but there is no such provision for non-necessary goods or services.

A minor's contract cannot be ratified upon reaching majority because a void contract cannot be made valid,
even with the passage of time.

Regarding parental liability, in general, a parent or guardian is not bound by the minor's contract unless they
act as an agent for the minor, which is not the case here.

Analysis of the given case

(i) By filing a case against Srishti, a minor, for recovery of the outstanding amount with interest:

A contract with a minor is void ab initio (void from the very beginning). Since Srishti is a minor and entered
into the contract, Mr. Gupta cannot recover the amount from her by filing a case. The law does not allow

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 35

enforcement of a contract against a minor. Hence, Mr. Gupta will not succeed in recovering the amount by
filing a case against Srishti.

(ii) By filing a case against Mr. Ram, the father of Srishti, for recovery of the outstanding amount:

A minor cannot bind their parent or guardian to a contract. In this case, there is no express or implied
authority given by Srishti to her father, Mr. Ram, to act as her agent in the transaction. Therefore, Mr. Ram is
not liable for the contract. Hence, Mr. Gupta will not succeed in recovering the amount from Mr. Ram.

(iii) By filing a case against Srishti, a minor, for recovery of the outstanding amount after she attains
maturity:

Even after Srishti attains majority, she cannot ratify the original agreement, as the contract with her was void
from the beginning. The law does not allow the ratification of a void agreement, regardless of the party’s
majority status. Therefore, Mr. Gupta will not succeed in recovering the outstanding amount by filing a case
against Srishti after she attains majority.

Conclusion

In this case, Mr. Gupta will not succeed in recovering the outstanding amount from:

1. Srishti, a minor, as the contract with a minor is void ab initio.

2. Mr. Ram, the father of Srishti, as he is not liable for the contract entered into by his minor child.

3. Srishti after attaining majority, because the contract remains void and cannot be ratified.

Q2. Dec 21 Exam (6 Marks)

Question:

Examine the validity of the following contracts as per the Indian Contract Act, 1872, giving reasons:

a. X, aged 16 years, borrowed a loan of ₹50,000 for his personal purposes. A few months later, he became a
major and could not pay back the amount borrowed on the due date. The lender wants to file a suit against X.

b. J contracts to take in cargo for K at a foreign port. J's government afterwards declares war against the
country in which the port is situated, and therefore the contract could not be fulfilled. K wants to file a suit
against J.

Provision under the law

1. Section 11 of the Indian Contract Act, 1872: A person is competent to contract if they are of the age of
majority according to the law to which they are subject. A minor, being underage, is not competent to
contract, and any agreement with or by a minor is void ab initio (void from the beginning). A minor cannot
ratify the contract once they attain majority.

2. Section 68 of the Indian Contract Act, 1872: This section provides that a minor may be liable to pay for
necessaries supplied to them, but it does not extend to personal loans for non-necessary items.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 36

3. Section 56 of the Indian Contract Act, 1872: A contract becomes void if its performance becomes
impossible due to an impossibility of performance or supervening events, such as a declaration of war by a
country.

Analysis of the given case

(a) X borrowed a loan of ₹50,000 while he was a minor:

• Minor’s contract is void ab initio: Since X was a minor at the time of borrowing the loan, the contract is void
ab initio, meaning the agreement is void from the start. The fact that X later attained majority does not
validate or ratify the contract. A minor cannot ratify a contract once they come of age.

• Necessaries: Even though the loan was for personal purposes and not for necessaries, Section 68 of the
Indian Contract Act only enforces a claim for necessaries supplied to a minor. A personal loan does not
qualify as a necessary under the Act, and therefore, the contract cannot be enforced by the lender.

• Conclusion for (a): The lender cannot file a suit against X for recovery of the loan amount because the
contract is void, and the loan was not for necessaries.

(b) J contracted to take in cargo for K, but war was declared after the contract:

• Supervening impossibility: According to Section 56 of the Indian Contract Act, a contract becomes void if
its performance becomes impossible due to circumstances beyond control, such as a declaration of war. In
this case, J's government declared war on the country in which the port is situated, making it impossible for J
to fulfill the contract.

• Result of supervening impossibility: The subsequent impossibility of performance renders the contract
void. K cannot enforce the contract against J because the impossibility was not due to any fault of J but due
to a supervening event (war).

• Conclusion for (b): K cannot file a suit against J because the contract is void due to supervening
impossibility caused by the declaration of war.

Conclusion

1. In case (a), Mr. Gupta cannot recover the loan from X, as the contract was void from the outset due to X
being a minor, and the loan was for personal purposes, not necessaries.

2. In case (b), K cannot sue J for the performance of the contract, as the contract became void due to
supervening impossibility (war declaration).

Q3. Jan 21 Exam (4 Marks)

Question:

Mr. S, aged 58 years, was employed in a Government Department. He was going to retire after two years. Mr.
D made a proposal to Mr. S to apply for voluntary retirement from his post so that Mr. D can be appointed in
his place. Mr. D offered a sum of ₹10 Lakhs as consideration to Mr. S in order to induce him to retire. Mr. S
refused at first instance, but when he evaluated the amount offered as consideration (which was double of
his cumulative remuneration to be received during the tenure of two years of employment), he agreed to

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 37

receive the consideration and accepted the above agreement to retire from his office. Whether the above
agreement is valid? Explain with reference to the provisions of the Indian Contract Act, 1872.

Provision under the law

1. Section 10 of the Indian Contract Act, 1872: This section provides that for an agreement to be valid, it must
have lawful consideration and a lawful object. The consideration and the object of the agreement must not
be illegal, immoral, or opposed to public policy.

2. Section 23 of the Indian Contract Act, 1872: This section states that the object or consideration of an
agreement must not be unlawful, and if it is, the agreement is void. An agreement with an unlawful
consideration or object is unenforceable.

Analysis of the given case

In this case, Mr. D offered Mr. S a sum of ₹10 Lakhs as consideration for retiring early so that Mr. D could take
his place. While Mr. S initially refused, he later agreed to the offer because the amount was substantial
compared to his expected future earnings.

• Voluntary retirement proposal: The agreement here involves Mr. S agreeing to retire voluntarily, induced by
a financial incentive from Mr. D. While a voluntary retirement arrangement in itself is not illegal, the issue
arises from the fact that the offer involves a financial transaction for a position in public office.

• Unlawful consideration: Public policy mandates that there should not be a financial exchange for public
office appointments. The exchange of money for early retirement with the expectation that it will facilitate
another person’s appointment is opposed to public policy. The consideration in this agreement essentially
amounts to a traffic in public office, which is deemed unlawful.

• Public policy violation: The essence of public policy is that appointments to public office should not be
influenced by money or other considerations. Such practices undermine the integrity of public institutions
and their functioning. Therefore, Mr. S’s acceptance of money to retire early and vacate his office for Mr. D’s
benefit is unlawful, making the agreement void.

Conclusion

The agreement between Mr. S and Mr. D is not valid as the consideration involved is unlawful and opposed
to public policy. Under Sections 10 and 23 of the Indian Contract Act, such an agreement is void and
unenforceable. Therefore, Mr. S’s acceptance of ₹10 Lakhs to retire voluntarily is invalid.

Q4 Nov 20 Exam (4 Marks)

Question:

Mr. X, a businessman, has been fighting a long-drawn litigation with Mr. Y, an industrialist. To support his
legal campaign, he enlists the services of Mr. C, a Judicial officer, stating that the amount of ₹10 lakhs would
be paid to him if he does not take up the brief of Mr. Y. Mr. C agrees, but at the end of the litigation, Mr. X
refuses to pay Mr. C. Decide whether Mr. C can recover the amount promised by Mr. X under the provisions of
the Indian Contract Act, 1872.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 38

Provision under the law

1. Section 10 of the Indian Contract Act, 1872: This section states that for an agreement to be valid, it must be
made by the free consent of the parties, be for a lawful consideration, have a lawful object, and not be
expressly declared to be void.

2. Section 23 of the Indian Contract Act, 1872: This section specifies that any agreement with an unlawful
object or consideration is void. Specifically, if the object of the agreement is against public policy, the
agreement is unenforceable.

3. Section 28 of the Indian Contract Act, 1872: This section makes agreements in restraint of legal
proceedings void. Any agreement that restricts a person’s ability to pursue their legal rights or interferes with
the course of justice is deemed void and unenforceable.

Analysis of the given case

In the given scenario, Mr. X proposes to pay ₹10 lakhs to Mr. C if he does not take up the brief for Mr. Y. This is
an agreement intended to influence Mr. C’s professional conduct as a judicial officer, by preventing him from
representing Mr. Y in the litigation.

• Unlawful object: The object of the agreement is to interfere with the judicial process and prevent Mr. C from
taking up a legal case. This can be seen as a form of restraint on legal proceedings and an attempt to
influence the judicial officer's independence.

• Against public policy: Such an agreement is clearly against public policy because it undermines the
principles of justice and fairness. It prevents a judicial officer from fulfilling their duties impartially, which is a
violation of the fundamental principles of the legal system.

• Void agreement: Since the agreement's object is to restrain legal proceedings and interfere with the course
of justice, it is unlawful and void under Section 28 of the Indian Contract Act, 1872.

Conclusion

Mr. C cannot recover the amount of ₹10 lakhs promised by Mr. X. The agreement is void under Section 28
of the Indian Contract Act, as it involves interference with the course of justice and is against public policy.
Therefore, the agreement is unenforceable by law.

Q5. May 23 RTP

Mr. Mukund wants to sell his car. For this purpose, he appoints Mr. Parth, a minor, as his agent. Mr. Mukund
instructs Mr. Parth that the car should not be sold at a price less than ₹2,00,000. Mr. Parth ignores the
instruction of Mr. Mukund and sells the car to Mr. Naman for ₹1,50,000. Explain the legal position of the
contract under the Indian Contract Act, 1872 whether:

i. Mr. Mukund can recover the loss of ₹50,000 from Mr. Parth?
ii. Mr. Mukund can recover his car from Mr. Naman?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 39

Provision under the law

• Section 11 of the Indian Contract Act, 1872:

"Every person is competent to contract who is of the age of majority according to the law to which he is
subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject."

• Section 68 of the Indian Contract Act, 1872:

"If a person, who is incapable of entering into a contract, or who is a minor, has done something for the
benefit of another person, the other person shall compensate the first person for the benefit received."

Analysis of the given case

• Mr. Parth's capacity as a minor:

According to Section 11, Mr. Parth, being a minor, is disqualified from contracting. Any contract made with
or by a minor is void ab initio (void from the very beginning). However, a minor can act as an agent, but he
will not be liable for his acts under such agency agreements.

• Mr. Mukund's instructions to Mr. Parth:

Mr. Mukund instructed Mr. Parth that the car should not be sold for less than ₹2,00,000. Since Mr. Parth
ignored the instructions and sold the car for ₹1,50,000, he acted in violation of the instructions. However,
since Mr. Parth is a minor, he cannot be held liable for the loss under the contract, as the agreement with
him is void due to his minority status.

• Mr. Naman's purchase:

The car was sold by Mr. Parth, who was acting as an agent for Mr. Mukund. According to the Indian Contract
Act, an agent who acts within the scope of his authority can transfer good title to a third party. Since Mr.
Parth was acting as Mr. Mukund's agent, Mr. Naman acquired a good title to the car even though the sale
price was below the instructed amount.

Conclusion

• (i) Mr. Mukund cannot recover the loss of ₹50,000 from Mr. Parth, as the contract between them is void ab
initio due to Mr. Parth being a minor, and he is not liable for his actions as an agent.

• (ii) Mr. Mukund cannot recover his car from Mr. Naman, as Mr. Naman purchased the car from Mr. Parth,
who was acting within his authority as an agent, and Mr. Naman acquired a good title to the car.

Q6. Nov 22 RTP

Karan agreed to purchase a wooden table for his study room from Mr. X. The table was in good condition and
was examined by Karan before purchasing. He found no defects in it and paid ₹20,000 for the table. Later on,
it was found that one leg of the table was broken, and Mr. X had pasted the wood and tried to hide the
defects in the table. Can Karan return the table and claim the amount back? Discuss the same with
reference to the Indian Contract Act, 1872.

Provision under the law

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 40

• Section 17 of the Indian Contract Act, 1872:

“Fraud: A false representation of material facts when made intentionally to deceive the other party to induce
him to enter into a contract is termed as a fraud.”
Section 17(2) further defines fraud as active concealment:
“When a party intentionally conceals or hides some material facts from the other party, making sure that the
other party is unable to know the truth, and inducing the other party to believe something false.”

• Section 19 of the Indian Contract Act, 1872:

"In case a fraud is committed, the aggrieved party gets the right to rescind the contract."

Analysis of the given case

• Fraud by Mr. X:
According to Section 17, fraud occurs when one party intentionally makes a false representation or hides
material facts to deceive the other party. In this case, Mr. X concealed the defect in the table by covering the
broken leg, thereby committing fraud by actively concealing the defect.

• Karan's right to rescind the contract:

As per Section 19, when fraud is committed, the aggrieved party (Karan) has the right to rescind the
contract. Since Mr. X intentionally concealed the defect and made Karan believe the table was in good
condition, Karan has the legal right to rescind the contract and demand a refund.

Conclusion

Karan can return the table and claim the amount back from Mr. X. This is because Mr. X committed fraud by
concealing the defect in the table, and under the provisions of Sections 17 and 19 of the Indian Contract
Act, 1872, Karan has the right to rescind the contract and seek compensation for the loss suffered.

Q7. Nov 22 RTP

In the light of the provisions of the Indian Contract Act, 1872, answer the following:

A student was induced by his teacher to sell his brand-new bike to the latter at a price less than the
purchase price to secure more marks in the examination. Accordingly, the bike was sold. However, the father
of the student persuaded him to sue his teacher. Whether the student can sue the teacher? If yes, on what
grounds?

Provision under the law

• Section 16 of the Indian Contract Act, 1872:

"A contract is voidable at the option of the party whose consent was caused by undue influence."
Undue influence occurs when one party is in a position to dominate the will of the other and uses that
position to get consent for a contract. The relationship of teacher and student is such that the teacher can
dominate the student's will.

Analysis of the given case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 41

• Undue Influence:
In this case, the teacher used their position of authority and influence over the student to induce him to sell
the bike at a price lower than its purchase price, with the promise of better marks in the examination. This
creates a scenario of undue influence under Section 16, where the teacher's position of power influences
the student's consent.

• Voidable Contract:
Since the consent of the student was induced by undue influence, the contract is voidable at the student's
option. The student can choose to either affirm or rescind the contract.

Conclusion

The student can sue the teacher on the grounds of undue influence. The contract between the student and
the teacher is voidable at the student's option due to the undue influence exerted by the teacher, as defined
under Section 16 of the Indian Contract Act, 1872.

Q8. May 21 RTP

Mr. SHYAM owned a motor car. He approached Mr. HARISH and offered to sell his motor car for ₹3,00,000.
Mr. SHYAM told Mr. HARISH that the motor car is running at the rate of 20 KMs per litre of petrol. Both the fuel
meter and the speed meter of the car were working perfectly. Mr. HARISH agreed with the proposal of Mr.
SHYAM and took delivery of the car by paying ₹3,00,000. After 10 days, Mr. HARISH came back with the car
and stated that the claim made by Mr. SHYAM regarding fuel efficiency was not correct and therefore there
was a case of misrepresentation.
Referring to the provisions of the Indian Contract Act, 1872, decide and write whether Mr. HARISH can
rescind the contract on the above ground.

Provision under the law

• Section 19 of the Indian Contract Act, 1872:

When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is
voidable at the option of the party whose consent was so caused.

o A party whose consent was caused by misrepresentation or fraud may, if they choose, insist that the
contract shall be performed and that they shall be put in the position they would have been in if the
representations had been true.

o Exception: If the consent was caused by misrepresentation or silence that was fraudulent within the
meaning of Section 17, the contract is not voidable if the party whose consent was caused had the means of
discovering the truth with ordinary diligence.

Analysis of the given case

• Misrepresentation:
Mr. SHYAM made a statement about the fuel efficiency of the car, claiming it ran 20 KMs per litre of petrol.
However, after taking possession, Mr. HARISH found the claim to be untrue. This constitutes

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 42

misrepresentation under Section 18, as it was an untrue statement made by Mr. SHYAM to induce Mr.
HARISH into the contract.

• Means of discovering the truth:

The fuel meter and speed meter of the car were in working condition, and Mr. HARISH had the means to
check the car's fuel efficiency with ordinary diligence. Therefore, he could have tested the car's fuel
efficiency before finalizing the deal. Since he had the means to verify the truth, the contract is not voidable
under the exception provided in Section 19.

Conclusion

Mr. HARISH cannot rescind the contract on the ground of misrepresentation, as he had the means of
discovering the truth with ordinary diligence. The contract is not voidable under Section 19 of the Indian
Contract Act, 1872.

Q9. May 21 RTP

Mr. S, aged 58 years, was employed in a Government department and was going to retire after two years. Mr.
D made a proposal to Mr. S to apply for voluntary retirement from his post so that Mr. D could be appointed in
his place. Mr. D offered a sum of ₹10 Lakhs as consideration to induce Mr. S to retire. Mr. S initially refused,
but upon evaluating the amount offered as consideration (which was double his cumulative remuneration
for the next two years of employment), he agreed to receive the money and accepted the agreement to retire.
Whether the above agreement is valid? Explain with reference to the provisions of the Indian Contract Act,
1872.

Provision under the law

• Section 10 of the Indian Contract Act, 1872:

An agreement is a contract if it is made by the free consent of the parties competent to contract, for a lawful
consideration and with a lawful object, and is not expressly declared to be void.

• Section 23 of the Indian Contract Act, 1872:

Every agreement whose object or consideration is unlawful is void.

Analysis of the given case

• Lawful Consideration:
The agreement between Mr. S and Mr. D involves a consideration of ₹10 Lakhs, which is offered by Mr. D to
Mr. S to induce him to voluntarily retire from his post. While the consideration amount may seem
reasonable, the object of the agreement is crucial.

• Public Policy and Sale of Public Office:

The object of the agreement, which involves Mr. S agreeing to retire in exchange for a sum of money to make
way for Mr. D, involves the sale of a public office. Public policy mandates that there should be no money
consideration for the appointment to public offices. Such agreements are seen as opposed to public policy,
as they encourage the sale or manipulation of positions in government services, which undermines the
integrity of public administration.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 43

• Unlawful Object:
Since the object of the agreement is to induce a government official to retire early in exchange for money, it
amounts to a sale of a public office, which is explicitly prohibited under the concept of public policy. This
makes the agreement unlawful.

Conclusion

The agreement between Mr. S and Mr. D is not valid. It is void because the consideration and object of the
agreement are unlawful, as they involve the sale of a public office, which is opposed to public policy under
Section 23 of the Indian Contract Act, 1872.

Q10. May 20 RTP

Sohan induced Suraj to buy his motorcycle, claiming it was in very good condition. After taking the
motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan proposed to get it
repaired and promised to pay 40% of the cost of repairs. After a few days, the motorcycle stopped working
completely. Now Suraj wants to rescind the contract.
Decide, giving reasons, whether Suraj can rescind the contract.

Provision under the law

• Section 19 of the Indian Contract Act, 1872:

When consent to an agreement is caused by misrepresentation, the agreement is voidable at the option of
the party whose consent was so caused. However, if the aggrieved party, after becoming aware of the
misrepresentation, takes a benefit under the contract or affirms the contract in any manner, they lose the
right to rescind it.

Analysis of the given case

• Misrepresentation:
Sohan misrepresented the condition of the motorcycle by claiming it was in very good condition. This
misrepresentation led Suraj to enter into the contract.

• Suraj's Actions After Misrepresentation:

After discovering the defects in the motorcycle, Suraj did not immediately seek to rescind the contract but
instead accepted Sohan's offer to bear 40% of the repair cost. By accepting this proposal, Suraj implicitly
affirmed the contract, even though he was dissatisfied with the condition of the motorcycle.

• Effect of Affirmation:
According to Section 19 of the Indian Contract Act, Suraj's acceptance of the repair offer and the
subsequent agreement to share the cost can be seen as an affirmation of the contract. Since Suraj has
already taken benefit from the contract (i.e., agreeing to the repair terms), he loses the right to rescind the
contract.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 44

Suraj cannot rescind the contract because by accepting Sohan's offer to repair the motorcycle and sharing
the cost, he has affirmed the contract and taken benefit from it. According to Section 19 of the Indian
Contract Act, this action precludes him from rescinding the contract.

Q11. May 20 RTP

X, a minor, was studying in M.Com. in a college. On 1st July 2019, he took a loan of ₹1,00,000 from B for the
payment of his college fees and to purchase books, and agreed to repay by 31st December 2019. X
possesses assets worth ₹9,00,000. On the due date, X fails to pay back the loan to B. B now wants to recover
the loan from X out of his (X’s) assets.
Referring to the provisions of the Indian Contract Act, 1872, decide whether B would succeed.

Provision under the law

• Section 68 of the Indian Contract Act, 1872:

"If a person, incapable of entering into a contract, or any one whom he is legally bound to support, is
supplied by another person with necessaries suited to his condition in life, the person who has furnished
such supplies is entitled to be reimbursed from the property of such incapable person."

Analysis of the given case

• Minor's Liability for Necessaries:

X, being a minor, is generally incapable of entering into contracts (as per Section 11 of the Indian Contract
Act). However, Section 68 makes an exception for contracts involving necessaries. If the goods or services
provided are deemed necessary for the minor's life or studies, the provider (B) can recover the value from the
minor's property.

• Necessaries in this Case:

The loan was taken by X for the payment of his college fees and for purchasing books, which are clearly
necessaries for his education. These are essential for X's life and studies, fitting the definition of
"necessaries" under Section 68.

• Minor's Assets:
Despite X being a minor and unable to contract for loans, Section 68 entitles B to be reimbursed for
necessaries provided to X, even from his property. Therefore, B can recover the loan amount from X's assets,
as the loan was for necessary items.

Conclusion

Yes, B can recover the loan from X’s assets because the loan was for necessaries (college fees and books),
which fall under the provisions of Section 68 of the Indian Contract Act. Hence, B has the right to claim
reimbursement from X’s assets.

Q12. Nov 21 MTP (4 Marks)

Mr. Shekhar wants to sell his car. For this purpose, he appoints Mr. Nadan, a minor, as his agent. Mr. Shekhar
instructs Mr. Nadan that the car should not be sold at a price less than Rs. 1,00,000. Mr. Nadan ignores the
instruction of Mr. Shekhar and sells the car to Mr. Masoom for Rs. 80,000. Explain the legal position of the

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 45

contract under the Indian Contract Act, 1872 whether:

(i) Mr. Shekhar can recover the loss of Rs. 20,000 from Mr. Nadan?
(ii) Mr. Shekhar can recover his car from Mr. Masoom?

Provision under the law

• Section 11 of the Indian Contract Act, 1872:

"Every person is competent to contract who is of the age of majority according to the law to which he is
subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is
subject."
A minor is disqualified from contracting, and any contract entered into by a minor is void ab initio (from the
beginning). However, a minor can act as an agent, though he is not liable to his principal for his actions in
the contract.

Analysis of the given case

1. Appointment of Minor as Agent:

o Mr. Shekhar appointed Mr. Nadan, a minor, as his agent to sell the car.

o Under Section 11, a minor cannot enter into a contract, but a minor can act as an agent.

o Even though the appointment is valid, the minor will not be held liable for the acts done as an agent.

2. Selling the Car Below Price:

o Mr. Shekhar instructed Mr. Nadan to sell the car for no less than ₹1,00,000.

o Despite this, Mr. Nadan sold the car to Mr. Masoom for ₹80,000, violating the instruction.

o As a minor agent, Mr. Nadan is not liable to Mr. Shekhar for this breach of instruction. The contract between
Mr. Shekhar and Mr. Nadan, while valid, does not make Mr. Nadan liable for damages as he is a minor.
Therefore, Mr. Shekhar cannot recover the loss of ₹20,000 from Mr. Nadan.

3. Recovery of Car from Mr. Masoom:

o Mr. Masoom purchased the car from Mr. Nadan, acting as an agent of Mr. Shekhar.

o As per Section 27 of the Sale of Goods Act, if an agent sells goods, the principal’s title passes to the buyer
unless the agent is acting outside his authority.

o Mr. Nadan acted as an agent of Mr. Shekhar, and Mr. Masoom acquired a valid title to the car.

o Therefore, Mr. Shekhar cannot recover his car from Mr. Masoom as the sale was valid.

Conclusion

1. Mr. Shekhar cannot recover the loss of ₹20,000 from Mr. Nadan as the contract between them is valid, but
a minor agent is not liable for his acts.

2. Mr. Shekhar cannot recover his car from Mr. Masoom because Mr. Masoom acquired a valid title to the car
through the sale made by the minor acting as an agent.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 46

Q13. Nov 21 MTP (6 Marks)

Mr. Murari owes payment of 3 bills to Mr. Girdhari as on 31st March, 2020:
a. ₹12,120 which was due in May 2016.
b. ₹5,650 which was due in August 2018.
c. ₹9,680 which was due in May 2019.

Mr. Murari made payment on 1st April 2020 as below without any notice of how to appropriate them:
(i) A cheque of ₹9,680
(ii) A cheque of ₹15,000

Advise under the provisions of the Indian Contract Act, 1872.

Provision under the law

• Section 59 of the Indian Contract Act, 1872:

"The debtor has, at the time of payment, the right to appropriate the payment."

• Section 60 of the Indian Contract Act, 1872:

"In default of appropriation by the debtor, the creditor has the option of appropriating the payment, unless
there is an express agreement to the contrary."

• Section 61 of the Indian Contract Act, 1872:

"In the absence of any appropriation by the debtor or creditor, the law will appropriate the payment in the
order of time."

Analysis of the given case

1. Payment of ₹9,680:

o Mr. Murari made a cheque payment of ₹9,680. This is exactly the amount of the bill that was due in May
2019.

o Even though no specific appropriation was made, it is clear that this payment will be appropriated against
the bill of ₹9,680 due in May 2019.

2. Payment of ₹15,000:

o Mr. Murari made a cheque payment of ₹15,000.

o This payment is higher than any of the individual bills due. The payment can be appropriated against any
lawful debt, even if the debt is time-barred.

o Given that the oldest debt is ₹12,120 (due in May 2016), Mr. Girdhari can appropriate ₹12,120 from the
₹15,000 towards that debt.

o The balance of ₹2,880 (₹15,000 - ₹12,120) can be appropriated towards the debt of ₹5,650, which was due
in August 2018.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 47

1. The cheque of ₹9,680 will be appropriated against the bill of ₹9,680 due in May 2019.

2. The cheque of ₹15,000 can be appropriated as follows:

o ₹12,120 against the debt of ₹12,120 due in May 2016.

o The remaining ₹2,880 can be appropriated towards the debt of ₹5,650 due in August 2018.

Q14. May 20 MTP (3 Marks)

P sells by auction to Q a horse which P knows to be unsound. The horse appears to be sound, but P knows
about the unsoundness of the horse. Is this contract valid in the following circumstances:
(i) If P says nothing about the unsoundness of the horse to Q.
(ii) If P says nothing about it to Q, who is P’s daughter.
(iii) If Q says to P “If you do not deny it, I shall assume that the horse is sound.” P says nothing.

Provision under the law

• Section 17 of the Indian Contract Act, 1872:

"Fraud is said to be committed by a party to a contract if he, by his own words or by conduct, intentionally
deceives another party, or by silence, does something with the intent to deceive or induce the other party to
enter into a contract."
Further, "mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances are such that it is the duty of the person keeping silence to speak, or unless
his silence is, in itself, equivalent to speech."

Analysis of the given case

1. (i) If P says nothing about the unsoundness of the horse to Q:

o In this scenario, P's silence regarding the unsoundness of the horse does not amount to fraud.

o According to Section 17, mere silence as to facts is not fraud unless it is the duty of the person to speak, or
silence is equivalent to speech. Since there is no obligation on P to disclose the unsoundness, the contract
is valid.

2. (ii) If P says nothing about it to Q, who is P’s daughter:

o In this case, there exists a fiduciary relationship between P and Q (as Q is P's daughter).

o Due to the relationship, Section 17 implies that P’s silence is equivalent to speech. P has a duty to disclose
the unsoundness of the horse, and failing to do so constitutes fraud. Therefore, the contract is not valid.

3. (iii) If Q says to P “If you do not deny it, I shall assume that the horse is sound.” P says nothing:

o Here, P’s silence after Q's statement is equivalent to speech under Section 17, as P is implicitly confirming
the horse's soundness by not denying the claim.

o P's silence constitutes fraud since it misleads Q into believing the horse is sound. Therefore, the contract is
not valid.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 48

Conclusion

1. In case (i), the contract is valid as P’s silence does not amount to fraud.

2. In case (ii), the contract is not valid due to the fiduciary relationship between P and Q, making P’s silence
equivalent to fraud.

3. In case (iii), the contract is not valid as P’s silence in response to Q’s statement amounts to fraud.

PART 2 – DIRECT QUESTIONS

Q1 Nov 20 Exam (7 Marks)

Define Misrepresentation and Fraud. Explain the difference between Fraud and Misrepresentation as
per the Indian Contract Act, 1872.

Answer :

Definition of Fraud under Section 17 of the Indian Contract Act, 1872:

'Fraud' means and includes any of the following acts committed by a party to a contract, or with his
connivance, or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to
enter into the contract:

(i) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(ii) the active concealment of a fact by one having knowledge or belief of the fact ;

(iii) a promise made without any intention of performing it;

(iv) any other act fitted to deceive;

(v) any such act or omission as the law specially declares to be fraudulent.

As per Section 18 of the Indian Contract Act, 1872, misrepresentation means and includes-

(i) the positive assertion, in a manner not warranted by the information of the person making it, of that
which is not true, though he believes it to be true;

(ii) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him; by misleading another to his prejudice or to the prejudice of
anyone claiming under him;

(iii) causing, however, innocently, a party to an agreement to make a mistake as to the substance of the
thing which is the subject of the agreement.

Basis of Difference Fraud Misrepresentation

To deceive the other party by No intention to deceive the other
Intention
hiding the truth. party.
The person making the The person making the statement
Knowledge of Truth statement knows it is believes it to be true, even though
untrue. it is false.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 49

Rescission of the The injured party can The injured party can repudiate
Contract and Claim repudiate the contract and the contract or sue for restitution
for Damages claim damages. but cannot claim damages.
The party using fraudulent
The injured party can argue that
acts cannot protect
Means to Discover the they could have discovered the
themselves by claiming the
Truth truth if they had exercised due
injured party had the means
diligence.
to discover the truth.

Q2. Nov 20 Exam

Enumerate the differences between 'Wagering Agreements' and 'Contract of Insurance' with reference
to the provisions of the Indian Contract Act, 1872.

Differences between Wagering Agreements and Contract of Insurance

Basis Wagering Agreement Contract of Insurance

A promise to pay money or
money’s worth on the happening A contract to indemnify the loss
Meaning
or non-happening of an caused by an uncertain event.
uncertain event.
There is mutual consideration
There is no consideration
in the form of premium
Consideration between the two parties; it is
payment and compensation
essentially gambling for money.
amount.
There is no insurable interest, as The insured party must have an
Insurable
the betting is done on another insurable interest in the life or
Interest
person's life or property. property being insured.

Insurance contracts indemnify

Loser must pay the fixed amount
Contract of the insured against the actual
based on the occurrence of an
Indemnity loss incurred, except in the
uncertain event.
case of life insurance.

It is void and unenforceable

It is valid and enforceable by
Enforceability under the Indian Contract Act,
law.
1872.
No calculation of premium is Premium calculation is based
Premium required, as it is based on on scientific and actuarial
betting. methods, assessing risk.
Wagering agreements are Insurance contracts are
Public Welfare considered harmful and against beneficial to society as they
public welfare. provide financial protection.

Q3. Nov 19 Exam (5 Marks), Oct 21 MTP (5 Marks)

Explain the term 'Coercion' and what are the effects of coercion under the Indian Contract Act, 1872.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 50

Coercion (Section 15 of the Indian Contract Act, 1872):

Coercion is defined under Section 15 of the Indian Contract Act, 1872, as the act of committing or
threatening to commit any act forbidden by the Indian Penal Code, or unlawfully detaining or threatening to
detain any property, to the prejudice of any person, with the intention of causing that person to enter into an
agreement.

In simpler terms, coercion involves using force, threats, or unlawful actions to compel someone to enter into
a contract against their free will.

Effects of Coercion under Section 19 of the Indian Contract Act, 1872:

1. Voidable Contract:
A contract induced by coercion is voidable at the option of the party whose consent was obtained through
coercion. This means the coerced party can choose to either affirm or rescind (cancel) the contract.

2. Restoration of Benefit:
If the contract is rescinded, the party who rescinds the contract must, if they have received any benefit
under the contract, restore such benefit to the other party, as far as applicable. Essentially, any benefit
received under coercion must be returned if the contract is voided.

3. Repayment or Return of Property:

If money or property has been paid or delivered under coercion, the coerced party must repay or return it.
This ensures that the party who was forced into the contract does not unjustly retain any benefit from the
coercive agreement.

Q4. May 19 Exam (7 Marks)

"Mere silence is not fraud" but there are some circumstances where "silence is fraud." Explain the
circumstances as per the provision of Indian Contract Act, 1872.

Mere Silence is Not Fraud:

As per Section 17 of the Indian Contract Act, 1872, mere silence regarding facts that may affect the
willingness of a person to enter into a contract is not considered fraud. A contracting party is not generally
obligated to disclose every fact they know that may affect the contract unless the specific circumstances of
the case require disclosure. The law does not require a party to voluntarily disclose all information, and
silence, in itself, does not amount to fraudulent conduct.

However, there are specific circumstances where silence may be considered fraud.

Silence is Fraud:

1. Duty of the Person to Speak:

In certain situations, it is the duty of a party to speak and disclose information. When the circumstances of
the case impose a duty on a person to speak, silence can be considered fraudulent. This includes situations
where the person is expected to act with honesty and disclose material facts that affect the other party’s
decision to enter into the contract.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 51

Examples of such contracts include:

o Fiduciary Relationship:
In relationships of trust and confidence (e.g., between partners, trustees, and agents), there is a duty to
disclose material facts. A person who holds such a relationship must act in good faith and disclose all
information that may affect the agreement.

o Contracts of Insurance:
In insurance contracts, especially for marine, fire, or life insurance, there is an implied obligation to
disclose all material facts. Failing to do so may lead to the insurer avoiding the contract.

o Contracts of Marriage:
In contracts of marriage, all material facts (e.g., health status, previous relationships) must be disclosed by
both parties to avoid fraud.

o Contracts of Family Settlement:

In family settlements, all material facts known to the parties must be fully disclosed to ensure fairness and
avoid misleading any party involved.

o Share Allotment Contracts:

When shares or debentures are issued publicly, the issuer must provide a prospectus containing all
material facts related to the company and the shares. Failing to disclose relevant information can lead to
accusations of fraud.

2. Silence Equivalent to Speech:

There are instances where silence itself is taken as equivalent to speech. In such cases, a person’s failure
to speak or deny something may imply consent or admission, which could be fraudulent.

Example:
A tells B, “If you do not deny it, I will assume the horse is sound.” If B remains silent, A may assume B agrees
with the statement. In this case, B’s silence is taken as an affirmation, making it equivalent to a false
representation.

Q5. May 19 Exam (5 Marks)

Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872.

Essentials of Undue Influence:

Undue influence is defined under Section 16 of the Indian Contract Act, 1872, and refers to situations
where one party exerts unfair pressure on another to enter into a contract. The following are the key
essentials:

1. Relation Between the Parties:

There must be a relationship between the parties involved, where one party can influence the other. This
relationship often exists in close or trusted relationships, such as between parent and child, teacher and
student, or employer and employee.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 52

2. Position to Dominate the Will:

One party must be in a position to dominate the will of the other, which implies that the dominant party can
influence the weaker party's decision. This may occur in various circumstances, including:

o Real and Apparent Authority:

When one party holds real authority over the other, as in the case of a master and servant, doctor and
patient, or guardian and ward.

o Fiduciary Relationship:
In relationships where trust and confidence exist, such as between father and son, solicitor and client, or
husband and wife, undue influence can occur.

o Mental Distress:
A party may use undue influence when the mental or bodily distress (e.g., illness, old age, or emotional
instability) of the weaker party affects their ability to give informed consent.

o Unconscionable Bargains:
If a contract appears to be unfair or unconscionable, where one party benefits at the expense of the other, it
is presumed that undue influence was exerted to gain consent. This is especially common in money-lending
contracts or gifts.

3. Object to Take Undue Advantage:

The intention behind using undue influence must be to take unfair advantage of the weaker party. The
dominant party must seek to exploit the influence to the detriment of the other party.

4. Burden of Proof:
In cases of undue influence, the burden of proof lies on the party accused of exerting undue influence. The
accused party must prove that their dominant position was not used to take unfair advantage of the other
party’s will.

Q6. Nov 18 Exam (2 Marks)

Examine with reason that the given statement is correct or incorrect: "Minor is liable to pay for the
necessaries supplied to him."

Answer:

The statement is incorrect.

As per Section 68 of the Indian Contract Act, 1872, a minor is not personally liable for the payment of
necessaries supplied to him. While the law allows for necessaries to be supplied to a minor, the minor's
personal liability does not exist.

• Liability of Minor: A minor is not personally liable to pay for necessaries, but his estate (if he possesses
any property) can be held liable for the cost of the necessaries.

• Limitations: The minor is only liable to the extent of the value of the necessaries supplied. In other words, if
a minor has property, only the property can be used to recover the cost, not the minor's personal assets or
income.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 53

Thus, while necessaries supplied to a minor can be enforced against their estate, there is no personal
liability for the minor to pay.

Q7. Nov 22 RTP

"Though a minor is not competent to contract, nothing in the Contract Act prevents him from making
the other party bound to the minor". Discuss.

Answer:

A minor can be a beneficiary or take benefit from a contract, even though he is not competent to contract.
Section 11 of the Indian Contract Act, 1872 disqualifies minors from entering into binding contracts, but this
does not prevent him from making the other party bound to him.

• Promissory note in favor of a minor: A promissory note duly executed in favor of a minor is not void and
can be sued upon by the minor, because, even though a minor is incompetent to contract, he can accept
benefits from such contracts.

• Partnership: A minor cannot become a partner in a partnership firm. However, under Section 30 of the
Indian Partnership Act, 1932, a minor may, with the consent of all the partners, be admitted to the
benefits of the partnership.

Thus, while a minor cannot be bound by contracts in the same way as an adult, he can still derive benefits
from contracts and may enforce such benefits, provided the other party is bound to him.

Q8. May 20 RTP

What is a wagering agreement? Describe the transactions which resemble wagering transactions but
are not void.

Answer:

Wagering Agreement (Section 30 of the Indian Contract Act, 1872):

A wagering agreement is void. It is an agreement that involves the payment of a sum of money upon the
determination of an uncertain event. The essence of a wager is that each side stands to win or lose
depending on the occurrence of an uncertain event, and neither party has a legitimate interest in the event's
outcome.

Example:
If A agrees to pay ₹50,000 to B if it rains, and B promises to pay a like amount to A if it does not rain, the
agreement is a wager. However, if one of the parties has control over the event, the agreement is not a
wager.

Transactions Resembling Wagering Agreements but Not Void:

1. Chit Fund:
A chit fund does not fall under the scope of a wager (Section 30). In a chit fund, a group of individuals
contribute a fixed sum for a specified period, and at the end of a month, the contributed amount is paid to
the lucky winner through a lucky draw. This is not considered a wager.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 54

2. Commercial Transactions or Share Market Transactions:

Commercial transactions or transactions in the share market, where the delivery of goods or shares is
intended, do not amount to wagers, as the transaction involves a genuine exchange and not merely betting
on an uncertain event.

3. Games of Skill and Athletic Competitions:

Crossword puzzles, picture competitions, and athletic competitions where prizes are awarded based on
skill and intelligence are valid. Under the Prize Competition Act, 1955, prize competitions in games of
skill are not wagers, provided the prize money does not exceed ₹1,000.

4. Contract of Insurance:
A contract of insurance is a contingent contract and is valid under law. These contracts differ from
wagering agreements, as they involve insurable interest and a legitimate risk, unlike mere betting on an
uncertain event.

Q9. Nov 18 RTP

"Mere silence does not amount to fraud". Discuss.

Answer:

Mere silence not amounting to fraud: Mere silence as to facts that are likely to affect the willingness of a
person to enter into a contract does not amount to fraud. According to Section 17 of the Indian Contract
Act, 1872, mere silence is not considered fraudulent unless certain circumstances exist. In general, a
contracting party is not bound to disclose the whole truth or provide all the information they possess
regarding the subject matter of the contract.

The Indian Contract Act clarifies this in the Explanation to Section 17, which states that mere silence
about facts affecting the willingness of the other party to enter into a contract is not fraud.

Exceptions to this rule:

1. Duty to speak: In certain cases, where the circumstances demand it, there is a duty for the person keeping
silence to speak. This duty arises in situations such as:

o Fiduciary relationships: Where one party places trust and confidence in the other (e.g., insurance
contracts, doctor-patient relationships).

o Contracts of good faith: Where one party relies on the other’s good sense or expertise.

2. Silence equivalent to speech: Silence can amount to fraud if it is, in itself, equivalent to speech. For
example, if one party says, "If you do not deny it, I shall assume that the horse is sound", their silence in
response can be considered an affirmation, as it communicates consent.

Q10. Oct 21 MTP (5 Marks)

Explain the term "Coercion" and what are the effects of coercion under the Indian Contract Act, 1872.

Answer:

Coercion (Section 15):

Coercion is defined under Section 15 of the Indian Contract Act, 1872 as:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 55

• The committing, or threatening to commit, any act forbidden by the Indian Penal Code, or

• The unlawful detaining, or threatening to detain, any property to the prejudice of any person, with the
intention of causing any person to enter into an agreement.

In simple terms, coercion involves force or threats used to compel a person to enter into a contract against
their will.

Effects of Coercion under Section 19 of the Indian Contract Act, 1872:

The effects of coercion on a contract are as follows:

1. Voidable at the option of the coerced party:

A contract induced by coercion is voidable at the option of the party whose consent was obtained through
coercion. This means the coerced party has the right to either affirm the contract or rescind it.

2. Restoration of benefits after rescission:

If the contract is rescinded due to coercion, the party rescinding the contract must, if they have received
any benefit under the contract from the other party, restore such benefit so far as may be applicable, to the
person from whom it was received.

3. Repayment or return of money or goods received under coercion:

As per Section 72 of the Indian Contract Act, a person who has received money or anything under
coercion must repay or return it to the other party.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 56

Chapter 1 – The Indian Contract Act, 1872

UNIT 4: PERFORMANCE OF CONTRACT

PART 1 – CASE LAW QUESTIONS

Q1. May 22 Exam (4 Marks)

Sheena was a classical dancer. She entered into an agreement with Shital Vidya Mandir for 60 dance
performances. As per the contract, she was supposed to perform every weekend and be paid ₹10,000 per
performance. However, after a month, she was absent without informing, due to her personal reasons.
Answer the following questions as per the Indian Contract Act, 1872:
(i) Whether the management of Shital Vidya Mandir has the right to terminate the contract?
(ii) If the management of Shital Vidya Mandir informed Sheena about its continuance, can the management
still rescind the contract after a month on this ground subsequently?
(iii) Can the Shital Vidya Mandir claim damages that it has suffered because of this breach in any of the
above cases?

Provision under the law

• Section 39 of the Indian Contract Act, 1872:

"When a party to a contract has refused to perform or disabled himself from performing his promise in its
entirety, the promisee may put an end to the contract unless he has signified, by words or conduct, his
acquiescence in its continuance."

• Section 40 of the Indian Contract Act, 1872:

"The promisee shall be required to perform personally, if there is such an apparent intention of the parties."

• Section 75 of the Indian Contract Act, 1872:

"A person who rightfully rescinds a contract is entitled to compensation for any damage which he has
sustained through non-fulfillment of the contract."

Analysis of the given case

1. (i) Whether the management of Shital Vidya Mandir has the right to terminate the contract?

o As Sheena failed to perform her contractual obligations by being absent without informing the management,
Section 39 allows Shital Vidya Mandir to terminate the contract since Sheena disabled herself from
performing the agreed-upon performances. Therefore, the management has the right to terminate the
contract.

2. (ii) If the management of Shital Vidya Mandir informed Sheena about its continuance, can the
management still rescind the contract after a month on this ground subsequently?

o Since Shital Vidya Mandir informed Sheena about the continuance of the contract and did not take
immediate action to rescind, the management has effectively acquiesced to Sheena's absence. According
to Section 39, the management cannot rescind the contract after a month on the same ground unless
further breach occurs. Therefore, the management cannot rescind the contract on this basis after the
passage of time.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 57

3. (iii) Can Shital Vidya Mandir claim damages that it has suffered because of this breach in any of the
above cases?

o Under Section 75, if Shital Vidya Mandir rightfully rescinds the contract (as in part (i) above), it is entitled to
compensation for damages suffered due to the non-fulfillment of the contract. Therefore, the management
can claim damages for the breach in the case of termination (part (i)).

Conclusion

1. (i) The management of Shital Vidya Mandir has the right to terminate the contract as per Section 39 due to
Sheena's failure to perform.

2. (ii) If the management informed Sheena about the continuance of the contract, it cannot rescind the
contract after a month on this ground.

3. (iii) Shital Vidya Mandir can claim damages for the breach as per Section 75 in case of termination.

Q2. Dec 21 Exam (4 Marks)

A, B, C, and D are the four partners in a firm. They jointly promised to pay ₹6,00,000 to F. B and C have
become insolvent. B was unable to pay any amount, and C could pay only ₹50,000. A is compelled to pay
the whole amount to F. Decide the extent to which A can recover the amount from D with reference to the
provisions of the Indian Contract Act, 1872.

Provision under the law

• Section 42 of the Indian Contract Act, 1872:

"When two or more persons have made a joint promise, then unless a contrary intention appears by the
contract, all such persons must jointly fulfill the promise."

• Section 43 of the Indian Contract Act, 1872:

"When two or more persons make a joint promise, the promisee may, in the absence of express agreement to
the contrary, compel any one or more of such joint promisors to perform the whole of the promise. If any one
of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear
the loss arising from such default in equal shares."

Analysis of the given case

1. Joint Promise and Default:

o A, B, C, and D made a joint promise to pay ₹6,00,000 to F. Since B and C became insolvent, they failed to
contribute the agreed amount:

▪ B could not pay anything.

▪ C could only pay ₹50,000.

o Section 42 applies, where all four are jointly responsible, but the failure of B and C requires A to bear the full
amount.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 58

2. A's Right to Recover from D:

o Section 43 allows A to recover the entire amount from any of the other partners, in this case, D. A can
demand the full amount of ₹6,00,000 from D, but D can only recover a proportionate share from C and B.

o A is entitled to recover from D based on the proportion of the liability:

▪ The total liability of ₹6,00,000 minus ₹50,000 paid by C leaves ₹5,50,000 to be shared equally between D
and A.

▪ C's share: Since C could pay ₹50,000, C's share is ₹1,50,000. After paying ₹50,000, C's remaining liability is
₹1,00,000.

▪ D's share: D is responsible for the remaining ₹2,75,000, as calculated below.

3. Breakdown of A's Recovery:

o From C: A can recover ₹50,000 from C, since C could pay only that amount out of their liability of ₹1,50,000.

o From D: A can recover ₹2,75,000 from D. This includes:

▪ D’s liability of ₹1,50,000.

▪ Half of the loss from B’s liability (₹75,000 from B's default).

▪ Half of C’s remaining liability (₹50,000 from C’s default).

Conclusion

A is entitled to recover the following amounts from C and D:

1. From C: ₹50,000 (the amount C could pay).

2. From D: ₹2,75,000 (the balance liability, shared equally between D and A).

Thus, A can recover a total of ₹3,25,000 (₹50,000 from C + ₹2,75,000 from D).

Q3. July 21 Exam (6 Marks)

X, Y and Z jointly borrowed ₹90,000 from L. Decide each of the following in the light of the Indian Contract
Act, 1872:

(i) Whether L can compel only Y to pay the entire loan of ₹90,000?
(ii) Whether L can compel only the legal representatives of Y to pay the loan of ₹90,000, if X, Y and Z died?
(iii) Whether Y and Z are released from their liability to L and X is released from his liability to Y and Z for
contribution, if L releases X from his liability and sues Y and Z for payment?

Provision under the law

• Section 42 of the Indian Contract Act, 1872:

"When two or more persons have made a joint promise, then unless a contrary intention appears by the
contract, all such persons must jointly fulfill the promise, during their joint lives, and after the death of any of
them, his representative jointly with the survivor or survivors, and after the death of the last survivor, the
representatives of all jointly must fulfill the promise."

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 59

• Section 43 of the Indian Contract Act, 1872:

"When two or more persons make a joint promise, the promisee may, unless a contrary intention appears by
the contract, compel any one or more of the joint promisors to perform the whole of the promise."

• Section 44 of the Indian Contract Act, 1872:

"Where two or more persons have made a joint promise, the release of one of such joint promisors by the
promisee does not discharge the other joint promisor or joint promisors, neither does it free the joint
promisors so released from responsibility to the other joint promisor or promisors."

Analysis of the given case

1. Can L compel only Y to pay the entire loan of ₹90,000?

o Yes, L can compel only Y to pay the entire loan.

o As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, the
promisee (L in this case) may compel any one or more of the joint promisors (X, Y, or Z) to perform the whole
promise, in the absence of any express agreement to the contrary.

o Therefore, L can choose to compel only Y to pay the full loan amount of ₹90,000.

2. Can L compel only the legal representatives of Y to pay the loan of ₹90,000 if X, Y, and Z die?

o No, L cannot compel only the legal representatives of Y to pay the loan.

o According to Section 42, if X, Y, and Z are jointly liable and any of them dies, the legal representatives of all
the deceased joint promisors (i.e., X, Y, and Z) must fulfill the promise jointly with the surviving partner(s).

o If all three have died, the legal representatives of all three (X, Y, and Z) are jointly responsible for paying the
₹90,000. L cannot compel only the legal representatives of Y to pay the full amount.

3. Are Y and Z released from their liability to L, and is X released from his liability to Y and Z for
contribution if L releases X from his liability and sues Y and Z for payment?

o No, Y and Z are not released from their liability to L, and X is not released from his liability to Y and Z for
contribution.

o Section 44 provides that the release of one joint promisor (X) by the promisee (L) does not discharge the
remaining joint promisors (Y and Z) from their liability.

o While X is no longer liable to L, he remains liable to contribute to Y and Z for his share of the loan amount. Y
and Z still remain responsible for the entire ₹90,000 to L, and they can seek contribution from X if they pay
more than their share.

Conclusion

• (i) L can compel only Y to pay the entire loan of ₹90,000, as per Section 43.

• (ii) L cannot compel only the legal representatives of Y to pay the loan if X, Y, and Z die. The legal
representatives of all three are jointly liable, as per Section 42.

• (iii) Y and Z are not released from their liability to L, and X remains liable for contribution to Y and Z, even if L
releases him from liability, as per Section 44.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 60

Q4. Nov 19 Exam (6 Marks)

Mr. Sonumal, a wealthy individual, provided a loan of ₹80,000 to Mr. Datumal on 26.02.2019. The borrower,
Mr. Datumal, asked for a further loan of ₹1,50,000. Mr. Sonumal agreed but provided the loan in parts on
different dates. He provided ₹1,00,000 on 28.02.2019 and the remaining ₹50,000 on 03.03.2019. On
10.03.2019, while paying off ₹75,000 to Mr. Sonumal, Mr. Datumal insisted that the lender adjust ₹50,000
towards the loan taken on 03.03.2019 and the balance towards the loan on 26.02.2019. Mr. Sonumal
objected to this arrangement and asked the borrower to adjust the payment in the order of the date of
borrowing the funds.

Now, decide:

(i) Whether the contention of Mr. Datumal is correct or otherwise as per the provisions of the Indian Contract
Act, 1872?
(ii) What would be the answer if the borrower does not insist on such an order of adjustment of repayment?
(iii) What would be the mode of adjustment/appropriation of such part payment in case neither Mr. Sonumal
nor Mr. Datumal insists on any order of adjustment on their part?

Provision under the Law

Appropriation of Payments (Section 59 to 61 of the Indian Contract Act, 1872):

1. Section 59 – When a debtor owing several distinct debts to one person makes a payment, either with
express intimation or under circumstances implying that the payment is to be applied to a particular debt, it
must be applied accordingly.

2. Section 60 – If the debtor omits to specify the appropriation of payment, and there are no other
circumstances indicating to which debt the payment is to be applied, the creditor may apply the payment at
his discretion to any lawful debt.

3. Section 61 – If neither party specifies the appropriation, the payment shall be applied in discharge of the
debts in order of time, with earlier debts being paid first. If the debts are of equal standing, payments shall
be applied proportionately.

Analysis of the Given Case

(i) Section 59 of the Act provides that if a debtor makes a payment with express intimation or under
circumstances implying a specific application to a particular debt, the payment must be applied as per the
debtor's instructions, provided the creditor accepts it.

• Conclusion: Mr. Datumal's contention is correct. Since he has specified the manner of appropriating the
repayment, Mr. Sonumal must apply the ₹50,000 towards the loan of 03.03.2019 and the remaining ₹25,000
towards the loan of 26.02.2019, as per Mr. Datumal's request.

(ii) Section 60 of the Act states that if the debtor omits to specify the appropriation and no other
circumstances indicate the application of payment, the creditor has the discretion to apply the payment to
any of the debts due.

• Conclusion: If Mr. Datumal does not specify the manner of repayment, Mr. Sonumal, as the creditor, can
apply the ₹75,000 payment at his discretion, towards any of the outstanding debts.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 61

(iii) Section 61 of the Act specifies that if neither party makes an appropriation, the payment shall be applied
in the order of time. If there are multiple debts of equal standing, the payment will be applied
proportionately.

• Conclusion: In case neither Mr. Datumal nor Mr. Sonumal specifies the appropriation, the ₹75,000 payment
will be applied towards the debts in the order in which they became due. The ₹50,000 will be applied to the
loan taken on 26.02.2019 (the earlier loan), and ₹25,000 to the loan of 28.02.2019.

Conclusion

1. (i) Mr. Datumal's contention is correct. He can specify the manner of appropriation of repayment as per
Section 59 of the Indian Contract Act, 1872.

2. (ii) If Mr. Datumal does not specify the order, Mr. Sonumal can apply the payment at his discretion, as per
Section 60.

3. (iii) If neither party specifies, the payment will be applied in the order of time, with the earlier debts being
paid first, as per Section 61.

Q5. May 19 Exam (6 Marks)

Mr. Rich aspired to get a self-portrait made by an artist. He went to the workshop of Mr. C, an artist, and
asked whether he could sketch Mr. Rich's portrait on oil painting canvas. Mr. C agreed to the offer and asked
for ₹50,000 as full advance payment for the creative work. Mr. C clarified that the painting would be
completed in 10 sittings and would take 3 months.

On reaching the workshop for the 6th sitting, Mr. Rich was informed that Mr. C had become paralyzed and
would not be able to paint for the near future. Mr. C had a son, Mr. K, who was still pursuing his studies and
had not taken up his father’s profession yet.

Discuss in light of the Indian Contract Act, 1872:

(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for a refund of the money paid in advance to his father?

Provision under the Law

1. Section 37 of the Indian Contract Act, 1872:

"The obligation of the promisor to perform the promise is subject to the condition that the promisee will
perform his part of the promise. The promisor is bound to perform the contract if he is alive or if the contract
is not terminated."

A contract that involves the use of personal skill or is founded on personal consideration terminates on the
death or incapacity of the promisor. In such cases, the legal representatives of the deceased or
incapacitated promisor are not bound to perform the contract unless a contrary intention appears from the
contract.

2. Section 65 of the Indian Contract Act, 1872:

"When an agreement is discovered to be void or when a contract becomes void, any person who has

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 62

received any advantage under such agreement or contract is bound to restore it, or to make compensation
for it to the person from whom he received it."

Analysis of the Given Case

(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?

• Section 37 of the Indian Contract Act provides that if a contract involves personal skill or consideration, it
comes to an end on the death or incapacity of the promisor.

• Since the artistic work (painting) is based on the personal skill of Mr. C, and Mr. C has become paralyzed, the
contract cannot be performed by anyone else, including Mr. K, who is not yet trained in the profession.

• Conclusion: Mr. Rich cannot ask Mr. K to complete the artistic work in lieu of his father, as the contract
requires Mr. C’s personal skill, and it cannot be transferred to his son, Mr. K, under the given circumstances.

(ii) Could Mr. Rich ask Mr. K for a refund of the money paid in advance to his father?

• Section 65 of the Indian Contract Act states that if a contract becomes void (as in the case of Mr. C’s
incapacity to complete the work), any advantage received under the contract must be returned or
compensated for.

• Since the contract became void due to Mr. C's paralysis, Mr. Rich is entitled to a refund of the ₹50,000
advance payment.

• Conclusion: Mr. Rich can ask Mr. K for a refund of the money paid in advance to Mr. C, as the contract has
become void due to Mr. C's incapacity.

Conclusion

1. (i) Mr. Rich cannot ask Mr. K to complete the artistic work, as the contract was based on Mr. C's personal
skill, which cannot be performed by Mr. K under Section 37 of the Indian Contract Act.

2. (ii) Mr. Rich can ask Mr. K for a refund of the ₹50,000 advance payment, as the contract has become void due
to Mr. C's incapacity, under Section 65 of the Indian Contract Act.

Q6. Nov 18 Exam (4 Marks), Apr 21 MTP (6 Marks)

Mr. X and Mr. Y entered into a contract on 1st August, 2018, by which Mr. X had to supply 50 tons of sugar to
Mr. Y at a certain price strictly within a period of 10 days of the contract. Mr. Y also paid an amount of
₹50,000 towards advance as per the terms of the contract. The mode of transportation available between
their places is roadway only. Severe flooding occurred on 2nd August, 2018, and the only road connecting
their places was damaged and could not be repaired within fifteen days. Mr. X offered to supply sugar on
20th August, 2018, for which Mr. Y did not agree. On 1st September, 2018, Mr. X claimed compensation of
₹10,000 from Mr. Y for refusing to accept the supply of sugar, which was not there within the purview of the
contract. On the other hand, Mr. Y claimed a refund of ₹50,000 which he had paid as advance in terms of the
contract.

Analyse the above situation in terms of the provisions of the Indian Contract Act, 1872 and decide on
Y's contention.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 63

Provision under the Law

1. Section 56 of the Indian Contract Act, 1872 – Impossibility of Performance:

"An agreement to do an act impossible in itself is void. A contract becomes void if its performance becomes
impossible due to an event or change in circumstances which is beyond the control of the parties, and was
not contemplated by them at the time of entering into the contract."

2. Section 65 of the Indian Contract Act, 1872 – Restoration of Benefits on Void Contracts:
"When an agreement is discovered to be void or when a contract becomes void, any person who has
received any advantage under such agreement or contract is bound to restore it, or to make compensation
for it to the person from whom he received it."

Analysis of the Given Case

• The contract between Mr. X and Mr. Y for the supply of sugar was dependent on the timely delivery of goods
within 10 days. However, the occurrence of the severe flood and the subsequent damage to the only
available road prevented the performance of the contract within the stipulated time.

• This flood represents an unforeseen event or supervening impossibility that made it impossible for Mr. X to
perform the contract as agreed, leading to the contract being void under Section 56 of the Indian Contract
Act.

• In such cases, as per Section 65, when a contract becomes void, any person who has received an
advantage under the contract must return it. Since Mr. X received ₹50,000 as an advance from Mr. Y, and the
contract is now void due to the impossibility of performance, Mr. X must return the advance to Mr. Y.

Conclusion

Mr. Y is entitled to claim a refund of ₹50,000, as the contract has become void due to the occurrence of the
flood, which made performance impossible within the stipulated time. Therefore, Mr. Y’s contention is
correct, and Mr. X must refund the advance payment as per the provisions of Section 65 of the Indian
Contract Act.

Q7. May 18 Exam (4 Marks)

X, Y, and Z are partners in a firm. They jointly promised to pay ₹3,00,000 to D. Y became insolvent, and his
private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole amount to D.
Examining the provisions of the Indian Contract Act, 1872, decide the extent to which X can recover the
amount from Z.

Provision under the Law

1. Section 43 of the Indian Contract Act, 1872 – Joint Promises:

"When two or more persons make a joint promise, the promisee may, in the absence of an express
agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the
promise. Each of the joint promisors may compel every other joint promisor to contribute equally with

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 64

himself to the performance of the promise. If any one of the joint promisors defaults in making such
contribution, the remaining joint promisors must bear the loss arising from such default in equal shares."

Analysis of the Given Case

• In this case, X, Y, and Z are jointly liable to pay ₹3,00,000 to D. Since Y became insolvent and his assets are
insufficient to meet his full share, X is compelled to pay the entire ₹3,00,000 to D.

• According to Section 43, when multiple parties make a joint promise, one party who fulfills the obligation
can seek contribution from the other parties.

• Y can pay only 1/5 of his share, which is ₹60,000 (₹3,00,000 * 1/5), leaving ₹2,40,000 unpaid. Since X paid
the entire amount, X can recover the defaulted share from Z.

• Since Y paid only ₹60,000, and X paid ₹2,40,000, Z must contribute equally to the remaining ₹2,40,000
(since the contract does not indicate a different agreement).

Conclusion

X can recover ₹1,40,000 from Z (half of the unpaid amount of ₹2,40,000), in accordance with Section 43 of
the Indian Contract Act, 1872. Additionally, X can recover ₹20,000 from Y's estate to cover the portion of Y’s
debt.

Q8. Jun 23 RTP

Mr. Harish owes payment of three bills to Mr. Ashish as on 31st March 2022:

• ₹12,120, which was due in May 2018.

• ₹5,650, which was due in August 2020.

• ₹9,680, which was due in May 2021.

Mr. Harish made payment on 1st April 2022 as below, without specifying how the payments should be
appropriated:

• (i) A cheque of ₹9,680.

• (ii) A cheque of ₹15,000.

Advise under the provisions of the Indian Contract Act, 1872.

Provision under the Law

As per Sections 59, 60, and 61 of the Indian Contract Act, 1872:

1. Section 59: When a debtor owes multiple distinct debts to a creditor and makes a payment, the debtor has
the right to specify which debt the payment is to be appropriated towards.

2. Section 60: If the debtor does not make such an appropriation, the creditor has the discretion to appropriate
the payment towards any lawful debt, even if it is time-barred.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 65

3. Section 61: If neither the debtor nor the creditor appropriates the payment, the payment is appropriated in
the order of time, i.e., the oldest debt is paid off first.

Analysis of the Given Case

• Cheque of ₹9,680:
Since this cheque matches the exact amount of the bill due in May 2021, it will be automatically
appropriated against that specific debt.

• Cheque of ₹15,000:
Since no appropriation was specified by Mr. Harish:

o As per Section 60, Mr. Ashish, the creditor, can appropriate the payment towards any lawful debt.

o Mr. Ashish may first appropriate ₹12,120 towards the debt due in May 2018 (even though it is time-barred, it
is a lawful debt).

o The remaining ₹2,880 (₹15,000 - ₹12,120) can be appropriated towards the debt of ₹5,650, which was due in
August 2020.

Conclusion

1. The cheque of ₹9,680 will be appropriated against the debt of ₹9,680 due in May 2021.

2. The cheque of ₹15,000 will be appropriated as follows:

o ₹12,120 towards the debt due in May 2018.

o ₹2,880 towards the debt due in August 2020.

o The balance of ₹2,770 from the debt of ₹5,650 will remain unpaid.

Q9. Jun 23 RTP

P left his carriage on D’s premises. The landlord of D seized the carriage against the rent due from D. P paid
the rent and got his carriage released. Can P recover the amount from D?

Provision under the Law

As per Section 69 of the Indian Contract Act, 1872, if a person, who is interested in the payment of money
that another person is legally bound to pay, makes the payment on their behalf, the payer is entitled to
reimbursement from the person who was originally bound to pay.

Analysis of the Given Case

• In this case, D was legally bound to pay rent to his landlord.

• P’s carriage was seized by the landlord due to the unpaid rent of D.

• P, being interested in protecting his property (the carriage), paid the rent to the landlord to secure its release.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 66

• Since P made the payment to fulfill an obligation that D was bound to meet, P is entitled to seek
reimbursement from D as per Section 69.

Conclusion

P can recover the amount paid to the landlord from D, as the payment was made in D's interest and for an
obligation D was legally bound to fulfill.

Q10. Nov 22 RTP

What will be the rights of the promisor in the following cases? Explain with reasons:
a) Mr. X promised to bring back Mr. Y to life again.
b) A agreed to sell 50 kgs of apples to B. The loaded truck left for delivery on 15th March but, due to riots in
between, reached B on 19th March.
c) An artist promised to paint on the fixed date for a fixed amount of remuneration but met with an accident
and lost his both hands.
d) Abhishek entered into a contract to import toys from China. But due to disturbances in the relations of
both countries, imports from China were banned.

Answer

Provision under the Law

1. Initial Impossibility: As per Section 56 of the Indian Contract Act, 1872, an agreement to do an act
impossible in itself is void from the beginning.

2. Subsequent or Supervening Impossibility: If, after a contract is entered into, the performance of the
contract becomes impossible due to events or circumstances beyond the control of the parties, the contract
becomes void.

3. Personal Nature of Contract: When a contract involves personal skills or qualifications and the performer is
unable to perform due to unforeseen circumstances, the contract is discharged.

Analysis of the Given Cases

a) Mr. X promised to bring back Mr. Y to life again.

• This is a case of initial impossibility, as it is impossible to bring a person back to life.

• Right of Promisor: The contract is void ab initio (from the beginning), and neither party can claim any rights
or liabilities under it.

b) A agreed to sell 50 kgs of apples to B. The loaded truck left for delivery on 15th March but, due to
riots, reached B on 19th March.

• In this case, time was the essence of the contract, and the apples were perishable goods. Due to riots, the
delay caused the apples to rot, rendering the contract void due to the destruction of the subject matter.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 67

• Right of Promisor: A is discharged from performing the contract, and the buyer (B) cannot compel the seller
to deliver the goods in their spoiled condition.

c) An artist promised to paint on the fixed date for a fixed amount of remuneration but met with an
accident and lost both hands.

• The contract involved personal skills, and the accident made the performance impossible. This is a case of
subsequent impossibility.

• Right of Promisor: The artist is discharged from performing the contract as it has become impossible due to
personal incapacity.

d) Abhishek entered into a contract to import toys from China, but imports were banned due to
disturbances in the relations between the two countries.

• This is a case of subsequent illegality, where the performance of the contract became illegal due to
government restrictions.

• Right of Promisor: The contract is discharged without performance, and neither party is liable to the other
for non-performance.

Conclusion

In all the above cases, the promisor is discharged from performing the contract due to the impossibility or
illegality of performance, as per the provisions of the Indian Contract Act, 1872.

Q11. Nov 21 RTP

Mr. X was a Disk Jockey at a five-star hotel bar. As per the contract, he was supposed to perform every
weekend (i.e., twice a week). Mr. X was to be paid ₹1500 per day. However, after a month, Mr. X willfully
absents himself from the performance.

(i) Does the hotel have the right to end the contract?
(ii) If the hotel sends out a mail to X stating that they are interested in continuing the contract and X accepts,
can the hotel rescind the contract after a month on this ground subsequently?
(iii) In which of the cases – (termination of contract or continuance of contract) – can the hotel claim
damages that it has suffered as a result of this breach?

Answer

Provision under Section 39 of the Indian Contract Act, 1872

When a party to a contract refuses to perform or disables himself from performing his promise entirely, the
promisee (the aggrieved party) accrues two rights:

1. To terminate the contract

2. To indicate by words or conduct that they are interested in its continuance

In both cases, the promisee is entitled to claim damages suffered due to the breach.

Analysis of the Given Situation

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 68

(i) Does the hotel have the right to end the contract?

• Yes, the hotel has the right to terminate the contract with Mr. X. By willfully absenting himself from the
performance, Mr. X has refused to perform his obligations under the contract, which entitles the hotel to
terminate the contract as per Section 39.

(ii) If the hotel sends out a mail to X stating that they are interested in continuing the contract and X
accepts, can the hotel rescind the contract after a month on this ground subsequently?

• No, if the hotel exercises its right to continue the contract and communicates the same to Mr. X, it cannot
subsequently rescind the contract on the same ground (Mr. X's prior breach). Once the right to terminate the
contract is waived, the hotel must honor its decision to continue the contract unless there is another
breach.

(iii) In which of the cases – termination of contract or continuance of contract – can the hotel claim
damages that it has suffered as a result of this breach?

• In both cases (whether the hotel terminates the contract or chooses to continue it), the hotel is entitled to
claim damages that it has suffered due to Mr. X's breach of contract.

Conclusion

The hotel has the right to terminate the contract due to Mr. X's refusal to perform. However, if the hotel
chooses to continue the contract and communicates this decision, it cannot rescind the contract on the
same grounds later. Regardless of whether the hotel terminates or continues the contract, it can claim
damages caused by the breach.

Q12. May 21 RTP

In light of the provisions of the Indian Contract Act, 1872, answer the following:

(i) Mr. S and Mr. R made a contract wherein Mr. S agreed to deliver a paper cup manufacturing machine to Mr.
R and to receive payment on delivery. On the delivery date, Mr. R didn’t pay the agreed price. Decide whether
Mr. S is bound to fulfill his promise at the time of delivery.

(ii) Mr. Y has given a loan of ₹30,00,000 to Mr. G. Mr. G defaulted on the loan on the due date, and the debt
became time-barred. After the debt became time-barred, Mr. G agreed to settle the full amount to Mr. Y. Is
the acceptance of this time-barred debt contract enforceable in law?

(iii) A and B entered into a contract to supply a unique item, an alternate of which is not available in the
market. A refused to supply the agreed unique item to B. What directions could the court give for the breach
of such a contract?

Provision under the law

(i) Section 51 of the Indian Contract Act, 1872:

When a contract consists of reciprocal promises to be simultaneously performed, no promisor needs to
perform their promise unless the promisee is ready and willing to perform their reciprocal promise. Such
promises constitute concurrent conditions, and the performance of one promise is conditional on the
performance of the other. If one promise is not performed, the other need not be performed.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 69

(ii) Promise to pay time-barred debts – Section 25(3):

Where there is an agreement, made in writing and signed by the debtor or by their agent, to pay wholly or in
part a time-barred debt, the agreement is valid and binding even though there is no consideration.

(iii) Specific performance under contract law:

Where there is a breach of contract for the supply of a unique item, monetary damages may not be an
adequate remedy for the aggrieved party. In such cases, the court may order specific performance, directing
the party in breach to carry out their promise according to the terms of the contract.

Analysis of the given case

(i) Referring to the above provision under Section 51, in the given case, Mr. S is not bound to deliver the goods
to Mr. R since payment was not made by Mr. R at the time of delivery. The performance of Mr. S’s promise
(delivery of goods) is conditional on the performance of Mr. R’s reciprocal promise (payment).

(ii) In the given case, the loan given by Mr. Y to Mr. G has become time-barred. Subsequently, Mr. G agreed to
make payment of the full amount to Mr. Y. Referring to Section 25(3), the contract entered between the
parties post time-barred debt is valid, provided it is in writing and signed by Mr. G or his agent. Thus, Mr. G is
bound to pay the agreed amount to Mr. Y if these conditions are fulfilled.

(iii) In this case, the contract between A and B involves the supply of a unique item, an alternative to which is
not available in the market. Mere monetary damages may not adequately compensate B. Therefore, the
court may order specific performance, directing A to supply the item to B as agreed in the terms of the
contract.

Conclusion

(i) Mr. S is not bound to deliver the goods to Mr. R as Mr. R did not fulfill his reciprocal promise of making
payment at the time of delivery.

(ii) The contract to pay a time-barred debt is enforceable under Section 25(3), provided the agreement is in
writing and signed by Mr. G or his agent. Therefore, Mr. G is legally bound to pay the agreed amount to Mr. Y.

(iii) The court may direct A to supply the agreed unique item to B as specific performance of the contract, as
monetary compensation would not be an adequate remedy for this breach.

Q13. Nov 19 RTP, Oct 20 MTP (4 Marks)

Question
X, Y, and Z jointly borrowed ₹50,000 from A. The whole amount was repaid to A by Y. Decide in light of the
Indian Contract Act, 1872, whether:

(i) Y can recover the contribution from X and Z.

(ii) Legal representatives of X are liable in case of the death of X.
(iii) Y can recover the contribution from the assets in case Z becomes insolvent.

Provision under the law

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 70

1. Section 42 of the Indian Contract Act, 1872:

When two or more persons have made a joint promise, all such persons jointly must fulfill the promise
unless a contrary intention appears in the contract. In the event of the death of one of the joint promisors,
their legal representatives are liable jointly with the survivors to fulfill the promise.

2. Section 43 of the Indian Contract Act, 1872:

• The liability of joint promisors is "joint and several." This means the promisee can compel any one or more of
the joint promisors to perform the whole promise.

• Joint promisors have the right to seek contribution among themselves. If one joint promisor performs the
promise, they can compel the other joint promisors to contribute equally unless the contract states
otherwise.

• If one joint promisor defaults, the remaining promisors must bear the loss equally.

Analysis of the given case

(i) Since X, Y, and Z are joint promisors, as per Section 43, Y can recover the contribution from X and Z. The
law allows a joint promisor who has discharged the entire debt to seek proportional reimbursement from the
others.

(ii) In case of the death of X, the legal representatives of X are liable to contribute their share of the debt to Y.
However, as per Section 42, their liability is limited to the extent of the property of the deceased received by
them.

(iii) If Z becomes insolvent, Y can recover Z's contribution from Z's assets. As per Section 43, if a joint
promisor defaults (due to insolvency in this case), the remaining joint promisors must bear the loss equally.

Conclusion

(i) Yes, Y can recover the contribution from X and Z as they are joint promisors under Section 43.

(ii) The legal representatives of X are liable to pay the contribution to Y, but their liability is limited to the
extent of the property inherited from the deceased.

(iii) Y can recover the contribution from Z's assets, even if Z becomes insolvent. If the recovery is insufficient,
Y and X must bear the loss equally.

Q14. May 19 RTP

Question
X received certain goods from Y and promised to pay ₹60,000. Later on, X expressed his inability to make
payment. Z, who is known to X, pays ₹40,000 to Y on behalf of X. However, X was not aware of the payment.
Now, Y is intending to sue X for the amount of ₹60,000. Can Y do so? Advise.

Provision under the law

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 71

Section 41 of the Indian Contract Act, 1872:

When a promisee accepts the performance of the promise from a third person (a stranger), he cannot
subsequently enforce the promise against the original promisor. In other words, if a third party makes a
payment on behalf of the promisor, and the promisee accepts the performance, the promisor is discharged
from the obligation, unless the promisor ratifies the act of the third party.

Analysis of the given case

• X's Inability to Pay: X had promised to pay ₹60,000 to Y but expressed his inability to make the payment.

• Z’s Payment: Z, who is known to X, paid ₹40,000 to Y on behalf of X. This payment was accepted by Y, though
X was not aware of it.

• Section 41 Application: As per Section 41, when Y accepts the payment from Z, this constitutes the
discharge of X’s liability to the extent of ₹40,000. Since X did not authorize or ratify the payment made by Z, Y
cannot enforce the full ₹60,000 debt against X.

Conclusion

Y can only sue X for the balance amount of ₹20,000, as the ₹40,000 paid by Z discharges X's obligation to
that extent. Since X did not authorize or ratify the payment, he remains liable for the remaining amount only.

Q15. Nov 18 RTP

Question
Ajay, Vijay, and Sanjay are partners in a software business and jointly promise to pay ₹6,00,000 to Kartik.
Over time, Vijay becomes insolvent, but his assets are sufficient to pay one-fourth of his debts. Sanjay is
compelled to pay the whole amount. Decide whether Sanjay is required to pay the whole amount himself to
Kartik in discharging the joint promise under the Indian Contract Act, 1872.

Provision under the law

Section 43 of the Indian Contract Act, 1872:

When two or more persons make a joint promise, the promisee, in the absence of an express agreement to
the contrary, may compel any one or more of such joint promisors to perform the whole of the promise.

• Each joint promisor may compel the others to contribute equally to the performance of the promise unless
the contract states otherwise.

• If one of the joint promisors defaults in contributing, the remaining joint promisors must bear the loss from
such default in equal shares.

Analysis of the given case

• Joint Promise: Ajay, Vijay, and Sanjay jointly promised to pay ₹6,00,000 to Kartik.

• Vijay's Insolvency: Vijay becomes insolvent, but his assets are sufficient to pay one-fourth of his debts.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 72

• Sanjay's Payment: Sanjay is compelled to pay the entire ₹6,00,000 amount.

• Application of Section 43:

o Sanjay can seek contribution from Vijay and Ajay for the amount paid.

o Since Vijay can pay one-fourth of his debts, Sanjay is entitled to recover ₹50,000 from Vijay’s assets (one-
fourth of Vijay’s share in the joint promise).

o The remaining ₹5,50,000 will be divided equally between Ajay and Sanjay. Thus, Sanjay can recover
₹2,75,000 from Ajay.

Conclusion

Sanjay is entitled to receive ₹50,000 from Vijay’s assets and ₹2,75,000 from Ajay to fulfill the joint promise of
₹6,00,000 to Kartik. Sanjay is not required to bear the entire payment alone.

Q16. Nov 22 MTP

Question
Examine the validity of the following contract as per the Indian Contract Act, 1872, giving reasons.
J contracts to take in cargo for K at a foreign port. J's government afterwards declares war against the country
in which the port is situated, and therefore the contract could not be fulfilled. K wants to file a suit against J.

Provision under the law

Section 56 of the Indian Contract Act, 1872:

A contract is said to be void if its performance becomes impossible due to a supervening event, such as the
declaration of war.

• Supervening Impossibility: A contract becomes void if an unforeseen event occurs that makes
performance impossible, and the event was not contemplated by the parties when entering the contract.

• Force Majeure: Events like war can discharge parties from their obligations under the contract due to
impossibility of performance.

Analysis of the given case

• Original Contract: J contracts to take cargo for K at a foreign port. The contract is valid when made.

• Supervening Event: After the contract is made, J’s government declares war against the country where the
port is situated. This makes it impossible for J to fulfill the contract.

• Application of Section 56:

o The declaration of war is a supervening event that renders the contract impossible to perform.

o According to Section 56, this event discharges J from performing the contract.

o Therefore, the contract is considered void due to the impossibility of performance arising from the war
declaration.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 73

Conclusion

K cannot file a suit against J for the performance of the contract because the contract has become void due
to the supervening impossibility caused by the declaration of war.

PART 2 – DIRECT QUESTIONS

Q1. Dec 21 Exam (7 Marks)

Explain any five circumstances under which contracts need not be performed with the consent of both
the parties.

Answer:

Under the following circumstances, contracts need not be performed with the consent of both parties:

1. Novation:
Novation occurs when the parties to a contract substitute a new contract for the old one. This can be either
between the same parties or different parties, with the mutual consideration being the discharge of the
original contract. Once novation takes place, the old contract is discharged, and therefore, it need not be
performed.
(Section 62 of the Indian Contract Act, 1872)

2. Rescission:
A contract can be discharged by rescission, where the parties mutually agree to cancel the contract. When
rescission occurs, the contract need not be performed as it is treated as if it never existed.
(Section 62)

3. Alteration:
When the parties to a contract agree to alter its terms, the original contract is rescinded and replaced by the
altered contract. This leads to the discharge of the original contract, meaning it need not be performed
anymore.
(Section 62)

4. Remission:
Under remission, the promisee may completely or partially dispense with the performance of the promise
made to them, extend the time for performance, or accept any satisfaction they deem fit. As a result, the
contract can be discharged by remission.
(Section 63)

5. Rescinds Voidable Contract:

If a person, at whose option a contract is voidable, decides to rescind the contract, the other party is no
longer bound to perform any promise contained in the contract. This effectively discharges the contract.
(Section 64)

6. Neglect of Promisee:
If the promisee neglects or refuses to provide the promisor with reasonable facilities to perform their
promise, the promisor is excused from performing the contract to the extent of the non-performance
caused by the promisee's neglect.
(Section 67)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 74

Q2. July 21 Exam (5 Marks)

Explain what is meant by 'Supervening Impossibility' as per the Indian Contract Act, 1872 with the help
of an example. What is the effect of such impossibility?

Answer:

According to Section 56 of the Indian Contract Act, 1872, impossibility of performance may occur in two
ways:

1. Initial Impossibility

2. Subsequent Impossibility (Supervening Impossibility)

Supervening Impossibility refers to a situation where the performance of a contract becomes impossible or
illegal after the contract has already been formed, due to an unexpected event or a change in
circumstances that was not anticipated by the parties. In simple terms, the contract, which was initially
possible, becomes impossible or unlawful due to reasons beyond the control of the parties. This is also
known as post-contractual impossibility.

Example:

• Case: 'A' and 'B' entered into a contract to marry each other. Before the time fixed for the marriage, 'A'
became mad.

• In this case, the contract becomes void due to subsequent impossibility (because 'A' is now incapable of
fulfilling the contract), and thus the contract is discharged.

Effect of Supervening Impossibility:

• The contract becomes void under Section 56, and the parties are discharged from further performance of
the contract.

• This means that no party is liable to perform or fulfill the obligations of the contract because performance
has become impossible or illegal

Q3. May 20 RTP

“The basic rule is that the promisor must perform exactly what he has promised to perform.” Explain
stating the obligation of parties to contracts.

Answer:

Obligations of Parties to Contracts (Section 37 of the Indian Contract Act, 1872):

The parties to a contract are required to either:

1. Perform or

2. Offer to perform
their respective promises unless performance is dispensed with or excused under the provisions of the
Contract Act or any other law.

Additionally:

• Promises bind the representatives of the promisor in case of the promisor's death, unless the contract
indicates a contrary intention.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 75

Examples:

• Example 1:
A promises to deliver goods to B on a certain day on payment of ₹ 1,00,000. If A dies before that day, A’s
representatives are bound to deliver the goods to B, and B is bound to pay ₹ 1,00,000 to A’s representatives.

• Example 2:
A promises to paint a picture for B by a certain day at a certain price. If A dies before the agreed day, the
contract cannot be enforced by either A’s representatives or B because the contract involves personal
skill.

Analysis of Section 37:

• A contract, being an agreement enforceable by law, creates a legal obligation that subsists until
discharged.

• Performance of the promise(s) is the primary and most common mode of discharge.

• The basic rule is that the promisor must perform exactly what he has promised. The obligation to perform
is absolute.

Key Points:

1. A party can enforce a promise only if they perform or offer to perform their part of the promise.

2. Performance may be:

o Actual: When the promisor fulfills the promise.

o Offer to perform: When the promisor is ready and willing to fulfill the promise but is prevented by the
promisee.

3. A party is absolved from responsibility only if:

o Performance is excused by law.

o The other party’s act excuses performance.

Thus, performance or an offer to perform is the foundation of fulfilling contractual obligations, as

enshrined in Section 37.

Q4. May 20 MTP (5 Marks)

“When a party to a contract has refused to perform, or disabled himself from performing his promise in
its entirety, the promisee may put an end to the contract”. Explain.

Answer:

Effect of a Refusal of Party to Perform Promise (Section 39 of the Indian Contract Act, 1872):

According to Section 39, if a party to a contract refuses to perform or becomes unable to perform their
promise in its entirety, the promisee (the aggrieved party) has the option to terminate the contract, unless
they have signified (by words or conduct) their acquiescence (consent) to the continuance of the contract.

Key Points:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 76

1. Right to Terminate the Contract:

o The promisee has the right to put an end to the contract if the other party refuses or disables themselves
from performing the promise.

2. Right to Continue the Contract:

o Alternatively, the promisee can choose to continue the contract despite the refusal or incapacity of the
other party. However, if the promisee continues the contract, they cannot later terminate on this same
ground.

3. Claim for Damages:

o Regardless of whether the promisee chooses to terminate or continue, they are entitled to claim damages
for any losses suffered due to the breach.

Summary:

• If a party refuses or is unable to perform their promise, the promisee has the option to either:

1. Terminate the contract, or

2. Continue the contract (but cannot later terminate on the same grounds).

• In either case, the promisee can claim damages resulting from the breach.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 77

Chapter 1 – The Indian Contract Act, 1872

UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

PART - 1 CASE LAW QUESTIONS

Q1. Nov 20 Exam

Question
In light of the provisions of the Indian Contract Act, 1872, answer the following:

(i) Mr. S and Mr. R made a contract wherein Mr. S agreed to deliver a paper cup manufacturing machine to Mr.
R and to receive payment on delivery. On the delivery date, Mr. R didn’t pay the agreed price. Decide whether
Mr. S is bound to fulfill his promise at the time of delivery?

(ii) Mr. Y gave a loan to Mr. G of INR 30,00,000. Mr. G defaulted on the loan on the due date and the debt
became time-barred. After the time-barred debt, Mr. G agreed to settle the full amount with Mr. Y. Is the
acceptance of the time-barred debt contract enforceable in law?

(iii) A & B entered into a contract to supply a unique item, an alternative of which is not available in the
market. A refused to supply the agreed unique item to B. What directions could be given by the court for
breach of such a contract?

Provision under the law

• Section 51 of the Indian Contract Act, 1872:

This section deals with reciprocal promises to be performed simultaneously. A promisor is not bound to
perform their promise unless the promisee is ready and willing to perform their reciprocal promise.
Performance of one promise is conditional on the performance of the other.

• Section 25(3) of the Indian Contract Act, 1872:

If a contract is made in writing and signed by the debtor or their agent to pay wholly or partly a time-barred
debt, the agreement is valid and binding even if there is no consideration.

• Section 14 of the Indian Contract Act, 1872:

This section defines "specific performance" as the enforcement of a contract when monetary damages are
not an adequate remedy. A party in breach may be compelled to perform the contract.

Analysis of the given case

(i) Mr. S and Mr. R's Contract

• Reciprocal Promises: Mr. S is obligated to deliver the machine, and Mr. R is obligated to make payment at
the time of delivery.

• Non-payment by Mr. R: Since Mr. R did not pay the agreed price at the time of delivery, Mr. S is not bound to
deliver the machine under the contract.

• Conclusion: Mr. S is not bound to fulfill his promise of delivering the machine unless Mr. R is ready to
perform his reciprocal promise (i.e., make payment).
Thus, Mr. S is not bound to deliver the machine at the time of delivery.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 78

(ii) Mr. Y and Mr. G's Loan Agreement

• Time-Barred Debt: The loan debt has become time-barred, but Mr. G agrees to pay the full amount.

• Validity of Contract: As per Section 25(3), an agreement to pay a time-barred debt is valid and enforceable
if the agreement is in writing and signed by the debtor or their agent.

• Conclusion: Since Mr. G has agreed to settle the full amount in writing, the contract is enforceable under
the law, and Mr. G is bound to pay the agreed amount to Mr. Y.

(iii) Breach of Contract for a Unique Item

• Breach of Contract: A refuses to supply the unique item, and no alternative item is available in the market.

• Specific Performance: In cases where a unique item is involved and monetary damages are not an
adequate remedy, the court may order specific performance. This means A may be directed to supply the
unique item as per the terms of the contract.

• Conclusion: The court may direct A to supply the unique item to B because monetary compensation would
not adequately resolve the breach of this contract.

Conclusion

(i) Mr. S is not bound to deliver the machine unless Mr. R is ready to make the payment.
(ii) Mr. G is bound to pay the full amount of the time-barred debt to Mr. Y as the agreement is enforceable
under Section 25(3).
(iii) The court may direct A to supply the unique item to B through a decree of specific performance, as
monetary damages would not be sufficient.

Q2 May 18 Exam

Question
M Ltd., contracts with Shanti Traders to make and deliver certain machinery to them by 30.6.2017 for ₹11.50
lakhs. Due to a labour strike, M Ltd. could not manufacture and deliver the machinery to Shanti Traders.
Later, Shanti Traders procured the machinery from another manufacturer for ₹12.75 lakhs. Due to this,
Shanti Traders were also prevented from performing a contract they had made with Zenith Traders at the
time of their contract with M Ltd. and were compelled to pay compensation for breach of contract.
Advise Shanti Traders on the amount of compensation they can claim from M Ltd., referring to the legal
provisions of the Indian Contract Act, 1872.

Relevant Legal Provision

• Section 73 of the Indian Contract Act, 1872:

This section provides that when a contract is breached, the party suffering from the breach is entitled to
receive compensation for any loss or damage that naturally arises in the usual course of things from the
breach or that the parties knew, at the time of making the contract, would likely result from the breach.
However, compensation is not provided for remote or indirect losses. The explanation also states that when
estimating the loss, the means available to remedy the inconvenience caused by non-performance should
be considered.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 79

Analysis and Application to the Case

• Claim for Compensation by Shanti Traders:

M Ltd. failed to deliver the machinery by the agreed date, leading Shanti Traders to purchase the machinery
from another manufacturer for ₹12.75 lakhs instead of ₹11.50 lakhs. The additional ₹1.25 lakh is a direct and
natural consequence of M Ltd.'s breach of contract.

o Loss Due to Non-Performance: The ₹1.25 lakh (₹12.75 lakhs - ₹11.50 lakhs) is a reasonable loss Shanti
Traders incurred due to M Ltd.'s failure to perform the contract.

o Compensation Under Section 73: Since this loss was a foreseeable consequence of M Ltd.’s breach (failure
to deliver on time), Shanti Traders can claim compensation of ₹1.25 lakh from M Ltd.

• Claim for Compensation Paid to Zenith Traders:

Shanti Traders was also unable to perform its contract with Zenith Traders and was compelled to pay
compensation for the breach of that contract.

o Knowledge of the Contract with Zenith Traders: If M Ltd. knew that Shanti Traders had entered into a
contract with Zenith Traders and the timely delivery of machinery was essential to Shanti Traders'
performance of that contract, M Ltd. could be held liable for the compensation Shanti Traders had to pay
Zenith Traders.

o If M Ltd. Was Unaware: If M Ltd. was unaware of Shanti Traders' obligations to Zenith Traders, M Ltd. would
not be liable for this indirect loss.

o Conclusion: Shanti Traders can claim compensation from M Ltd. for the ₹1.25 lakh loss due to M Ltd.'s
delay. As for the compensation to Zenith Traders, it depends on whether M Ltd. knew about the contract and
the related consequences.

Conclusion

1. Amount Shanti Traders can claim:

Shanti Traders can claim ₹1.25 lakh from M Ltd. for the direct loss caused by the failure of M Ltd. to deliver
the machinery on time (₹12.75 lakhs - ₹11.50 lakhs).

2. Claim for compensation to Zenith Traders:

Shanti Traders can only claim the compensation paid to Zenith Traders if M Ltd. knew about the contract and
the potential for such a loss. Otherwise, M Ltd. is not liable for this indirect loss.

Q3 May 22 RTP

Question
Seema was running a boutique in New Delhi and was to deliver some cloth to her friend Kiran, who was
holding an exhibition in Mumbai. Seema delivered the sewing machine and some cloth to a railway company
to be delivered to the place where the exhibition was to be held. Seema expected to earn exceptional profit
from sales at the exhibition but did not inform the railway authorities of this. The goods were delivered after
the exhibition concluded.
On account of this breach of contract by the railway authorities, can Seema recover the loss of profits under
the Indian Contract Act, 1872?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 80

Relevant Legal Provisions

• Section 73 of the Indian Contract Act, 1872:

This section deals with compensation for loss or damage caused by a breach of contract. It allows the
aggrieved party to claim compensation for the loss that naturally arises from the breach in the usual course
of business (general damages). Special damages, which are recoverable in exceptional circumstances,
require the aggrieved party to have informed the other party of the special circumstances that might result in
an extraordinary loss.

• Hadley v. Baxendale (1854):

This case established the rule for calculating damages in breach of contract. It states that the damages for
breach of contract should cover losses that arise naturally in the usual course of things or those that the
parties foresaw at the time of the contract.

Analysis and Application to the Case

• Ordinary Damages:
Seema can recover ordinary damages, which are the natural and foreseeable losses from the breach of
contract. These losses are those that arise in the usual course of business and are not related to any special
circumstances that Seema expected to profit from the exhibition.

• Special Damages:
Special damages arise from unusual circumstances, such as Seema’s expected exceptional profit from the
exhibition. However, Seema did not inform the railway authorities about the specific importance of the
timely delivery of the goods for the exhibition and the potential profit. Since the railway authorities were not
made aware of these special circumstances, they cannot be held liable for the loss of exceptional profits.

• Loss of Profits:
Since Seema did not notify the railway authorities about the special nature of the exhibition, she cannot
claim the loss of profits from the delayed delivery. Only the losses that naturally arose in the usual course of
the transaction (e.g., the cost of the delayed goods) can be claimed as ordinary damages.

Conclusion

Seema can recover only the ordinary damages arising from the breach of contract, such as the cost of the
delayed goods or any other loss that naturally resulted from the breach in the usual course of business. She
cannot recover the loss of exceptional profits, as the railway authorities were not informed about the special
circumstances of her expected profits from the exhibition.

Q4 Nov 21 RTP

Question
Mr. X was a Disk Jockey (DJ) at a five-star hotel bar. According to the contract, he was required to perform
every weekend (twice a week) and would be paid ₹1500 per day. After a month, Mr. X willfully absents
himself from performing.

1. Does the hotel have the right to end the contract?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 81

2. If the hotel sends a mail to Mr. X stating that they are interested in continuing the contract and Mr. X accepts,
can the hotel rescind the contract after a month on this ground subsequently?

3. In which of the cases—termination of contract or continuance of contract—can the hotel claim damages it
has suffered as a result of this breach?

Relevant Legal Provisions

• Section 39 of the Indian Contract Act, 1872:

This section deals with the rights of the aggrieved party when the other party either refuses to perform or
disables themselves from performing their contractual obligations entirely. The aggrieved party has two main
options:

1. Terminate the contract (terminate the performance of the contract).

2. Continue the contract (indicate by words or conduct that they wish to continue the contract despite the
other party's failure to perform).

The aggrieved party is entitled to claim damages in both cases.

Analysis and Application to the Case

1. Does the hotel have the right to end the contract?

Yes, according to Section 39 of the Indian Contract Act, if a party (Mr. X) refuses to perform or disables
themselves from performing their promise (i.e., by willfully absents himself), the aggrieved party (the hotel)
has the right to terminate the contract. Mr. X's absence from performing his duties for a month constitutes a
breach, giving the hotel the right to terminate the contract.

2. Can the hotel rescind the contract after a month if Mr. X accepts the offer to continue the contract?
If the hotel expresses an interest in continuing the contract (e.g., by sending an email), and Mr. X accepts,
then the hotel has chosen to continue the contract. Once the hotel has exercised this option, it cannot
subsequently rescind the contract on the grounds of the prior breach (Mr. X's willful absence) unless further
breaches occur. By accepting Mr. X's willingness to continue, the hotel effectively waives the option to
terminate based on the prior breach.

3. In which case can the hotel claim damages for the breach?
The hotel can claim damages in both scenarios:

o If the hotel terminates the contract due to Mr. X's absence, the hotel is entitled to claim damages for any
losses directly resulting from the breach (e.g., cost of finding a replacement DJ or lost business).

o If the hotel continues the contract, they can still claim damages for the breach of contract, as the
continued contract would not erase the harm caused by Mr. X's initial failure to perform.

Conclusion

1. Yes, the hotel has the right to end the contract due to Mr. X’s willful absence.

2. Once the hotel accepts Mr. X’s willingness to continue the contract, they cannot rescind it on the same
ground (his earlier breach).

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 82

3. The hotel can claim damages in both cases—whether it terminates the contract or continues with it—if it
can show that it has suffered a loss due to Mr. X's breach.

Q5 Nov 20 RTP

Question
‘X’ entered into a contract with ‘Y’ to supply 1,000 water bottles at ₹5.00 per bottle to be delivered at a
specified time. Subsequently, ‘X’ contracts with ‘Z’ to purchase the 1,000 water bottles at ₹4.50 per bottle,
informing ‘Z’ that he did so to perform his contract with ‘Y’. However, ‘Z’ fails to deliver, and the market price
on the day of the breach is ₹5.25 per bottle. As a result, ‘X’ could not procure the water bottles and ‘Y’
rescinded the contract.

(i) What amount of damages can ‘X’ claim from ‘Z’?

(ii) What would be the situation if ‘Z’ had not been informed about the contract with ‘Y’?

Relevant Legal Provisions

• Section 73 of the Indian Contract Act, 1872:

This section deals with the compensation for breach of contract. It states that when a contract is broken, the
party suffering from the breach is entitled to compensation for the loss or damage caused, which naturally
arises in the usual course of things from the breach or which both parties knew when they made the contract
to be likely to result from the breach.

• Case Law – Hadley v. Baxendale:

In this case, it was held that damages for breach of contract include the losses arising naturally from the
breach. Special circumstances, known to both parties at the time of the contract, are also considered when
calculating damages.

Analysis and Application to the Case

1. Damages When Special Circumstances Are Known:

o Since ‘X’ informed ‘Z’ that the purchase was for fulfilling his contract with ‘Y’, ‘Z’ was aware of the special
circumstances.

o As per Section 73 and the ruling in Hadley v. Baxendale, damages will be calculated based on the amount
of profit that ‘X’ expected to make from the contract with ‘Y’.

o The difference between the contracted price and the purchase price for the bottles was ₹5.00 (contract
price) - ₹4.50 (purchase price) = ₹0.50 per bottle.

o Therefore, ‘X’ can claim damages from ‘Z’ for the lost profit: 1000 bottles×₹0.50=₹500

So, ‘X’ can claim ₹500 from ‘Z’ for the lost profit due to the breach.

2. Damages When Special Circumstances Are Not Known:

o If ‘X’ had not informed ‘Z’ about his contract with ‘Y’, ‘Z’ would not be aware of the special circumstances
surrounding the contract.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 83

o In this case, the damages would be based on the difference between the contract price and the market price
on the day of default (i.e., ₹5.25 per bottle).

o The difference between the contracted price (₹5.00) and the market price (₹5.25) is ₹0.25 per bottle.
1000 bottles×₹0.25=₹250

o So, if ‘Z’ had not been informed of the contract with ‘Y’, ‘X’ could claim ₹250 from ‘Z’ as the damage for the
breach.

Conclusion

1. If ‘X’ informed ‘Z’ about the contract with ‘Y’, ‘X’ can claim ₹500 as damages from ‘Z’, representing the lost
profit from the contract.

2. If ‘X’ did not inform ‘Z’ about the contract with ‘Y’, ‘X’ can claim ₹250 as damages based on the market price
difference.

Q6. Oct 19 MTP (6 Marks)

Question
Evergreen Ltd. contracted with Shakti Traders to deliver certain machinery by 30th June 2004 for ₹11.50
lakhs. However, due to a labour strike, Evergreen Ltd. failed to deliver the machinery. Consequently, Shakti
Traders procured the machinery from another manufacturer for ₹12.75 lakhs. Additionally, Shakti Traders
were prevented from fulfilling a contract they had entered into with Xylo Traders, leading them to pay
compensation for breach of contract.

Advise Shakti Traders regarding the compensation they can claim from Evergreen Ltd., referring to the
Indian Contract Act, 1872.

Answer

Relevant Legal Provisions

• Section 73 of the Indian Contract Act, 1872:

This section addresses the consequences of breach of contract. When a contract is broken, the party who
suffers by the breach is entitled to receive compensation for:

o Any loss or damage caused, which naturally arises in the usual course of things from such breach, or

o Loss or damage that both parties knew at the time of the contract to be likely to result from the breach.

Compensation is not payable for any remote or indirect loss or damage. Furthermore, the explanation to this
section clarifies that when estimating the loss, the means available to remedy the inconvenience caused by
the breach must also be considered.

Application to the Case

1. Difference in Machinery Cost:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 84

o Evergreen Ltd. failed to deliver the machinery, forcing Shakti Traders to procure it at a higher cost of ₹12.75
lakhs instead of ₹11.50 lakhs.

o The additional expense incurred by Shakti Traders is: ₹12.75 lakhs−₹11.50 lakhs=₹1.25 lakhs

o This loss naturally arose from the breach and is therefore recoverable from Evergreen Ltd.

2. Compensation Paid to Xylo Traders:

o Shakti Traders were also unable to fulfill their contract with Xylo Traders, leading to compensation being paid
for breach.

o Whether this compensation is recoverable depends on whether Evergreen Ltd. was aware of Shakti Traders’
contract with Xylo Traders when the original contract was made.

▪ If Evergreen Ltd. knew of the subsequent contract, this loss is recoverable under special damages.

▪ If Evergreen Ltd. was not informed, this loss is remote and not recoverable.

Conclusion

• Shakti Traders can claim ₹1.25 lakhs as compensation for the additional cost incurred due to Evergreen
Ltd.’s breach.

• The compensation paid to Xylo Traders can also be claimed, but only if Evergreen Ltd. was aware of Shakti
Traders’ contractual obligations with Xylo Traders at the time of their agreement.

PART 2 – DIRECT QUESTIONS – 6

Q1. May 22 Exam (5 Marks)

"Liquidated damage is a genuine pre-estimate of compensation for certain anticipated breach of
contract, whereas Penalty, on the other hand, is an extravagant amount stipulated and is clearly
unconscionable and has no comparison to the loss suffered by the parties". Explain the statement by
differentiating between liquidated damages and penalty with reference to provisions of the Indian
Contract Act, 1872.

Answer:

Liquidated Damages vs. Penalty

• Liquidated Damages:
Liquidated damages refer to a genuine pre-estimate of the compensation for a breach of contract. This sum
is agreed upon by both parties at the time of entering into the contract, aiming to avoid lengthy calculations
and external evaluations later.

• Penalty:
Penalty, on the other hand, is an excessive amount stipulated in the contract that is clearly
unconscionable and does not correlate with the actual loss suffered due to the breach.

Distinction between Liquidated Damages and Penalty:

1. Excessive Sum:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 85

o If the amount stipulated is far in excess of the actual probable damage resulting from the breach, it is
classified as a penalty.

2. Additional Sum for Delay:

o If a sum is stipulated to be payable on a certain date, and a further sum is specified in case of a delay, this
additional sum is considered a penalty, as mere delay is unlikely to cause significant damage.

3. Court's Role in Determining the Nature:

o The terms used by the parties are not final. The court must determine whether the stipulated sum is
genuinely liquidated damages or a penalty. If the sum is excessive or exorbitant, the court will treat it as a
penalty, even if termed as liquidated damages in the contract.

4. Essence of Penalty vs. Liquidated Damages:

o The essence of a penalty is to deter the offending party by imposing a heavy monetary burden.

o The essence of liquidated damages is to provide a genuine pre-estimate of the damages suffered due to
the breach.

5. Legal Framework in India:

o While English law makes a clear distinction between liquidated damages and penalty, Indian law does not
follow such a distinction.

o The Indian courts focus on ascertaining the actual loss and awarding compensation accordingly. However,
the compensation cannot exceed the sum fixed in the contract. The court’s role is to award reasonable
compensation without focusing on the distinction between liquidated damages and penalty.

Q2. Nov 22 RTP

In the light of the provisions of the Indian Contract Act, 1872, answer the following:
Give the circumstances as to when “Vindictive or Exemplary Damages” may be awarded for breach of
a contract.

Answer:

Vindictive or Exemplary Damages

Vindictive or exemplary damages are awarded in specific circumstances where the breach of contract has
caused not only loss but also harm to the reputation, feelings, or standing of a party. These damages are
intended to punish the wrongdoer and deter similar future actions.

These damages may be awarded in the following two cases:

1. Breach of Promise to Marry:

o Exemplary damages can be awarded for the breach of a promise to marry because such a breach causes
injury to the feelings of the aggrieved party.

o This is because the breach of a marriage promise is viewed as an emotional injury rather than just financial
loss.

2. Wrongful Dishonour of a Customer's Cheque by a Banker:

o Exemplary damages may also be awarded for the wrongful dishonour of a customer’s cheque by a banker.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 86

o In this case, the injury to the customer is severe, often leading to loss of credit and reputation.

o A businessman, whose credit is damaged due to wrongful dishonour, may receive exemplary damages, even
if there is no pecuniary loss.

o However, a non-trader can only receive heavy damages if the damages are alleged and proven as special
damages (as per the case Gibbons v Westminster Bank).

Q3. May 22 RTP, Oct 20 MTP (7 Marks), Oct 19 MTP (7 Marks)

“An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived.” Discuss stating also the effect of anticipatory breach on contracts.

Answer:

Anticipatory Breach of Contract

An anticipatory breach of contract occurs when one party refuses to perform their promise before the
time fixed for performance has arrived. This refusal or unwillingness to perform signifies a breach of
contract even before the agreed-upon time for performance.

When the promisor clearly indicates that they will not fulfill their contractual obligations or disables
themselves from doing so, it is termed an Anticipatory Breach.

Relevant Case Laws:

• Frost v. Knight and Hochster v. De la Tour are important cases that elaborate on anticipatory breach, where
it was held that if one party shows an intention not to perform the contract, the other party may treat the
contract as breached.

Section 39 of the Indian Contract Act, 1872

• Section 39 specifically addresses anticipatory breach. It states that when a party to the contract refuses to
perform or disables themselves from performing their promise, the promisee may terminate the
contract immediately.

• Unless the promisee shows by words or conduct that they accept the continued performance of the
contract, they have the option to end it at that point.

Effect of Anticipatory Breach

1. Right to Terminate:
The promisee has the right to terminate the contract once anticipatory breach is communicated, even
before the performance date arrives.

2. Right to Claim Damages:

The promisee can also claim damages for any losses caused by the anticipatory breach.

3. No Need to Wait for Performance:

The promisee does not need to wait for the date of performance to file a lawsuit or take any action. The
breach is treated as having already occurred.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 87

Q4. May 22 RTP, Oct 20 MTP (7 Marks), Oct 19 MTP (7 Marks)

“An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived”. Discuss stating also the effect of anticipatory breach on contracts.

Answer:

Anticipatory Breach of Contract

An anticipatory breach of contract occurs when one party to the contract refuses to perform their promise
before the time fixed for performance has arrived. In simple terms, when the promisor expresses their
unwillingness or incapacity to perform the contract even before the agreed time, it is called Anticipatory
Breach.

The law on this matter is well established in the cases of Frost v. Knight and Hochster v. DelaTour.

Section 39 of the Indian Contract Act, 1872

Section 39 of the Indian Contract Act, 1872, deals with anticipatory breach and provides as follows:
“When a party to a contract has refused to perform or disables himself from performing his promise in
its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct,
his acquiescence in its continuance.”

Effect of Anticipatory Breach

The effect of anticipatory breach is that the promisee is excused from performance or further performance
under the contract. Upon anticipatory breach, the promisee has the following options:

1. Rescind and Sue for Damages

o The promisee can treat the contract as rescinded and immediately sue the other party for damages
arising from the breach of contract, without waiting for the performance date.

2. Wait for Performance

o Alternatively, the promisee can choose not to rescind but instead, treat the contract as still operative.

o The promisee can then wait for the time of performance and hold the other party responsible for non-
performance.

o By doing so, the promisee keeps the contract alive, allowing the guilty party the option to reconsider and still
perform their part of the contract.

o The guilty party, if they decide to reconsider, may also take advantage of any supervening impossibility that
could discharge the contract.

Q5. May 20 RTP

What do you mean by Quantum Meruit and state the cases where the claim for Quantum Meruit arises?

Answer:

Quantum Meruit

The term Quantum Meruit means "as much as the party doing the service has deserved." It applies when
one person has rendered services to another with an understanding that it is to be paid for, even though no

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 88

specific remuneration has been fixed. The law infers a promise to pay reasonable compensation for the
services provided.

This principle is applicable when the injured party, due to a breach of contract, has completed part of the
work and seeks compensation for the value of the work done.

Conditions for Application:

1. Original Contract Must Be Discharged:

The doctrine is applicable only if the original contract has been discharged.

2. Claim Must Be Brought by a Party Not in Default:

The party claiming quantum meruit must not have been at fault.

Objective:
The objective of quantum meruit is to provide reasonable compensation for the value of the work done.
While damages are compensatory in nature, quantum meruit is restitutory, ensuring fair recompense for
the service rendered.

Cases Where Claim for Quantum Meruit Arises:

a) When an agreement is discovered to be void or when a contract becomes void.

b) When something is done without any intention to do so gratuitously (i.e., not free of charge).

c) Where there is an express or implied contract to render services but no agreement regarding
remuneration.

d) When one party abandons or refuses to perform the contract.

e) Where a contract is divisible and the party not in default has enjoyed the benefit of part performance.

f) When an indivisible contract for a lump sum is completely performed but badly:

• The person who has performed the contract can claim the lump sum.

• However, the other party can deduct for the bad work.

Q6. Nov 19 RTP

What is the law relating to determination of compensation, on breach of contract, contained in Section
73 of the Indian Contract Act, 1872?

Answer:

Compensation on Breach of Contract:

Section 73 of the Indian Contract Act, 1872 provides the following principles for determining
compensation when a contract is broken:

1. Right to Compensation:

o The party who suffers due to a breach of contract is entitled to receive compensation from the party who has
broken the contract.

2. Scope of Loss or Damage:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 89

o The compensation is for:

a) Loss or damage that naturally arises in the usual course of things from the breach.
b) Loss or damage that the parties knew, at the time of making the contract, was likely to result from the
breach.

3. No Compensation for Remote or Indirect Loss:

o Compensation is not awarded for remote or indirect loss or damage arising from the breach.

4. Explanation to Section 73:

o While estimating the loss or damage caused by the breach, any means that existed to remedy the
inconvenience caused by the non-performance of the contract must also be considered.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 90

Chapter 1 – The Indian Contract Act, 1872

UNIT 6 : CONTINGENT AND QUASI CONTRACTS

PART 1 – CASE LAW QUESTIONS

Q1. Nov 19 Exam (4 Marks)

Question
X found a wallet in a restaurant and, after inquiring about the owner from the customers present, was unable
to locate the true owner. He handed over the wallet to the restaurant manager for safekeeping until the true
owner could be found. A week later, X returned to the restaurant to inquire about the wallet, but the manager
refused to return it, stating that it did not belong to X. Can X recover the wallet from the manager under the
Indian Contract Act, 1872?

Answer

Provision under the law:

Responsibility of Finder of Goods (Section 71 of the Indian Contract Act, 1872):

According to Section 71, a person who finds goods belonging to someone else and takes them into their
custody assumes the responsibilities of a bailee. The obligations of the finder are as follows:

1. Proper Care: The finder must take care of the goods as a person of ordinary prudence would take care of
their own goods.

2. No Right to Appropriate: The finder has no right to appropriate the goods for personal use or gain.

3. Restoration of Goods: The finder is obligated to return the goods if and when the true owner is identified or
claims them.

Rights of the Finder:

• A finder of goods is entitled to retain possession of the goods against everyone except the true owner.

Application to the Case:

In this case, X found the wallet and followed the due process by making inquiries to locate the true owner.
When the owner could not be identified, X acted responsibly by entrusting the wallet to the restaurant
manager for safekeeping. As per the law, X, being the finder, has a right to retain the wallet against all others
except the true owner.

The manager, therefore, has no legal right to withhold the wallet from X, as X’s claim to the wallet is superior
to that of the manager.

Conclusion
X can recover the wallet from the manager, as X, being the finder, is entitled to retain the wallet until the true
owner is located. The manager’s refusal to return the wallet is unlawful under Section 71 of the Indian
Contract Act, 1872.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 91

Q2. Jun 23 RTP

Question:
P left his carriage on D’s premises. The landlord of D seized the carriage against the rent due from D. P paid
the rent and got his carriage released. Can P recover the amount from D?

Provision under the law

Section 69 of the Indian Contract Act, 1872 states:

A person who is interested in the payment of money which another person is bound by law to pay, and who
therefore pays it, is entitled to get it reimbursed by the other.

Analysis of the given case

In the present case:

• D was lawfully bound to pay rent to the landlord.

• P left his carriage on D’s premises, which was seized by the landlord against the rent due from D.

• To secure the release of his carriage, P, as an interested party, paid the rent owed by D to the landlord.

Since P paid the money on behalf of D, and D was legally bound to pay it, P is entitled to recover the amount
paid from D under the provisions of Section 69.

Conclusion

Yes, P can recover the amount paid for the rent from D.

Q3. Nov 21 RTP

Question:
PQR, a hospital in Delhi, recruits Dr. A on a contract basis for a period of 3 months. The hospital
management promises to pay Dr. A a lump sum amount of ₹ 1,00,000 if Dr. A tests positive for the novel
coronavirus (Covid-19) during the contract period of 3 months.
Identify the type of contract and highlight the rule of enforcement. Also, what will happen if Dr. A does not
contract Covid-19?

Provision under the law

Section 31 of the Indian Contract Act, 1872 defines a Contingent Contract as:
A contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Section 35 of the Indian Contract Act, 1872 states:

Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time,
become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed,
such event becomes impossible.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 92

Analysis of the given case

In this case:

• The contract between PQR Hospital and Dr. A is a Contingent Contract because the obligation of the
hospital to pay ₹ 1,00,000 depends on the uncertain event of Dr. A contracting Covid-19 within the period of
3 months.

• PQR Hospital will only be required to perform its promise of payment if the specified condition (Dr. A
contracting Covid-19) occurs during the contract period.

Conclusion

If Dr. A does not contract Covid-19, the contract will become void as per Section 35 of the Indian Contract
Act, 1872, since the specified event (Dr. A contracting Covid-19) did not occur within the fixed time period.

Q4. Mar 22 MTP

Question:
Mr. Murti was travelling to Manali with his wife by bus of Himalya Travels Pvt. Ltd. Due to some technical
default in the bus, the driver had to stop the bus midway on a cold night. The driver advised the passengers
to seek shelter in the nearest hotel, which was only one kilometre away. Mr. Murti’s wife caught a cold and
fell ill due to being asked to get down and walk in the cold night to reach the hotel. Mr. Murti filed a suit
against Himalya Travels Pvt. Ltd. for damages for personal inconvenience, hotel charges, and medical
treatment for his wife.
Explain whether Mr. Murti would get compensation for the damages he filed in the suit.

Provision under the law

Section 73 of the Indian Contract Act, 1872 states:

When a contract has been broken, the party who suffers by such breach is entitled to receive from the party
who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it.
However, compensation is not to be given for any remote and indirect loss or damage sustained by reason of
the breach.

Analysis of the given case

• In this case, Himalya Travels Pvt. Ltd. breached its duty of providing safe transportation to the passengers,
leading to the inconvenience caused to Mr. Murti and his wife.

• Mr. Murti is entitled to compensation for personal inconvenience and hotel charges as these were direct
and natural consequences of the breach (i.e., the technical defect in the bus).

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 93

• Medical treatment for his wife, however, would be considered a remote or indirect loss, as it did not
directly result from the breach in the usual course of things. It was an unforeseen consequence that could
not have been expected by the parties when the contract was made.

Conclusion

Mr. Murti would be entitled to compensation for personal inconvenience and hotel charges, but not for
the medical treatment of his wife, as the medical expenses are considered an indirect or remote loss under
Section 73 of the Indian Contract Act, 1872.

PART 2 – DIRECT QUESTIONS - 5

Q1. Dec 21 Exam (5 Marks)

What is meant by 'Quasi-Contract'? State any three salient features of a quasi-contract as per the
Indian Contract Act, 1872.

Answer:

Meaning of Quasi-Contract:

Under certain special circumstances, obligations resembling those created by a contract are imposed by
law, even though the parties have never entered into a formal contract. Such obligations are referred to as
'Quasi-Contracts.'

Quasi-contracts resemble contracts in terms of their results or effects, but they differ significantly in terms
of their mode of creation. These contracts are based on the doctrine that no person should unjustly enrich
themselves at the expense of another.

Salient Features of Quasi-Contracts:

1. Imposed by Law:

o Quasi-contracts do not arise from any agreement or mutual consent of the parties but are imposed by law
to prevent unjust enrichment.

2. Right to Money:

o The right under a quasi-contract is always a right to money, generally involving a liquidated sum.

3. Against Specific Persons:

o The right under a quasi-contract is not enforceable against the whole world but only against specific
individuals, resembling a contractual right.

Q2. Jul 21 Exam (7 Marks), Oct 20 MTP (5 Marks)

Explain the term Contingent Contract with reference to the Indian Contract Act, 1872, with the help of
an example. Also discuss the rules relating to enforcement of a contingent contract.

Answer:

Definition of Contingent Contract (Section 31 of the Indian Contract Act, 1872):

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 94

A contingent contract is a contract to do or not to do something if some event, collateral to such contract,
does or does not happen.

Example:
A contracts to pay B ₹1,00,000 if B’s house is burnt. This is a contingent contract.

Rules Relating to Enforcement of Contingent Contracts:

The rules governing the enforcement of contingent contracts are outlined in Sections 32, 33, 34, 35, and 36
of the Act:

a) Enforcement of contracts contingent on an event happening:

• If a contract is contingent on the happening of a future uncertain event, it cannot be enforced unless and
until the event happens.

• If the event's happening becomes impossible, the contract becomes void.

b) Enforcement of contracts contingent on an event not happening:

• If a contract is contingent on the non-happening of an event, it can be enforced only when the happening of
the event becomes impossible.

c) Contingent on the conduct of a living person:

• A contract ceases to be enforceable if it is contingent upon the conduct of a living person who does
something to make the event or conduct impossible.

d) Contingent on the happening of a specified event within a fixed time:

• If a contract is contingent on a specified uncertain event happening within a fixed time, it becomes void:

o If the event does not happen within the time specified.

o If it becomes impossible for the event to happen before the expiration of the fixed time.

e) Contingent on a specified event not happening within a fixed time:

• Contracts contingent on an event not happening within a fixed time can be enforced:

o When the fixed time has expired, and the event has not happened.

o When it becomes certain, before the fixed time expires, that the event will not happen.

f) Contingent on an impossible event (Section 36):

• Agreements contingent upon an impossible event are void, whether the impossibility is known or unknown
to the parties at the time of making the agreement.

Q3. Nov 18 Exam (7 Marks)

What is Contingent Contract? Discuss the essentials of Contingent Contract as per the Indian Contract
Act, 1872.

Answer:

Definition of Contingent Contract (Section 31 of the Indian Contract Act, 1872):

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 95

A contingent contract is a contract to do or not to do something, if some event, collateral to such contract,
does or does not happen.

Example:
Contracts of Insurance, Indemnity, and Guarantee are examples of contingent contracts.

Essentials of a Contingent Contract:

a) Dependency on the Happening or Non-Happening of an Event:

• The performance of a contingent contract depends upon the occurrence or non-occurrence of some event
or condition.

• The condition may be precedent or subsequent.

b) Event Collateral to the Contract:

• The event referred to in the contract is collateral to the contract itself.

• The event is not part of the contract, meaning it is neither the promised performance nor the consideration
for the promise.

c) The Event Should Not Be the Mere Will of the Promisor:

• The event must be contingent and not solely depend on the will of the promisor.

• For example, a promise to pay ₹10,000 if the promisor “wills” to do so is not a contingent contract.

d) The Event Must Be Uncertain:

• The event must involve uncertainty.

• If the event is certain or bound to happen, the contract is not a contingent contract but a regular contract
due for performance.

Q4. May 20 RTP

Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts.

Answer:

Contingent Contract (Section 31 of the Indian Contract Act, 1872):

A contract may be absolute or contingent.

• Absolute Contract: A contract where the promisor undertakes to perform the contract in all events.

• Contingent Contract: A contract to do or not to do something if some event, collateral to the contract, does
or does not happen. The performance becomes due only upon the happening of some event which may or
may not happen.

Example:
A contracts to pay B ₹10,000 if he is elected President of a particular association. This is a contingent
contract.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 96

Rules Relating to Contingent Contracts:

1. Contingent Contracts Dependent on an Uncertain Future Event (Section 32):

o A contingent contract dependent on the happening of an uncertain future event cannot be enforced until the
event has happened.

o If the event becomes impossible, the contract becomes void.

2. Contingent Contracts Dependent on Non-Happening of an Event (Section 33):

o Where a contingent contract is to be performed only if a particular event does not happen, performance can
be enforced only when the happening of that event becomes impossible.

3. Contingent Contracts Based on a Person’s Conduct (Sections 34 and 35):

o If the contract is contingent upon how a person will act at an unspecified time, the event is considered
impossible if the person does anything which renders it impossible for him to act within any definite time or
under any further contingencies.

4. Contingent Contracts Involving Impossible Events (Section 36):

o Contingent contracts to do or not to do anything if an impossible event happens are void, whether or not
the fact of impossibility is known to the parties.

Q5. Nov 19 RTP

Explain the meaning of ‘Quasi-Contracts’. State the circumstances which are identified as quasi
contracts by the Indian Contract Act, 1872.

Answer:

Quasi-Contracts:

Even in the absence of a contract, certain social relationships give rise to specific obligations, which are
imposed by law. These obligations, though not arising from an actual contract, create rights and duties as in
the case of regular contracts. Such obligations are known as quasi-contracts. They are based on the
principles of equity, justice, and good conscience.

Salient Features of Quasi-Contracts:

1. The right under a quasi-contract is always a right to money, and generally, though not always, to a
liquidated sum of money.

2. It does not arise from any agreement between the parties concerned, but the obligation is imposed by law.

3. The rights under a quasi-contract are not available against everyone, but only against specific individuals,
making it similar to a contractual right.

Circumstances Identified as Quasi-Contracts:

1. Claim for Necessaries Supplied to Persons Incapable of Contracting:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 97

o A person who supplies necessaries of life to someone incapable of contracting (such as a minor or
mentally ill person) is entitled to claim the price from the other person’s property. Similarly, reimbursement
can be claimed when money is paid on behalf of such persons for necessaries.

2. Payment by an Interested Person:

o A person who pays a sum of money which another person is obliged to pay is entitled to be reimbursed by
the other person, provided the payment was made to protect the payer’s own interest.

3. Obligation of Person Enjoying Benefits of Non-Gratuitous Act:

o When a person lawfully does something or delivers something to another person, not intending to do so
gratuitously, and the other person enjoys the benefit, the latter is bound to pay compensation or restore the
value of what has been done or delivered.

4. Responsibility of Finder of Goods:

o A person who finds goods belonging to another person and takes them into custody has the responsibility of
a bailee. This includes:
(i) Taking proper care of the goods, as a prudent person would.
(ii) Not having the right to appropriate the goods.
(iii) Restoring the goods to the owner if they are found.

5. Liability for Money Paid or Things Delivered by Mistake or Coercion:

o A person who has received money or goods by mistake or under coercion must repay or return the same to
the person from whom they were received.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 98

Chapter 1 – THE INDIAN CONTRACT ACT, 1872

UNIT 7: Indemnity and guarantee

PART 1 – CASE LAW QUESTIONS

Question 1

Explaining the provisions of the Indian Contract Act, 1872, answer the following:

(i) A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the
necessary material to be used in the construction. C guarantees A’s performance of the contract. B does not
supply the material as per the agreement. Is C discharged from his liability?

(ii) C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with
X to give time to B. Is A discharged from his liability?
(November 2006)

Answer

(i)

• According to Section 134 of the Indian Contract Act, 1872:

"The surety is discharged by any contract between the creditor and the principal debtor, by which
the principal debtor is released or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor."

• In the given case, B omits to supply the material (timber) which was essential for the performance
of the contract. This omission by the creditor (B) makes the performance of the contract impossible
for A.

• Hence, C (the surety) is discharged from his liability.

(ii)

• According to Section 136 of the Indian Contract Act, 1872:

"Where a contract to give time to the principal debtor is made by the creditor with a third person
and not with the principal debtor, the surety is not discharged."

• In the given case, the creditor contracts with X (a third person) to give time to B (the principal
debtor). Since this agreement is not made with B, the principal debtor himself, the surety (A) is not
discharged from his liability.

Question 2

B owes C a debt guaranteed by A. C does not sue B for a year after the debt has become payable. In the
meantime, B becomes insolvent. Is A discharged? Decide with reference to the provisions of the Indian
Contract Act, 1872.
(November 2008)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 99

Answer

Discharge of Surety:
The problem is based on the provisions of Section 137 of the Indian Contract Act, 1872, which relates to
the discharge of a surety.

• Section 137 states:

"Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him does not, in the absence of any provision in the guarantee to the contrary,
discharge the surety."

• In the given case:

o C (the creditor) did not sue B (the principal debtor) for a year after the debt became
payable.

o During this period, B became insolvent.

However, as per Section 137, the delay or forbearance by C to sue B does not discharge A (the surety) from
his liability.

Question 3

‘Ramesh’ and ‘Suresh’ were engaged in business having the same nature. ‘Ramesh’ stands surety for ‘Suresh’
for any amount which ‘Kamlesh’ may lend to ‘Suresh’ from time to time during the next 6 months, subject to
a maximum of ₹ 85,000. Three months later, ‘Ramesh’ revokes the guarantee, when ‘Kamlesh’ had lent ₹
35,000 to ‘Suresh’. Decide whether ‘Ramesh’ is discharged from all liabilities to ‘Kamlesh’ for any
subsequent loan under the provisions of the Indian Contract Act, 1872. Would your answer differ if ‘Suresh’
defaults on paying back the ₹ 35,000 already borrowed?
(5 Marks) (Nov 2017)

Answer

Revocation of Continuing Guarantee:

The case is based on Section 130 of the Indian Contract Act, 1872, which deals with the revocation of a
continuing guarantee.

Key Provisions:

1. By Notice:

o A continuing guarantee may be revoked by the surety at any time as to future

transactions, by giving notice to the creditor.

o However, the surety remains liable for transactions entered into before the notice of
revocation.

2. By Death of Surety (Section 131):

o The death of the surety operates as a revocation of a continuing guarantee for future
transactions, unless there is a contract to the contrary.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 100

Application to the Case:

• Ramesh stands as a surety for Suresh for any amount lent by Kamlesh, subject to a maximum of ₹
85,000, for a period of 6 months.

• After 3 months, Ramesh revokes the guarantee by giving notice to Kamlesh.

• At the time of revocation, Kamlesh had already lent ₹ 35,000 to Suresh.

Implications:

1. For Subsequent Loans:

o After the notice of revocation, Ramesh is discharged from liability for any subsequent
loans given by Kamlesh to Suresh.

2. For Existing Liability (₹ 35,000):

o Ramesh remains liable for the amount already lent (₹ 35,000), as the loan was taken
before the notice of revocation was given.

o If Suresh defaults on repayment of the ₹ 35,000, Ramesh, as a surety, will be liable to

Kamlesh for this amount.

Conclusion:

• Ramesh is discharged from all liabilities to Kamlesh for any subsequent loan made after the
revocation.

• However, Ramesh remains liable for ₹ 35,000 (the loan taken before revocation) if Suresh defaults.

Question 4

‘A’ gives to ‘M’ a continuing guarantee to the extent of ₹ 8,000 for the fruits to be supplied by ‘M’ to ‘S’ from
time to time on credit. Afterwards, ‘S’ became embarrassed and, without the knowledge of ‘A’, ‘M’ and ‘S’
contract that ‘M’ shall continue to supply ‘S’ with fruits for ready money and that payments shall be applied
to the existing debts between ‘S’ and ‘M’. Examining the provision of the Indian Contract Act, 1872, decide
whether ‘A’ is liable on his guarantee given to ‘M’.
(4 Marks) (Nov 2017)

Answer

Discharge of Surety by Variance in Terms of Contract:

This problem is governed by Section 133 of the Indian Contract Act, 1872, which deals with discharge of
surety when there is a variance in the terms of the contract.

Key Provision (Section 133):

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 101

• Any variance made without the surety’s consent in the terms of the contract between the
principal debtor and the creditor discharges the surety as to transactions subsequent to the
variance.

• The surety’s liability is based on the original contract. If the terms are altered, the surety is not
liable for the altered contract because it is different from the one they originally agreed to.

Application to the Case:

• ‘A’ gave a continuing guarantee to ‘M’ for fruits to be supplied on credit to ‘S’ (the principal debtor)
to the extent of ₹ 8,000.

• Later, ‘M’ and ‘S’, without A’s knowledge and consent, entered into a new contract where fruits
would be supplied for ready money and payments would be adjusted against existing debts.

Analysis:

• The new contract between ‘M’ and ‘S’ varies the original contract (credit basis to ready money
basis).

• This variance was made without A’s consent.

• According to Section 133, such a change discharges the surety (‘A’) for all subsequent
transactions under the altered contract.

Conclusion:

‘A’ is not liable on his guarantee for any fruits supplied after the new arrangement between ‘M’ and ‘S’. The
reason is that the original contract, for which A agreed to be liable, has been materially altered without his
consent. Therefore, A is discharged from his liability.

Question 6

Mr. D was in urgent need of money amounting to ₹ 5,00,000. He asked Mr. K for the money. Mr. K lent the
money on the sureties of A, B, and N without any contract between them in case of default in repayment of
money by D to K. D makes default in payment. B refused to contribute. Examine whether B can escape
liability. (4 Marks) (New, May 2018)

Answer

Co-sureties liable to contribute equally (Section 146 of the Indian Contract Act, 1872):

• Principle: As per Section 146 of the Indian Contract Act, 1872, when two or more persons are co-
sureties for the same debt or duty, whether:

o Jointly or severally,

o Under the same or different contracts,

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 102

o With or without the knowledge of each other,

the co-sureties, in the absence of any contract to the contrary, are liable to pay an equal share of the
unpaid debt.

Application to the Case:

• Mr. K lent ₹ 5,00,000 to Mr. D on the surety of A, B, and N.

• There is no contract between the sureties specifying any unequal contribution.

• When D defaults, the liability of the co-sureties arises as per Section 146.

• Therefore, all three co-sureties—A, B, and N—are liable to contribute equally towards the debt.

Conclusion:

B cannot escape liability. In the absence of any agreement to the contrary, B is legally bound to contribute
equally along with A and N towards the repayment of the debt (₹ 5,00,000).

Question 7

Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two-year contract at a
monthly salary of ₹ 50,000. Mr. Pawan gave a surety in respect of Mr. Chetan’s conduct. After six months, the
company could not pay ₹ 50,000 to Mr. Chetan due to financial constraints. Chetan agreed for a lower salary
of ₹ 30,000 from the company. This was not communicated to Mr. Pawan. Three months afterward, it was
discovered that Chetan had been committing fraud since the time of his appointment. What is the liability of
Mr. Pawan during the whole duration of Chetan’s appointment? (Nov 2018 - NS) (3 Marks)

Answer

Discharge of Surety by Variance in Contract (Section 133 of the Indian Contract Act, 1872):

• Principle: As per Section 133, if the terms of the original contract between the principal debtor
(Chetan) and the creditor (ABC Constructions) are varied without the consent of the surety
(Pawan), the surety is discharged from liability for any acts subsequent to such variation.

• The surety remains liable only for the acts committed before the variation in the contract terms.

Application to the Case:

1. Initial Contract: Chetan was employed for two years at a salary of ₹ 50,000.

2. Surety: Pawan provided surety for Chetan’s conduct.

3. Variation in Terms: After six months, Chetan’s salary was reduced to ₹ 30,000 due to the
company’s financial constraints.

o This change was made without the consent of Pawan.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 103

4. Fraud by Chetan: It was discovered that Chetan had been committing fraud since his
appointment.

Conclusion:

• Mr. Pawan, as the surety, will be liable for any fraudulent acts committed by Mr. Chetan before the
variation (i.e., during the first six months when the salary was ₹ 50,000).

• Mr. Pawan is not liable for fraudulent acts committed after the variation (i.e., after the salary was
reduced to ₹ 30,000), as the change in contract terms was done without his consent.

Thus, Pawan’s liability is limited to the first six months of Chetan’s appointment.

Question 8

Y advances Z a loan of ₹ 10,000 on the guarantee of X, at an interest of 10%. Subsequently, as Z was having
some financial problems, Y reduced the rate of interest to 7% and also extended time for repayment of the
loan without the consent of X. Z becomes insolvent. Can Y sue X for recovery of the amount? (Nov 2018 – OS)
(4 Marks)

Answer

Discharge of Surety by Variance in Contract Terms (Section 133 of the Indian Contract Act, 1872):

• Principle: As per Section 133, any variance in the terms of the original contract between the
principal debtor (Z) and the creditor (Y), without the surety’s (X’s) consent, discharges the surety
from liability.

• This holds true irrespective of whether the variation benefits the surety or does not materially affect
the surety's position.

Application to the Case:

1. Original Terms:

o Loan Amount = ₹ 10,000

o Interest Rate = 10%

o Surety = X

2. Change in Terms Without X’s Consent:

o Interest Rate Reduced: From 10% to 7%.

o Time for Repayment Extended: Granted additional time for repayment.

3. Effect of Variation:

o Since these changes were made without the consent of X, the surety (X) is discharged
from his liability for all subsequent transactions.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 104

o It does not matter whether the change (reduction in interest rate) was seemingly beneficial
to X.

4. Z’s Insolvency:

o Z’s insolvency does not revive the discharged liability of X.

Conclusion:

Y cannot sue X for recovery of the amount because the surety (X) has been discharged from liability under
Section 133 of the Indian Contract Act, 1872, due to the changes made in the contract terms without X’s
consent.

Question 9

Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ₹ 1,00,000, for which Sharma, the
supplier, may from time to time supply goods on a credit basis to Ranjan during the next 3 months.
After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for ₹ 40,000.
Referring to the provisions of the Indian Contract Act, 1872, decide:

• Whether Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply.

• What would be the answer if Ranjan makes default in paying back Sharma for the goods already
supplied on credit, i.e., ₹ 40,000? (4 Marks) (May 2019 – NS)

Answer

Discharge of Surety by Revocation – Section 130 of the Indian Contract Act, 1872:

• Principle:
As per Section 130, a continuing guarantee may be revoked by the surety as to future transactions
by giving notice to the creditor. However, the surety remains liable for any transactions already
entered into before the revocation notice was served.

Application to the Case:

1. Revocation and Future Liabilities:

o Manoj revoked the continuing guarantee after 1 month, during which Sharma had supplied
goods on credit for ₹ 40,000.

o Post revocation, Sharma is aware of the revocation and cannot claim Manoj’s guarantee for
any subsequent credit supplies made to Ranjan.

Conclusion:
Manoj is discharged from liability for all subsequent credit supplies made after the revocation of the
guarantee.

2. Existing Liability for ₹ 40,000:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 105

o At the time of revocation, goods worth ₹ 40,000 had already been supplied.

o Since the liability for these transactions had already accrued before the revocation, Manoj
remains liable as a surety for the ₹ 40,000.

Conclusion:
Manoj is not discharged from the liability for the goods already supplied (₹ 40,000). If Ranjan defaults in
repayment, Manoj is liable to Sharma for this amount.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 106

Chapter 1 – THE INDIAN CONTRACT ACT, 1872

UNIT 8: Bailment and Pledge

PART 1 – CASE LAW QUESTIONS

Q1. Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian
Contract Act, 1872:

1. V parks his car at a parking lot, locks it, and keeps the keys with himself.

2. Seizure of goods by customs authorities. (May 2007)

Answer

(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.

• Explanation:
For a contract of bailment to exist under Section 148 of the Indian Contract Act, 1872, the bailor
(person giving the goods) must transfer possession of the goods to the bailee (person receiving the
goods). In this case:

o V retains the keys and the possession of the car. The car is not handed over to the parking
lot (bailee) for safe custody or other purposes.

o No transfer of possession has occurred because possession involves the control over the
goods, which is retained by V in this case.

Conclusion:
This does not constitute bailment, as possession has not been transferred. Mere custody or parking of the
vehicle without handing it over to the parking lot doesn't fulfill the criteria of bailment under Section 148.

(ii) Seizure of goods by customs authorities.

• Explanation:
In this case, the customs authorities take possession of the goods for a specific purpose, such as
verification, taxation, or investigation. Although the ownership remains with the original owner, the
possession is transferred to the authorities temporarily.

o The seizure is a form of taking possession for a purpose, which aligns with the concept of
bailment, where the goods are transferred to the bailee (customs authorities) for
safekeeping or as part of the process.

Conclusion:
This does constitute bailment under Section 148 of the Indian Contract Act, as the goods are taken into
the possession of the customs authorities for a specific purpose.

Q2. Ravi sent a consignment of goods worth ₹60,000 by railway and got a railway receipt. He obtained an
advance of ₹30,000 from the bank and endorsed and delivered the railway receipt in favour of the bank by

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 107

way of security. The railway failed to deliver the goods at the destination. The bank filed a suit against the
railway for ₹60,000.
Decide in the light of the provisions of the Indian Contract Act, 1872, whether the bank would succeed in
the said suit. (May 2008, Nov 2014)

Answer

Rights of Bailee

As per Sections 178 and 178A of the Indian Contract Act, 1872, the deposit of title deeds with the bank as
security against an advance constitutes a pledge.

• Pledge: In the case of a pledge, the banker's rights are not limited to just the interest in the goods
pledged.

• Remedies for Injury or Deprivation: In the event of injury to the goods or their deprivation by a
third party (such as the railway failing to deliver the goods), the pledgee (the bank) has the same
remedies that the owner of the goods would have against the third party.

Case Law:

In the case of Morvi Mercantile Bank Ltd. vs. Union of India, the Supreme Court held that the bank
(pledgee) was entitled to recover not only the amount of the advance due to it but also the full value of the
consignment.

• The amount over and above the bank's interest in the goods must be held by the bank in trust for
the pledgor (the owner of the goods).

Conclusion:

In this case, since the bank holds a pledge over the goods and the goods were not delivered by the railway,
the bank would be entitled to recover the full value of the consignment (₹60,000) from the railway. The
bank would succeed in the suit, as it has the same rights as the owner to recover the full amount for the
loss of the goods.

Q3. Ram, the bailor, pledges a cinema projector and other associates with Movie Association
Co−operative Bank Limited, the bailee, for a loan. Ram requests the bank to allow the pledged goods to
remain in his possession and promises to hold the same in trust for the bailee and also further
promises to hand over the possession of the same to the bank whenever demanded. Examining the
provisions of the Indian Contract Act, 1872, decide whether a valid contract of pledge has been made
between Ram, the bailor, and the bank, the bailee? (4 Marks, May 2017)

Answer

Delivery to Pawnee under the Indian Contract Act, 1872

The situation described in the question is governed by Section 149 of the Indian Contract Act, 1872, which
deals with delivery to bailee and pledge. According to this section, the delivery of goods to the bailee (or
pawnee) may be made in the following ways:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 108

1. Actual Delivery (physical handing over of the goods).

2. Constructive Delivery (a change in the legal possession of the goods, even if physical possession
remains with the bailor).

In this case, Ram, the bailor, requests the Movie Association Co−operative Bank Limited, the bailee
(pawnee), to allow the pledged goods (cinema projector and associates) to remain in his possession. Ram
further promises to hold the goods in trust for the bank and agrees to hand over possession on demand.

• The constructive delivery occurs when Ram holds the goods in trust for the bailee and agrees to
deliver them on demand. Although Ram retains physical possession, the legal possession is
transferred to the bank (pawnee).

• This arrangement is considered a constructive pledge because the pawnor (Ram) promises to
deliver the goods whenever demanded by the pawnee (Bank), even though the goods remain
physically with Ram.

Conclusion

A valid pledge has been made between Ram (the bailor) and the Movie Association Co−operative Bank
Limited (the bailee), as the constructive delivery of goods satisfies the legal requirements of a pledge
under the Indian Contract Act, 1872. The transaction is valid because the possession of the goods, though
physically with the bailor, is legally transferred to the pawnee. This is supported by the case of Bank of
Chittur Ltd. vs. Narasimhulu AIR 1966 AP 163.

Q4. Amar bailed 50 kg of high−quality sugar to Srijith, who owned a kirana shop, promising to give ₹ 200
at the time of taking back the bailed goods. Srijith’s employee, unaware of this, mixed the 50 kg of
sugar belonging to Amar with the sugar in the shop and packaged it for sale when Srijith was away. This
came to light only when Amar came asking for the sugar he had bailed with Srijith, as the price of the
specific quality of sugar had trebled. What is the remedy available to Amar? (3 Marks, Nov 2018 - NS)

Answer

Under Section 157 of the Indian Contract Act, 1872, the following remedy is available to Amar:

• Mixing of Goods Without Consent: If the bailee (Srijith, in this case) mixes the bailed goods
(Amar’s sugar) with their own goods without the bailor's (Amar's) consent, and the goods cannot be
separated, the bailor is entitled to be compensated for the loss of the goods.

• Application to the Situation: In the given scenario, Srijith’s employee mixed the 50 kg of high-
quality sugar bailed by Amar with sugar from the shop, making it impossible to separate the two
types of sugar. Since the sugar can no longer be identified or returned in its original form, Srijith
(the bailee) must compensate Amar for the loss of the 50 kg of sugar.

Thus, Amar’s remedy is to claim compensation for the value of the sugar, especially considering the price
of the sugar has trebled.

Q5. Sunil delivered his car to Mahesh for repairs. Mahesh completed the work but did not return the car
to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the return of the car. In

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 109

the meantime, a big fire occurred in the neighborhood and the car was destroyed. Decide whether
Mahesh can be held liable under the provisions of the Indian Contract Act, 1872. (Nov 2003)

Answer

Under Section 161 of the Indian Contract Act, 1872, the bailee (Mahesh) has a duty to return the goods
(Sunil's car) to the bailor (Sunil) after the purpose of the bailment (repair) is completed. Failure to return the
goods within a reasonable time constitutes a breach of duty.

In this case, Mahesh completed the repairs but failed to return the car within a reasonable time, despite
Sunil's reminders. The fire destroyed the car while it was still under Mahesh's possession. The liability of
Mahesh depends on whether the loss of the car occurred due to his negligence.

Since Mahesh did not return the car in a timely manner, he failed in his duty as a bailee to return the
goods and is thus liable for the loss of the car, even if the fire was an external event.

The bailee is responsible for returning the goods within a reasonable time and cannot avoid liability for loss
if he has breached his duty. Therefore, Mahesh can be held liable for the destruction of the car due to his
failure to return it on time.

Q6. A hires a carriage from B and agrees to pay ₹ 500 as hire charges. The carriage is unsafe, though B is
unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay.
Discuss the liability of B. (May 2005)

Answer

In this case, the relationship between A and B is governed by the principles of contract of bailment under
the Indian Contract Act, 1872, as A has hired the carriage from B. The contract of bailment involves the
delivery of goods (carriage) for a specific purpose (transportation), with the understanding that the goods will
be returned after use.

As per Section 151 of the Indian Contract Act, 1872, a bailor (B) is under an obligation to take reasonable
care to ensure that the bailed goods (carriage) are in a safe condition for the intended use (transportation).
Even if B is unaware of the unsafe condition of the carriage, B is still liable for failing to provide a safe
carriage.

Since the carriage is unsafe, and A is injured while using it, B is liable for the injury under the following
reasoning:

1. Bailment Duty of Care: As a bailor, B is required to ensure that the carriage is in a safe condition
for use. The fact that B was unaware of the defect does not absolve him of liability. A bailee or
bailor is responsible for ensuring that the goods are fit for the intended purpose.

2. Implied Warranty of Safety: There is an implied warranty that goods provided for hire are safe for
use, even if the party providing the goods is unaware of the defect.

3. Liability for Injury: Since the carriage was unsafe and A was injured as a result, B can be held liable
for compensation to A, even if he was unaware of the defect. The liability arises due to the breach
of the duty of care and the implied warranty of safety.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 110

Conclusion:

B is liable for the injury suffered by A due to the unsafe condition of the carriage, even though B was unaware
of the defect. B's refusal to pay compensation is not justified, as he is responsible for ensuring the safety of
the goods provided for hire.

Q7. M lends a sum of ₹5,000 to B, on the security of two shares of a Limited Company on 1st April 2007.
On 15th June, 2007, the company issued two bonus shares. B returns the loan amount of ₹5,000 with
interest but M returns only two shares which were pledged and refuses to give the two bonus shares.
Advise B in the light of the provisions of the Indian Contract Act, 1872. (November 2008)

Answer

In this case, the relationship between M and B is governed by the contract of pledge, as M has lent money to
B on the security of the shares. A pledge is governed by Section 172 of the Indian Contract Act, 1872, which
defines a pledge as a bailment of goods as security for a debt or performance of a promise.

Key Provisions under the Indian Contract Act, 1872:

1. Rights of Pledgee (M): As a pledgee, M has the right to retain the pledged goods (the shares) until
the loan is repaid. However, M does not have absolute ownership of the pledged goods. His rights
are limited to retaining the goods as security.

2. Effect of Bonus Shares: According to Section 177 of the Indian Contract Act, 1872, if any bonus
shares are issued on the pledged shares, they automatically become a part of the pledge. This
means that bonus shares issued on the pledged shares belong to the bailor (B), and M (the
pledgee) is required to return not only the original pledged shares but also any bonus shares
received during the period of pledge.

3. M's Duty to Return the Bonus Shares: In this case, when the company issued two bonus shares
on 15th June 2007, these shares were also pledged along with the original two shares, and M was
obligated to return the bonus shares to B along with the original pledged shares. Since M has
returned only the original shares and has refused to give the two bonus shares, M is in breach of
his duty under the contract of pledge.

B's Rights:

• B is entitled to the bonus shares as they are part of the pledged property and cannot be retained by
M once the loan has been repaid.

• B can demand the return of the bonus shares from M, as they form part of the security for the
loan.

Conclusion:

M is liable to return the two bonus shares to B, as they are considered part of the pledged security. B is
entitled to the bonus shares in addition to the original pledged shares, and M's refusal to return them is a
violation of the terms of the pledge. B can take legal action to recover the bonus shares.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 111

Q8. Srushti acquired a valuable diamond at a very low price by a voidable contract under the
provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded. Srushti pledged
the diamond with Mr. VK. Is this a valid pledge under the Indian Contract Act, 1872? Whether a Pawnee
has a right to retain the goods pledged?
(Nov 2019 − NS)

Answer

1. Validity of the Pledge of the Diamond:

Under the Indian Contract Act, 1872, a pledge is governed by Section 172, which defines it as a bailment
of goods as security for a debt or performance of a promise. For a valid pledge, the pledger (Srushti) must
have legal ownership or valid title to the goods pledged. If the contract under which Srushti acquired the
diamond was voidable and has not been rescinded, then Srushti still has the right to transfer possession
of the diamond, but not necessarily the title of the goods.

• Since the contract was voidable and has not been rescinded, Srushti has the right to possess the
diamond, but the title to the diamond may still be disputed or subject to rescission.

• If the contract is eventually rescinded, Srushti would lose the title to the diamond, and the pledge
would be invalid. However, as the contract has not been rescinded, and Srushti has possession of
the diamond, the pledge may be valid, though it depends on whether the title to the diamond
remains valid in the future.

Thus, as of now, the pledge appears valid, as the contract has not been rescinded, and Srushti has
possession of the diamond.

2. Right of the Pawnee to Retain the Pledged Goods:

Under Section 174 of the Indian Contract Act, 1872, a pawnee (Mr. VK) has the right to retain the pledged
goods until the debt or obligation secured by the pledge is satisfied. The pawnee is also entitled to retain
the goods if the pledged goods are lost, damaged, or deteriorated due to the fault of the pledger.

• In this case, as long as Mr. VK holds the diamond as security for a valid debt or obligation, he has
the right to retain the diamond.

• If Srushti defaults on the obligation secured by the pledge, Mr. VK may also have the right to sell the
pledged goods to recover the debt (under Section 176 of the Indian Contract Act).

Conclusion:

• The pledge of the diamond by Srushti with Mr. VK is valid as long as the voidable contract has not
been rescinded. If the contract is rescinded later, the validity of the pledge may be affected.

• Mr. VK, as the pawnee, has the right to retain the pledged diamond until the debt is satisfied or the
obligations are met, provided there is no issue with the title of the diamond.

PART 2 – DIRECT QUESTIONS

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 112

Q1. State the essential elements of a contract of bailment. Distinguish between the 'contract of
bailment' and 'contract of pledge'. (8 Marks, Nov 2012)

Answer

Essential Elements of a Contract of Bailment

Section 148 of the Indian Contract Act, 1872 defines the term ‘Bailment’ as the delivery of goods by one
person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering them.
The essential elements of a contract of bailment are:

1. Delivery of Goods
The essence of bailment is the delivery of goods by one person (the bailor) to another (the bailee).

2. Contractual Agreement
The delivery of goods is done under a contract that, when the purpose is accomplished, the goods
shall be returned to the bailor or disposed of according to their directions.

3. Return of Goods in Specific

The goods are delivered for a specific purpose, and it is agreed that the specific goods shall be
returned once the purpose is fulfilled.

4. Ownership of Goods
In a bailment, only the possession of the goods is transferred. The bailor continues to be the
owner of the goods, while the bailee holds them temporarily.

5. Movable Property
Bailment applies only to movable goods and cannot be applied to immovable goods or money.

Difference between Contract of Bailment and Contract of Pledge

Aspect Contract of Bailment Contract of Pledge

The bailee has no right to sell The pawnee (pledgee) has the
the goods. He may retain the right to sell the goods and recover
Right of Sale
goods and sue for damages, the debt if the pawnor (pledger)
but he cannot sell them. defaults.
Bailment may be for any
Pledge is specifically for securing
Purpose purpose, such as for repairs,
a debt.
safe custody, etc.
The bailee can use the goods
Right to Use The pawnee cannot use the goods
only if the contract provides
the Goods pledged.
for such use.
The pawnor retains ownership,
The bailor retains the
Ownership but the pawnee has a special lien
ownership of the goods.
on the goods until the debt is paid.
Type of Only movable goods can be Movable goods are pledged for
Property bailed. securing a debt.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 113

Q2. What are the rights available to the finder of the lost goods under Section 168 and Section 169 of
the Indian Contract Act, 1872? (3 Marks, Nov 2018 - NS)

Answer

Under Section 168 and Section 169 of the Indian Contract Act, 1872, the following rights are available to
the finder of lost goods:

Section 168: Right to Reimbursement

1. No Right to Compensation for Trouble and Expense: The finder of lost goods cannot sue the
owner for compensation for the trouble and expenses incurred in preserving the goods or trying to
find the owner.

2. Right to Reimbursement: However, the finder can ask for reimbursement for the expenses
incurred in preserving the goods and in making efforts to locate the owner.

3. Right to Retain Goods: If the true owner refuses to pay the compensation or reimbursement, the
finder has the right to retain the goods.

4. Right to Reward: If the real owner has offered a reward for the return of the goods, the finder is
entitled to claim and receive the reward. The right to claim the reward takes precedence over the
right to seek reimbursement for expenses.

Section 169: Right to Sell Lost Goods

1. Conditions for Sale: Although the finder of the goods does not have a general right to sell the found
goods, he may sell them under the following circumstances:

o Perishing Goods: If the goods are in danger of perishing or losing a substantial part of their
value, the finder has the right to sell them.

o Unpaid Charges: If the lawful charges incurred by the finder amount to two-thirds or
more of the value of the article found, the finder may sell the goods to recover those
charges.

Q3. What is the liability of a bailee making unauthorized use of goods bailed? (2 Marks, May 2019 – NS)

Answer

Under Section 154 of the Indian Contract Act, 1872, if the bailee makes unauthorized use of the goods
bailed, i.e., uses the goods in a manner not specified in the contract of bailment, the bailee becomes liable
to compensate the bailor for any damage caused to the goods due to such unauthorized use.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 114

Chapter 1 – THE INDIAN CONTRACT ACT, 1872

UNIT 9: Agency

PART 1 – CASE LAW QUESTIONS

Q1. Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh
bought a house for ₹20 lakhs in the name of a nominee and then purchased it himself for ₹24 lakhs. He
then sold the same house to Mr. Ahuja for ₹26 lakhs. Mr. Ahuja later comes to know the mischief of Mr.
Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount
from Mr. Singh? If so, how much? Explain.
(November 2005) (May 2016)

Answer

Relevant Provisions of the Indian Contract Act, 1872:

• Section 215: If the agent deals in the business of the agency on his own account, without the
knowledge of the principal, the principal has the following options:

1. Repudiate the transaction if the agent has dishonestly concealed any material fact from
the principal, or if the dealings have been disadvantageous to the principal.

2. Claim any benefit which the agent may have received from the transaction.

• Section 216: If the agent makes a secret profit from the transaction without the knowledge of the
principal, the principal has the right to recover the profit made by the agent.

Analysis of the Situation:

1. Mr. Singh's actions:

o Mr. Singh purchased the house for ₹20 lakhs in the name of a nominee and later purchased
it for ₹24 lakhs himself, making an undisclosed profit of ₹4 lakhs.

o He then sold the house to Mr. Ahuja for ₹26 lakhs, earning an additional profit of ₹2 lakhs
from Mr. Ahuja.

2. Mr. Ahuja’s entitlement:

o Since Mr. Singh made a profit of ₹4 lakhs (from purchasing the house for ₹24 lakhs and later
selling it for ₹26 lakhs) by acting dishonestly and not disclosing the transaction to Mr. Ahuja,
he is required to return the excess amount paid to Mr. Ahuja.

o Under Section 215, Mr. Ahuja is entitled to recover the ₹6 lakhs (₹2 lakhs excess paid on
the house + ₹4 lakhs profit made by Mr. Singh) because of the secret profit made by Mr.
Singh and the excessive amount charged.

Conclusion:

• Mr. Ahuja is entitled to recover ₹6 lakhs from Mr. Singh. This includes the ₹2 lakhs excess amount
paid for the house and the ₹4 lakhs profit that Mr. Singh made by purchasing the house at a lower
price and selling it at a higher price to Mr. Ahuja.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 115

Q2. R is the wife of P. She purchased some sarees on credit from Q. Q demanded the amount from P. P
refused. Q filed a suit against P for the said amount. Decide in the light of provisions of the Indian
Contract Act, 1872, whether Q would succeed.
(May 2008) (May 2013)

Answer

Agency by Presumption in Case of Husband and Wife:

As per the Indian Contract Act, a wife living with her husband is presumed to have implied authority to
pledge the husband's credit for purchasing necessaries. This is based on the presumption that a wife, in
cohabitation with her husband, may act as his agent to purchase items that are essential for her personal
use or family welfare.

The relevant sections of the Indian Contract Act, 1872, for this issue are:

1. Section 2 of the Indian Contract Act (definition of an agent):

An agent is someone who acts on behalf of another (the principal). If the principal authorizes the
agent to act on his behalf, the actions of the agent bind the principal.

2. Section 189 of the Indian Contract Act:

The presumption that a wife can act as an agent for her husband is specifically applicable when it
comes to purchasing necessaries. Necessaries include items that are essential for the wife's well-
being and welfare, like food, clothing, and shelter.

Conditions under which Q may succeed:

1. Goods Purchased are Necessaries:

The presumption that a wife can pledge her husband's credit applies only to necessaries. In this
case, the sarees purchased by R would be considered necessaries if they are required for her
personal use. Since the sarees can be classified as personal items of clothing, they may qualify as
necessaries.

2. No Legal Exception to the Presumption:

The husband (P) can rebut the presumption of agency if one of the following conditions is met:

o The goods purchased are not necessaries.

o The wife has been provided with sufficient funds to purchase the necessaries.

o The wife has been expressly forbidden from purchasing on credit or contracting debts.

o The trader (Q) has been warned not to extend credit to the wife.

If none of these exceptions apply, the wife’s act of purchasing sarees on credit will be deemed authorized by
her husband, and Q can seek the payment from P.

Conclusion:

• Q would succeed in recovering the amount from P if the sarees purchased by R are considered
necessaries. In this case, the sarees, being essential clothing, would likely qualify as necessaries.
Since there is no information suggesting that any of the exceptions apply (such as P having
forbidden his wife from purchasing on credit or giving her sufficient funds for necessaries), the legal
presumption stands.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 116

Thus, P would be liable to pay for the sarees, as the transaction is deemed to have been made on his behalf
by his wife, who is acting as his implied agent.

Q3. Sunil borrowed a sum of ₹3 lakh from Rajendra. Sunil appointed Rajendra as his agent to sell his
land and authorized him to appropriate the amount of the loan out of the sale proceeds. Afterwards,
Sunil revoked the agency. Decide under the provisions of the Indian Contract Act, 1872 whether the
revocation of the said agency by Sunil is lawful.
(May 2014)

Answer

The issue presented in this question revolves around the concept of "agency coupled with an interest"
under the Indian Contract Act, 1872.

Agency Coupled with an Interest:

According to Section 202 of the Indian Contract Act, 1872, an agency becomes irrevocable if the agent
has an interest in the subject matter of the agency. This means that the agent, in such cases, holds some
benefit or right in the property or transaction that is the subject of the agency. Therefore, the agency cannot
be revoked by the principal (in this case, Sunil) to the prejudice of the agent’s interest. The agency would only
end in the case of the agent's death, insanity, or insolvency, unless expressly stated otherwise in the
agreement.

Application to the Case:

In this scenario, Sunil borrowed ₹3 lakh from Rajendra and appointed him as an agent to sell his land.
Rajendra was also authorized to appropriate the amount of loan out of the sale proceeds. This condition
creates an interest in the agent (Rajendra) in the property being sold because Rajendra has a financial stake
in the sale proceeds (the repayment of his loan).

• The appointment of Rajendra as an agent to sell the land and the authorization to retain the loan
amount from the sale proceeds establishes an agency coupled with interest. Rajendra has an
interest in the proceeds of the sale since part of the sale amount is intended to pay off his loan.

Conclusion:

Since Rajendra has an interest in the sale proceeds (the loan repayment), the agency in this case cannot be
revoked unilaterally by Sunil. The revocation of the agency by Sunil is not lawful, as it would prejudice
Rajendra’s interest in the sale proceeds.

Thus, the agency cannot be revoked by Sunil, and Rajendra is entitled to proceed with the sale and
appropriate the loan amount from the proceeds, as per the agreement.

Q4. ABC Ltd. sells its products through some agents and it is not the custom in their business to sell
the products on credit. Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s. Parul Pvt. Ltd. (on
credit) which was insolvent at the time of such sale. ABC Ltd. sued Mr. Pintu for compensation towards
the loss caused due to sale of products to M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim?
(May 2018 - New)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 117

Answer

The situation described in the question concerns an agent’s duty to act according to the principal’s
instructions and the custom of the trade.

Agent’s Duties Under the Indian Contract Act, 1872:

According to Section 211 of the Indian Contract Act, 1872, an agent is required to conduct the business of
the principal in the manner specified by the principal or, if no directions are given, according to the custom
of the trade in the locality. The agent must follow the principal's directions and, if the agent acts contrary to
those instructions, any loss incurred must be compensated by the agent. Furthermore, any profits arising
from such unauthorized actions must be accounted for by the agent.

Application to the Case:

In this case:

• ABC Ltd. has a clear policy that its products should not be sold on credit.

• Mr. Pintu, acting as an agent, violated this policy by selling goods to M/s. Parul Pvt. Ltd. on credit,
despite the fact that the buyer was insolvent at the time of the sale.

• The sale on credit was against the custom of the principal (ABC Ltd.).

Since Mr. Pintu did not follow the instructions or the business custom of ABC Ltd., and the sale was made to
an insolvent buyer (which resulted in a loss for ABC Ltd.), he is liable for the loss caused.

Conclusion:

ABC Ltd. will succeed in its claim for compensation from Mr. Pintu for the loss caused by the unauthorized
sale on credit. As per Section 211, Mr. Pintu is bound to make good the loss to ABC Ltd. due to his failure to
act in accordance with the principal’s instructions.

Q5. Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm to a
city by Aswin. Due to heavy rains, Rahul was stranded for more than two days. Rahul sold the tomatoes
below the market rate in the nearby market where he was stranded fearing that the tomatoes may
perish. Can Aswin recover the loss from Rahul on the ground that Rahul had acted beyond his
authority?
(May 2018 - New)

Answer

The issue here concerns the agent's actions during an emergency and the scope of authority granted by the
principal under Section 189 of the Indian Contract Act, 1872.

Agent's Authority in Emergencies (Section 189):

As per Section 189 of the Indian Contract Act, 1872, an agent has the authority to act in an emergency to
prevent loss to the principal, even if it goes beyond the specified authority. The actions must be those that a
person of ordinary prudence would take under similar circumstances to protect the principal’s interest.

Application to the Case:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 118

• Rahul, the agent, was transporting perishable goods (tomatoes), which were at risk of spoiling due
to the delay caused by the heavy rains and his being stranded.

• In this situation, Rahul’s decision to sell the tomatoes at a lower market rate was a reasonable
step to prevent them from perishing, which would have resulted in a complete loss.

• The sale of the tomatoes, though not in strict accordance with the instructions, was an emergency
action taken in good faith to protect Aswin’s interests, considering the goods were perishable.

Conclusion:

Since Rahul acted in an emergency to protect the goods from spoilage, his actions were within the ordinary
prudence standard expected in such situations. Aswin cannot recover the loss from Rahul on the grounds
that he acted beyond his authority. Rahul’s actions were justified in the emergency circumstances.

Q6. Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim, a reputed auctioneer, to
sell the goods consigned to him through auction. Aziz authorized Rahim to receive the proceeds and
transfer those proceeds once in 45 days. Rahim sold the goods at auction and became insolvent.
Assess the liability of Aziz according to the provisions of the Indian Contract Act, 1872.
(Nov 2018 - NS)

Answer

This situation concerns the concept of a substituted agent under Section 195 of the Indian Contract Act,
1872.

Section 195 - Liability of the Principal for Acts of a Substituted Agent:

Under Section 195, when an agent (Aziz) appoints a substituted agent (Rahim), the principal (Azar) is not
automatically responsible for the acts or negligence of the substituted agent if the original agent has
exercised ordinary prudence in selecting the substituted agent. This means that Aziz is not liable for
Rahim's actions if Aziz acted diligently in choosing Rahim, a reputed auctioneer, to handle the sale.

Application to the Case:

• Aziz, acting as the agent for Azar, entrusted Rahim with the responsibility of selling the goods and
receiving the proceeds.

• Rahim, despite being a reputed auctioneer, became insolvent after selling the goods.

• Aziz is not liable for Rahim’s insolvency if Aziz took reasonable care in selecting Rahim, as Rahim's
insolvency is not directly attributable to any negligence or misconduct on Aziz's part.

Conclusion:

If Aziz acted with ordinary prudence in selecting Rahim, then Aziz will not be responsible for the proceeds
of the auction, as per Section 195. However, if Aziz did not exercise due diligence in selecting Rahim, he
could be liable for the proceeds.

Q7. Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow Silks, Jaipur.
M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused. M/s Rainbow Silks,

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 119

Jaipur filed a suit against Naresh for the said amount. Decide in the light of provisions of the Indian
Contract Act, 1872, whether M/s Rainbow Silks, Jaipur would succeed?
(May 2019 - NS)

Answer

This situation involves the application of Agency by Legal Presumption under the Indian Contract Act,
1872.

Legal Presumption of Agency of a Wife:

As per the Indian Contract Act, 1872, there is a legal presumption that a wife, living with her husband, has
the authority to pledge her husband's credit for purchasing necessaries. This presumption can be rebutted
under specific circumstances.

When the Presumption Can Be Rebutted:

The presumption of a wife being authorized to pledge her husband's credit is rebutted in the following cases:

1. Non-necessaries: If the goods purchased on credit are not necessaries.

2. Sufficient money: If the wife has been provided with sufficient money by her husband to buy
necessaries.

3. Forbidden by husband: If the wife is expressly forbidden by her husband from purchasing on
credit or contracting debts.

4. Trader warned: If the trader (M/s Rainbow Silks) has been expressly warned not to give credit to the
wife.

Application to the Case:

• Aarthi purchased sarees on credit, and the case must be decided based on whether these sarees
are considered necessaries.

• If the sarees are deemed necessaries for Aarthi (based on her needs and lifestyle), then under the
legal presumption, Naresh would be liable for the amount, as Aarthi had the implied authority to
pledge his credit.

• If, however, the sarees are not deemed necessaries or if any of the conditions to rebut the
presumption are met (e.g., Naresh had forbidden Aarthi from purchasing on credit), then M/s
Rainbow Silks would not succeed in its claim against Naresh.

Conclusion:

In this case, M/s Rainbow Silks will likely succeed in recovering the amount from Naresh if the sarees are
considered necessaries for Aarthi. If the sarees were necessaries, the legal presumption of agency applies,
and Naresh will be liable for the debt.

Q8. Bhupendra borrowed a sum of ₹3 lacs from Atul. Bhupendra appointed Atul as his agent to sell his
land and authorised him to appropriate the amount of the loan out of the sale proceeds. Afterwards,
Bhupendra revoked the agency. Decide under the provisions of the Indian Contract Act, 1872 whether

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 120

the revocation of the said agency by Bhupendra was lawful.

(Nov 2019 - NS)

Answer

This question is related to the concept of an "agency coupled with interest" under the Indian Contract
Act, 1872.

Relevant Provision:

According to Section 202 of the Indian Contract Act, 1872, an agency becomes irrevocable when the
agent has an interest in the subject matter of the agency, such as a situation where the agent has an
interest in the property or is entitled to some benefit from the transaction.

Application of Section 202:

In this case, Bhupendra appointed Atul as his agent to sell his land and authorised Atul to appropriate the
amount of loan out of the sale proceeds. This arrangement creates an interest for Atul in the property
(since Atul has the right to appropriate the loan repayment from the proceeds of the sale). The agency
becomes irrevocable, meaning that Bhupendra cannot revoke the agency without Atul's consent, unless
the agency has been completed or the principal-agent relationship is terminated for other legal reasons.

Conclusion:

Since the agency is coupled with interest, Bhupendra cannot revoke the agency at his will. The revocation
of the agency by Bhupendra is not lawful under the provisions of the Indian Contract Act, 1872, because
Atul has an interest in the subject matter (the sale proceeds of the land) that gives him the right to continue
as the agent until the purpose is fulfilled

PART 2 – DIRECT QUESTIONS

Q1. "An agent is neither personally liable nor can he personally enforce the contract on behalf of the
principal." Comment.
(May 2019 - NS)

Answer

Under the Indian Contract Act, 1872, Section 230 establishes the rule that an agent is neither personally
liable nor can he personally enforce the contract on behalf of his principal, unless there is an agreement to
the contrary.

Key Points:

1. Agent's Role: An agent enters into contracts on behalf of the principal. The agent is considered a
representative, and it is the principal who is bound by the contract. Therefore, unless specifically
agreed otherwise, the agent is not personally liable for the contract entered into on behalf of the
principal.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 121

2. Non-Enforceability by Agent: As a general rule, the agent cannot enforce the contract for the
principal in his own name. The principal is the party that can enforce the contract, as long as the
principal is disclosed and the agent is acting within the scope of their authority.

Exceptions:

There are certain situations where the agent may be personally liable or may be able to enforce the contract:

1. Foreign Principals: If an agent contracts on behalf of a foreign principal (for example, for the sale
or purchase of goods for a merchant resident abroad), the agent may be personally liable or
enforce the contract, depending on the circumstances.

2. Undisclosed Principal: If the agent does not disclose the name of the principal (an undisclosed
principal), the agent may become personally liable for the contract.

3. Principal Cannot Be Sued: If the principal, though disclosed, cannot be sued (for example, if the
principal is absent or otherwise cannot be found), the agent may have to fulfill the contract and
may be liable for enforcing it.

Q2. “The relationship of principal and agent (i.e. Agency) may be constituted by subsequent ratification
by the principal.” Examine the validity of the statement and state the requisites of a valid ratification in
the light of the provisions of the Indian Contract Act, 1872.
(November 2006)

Answer

The statement is valid. The relationship of principal and agent can indeed be constituted by subsequent
ratification by the principal. This is a key provision under Section 196 of the Indian Contract Act, 1872,
which allows a principal to ratify an act done by an agent without his knowledge or authority. Through
ratification, the principal validates the agent's actions, making the agent's unauthorized acts as effective as
if they had been authorized initially.

Explanation of Ratification:

1. Section 196 of the Indian Contract Act, 1872:

o The section states that if an agent does an act on behalf of the principal without the
principal's knowledge or authority, the principal can later choose to ratify or disown that
act.

o If the principal ratifies the act, it has the same effect as if it had been originally done with
the principal's authority. This is called ratification.

2. Nature of Ratification:

o Ratification is a subsequent approval of an act done by the agent, which would otherwise
be outside the scope of authority.

o The act of ratification is considered as if the agent had authority from the beginning.

Requisites of Valid Ratification:

For ratification to be valid, the following requisites must be satisfied:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 122

1. Knowledge of Material Facts:

o The principal must have full knowledge of all material facts related to the act being ratified.
If the principal is not fully informed or is unaware of critical facts, the ratification may not be
valid.

2. Ratification Must be in Whole:

o The principal must ratify the entire transaction, not just part of it. Selective ratification of
parts of a transaction is not allowed.

3. Ratification Must be Timely:

o Ratification must occur within a reasonable time after the agent's actions. If the principal
delays excessively, it may amount to rejection of the act or abandonment of the right to
ratify.

4. Principal Must be Legally Capable:

o The principal must be legally capable of ratifying the act at the time of ratification. If the
principal lacks the capacity to contract at the time the act was done, the ratification will not
be valid.

5. No Existing Disposition of the Property:

o If the subject matter of the transaction has already been disposed of, the principal cannot
ratify the act. For example, if the goods involved in the transaction are sold to a third party,
the principal cannot ratify the agent's unauthorized sale.

6. Act Must Be Lawful:

o The act done by the agent must be lawful for the ratification to be valid. If the act is illegal or
involves fraudulent conduct, the principal cannot ratify it.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 123

Chapter 2 – The Sale of Goods Act, 1930

UNIT 1: FORMATION OF THE CONTRACT OF SALE

PART 1 – CASE LAW QUESTIONS

Q1. Jun 23 RTP

Question:
Avyukt purchased 100 Kgs of wheat from Bhaskar at ₹30 per kg. Bhaskar says that the wheat is in his
warehouse in the custody of Kishore, the warehouse keeper. Kishore confirmed to Avyukt that he can take
the delivery of the wheat from him, and until then, he is holding the wheat on Avyukt’s behalf. Before Avyukt
picks up the goods from the warehouse, the whole wheat in the warehouse was destroyed in a flood. Now,
Avyukt wants his price back, contending that no delivery has been made by the seller. Is Avyukt correct in his
views under the Sale of Goods Act, 1930?

Provision under the law

Section delivery under the Sale of Goods Act, 1930

• Actual delivery

• Constructive delivery

• Symbolic delivery

Constructive delivery occurs when there is no actual change in possession but the person holding the goods
on behalf of the buyer acknowledges the transfer, i.e., the goods are in the possession of a third party
(warehouse keeper, for example) but are being held on behalf of the buyer.

Analysis of the given case

In the present case, Avyukt has not yet physically taken possession of the wheat, but Kishore (the
warehouse keeper) has acknowledged that he is holding the wheat on Avyukt’s behalf. This constitutes
constructive delivery.

As per the provisions of the Sale of Goods Act, constructive delivery occurs when the seller, through a third
party (in this case, the warehouse keeper), acknowledges that the goods are held on behalf of the buyer. The
delivery in this scenario was not physical, but legally effective.

Now, the flood incident destroyed the goods before Avyukt could take delivery. Since the delivery was
already considered to have taken place constructively, the risk of loss passed to Avyukt once the goods
were in the warehouse under the condition that they were held on his behalf.

Therefore, Avyukt cannot claim the price back because, under the Sale of Goods Act, the transfer of
ownership (even though not physically taken) occurred through constructive delivery, and the risk passed on
to him once the goods were under the custody of the warehouse keeper.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 124

Avyukt is not correct in his views. Constructive delivery was completed when Kishore, the warehouse
keeper, acknowledged that the wheat was held on Avyukt’s behalf. As a result, the risk of loss passed to
Avyukt, and he cannot claim the price back.

Q2. Nov 21 RTP

Question:
X contracted to sell his car to Y. They did not discuss the price of the car at all. X later refused to sell his car
to Y on the ground that the agreement was void due to uncertainty about the price. Can Y demand the car
under the Sale of Goods Act, 1930?

Provision under the law

Section 9 of the Sale of Goods Act, 1930

• This section states that if the price is not fixed by the contract, the buyer is required to pay a reasonable
price for the goods.

• The contract remains valid even if the price is not agreed upon, and the reasonable price will be determined
based on the circumstances of the case.

Analysis of the given case

In this case, X and Y entered into a contract for the sale of the car, but they did not discuss or agree on the
price.

• According to Section 9 of the Sale of Goods Act, if the price is not fixed in the contract, it does not render the
agreement void.

• Instead, the buyer is obligated to pay a reasonable price for the car.

• Even though the price was not explicitly agreed upon, the contract is still valid because the reasonable
price can be determined based on market conditions or other relevant factors.

• Therefore, X's refusal to sell the car on the grounds of price uncertainty is incorrect.

Conclusion

Y can demand the car from X. X can recover a reasonable price for the car from Y, as the contract is still
valid despite the lack of an agreed price.

Q3. May 20 RTP

Question:
Mr. Amit was shopping in a self-service supermarket. He picked up a bottle of cold drink from a shelf. While
he was examining the bottle, it exploded in his hand and injured him. He files a suit for damages against the
owner of the market on the ground of breach of condition. Decide under the Sale of Goods Act, 1930,
whether Mr. Amit would succeed in his claim?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 125

Provision under the law

Section 16(2) of the Sale of Goods Act, 1930

• When goods are bought by description from a seller who deals in goods of that description, there is an
implied condition that the goods shall be of merchantable quality.

• Merchantable quality means that the goods are fit for the purpose they are commonly used for. Though the
term is not defined in the Act, it is understood that goods should meet reasonable expectations for quality
and safety, especially when they are sold for self-use.

Analysis of the given case

• Mr. Amit bought the bottle of cold drink from the self-service supermarket, and while examining the product,
it exploded and caused injury.

• The bottle of cold drink, being a product that is commonly used for drinking, must meet the condition of
being merchantable quality, meaning it should be properly sealed and safe for consumption.

• Since the bottle exploded while being handled, it did not meet the standard of merchantable quality as
expected for such goods.

• The explosion of the bottle indicates a breach of condition regarding the safety and quality of the product.
The owner of the market, as the seller, is liable under the implied condition of merchantable quality.

Conclusion

Mr. Amit would succeed in his claim for damages against the owner of the supermarket, as the bottle was
not of merchantable quality, leading to the injury. The breach of condition entitles him to claim damages
under Section 16(2) of the Sale of Goods Act, 1930.

Q4. Jun 22 Exam (6 Marks)

Question:
Sonal went to a jewellery shop and asked the sales girl to show her diamond bangles with ruby stones. The
jeweller told her that they had a lot of designs of diamond bangles but with red stones. If she chose any
special design, they would replace the red stones with ruby stones, for which she would pay extra cost.
Sonal selected a beautiful set of designer bangles and paid for them, including the extra cost for the ruby
stones. The jeweller requested her to come back a week later for the delivery of the bangles. When Sonal
arrived after a week to take delivery, she noticed that due to the ruby stones, the design of the bangles had
been completely disturbed. She now wants to terminate the contract and asks the manager to give her a
refund, but he denies her request.
Answer the following questions as per the Sale of Goods Act, 1930:
(i) State with reasons whether Sonal can recover the amount from the jeweller.
(ii) What would be your answer if the jeweller says that he can change the design, but he will charge extra
cost for the same?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 126

Provision under the law

Section 4(3) of the Sale of Goods Act, 1930:

“Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the
contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.”
Section 4(4) of the Sale of Goods Act, 1930:
“An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which
the property in the goods is to be transferred.”

Analysis of the given case

(i) Can Sonal recover the amount from the jeweller?

• In this case, Sonal and the jeweller entered into an agreement to sell the bangles, not a sale, as the transfer
of property (ownership) in the goods was subject to the condition of fulfilling the modification with ruby
stones.

• According to Section 4(3) and Section 4(4) of the Sale of Goods Act, the contract remains an agreement to
sell until the condition (modification of design with ruby stones) is fulfilled.

• Since the modification disturbed the original design and resulted in a product that did not meet Sonal's
expectations, she has the right to avoid the agreement to sell.

• Therefore, Sonal can recover the amount paid because the product delivered does not conform to what
was agreed upon. The goods are not as described or as expected, so she has the right to terminate the
contract and request a refund.

(ii) What if the jeweller says he can change the design, but will charge extra cost for the same?

• If the jeweller offers to repair the bangles and restore the original design, he cannot charge extra cost from
Sonal.

• Since the jeweller failed to meet the agreed-upon specification (the design with ruby stones), the cost of
repair should be borne by the jeweller, not Sonal, even if there are expenses for the repair.

• Sonal should not be liable for any extra cost, as the modification of the bangles was not her fault, and the
jeweller must rectify the issue at his own cost.

Conclusion

(i) Sonal can recover the amount paid from the jeweller, as the goods delivered (bangles with ruby stones)
did not meet the expectations agreed upon, and she is entitled to terminate the agreement to sell.
(ii) If the jeweller offers to change the design, he cannot charge Sonal extra for the repair, as it is the
jeweller's responsibility to fix the issue without additional cost to the buyer.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 127

PART 2 – DIRECT QUESTIONS

Q1. Jun 22 Exam (4 marks)

What are the consequences of destruction of specified goods, before making of contract and after the
agreement to sell under the Sale of Goods Act, 1930?

Answer:

(i) Goods Perishing Before Making of Contract (Section 7 of the Sale of Goods Act, 1930):
According to Section 7 of the Sale of Goods Act, 1930, if a contract for the sale of specific goods is made,
and at the time of making the contract, the goods have perished or become so damaged that they no longer
answer to their description (without the seller's knowledge), the contract is considered void ab initio (void
from the outset). This means that the contract is not enforceable due to the destruction of the goods.

(ii) Goods Perishing Before Sale but After Agreement to Sell (Section 8 of the Sale of Goods Act, 1930):
Under Section 8, if there is an agreement to sell specific goods, and the goods perish or become so
damaged that they no longer meet the description in the agreement, before the risk passes to the buyer, the
agreement is void. The goods' destruction occurs without fault of either party, and the agreement is
automatically avoided due to the goods being rendered unavailable for sale.

Q2. Dec 21 Exam (6 Marks)

Distinguish between 'Sale' and 'Hire Purchase' under the Sale of Goods Act, 1930.

Answer:

The main points of distinction between 'Sale' and 'Hire-Purchase' are as follows:

Basis of Difference Sale Hire-Purchase

Property in the goods is
1. Time of Property transferred to the buyer Property in goods passes to the hirer
Passing immediately at the time of the upon payment of the last installment.
contract.
The position of the hirer is that of a
2. Position of the The position of the buyer is that
bailee until he pays the last
Buyer/Hirer of the owner of the goods.
installment.
The hirer may, if he likes, terminate the
The buyer cannot terminate the
3. Termination of contract by returning the goods to the
contract and is bound to pay the
Contract owner without any liability to pay the
price of the goods.
remaining installments.
The owner takes no such risk. If the
The seller takes the risk of any
4. Burden of Risk in hirer fails to pay an installment, the
loss resulting from the
Case of Insolvency owner has the right to take back the
insolvency of the buyer.
goods.
The buyer can pass a good title
The hirer cannot pass any title, even to
5. Transfer of Title to a bona fide purchaser from
a bona fide purchaser.
him.
The hire purchaser cannot resell the
The buyer in a sale can resell
6. Resale goods unless he has paid all the
the goods.
installments.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 128

Q3. Nov 18 Exam (4 Marks)

Differentiate between Ascertained and Unascertained Goods with example.

Answer:

Basis Ascertained Goods Unascertained Goods

Ascertained goods are those Unascertained goods are
which are identified and those that are not
Definition specified in accordance with the specifically identified or
agreement after the contract of ascertained at the time of
sale is made. making the contract.
Goods from a large lot or bulk Goods described by type,
that are specifically identified quantity, or sample, but
Example after the contract is made, e.g., not yet specified, e.g., 100
100 bags of rice selected from a bags of rice to be
larger lot. delivered in the future.

They are specific and can be They are general in nature

Nature physically identified or separated and not yet separated or
from other goods. identified.

Not identified at the time

Identification Identified post-agreement.
of the agreement.

Q4. May 18 Exam (4 Marks)

What is meant by delivery of goods under the Sale of Goods Act, 1930? State various modes of delivery.

Answer:

Delivery of Goods (Section 2(2) of the Sale of Goods Act, 1930):

Delivery refers to the voluntary transfer of possession of goods from one person to another. It means that the
possession of the goods is given to the buyer or a person authorized to hold them on the buyer's behalf.

Modes of Delivery:

1. Actual Delivery:

o This occurs when goods are physically transferred to the buyer. For example, handing over the goods to the
buyer or delivering them at the buyer's location.

2. Constructive Delivery:

o This type of delivery happens without any change in the physical possession of the goods. For example,
when a warehouseman holding goods for A agrees to hold them on behalf of B at A's request.

3. Symbolic Delivery:

o This is when goods are delivered through a symbolic act, such as handing over documents of title to goods
(e.g., bill of lading, railway receipt, or delivery orders) or giving the key to a warehouse where the goods are
stored.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 129

Q5. Jun 23 RTP

State the difference between Sale and Agreement to Sell.

Answer:

The differences between Sale and Agreement to Sell are as follows:

Basis Ascertained Goods Unascertained Goods

Ascertained goods are Unascertained goods are
those which are identified those that are not
Definition and specified in accordance specifically identified or
with the agreement after the ascertained at the time of
contract of sale is made. making the contract.
Goods from a large lot or
Goods described by type,
bulk that are specifically
quantity, or sample, but
identified after the contract
Example not yet specified, e.g., 100
is made, e.g., 100 bags of
bags of rice to be delivered
rice selected from a larger
in the future.
lot.
They are specific and can be
They are general in nature
physically identified or
Nature and not yet separated or
separated from other
identified.
goods.

Not identified at the time of

Identification Identified post-agreement.
the agreement.

Q6. May 22 RTP

Classify the following transactions according to the types of goods they are:

(i) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales, and these bales were
selected and set aside.
(ii) A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his shop.
(iii) T agrees to sell to S all the apples which will be produced in his garden this year.

Answer:

1. A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales, and these bales were
selected and set aside.

o Type of Goods: Ascertained Goods

o Explanation: The 50 bales of cotton are specifically selected and set aside after the contract is formed.
These goods are ascertained because they are identified and agreed upon for sale.

2. A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his shop.

o Type of Goods: Existing but Unascertained Goods

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 130

o Explanation: The 100 packets of sugar are existing goods, but the specific packet to be sold is not yet
determined. These are unascertained goods because the particular packet is not identified at the time of the
contract.

3. T agrees to sell to S all the apples which will be produced in his garden this year.

o Type of Goods: Future Goods

o Explanation: The apples have not yet been produced and will be harvested in the future. The contract
pertains to future goods, which are goods to be produced or acquired after the contract is formed.

Q7. May 21 RTP, May 20 RTP

State briefly the essential elements of a contract of sale under the Sale of Goods Act, 1930.

Answer:

The following elements must co-exist to constitute a contract of sale of goods under the Sale of Goods Act,
1930:

1. Two Parties: There must be at least two parties to the contract, i.e., the seller and the buyer.

2. Subject Matter: The subject matter of the contract must be goods, as defined under the Act.

3. Price in Money: A price must be paid or promised in money (not in kind).

4. Transfer of Property: There must be a transfer of property in the goods from the seller to the buyer.

5. Nature of Contract: The contract of sale must be either absolute or conditional (Section 4(2)).

6. Other Essentials of a Valid Contract: All other essential elements required for the validity of a contract,
such as mutual consent, consideration, capacity, and lawful object, must also be present.

Q8. Nov 20 RTP

What are the consequences of the "destruction of goods" under the Sale of Goods Act, 1930, where the
goods have been destroyed after the agreement to sell but before the sale is affected?

Answer:

Consequences of Destruction of Goods:

1. Section 7 of the Sale of Goods Act, 1930: If a contract for the sale of specific goods is made, and the goods
perish or become so damaged that they no longer answer to their description, without the knowledge of the
seller, the contract becomes void ab initio. This section follows the principle that if both parties are mistaken
about a fact essential to the contract, the contract is void.

2. Section 8 of the Sale of Goods Act, 1930: If an agreement to sell specific goods is made, and the goods
perish or become so damaged that they no longer answer to their description before the risk passes to the
buyer, the agreement becomes void. The goods must have perished without any fault of the seller or buyer.

It is important to note that Sections 7 & 8 apply only to specific goods, not unascertained goods. If the
agreement is to sell unascertained goods, the destruction of the entire quantity of goods in the seller's
possession will not relieve him of the obligation to deliver the goods.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 131

Q9. May 19 RTP

What are the rules related to Acceptance of Delivery of Goods?

Answer:

The rules related to acceptance of delivery of goods are as follows:

Acceptance is deemed to take place when the buyer:

• (a) Intimates to the seller that he has accepted the goods; or

• (b) Does any act towards the goods that is inconsistent with the ownership of the seller (e.g., using, altering,
or reselling the goods); or

• (c) Retains the goods after a reasonable time has passed, without informing the seller that he has rejected
them (Section 42).

In general, a seller cannot compel the buyer to return rejected goods. However, the seller is entitled to a
notice of rejection.

If the seller is ready and willing to deliver the goods and requests the buyer to take delivery, but the buyer
does not take delivery within a reasonable time, the buyer is liable to the seller for any loss caused by the
refusal or neglect to take delivery. Additionally, the buyer may also be liable for a reasonable charge for the
care and custody of the goods (Sections 43 and 44).

Q10. Nov 22 MTP (6 Marks)

Explain the term “Delivery and its forms” under the Sale of Goods Act, 1930.

Answer:

Delivery - its forms:

Delivery means the voluntary transfer of possession from one person to another, as defined under Section
2(2) of the Sale of Goods Act, 1930. It refers to the act of transferring possession of the goods from the seller
to the buyer or any person authorized to hold the goods on behalf of the buyer.

Forms of Delivery: The following are the types of delivery for transferring possession of goods:

1. Actual Delivery:
This occurs when the goods are physically delivered to the buyer. The seller transfers the physical
possession of the goods either to the buyer or to a third person authorized to hold the goods on behalf of the
buyer. It is the most common method of delivery.

2. Constructive Delivery:
Constructive delivery occurs when there is no change in the custody or actual possession of the goods but
the possession is transferred in law. This can occur through "attornment" (acknowledgement), where a
person in possession of goods belonging to the seller acknowledges to the buyer that he holds the goods on
the buyer’s behalf.

3. Symbolic Delivery:
Symbolic delivery happens when the delivery of a token or symbol represents the transfer of possession of
the goods. For example, in cases where the actual delivery of goods is not possible, the delivery may be
made by handing over documents of title to goods, such as a bill of lading, railway receipt, delivery order, or
even the key to a warehouse where the goods are stored. These documents or items serve as evidence of the
transfer of possession of the goods.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 132

Chapter 2 – The Sale of Goods Act, 1930

UNIT 2 : CONDITIONS AND WARRANTIES

PART 1 – CASE LAW QUESTIONS

Q1. Dec 21 Exam (3 Marks)

Question:
TK ordered timber of 1-inch thickness for being made into drums. The seller agreed to supply the required
timber of 1 inch. However, the timber supplied by the seller varies in thickness from 1 inch to 1.4 inches. The
timber is commercially fit for the purpose for which it was ordered. TK rejects the timber. Explain with
relevant provisions of the Sale of Goods Act, 1930 whether TK can reject the timber.

Provision under the law

Section 16(1) of the Sale of Goods Act, 1930

• Condition as to quality or fitness:

The condition as to the reasonable fitness of goods for a particular purpose may be implied if the buyer has
made known to the seller the purpose of the purchase and relies upon the seller's skill and judgment to
select the goods.

o Implied condition: The goods must be reasonably fit for the buyer’s intended purpose.

o Criteria: The buyer must:

1. Make known to the seller the particular purpose for which the goods are required.

2. Rely on the seller’s skill and judgment in selecting the goods.

3. The goods must be of a description commonly dealt with by the seller.

Analysis of the given case

• In this case, TK has ordered timber of 1-inch thickness, and the seller has supplied timber with varying
thickness, ranging from 1 inch to 1.4 inches.

• The timber, although varying in thickness, is commercially fit for the intended purpose of being made into
drums, meaning it can still be used effectively for its intended purpose.

• As per Section 16(1), the goods need to be reasonably fit for the purpose for which they were bought. The
fact that the timber is commercially suitable for making drums indicates that the implied condition of fitness
is met, even though the thickness deviates slightly from the exact specification.

Conclusion

Since the timber is commercially fit for the purpose and meets the implied condition of fitness under
Section 16(1) of the Sale of Goods Act, 1930, TK cannot reject the timber solely based on the slight
variation in thickness.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 133

Q2. Dec 21 Exam (3 Marks)

Question:
TK ordered timber of 1 inch thickness for being made into drums. The seller agreed to supply the required
timber of 1 inch. However, the timber supplied by the seller varies in thickness from 1 inch to 1.4 inches. The
timber is commercially fit for the purpose for which it was ordered. TK rejects the timber. Explain with
relevant provisions of the Sale of Goods Act, 1930 whether TK can reject the timber.

Provision under the law

Section 15 of the Sale of Goods Act, 1930

• Where there is a contract for the sale of goods by description, there is an implied condition that the goods
shall correspond with the description.

• The buyer is not bound to accept and pay for goods that do not conform to the agreed-upon description, as
the contract specifies that goods must match the description.

Analysis of the given case

• In this case, TK specifically ordered timber of 1 inch thickness, which forms part of the description of the
goods.

• The timber supplied by the seller varies in thickness from 1 inch to 1.4 inches, which does not match the
exact description of the goods as agreed upon.

• Even though the timber is commercially fit for the purpose of being made into drums, the critical factor is the
description of the timber, which is not fulfilled in this case.

• According to Section 15, since the timber does not correspond to the agreed description of 1 inch
thickness, TK has the right to reject the timber.

Conclusion

TK can reject the timber, as it does not conform to the description of 1 inch thickness specified in the
contract. This is a breach of the implied condition under Section 15 of the Sale of Goods Act, 1930.

Q3. July 21 Exam (6 Marks)

Question:
Mr. Das, a general store owner, went to purchase 200 kg of Basmati Rice of specific length from a wholesaler.
He saw the samples of rice and agreed to buy the one for which the price was quoted as ₹150 per kg. While
examining the sample, Mr. Das failed to notice that the rice contained a mix of long and short grains of rice.
The wholesaler supplied the required quantity exactly the same as shown in the sample. However, when Mr.
Das sold the rice to one of his regular customers, she complained that the rice contained two different
qualities and returned the rice.
With reference to the provisions of the Sale of Goods Act, 1930, discuss the options open to Mr. Das for

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 134

grievance redressal. What would be your answer in case Mr. Das specified his exact requirement as to the
length of rice?

Provision under the law

Section 17(2) of the Sale of Goods Act, 1930

• In a contract of sale by sample, there is an implied condition that:

o (a) The bulk must correspond with the sample in quality.

o (b) The buyer must have a reasonable opportunity to compare the bulk with the sample.

Analysis of the given case

• Mr. Das agreed to buy the rice based on the sample presented to him, which was a mix of long and short
grain rice.

• Upon selling the rice, his customer found that the rice contained mixed grains of different qualities and
returned it.

• According to Section 17(2)(a), the bulk of goods must correspond with the sample in quality, and Mr. Das
failed to notice the mix of grains while examining the sample.

• Section 17(2)(b) further implies that the buyer should have a reasonable opportunity to examine the goods,
but Mr. Das did not exercise due diligence in identifying the mixed quality of the rice in the sample.

• Since Mr. Das had the opportunity to examine the sample and failed to detect the mix of grains, his
grievance redressal options are limited. This could be seen as a lack of diligence on Mr. Das's part, and
therefore, he may not be successful in demanding any remedy from the wholesaler.

Conclusion

• In this case, Mr. Das does not have any options for grievance redressal due to his failure to notice the mix
of grains while examining the sample.

• If Mr. Das had specified his exact requirement for the rice's length, this would have created an implied
condition that the goods should conform to the specified description. In such a case, the seller would be
liable for supplying goods that did not meet the description, and Mr. Das could seek redressal for the
breach.

Q4. Jan 21 Exam (6 marks), May 21 RTP

Mr. T was a retail trader of fans of various kinds. Mr. M came to his shop and asked for an exhaust fan for the
kitchen. Mr. T showed him different brands and Mr. M approved of a particular brand and paid for it. The fan
was delivered to Mr. M's house. At the time of opening the packet, he found that it was a table fan. He
informed Mr. T about the delivery of the wrong fan. Mr. T refused to exchange the fan, saying that the contract
was complete after the delivery of the fan and payment of the price.
(i) Discuss whether Mr. T is right in refusing to exchange as per the provisions of the Sale of Goods Act, 1930?
(ii) What is the remedy available to Mr. M?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 135

Provision under the law

Section 15 of the Sale of Goods Act, 1930

• When goods are sold by sample as well as by description, there is an implied condition that the goods
supplied must correspond with both the sample and the description.

• If the goods do not correspond with the sample or the description, the buyer can repudiate the contract.

Section 16(1) of the Sale of Goods Act, 1930

• If the buyer has communicated to the seller the specific purpose for which the goods are required and
relies on the judgment or skill of the seller, the seller must supply goods that are reasonably fit for that
purpose.

Analysis of the given case

• Mr. M specifically told Mr. T that he required an exhaust fan for the kitchen.

• Mr. T delivered a table fan instead, which was clearly unfit for the intended purpose.

• According to Section 15, since the goods delivered (table fan) did not correspond with the description of an
exhaust fan, Mr. T's refusal to exchange the fan is not justified.

• Additionally, under Section 16(1), as Mr. M relied on Mr. T's expertise to select a fan fit for the kitchen, the
table fan is not reasonably fit for that purpose, further entitling Mr. M to request an exchange or remedy.

Conclusion

(i) No, Mr. T is not right in refusing to exchange the fan. The goods delivered do not correspond with the
description of the exhaust fan that Mr. M requested.
(ii) The remedy available to Mr. M is to either:

• Rescind the contract and claim a refund of the price paid, or

• Require Mr. T to replace the table fan with the correct exhaust fan.

Q5. Nov 19 Exam (6 Marks)

Mrs. Geeta went to the local rice and wheat wholesale shop and asked for 100 kgs of Basmati rice. The
shopkeeper quoted the price of ₹125 per kg, to which she agreed. Mrs. Geeta insisted that she would like to
see the sample of the rice before agreeing to the purchase. The shopkeeper showed her a bowl of rice as a
sample, which exactly corresponded to the entire lot. Mrs. Geeta examined the sample casually without
noticing that, even though the sample was of Basmati rice, it contained a mix of long and short grains.

The cook, upon opening the bags, complained that the dish, if prepared with the rice, would not taste the
same, as the quality of rice was not as per the requirement of the dish. Now Mrs. Geeta wants to file a suit of
fraud against the seller, alleging that the seller sold a mix of good and cheap quality rice. Will she be
successful?

• Explain the basic law on sale by sample under the Sale of Goods Act, 1930.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 136

• Decide the fate of the case and options open to the buyer for grievance redressal as per the provisions
of the Sale of Goods Act, 1930.

• What would be your answer if Mrs. Geeta specified her exact requirement as to the length of rice?

Provision under the law

Section 17 of the Sale of Goods Act, 1930 – Sale by Sample

• Sub-Section (1): A contract of sale is a contract for sale by sample if the contract contains a term, express
or implied, to that effect.

• Sub-Section (2): In a contract of sale by sample, there is an implied condition that:

1. The bulk shall correspond with the sample in quality.

2. The buyer shall have a reasonable opportunity of comparing the bulk with the sample.

3. The goods shall be free from any defect rendering them unmerchantable, which would not be apparent on
reasonable examination of the sample.

Analysis of the given case

• Sale by Sample:
In this case, Mrs. Geeta agreed to purchase Basmati rice based on the sample shown by the shopkeeper,
which corresponds with the entire lot. According to Section 17, the goods delivered must correspond with
the sample in quality, and the buyer must have a reasonable opportunity to compare the bulk with the
sample.

• Casual Examination:
Mrs. Geeta examined the sample casually and did not notice that the sample, although Basmati rice,
contained a mix of long and short grains. Since the rice delivered corresponds to the sample in terms of both
quality and appearance (though it contains mixed grains), Mrs. Geeta does not have grounds to claim
fraud based on her casual examination. The law does not allow grievance redressal if the defect could have
been discovered by reasonable examination.

• Grievance Redressal:
Since Mrs. Geeta did not notice the defect in the sample during her examination, she would not succeed in
filing a suit for fraud. She is bound by the contract as the goods corresponded with the sample.

Conclusion

• Fate of the Case:

Mrs. Geeta is unlikely to succeed in her claim for fraud, as the rice delivered corresponds to the sample, and
she had a reasonable opportunity to examine it. The defect (mix of long and short grains) could have been
noticed with a more thorough examination. Therefore, she has no grounds for grievance redressal under the
Sale of Goods Act, 1930.

• If Mrs. Geeta specified her exact requirement as to the length of rice:

If Mrs. Geeta had specified the exact requirement, such as the length of the rice, then the seller would be

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 137

under an implied condition to deliver rice that meets the description. If the rice does not meet the specified
description, the seller would be held liable for breach of contract, and Mrs. Geeta would have options for
grievance redressal, including the right to reject the goods or claim damages.

Q6. May 19 Exam (6 Marks), May 22 RTP

M/s Woodworth & Associates, a firm dealing with the wholesale and retail buying and selling of various kinds
of wooden logs, customized as per the requirements of the customers, dealt with Rosewood, Mango wood,
Teak wood, Burma wood, etc.

Mr. Das, a customer, came to the shop and asked for wooden logs measuring 4 inches broad and 8 feet long
as required by the carpenter. Mr. Das specifically mentioned that he required the wood which would be best
suited for the purpose of making wooden doors and window frames. The shop owner agreed and arranged
the wooden pieces cut to Mr. Das's specifications.

The carpenter visited Mr. Das's house the next day and found that the seller had supplied Mango Tree wood,
which was most unsuitable for the purpose. The carpenter asked Mr. Das to return the wooden logs, as it
would not meet the requirements. The shop owner refused to return the logs on the plea that they were cut
to Mr. Das's specific requirements and hence could not be resold.

• (i) Explain the duty of the buyer as well as the seller according to the doctrine of “Caveat Emptor”.

• (ii) Whether Mr. Das would be able to get the money back or the right kind of wood as required for his
purpose?

Provision under the law

Doctrine of Caveat Emptor:

The doctrine of "Caveat Emptor" means "let the buyer beware", which implies that it is the responsibility of
the buyer to examine and select goods carefully before making a purchase.

Exceptions to the Doctrine of Caveat Emptor:

However, there are certain exceptions where the doctrine does not apply, and the seller has specific duties:

1. Fitness for a particular purpose (Section 16(1) of the Sale of Goods Act, 1930).

2. Goods sold under a patent or brand name.

3. Goods sold by description (Section 15 of the Sale of Goods Act, 1930).

4. Goods of merchantable quality.

5. Sale by sample (Section 17 of the Sale of Goods Act, 1930).

6. Sale by sample and description.

7. Trade usage.

8. Seller actively conceals a defect or is guilty of fraud.

Analysis of the given case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 138

• Duty of the buyer (Caveat Emptor):

According to the Caveat Emptor principle, the buyer must carefully select the goods and cannot hold the
seller responsible if the goods turn out to be defective. The buyer is responsible for ensuring the goods meet
their needs. However, the doctrine of Caveat Emptor does not apply in this case because Mr. Das specified
the intended use of the wood.

• Duty of the seller:

The seller, on the other hand, has an obligation to ensure that the goods supplied are fit for the particular
purpose for which the buyer requires them. Since Mr. Das explicitly mentioned that he needed wood suited
for making doors and window frames, the seller was under a duty to provide the appropriate type of wood.

According to Section 16(1) of the Sale of Goods Act, 1930, when the buyer makes known to the seller the
particular purpose for which the goods are required and relies on the seller's judgment or skill, the seller
must provide goods that are reasonably fit for that purpose.

In this case, the seller supplied Mango wood, which was unsuitable for the intended use of making doors
and window frames. Therefore, the seller has breached the implied condition under Section 16(1) of the Sale
of Goods Act.

Conclusion

• Mr. Das's Rights:

Since the seller provided unsuitable wood for the specified purpose, Mr. Das is entitled to either a refund or
to have the correct type of wood delivered to meet his requirements.

• Remedy for Mr. Das:

Mr. Das can insist on the seller supplying the correct type of wood or seek a refund, as the seller has failed to
fulfill the obligation to supply goods that are fit for the particular purpose.

In this case, the doctrine of Caveat Emptor does not apply, and the seller is liable to fulfill the buyer's
specific requirements or provide a remedy.

Q7. Jun 23 RTP

Priyansh orders an iron window from an iron merchant for his new house. The merchant sends his technician
to take the measurements of the window area. After taking the measurements, the merchant informs
Priyansh that the cost of the window will be ₹5,000, with ₹1,000 as an advance. Priyansh pays the ₹1,000
advance, agreeing to pay the balance after the window is fitted.

After three days, when the technician attempts to fit the window, it is noticed that the window size is
incorrect. Priyansh requests the merchant to either correct the defect or refund his advance. The iron
merchant responds that the window was specifically made for Priyansh's site and cannot be reused or
altered, and refuses to refund the advance, insisting that Priyansh pay the remaining ₹4,000.

• State with reason under the provisions of the Sale of Goods Act, 1930, whether Priyansh can take his
advance back.

Provision under the law

Section 16 of the Sale of Goods Act, 1930:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 139

• This section implies a condition that the goods must be merchantable at the time of transfer of property.
Goods are considered merchantable if they are of satisfactory quality and fit for the purpose they were sold
for.

• In cases where goods are bought for a particular purpose, if that purpose is known to the seller, the goods
must be reasonably fit for that purpose. If the goods fail to meet the required standard, the buyer has the
right to reject the goods and demand a refund.

Analysis of the given case

• Implied Condition of Merchantability:

According to Section 16 of the Sale of Goods Act, 1930, goods must be in a merchantable condition at the
time of delivery. This includes goods being fit for the purpose for which they were sold.

• In this case:
The window was specifically made according to Priyansh's requirements. However, the size was incorrect,
and the window could not be fitted properly. As a result, the window was not fit for its intended purpose—
installing it in Priyansh's house.

• The buyer's right:

Since the window was not merchantable (not fit for the purpose for which it was made), Priyansh has the
right to reject the defective goods. Under the provisions of the Sale of Goods Act, Priyansh can demand the
return of his advance because the merchant has failed to deliver goods that meet the implied condition of
merchantability.

Conclusion

Priyansh can take back his advance of ₹1,000. The window was defective and not fit for its intended
purpose, violating the implied condition under Section 16 of the Sale of Goods Act, 1930. Since the window
was not merchantable, Priyansh is entitled to avoid the contract and claim a refund of his advance money.
The iron merchant's refusal to refund the advance is not justified.

Q8. Jun 23 RTP

Ayushman is the owner of a residential property situated at Indraprastha Marg, New Delhi. He wants to sell
this property and appoints Ravi, a mercantile agent, with the condition that Ravi will not sell the house at a
price less than ₹5 crores. Ravi sells the house for ₹4 crores to Mudit, who buys in good faith. Ravi
misappropriates the money received from Mudit. Ayushman files a suit against Mudit to recover his property.

• Decide with reasons, can Ayushman do so under the Sale of Goods Act, 1930?

Provision under the law

Proviso to Section 27 of the Sale of Goods Act, 1930:

• A sale made by a mercantile agent of goods passes a good title to the buyer if the following conditions are
met:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 140

1. The mercantile agent was in possession of the goods or documents with the consent of the owner.

2. The sale was made by the agent in the ordinary course of business as a mercantile agent.

3. The buyer acted in good faith and was not aware at the time of the sale that the agent did not have the
authority to sell.

Analysis of the given case

• Mercantile Agent's Authority:

Ravi, as a mercantile agent, was given authority to sell the property on behalf of Ayushman, with the
condition that the property would not be sold for less than ₹5 crores. However, Ravi sold the property for ₹4
crores, which was below the stipulated price.

• Sale in Good Faith:

Mudit bought the property in good faith, unaware that Ravi was not authorized to sell the property at this
price. According to the provisions of Section 27, if the buyer purchases in good faith, the sale is valid and
passes a good title to the buyer.

• Ayushman’s Position:
Ayushman cannot recover the property from Mudit, as the sale was completed in accordance with the law
and passed a good title to Mudit. Mudit acted in good faith and had no notice of Ravi’s lack of authority to
sell at that price.

Conclusion

Ayushman cannot recover his property from Mudit under the Sale of Goods Act, 1930. Since the sale was
made by Ravi, the mercantile agent, and Mudit bought in good faith without knowledge of Ravi's lack of
authority, the title of the property passes to Mudit. Ayushman’s remedy lies in recovering his loss from Ravi,
the agent who misappropriated the money.

Q9. Nov 22 RTP

Ankit needs a black pen for his exams. He went to a nearby stationery shop and told the seller he needed a
black pen. The seller gives him a pen saying that it is a black pen, but it is clearly mentioned on the packet of
the pen that it is a "Blue Ink Pen." Ankit ignores this and takes the pen. After reaching home, Ankit finds that
the pen is actually a blue pen. Now Ankit wants to return the pen, stating that the seller has violated the
implied conditions of sale by description.

• Can Ankit do what he wants as per the Sale of Goods Act, 1930?

Provision under the law

Section 16(2) of the Sale of Goods Act, 1930:

• Where the goods are bought by description from a seller who deals in goods of that description, there is an
implied condition that the goods shall correspond with the description.

• However, if the buyer can discover the defect by an ordinary examination, this rule does not apply.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 141

• Caveat Emptor (let the buyer beware) applies in cases where the defect could be discovered with ordinary
diligence.

Analysis of the given case

• Sale by Description:
In this case, Ankit requested a black pen, and the seller provided a pen, claiming it to be a black pen.
However, the packaging clearly stated "Blue Ink Pen," which directly contradicts the description Ankit was
given.

• Ordinary Examination:
The description of the pen as a "Blue Ink Pen" was visible on the packaging, which Ankit could have easily
noticed during his purchase. Since the defect (the ink color) was clearly mentioned on the packaging, Ankit
could have discovered this defect with ordinary diligence before completing the purchase.

• Caveat Emptor:
Because Ankit could have easily noticed the defect (blue ink instead of black) by checking the packaging, the
principle of Caveat Emptor applies here. This means that Ankit cannot claim that the seller violated the
implied conditions of sale by description.

Conclusion

Ankit cannot return the pen as per the provisions of the Sale of Goods Act, 1930. Since the defect (blue ink)
was clearly mentioned on the packaging and could have been noticed by ordinary diligence, Caveat Emptor
applies, and Ankit is not entitled to return the pen.

Q10. May 22 RTP

Certain goods were sold by sample by A to B, who in turn sold the same goods by sample to C, and C by
sample sold the goods to D. The goods were not according to the sample. Therefore, D, who found the
deviation of the goods from the sample, rejected the goods and gave a notice to C. C sued B and B sued A.

• Advise B and C under the Sale of Goods Act, 1930.

Provision under the law

Section 15 of the Sale of Goods Act, 1930:

• When goods are sold by sample, there is an implied condition that the goods must correspond with the
sample in quality.

• The buyer must be given a reasonable opportunity to compare the bulk with the sample.

Analysis of the given case

• D's Rights: D, the final buyer, notices that the goods do not match the sample. Since the goods are not as
per the sample, D is within their rights to reject the goods, as this constitutes a breach of the implied

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 142

condition that the goods should match the sample (Section 15 of the Sale of Goods Act). D can also give
notice of rejection to C.

• C's Rights: C, having received the goods from B, is in a position to sue B for breach of contract, specifically
for the deviation of goods from the sample. However, as per Section 13(2) of the Sale of Goods Act, since C
accepted the goods (by selling them to D), this cannot be treated as a breach of the implied condition about
the sample for C. C can only claim damages from B for the deviation.

• B's Rights: B, in turn, can recover damages from A, because A was the original seller who supplied goods
that did not match the sample. Similarly, since B also accepted the goods and sold them to C, this would not
be considered a breach of the implied condition for B either.

Conclusion

• D: Has the right to reject the goods, as they do not conform to the sample.

• C: Can claim damages from B for the breach of the sample condition. C cannot treat it as a breach of the
implied condition as to the sample since they accepted the goods.

• B: Can claim damages from A for supplying goods that deviated from the sample.

Q11. Nov 21 RTP

Prashant reaches a sweet shop and asks for 1 Kg of ‘Burfi’ if the sweets are fresh. The seller replies, “Sir, all
my sweets are fresh and of good quality.” Prashant agrees to buy on the condition that he first tastes one
piece of ‘Burfi’ to check the quality. The seller gives him one piece to taste. Prashant, on finding the quality is
good, asks the seller to pack it. On reaching home, Prashant finds that the ‘Burfi’ is stale, not fresh, while the
piece he tasted was fresh. Now, Prashant wants to avoid the contract and return the ‘Burfi’ to the seller.

(i) State with reason whether Prashant can avoid the contract under the Sale of Goods Act, 1930?
(ii) Will your answer be different if Prashant does not taste the sweet?

Provision under the law

• Section 15 of the Sale of Goods Act, 1930:

Where the goods are sold by description, there is an implied condition that the goods shall correspond with
the description.
Section 17 of the Sale of Goods Act, 1930:
In the case of a contract for the sale of goods by sample, there is an implied condition that the bulk shall
correspond with the sample in quality and that the buyer shall have a reasonable opportunity to compare
the bulk with the sample.

Analysis of the given case

1. Prashant tastes the sweet:

o The transaction can be viewed as a sale by sample, as Prashant tasted one piece of 'Burfi' to evaluate the
quality before committing to the full purchase.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 143

o Under Section 17, the goods (the bulk of 'Burfi') must correspond with the sample (the piece Prashant
tasted). Since the bulk does not meet the quality of the sample (i.e., it was stale), Prashant can avoid the
contract and reject the goods.

2. Prashant does not taste the sweet:

o If Prashant had not tasted the sweet, the transaction would have been a sale by description, based on the
seller's statement that all sweets were fresh and of good quality.

o Under Section 15, the goods must correspond with the description made by the seller. Since the 'Burfi' did
not match the seller's description (it was stale), Prashant can again reject the goods and avoid the contract.

Conclusion

(i) In this case, Prashant can avoid the contract and return the 'Burfi' under Section 17 as the bulk does not
match the quality of the sample he tasted.

(ii) Even if Prashant had not tasted the sweet, he could still avoid the contract under Section 15 because the
goods do not correspond with the seller's description of being fresh and of good quality.

Q12. May 21 RTP

Mrs. G bought a tweed coat from P. When she used the coat, she got rashes on her skin because her skin
was abnormally sensitive. However, she did not inform the seller, P, about this sensitivity. Mrs. G filed a case
against the seller to recover damages. Can she recover damages under the Sale of Goods Act, 1930?

Provision under the law

• Section 16(1) of the Sale of Goods Act, 1930:

Normally, there is no implied condition or warranty as to the quality or fitness for any particular purpose of
goods supplied. The general rule is “Caveat Emptor” (let the buyer beware).

• Exception under Section 16(1):

If the buyer expressly or impliedly makes known to the seller the particular purpose for which the goods are
required and relies on the seller’s skill and judgment, the seller is liable if the goods are not fit for that
purpose. This applies when the goods are sold in the ordinary course of business.

Analysis of the given case

In this case, Mrs. G purchased the tweed coat without informing the seller, P, about her skin’s sensitivity.
Since she did not make known to the seller that the coat was required for someone with sensitive skin, the
seller cannot be held liable under the provisions of Section 16(1). The seller was not made aware of the
particular purpose for which the coat was needed. Therefore, Mrs. G cannot claim damages from the seller
for the rashes caused by the coat.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 144

Mrs. G cannot recover damages from the seller because she did not inform the seller about her sensitive
skin. As per Section 16(1) of the Sale of Goods Act, the seller is not liable for fitness or quality unless the
buyer makes known the particular purpose for which the goods are needed, which was not the case here.

Q13. Nov 20 RTP

J, the owner of a Fiat car, wants to sell his car. For this purpose, he hands over the car to P, a mercantile
agent, for sale at a price not less than ₹50,000. The agent sells the car for ₹40,000 to A, who buys the car in
good faith and without notice of any fraud. P misappropriates the money as well. J sues A to recover the car.
Decide, with reasons, whether J would succeed.

Provision under the law

• Proviso to Section 27 of the Sale of Goods Act, 1930:

A sale made by a mercantile agent who does not have authority from the owner to sell can still transfer a
good title to the buyer under the following conditions:

1. The agent must be in possession of the goods or documents of title to the goods with the consent of the
owner.

2. The agent must act in the ordinary course of business as a mercantile agent.

3. The buyer must act in good faith.

4. The buyer must not have notice, at the time of the sale, that the agent had no authority to sell the goods.

• Section 2(9): Defines a "mercantile agent" as one who, in the ordinary course of his business, is authorized
to sell goods, consign goods for sale, buy goods, or raise money on the security of goods.

Analysis of the given case

In this case:

1. P, the mercantile agent, had possession of the car with J’s consent for the purpose of sale.

2. P sold the car to A for ₹40,000, which is below the agreed price of ₹50,000. However, A bought the car in
good faith and without notice of the fraud committed by P.

3. A acted in the ordinary course of business as a buyer, and A was unaware that P had no authority to sell the
car at a price lower than the agreed ₹50,000.

Given these conditions, A obtained a good title to the car because the sale was made by a mercantile agent
in possession of the goods, acting within the scope of his authority, and A was a buyer in good faith.
Therefore, J cannot recover the car from A.

Q14. May 20 RTP

Mr. S agreed to purchase 100 bales of cotton from V, out of his large stock, and sent his men to take delivery
of the goods. They could pack only 60 bales. Later on, there was an accidental fire, and the entire stock was

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 145

destroyed, including the 60 bales that were already packed. Referring to the provisions of the Sale of Goods
Act, 1930, explain as to who will bear the loss and to what extent.

Provision under the law

• Section 26 of the Sale of Goods Act, 1930:

Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the
buyer, regardless of whether delivery has been made or not.

• Section 18 and Section 23 of the Sale of Goods Act, 1930:

In a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless
and until the goods are ascertained. For future or unascertained goods, the property passes when the
goods are unconditionally appropriated to the contract by either the seller or buyer with the assent of the
other.

Analysis of the given case

In this case:

1. 100 bales were agreed to be purchased by Mr. S from V.

2. The goods were unascertained at the time the agreement was made, as Mr. S was selecting the bales from
V’s stock.

3. The fire occurred after 60 bales were packed and 40 bales were still unselected.

The question hinges on whether the property in the goods had passed to Mr. S at the time of the fire. The
property in the goods passes when the goods are ascertained and appropriated to the contract. This can
happen in two ways:

1. If the bales were selected with the consent of Mr. S’s representatives:
In this case, the 60 bales that were packed and identified as Mr. S's goods have been appropriated to the
contract. Therefore, the loss of these 60 bales would be borne by Mr. S. The remaining 40 bales, which were
not selected and appropriated, still belong to Mr. V, and the loss of these bales would be borne by Mr. V.

2. If the bales were not selected with the consent of Mr. S’s representatives:
In this case, no goods were appropriated to the contract at the time of the fire. Therefore, all 100 bales
remain the property of Mr. V, and the loss of all the bales would be borne by Mr. V.

Conclusion

• If the 60 bales were selected with the consent of Mr. S's representatives, Mr. S would bear the loss of those
60 bales, and Mr. V would bear the loss of the remaining 40 bales.

• If the 60 bales were not selected with the consent of Mr. S's representatives, the entire loss of the 100 bales
would be borne by Mr. V.

Q15. Nov 19 RTP

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 146

J, the owner of a car, wants to sell his car. For this purpose, he hands over the car to P, a mercantile agent, for
sale at a price not less than ₹50,000. The agent sells the car for ₹40,000 to A, who buys the car in good faith
and without notice of any fraud. P misappropriated the money also. J sues A to recover the car. Decide, given
reasons, whether J would succeed.

Provision under the law

• Proviso to Section 27 of the Sale of Goods Act, 1930:

The sale made by a mercantile agent will pass a good title to the buyer if the following conditions are
satisfied:

1. The agent must be in possession of the goods or documents of title to the goods with the consent of the
owner.

2. The agent must sell the goods in the ordinary course of business as a mercantile agent.

3. The buyer must act in good faith.

4. The buyer must not have notice at the time of the sale that the agent has no authority to sell.

Analysis of the given case

• Condition 1: P, the mercantile agent, was in possession of the car with J's consent for the purpose of sale.
Therefore, this condition is fulfilled.

• Condition 2: P sold the car in the ordinary course of his business as a mercantile agent, which also satisfies
this requirement.

• Condition 3: A, the buyer, bought the car in good faith and had no knowledge of any fraud or unauthorized
action by P.

• Condition 4: A had no notice that P did not have the authority to sell the car at the lower price of ₹40,000, as
P was acting as a legitimate agent.

Since all conditions of the proviso to Section 27 are satisfied, A obtained a good title to the car.

Conclusion

J would not succeed in recovering the car from A. Since A purchased the car in good faith and all conditions
for a valid sale by the mercantile agent were met, A holds a good title to the car. J can, however, pursue legal
action against P to recover the misappropriated money.

Q16. Nov 18 RTP

Ram consults Shyam, a motor-car dealer, for a car suitable for touring purposes to promote the sale of his
product. Shyam suggests a 'Maruti,' and Ram accordingly buys it from Shyam. The car turns out to be unfit
for touring purposes. What remedy does Ram have now under the Sale of Goods Act, 1930?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 147

Provision under the law

• Section 12 - Condition and Warranty

1. Sub-section (1): A stipulation in a contract of sale with reference to goods may be a condition or a warranty.

2. Sub-section (2): "A condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated."

3. Sub-section (3): "A warranty is a stipulation collateral to the main purpose of the contract, the breach of
which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated."

4. Sub-section (4): Whether a stipulation is a condition or warranty depends on the construction of the
contract, and a stipulation may be a condition even if called a warranty in the contract.

Analysis of the given case

• The essential stipulation in the contract was that the car should be suitable for touring purposes, which is
critical to the main purpose of the contract.

• The non-fulfillment of this condition defeats the very purpose for which Ram bought the car. Since this
stipulation is a condition and not a warranty, the breach of this condition allows Ram to reject the goods
and treat the contract as repudiated.

Conclusion

Ram is entitled to reject the car and claim a refund of the price under the Sale of Goods Act, 1930. The
breach of the condition that the car should be suitable for touring purposes allows him to repudiate the
contract.

Q17. Apr 23 MTP (6 Marks)

Mr. Dheeraj was running a shop selling good quality washing machines. Mr. Vishal came to his shop and
asked for a washing machine suitable for washing woollen clothes. Mr. Dheeraj showed him a particular
machine which Mr. Vishal liked and paid for it. Later on, when the machine was delivered to Mr. Vishal’s
house, it was found to be the wrong machine and also unfit for washing woollen clothes.

He immediately informed Mr. Dheeraj about the delivery of the wrong machine. Mr. Dheeraj refused to
exchange it, saying that the contract was complete after the delivery of the washing machine and payment
of the price. With reference to the provisions of the Sale of Goods Act, 1930, discuss whether Mr. Dheeraj is
right in refusing to exchange the washing machine?

Provision under the law

• Section 15 of the Sale of Goods Act, 1930

"Where goods are sold by description as well as by sample, there is an implied condition that the goods shall
correspond to the description and the sample."

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 148

• Implied Condition as to Fitness for Purpose (Section 16)

"Where the buyer, expressly or impliedly, makes known to the seller the particular purpose for which the
goods are required, and the seller, who has the skill or judgment to provide the goods for that purpose,
supplies the goods, then there is an implied condition that the goods shall be fit for that purpose."

Analysis of the given case

• Breach of Implied Condition: Mr. Vishal specifically informed Mr. Dheeraj that he needed the washing
machine for washing woollen clothes, which implies an implied condition that the machine should be fit for
that purpose.

• The washing machine delivered was not only wrong but also unfit for the stated purpose, breaching the
implied condition of fitness for purpose.

• Additionally, if the goods were sold by description and not matching that description, Mr. Vishal would have
the right to repudiate the contract or demand a replacement under the law.

• Refusal to Replace: Mr. Dheeraj's refusal to replace the washing machine is not justified, as the delivery of
goods unfit for the stated purpose constitutes a breach of the contract. Mr. Vishal is within his rights to
demand a replacement or claim a refund.

Conclusion

Mr. Dheeraj is not right in refusing to exchange the washing machine. Mr. Vishal has the right to either
repudiate the contract, claim a refund, or request a replacement for the machine that is fit for washing
woollen clothes, as per the provisions of the Sale of Goods Act, 1930.

Q18. Nov 22 MTP (6 Marks)

Mr. X, a retailer, is running a shop dealing in toys for children. He purchased a number of toy cars from a
wholesaler in a sale by sample. A boy came to the retailer's shop to buy toys and bought one of the toy cars.
When the boy tried to play with it, the toy broke into pieces due to a manufacturing defect, and the boy was
injured. Mr. X, the retailer, was held liable to pay compensation to the boy. Due to this incident, the retailer
sued the wholesaler to claim indemnity from him.

With reference to the provisions of the Sale of Goods Act, 1930, discuss if the retailer can claim
compensation from the wholesaler.

Provision under the law

• Section 16(2) - Condition as to Merchantability:

When goods are sold by description and the seller is dealing in goods of that description, there is an implied
condition that the goods must be merchantable. This means the goods must be fit for the purpose for which
they are sold, and in this case, fit for use as a children's toy.

• Section 17 - Latent Defects:

If a defect is latent, meaning it is not discoverable upon a reasonable inspection of the goods, and the goods

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 149

are purchased in a condition that appears to be suitable, the seller (wholesaler) is liable for the defect that
was not detected during a reasonable examination.

Analysis of the given case

• Merchantability: The toy cars were sold by sample, meaning that the wholesaler had an obligation to ensure
that the goods matched the sample in terms of quality. Since the toy car broke due to a manufacturing
defect that was not apparent during a reasonable examination, it indicates that the toy was not
merchantable or fit for use.

• Latent Defect: Since the defect in the toy car was not visible during a reasonable examination (which is
typically the case with manufacturing defects), it qualifies as a latent defect. The wholesaler is responsible
for this defect and the retailer, having sold the toy in good faith, can seek indemnity for the compensation he
had to pay to the boy.

• Liability of the Wholesaler: The wholesaler is bound to indemnify the retailer for the losses incurred due to
the latent defect in the toy. The retailer could not have reasonably discovered this defect before selling the
toy, and thus, the wholesaler is liable for the defect that led to the injury and compensation claim.

Conclusion

The retailer, Mr. X, can claim indemnity from the wholesaler because the toy car sold to the boy had a
latent defect that was not discoverable through a reasonable examination. Since the defect caused an injury
and the retailer had to compensate the boy, the wholesaler is responsible for indemnifying the retailer for the
loss suffered.

PART 2 – DIRECT QUESTIONS –

Q1. Jun 22 Exam (6 Marks)

What are the implied conditions in a contract of 'Sale by Sample' under the Sale of Goods Act, 1930?
Also, state the implied warranties operative under the Act.

Answer:

Implied Conditions in Sale by Sample [Section 17 of the Sale of Goods Act, 1930]:

In a contract of sale by sample, the following implied conditions apply:

1. Bulk Corresponding with the Sample in Quality:

The goods in the bulk must correspond with the sample in quality. The buyer expects the goods to match the
sample presented, and if they do not, the buyer can reject the goods.

2. Opportunity for Comparison:

The buyer must have a reasonable opportunity to compare the bulk with the sample. This ensures that the
buyer has sufficient time and opportunity to inspect the goods and confirm that they match the sample.

3. Goods Free from Hidden Defects:

The goods must be free from any defect that would make them unmerchantable and that is not apparent on
a reasonable examination of the sample. This condition applies only to latent defects (defects that are not
immediately visible), and the buyer can reject the goods if such defects are found.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 150

Implied Warranties under the Sale of Goods Act:

1. Warranty as to Undisturbed Possession [Section 14(b)]:

There is an implied warranty that the buyer shall have quiet possession of the goods. If the buyer is disturbed
in possession by a third party, the buyer can sue the seller for the breach of this warranty.

2. Warranty as to Non-existence of Encumbrances [Section 14(c)]:

There is an implied warranty that the goods shall be free from any charge or encumbrance in favor of any
third party, which the buyer was not informed of before or at the time the contract was made.

3. Warranty as to Quality or Fitness by Usage of Trade [Section 16(3)]:

An implied warranty regarding the quality or fitness of the goods for a particular purpose may arise based on
the usage of trade. If the trade practice suggests that goods of a certain kind must meet certain qualities, the
seller must adhere to those expectations.

4. Disclosure of Dangerous Nature of Goods:

If the goods are dangerous in nature and the buyer is unaware of the danger, the seller is required to warn the
buyer about the potential risk. Failure to disclose such dangers could lead to the seller being liable for
damages if a breach of warranty occurs.

Q2. Dec 21 Exam (4 Marks)

"A breach of condition can be treated as a breach of warranty". Explain this statement as per relevant
provisions of the Sale of Goods Act, 1930.

Answer:

As per Section 13 of the Sale of Goods Act, 1930, a breach of condition may be treated as a breach of
warranty under certain circumstances. This provision allows the buyer to lose the right to rescind the
contract and claim only damages. The specific cases where a breach of condition can be treated as a breach
of warranty are:

1. Waiver of Condition by Buyer:

If the buyer voluntarily waives the performance of a condition, the condition can be treated as a warranty.
This means that the buyer relinquishes the right to reject the goods based on the breach of the condition.

2. Election by the Buyer:

The buyer may elect to treat a breach of condition as a breach of warranty. In this case, the buyer does not
rescind the contract but instead chooses to claim only damages, treating the breach as a minor issue rather
than a fundamental one.

3. Acceptance of Goods:
If the contract is non-severable and the buyer accepts the goods (either entirely or partially), the breach of
condition may be treated as a breach of warranty. Acceptance of the goods, as per Section 72 of the Indian
Contract Act, 1872, signifies that the buyer acknowledges the goods and waives the right to reject them due
to a breach of condition.

4. Excuse by Law:
If the fulfilment of a condition is excused by law (due to impossibility or other reasons), the breach of that
condition may be treated as a breach of warranty. This means that the law may relieve the parties from

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 151

fulfilling the condition, and the breach would not justify rescinding the contract but would instead be
addressed through a warranty.

In summary, a breach of condition can be downgraded to a breach of warranty in cases where the buyer
waives the breach, accepts the goods, or is legally excused from the condition, thus losing the right to
rescind the contract.

Q3. Jan 21 Exam (6 marks)

What are the differences between a 'Condition' and a 'Warranty' in a contract of sale? Also, explain
when a 'breach of condition' shall be treated as a 'breach of warranty' under the provisions of the Sale
of Goods Act, 1930.

Answer:

Differences between Condition and Warranty:

Point of Difference Condition Warranty

A condition is essential to the A warranty is collateral or

Meaning main purpose of the secondary to the main
contract. purpose of the contract.

The aggrieved party can

The aggrieved party can claim
Right in case of repudiate the contract or
only damages in case of a
breach claim damages or both in the
breach of warranty.
case of breach of condition.

A breach of condition may be

A breach of warranty cannot
Conversion of treated as a breach of
be treated as a breach of
stipulations warranty under certain
condition.
circumstances.

Breach of Condition treated as Breach of Warranty:

Under Section 13 of the Sale of Goods Act, 1930, there are certain circumstances where a breach of
condition may be treated as a breach of warranty, and the buyer loses the right to rescind the contract but
can only claim damages. These circumstances are:

1. Waiver by the Buyer:

If the buyer voluntarily waives the performance of the condition, the condition can be treated as a warranty.
The buyer cannot rescind the contract but may still seek damages.

2. Election by the Buyer:

The buyer may elect to treat the breach of condition as a breach of warranty. Instead of repudiating the
contract, the buyer may choose to claim only damages for the breach.

3. Acceptance of Goods:
If the contract is non-severable and the buyer has accepted either the whole goods or any part thereof, the

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 152

breach of condition will be treated as a breach of warranty. Acceptance of goods means the buyer
acknowledges the goods and cannot repudiate the contract on the basis of a breach of condition.

4. Excuse by Law:
If the fulfilment of a condition is excused by law due to impossibility or other reasons, a breach of that
condition may be treated as a breach of warranty. This means that the law may relieve the parties from
fulfilling the condition, and the breach will not justify rescinding the contract but will be treated as a
warranty.

Q4. Nov 20 Exam (4 Marks), Nov 18 Exam (6 Marks), Nov 21 RTP

Write any four exceptions to the doctrine of Caveat Emptor as per the Sale of Goods Act, 1930.

Answer:

The doctrine of Caveat Emptor (let the buyer beware) is subject to the following exceptions under the Sale
of Goods Act, 1930:

1. Fitness as to quality or use (Section 16(1)):

If the buyer informs the seller of the specific purpose for which the goods are required, the seller must
supply goods that are reasonably fit for that particular purpose. The rule of Caveat Emptor does not apply in
such cases.

2. Goods purchased under patent or brand name (Section 16(1)):

When goods are sold under a patent or brand name, there is no implied condition that the goods will be fit for
any particular purpose. The buyer assumes the quality or suitability of the goods based on the brand or
patent.

3. Goods sold by description (Section 15):

If goods are sold by description, there is an implied condition that the goods must correspond with that
description. If they do not, the seller is liable, and the rule of Caveat Emptor does not apply.

4. Goods of Merchantable Quality (Section 16(2)):

When goods are sold by description by a seller who deals in goods of that description, there is an implied
condition that the goods will be of merchantable quality. The rule of Caveat Emptor does not apply in this
case.

5. Sale by sample (Section 17):

If goods are purchased by sample, the rule of Caveat Emptor does not apply if the bulk of the goods does not
correspond with the sample provided.

6. Goods by sample as well as description (Section 15):

If goods are purchased by both sample and description, the goods must correspond with both. If not, Caveat
Emptor does not apply.

7. Trade Usage (Section 16(3)):

An implied warranty or condition regarding quality or fitness for a particular purpose may arise from the
usage of trade. If the seller deviates from such usage, the rule of Caveat Emptor is overridden.

8. Seller actively conceals a defect or commits fraud:

If the seller actively conceals a defect or commits fraud, the rule of Caveat Emptor does not apply. The buyer
is protected in cases of misrepresentation or fraud.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 153

Q5. May 19 Exam (4 Marks), May 20 RTP, Nov 19 RTP

Discuss the various types of implied warranties as per the Sale of Goods Act, 1930.

Answer:

The Sale of Goods Act, 1930 implies several warranties in a contract of sale to protect the buyer. The key
implied warranties are:

1. Warranty as to undisturbed possession (Section 14(b)):

There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. If the buyer's
possession is disturbed later on (for example, by a third party claiming ownership), the buyer can sue the
seller for the breach of this warranty.

2. Warranty as to non-existence of encumbrances (Section 14(c)):

There is an implied warranty that the goods sold are free from any charge or encumbrance in favor of a third
party, unless such encumbrance is declared or known to the buyer at the time the contract is made. If the
goods are encumbered, the buyer can hold the seller liable for breach.

3. Warranty as to quality or fitness by usage of trade (Section 16(3)):

An implied warranty may exist as to the quality or fitness of goods for a particular purpose, based on the
usage of trade. If the seller deviates from this standard, it could be considered a breach of the warranty, and
the buyer may claim for damages.

4. Disclosure of dangerous nature of goods:

If the goods being sold are dangerous in nature, and the buyer is unaware of the potential danger, the seller is
required to disclose this. Failure to do so, or if the buyer suffers harm from the dangerous nature of the
goods, the seller may be liable for damages. This warranty ensures that the buyer is properly informed about
the risks associated with the goods.

Q6. May 21 RTP, Nov 20 RTP

What are the differences between a ‘Condition’ and ‘Warranty’ in a contract of sale? Also explain when
shall a ‘breach of condition’ be treated as a ‘breach of warranty’ under the provisions of the Sale of
Goods Act, 1930?

Answer:

Differences Between Condition and Warranty:

Point of Differences Condition Warranty

A condition is essential to A warranty is collateral to

Meaning the main purpose of the the main purpose of the
contract. contract.

The aggrieved party can

repudiate the contract or The aggrieved party can
Right in case of
claim damages or both in only claim damages in case
breach
case of a breach of of breach of warranty.
condition.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 154

A breach of condition may A breach of warranty

Conversion of
be treated as a breach of cannot be treated as a
stipulations
warranty. breach of condition.

Breach of Condition Treated as Breach of Warranty:

Under Section 13 of the Sale of Goods Act, 1930, a breach of condition may, in certain cases, be treated as
a breach of warranty, leading the buyer to lose the right to rescind the contract and instead only claim
damages.

The following are the cases where a breach of condition can be treated as a breach of warranty:

1. Waiver of Performance:
If the buyer altogether waives the performance of the condition, the buyer cannot rescind the contract, but
may claim damages if any.

2. Election to Treat Condition as Warranty:

If the buyer elects to treat the breach of a condition as one of a warranty, they may only claim damages
rather than repudiating the contract. This means the buyer consciously chooses to treat the breach as minor
and proceeds with the contract.

3. Acceptance of Goods:
Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof,
the breach of condition will be treated as a breach of warranty. Acceptance of the goods implies the buyer’s
intention to continue with the contract despite the breach.

4. Excused Fulfillment of Condition:

Where the fulfillment of any condition or warranty is excused by law due to impossibility or other reasons,
the breach of condition may be treated as a breach of warranty. For example, if the performance of a
condition becomes impossible due to unforeseen circumstances, the buyer cannot rescind the contract
based on that condition's breach.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 155

Chapter 2 – The Sale of Goods Act, 1930

UNIT 3: TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS

PART 1 – CASE LAW QUESTIONS

Q1. Nov 20 Exam (6 Marks), May 21 RTP

Ms. R owns a Two Wheeler which she handed over to her friend Ms. K on sale or return basis. Even after a
week, Ms. K neither returned the vehicle nor made payment for it. She instead pledged the vehicle to Mr. A to
obtain a loan. Ms. R now wants to claim the Two Wheeler from Mr. A. Will she succeed?
(i) Examine with reference to the provisions of the Sale of Goods Act, 1930, what recourse is available to Ms.
R?
(ii) Would your answer be different if it had been expressly provided that the vehicle would remain the
property of Ms. R until the price has been paid?

Provision under the Law

As per Section 24 of the Sale of Goods Act, 1930, when goods are delivered to the buyer on approval or
“sale or return” or similar terms, the property in the goods passes to the buyer under the following
conditions:

• (a) When the buyer signifies their approval or acceptance to the seller or does any other act adopting the
transaction.

• (b) If the buyer does not signify their approval or acceptance but retains the goods without giving notice of
rejection, then:

o If a time has been fixed for the return of the goods, on the expiration of such time.

o If no time has been fixed, on the expiration of a reasonable time.

• (c) If the buyer does something equivalent to accepting the goods, such as pledging or selling the goods.

Analysis of the Given Case

(i) In the current situation, Ms. K received the two-wheeler on a sale or return basis. She pledged the
vehicle to Mr. A to obtain a loan. By doing so, Ms. K acted in a manner equivalent to accepting the goods, as
pledging the goods is considered an act of acceptance under Section 24(c). Therefore, the property in the
two-wheeler passed to Ms. K, and she could no longer return it to Ms. R.

Since the property in the vehicle passed to Ms. K, Ms. R cannot claim the two-wheeler from Mr. A. However,
Ms. R has the right to claim the price of the two-wheeler from Ms. K.

(ii) If it had been expressly agreed that the vehicle would remain the property of Ms. R until the price was
paid, the situation would change. According to Section 24, in such a case, the property in the goods would
not pass to the buyer (Ms. K) until the price was paid. Therefore, when Ms. K pledged the vehicle to Mr. A,
the ownership would not have transferred to her. As a result, Ms. R could successfully claim the two-
wheeler from Mr. A, as the pledge would be invalid in this context.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 156

Conclusion

• (i) In the absence of an agreement specifying that ownership remains with Ms. R, Ms. R cannot claim the
two-wheeler from Mr. A. She can only claim the price of the vehicle from Ms. K.

• (ii) If the agreement explicitly stated that the vehicle would remain the property of Ms. R until the price was
paid, Ms. R could successfully claim the two-wheeler from Mr. A, as the pledge by Ms. K would not transfer
ownership.

Q2. Nov 18 Exam (4 Marks)

Mr. G sold some goods to Mr. H for a certain price by issuing an invoice, but payment was not received on
that day. The goods were packed and lying in the godown of Mr. G. The goods were inspected by H's agent
and were found to be in order. Later on, the dues for the goods were settled in cash. Just after receiving the
cash, Mr. G asked Mr. H that the goods should be taken away from his godown to enable him to store other
goods purchased by him. After one day, since Mr. H did not take delivery of the goods, Mr. G kept the goods
out of the godown in an open space. Due to rain, some goods were damaged.

Referring to the provisions of the Sale of Goods Act, 1930, analyse the above situation and decide who will
be held responsible for the damage. Will your answer be different if the dues were not settled in cash and are
still pending?

Provision under the Law

1. Section 44 of the Sale of Goods Act, 1930:

o When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the
buyer does not take delivery within a reasonable time after such request, the buyer is liable to the seller for
any loss caused by their neglect or refusal to take delivery, as well as for a reasonable charge for the care
and custody of the goods.

2. Risk and Property in Goods:

o The property in the goods or beneficial ownership of the goods passes to the buyer when the goods are
appropriated to the contract and delivery occurs.

o The risk of loss of goods follows the passing of property. Before the transfer of property, the goods remain at
the seller’s risk.

o After the transfer of property to the buyer, the risk of loss is transferred to the buyer, even if delivery has not
been made.

Analysis of the Given Case

1. In this case, Mr. G has already requested Mr. H to take delivery of the goods to make room for other goods.
However, Mr. H did not take delivery within a reasonable time. According to Section 44, Mr. H is liable for the
loss of goods due to his failure to take delivery within a reasonable time. Since Mr. G had already given notice
and the goods were out of the godown in an open space due to Mr. H's failure to collect them, the damage
caused by rain should be borne by Mr. H, as the risk had already passed to him when the property in the
goods was transferred upon payment.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 157

2. If the price had not been settled in cash and some amount was still pending, the situation would be
different. As an unpaid seller, Mr. G would still retain ownership of the goods until the price was paid in full.
In such a case, Mr. G would still bear the risk of damage to the goods until payment was made, as the
property in the goods would not have passed to Mr. H. Thus, Mr. G would be responsible for the damage
caused to the goods while they were in his possession.

Conclusion

1. Since Mr. H had already paid the dues, and Mr. G requested him to take delivery of the goods, the risk of loss
passed to Mr. H. Mr. H is responsible for the damage caused to the goods due to his failure to take delivery
on time.

2. If the dues had not been settled, Mr. G, as the unpaid seller, would remain responsible for the damage to the
goods because the property in the goods had not yet passed to Mr. H.

Q3. Nov 22 RTP, Nov 21 RTP

Akansh purchased a Television set from Jethalal, the owner of Gada Electronics, on the condition that for the
first three days, he would check its quality and, if satisfied, he would pay for it; otherwise, he would return
the Television set. On the second day, the Television set was spoiled due to an earthquake. Jethalal
demanded the price of the Television set from Akansh.

Whether Akansh is liable to pay the price under the Sale of Goods Act, 1930? Who will ultimately bear
the loss?

Provision under the Law

1. Section 24 of the Sale of Goods Act, 1930:

o When goods are delivered to the buyer on approval or on sale or return terms, the property in the goods
passes to the buyer when:
(i) the buyer signifies his approval or acceptance to the seller,
(ii) the buyer does any other act adopting the transaction, or
(iii) if the buyer does not signify his approval or acceptance to the seller but retains the goods beyond a
reasonable time.

2. Section 8 of the Sale of Goods Act, 1930:

o Where there is an agreement to sell specific goods, and those goods perish or are damaged, without any
fault of the seller or the buyer, before the risk passes to the buyer, the agreement is avoided.

Analysis of the Given Case

• In this case, Akansh entered into a sale or approval agreement with Jethalal, where he had three days to
inspect the Television set. Since the Television set was spoiled due to an earthquake on the second day,
before Akansh could make any decision, the property in the goods had not passed to him as per Section 24.

• Conditions for passing the property under Section 24 were not met in this case:

1. Akansh did not signify his approval or acceptance to Jethalal.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 158

2. Akansh did not take any act adopting the transaction (e.g., using or keeping the Television set).

3. Akansh did not retain the goods beyond a reasonable time.

• As per Section 8, since the goods were specific goods and were damaged without fault of either party
before the risk passed to the buyer, the agreement is avoided. Therefore, Akansh is not liable to pay the
price for the Television set.

Conclusion

• Akansh is not liable to pay the price of the Television set as the risk had not passed to him, and the
agreement was avoided due to the destruction of the goods before acceptance.

• The loss will ultimately be borne by the seller, Mr. Jethalal, as the goods were damaged due to a force
majeure event (earthquake), and the property had not passed to Akansh.

Q4. May 22 RTP

A went to B’s shop and selected some jewellery. He falsely represented himself to be a man of credit and
thereby persuaded B to take the payment by cheque. He further requested him to hand over the particular
type of ring immediately. On the due date, when the seller, B, presented the cheque for payment, the cheque
was found to be dishonoured. Before B could avoid the contract on the ground of fraud by A, he had sold the
ring to C. C had taken the ring in good faith and without any notice of the fact that the goods with A were
under a voidable contract.

Discuss if such a sale made by the non-owner is valid or not as per the provisions of the Sale of Goods
Act, 1930?

Provision under the Law

1. Section 27 of the Sale of Goods Act, 1930:

o No one can transfer a better title to goods than they themselves have. Therefore, a person who is not the
owner of the goods cannot sell them to a buyer with a good title.

2. Section 29 of the Sale of Goods Act, 1930:

o Sale by a person in possession under a voidable contract:

A person who has possession of goods under a voidable contract may sell the goods if:

▪ The contract has not been rescinded or avoided,

▪ The seller sells the goods to a buyer in good faith,

▪ The buyer has no knowledge of the seller’s lack of title,

▪ The buyer acts in good faith.

Analysis of the Given Case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 159

• Mr. A is in possession of the ring under a voidable contract with B. The contract is voidable because A has
committed fraud by misrepresenting himself as a man of credit, as per the provisions of the Indian Contract
Act, 1872.

• B has not yet rescinded or avoided the contract with A at the time A sells the ring to C.

• C buys the ring in good faith and without knowledge that A does not have the title to the goods.

• According to Section 29, the sale of goods under a voidable contract is valid if the conditions are met, and
since all these conditions are satisfied in this case, the sale made by Mr. A to Mr. C is a valid sale.

Conclusion

The sale of the ring made by Mr. A to Mr. C is valid as per Section 29 of the Sale of Goods Act, 1930,
because:

• A was in possession of the goods under a voidable contract,

• The contract had not been rescinded,

• Mr. C bought the ring in good faith and without knowledge of the voidable nature of the contract between A
and B.
Thus, C obtains a valid title to the ring.

Q5. Nov 21 RTP

Archika went to a jewellery shop and asked the shopkeeper to show the gold bangles with white polish. The
shopkeeper informed that he has gold bangles with lots of designs but not in white polish. He further
explained that if Archika selected gold bangles in his shop, he would arrange white polish on those gold
bangles without any extra cost. Archika selected a set of designer bangles and paid for them. The
shopkeeper requested Archika to come after two days for delivery of those bangles so that the white polish
could be done.

When Archika came after two days to take delivery of the bangles, she noticed that the design of the bangles
had been disturbed due to the white polishing. Now, she wants to avoid the contract and asks the
shopkeeper to refund her money, but the shopkeeper denies it.

1. State with reasons whether Archika can recover the amount under the Sale of Goods Act, 1930.

2. What would be your answer if the shopkeeper says that he can repair the bangles but he will charge extra
cost for the same?

Provision under the Law

1. Section 4(3) of the Sale of Goods Act, 1930:

o A contract where the property in goods is transferred from the seller to the buyer immediately is termed a
sale.

o If the transfer of property is to take place at a future time or subject to some condition to be fulfilled later, it is
an agreement to sell.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 160

o Section 4(4): An agreement to sell becomes a sale once the specified time elapses or the condition is
fulfilled.

Analysis of the Given Case

1. (i) Recovery of Amount:

o In this case, Archika and the shopkeeper have entered into an agreement to sell rather than a sale.

o The property in the bangles was not transferred immediately but was subject to the condition that white
polishing would be done.

o According to Section 4(3), the contract is an agreement to sell, and Section 4(4) states that it becomes a
sale when the condition (the polishing) is fulfilled.

o When the polishing was done, it caused a disturbance to the design of the bangles. This constitutes a
breach of contract, as the goods were not as described, which gives Archika the right to avoid the
agreement and recover the amount paid.

2. (ii) Extra Cost for Repair:

o If the shopkeeper offers to repair the bangles to restore their original design, he cannot charge extra costs
from Archika.

o Even though the shopkeeper may incur some expense for the repair, he is bound to provide the bangles in
the original condition as per the agreement, which was implied by the terms of the contract (i.e., polishing
without disturbing the design).

o Charging extra would be unfair, as Archika did not consent to paying additional costs for repairs that were
necessary due to the shopkeeper's mistake.

Conclusion

1. Archika can recover the amount she paid for the bangles because the contract was an agreement to sell,
and the goods were not as described (the design was disturbed). She has the right to avoid the agreement
and get a refund.

2. If the shopkeeper offers to repair the bangles, he cannot charge extra costs for the repair. The responsibility
to restore the bangles lies with the shopkeeper, and any additional charges would be unreasonable.

Q6. Nov 21 RTP

Rachit arranges an auction to sell an antique wall clock. Megha, being one of the bidders, gives the highest
bid. For announcing the completion of the sale, the auctioneer falls the hammer on the table, but suddenly
the hammer breaks and damages the clock. Megha wants to avoid the contract. Can she do so under the
provisions of the Sale of Goods Act, 1930?

Provision under the Law

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 161

• Section 64 of the Sale of Goods Act, 1930:

In the case of an auction sale, the sale is considered complete when the auctioneer announces its
completion, typically by the fall of the hammer or in another customary manner.

Analysis of the Given Case

• In the case of an auction, the sale is not considered complete until the auctioneer announces it as such,
usually by falling the hammer or a similar customary act.

• Here, Megha gave the highest bid for the antique wall clock. The auctioneer attempted to announce the
completion of the sale by falling the hammer on the table, but the hammer broke, damaging the clock in
the process.

• According to Section 64, the sale is not complete until the auctioneer successfully announces it with the
fall of the hammer (or an alternative customary manner). Since the hammer broke before this could happen,
the sale was not completed.

Conclusion

• Since the sale was not completed due to the hammer breaking before the announcement could be made,
Megha is not liable for the contract.

• Megha can avoid the contract because the sale did not formally complete under the provisions of the Sale
of Goods Act, 1930.

Q7. May 19 RTP

(i) For the purpose of making uniforms for the employees, Mr. Yadav bought dark blue coloured cloth from
Vivek but did not disclose to the seller the purpose of said purchase. When uniforms were prepared and
used by the employees, the cloth was found unfit. However, there was evidence that the cloth was fit for
caps, boots, and carriage lining. Advise Mr. Yadav whether he is entitled to have any remedy under the Sale
of Goods Act, 1930?

(ii) Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by railway. Shyam
receives delivery of 100 bales sent by lorry, but before he receives the delivery of the bales sent by railway, he
becomes bankrupt. Ram, being still unpaid, stops the goods in transit. The official receiver, on Shyam’s
insolvency, claims the goods. Decide the case with reference to the provisions of the Sale of Goods Act,
1930.

Provision under the law

(i) Fitness of Cloth

As per Section 16(1) of the Sale of Goods Act, 1930, an implied condition in a contract of sale arises that
an article is fit for a particular purpose only when:

1. The purpose for which the goods are supplied is known to the seller.

2. The buyer relies on the seller’s skill or judgment.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 162

3. The seller deals in the goods in his usual course of business.

(ii) Right of Stoppage of Goods in Transit

As per Section 50 of the Sale of Goods Act, 1930, an unpaid seller has the right to stop goods in transit
under the following conditions:

1. The seller must be unpaid.

2. The seller must have parted with possession of goods.

3. The goods must be in transit.

4. The buyer must have become insolvent.

5. The right is subject to the provisions of the Act.

Analysis of the given case

(i) Fitness of Cloth

In this case, Mr. Yadav bought dark blue-colored cloth from Vivek but did not disclose the specific purpose
(for making uniforms) for which the cloth was being purchased. The cloth was found unfit for making
uniforms but was suitable for other uses like caps, boots, and carriage lining.
Since Mr. Yadav did not inform the seller of the specific purpose of the cloth, the seller was not made aware
of it. As per Section 16(1), the implied condition of fitness for a particular purpose only applies when the
purpose is made known to the seller, and the seller's judgment is relied upon. In this case, the seller had no
knowledge of the specific purpose, so the implied condition does not apply, and Mr. Yadav is not entitled
to a remedy.

(ii) Right of Stoppage of Goods in Transit

In this case, Ram is still unpaid for the goods and has sent 100 bales by lorry and 100 bales by railway.
Shyam has received the 100 bales sent by lorry but has not yet received the bales sent by railway when he
becomes bankrupt. The official receiver claims the goods.
As per Section 50, Ram, being an unpaid seller, has the right to stop the goods in transit as long as the
conditions are met. In this case, the bales sent by railway are still in transit, and since Shyam has become
insolvent, Ram can stop the goods from being delivered to Shyam.

Conclusion

(i) Fitness of Cloth

Since Mr. Yadav did not inform the seller about the specific purpose of the cloth, the implied condition of
fitness for a particular purpose under Section 16(1) does not apply. Therefore, Mr. Yadav is not entitled to a
remedy under the Sale of Goods Act, 1930.

(ii) Right of Stoppage of Goods in Transit

Since all the conditions under Section 50 are met, Ram has the right to stop the 100 bales of cloth sent by
railway, as these goods are still in transit and Shyam has become insolvent.

Q8. Nov 18 RTP

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 163

Referring to the provisions of the Sale of Goods Act, 1930, state the circumstances under which when goods
are delivered to the buyer “on approval” or “on sale or return” or other similar terms, the property therein
passes to the buyer.
Ms. Preeti owned a motor car which she handed over to Mr. Joshi on a sale or return basis. After a week, Mr.
Joshi pledged the motor car to Mr. Ganesh. Ms. Preeti now claims back the motor car from Mr. Ganesh. Will
she succeed?

Provision under the law

As per Section 24 of the Sale of Goods Act, 1930, when goods are delivered to the buyer “on approval,” “on
sale or return,” or under similar terms, the property in the goods passes to the buyer under the following
circumstances:

1. Signifying Approval or Acceptance: The property passes when the buyer signifies his approval or
acceptance of the goods to the seller, or performs an act adopting the transaction.

2. Failure to Reject: If the buyer does not signify his approval or rejection but retains the goods without giving
notice of rejection, the property passes:

o When a time is fixed for the return of the goods, on the expiration of that time.

o If no time is fixed, then on the expiration of a reasonable time.

3. Equivalent Acts of Acceptance: The property passes when the buyer does something equivalent to
accepting the goods, such as pledging or selling the goods.

Analysis of the given case

In this case, Ms. Preeti handed over the motor car to Mr. Joshi on a sale or return basis. Mr. Joshi then
pledged the motor car to Mr. Ganesh.

• According to Section 24, when goods are delivered on sale or return, the property passes to the buyer under
the third condition mentioned: if the buyer does something that is equivalent to acceptance, such as
pledging or selling the goods.

• Mr. Joshi’s action of pledging the motor car to Mr. Ganesh is considered an act of acceptance. By pledging
the car, Mr. Joshi has treated the motor car as his own, which leads to the passing of ownership of the car to
him.

Therefore, the property in the motor car has passed to Mr. Joshi, and Ms. Preeti can no longer claim the
motor car from Mr. Ganesh.

Conclusion

Since Mr. Joshi’s act of pledging the motor car to Mr. Ganesh constitutes acceptance of the motor car under
Section 24, the property has passed to Mr. Joshi. Therefore, Ms. Preeti cannot claim back the motor car
from Mr. Ganesh. She may only claim the price of the motor car from Mr. Joshi.

Q9. Nov 22 MTP (6 Marks)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 164

Sonal went to a jewellery shop and asked the salesgirl to show her diamond bangles with ruby stones. The
jeweller told her that they had a lot of designs of diamond bangles but with red stones, and if she chose a
design, they would replace the red stones with ruby stones for an additional cost. Sonal selected a set of
designer bangles and paid for them, including the extra cost for the ruby stones. The jeweller requested her
to come back a week later for delivery of the bangles. When Sonal came to pick them up a week later, she
noticed that the design of the bangles had been disturbed due to the ruby stones. She asked for her money
back, but the jeweller denied her request.

(i) State with reasons whether Sonal can recover the amount from the jeweller.

Provision under the law

As per Section 4(3) of the Sale of Goods Act, 1930, when the property in the goods is transferred from the
seller to the buyer, the contract is called a sale. However, when the transfer of property is to take place at a
future time or subject to some condition, it is called an agreement to sell. As per Section 4(4), an agreement
to sell becomes a sale when the conditions are fulfilled or the time elapses.

Analysis of the given case

In this case, Sonal made an agreement to buy the bangles with ruby stones, but the property in the goods
(the bangles) was to transfer only when the jeweller had fulfilled the condition of adding the ruby stones.
However, the replacement of the red stones with ruby stones disturbed the original design of the bangles.
This change altered the essence of the contract and made the goods not in the condition that Sonal had
expected.

Since the bangles no longer met the terms of the contract as agreed upon (i.e., maintaining the original
design while adding ruby stones), Sonal has the right to avoid the agreement to sell.

Conclusion

Sonal can recover the amount from the jeweller as she has the right to terminate the agreement due to the
breach caused by the jeweller’s failure to deliver the goods as originally promised.

(ii) What would be your answer if the jeweller says that he can change the design but will charge extra
cost for the same?

Provision under the law

As per the general principles of contract law, any change to the terms of the original agreement, including
charges for repairs or modifications, needs to be mutually agreed upon by both parties. In the Sale of Goods
Act, 1930, when goods are delivered in a manner that deviates from the agreed specifications, the buyer has
the right to seek a remedy.

Analysis of the given case

In this case, if the jeweller offers to restore the design to its original state but demands extra payment, it
creates an issue. Since the jeweller failed to deliver the goods as per the original terms of the contract (with
ruby stones, maintaining the original design), he cannot charge Sonal extra for restoring the design to the
agreed condition.

The jeweller should bear the costs of repairing the design at his own expense as he is responsible for
delivering the goods in the agreed-upon form, without charging Sonal additional costs for rectifying the
problem.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 165

Conclusion

If the jeweller offers to change the design but demands extra payment, Sonal does not have to pay the
extra cost. The jeweller is responsible for bearing the costs of the repairs due to his failure to deliver the
goods in the agreed-upon form.

Q10. Mar 22 MTP (6 Marks)

Sohan is a trader in wheat. Binod comes to his shop and asks Sohan to show him some good-quality wheat.
Binod is satisfied with the quality, and Sohan agrees to sell 100 bags of wheat to Binod, with delivery and
payment to be made by 10th September 2021. Before delivery, Sohan gets another customer, Vikram, who is
ready to pay a higher price for the wheat. Sohan sells the wheat, which was already lying in his possession
(even after the sale to Binod), to Vikram. Vikram has no knowledge that Sohan is not the owner of the goods.

With reference to the Sale of Goods Act, 1930, discuss if the sale made by Sohan to Vikram is a valid sale.

Provision under the law

As per Section 27 of the Sale of Goods Act, 1930, the general rule is that no one can sell goods and
transfer a good title unless they are the owner of the goods. The legal maxim "Nemo dat quod non
habet" (No one can give what they do not have) applies here. However, there are exceptions to this rule,
particularly Section 30(1), which deals with the situation where a seller in possession of goods after the sale
can still transfer the goods to a third party in certain circumstances.

Analysis of the given case

In this case, Sohan is in possession of the wheat even after agreeing to sell it to Binod. He has not yet
delivered the wheat to Binod, and the sale is pending.

As per Section 30(1), a sale made by a seller who continues to possess the goods even after a sale can be
considered valid if the following conditions are met:

1. The seller retains possession of the goods after the initial sale.

2. The buyer (Binod) consents to the seller retaining possession.

3. The seller sells the goods (which have already been sold) to a new buyer (Vikram).

4. The new buyer (Vikram) acts in good faith.

5. The new buyer (Vikram) has no knowledge that the seller (Sohan) no longer owns the goods.

In this scenario:

• Sohan retains possession of the goods (wheat) after agreeing to sell them to Binod, and Binod has
consented to this arrangement.

• Sohan then sells the wheat to Vikram, a new buyer, who acts in good faith and has no knowledge that Sohan
is not the owner of the goods.

Since all the conditions under Section 30(1) are satisfied, the sale to Vikram is considered valid, even
though Sohan is not the actual owner of the goods at the time of the sale.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 166

The sale made by Sohan to Vikram is a valid sale under Section 30(1) of the Sale of Goods Act, 1930,
because the conditions required for a valid sale by a seller in possession of goods have been met.

Q11. Oct 20 MTP (6 Marks)

A, who is an agent of a buyer, had obtained the goods from the Railway Authorities and loaded the goods on
his truck. In the meantime, the Railway Authorities received a notice from B, the seller, to stop the goods in
transit as the buyer had become insolvent. Referring to the provisions of the Sale of Goods Act, 1930,
decide whether the Railway Authorities can stop the goods in transit as instructed by the seller?

Provision under the law

The right of stoppage of goods in transit is provided under Sections 50, 51, and 52 of the Sale of Goods Act,
1930. It allows an unpaid seller to stop the goods in transit if certain conditions are met. These conditions
are:

1. The buyer must be insolvent.

2. The seller must have delivered the goods to a carrier, losing his right of lien over them.

3. The seller must be unpaid.

4. The goods must still be in transit and have not yet reached the buyer.

Analysis of the given case

In the given scenario, A, an agent of the buyer, had already obtained the goods from the Railway Authorities
and loaded them onto his truck. This indicates that the goods were no longer in the possession of the
Railway Authorities and were now under the control of the buyer or the buyer's agent, A.

According to the Sale of Goods Act, 1930, the transit of goods ends when the buyer, or their agent, takes
possession of the goods from the carrier. Since A, the buyer's agent, had already taken possession of the
goods, the goods are no longer in transit. Therefore, the right of stoppage in transit is no longer applicable,
and the Railway Authorities cannot stop the goods as instructed by the seller, B.

Conclusion

The Railway Authorities cannot stop the goods in transit as the goods are no longer in transit once A, the
buyer's agent, took possession. The transit ended when the goods were loaded onto the truck by A, and the
seller's right to stop the goods no longer exists.

Q12. Oct 19 MTP (6 Marks)

Question:
Mr. G sold some goods to Mr. H for a certain price by issuing an invoice, but payment in respect of the same
was not received on that day. The goods were packed and lying in the godown of Mr. G. The goods were
inspected by H's agent and were found to be in order. Later on, the dues of the goods were settled in cash.

Just after receiving cash, Mr. G asked Mr. H to take the goods away from his godown to enable him to store
other goods purchased by him. After one day, since Mr. H did not take delivery of the goods, Mr. G kept the
goods out of the godown in an open space. Due to rain, some goods were damaged.

Referring to the provisions of the Sale of Goods Act, 1930, analyze the above situation and decide who will
be held responsible for the above damage. Will your answer be different if the dues were not settled in cash
and are still pending?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 167

Provision under the law

Section 44 of the Sale of Goods Act, 1930:

When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, but the
buyer fails to take delivery within a reasonable time after such request, the buyer is liable for:

1. Any loss or damage to the goods caused by such neglect or refusal.

2. A reasonable charge for the care and custody of the goods.

The property or beneficial right in the goods passes to the buyer based on ascertainment, appropriation, and
delivery of goods. The risk of loss generally follows the passing of property.

• Until the property in the goods is transferred to the buyer, the goods remain at the seller's risk.

• After the property is transferred, the goods are at the buyer's risk, irrespective of whether delivery has been
made.

Section 55 of the Sale of Goods Act, 1930 (for unpaid sellers):

If the buyer neglects or refuses to pay for the goods:

• Section 55(1): The seller may sue the buyer for the price when the property has passed.

• Section 55(2): Even if the property has not passed, the seller can sue for the price if payment was due on a
certain date.

Analysis of the given case

1. When dues were settled in cash:

o In this case, the property in the goods had passed to Mr. H since payment was settled in cash.

o Mr. G informed Mr. H to take delivery, and when Mr. H failed to do so within a reasonable time, Mr. G moved
the goods outside to make space for other goods.

o As the property in goods had passed, the risk also shifted to Mr. H.

o Therefore, the damage to the goods caused by rain should be borne by Mr. H as per Section 44.

2. When dues were not settled in cash:

o If payment had not been settled, Mr. G would remain an unpaid seller and retain certain rights:
a) Right to sue Mr. H for the price if the property in goods had passed (Section 55(1)).
b) Right to sue for the price even if the property had not passed, provided the payment was due on a specific
date (Section 55(2)).

o In such a case, Mr. G could also exercise the right of lien or stoppage in transit. The risk of damage would
remain with Mr. G until the property passed to Mr. H.

Conclusion

• When dues are settled in cash: Mr. H will be responsible for the damage as the property and risk had
already transferred to him.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 168

• When dues are not settled in cash: Mr. G retains the risk as an unpaid seller until the property passes.
However, he may enforce his rights against Mr. H, including suing for the price of the goods.

PART 2 – DIRECT QUESTIONS

Q1. July 21 Exam (4 marks)

"Risk Prima Facie Passes with Property." Elaborate in the context of the Sale of Goods Act, 1930.

Answer:

Under Section 26 of the Sale of Goods Act, 1930, the principle "Risk Prima Facie Passes with Property" is
established. This means that, generally, the risk of loss or damage to goods passes to the buyer when the
property (or ownership) in the goods is transferred from the seller to the buyer.

Explanation:

1. Risk and Property Transfer:

o Unless specifically agreed otherwise, the goods remain at the seller’s risk until ownership is transferred to
the buyer.

o Once the property in the goods passes to the buyer, the risk also passes to the buyer, regardless of whether
the goods have been physically delivered.

2. Impact of Delivery Delay:

o If delivery is delayed due to the fault of either party, the risk of loss or damage that occurs during the delay
lies with the party responsible for the fault. For instance:

▪ If the seller delays the delivery, the seller bears the risk of any loss.

▪ If the buyer delays the acceptance or collection of the goods, the buyer bears the risk.

3. Bailee’s Duties:

o The section also specifies that the duties or liabilities of the buyer or seller as a bailee (a party entrusted
with goods) remain unaffected by the transfer of risk. Even though the risk shifts to the buyer, the buyer and
seller still owe each other their responsibilities as bailees for the goods in their possession.

Q2. Jan 21 Exam (4 marks)

What are the rules which regulate the Sale by Auction under the Sale of Goods Act, 1930?

Answer:

Section 64 of the Sale of Goods Act, 1930 outlines the rules that govern the sale by auction. These rules
include:

1. Sale in Lots:

o When goods are sold in lots, each lot is considered prima facie (i.e., presumed) to be the subject of a
separate contract of sale. This means that each lot represents a distinct transaction.

2. Completion of the Contract of Sale:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 169

o The sale is completed when the auctioneer announces its completion, typically by the fall of the hammer
or in another customary manner. Until the announcement, any bidder may retract their bid.

3. Right to Bid Reserved:

o The seller can expressly reserve the right to bid during the auction. If this right is reserved, the seller or their
representative may bid on the goods. However, this right must be expressly mentioned; otherwise, the seller
is not permitted to bid.

4. Sale Notified Without Seller’s Right to Bid:

o If the auction is not notified to be subject to the right of the seller to bid, then it is illegal for the seller or their
agent to bid or for the auctioneer to accept such bids. Any sale that contravenes this rule may be treated as
fraudulent by the buyer.

5. Reserved Price:

o The reserved price (or upset price) is the minimum price at which the seller is willing to sell the goods. The
auction may be subject to such a reserved price, and the goods will not be sold if the bid does not meet or
exceed this price.

6. Pretended Bidding:

o Pretended bidding refers to when the seller (or someone acting on their behalf) engages in fake or
misleading bids to artificially raise the price. In such cases, the auction sale is voidable at the buyer's
discretion.

Q3. Nov 20 Exam (6 Marks), May 19 Exam (6 Marks)

Explain any six circumstances in detail in which a non-owner can convey a better title to a bona fide
purchaser of goods for value as per the Sale of Goods Act, 1930.

Answer:

Under the Sale of Goods Act, 1930, certain circumstances allow a non-owner to convey a better title to a
bona fide purchaser for value. These include:

1. Sale by a Mercantile Agent (Section 27):

o A mercantile agent who is in possession of goods or documents of title with the owner's consent can pass a
good title to a bona fide purchaser, provided:

▪ The sale is made in the ordinary course of business.

▪ The buyer acts in good faith and is unaware of the agent's lack of authority to sell.

2. Sale by One of the Joint Owners (Section 28):

o If one of several joint owners has sole possession of the goods with the consent of the co-owners, the sale
by this joint owner to a bona fide purchaser will transfer a good title, as long as the buyer is unaware of the
seller's lack of authority.

3. Sale by a Person in Possession under a Voidable Contract (Section 29):

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 170

o A seller who possesses goods under a voidable contract (due to fraud, coercion, etc.) but the contract has
not been rescinded can transfer a good title to the buyer, provided the sale occurs before the contract is
rescinded.

4. Sale by One Who Has Sold Goods But Continues in Possession (Section 30(1)):

o If a person who has sold goods continues to possess them or their documents, they can sell the goods to a
third party. If the third party acquires the goods in good faith and without knowledge of the prior sale, they
acquire a good title, even though the ownership had passed to the first buyer.

5. Sale by a Buyer Obtaining Possession Before Property Passes (Section 30(2)):

o A buyer who has possession of goods before the property passes to them (with the seller's consent) can sell
the goods to a third party. If the third party buys them in good faith, they acquire a good title, even if the
property has not yet passed to the original buyer.

6. Effect of Estoppel:

o If the true owner, through their conduct, allows another person to appear as the rightful owner or authorized
seller, the buyer can acquire a good title through estoppel. The true owner is "estopped" from denying the
seller’s authority to sell.

Q4. Nov 19 Exam (4 Marks)

State the various essential elements involved in the sale of unascertained goods and its appropriation
as per the Sale of Goods Act, 1930.

Answer:

The Sale of Goods Act, 1930, under Section 23, outlines the concept of appropriation in the sale of
unascertained goods. Appropriation refers to the process of selecting goods and linking them to the contract
with mutual consent from both the buyer and the seller.

Essential Elements Involved in the Sale of Unascertained Goods and Appropriation:

1. Contract for Sale of Unascertained Goods:

o The sale must involve unascertained goods, which are goods not specifically identified or agreed upon at the
time of the contract. These may be future goods or goods identified by description.

2. Conformity to Description and Quality:

o The goods sold must conform to the description and quality as specified in the contract. The buyer should
not receive goods that do not meet the agreed terms.

3. Deliverable State:

o The goods must be in a deliverable state at the time of appropriation, meaning they are ready for delivery or
use as per the contract terms.

4. Unconditional Appropriation:

o The goods must be unconditionally appropriated (set aside) for the contract, either by delivery to the buyer,
the buyer's agent, or a carrier. This act must clearly link the goods to the contract.

5. Mutual Assent for Appropriation:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 171

o The appropriation can be made by either:

▪ The seller with the assent of the buyer; or

▪ The buyer with the assent of the seller.

6. Express or Implied Assent:

o The assent of both parties (buyer and seller) to the appropriation may be express (explicitly stated) or
implied (inferred from actions or circumstances).

7. Timing of Assent:

o The assent for appropriation may be provided either before or after the goods are appropriated, allowing
flexibility in the transaction process.

Q5. May 18 Exam (6 Marks)

What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials regarding
appropriation of unascertained goods.

Answer:

Appropriation of Goods: Under the Sale of Goods Act, 1930, appropriation refers to the process of
selecting specific goods and allocating them to a contract. This selection is made with the intention of
performing the contract and requires mutual consent from both the seller and the buyer.

Essentials Regarding Appropriation of Unascertained Goods: When the goods are unascertained (not
specifically identified at the time of the contract), the following essentials must be fulfilled for proper
appropriation:

1. Existence of a Contract for Unascertained Goods:

o There must be a contract for the sale of unascertained or future goods. These goods are not yet identified
or determined at the time of the contract.

2. Conformance to Description and Quality:

o The goods must conform to the description and quality as specified in the contract. The buyer should not
receive goods that do not meet the agreed terms.

3. Deliverable State:

o The goods must be in a deliverable state, meaning they are ready to be transferred or used as per the
contract.

4. Unconditional Appropriation to the Contract:

o The goods must be unconditionally appropriated (set aside) for the contract. This is distinct from simply
intending to appropriate. Appropriation is made either by delivery to the buyer, the buyer's agent, or the
carrier.

5. Mutual Assent for Appropriation:

o Appropriation can be made either by:

▪ The seller with the assent of the buyer; or

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 172

▪ The buyer with the assent of the seller.

6. Express or Implied Assent:

o The assent (agreement) for appropriation can be either express (explicitly stated) or implied (inferred from
the circumstances).

7. Timing of Assent:

o The assent may be given either before or after the actual appropriation of the goods.

Q6. Nov 18 RTP

Referring to the provisions of the Sale of Goods Act, 1930, state the rules provided to regulate the “Sale
by Auction.”

Answer:

The Sale of Goods Act, 1930, under Section 64, provides the following rules to regulate the sale by auction:

1. Sale in Lots:

o Where goods are sold in lots, each lot is prima facie treated as the subject of a separate contract of sale.
This means that each lot is considered an individual transaction unless stated otherwise.

2. Completion of the Contract of Sale:

o The contract of sale is considered complete when the auctioneer announces the completion of the sale,
usually by the fall of the hammer or any other customary manner. Until this announcement is made, any
bidder may retract their bid without forming a binding contract.

3. Right to Bid Reserved:

o The seller may expressly reserve the right to bid at the auction. If such a right is expressly reserved, the seller
or a person acting on their behalf can bid at the auction. If no such right is reserved, the seller cannot bid at
the auction.

4. Prohibition of Seller’s Bid (Without Notification):

o If the sale is not notified as being subject to the seller's right to bid, it is unlawful for the seller to bid, or for
the seller to employ someone else to bid on their behalf. Additionally, it is illegal for the auctioneer to
knowingly accept a bid from the seller or their representative. Any sale in contravention of this rule can be
treated as fraudulent by the buyer.

5. Reserved Price:

o The sale may be notified as subject to a reserve price (the minimum price the seller is willing to accept for
the goods). If this reserve price is not met, the auction may not be completed.

6. Pretended Bidding:

o If the seller engages in pretended bidding (i.e., bidding on their own goods to artificially inflate the price),
the sale can be voidable at the buyer's option. This ensures that the buyer is not misled into paying an
inflated price due to fake bids.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 173

Q7. Oct 19 MTP (6 Marks)

What do you understand by the term “unpaid seller” under the Sale of Goods Act, 1930? When can an
unpaid seller exercise the right of stoppage of goods in transit?

Answer:

Unpaid Seller:

As per Section 45 of the Sale of Goods Act, 1930, a seller of goods is deemed to be an 'Unpaid Seller'
when:
a) The whole price has not been paid or tendered.
b) A bill of exchange or other negotiable instrument has been received as conditional payment, and it has
been dishonoured.

Right of Stoppage of Goods in Transit:

An unpaid seller can exercise the right of stoppage of goods in transit under the following circumstances:

• When:
If the unpaid seller has handed over the goods to a carrier and the buyer has become insolvent, the seller
may:

o Request the carrier to return the goods.

o Instruct the carrier not to deliver the goods to the buyer.

• Conditions to Exercise the Right:

(i) The seller must be unpaid.
(ii) The seller must have parted with possession of the goods.
(iii) The goods must be in the course of transit.
(iv) The buyer must have become insolvent.
(v) The right is subject to provisions of the Act.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 174

Chapter 2 – The Sale of Goods Act, 1930

UNIT 4 : UNPAID SELLER

PART 1 – CASE LAW QUESTIONS

Q1. Dec 21 Exam (4 Marks)

Question:
AB sold 500 bags of wheat to CD. Each bag contains 50 kilograms of wheat. AB sent 450 bags by road
transport, and CD himself took the remaining 50 bags. Before CD receives delivery of the 450 bags sent by
road transport, he becomes bankrupt. AB, being still unpaid, stops the bags in transit. The official receiver,
on CD's insolvency, claims the bags. Decide the case with reference to the provisions of the Sale of Goods
Act, 1930.

Provision under the law

Right of stoppage in transit (Section 50 of the Sale of Goods Act, 1930):

• When the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession of the
goods has the right of stopping them in transit.

• This means the seller may resume possession of the goods as long as they are in the course of transit and
may retain them until the price is paid or tendered.

• If the goods have been delivered to a carrier for transmission to the buyer, and the buyer becomes insolvent,
the unpaid seller can exercise this right by notifying the carrier to:

1. Return the goods to the seller.

2. Withhold delivery to the buyer.

Analysis of the given case

• AB, the seller, sold 500 bags of wheat to CD. Out of these, 50 bags were taken by CD, and 450 bags were sent
via road transport.

• Before the delivery of 450 bags, CD, the buyer, becomes insolvent. Since the price remains unpaid and the
goods are still in transit, AB, as an unpaid seller, can exercise the right to stop the goods in transit under
Section 50 of the Sale of Goods Act, 1930.

• The official receiver, acting on behalf of the insolvent CD, cannot claim the goods as long as they are in
transit, and AB retains the right to stop them and regain possession.

Conclusion

• AB, the unpaid seller, has the right to stop the 450 bags in transit and retain possession until the price is paid
or tendered.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 175

• The official receiver on CD’s insolvency cannot claim the 450 bags as long as they are in the course of
transit.

Q4. May 18 Exam (6 Marks)

Question:
Mr. D sold some goods to Mr. E for ₹5,00,000 on 15 days' credit. Mr. D delivered the goods. On the due date,
Mr. E refused to pay for it. State the position and rights of Mr. D as per the Sale of Goods Act, 1930.

Provision under the law

Unpaid Seller (Section 45(1) of the Sale of Goods Act, 1930):

A seller of goods is deemed to be an "Unpaid Seller" when:

1. The whole of the price has not been paid or tendered.

2. The seller had an immediate right of action for the price.

Rights of an unpaid seller:

If the buyer fails to pay for the goods, the unpaid seller may exercise certain rights against the goods (if they
are still in possession or transit) or against the buyer personally.

Analysis of the given case

• Mr. D delivered goods worth ₹5,00,000 to Mr. E on 15 days' credit.

• On the due date, Mr. E refused to pay, making Mr. D an unpaid seller as per Section 45(1) of the Sale of
Goods Act, 1930.

• Since the goods have already been delivered, Mr. D cannot exercise rights against the goods but can exercise
rights against the buyer, Mr. E. These rights include:

1. Suit for Price (Section 55):

o Mr. D can sue Mr. E for the price of the goods, as the contract stipulated payment after 15 days and Mr. E
failed to fulfill his obligation.

2. Suit for Damages for Non-Acceptance (Section 56):

o If Mr. E wrongfully neglects or refuses to pay for the goods, Mr. D can sue for damages.

o The measure of damages will be determined as per Section 73 of the Indian Contract Act, 1872, which
covers compensation for loss or damage caused by breach of contract.

3. Suit for Interest (Section 61):

o If there is no specific agreement on interest, Mr. D can charge interest on the unpaid price from the due date.

o Mr. D must notify Mr. E of the day from which interest will be charged.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 176

Mr. D, being an unpaid seller, cannot exercise rights against the goods since they have already been
delivered. However, he can exercise rights against Mr. E personally by filing:

1. A suit for the price of the goods.

2. A suit for damages for non-acceptance.

3. A suit for interest on the unpaid amount, if applicable.

Q5. Jun 23 RTP

Question:
A agrees to sell certain goods to B on a certain date on 10 days' credit. The period of 10 days expired, and the
goods were still in the possession of A. B has also not paid the price of the goods. B becomes insolvent. A
refuses to deliver the goods to exercise his right of lien on the goods. Can he do so under the Sale of Goods
Act, 1930?

Provision under the law

Right of Lien (Section 47(1) of the Sale of Goods Act, 1930):

The unpaid seller who is in possession of the goods is entitled to retain possession of the goods until
payment is made in the following cases:

1. Where the goods have been sold without any stipulation as to credit.

2. Where the goods have been sold on credit, but the term of credit has expired.

3. Where the buyer becomes insolvent, even though the term of credit has not yet expired.

Lien is the right of a seller to retain possession of the goods belonging to the buyer until the claim of the
seller is satisfied.

Analysis of the given case

• A agreed to sell goods to B on a 10-day credit period.

• The 10-day credit period expired, but B neither paid the price nor took possession of the goods.

• The goods are still physically in the possession of A.

• B, the buyer, has become insolvent.

As per Section 47(1) of the Sale of Goods Act, 1930, A, being an unpaid seller, is entitled to exercise the right
of lien on the goods because:

1. The term of credit (10 days) has expired without payment by B.

2. The goods are still in A’s possession.

3. B has become insolvent, which further strengthens A’s right to retain the goods.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 177

Yes, A can exercise his right of lien on the goods under Section 47(1) of the Sale of Goods Act, 1930. Since
the term of credit has expired, the buyer has not paid the price, and the goods are still in the seller's
possession, A is within his rights to refuse delivery of the goods

Q7. Nov 20 RTP

Question:
Suraj sold his car to Sohan for ₹75,000. After inspection and satisfaction, Sohan paid ₹25,000 and took
possession of the car and promised to pay the remaining amount within a month. Later on, Sohan refuses to
give the remaining amount on the ground that the car was not in good condition. Advise Suraj as to what
remedy is available to him against Sohan.

Provision under the law

Right to sue for price (Section 55 of the Sale of Goods Act, 1930):

1. Section 55(1): Where, under a contract of sale, the property in the goods has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him for the price of the goods.

2. Section 55(2): Where, under a contract of sale, the price is payable on a certain day irrespective of delivery
and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price, even if
the property in the goods has not passed and the goods have not been appropriated to the contract.

Analysis of the given case

• Suraj sold the car to Sohan for ₹75,000, with Sohan paying ₹25,000 and taking possession of the car.

• The remaining amount of ₹50,000 was promised to be paid within a month.

• Sohan refuses to pay the remaining amount, claiming the car was not in good condition.

As per Section 55(1) of the Sale of Goods Act, 1930, Suraj, being the seller, has the right to sue Sohan for the
price of the goods (₹50,000) because:

1. The property in the car has passed to Sohan (as possession was taken).

2. Sohan wrongfully refuses to pay the remaining amount.

Suraj can also claim:

1. Interest on the remaining amount from the due date.

2. Interest during the pendency of the suit (if applicable).

3. Costs of the proceedings.

Conclusion

Suraj has a right to sue Sohan for the remaining ₹50,000 as per Section 55(1) of the Sale of Goods Act, 1930.
Despite Sohan's claim about the car's condition, Suraj can legally recover the outstanding amount along
with any interest and costs associated with the proceedings

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 178

PART 2 – DIRECT QUESTIONS

Q1. July 21 Exam (4 Marks), May 20 RTP

Discuss the rights of an unpaid seller against the buyer under the Sale of Goods Act, 1930.

Answer:

The rights of an unpaid seller against the buyer are as follows:

1. Suit for Price (Section 55):

(a) If the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay
for the goods as per the contract terms, the seller may sue for the price of the goods. [Section 55(1)]

(b) If the price is payable on a certain date (irrespective of delivery) and the buyer wrongfully neglects or
refuses to pay, the seller may sue for the price, even if the property has not passed and the goods are not
appropriated to the contract. [Section 55(2)]

2. Suit for Damages for Non-Acceptance (Section 56):

If the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue for
damages for non-acceptance.

3. Repudiation of Contract Before Due Date (Section 60):

If the buyer repudiates the contract before the delivery date, the seller can:

• Treat the contract as rescinded.

• Sue for damages for breach of contract.

• This is known as the rule of anticipatory breach of contract.

4. Suit for Interest (Section 61):

(a) If there is a specific agreement between the seller and buyer for interest on the price from the due date
of payment, the seller can recover interest.

(b) If no such agreement exists, the seller can charge interest from the day he notifies the buyer.

(c) The Court may award interest at a reasonable rate on the amount of the price:

• From the date of tender of the goods, or

• From the date on which the price was payable.

Q2. Nov 19 Exam (6 Marks)

What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?

Answer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 179

The rights of an unpaid seller against the goods are as follows:

Rights of an Unpaid Seller (Section 46):

Notwithstanding the property in the goods may have passed to the buyer, the unpaid seller has the
following rights by implication of law:
(a) Lien on the goods for the price while in possession of them.
(b) In case of buyer’s insolvency, a right of stopping the goods in transit after parting with possession.
(c) A right of re-sale as limited by the Act.

If the property in goods has not passed to the buyer, the unpaid seller has a right of withholding delivery,
co-extensive with lien and stoppage in transit.

Circumstances Where These Rights Can Be Exercised:

(i) Right of Lien (Section 47):

The unpaid seller in possession of goods can retain possession until payment or tender of the price in the
following cases:

1. When the goods are sold without stipulation as to credit.

2. When the goods are sold on credit but the credit term has expired.

3. When the buyer becomes insolvent.

(ii) Right of Stoppage in Transit (Section 50):

The unpaid seller, after parting with the goods, may stop goods in transit if the buyer becomes insolvent.
This means the seller can:

• Resume possession of the goods while they are in transit.

• Retain them until payment or tender of the price.

(iii) Right to Re-Sell the Goods (Section 54):

The unpaid seller may re-sell the goods under the following conditions:

1. When the goods are of a perishable nature.

2. When the seller gives notice to the buyer of the intention to re-sell.

3. When the unpaid seller exercises the right of lien or stoppage in transit and then re-sells the goods.

4. When the contract of sale expressly reserves the right of re-sale.

5. When the property in goods has not passed to the buyer.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 180

Q3. Nov 22 RTP

When can an unpaid seller of goods exercise his right of lien over the goods under the Sale of Goods
Act? Can he exercise his right of lien even if the property in goods has passed to the buyer? When is
such a right terminated? Can he exercise his right even after he has obtained a decree for the price of
goods from the court?

Answer:

A lien is the right to retain possession of goods until the payment of the price. The unpaid seller can exercise
this right under the following circumstances:

When Can the Unpaid Seller Exercise the Right of Lien?

The right of lien is available to the unpaid seller who is in possession of the goods in the following situations:

1. The goods have been sold without any stipulation as to credit.

2. The goods have been sold on credit, but the term of credit has expired.

3. The buyer becomes insolvent.

Can the Unpaid Seller Exercise the Right of Lien Even if the Property in Goods Has Passed to the Buyer?

Yes, the unpaid seller can exercise his right of lien even if the property in the goods has passed to the
buyer. He can do so as long as he retains possession of the goods, even if he is acting as an agent or
bailee for the buyer.

When Is the Right of Lien Terminated?

The unpaid seller loses his right of lien under the following circumstances:

1. When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer,
without reserving the right of disposal of the goods.

2. When the buyer or his agent lawfully obtains possession of the goods.

Can the Unpaid Seller Exercise the Right of Lien After Obtaining a Decree for the Price of Goods from
the Court?

Yes, the unpaid seller can exercise his right of lien even after obtaining a decree for the price of the
goods from the court. This right is independent of any legal proceedings.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 181

Chapter 3 – The Indian Partnership Act ,1932

UNIT 1 : GENERAL NATURE OF PARTNERSHIP

PART 1 – CASE LAW QUESTIONS

Q1. Jun 23 RTP

Question:
Mr. Ram and Mr. Raheem are working as teachers at Ishwarch and Vidhyasagar Higher Secondary School
and are also very good friends. They jointly purchased a flat which was given on rent to Mr. John. It was
decided between the landlords and the tenant that the rent would be ₹10,000 per month, inclusive of the
electricity bill. This meant that the electricity bill would be paid by the landlords. The landlords, by mistake,
did not pay the electricity bill for the month of March 2021. Due to this, the electricity department cut the
connection. Mr. John had to pay the electricity bill of ₹2,800 and ₹200 as a penalty to resume the electricity
connection. Mr. John claimed ₹3,000 from Mr. Ram, but Mr. Ram replied that he is liable only for ₹1,500. Mr.
John said that Mr. Ram and Mr. Raheem are partners, therefore he can claim the full amount from any of the
partners. Explain, under the provisions of the Indian Partnership Act, 1932, whether Mr. Ram is liable to pay
the whole amount of ₹3,000 to Mr. John.

Provision under the law

Section 4 of the Indian Partnership Act, 1932:

• A "Partnership" is the relation between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all.

• For a partnership to exist, the following conditions must be satisfied:

1. There must be an agreement between all the persons concerned.

2. The agreement must be to carry on some business.

3. The agreement must involve sharing the profits of the business.

4. The business must be carried on by all or any of them acting for all.

Analysis of the given case

• Mr. Ram and Mr. Raheem are co-owners of a flat which they rented out to Mr. John.

• The agreement between the landlords (Mr. Ram and Mr. Raheem) and the tenant (Mr. John) was that the rent
of ₹10,000 would include the electricity bill, which the landlords were responsible for paying.

• Due to the landlords' mistake, the electricity bill was not paid, and Mr. John had to pay ₹2,800 for the bill and
₹200 as a penalty.

• Mr. John claimed ₹3,000 from Mr. Ram, but Mr. Ram insists he is only liable for ₹1,500.

The key issue is whether Mr. Ram and Mr. Raheem are partners under the Indian Partnership Act, 1932, as
this would determine the extent of their liability.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 182

Based on the provisions of Section 4, a partnership requires the existence of a business that is carried on for
profit. In this case, the two individuals are co-owners of the flat and have rented it out to Mr. John. This act of
renting a flat does not constitute a business as defined by the Indian Partnership Act. It is simply a co-
ownership arrangement that generates income from property.

Conclusion

Since Mr. Ram and Mr. Raheem are not carrying on a business for profit, there is no partnership between
them. Therefore, Mr. Ram is only liable for his share of the amount, i.e., ₹1,500. Mr. John must claim the
remaining ₹1,500 from Mr. Raheem. Mr. Ram is not liable to pay the full ₹3,000.

Q2. Nov 22 RTP

Question:
Mohan, Sohan, and Rohan are partners in the firm M/s Mosoro & Company. They admitted Bohan as a
nominal partner, and by agreement among all the partners, Bohan is not entitled to share profits in the firm.
After some time, a creditor, Karan, filed a suit against Bohan for recovery of his debt. Bohan denied the
claim, stating that he is just a nominal partner and is not liable for the debts of the firm, and that Karan
should claim his dues from the other partners. Taking into account the provisions of the Indian Partnership
Act, 1932:

a) Whether Bohan is liable for the dues of Karan against the firm?
b) In case Karan has filed the suit against the firm, would Bohan be liable?

Answer:

Nominal Partner:
A nominal partner is a person who is a partner only in name. The person's name is used as if they were a
partner of the firm, but in reality, they are not actively involved in the business operations or entitled to share
the profits. Despite not having a share in the profits, a nominal partner remains liable for the debts and
obligations of the firm just like any other partner, unless there is a specific agreement to the contrary or they
have properly retired from the firm and given public notice.

a) Is Bohan liable for the dues of Karan against the firm?

Yes, Bohan is liable for the debts of the firm, including the dues owed to Karan. Even though Bohan is a
nominal partner and is not entitled to share in the profits, he is still considered a partner in the eyes of the
law. As a nominal partner, Bohan is liable for the acts of the firm and can be held responsible for the debts
of the firm, just like the other partners. Therefore, Karan can claim his dues from Bohan as well as from the
other partners in the firm.

b) If Karan files the suit against the firm, would Bohan be liable?

Yes, Bohan would still be liable. Even if Karan files a suit against the firm, Bohan, as a nominal partner,
remains liable for the firm’s obligations. The fact that Bohan is a nominal partner does not exempt him from
liability. He would be treated as a partner of the firm for all legal purposes, including liability for debts, even

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 183

though he is not entitled to share in the profits. Therefore, Bohan is liable for the debt in case Karan has filed
a suit against the firm.

Conclusion:

• a) Yes, Bohan is liable for Karan’s dues as a nominal partner, even though he does not share in the profits.

• b) If Karan files a suit against the firm, Bohan would be liable for the debts, as nominal partners are liable for
the firm’s debts just like any other partner.

Q3. May 22 RTP

Sohan, Rohan, and Jay were partners in a firm. The firm is a dealer in office furniture. They have regular
dealings with M/s AB and Co. for the supply of furniture for their business. On 30th June 2018, one of the
partners, Mr. Jay, died in a road accident. The firm had ordered M/s AB and Co. to supply the furniture for
their business on 25th May 2018, when Jay was also alive.

Now Sohan and Rohan continue the business in the firm’s name after Jay’s death. The firm did not give any
notice about Jay’s death to the public or the persons dealing with the firm. M/s AB and Co. delivered the
furniture to the firm on 25th July 2018. The fact about Jay’s death was known to them at the time of delivery
of goods. Afterwards, the firm became insolvent and failed to pay the price of the furniture to M/s AB and Co.
Now M/s AB and Co. has filed a case against the firm for recovery of the price of the furniture. With reference
to the provisions of the Indian Partnership Act, 1932, explain whether Jay’s private estate is also liable for the
price of the furniture purchased by the firm?

Provision under the law:

Section 35 of the Indian Partnership Act, 1932 states:

"Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate
of a deceased partner is not liable for any act of the firm done after his death."
Additionally, Section 35 clarifies that it is not necessary to give any notice to the public or the persons
dealing with the firm regarding the death of the partner in order to absolve the deceased partner’s estate
from future obligations.

Analysis of the given case:

In this case, Sohan, Rohan, and Jay were partners in a firm dealing in office furniture. Jay died on 30th June
2018. However, the firm had already placed an order with M/s AB and Co. for the supply of furniture on 25th
May 2018, while Jay was still alive. After Jay’s death, the remaining partners continued the business under
the firm’s name, but no notice of Jay’s death was given to the public or the persons dealing with the firm.

M/s AB and Co. delivered the furniture on 25th July 2018, with knowledge of Jay's death. Subsequently, the
firm became insolvent and was unable to pay for the furniture. M/s AB and Co. filed a suit for the recovery of
the price of the goods.

As per Section 35, since the firm was not dissolved by Jay’s death, and the delivery occurred after his
death, Jay's private estate is not liable for the debts incurred by the firm after his death. Additionally, there

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 184

is no requirement to notify third parties (like M/s AB and Co.) about Jay’s death to relieve his estate of liability
for future obligations of the firm.

Conclusion:

Based on Section 35 of the Indian Partnership Act, 1932, Jay's private estate is not liable for the price of
the furniture purchased after his death. The delivery occurred after his death, and the firm continued its
business in the same name without any dissolution. Therefore, M/s AB and Co. cannot claim the price of the
furniture from Jay’s estate.

Q4. Nov 21 RTP

A, B, and C are partners of a partnership firm carrying on the business of construction of apartments. B, who
himself was a wholesale dealer of iron bars, was entrusted with the task of selecting iron bars after
examining their quality. As a wholesaler, B is well aware of the market conditions. The current market price of
iron bars for construction is ₹ 350 per kilogram. B already had 1000 kg of iron bars in stock, which he had
purchased before the price hike in the market for ₹ 200 per kg. He supplied iron bars to the firm without the
firm realizing the purchase cost. Is B liable to pay the firm the extra money he made, or does he not have to
inform the firm since it is his own business and he has not taken any amount more than the current
prevailing market price of ₹ 350? Assume there is no contract between the partners regarding the above.

Provision under the law:

Section 16 of the Indian Partnership Act, 1932 provides that:

1. If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or
business connection of the firm, or the firm name, he shall account for that profit and pay it to the firm.

2. If a partner carries on any business of the same nature as, and competing with, that of the firm, he shall
account for and pay to the firm all profits made by him in that business.

Analysis of the given case:

In this case, B is a partner in a construction firm and is responsible for selecting iron bars for the firm. B,
being a wholesale dealer, is aware of the market conditions and has a stock of iron bars purchased for ₹ 200
per kg. He supplies the iron bars to the firm at the current market rate of ₹ 350 per kg.

While the firm is unaware of B’s purchase cost, B has made a profit of ₹ 150 per kg (₹ 350 – ₹ 200) by selling
the iron bars at market value. This profit is derived from a transaction involving the firm, and there is no
agreement between the partners that exempts B from accounting for the profit he made from this
transaction.

According to Section 16, B is required to account for the extra profit he made (₹ 150 per kg) and pay it to the
firm. The fact that he did not inform the firm of his purchase cost does not exempt him from this obligation.

Conclusion:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 185

B is liable to pay the extra profit he made (₹ 150 per kg) to the firm, as he derived this profit from a
transaction with the firm. Under Section 16 of the Indian Partnership Act, 1932, any profit made by a
partner from transactions with the firm must be accounted for and paid to the firm.

Q5. Mar 21 MTP (3 Marks)

Alfa school started imparting education on 1st April 2010, with the sole objective of providing education to
children from weaker sections of society, either free of cost or at a very nominal fee, depending on the
financial condition of their parents. However, on 30th March 2018, it came to the knowledge of the Central
Government that the said school was operating in violation of its objective clause. As a result, it was granted
the status of a Section 8 company under the Companies Act, 2013. Describe the powers that can be
exercised by the Central Government against Alfa School in such a case.

Provision under the law:

Section 8 of the Companies Act, 2013 deals with the formation of companies that are created to promote
charitable objects such as education, arts, science, commerce, or sports. Such companies are not intended
to make profits for shareholders, but rather to apply their profits toward achieving their objectives. A
company under Section 8 must obtain a license from the Central Government to be registered.

The Central Government has the power to intervene if a Section 8 company violates the conditions under
which it was granted its license, particularly if it fails to fulfill its objectives.

Analysis of the given case:

In this case, Alfa School, which was registered as a Section 8 company, was found to be violating the objects
of its objective clause. As a result, the Central Government has the authority to take certain actions against
the school under Section 8 of the Companies Act, 2013. The potential powers that can be exercised by the
Central Government include:

1. Revocation of License:

o The Central Government may revoke the license granted to the company if it contravenes any of the
conditions or requirements under Section 8, conducts its affairs fraudulently, or violates the objects of the
company.

o The company would be required to change its name by adding "Limited" or "Private Limited" to it.

o Before revocation, the company must be given written notice of the intention to revoke the license and an
opportunity to be heard.

2. Winding Up or Amalgamation:

o If the license is revoked, the Central Government may, if deemed necessary in the public interest, order the
winding up of the company or direct it to be amalgamated with another company registered under Section 8,
provided that the company is given a reasonable opportunity to be heard.

3. Amalgamation with Another Section 8 Company:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 186

o If it is in the public interest, the Central Government can direct the company to be amalgamated with
another Section 8 company that has similar objects. This can happen even if the company’s articles or other
provisions conflict with such an order.

o The Government can issue an order to create a single company, specifying the constitution, properties,
powers, rights, obligations, and liabilities of the amalgamated entity.

Conclusion:

In this case, since Alfa School violated the objectives of its objective clause, the Central Government has the
power to:

1. Revoke the company’s license and force a name change to "Limited" or "Private Limited."

2. Order the winding up of the company or direct its amalgamation with another Section 8 company in the
public interest.

3. Mandate amalgamation with another similar Section 8 company if it benefits the public interest.

The Central Government must ensure that Alfa School is given a reasonable opportunity to be heard before
any such action is taken.

PART 2 – DIRECT QUESTIONS

Q1. Jun 22 Exam (2 Marks)

What do you mean by 'Partnership for a fixed period' as per the Indian Partnership Act, 1932?

Answer:

Partnership for a fixed period (Indian Partnership Act, 1932):

A partnership for a fixed period refers to a partnership where the duration is specifically mentioned in the
contract. It is created for a predetermined period of time, and the partnership automatically comes to an end
once the fixed period expires

Q2. Dec 21 Exam (6 Marks), Nov 22 MTP (6 Marks)

Define partnership and name the essential elements for the existence of a partnership as per the
Indian Partnership Act, 1932. Explain any two such elements in detail.

Answer:

Partnership (Indian Partnership Act, 1932):

A partnership is defined under Section 4 of the Indian Partnership Act, 1932 as a relationship between two
or more persons who have agreed to share the profits of a business carried on by all or any of them acting for
all.

Essential Elements for the Existence of a Partnership:

The following five elements must co-exist for a partnership to come into existence:

1. Association of Two or More Persons:

A partnership requires the association of at least two persons. A firm, which is not a legal entity, cannot be a

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 187

partner. Additionally, minors cannot be full partners but may be admitted to the benefits of the partnership
with the consent of all partners. The Indian Companies Act, 2013 limits the maximum number of partners to
50 in a partnership firm.

2. Agreement:
A partnership must result from an agreement between the parties involved. This agreement can either be
express (written or oral) or implied through conduct. It emphasizes the voluntary and contractual nature of
the relationship.

3. Business:
There must be an existing business, which includes any trade, profession, or occupation. The business must
aim to acquire gains. A partnership cannot exist without a business.

4. Agreement to Share Profits:

An essential feature of a partnership is the mutual agreement to share the profits of the business. Partners
may decide the manner in which profits are shared, but it is not mandatory to agree on sharing losses.
However, in case of losses, unless otherwise agreed, the losses are shared in the same ratio as profits.

5. Business Carried on by All or Any of Them Acting for All:

The business must be conducted by all partners or by one or more acting on behalf of all. This is the core
principle of mutual agency. Any partner’s act in the course of the business is binding on the others, and each
partner is both a principal and an agent for the others.

Q3. Dec 21 Exam (6 Marks)

State whether the following are partnerships:

(i) A and B jointly own a car which they use personally on Sundays and holidays and let it on hire as a taxi on
other days and equally divide the earnings.
Answer:
No, this is not a partnership because the sharing of profits or gross returns from jointly owned property (the
car in this case) does not automatically create a partnership. The arrangement described here pertains to
joint ownership and use of the car, but it lacks the primary characteristics of a partnership such as a mutual
agreement to conduct business for profit.
Alternatively, this could be considered a partnership if the main purpose of owning the car is to let it out for
hire, with a clear agreement to divide the earnings. In that case, the intention to conduct business for profit
and share the earnings equally could indicate a partnership.

(ii) Two firms, each having 12 partners, combine by an agreement into one firm.
Answer:
Yes, this is a partnership because the two firms, by mutual agreement, are combining into a single firm. This
represents the formation of a new partnership through the joining of two existing partnerships.

(iii) A and B, co-owners, agree to conduct the business in common for profit.
Answer:
Yes, this is a partnership because A and B, as co-owners, have agreed to conduct a business in common
with the intention of making a profit. This fulfills the criteria for the existence of a partnership under the
Indian Partnership Act.

(iv) Some individuals form an association to which each individual contributes ₹500 annually. The objective
of the association is to produce clothes and distribute the clothes free to the war widows.
Answer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 188

No, this is not a partnership because the association is formed for charitable purposes (producing and
distributing clothes to war widows), not for profit. A partnership requires the intention to conduct a business
for profit.

(v) A and B, co-owners share between themselves the rent derived from a piece of land.
Answer:
No, this is not a partnership because they are simply co-owners of the land and share the rental income.
There is no business activity involved, and the primary intention here is property ownership, not business for
profit.

(vi) A and B buy commodity X and agree to sell the commodity, sharing the profits equally.
Answer:
Yes, this is a partnership because A and B are conducting a business (buying and selling commodity X) with
the intention of making a profit, and they have agreed to share the profits equally. This arrangement fulfills
the basic criteria for a partnership under the Indian Partnership Act.

Q4. Dec 21 Exam (4 Marks)

“Sharing in the profits is not conclusive evidence in the creation of partnership”. Comment.

Answer:
The statement “Sharing in the profits is not conclusive evidence in the creation of partnership” is correct.

Sharing in profits is a key element in the creation of a partnership, but it is not by itself conclusive proof of a
partnership. The sharing of profits can be considered prima facie evidence of a partnership, meaning it
suggests the existence of a partnership but does not automatically establish it. The relationship between the
parties must be assessed in its entirety, including the actual conduct and intentions of the parties involved.

For example, joint ownership of property and sharing of returns from it (such as rent or interest) does not
necessarily create a partnership, even though profits are being shared. In such cases, the parties may not be
conducting a business together, but simply enjoying a joint interest in the property.

Under Section 4 of the Indian Partnership Act, 1932, a partnership exists if there is an agreement between
two or more persons to carry on a business with the intention of making profits, and they agree to share the
profits. However, if there is no specific agreement, or the agreement does not explicitly mention a
partnership, the courts will look at the whole contract and the real intention of the parties.

According to Section 6, the existence of a partnership must be determined by considering all relevant facts.
This includes the written or oral agreements, the actual conduct of the parties, and any other
circumstances that can provide insight into their relationship.

Therefore, sharing in profits is an important factor, but it is not enough on its own to conclusively establish a
partnership. The full context and intention behind the arrangement must be considered.

Q5. Jan 21 Exam (2 Marks)

What do you mean by "Particular Partnership" under the Indian Partnership Act, 1932?

Answer:
Particular Partnership:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 189

A particular partnership is a partnership formed for the purpose of conducting a single adventure or
undertaking. It is a partnership formed for a specific, limited task or project rather than for the ongoing
conduct of a business.

In such a partnership, the partners agree to come together for a particular purpose, and once that purpose
or adventure is completed, the partnership is automatically dissolved unless the parties have agreed
otherwise.

For example, two individuals may form a partnership to undertake the construction of a building, and once
the building is completed and the task is finished, the partnership ceases to exist.

Q6. Jan 21 Exam (2 Marks)

Who is a nominal partner under the Indian Partnership Act, 1932? What are his liabilities?

Answer:
Nominal Partner:
A nominal partner is a person who lends his name to the partnership but does not have any real interest or
investment in the firm. He does not actively participate in the day-to-day operations or management of the
business.

Liabilities:
Although a nominal partner does not share in the profits or invest in the business, he is still liable to third
parties for the acts of the firm. This means he is legally accountable for any obligations or actions of the
firm, even though he does not take part in the actual business activities.

Q7. Jan 21 Exam (4 Marks)

"Business carried on by all or any of them acting for all." Discuss the statement under the Indian
Partnership Act, 1932.

Answer:
Under the Indian Partnership Act, 1932, the statement "Business carried on by all or any of them acting
for all" refers to the mutual agency principle, which is a fundamental element of a partnership. This means
that the business must be conducted either by all partners or by any one or more partners acting on behalf of
all the others.

Key Points:

1. Mutual Agency:
There is a binding contract of mutual agency between the partners. Each partner acts both as a principal and
as an agent. An act done by one partner in the course of the business binds all the other partners, and
similarly, they are also bound by the actions of the other partners.

2. Principle of Shared Responsibility:

A partner who carries on the business is considered both a principal (in terms of their own liabilities) and an
agent (in terms of their power to bind the other partners). Hence, a single partner's action in the firm's
business is considered an act of all partners, making them jointly liable.

3. Essential Conditions:
The Supreme Court in KD Kamath & Co. held that for a partnership to exist, two conditions must be met:

o There must be an agreement to share both profits and losses.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 190

o The business must be carried on by all the partners or by any of them acting for all.

Even if, by agreement, one partner has exclusive control over certain aspects of the business (e.g., handling
bank accounts), it does not negate the existence of a partnership as long as the two essential conditions are
fulfilled.

4. Test of Partnership:
The real test of whether a partnership exists is not merely the sharing of profits but the element of mutual
agency. Without this mutual agency, there would be no partnership.

Q8. Nov 20 Exam (2 Marks)

What do you mean by 'Partnership at will' as per the Indian Partnership Act, 1932?

Answer:
A partnership at will under the Indian Partnership Act, 1932, is defined in Section 7 of the Act. It refers to a
partnership in the following circumstances:

1. No Fixed Duration: There is no specific time period agreed upon for the duration of the partnership.

2. No Agreement on Termination: There is no provision made regarding how or when the partnership should
be terminated.

If a partnership that was originally formed for a fixed term continues even after the expiration of that term, it
is considered to have become a partnership at will. In such a partnership, any partner can dissolve the
partnership at any time by giving notice to the other partners.

Q9. Nov 20 Exam (2 Marks)

Comment on 'the right to expel a partner must be exercised in good faith' under the Indian Partnership
Act, 1932.

Answer:
Under the Indian Partnership Act, 1932, a partner can be expelled from the firm only if the right to do so is
explicitly granted by the partnership agreement and is exercised in good faith. This means:

1. Existence of Power in Contract: The partnership agreement must contain a specific provision granting the
right to expel a partner.

2. Majority Decision: The power to expel must be exercised by the majority of the partners, as per the
agreement.

3. Exercise in Good Faith: The expulsion must be carried out in good faith, with the intention of benefiting the
business and not for personal reasons or to harm the expelled partner.

If any of these conditions are violated, the expulsion would be considered unlawful, and the expelled partner
may have grounds for legal action against the firm. The expulsion must always be in the best interest of the
business, not for arbitrary or unfair reasons.

Q10. Nov 19 Exam (2 Marks)

When can the continuing guarantee be revoked under the Indian Partnership Act, 1932?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 191

Answer:
Under Section 38 of the Indian Partnership Act, 1932, a continuing guarantee given to a firm or to a third
party in respect of the firm's transactions can be revoked for future transactions upon any change in the
constitution of the firm. Such changes include:

1. Death of a partner

2. Retirement of a partner

3. Introduction of a new partner

This revocation only applies to future transactions, and the guarantee remains valid for past transactions
unless otherwise agreed upon.

Q11. Nov 19 Exam (2 Marks)

What do you mean by Goodwill as per the provisions of the Indian Partnership Act, 1932?

Answer:
The term "Goodwill" is not specifically defined under the Indian Partnership Act, 1932. However, Section 14
of the Act provides that goodwill is considered the property of the firm.

Goodwill can be defined as the value attached to the reputation of a business, which reflects the expected
future profits above the normal level of profits earned by similar businesses in the same industry. It
represents the intangible asset that contributes to a firm's earning potential beyond the ordinary income
from its operations.

Q12. May 19 Exam (2 Marks)

What is the provision related to the effect of notice to an acting partner of the firm as per the Indian
Partnership Act, 1932?

Answer:
According to Section 24 of the Indian Partnership Act, 1932, a notice given to a partner who habitually acts
in the business of the firm regarding any matter related to the firm's affairs is considered as notice to the firm
itself, except in cases of fraud committed by or with the consent of that partner.

In other words, notice to one acting partner is equivalent to notice to all partners in the firm, similar to how a
notice to an agent is notice to the principal. However, the notice must be actual (not constructive) and
should relate to the business of the firm in order to be valid.

Q13. May 19 Exam (2 Marks)

Discuss the provisions regarding personal profits earned by a partner under the Indian Partnership Act,
1932.

Answer:
Personal Profit Earned by Partners (Section 16 of the Indian Partnership Act, 1932):

As per Section 16 of the Indian Partnership Act, 1932, the following provisions apply regarding personal
profits earned by a partner:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 192

1. Profit from Firm Transactions or Assets:

If a partner earns any personal profit from transactions of the firm or from using the firm’s property, business
connections, or name, they must account for that profit and pay it to the firm.

2. Profit from Competing Business:

If a partner carries on any business of the same nature as the firm's business or one that competes with the
firm's business, they must account for and pay to the firm all the profits made from such business.

These provisions ensure that the profits generated by a partner in ways that involve the firm’s assets or
operations are returned to the firm, promoting fairness and preventing conflicts of interest.

Q14. May 19 Exam (4 Marks)

"Whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm." Explain
the mode of determining the existence of partnership as per the Indian Partnership Act, 1932?

Answer:
Mode of Determining the Existence of Partnership (Section 6 of the Indian Partnership Act, 1932):

To determine whether a group of persons is a firm or whether a person is a partner in a firm, the real
relationship between the parties must be considered. All relevant facts and circumstances should be taken
into account to assess the partnership's existence.

The existence of a partnership must be proved based on three key factors:

1. Agreement:
A partnership is formed by agreement between the parties involved, not by status. This agreement is the
foundation of the partnership (Section 5 of the Act). The relationship of partnership arises from the contract
and not by the mere carrying on of a business. For instance, members of a Hindu Undivided Family (HUF)
carrying on a family business do not automatically form a partnership.

2. Sharing of Profits:
Sharing of profits is a fundamental aspect of partnership. However, sharing profits is not conclusive
evidence of partnership. While sharing profits or gross returns from a joint interest may suggest a
partnership, the final determination depends on the entire agreement and contract between the parties.
Therefore, merely sharing profits does not automatically make individuals partners. The whole contract,
including the terms and intent of the parties, must be examined.

3. Agency (Mutual Agency):

The concept of mutual agency is central to the partnership. In a partnership, each partner acts as both a
principal and an agent for the other partners. This means that the acts of one partner in conducting business
on behalf of the firm bind all the partners. If mutual agency exists between the parties, where each partner
acts for the benefit of the others, it is a strong indicator that a partnership exists.

Thus, the determination of whether a group forms a partnership involves assessing the agreement, the
sharing of profits, and the presence of mutual agency between the parties involved. These factors
collectively help establish whether a partnership exists under the Indian Partnership Act, 1932.

Q15. May 18 Exam (4 Marks), Oct 19 MTP (4 Marks)

What is the conclusive evidence of partnership? State the circumstances when partnership is not
considered between two or more parties.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 193

Answer:

Conclusive Evidence of Partnership:

The most conclusive evidence of the existence of a partnership is the mutual agency between the partners,
which is a fundamental principle of partnership law. Mutual agency means that each partner acts both as a
principal and as an agent for the other partners. This relationship implies that the acts of one partner, done
in the course of the partnership's business, bind all the partners. If mutual agency exists, it is a strong
indicator that the parties are indeed in a partnership. In other words, the partners have agreed to carry on a
business together for mutual profit, and each has the authority to act on behalf of the others.

Circumstances When Partnership is Not Considered Between Two or More Parties:

While mutual agency and profit-sharing are the core elements of a partnership, certain circumstances may
indicate that no partnership exists between two or more parties, even if they are engaged in business
activities. These include:

1. Absence of Record of Terms and Conditions:

If the parties do not have any record (written or otherwise) of the terms and conditions of their partnership, it
may lead to the conclusion that there is no formal partnership agreement in place.

2. No Maintenance of Accounts:
If the business conducted by the parties does not maintain proper accounts, and if such accounts are not
open for inspection by all the partners, it could indicate that the relationship is not one of partnership.

3. No Bank Account for the Business:

If the business has not opened an account with any bank in the name of the firm, it may suggest that the
parties are not operating as partners. A partnership typically requires a separate account to handle the firm’s
finances.

4. Lack of Intimation to Authorities:

If there has been no written intimation to the relevant authorities (such as the Deputy Director of
Procurement or other regulatory bodies) regarding the formation of a partnership, it could imply that the
parties have not formally declared or established a partnership.

Q16. Nov 20 RTP

Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of Partnership by
holding out.

Answer:

Partnership by Holding Out (Partnership by Estoppel):

Partnership by holding out, also known as partnership by estoppel, occurs when a person holds himself out,
either by words or conduct, as a partner in a firm or allows others to represent him as a partner. In such
cases, he cannot deny the existence of the partnership once he has made such representations, especially if
third parties, such as creditors, have relied on this belief to their detriment.

If someone induces others to believe he is a partner in a firm, or permits others to represent him as a partner,
he is estopped from denying this partnership relationship in the future. This is true even if no actual
partnership exists between the parties. The third parties, who have relied on the representation, can hold
him accountable as a partner.

Example:
X and Y are partners in a partnership firm. X introduces A, the manager, as his partner to Z, a supplier. A does

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 194

not clarify or deny the statement. Z, believing A to be a partner, supplies 100 TV sets to the firm on credit.
After the credit period ends, Z is unable to recover the payment for the goods supplied. Z sues X and A for the
payment. In this case, A is liable for the payment, even though he was merely the manager, because he was
held out as a partner. As a result, A is considered a partner by holding out under Section 28 of the Indian
Partnership Act, 1932.

Key Points:

• A person can be held liable for debts incurred by the firm if they have been represented (either by themselves
or others) as a partner.

• The liability arises only when the third party (creditor) has acted based on the representation, such as
supplying goods or services in the belief that the person is a partner.

• The liability cannot be enforced by someone who has not relied on the misrepresentation, i.e., only the party
to whom the representation was made and who acted upon it can enforce liability.

Thus, a person who is held out as a partner, even if not an actual partner, can be held accountable for the
firm’s liabilities as if they were a partner.

Q17. May 20 RTP

Explain the following kinds of partnership under the Indian Partnership Act, 1932:

i. Partnership at Will:

As per Section 7 of the Indian Partnership Act, 1932, a Partnership at Will is a partnership where:

1. No fixed period has been agreed upon for the duration of the partnership.

2. No provision has been made regarding the determination or termination of the partnership.

If these two conditions are met, the partnership is considered a partnership at will. If there is an agreement
that specifies a fixed term or a method to dissolve the partnership, it is not a partnership at will.

Additionally, if a partnership that was originally entered into for a fixed term continues after the expiration of
that term, it will be considered a Partnership at Will.

A Partnership at Will can be dissolved by any partner by providing a written notice to all other partners,
indicating the intention to dissolve the partnership.

ii. Particular Partnership:

A Particular Partnership is a partnership that is created for a specific venture or undertaking, rather than for
the continuous operation of a business. It is formed when two or more persons come together to carry out a
single adventure or undertaking. Once the specific adventure or undertaking is completed, the partnership is
dissolved, unless otherwise agreed by the partners.

A Particular Partnership is generally dissolved by the completion of the specific undertaking, but the
dissolution is subject to any agreement between the partners. If the partners do not agree otherwise, the
partnership ends once the particular project or venture is completed.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 195

Q18. May 20 RTP

“Partner indeed virtually embraces the character of both a principal and an agent.” Describe the said
statement keeping in view the provisions of the Indian Partnership Act, 1932.

The statement "Partner indeed virtually embraces the character of both a principal and an agent" refers to
the dual role that a partner plays in a partnership, as established by the Indian Partnership Act, 1932.

1. Agent of the Firm:

According to Section 18 of the Indian Partnership Act, a partner is an agent of the firm for the purposes of
conducting the business of the firm. This means that each partner has the authority to bind the firm in their
dealings and actions that are in line with the firm’s business activities. In this capacity, the partner acts on
behalf of all partners and has the ability to create obligations for them, just as an agent would for a principal.

2. Principal in the Partnership:

While a partner acts as an agent of the firm, they also have a principal role. As a partner, they share in the
ownership of the partnership’s assets, profits, and liabilities. This makes them a principal with respect to
their own interest in the partnership. A partner has a community of interest with other partners in the
partnership’s property, business, and liabilities, unlike an agent, who typically has no ownership or interest
in the principal's business.

3. Dual Role – Principal and Agent:

o When a partner is acting on their own behalf and in their own interest in the partnership's business, they are
considered a principal.

o When a partner is acting on behalf of the other partners and representing the firm in transactions, they are
considered an agent.

In summary, a partner embodies the role of both a principal and an agent. As a principal, they have a stake
in the firm’s assets and liabilities. As an agent, they have the authority to bind the firm and represent it in
business dealings. However, the rule of agency applies primarily to acts done in the course of the firm's
business. Any act performed outside this scope does not bind the other partners.

Q19. May 20 RTP

A, B, and C are partners in a firm. As per the terms of the partnership deed, A is entitled to 20 percent of
the partnership property and profits. A retires from the firm and dies after 15 days. B and C continue
the business of the firm without settling accounts. What are the rights of A’s legal representatives
against the firm under the Indian Partnership Act, 1932?

Answer:

Under Section 37 of the Indian Partnership Act, 1932, the legal representatives of a deceased or retired
partner have certain rights in the absence of a final settlement of accounts. The legal representatives are
entitled to either:

1. Share of profits earned after death or retirement:

The legal representatives can claim a share in the profits earned by the firm after the partner's death or
retirement, attributable to the use of the deceased partner's share in the property of the firm. In this case, A’s
legal representatives are entitled to 20% of the profits made by the firm after A's death, based on the
partnership deed.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 196

2. Interest on the partner’s share:

Alternatively, A's legal representatives are entitled to interest at the rate of 6% per annum on A’s share in the
partnership property if the profits are not claimed. This interest is payable on the amount of A’s share in the
firm’s property.

In this case, A’s legal representatives have the option to claim either:

• 20% share of the profits made after A's death, or

• Interest at the rate of 6% per annum on A's share in the firm's property.

Thus, A’s legal representatives are entitled to one of these options but not both

Q20. Nov 18 RTP

(i) Ram & Co., a firm consists of three partners A, B, and C having one-third share each in the firm.
According to A and B, the activities of C are not in the interest of the partnership and thus want to expel
C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian
Partnership Act, 1932.

Answer:
It is not possible for A and B to expel C from the firm merely because they are in the majority. Expulsion of a
partner is governed by Section 33 of the Indian Partnership Act, 1932. The conditions for expelling a
partner are:

1. Power of Expulsion: The partnership deed must specifically grant the power to expel a partner. If such a
provision is not present in the partnership deed, the majority partners cannot expel a partner.

2. Majority Decision: The power of expulsion must be exercised by a majority of the partners. Since A and B are
in the majority, they can expel C, provided the partnership deed grants this right.

3. Good Faith: The expulsion must be done in good faith. The partner to be expelled (C) must be given notice
and an opportunity to be heard. Additionally, the expulsion must be in the interest of the firm and not for
personal reasons.

In the given case, if A and B wish to expel C, they must ensure the following conditions are met:

• There is a provision in the partnership deed granting the power to expel.

• The expulsion is in good faith, meaning it benefits the partnership and C is given an opportunity to present
their side.

• The expulsion must be in accordance with the procedure specified in the partnership deed.

(ii) What is a Partnership Deed? What are the particulars that the partnership deed may contain?

Answer:
A Partnership Deed is a written document that outlines the terms and conditions agreed upon by the
partners when forming a partnership. It serves as the foundation of the partnership, outlining the rights,
duties, and responsibilities of the partners. Although a partnership can exist without a deed (as long as there
is an agreement), it is advisable to have the deed in writing to avoid disputes in the future. The deed must be
properly stamped as per the Stamp Act, 1899, and if the partnership involves immovable property, it must
also be registered under the Registration Act.

The particulars that a partnership deed may contain are:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 197

1. Name of the Partnership Firm: The name under which the firm will operate.

2. Names of Partners: The individuals or entities that form the partnership.

3. Nature and Place of Business: The kind of business the firm will engage in and its location.

4. Date of Commencement: The start date of the partnership.

5. Duration of the Partnership: Whether it is a partnership at will or for a fixed term.

6. Capital Contribution: The amount of capital each partner contributes to the firm.

7. Profit and Loss Sharing Ratio: How the profits and losses will be shared among the partners.

8. Admission and Retirement of Partners: The procedure for admitting new partners or for the retirement of
existing partners.

9. Interest on Capital, Drawings, and Loans: The rates of interest applicable to capital invested, partner
withdrawals (drawings), and loans to/from the firm.

10. Settlement of Accounts on Dissolution: How the firm's accounts will be settled if the partnership is
dissolved.

11. Salaries or Commissions: If any partner is entitled to a salary or commission, the terms should be
mentioned.

12. Expulsion of a Partner: The conditions under which a partner may be expelled due to misconduct, breach of
duty, or fraud.

A partnership deed may include additional clauses as needed by the firm, depending on the specific needs
and circumstances of the partnership.

Q21. Nov 22 MTP (6 Marks)

Define partnership and name the essential elements for the existence of a partnership as per the
Indian Partnership Act, 1932. Explain any two such elements in detail.

Answer:

Definition of Partnership:
According to Section 4 of the Indian Partnership Act, 1932, partnership is defined as the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

The definition of a partnership contains the following essential elements that must co-exist for the
existence of a partnership:

1. Association of two or more persons

2. Agreement

3. Business

4. Agreement to share profits

5. Business carried on by all or any of them acting for all

Explanation of Two Essential Elements:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 198

1. Association of Two or More Persons:

o A partnership must involve at least two persons. It is not possible to have a partnership with a single
person.

o These persons must have the capacity to enter into a contract under the law. For instance, minors cannot be
full partners in a partnership, although they can be admitted to the benefits of the partnership with the
consent of all partners.

o The maximum number of partners is not explicitly mentioned in the Partnership Act; however, according to
Section 464 of the Companies Act, 2013, the limit is 50 partners for any association or partnership firm.

2. Agreement:

o A partnership must arise out of an agreement between the partners. This agreement can be either
expressed or implied, meaning it can be written or verbal.

o The agreement defines the terms of the partnership, including profit-sharing, capital contributions, and
other rights and duties of the partners.

o Since a partnership is a voluntary contractual relationship, the agreement must be entered into willingly by
all partners. An implied agreement arises when the partners’ actions or consistent behavior demonstrate a
mutual understanding.

o This element highlights the contractual nature of the partnership, where each partner is bound by the terms
and obligations stipulated in the agreement.

Q22. Nov 22 MTP (4 Marks)

Ms. Lucy while drafting partnership deed taken care of few important points. What are those points?
She wants to know the list of information which must be part of partnership deed drafted by her. Also,
give list of information to be included in partnership deed?

Answer:

Ms. Lucy, while drafting the partnership deed, must ensure the following important points are considered:

• No particular formalities are required for the agreement of partnership.

• The partnership deed may be in writing or formed verbally, but it is advisable to have a written document to
avoid future disputes.

• The partnership deed should be carefully drafted and properly stamped in accordance with the provisions
of the Stamp Act, 1899.

• If the partnership involves immovable property, the deed must be in writing, stamped, and registered
under the Registration Act.

List of Information to Be Included in the Partnership Deed:

1. Name of the partnership firm

2. Names of all the partners

3. Nature and place of the business of the firm

4. Date of commencement of partnership

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 199

5. Duration of the partnership firm

6. Capital contribution of each partner

7. Profit-sharing ratio of the partners

8. Admission and retirement of a partner

9. Rates of interest on capital, drawings, and loans

10. Provisions for settlement of accounts in the case of dissolution of the firm

11. Provisions for salaries or commissions payable to the partners, if any

12. Provisions for the expulsion of a partner in case of gross breach of duty or fraud

Note: Ms. Lucy may add or delete any provision based on the specific needs of the partnership firm.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 200

Chapter 3 – The Indian Partnership Act ,1932

UNIT 2 : RELATIONS OF PARTNERS

PART 1 – CASE LAW QUESTIONS

Q1. Jun 22 Exam (6 Marks)

M/s ABC Associates is a partnership firm established in 1990. Mr. A, Mr. B, and Mr. C have been partners in
the firm since its inception. Mr. A, being a senior partner aged 78 years, transfers his share in the firm to his
son, Mr. Prateek, a Chartered Accountant. However, Mr. B and Mr. C are not interested in allowing Mr. Prateek
to join the firm as a partner.

Later, Mr. Prateek notices that the books of accounts of the firm display only a small amount as profit
despite a huge turnover. He wishes to inspect the books of accounts, arguing that he is entitled to do so as a
transferee of his father’s share. The other partners disagree and believe he cannot challenge the books.

The question arises whether Mr. Prateek can be introduced as a partner if his father, Mr. A, wishes to retire.

As an advisor, analyze and resolve the issues based on the Indian Partnership Act, 1932.

Provision under the law:

(i) Introduction of a Partner (Section 31 of the Indian Partnership Act, 1932):

According to Section 31, subject to the contract between the partners, no person shall be introduced as a
partner in a firm without the consent of all the existing partners. This applies irrespective of whether the new
partner is related to an existing partner or not.

(ii) Rights of a Transferee of a Partner’s Interest (Section 29 of the Indian Partnership Act, 1932):

A partner may transfer his interest in the firm to another person. However, such a transfer does not grant the
transferee the right to:

1. Interfere in the conduct of the firm’s business.

2. Require accounts or inspect the books of the firm during the continuance of the firm.

3. Challenge the profits agreed upon by the existing partners.

The transferee is only entitled to receive the share of profits from the transferring partner.

Analysis of the given case:

1. Introduction of Mr. Prateek as a Partner:

o Mr. A wishes to retire and transfer his share to Mr. Prateek. However, Section 31 makes it clear that the
consent of all the existing partners is required to introduce Mr. Prateek as a partner.

o Since Mr. B and Mr. C are not interested in Mr. Prateek joining the firm, he cannot be introduced as a partner
unless they give their consent.

2. Right to Inspect Books of Accounts:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 201

o As per Section 29, the transferee (Mr. Prateek) is only entitled to receive the share of profits of the
transferring partner (Mr. A). He does not have the right to interfere in the management of the business or
inspect the books of accounts of the firm.

o Hence, the contention of Mr. B and Mr. C is correct. Mr. Prateek cannot inspect the books of accounts or
challenge them.

Conclusion:

1. Mr. Prateek can only be introduced as a partner in M/s ABC Associates with the consent of Mr. B and Mr. C,
as required under Section 31 of the Indian Partnership Act, 1932. Without their consent, he cannot become
a partner, even if his father wishes to retire.

2. As a transferee of his father’s share, Mr. Prateek is entitled only to receive Mr. A’s share of profits but does not
have the right to inspect the books of accounts or challenge the profits agreed upon by the partners, as per
Section 29 of the Act.

Q2. Dec 21 Exam (4 Marks)

Case Details:
A, B, C, and D are partners in a firm. They jointly promised to pay ₹6,00,000 to F. However, B and C became
insolvent. B was unable to pay any amount, and C could only pay ₹50,000. A was compelled to pay the entire
amount to F.

You need to decide the extent to which A can recover the amount from D.

Legal Provisions:

1. Joint Promisors (Section 42 of the Indian Contract Act, 1872):

When two or more persons make a joint promise, they are bound to fulfil the promise jointly unless a
contrary intention appears in the contract.

2. Contribution by Joint Promisors (Section 43 of the Indian Contract Act, 1872):

• In the absence of any agreement to the contrary, a promisee can compel any one or more of the joint
promisors to perform the entire promise.

• If one joint promisor performs the entire promise, he is entitled to claim contribution from the other joint
promisors to the extent of their liability.

• If a joint promisor defaults due to insolvency or any other reason, the loss must be shared equally by the
remaining solvent joint promisors.

Analysis of the Case:

1. Total liability of the partners:

The total amount payable is ₹6,00,000. Since there are four partners, the liability of each partner is:
₹6,00,000 ÷ 4 = ₹1,50,000.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 202

2. Loss due to Insolvency:

o B's liability: ₹1,50,000 (entirely unpaid).

o C's liability: ₹1,50,000 – ₹50,000 = ₹1,00,000 (unpaid).

The total loss due to B and C’s insolvency is:

₹1,50,000 (B) + ₹1,00,000 (C) = ₹2,50,000.

3. Liability of D:

o D is liable for his original share of ₹1,50,000.

o D must also bear an equal share of the loss due to B and C’s defaults.

Loss to be shared by A and D:

₹2,50,000 ÷ 2 = ₹1,25,000 each.

Hence, D’s total liability is:

₹1,50,000 (his share) + ₹1,25,000 (his share of the loss) = ₹2,75,000.

4. Recovery by A:

o From C: ₹50,000 (C’s contribution).

o From D: ₹2,75,000.

Conclusion:

A can recover ₹2,75,000 from D and ₹50,000 from C, totaling ₹3,25,000.

Q3. Jul 21 Exam (6 Marks)

Case Details:
Mr. M, one of the four partners in M/s XY Enterprises, owes ₹6 crore to his friend, Mr. Z. To settle the amount,
Mr. M proposes to sell his share in the firm to Mr. Z. The following issues are to be discussed:

1. Can Mr. M validly transfer his interest in the firm by way of sale?

2. What would be the rights of Mr. Z (the transferee) if Mr. M retires from the firm 6 months after the transfer?

Legal Provisions:

Section 29 of the Indian Partnership Act, 1932:

• Transfer of Interest:
A partner can transfer his interest in the firm either absolutely, by mortgage, or by creating a charge on such
interest. However, this does not entitle the transferee to:
a) Interfere in the conduct of the business of the firm.
b) Require accounts.
c) Inspect the books of the firm.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 203

The transferee is entitled only to receive the share of profits of the transferring partner and must accept the
account of profits as agreed upon by the partners.

• Dissolution or Retirement:
If the firm is dissolved or the transferring partner retires, the transferee is entitled to:
a) The share of assets of the firm to which the transferring partner is entitled.
b) An account of the firm's assets as of the date of dissolution or retirement for determining the share of the
transferring partner.

Analysis of the Case:

1. Validity of Transfer of Interest by Mr. M:

o Mr. M can transfer his interest in the firm to Mr. Z by way of sale.

o However, Mr. Z, as the transferee, cannot interfere in the management or operations of the firm, inspect
books, or demand accounts. Mr. Z is entitled only to the share of profits belonging to Mr. M during the
continuance of the firm.

2. Rights of Mr. Z (Transferee) After Mr. M’s Retirement:

o On Mr. M's retirement, Mr. Z would step into Mr. M's shoes with respect to his share in the firm.

o Mr. Z would be entitled to:

a) The share of the firm’s assets to which Mr. M was entitled at the time of retirement.
b) An account of the firm’s assets as of the date of retirement to determine Mr. M's share.

o Mr. Z would receive the value of Mr. M's share in the firm’s assets, which would be used to settle the ₹6 crore
owed to him.

Conclusion:

(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale to Mr. Z.

(ii) Upon Mr. M’s retirement, Mr. Z will be entitled to:

1. The share of the firm's assets that Mr. M was entitled to.

2. An account of the firm's assets as of the date of Mr. M’s retirement.

Mr. Z would ultimately receive ₹6 crore or the value of Mr. M's share in the firm’s assets.

Q4. Jan 21 Exam (3 Marks)

Case Details:
SK Infrastructure Limited has a paid-up share capital of 6,00,000 equity shares of ₹100 each. Out of this,
2,00,000 equity shares are held by the Central Government, and 1,20,000 equity shares are held by the
Government of Maharashtra. The question is whether SK Infrastructure Limited can be treated as a
Government company under the Companies Act, 2013.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 204

Relevant Provisions:

Definition of Government Company (Section 2(45) of the Companies Act, 2013):

A Government Company is defined as:

1. A company in which not less than 51% of the paid-up share capital is held by:

o The Central Government, or

o Any State Government(s), or

o Partly by the Central Government and partly by one or more State Governments.

2. This also includes a subsidiary company of such a Government company.

Analysis of the Case:

• Paid-up Share Capital of SK Infrastructure Limited: ₹6,00,000 equity shares.

• Shares Held by the Central Government: 2,00,000 shares.

• Shares Held by the Government of Maharashtra: 1,20,000 shares.

• Total Government Holding: 2,00,000 + 1,20,000 = 3,20,000 shares.

• Percentage of Government Holding: (3,20,000 / 6,00,000) × 100 = 53.33%.

As the total government holding is more than 51% of the paid-up share capital, SK Infrastructure Limited
satisfies the criteria for being a Government Company as per Section 2(45) of the Companies Act, 2013.

Conclusion:

Yes, SK Infrastructure Limited is a Government company, as more than 51% of its paid-up share capital is
held jointly by the Central Government and the Government of Maharashtra.

Q5. Nov 20 Exam (6 Marks)

Case Details:
P, Q, R, and S are partners in M/S PQRS & Co., which trades in washing machines. Due to conflicts, P and Q
left the firm and started a competing business (M/S PQ & Co.) on 31st July 2019. Meanwhile, R and S
continued using the property in the name of M/S PQRS & Co., which includes the share of P and Q. The
question involves examining the rights of outgoing partners P and Q under the Indian Partnership Act, 1932,
regarding:

1. Their right to start a competing business.

2. Their right to their share in the property of M/S PQRS & Co.

Relevant Provisions of the Indian Partnership Act, 1932:

(i) Rights of Outgoing Partners to Carry on Competing Business (Section 36):

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 205

An outgoing partner may carry on a business competing with that of the firm, subject to certain conditions:

1. Permitted Actions:

o The outgoing partner can start a competing business and advertise it.

2. Restrictions:

o The outgoing partner may not (in the absence of an agreement):

(a) Use the firm name,
(b) Represent himself as carrying on the business of the firm, or
(c) Solicit the customers of the firm who were dealing with it before his departure.

3. Restraint Agreement:

o Outgoing partners may agree with their former partners not to carry on a similar business for a specified time
or within specified local limits, provided the restraint is reasonable. Such agreements are enforceable under
Section 36(2) and are not considered restraint of trade.

Application to the Case:

• P and Q, as outgoing partners, are allowed to start a competitive business (M/S PQ & Co.), provided they:

o Do not use the name "M/S PQRS & Co.,"

o Do not misrepresent themselves as conducting the business of M/S PQRS & Co., and

o Do not solicit the customers of M/S PQRS & Co.

• If there is no specific agreement to the contrary, P and Q’s actions in starting a competing business are valid
and legal.

(ii) Rights of Outgoing Partners in the Firm's Property (Section 37):

Section 37 provides the rights of outgoing partners when the continuing partners use the firm’s property
without settling accounts with the outgoing partners:

1. Entitlement of the Outgoing Partner:

o The outgoing partner (or their representatives) is entitled to:

(a) A share of the profits made by the continuing partners attributable to the use of the firm’s property, OR
(b) Interest at 6% per annum on the amount of their share in the firm’s property.

2. Option:

o The outgoing partner has the option to choose between the above two rights.

Application to the Case:

• Since R and S are continuing to use the property of M/S PQRS & Co., which includes the share of P and Q,
and no final settlement of accounts has occurred, P and Q are entitled to either:

o A proportionate share of the profits attributable to the use of their share in the firm’s property, OR

o Interest at 6% per annum on their share in the firm’s property, as per their choice.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 206

Conclusion:

1. Rights to Start a Competitive Business:

P and Q can legally start a competitive business (M/S PQ & Co.) provided they comply with the restrictions
under Section 36.

2. Rights to Property of M/S PQRS & Co.:

P and Q are entitled to either:

o A share in the profits attributable to their share in the property, OR

o Interest at 6% per annum on the value of their share, under Section 37.

Q6. Nov 19 Exam (6 Marks), May 21 RTP

Case Details:
Master X was introduced to the benefits of partnership in M/s ABC & Co. with the consent of all partners.
After attaining majority, more than six months elapsed, and he failed to give a public notice regarding his
decision to become or not become a partner. Later, Mr. L, a supplier to M/s ABC & Co., filed a suit against the
firm for recovery of a debt.

The question asks about:

1. The liability of X for failing to give public notice after attaining majority.

2. Whether Mr. L can recover his debt from X.

Relevant Provisions of the Indian Partnership Act, 1932:

Section 30 - Rights and Liabilities of a Minor Admitted to the Benefits of Partnership

1. Section 30(5):

o A minor admitted to the benefits of partnership must give a public notice within six months of attaining
majority (or within six months of becoming aware that he was admitted to the benefits of the partnership),
indicating whether he elects to become a partner or not.

o If the minor fails to give such notice, he will be deemed to have elected to become a partner in the firm after
the expiry of the six-month period.

2. Section 30(7):

o If the minor becomes a partner by failure to give the notice, he becomes personally liable for all acts of the
firm done since he was admitted to the benefits of the partnership.

o His share in the property and profits of the firm remains the same as it was during his minority.

(i) Liability of X for Failing to Give Public Notice

• Since Master X failed to give the public notice within six months of attaining majority, as required by Section
30(5), he will be deemed to have elected to become a partner in the firm after the expiry of the specified
period.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 207

• Liability:

o X will become personally liable for all acts of the firm, including those that occurred since he was admitted
to the benefits of the partnership.

o This means X will be personally liable for the debt owed to Mr. L, just like any other partner of the firm.

(ii) Can Mr. L Recover His Debt from X?

• Yes, Mr. L can recover his debt from X.

o Since X is deemed to have become a partner after the six-month period and is personally liable for the acts
of the firm done after his admission, Mr. L can recover the debt from him in the same way as he can from any
other partner of the firm.

o This liability arises from X’s failure to give the public notice, which resulted in his automatic admission as a
partner.

Conclusion:

1. Liability of X:

o X will be personally liable to third parties (like Mr. L) for all acts of the firm that occurred since he was
admitted to the benefits of partnership, and this liability continues even after his majority.

2. Recovery of Debt by Mr. L:

o Mr. L can recover his debt from X because X is deemed to be a partner after failing to give the required public
notice. Hence, X is equally liable for the firm's obligations, including the debt owed to Mr. L

Q7. May 19 Exam (6 Marks), Nov 22 MTP (6 Marks)

Case Details:
M/s XYZ & Associates, a partnership firm, had senior partners X, Y, and Z engaged in carpet manufacturing
and exporting. On 25th August 2016, Mr. G, an expert in carpet manufacturing, was inducted as a partner.
However, on 10th January 2018, Mr. G was expelled from the firm due to allegations of unauthorized
activities, following unanimous approval from the rest of the partners.

The question asks:

1. Whether the expulsion of Mr. G was justified.

2. What factors should be considered before expelling a partner according to the Indian Partnership Act, 1932.

Relevant Provisions of the Indian Partnership Act, 1932:

Section 33 - Expulsion of a Partner

1. Section 33(1):
A partner may be expelled from the firm by a majority of partners only if:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 208

o The partnership agreement expressly confers such a right.

o The expulsion is exercised in good faith and in the interest of the partnership.

o The partner to be expelled is served with a notice and is given an opportunity to be heard.

2. Good Faith Test:

o The expulsion must be in the best interest of the partnership.

o The expelled partner must be given a proper notice and a fair hearing.

3. Invalid Expulsion:

o If these conditions are not met, the expulsion is deemed invalid and the partner’s rights are not affected.

(i) Was the Action by the Partners Justified?

• Justification:

o The expulsion of Mr. G by unanimous consent of the partners was justified, provided the expulsion was
exercised in good faith to protect the firm’s interest, especially due to the alleged unauthorized activities
committed by Mr. G.

o However, for the expulsion to be valid, it must have been in the firm’s interest, and Mr. G must have been
given due notice and an opportunity to be heard.

o Conclusion: If these conditions were met, the expulsion was justified as the partners acted in good faith and
in the firm’s interest.

(ii) Factors to Be Kept in Mind Prior to Expelling a Partner

The following factors should be considered before expelling a partner, as per Section 33 of the Indian
Partnership Act, 1932:

1. Existence of Power in the Partnership Agreement:

o The power to expel a partner must be explicitly mentioned in the partnership agreement.

o If not mentioned, the partners cannot expel a partner unless all the partners agree to such action.

2. Exercise by Majority:

o The power of expulsion must be exercised by a majority of the partners, unless the agreement specifies
otherwise.

3. Exercise in Good Faith:

o The expulsion must be in the best interest of the partnership and not for personal reasons or motives.

o The expulsion should be for valid reasons such as breach of the partnership agreement, unethical behavior,
or activities that harm the partnership.

4. Notice and Opportunity to be Heard:

o The partner being expelled must be given a proper notice regarding the expulsion.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 209

o The expelled partner must also be given an opportunity to defend himself or present his side of the story.

Conclusion:

1. Justification of Expulsion:

o The action taken by the partners to expel Mr. G was justified, assuming the expulsion was in the firm’s best
interest, and Mr. G was properly notified and given a chance to present his case. The expulsion was carried
out with unanimous approval, which meets the requirements of Section 33.

2. Factors Before Expelling a Partner:

o The partnership agreement should explicitly grant the right to expel a partner.

o The power to expel must be exercised by the majority of partners in good faith.

o The partner must be given a proper notice and a chance to be heard before expulsion.

In this case, the partners acted according to the provisions of the Indian Partnership Act, provided the
conditions were met.

Q8. Nov 18 Exam (6 Marks)

(i) Mr. A, Mr. B, and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in the business
of trading branded furniture. The names of the partners were clearly written along with the firm name in front
of the head office of the firm as well as on the letterhead of the firm. On 1st October 2018, Mr. C passed
away. His name was neither removed from the list of partners as stated in front of the head office nor from
the letterheads of the firm. As per the terms of the partnership, the firm continued its operations with Mr. A
and Mr. B as partners. The accounts of the firm were settled, and the amount due to the legal heirs of Mr. C
was also determined on 10th October 2018. But the same was not paid to the legal heirs of Mr. C. On 16th
October 2018, Mr. X, a supplier, supplied furniture worth ₹ 20,00,000 to M/s ABC & Co. M/s ABC & Co. could
not repay the amount due to heavy losses. Mr. X wants to recover the amount not only from M/s ABC & Co.,
but also from the legal heirs of Mr. C.

Analyse the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide
whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X. (3 Marks)

Provision under the Law

Section 42 and Section 37 of the Indian Partnership Act, 1932:

• Section 42: The death of a partner does not automatically result in the dissolution of the partnership unless
the partnership agreement states otherwise. If the partnership agreement provides that the business shall
continue after the death of a partner, then the remaining partners can carry on the business.

• Section 37: Upon the death of a partner, the legal representatives of the deceased partner are liable only to
settle the deceased partner's share in the firm. The legal heirs are not liable for the future obligations or
debts of the firm unless they have agreed to assume such liability.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 210

Analysis of the Given Case

1. Death of Mr. C and its Implications:

o Mr. C’s death on 1st October 2018 does not automatically dissolve the partnership since the firm continued
its operations with the surviving partners, Mr. A and Mr. B. As per the partnership agreement, the firm
continued its business, which indicates an agreement between the partners that the death of one partner
will not dissolve the partnership.

o The death of Mr. C does not relieve the partnership of any existing or future liabilities incurred during the
ongoing business operations unless specified otherwise in the partnership agreement.

2. Liability of the Legal Heirs:

o According to Section 37, the legal heirs of the deceased partner, Mr. C, are not liable for the future debts or
obligations of the firm after his death, including the debt owed to Mr. X for the furniture supplied.

o The legal heirs are only entitled to the value of Mr. C’s share in the partnership, which was settled on 10th
October 2018. However, the payment due to them has not been made.

o Mr. X, as a creditor, can only claim the debt from the surviving partners (Mr. A and Mr. B), as they continued
the business after Mr. C's death. The legal heirs of Mr. C cannot be held liable for the debt owed to Mr. X for
the goods supplied after the death of Mr. C.

3. Lack of Notice:

o The failure to remove Mr. C's name from the firm’s letterhead or notice does not affect the liability of the legal
heirs. The absence of a public notice does not extend the liability of the deceased partner’s heirs for future
debts. The continuing partners (Mr. A and Mr. B) would be liable to creditors for obligations incurred after Mr.
C’s death.

Conclusion

• Liability of Legal Heirs of Mr. C: The legal heirs of Mr. C cannot be held liable for the dues towards Mr. X.
The partnership continued without dissolving, and the legal heirs are not responsible for future debts of the
firm incurred after Mr. C's death. The surviving partners, Mr. A and Mr. B, are personally liable for the debt,
and Mr. X can only seek recovery from them.

Q9. Nov 18 Exam (6 Marks)

(ii) Mr. M, Mr. N, and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st October 2018,
Mr. P retired from the partnership but failed to give public notice of his retirement. After his retirement, Mr. M,
Mr. N, and Mr. P visited a trade fair and enquired about some refrigerators with the latest techniques. Mr. X,
who was exhibiting his refrigerators with the new techniques, was impressed with the interactions of Mr. P
and requested the visiting card of the firm. The visiting card also included the name of Mr. P as a partner,
even though he had already retired. Mr. X supplied some refrigerators to the firm and could not recover his
dues from the firm. Now, Mr. X wants to recover the dues not only from the firm but also from Mr. P.

Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and decide whether Mr.
P is liable in this situation.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 211

Provision under the Law

Section 32(2) of the Indian Partnership Act, 1932:

• A partner who retires from the firm continues to be liable for the acts of the firm done after his retirement
unless a public notice of his retirement has been given.

• Section 28 of the Indian Partnership Act, 1932 states that if a partner holds himself out as a partner or
allows others to do so, he is prevented from denying his status as a partner, and creditors may act based on
this assumption.

Analysis of the Given Case

1. Retirement of Mr. P:

o Mr. P retired from the partnership on 1st October 2018 but did not give public notice of his retirement.

o As per Section 32(2), a retiring partner remains liable to third parties for the acts of the firm unless notice of
his retirement is given to the public. Since Mr. P did not give a public notice, he continues to be liable for the
firm's activities after his retirement.

2. Representation as a Partner:

o Mr. P attended a trade fair and interacted with Mr. X regarding the supply of refrigerators. Mr. P’s name was
still included on the visiting card, which gave the impression to Mr. X that Mr. P was still a partner of the firm.

o According to Section 28, if a partner holds himself out as a partner or allows others to do so, he cannot deny
the partnership relationship. Mr. P’s actions at the trade fair and the use of the visiting card with his name as
a partner led Mr. X to believe that he was still a partner.

3. Liability to Mr. X:

o Mr. P’s failure to give public notice of his retirement, combined with his actions that misrepresented him as a
partner, means that he is liable to Mr. X for the debts incurred after his retirement.

o Even though Mr. P retired, his failure to notify the public and his continued representation as a partner
exposes him to liability for the firm’s obligations, including the debt owed to Mr. X.

Conclusion

• Liability of Mr. P: Mr. P is liable to Mr. X for the dues. His failure to give a public notice of retirement,
combined with his actions that allowed Mr. X to assume he was still a partner, means he cannot deny his
liability for the firm’s obligations.

Q9. May 18 Exam (4 Marks)

X, Y, and Z are partners in a firm. They jointly promised to pay ₹ 3,00,000 to D. Y became insolvent and his
private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole amount to D.
Examining the provisions of the Indian Contract Act, 1872, decide the extent to which X can recover the
amount from Z.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 212

Provision under the Law

Section 43 of the Indian Contract Act, 1872:

• When two or more persons make a joint promise, the promisee may, in the absence of an express
agreement to the contrary, compel any one or more of the joint promisors to perform the whole of the
promise.

• Each joint promisor has the right to compel every other joint promisor to contribute equally to the
performance of the promise, unless the contract specifies otherwise.

• If any joint promisor defaults in their contribution, the remaining joint promisors must share the loss arising
from such default equally.

Analysis of the Given Case

1. Joint Promise to Pay ₹ 3,00,000:

o X, Y, and Z made a joint promise to pay ₹ 3,00,000 to D. This means they are jointly liable to pay the entire
amount unless there is an agreement specifying otherwise.

2. Insolvency of Y:

o Y became insolvent and his private assets can only cover 1/5 of his share of the debt. Y's inability to
contribute his share means he defaults on his obligation to pay ₹ 1,00,000 (1/3 of ₹ 3,00,000).

3. Liability of X:

o X was compelled to pay the whole ₹ 3,00,000 to D due to Y's insolvency. Under Section 43, X has the right to
seek contribution from Y's estate and Z for the amounts they owe.

4. Recovery from Y and Z:

o X is entitled to recover ₹ 20,000 from Y's estate, as Y's estate can pay only 1/5 of his share.

o The remaining amount of ₹ 2,80,000 (₹ 3,00,000 - ₹ 20,000) must be shared between X and Z. Since Z is
liable for an equal share of the debt, X can recover ₹ 1,40,000 from Z.

Conclusion

• X can recover ₹ 20,000 from Y’s estate and ₹ 1,40,000 from Z. The remaining amount of ₹ 1,40,000 that was
Y's share cannot be recovered from him due to his insolvency, but must be equally borne by X and Z.

Q10. Jun 23 RTP

Shyam, Mohan, and Keshav were partners in M/s Nandlal Gokulwale and Company. They mutually decided
that Shyam will take the responsibility to sell the goods, Mohan will handle the purchase of goods for the
firm, and Keshav will look after the accounts and banking department. No one will interfere in the other’s
department. Once, when Shyam and Keshav were out of town, Mohan got information that the price of their
goods was going down sharply due to some government policy, which would result in a heavy loss to the firm
if the goods were not sold immediately. He tried to contact Shyam, who had the authority to sell the goods.
When Mohan couldn’t contact Shyam, he sold all the goods at a reduced price to save the firm from heavy

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 213

loss. Thereafter, Shyam and Keshav denied accepting the loss due to the sale of goods at a reduced price, as
only Shyam had express authority to sell the goods.

Discuss the consequences under the provisions of the Indian Partnership Act, 1932.

Provision under the Law

Section 20 of the Indian Partnership Act, 1932:

• Partners in a firm may, by contract, extend or restrict the implied authority of any partner.

• However, any act done by a partner on behalf of the firm within his implied authority binds the firm, unless
the person with whom he is dealing knows of the restriction or does not believe the partner to be a partner.

Section 21 of the Indian Partnership Act, 1932:

• In an emergency, a partner has the authority to do all acts necessary to protect the firm from loss, which
would be done by a person of ordinary prudence in similar circumstances.

• Such acts bind the firm.

Analysis of the Given Case

1. Mutual Agreement and Division of Responsibilities:

o The partners had agreed that Shyam was responsible for selling goods, Mohan was responsible for
purchasing goods, and Keshav handled the accounts and banking. This shows a clear division of authority
among the partners.

2. Emergency Situation:

o Due to the sharp fall in the price of goods, Mohan acted promptly to sell the goods at a reduced price, as he
believed this action was necessary to prevent a heavy loss for the firm.

o Although Shyam had the express authority to sell the goods, Mohan acted in an emergency to protect the
firm from substantial loss.

3. Authority in Emergency:

o As per Section 21 of the Indian Partnership Act, a partner has the authority to act in an emergency to prevent
harm to the firm. Mohan, in this case, acted with the prudence expected in such a situation, thereby binding
the firm to the sale.

4. Implied Authority:

o While Shyam had express authority to sell the goods, Mohan’s action was within the implied authority in an
emergency. As per Section 20, Mohan’s actions, although outside his usual scope of authority, are still
binding on the firm because they fall within the realm of protecting the firm from loss.

Conclusion

• Despite Shyam having express authority to sell the goods, Mohan’s decision to sell the goods at a reduced
price in response to the emergency situation was justified. The act of selling the goods was in the best

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 214

interest of the firm to avoid a larger loss, and as such, it binds the firm under the provisions of the Indian
Partnership Act, 1932. Shyam and Keshav cannot deny responsibility for the loss incurred from the sale, as
Mohan acted within the implied authority granted to him in the emergency situation.

Q11. May 18 Exam (6 Marks)

X, Y, and Z are partners in a Partnership Firm. They were carrying their business successfully for several
years. The spouses of X and Y had a fight at a ladies' club over a personal issue, and X's wife was badly hurt.
X got angry over the incident and convinced Z to expel Y from their partnership firm. Y was expelled from the
partnership without any notice from X and Z.

Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from
the firm. What are the criteria for the test of good faith in such circumstances?

Provision under the Law

Section 33 of the Indian Partnership Act, 1932:

• A partner may not be expelled from a firm by a majority of partners, except in the exercise of powers
conferred by the contract between the partners and in good faith.

• The power of expulsion must be exercised in good faith and for the bona fide interest of the partnership.

• The test of good faith includes the following:

o The expulsion must be in the interest of the partnership.

o The partner to be expelled must be served with notice.

o The partner must be given an opportunity of being heard.

If these conditions are not met, the expulsion is not valid, and the expelled partner may challenge the
expulsion.

Analysis of the Given Case

1. Existence of Expulsion Power:

o The partnership agreement does not indicate whether there was an explicit power to expel a partner.
Therefore, we assume that there is no provision in the contract allowing expulsion in this case.

2. Lack of Notice and Hearing:

o Y was expelled without notice or an opportunity to defend himself. The Indian Partnership Act requires that
the expelled partner be notified and given a chance to be heard, which was not done in this case.

3. Good Faith:

o The expulsion of Y appears to be driven by a personal issue between the spouses of X and Y rather than the
interests of the firm. This is not an action taken in good faith for the benefit of the business. The anger of X
over the personal matter does not justify the expulsion in the context of the partnership's welfare.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 215

Conclusion

• According to Section 33(1) of the Indian Partnership Act, the expulsion of Y is not valid because it was not
done in good faith, and Y was not given notice or an opportunity to be heard. The expulsion does not meet
the criteria of being in the interest of the partnership or being exercised with the consent of the majority in
good faith. Therefore, Y's expulsion is not lawful and can be challenged.

Q12. Nov 22 RTP

A, B, and C are partners in M/s ABC & Company. The firm decided to purchase a machine from M/s LMN &
Company. Before A and B purchased the machine, C died. The machine was purchased, but thereafter, A
and B became insolvent, and the firm was unable to pay for the machine.

Explain whether the estate of C would be liable for the dues of M/s LMN & Company.

Provision under the Law

Section 35 of the Indian Partnership Act, 1932:

• The estate of a deceased partner is not liable for any acts of the firm done after his death.

• To absolve the deceased partner's estate from liability for future obligations of the firm, there is no need to
give notice to the public or to persons dealing with the firm.

Analysis of the Given Case

1. Death of C Before Purchase:

o C's death occurred before A and B finalized the purchase of the machine. Since the purchase was made
after C's death, it falls outside the scope of C's liabilities as a partner.

2. Obligation After C's Death:

o As per Section 35, the estate of C is not liable for any transactions or debts incurred after his death. Since
the purchase of the machine occurred after C's passing, the estate of C cannot be held responsible for the
dues.

3. Insolvency of A and B:

o The fact that A and B became insolvent does not affect the liability of C's estate because the purchase
occurred after C's death, and the liabilities incurred after death are not attributable to the deceased partner.

Conclusion

• According to Section 35 of the Indian Partnership Act, 1932, the estate of C is not liable for the dues of M/s
LMN & Company, as the purchase of the machine and subsequent obligations occurred after C's death.
Therefore, C’s estate is absolved from any responsibility for the debt incurred by the firm after his death.

Q13. May 22 RTP

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 216

Moni and Tony were partners in the firm M/s MOTO & Company. They admitted Sony as a partner in the firm,
and he is actively engaged in the day-to-day activities of the firm. There is a tradition in the firm that all active
partners will get a monthly remuneration of ₹ 20,000, but no express agreement was made. After Sony's
admission into the firm, Moni and Tony continued receiving salary from the firm, but Sony did not receive any
salary. Sony claimed his remuneration, but the existing partners denied this, stating there was no express
agreement for it.

Can Sony claim remuneration from the firm under the provisions of the Indian Partnership Act, 1932?

Provision under the Law

Section 13(a) of the Indian Partnership Act, 1932:

• A partner is not entitled to receive remuneration for taking part in the conduct of the business unless there
is an express agreement or a course of dealings between the partners.

Analysis of the Given Case

1. Customary Remuneration:

o The firm has a tradition of paying active partners a monthly remuneration of ₹ 20,000. Although there is no
express agreement regarding this remuneration, it is part of the course of dealings within the firm.

2. Admission of Sony:

o Sony, being admitted as an active partner, is involved in the day-to-day activities of the firm. Based on the
established custom, he should be entitled to the same remuneration as the other active partners.

3. Entitlement of Sony:

o Since it is a custom in the firm to provide remuneration to working partners, Sony is entitled to the same
treatment, even though there is no formal written agreement.

Conclusion

• Under Section 13(a) of the Indian Partnership Act, 1932, Sony can claim remuneration from the firm, as it
is customary for working partners to receive a salary. The absence of an express agreement does not
invalidate his claim, given the established practice within the firm. Therefore, Sony is entitled to receive the
monthly remuneration of ₹ 20,000 like Moni and Tony

Q14. Nov 21 RTP

Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr. B felt that the books of
accounts were displaying only a small amount as profit despite a huge turnover. He wanted to inspect the
books of accounts of the firm, arguing that it is his entitlement as a transferee. However, the other partners
were of the opinion that Mr. B cannot challenge the books of accounts. As an advisor, help them solve the
issue applying the necessary provisions from the Indian Partnership Act, 1932.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 217

Provision under the Law

Section 29 of the Indian Partnership Act, 1932:

• A transferee of a partner's share does not have the right:

1. To interfere with the conduct of the business.

2. To require the accounts.

3. To inspect the books of the firm.

• The transferee is only entitled to receive the share of profits that was due to the transferring partner (Mr. A in
this case).

Analysis of the Given Case

1. Rights of the Transferee:

o As per Section 29, a transferee of a partner's share does not acquire the right to interfere with the business
or challenge its operation. This includes rights related to inspecting the books of accounts or demanding
the firm's financial details.

2. Entitlement of Mr. B:

o Mr. B is only entitled to the share of profits from the firm that belonged to Mr. A. He has no right to interfere
with the firm's management or question the accounting practices unless there is a specific agreement to
the contrary.

3. Conduct of Business:

o The other partners' view that Mr. B cannot challenge the books of accounts aligns with the provisions of
Section 29. Since Mr. B is a transferee and not an active partner, he cannot question or inspect the firm's
books of accounts.

Conclusion

• According to Section 29 of the Indian Partnership Act, 1932, Mr. B cannot challenge the books of accounts
or demand access to the firm's financial records. He is entitled only to receive his share of the profits as
agreed upon. Therefore, the other partners are correct in their position that Mr. B has no right to inspect the
books or interfere with the firm's operations

Q15. May 21 RTP

M, N, and P were partners in a firm. The firm ordered JR Limited to supply furniture. P dies, and M and N
continue the business in the firm’s name. The firm did not give any notice about P’s death to the public or the
persons dealing with the firm. The furniture was delivered to the firm after P’s death, and the fact about his
death was known to JR Limited at the time of delivery. Afterwards, the firm became insolvent and failed to
pay the price of the furniture to JR Limited.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 218

Explain with reasons: (i) Whether P’s private estate is liable for the price of the furniture purchased by the
firm? (ii) Does it make any difference if JR Limited supplied the furniture to the firm believing that all three
partners were alive?

Provision under the Law

Section 35 of the Indian Partnership Act, 1932:

• The estate of a deceased partner is not liable for any act of the firm done after his death if the firm continues
its business.

• It is not necessary for the firm to give public notice of the death of a partner to absolve the estate of the
deceased partner from future obligations of the firm.

Analysis of the Given Case

1. Liability of P’s Estate (i):

o As per Section 35, the estate of the deceased partner (P) is not liable for any act or debt incurred by the firm
after his death, provided that the firm continues operating.

o In this case, the furniture was delivered after P’s death, and the firm failed to pay for it after becoming
insolvent. Since the goods were supplied after P’s death, the debt cannot be charged to his estate, even
though the firm didn’t notify the public of his death.

2. Effect of Belief of JR Limited (ii):

o Even if JR Limited supplied the furniture believing all three partners (M, N, and P) were alive, it does not
change the outcome. The law does not require a notice to the public or to those dealing with the firm to
absolve the deceased partner’s estate from future liabilities.

o Since the debt was incurred after P’s death, his estate is not liable regardless of JR Limited's belief about the
partners' status.

Conclusion

• (i) P’s estate is not liable for the price of the furniture because the transaction occurred after P's death, and
his estate is not responsible for any debts of the firm after his passing.

• (ii) It makes no difference if JR Limited supplied the furniture believing all three partners were alive. The
estate of the deceased partner is still not liable under Section 35 of the Indian Partnership Act, 1932

Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr. B is not entitled to a few
rights and privileges that Mr. A (transferor) was entitled to. Discuss briefly the points for which Mr. B is not
entitled during the continuance of the partnership.

Q16. May 21 RTP

Master X was introduced to the benefits of partnership in M/s ABC & Co. with the consent of all partners.
After attaining majority, more than six months elapsed, and he failed to give a public notice about whether

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 219

he elected to become or not to become a partner in the firm. Later on, Mr. L, a supplier of material to M/s
ABC & Co., filed a suit against the firm for recovery of the debt due.

In light of the Indian Partnership Act, 1932, explain:

1. To what extent X will be liable if he failed to give public notice after attaining majority?

2. Can Mr. L recover his debt from X?

Provision under law

Section 30(5) of the Indian Partnership Act, 1932:

• After attaining majority, a person introduced to the benefits of a partnership must give a public notice within
six months to elect whether to become a partner or not.

• If the person fails to give the notice, they automatically become a partner after the expiration of six
months.

• The rights and liabilities of the person are governed under Section 30(7).

Analysis of the case

1. Liability of X for Failing to Give Public Notice:

o X, after attaining majority, failed to give the public notice within the stipulated six months. As per Section
30(5), due to this failure, X automatically becomes a partner in the firm after the expiration of the six-month
period.

o As a partner, X becomes personally liable to third parties for all acts of the firm that occurred after he was
admitted to the benefits of the partnership (i.e., from the date of his introduction to the firm).

Therefore, X will be personally liable for any debts or obligations of the firm, including those incurred before
the notice period expired.

2. Can Mr. L Recover the Debt from X?

o Since X failed to give the public notice, he will be deemed to have become a partner in the firm after six
months.

o According to Section 30(7), X will be liable for the firm's debts incurred since he was admitted to the
benefits of partnership, and therefore Mr. L can recover the debt from X in the same way as from any other
partner.

Conclusion:

• (i) Since X failed to give the public notice within six months, he becomes a partner in the firm and
personally liable for the firm's obligations, including debts owed to Mr. L.

• (ii) Mr. L can recover his debt from X, as X is now deemed a partner in the firm after the six-month period.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 220

Q17. Nov 19 RTP

X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A remained silent.
Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After expiry of the credit period, Z
did not get the amount of T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery of
price. Advice Z whether he can recover the amount from X and A under the Indian Partnership Act, 1932.

Provision under the Law:

Section 28 – Partner by Holding Out (Indian Partnership Act, 1932)

A person may be deemed a partner by "holding out" (also known as partnership by estoppel) if they hold
themselves out as a partner or allow others to do so. In such cases, they are stopped from denying the
character of partner they have assumed, and creditors may act upon the assumption that they are partners.
For fixing liability on a person who has represented themselves as a partner, it is not necessary to show
fraudulent intention. Additionally, this provision applies to former partners who have retired without giving
proper notice, and creditors may still hold them liable if they extend credit based on the assumption that
they are still partners.

Analysis of the Given Case:

• Partnership by Holding Out: In the given scenario, A, though a manager, was introduced by X as a partner to
Z. A remained silent and did not clarify his position, leading Z to believe A was a partner in the firm.

• Liability of A: Under Section 28, A can be deemed a partner by holding out because A allowed Z to believe
he was a partner. Z, acting in good faith, supplied goods on credit, assuming A was a partner.

• Liability of X: X, being a partner in the firm, is directly liable for the debt, but since Z believed A was also a
partner, A becomes liable under the doctrine of partnership by holding out. Z has the right to enforce liability
on A for the amount due.

Conclusion:

Z can recover the amount from both X and A.

• X is liable as a genuine partner in the firm.

• A is also liable as a partner by holding out, as Z acted based on the representation that A was a partner, even
though A did not explicitly assume that role

Q18. May 19 RTP

a) P, X, Y, and Z are partners in a registered firm A & Co. X died and P retired. Y and Z filed a suit against W in
the name and on behalf of the firm without notifying the Registrar of firms about the changes in the
constitution of the firm. Is the suit maintainable?

Provision under the Law:

Section 69(2) of the Indian Partnership Act, 1932:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 221

• A suit cannot be instituted by or on behalf of a registered firm if the firm has not been re-registered after
changes in its constitution, such as the death of a partner or the retirement of a partner, and the changes
have not been notified to the Registrar of Firms.

• The test for maintainability of the suit is whether the firm is registered and whether the suit is filed by or on
behalf of the firm that was originally registered. If there have been changes in the firm’s constitution, these
must be reported to the Registrar, and the firm must be re-registered.

Analysis of the Given Case:

• Changes in the Firm's Constitution:

In the present case, X died and P retired, which means there have been changes in the constitution of the
firm. The remaining partners, Y and Z, filed a suit without notifying the Registrar about these changes.

• Requirement for Re-registration:

According to Section 69(2), the changes in the constitution of the firm (X's death and P's retirement) should
have been communicated to the Registrar, and the firm should have been re-registered. Without this
notification, the firm cannot file a suit in its original name on behalf of the partnership.

• Suit by the Remaining Partners:

Even though the firm was originally registered, the failure to notify the Registrar about the changes in the
firm’s constitution renders the suit invalid as the firm, in its previous constitution, is no longer in existence.
The remaining partners, Y and Z, cannot file a suit on behalf of the firm without this re-registration.

Conclusion:

The suit filed by Y and Z is not maintainable because the changes in the constitution of the firm (X’s death
and P’s retirement) were not notified to the Registrar of Firms. As per Section 69(2) of the Indian Partnership
Act, 1932, the firm must be re-registered to file a suit on behalf of the firm.

Q19. May 19 RTP

b) Ram, Mohan, and Gopal were partners in a firm. During the course of the partnership, the firm ordered
Sunrise Ltd. to supply a machine to the firm. Before the machine was delivered, Ram expired. The machine,
however, was later delivered to the firm. Thereafter, the remaining partners became insolvent, and the firm
failed to pay the price of the machine to Sunrise Ltd.
Explain with reasons:
a) Whether Ram’s private estate is liable for the price of the machine purchased by the firm?
b) Against whom can the creditor obtain a decree for the recovery of the price?

Provision under the Law:

Section 35 of the Indian Partnership Act, 1932:

• This section states that if a partner dies and the firm is not dissolved due to the partner’s death (i.e., the
partnership continues with the surviving partners), the estate of the deceased partner is not liable for any
act of the firm done after his death.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 222

• The firm remains liable for transactions that occur after the death of a partner if the firm continues to
operate, but the deceased partner's estate is not responsible for those obligations.

Analysis of the Given Case:

• Ram’s Estate Liability:

In the given case, Ram expired before the machine was delivered. Since the firm continued its operations
after his death, the estate of the deceased partner (Ram) is not liable for the purchase of the machine, as
the act of ordering and receiving the machine occurred after his death. Section 35 clearly absolves Ram’s
estate from responsibility for actions taken after his passing.

• Creditor’s Claim (Sunrise Ltd.):

The creditor, Sunrise Ltd., cannot recover the price of the machine from Ram’s estate since the liability for
the transaction arose after his death. However, they can pursue recovery from the surviving partners, Mohan
and Gopal.
Since the surviving partners have become insolvent, a suit for the recovery of the debt cannot be pursued
successfully against them either, as they are unable to meet their obligations due to insolvency. The creditor
can file a claim against the partnership assets in the hands of the surviving partners, but the chances of
recovery may be limited due to insolvency.

Conclusion:

a) Ram’s private estate is not liable for the price of the machine purchased by the firm because the delivery
of the machine occurred after his death, and Section 35 of the Indian Partnership Act absolves his estate
from responsibility for acts done after his death.

b) The creditor, Sunrise Ltd., can obtain a decree against the surviving partners, Mohan and Gopal, for the
price of the machine. However, since they are insolvent, recovery from them may not be possible, and a
claim can be made against the partnership assets still available in their hands.

Q20. Nov 22 MTP (6 Marks)

Mr. M is one of the four partners in M/s XY Enterprises. He owes a sum of ₹6 crore to his friend Mr. Z, which he
is unable to pay on due time. So, he wants to sell his share in the firm to Mr. Z for settling the amount.
In the light of the provisions of the Indian Partnership Act, 1932, discuss each of the following:
(i) Can Mr. M validly transfer his interest in the firm by way of sale?
(ii) What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire from the firm after a period
of 6 months from the date of transfer?

Provision under the Law:

Section 29 of the Indian Partnership Act, 1932:

• A partner can transfer his interest in the firm either absolutely or by mortgage or by creating a charge on such
interest. However, the transferee does not have the right to interfere in the conduct of the business, require
accounts, or inspect the books of the firm unless otherwise agreed upon by the partners.

• The transferee is only entitled to receive the share of profits of the transferring partner.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 223

• If the firm is dissolved, or the transferring partner ceases to be a partner, the transferee is entitled to receive
the share of the firm’s assets as per the transferring partner's entitlement.

Analysis of the Given Case:

• Transfer of Interest (Mr. M to Mr. Z):

As per Section 29, Mr. M can validly transfer his interest in the firm to Mr. Z. However, this transfer does not
give Mr. Z the right to directly interfere in the management or operations of the business unless agreed
otherwise. Mr. Z will be entitled to receive only the share of the profits that Mr. M was entitled to. The transfer
does not automatically grant him access to the firm’s accounts or the right to inspect its books.

• Rights of the Transferee (Mr. Z) Upon Mr. M’s Retirement:

If Mr. M retires from the firm after six months of the transfer, Mr. Z is entitled to:

1. Share of the Firm’s Assets: He can claim the share of assets of the firm that was originally entitled to Mr. M.

2. Right to Account: Mr. Z has the right to an account as of the date of dissolution (if the firm is dissolved after
Mr. M’s retirement), to ascertain the share of Mr. M's interest in the firm's assets.

Hence, Mr. Z’s rights after Mr. M’s retirement would allow him to receive the value of Mr. M's share in the firm,
to the extent of ₹6 crore.

Conclusion:

(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale to Mr. Z, as per Section 29 of the
Indian Partnership Act. However, the transferee (Mr. Z) will not have any rights to manage the firm or inspect
its accounts unless specified otherwise.

(ii) Upon Mr. M’s retirement, Mr. Z is entitled to:

• Receive the share of the firm’s assets that Mr. M was entitled to.

• Have an account as from the date of the dissolution, in order to ascertain the value of Mr. M’s share.

Q21. Nov 22 MTP (6 Marks)

M/s ABC & Associates, a partnership firm with A, B, and C as senior partners engaged in the business of
curtain manufacturing and exporting to foreign countries. On 25th August, 2020, they inducted Mr. P, an
expert in the field of curtain manufacturing, as their partner. On 10th January 2022, Mr. P was blamed for
unauthorized activities and thus expelled from the partnership by approval of all of the remaining partners.
(i) Examine whether the action by the partners was justified or not?
(ii) What should have been the factors to be kept in mind prior to expelling a partner from the firm by other
partners according to the provisions of the Indian Partnership Act, 1932?

Provision under the Law:

Section 33 of the Indian Partnership Act, 1932 - Expulsion of a Partner:

• A partner may not be expelled from a firm by a majority of partners except in the exercise, in good faith, of
powers conferred by the contract between the partners.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 224

• The test of good faith includes:

1. The expulsion must be in the best interest of the partnership.

2. The partner to be expelled must be served with a notice.

3. The partner must be given an opportunity to be heard.

• If these conditions are not met, the expulsion will be considered null and void.

Analysis of the Given Case:

• Justification of Action (Expulsion of Mr. P):

In this case, the partners of M/s ABC & Associates expelled Mr. P based on unauthorized activities. The
expulsion was approved by all remaining partners, which indicates unanimous consent. As per Section 33,
expulsion is justified if it is carried out in good faith to protect the partnership. Since the expulsion was done
in response to Mr. P’s alleged unauthorized activities, which could harm the firm, it can be considered in the
interest of the partnership.

However, the conditions of good faith must still be met:

1. The expulsion must be in the interest of the firm, which seems to be the case here.

2. Mr. P must have been served with notice of expulsion.

3. Mr. P must have been given an opportunity to be heard, which is not specified in the case. If these procedural
steps were followed, then the expulsion would be justified.

Conclusion:

(i) Yes, the action by the partners was justified, provided the conditions of good faith and proper
procedural steps were followed (i.e., serving notice and giving Mr. P an opportunity to be heard). The
expulsion was made in response to alleged unauthorized activities, which can be seen as in the interest of
the partnership.

(ii) The factors to be kept in mind prior to expelling a partner include:

• The partnership agreement must grant the power to expel.

• The expulsion must be approved by the majority of the partners.

• The expulsion must be in good faith, with the aim of protecting the firm.

• The partner being expelled must be given a notice and an opportunity to be heard.

Q22. Mar 22 MTP (4 Marks)

X, Y, and Z are partners in a Partnership Firm. They were carrying their business successfully for the past
several years. Due to expansion of business, they planned to hire another partner, Mr. A. Now, the firm has 4
partners: X, Y, Z, and A. The business was continuing at a normal pace.
In one formal business meeting, it was observed that Mr. Y misbehaved with Mrs. A (wife of Mr. A). Mr. Y was
badly drunk and also spoke rudely with Mrs. A. Mrs. A felt very embarrassed and told her husband Mr. A
about the entire incident. Mr. A got angry about the incident and started arguing and fighting with Mr. Y in the

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 225

meeting place itself. The next day, in the office, Mr. A convinced X and Z that they should expel Y from the
partnership firm. Y was expelled from the partnership without any notice from X, A, and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from
the firm. What are the criteria for the test of good faith in such circumstances?

Provision under the Law:

Section 33 of the Indian Partnership Act, 1932 - Expulsion of a Partner:

• A partner may not be expelled from the firm by a majority of partners except in the exercise, in good faith, of
powers conferred by contract between the partners.

• The test of good faith includes:

1. The expulsion must be in the interest of the partnership.

2. The partner to be expelled must be served with notice.

3. The partner must be given an opportunity to be heard.

• If these conditions are not met, the expulsion is considered null and void.

Analysis of the Given Case:

• Can they expel Mr. Y from the firm?

In this case, Mr. Y was expelled without any prior notice or an opportunity to be heard. According to Section
33, the expulsion of a partner is only valid if the power to expel is conferred by the partnership agreement
and if the expulsion is carried out in good faith, in the best interest of the firm.
The expulsion of Mr. Y, based solely on a personal altercation between him and Mr. A (and not for business-
related reasons), does not satisfy the requirement of being in the interest of the partnership. Moreover, Mr. Y
was not given a notice, nor an opportunity to present his side of the story.
Thus, in this case, the expulsion was not valid.

• Test of Good Faith:

For the expulsion to be valid, the following conditions must be met under the test of good faith:

1. In the interest of the partnership: The expulsion must be justified by business reasons, not personal
issues. Since the altercation was personal, it does not meet this criterion.

2. Notice: Mr. Y was not served with any notice of expulsion.

3. Opportunity to be heard: Mr. Y was not given a chance to defend himself before the decision to expel him
was made.

Conclusion:

No, the partners cannot validly expel Mr. Y from the firm, as the expulsion does not meet the criteria set
under Section 33 of the Indian Partnership Act, 1932. The expulsion was based on personal reasons rather
than the interests of the partnership, and Mr. Y was neither given notice nor an opportunity to be heard.
Therefore, the expulsion is null and void.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 226

Q23. Apr 21 MTP (6 Marks)

A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in office furniture. A was in
charge of purchase and sale, B was in charge of the maintenance of accounts of the firm, and C was in
charge of handling all legal matters. Recently, through an agreement among them, it was decided that A will
be in charge of the maintenance of accounts and B will be in charge of purchase and sale. Being ignorant
about such agreement, M, a supplier, supplied some furniture to A, who ultimately sold them to a third party.
Referring to the provisions of the Partnership Act, 1932, advise whether M can recover money from the firm.
What will be your advice in case M was having knowledge about the agreement?

Provisions of the Indian Partnership Act, 1932:

Section 20 of the Indian Partnership Act, 1932 - Implied Authority of Partners:

• Implied authority: Partners in a firm have the authority to bind the firm in matters related to the firm's
business, which includes the authority to make purchases and sales, maintain accounts, and handle legal
matters. However, the partners can, by agreement among themselves, extend or restrict a partner's implied
authority.

• Effect of restriction: Any restriction on a partner’s implied authority is effective against third parties only
under the following two conditions:

1. The third party is aware of the restriction.

2. The third party does not believe the partner is authorized to act on behalf of the firm.

Analysis of the Case:

• M's ignorance of the agreement (M does not know about the internal agreement):

Since M, the supplier, was unaware of the internal agreement between the partners and did not know that A's
authority was restricted, M can rely on A's implied authority to bind the firm. Therefore, M can recover the
money from the firm as A was acting within the scope of his implied authority as a partner, and M had no
knowledge of the restrictions imposed by the partners.

• M's knowledge of the agreement (M knows about the internal agreement):

If M was aware of the internal agreement among the partners, restricting A's authority to make purchases
and sales, then M cannot recover the money from the firm. In such a case, M would be dealing with A,
knowing that A does not have the implied authority to conduct those transactions. Since the restriction on
A's authority is known to M, the firm would not be bound by A’s actions, and M cannot claim payment from
the firm.

Conclusion:

• If M was not aware of the internal agreement among the partners, M can recover the money from the firm,
as A was acting within his implied authority as a partner.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 227

• If M was aware of the agreement, M cannot recover the money from the firm, as A’s authority was
restricted, and M knew that A could not bind the firm in such transactions.

Q24. Oct 19 MTP (4 Marks)

Mahesh, Suresh, and Dinesh are partners in a trading firm. Mahesh, without the knowledge or consent of
Suresh and Dinesh, borrows Rs. 50,000 from Ramesh, a customer of the firm, in the name of the firm.
Mahesh then buys some goods for his personal use with that borrowed money. Can Mr. Ramesh hold Mr.
Suresh & Mr. Dinesh liable for the loan? Explain the relevant provisions of the Indian Partnership Act, 1932.

Answer:

According to the Indian Partnership Act, 1932, the relevant provisions are as follows:

Section 19 - Implied Authority of a Partner:

Every partner has an implied authority to bind the firm and the other partners for acts done in the name of
the firm. However, this authority is limited to acts done in the ordinary course of business. Any act that falls
outside the usual course of business, or that is done without the consent of the other partners, does not
bind the firm unless the other partners ratify it.

Section 22 - Acts Not in the Usual Course of Business:

A partner does not have the authority to bind the firm for acts that are not in the usual course of the firm's
business, unless the other partners give their consent or subsequently ratify the act.

Application to the Case:

In this case:

• Mahesh borrowed Rs. 50,000 from Ramesh in the name of the firm but used the money for his personal
use.

• Mahesh's actions were outside the scope of the firm’s usual business, as the money was not used for
any business-related purposes, but instead for Mahesh's personal benefit.

• Since Ramesh had no knowledge that Mahesh was acting without the consent of Suresh and Dinesh,
Ramesh can hold Suresh and Dinesh liable for the loan under Section 19. This is because Ramesh dealt
with Mahesh as if he were acting within his implied authority.

However, Suresh and Dinesh can later seek to hold Mahesh liable for the misuse of the loan since he
acted outside the firm’s business scope.

Conclusion:

• Yes, Ramesh can hold Suresh and Dinesh liable for the loan under Section 19 of the Indian Partnership Act
because Mahesh, as a partner, had implied authority to bind the firm, and Ramesh did not know about the
internal arrangement.

• However, Mahesh's personal misuse of the loan is outside the firm’s business, and the other partners can
claim against him for the personal nature of his actions.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 228

PART 2 – DIRECT QUESTIONS –

Q1. Jun 22 Exam (4 Marks), Nov 21 RTP

Can a minor become a partner in a partnership firm? Justify your answer and also explain the rights of a
minor in a partnership firm.

Answer:

Minor as a Partner:
As per the Indian Partnership Act, 1932, a minor is not competent to contract. Therefore, a minor cannot
become a full-fledged partner in a partnership firm. However, with the consent of all the partners, a minor
can be admitted to the benefits of a partnership (Section 30). This means that while a minor cannot
actively participate in the management of the firm or be held personally liable for its obligations, they can
enjoy a share in the profits.

Rights of a Minor in a Partnership Firm:

1. Right to Share of Profits:

A minor is entitled to their agreed share of profits and benefits from the firm.

2. Right to Access Firm Accounts:

A minor has the right to access, inspect, and copy the accounts of the firm.

3. Right to Sue for Benefits:

A minor can sue the partners to recover their share of profits or accounts only when they decide to sever
their connection with the firm. They cannot sue otherwise.

4. Option on Attaining Majority:

o Upon attaining majority, the minor must decide within 6 months whether to become a partner in the firm or
not.

o If they choose to become a partner, they must provide public notice and will continue with the same share of
profits they enjoyed as a minor.

o If they choose not to become a partner, they must also give public notice, and their liability will cease from
the date of the notice for acts of the firm performed thereafter.

Note: If no decision is made within 6 months of attaining majority, the minor will automatically be treated as
a full-fledged partner in the firm.

Q2. Jan 21 Exam (4 Marks)

Discuss the liability of a partner for the act of the firm and the liability of the firm for the act of a partner
to third parties as per the Indian Partnership Act, 1932.

Liability of a Partner for Acts of the Firm (Section 25):

As per Section 25 of the Indian Partnership Act, 1932:

• Joint and Several Liability:

Every partner is jointly and severally liable for all acts of the firm done while he is a partner.

• Partners are responsible for acts performed within the scope of their express or implied authority.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 229

• The term "act of the firm" refers to any act or omission by all the partners, or by any partner or agent of the
firm, which creates a legal obligation enforceable by or against the firm.

• The liability of a partner applies only to acts done during the period when he was a partner in the firm.

Liability of the Firm for Acts of a Partner (Sections 26 & 27):

1. Liability for Wrongful Acts of a Partner (Section 26):

The firm is liable for the wrongful acts or omissions of a partner if:

o The act or omission occurs in the ordinary course of the business of the firm, or

o The wrongful act or omission is done with the authority of the other partners.
If such an act causes loss or injury to a third party or results in a penalty, the firm is liable to the same extent
as the partner responsible for the act.

2. Liability for Misapplication by a Partner (Section 27):

The firm is liable to make good the loss if:

o A partner acting within their apparent authority receives money or property from a third party and
misapplies it.

o The firm receives money or property in the course of its business, and any partner misapplies it while it is in
the custody of the firm.

In such cases, the entire firm is held liable for the loss caused to the third party due to the misconduct of the
partner.

Q3. Nov 20 Exam (4 Marks)

Referring to the Provisions of the Indian Partnership Act, 1932, answer the following:
(i) What are the consequences of non-registration of a partnership firm?
(ii) What are the rights which won't be affected by non-registration of a partnership firm?

(i) Consequences of Non-Registration of a Partnership Firm (Section 69):

Under Section 69 of the Indian Partnership Act, 1932, non-registration of a partnership firm results in several
legal disabilities:

1. No Suit in Civil Court by Firm or Co-Partners Against Third Parties:

o An unregistered firm or any of its partners cannot bring an action in a civil court to enforce a right arising out
of a contract entered into by the firm with a third party.

2. No Relief to Partners for Set-Off of Claims:

o If a third party sues the firm, neither the firm nor its partners can claim a set-off if the suit is valued at more
than ₹100.

3. No Legal Action by Partners Against the Firm or Co-Partners:

o A partner of an unregistered firm cannot file a suit against the firm or any of its co-partners to enforce a right
arising from the partnership agreement.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 230

4. Third Parties Can Sue the Firm:

o An unregistered firm is not protected from legal actions initiated by third parties.

(ii) Rights Not Affected by Non-Registration:

Non-registration of a partnership firm does not affect the following rights:

1. Right of Third Parties to Sue the Firm or Its Partners:

o Third parties retain the right to sue the firm or its partners, even if the firm is unregistered.

2. Right of Partners in the Following Cases:

o Partners may sue for:

▪ Dissolution of the firm.

▪ Settlement of accounts of a dissolved firm.

▪ Realization of the property of a dissolved firm.

3. Right of the Official Assignee or Receiver:

o The Official Assignee or Receiver of the court can release the property of an insolvent partner and bring an
action to enforce rights related to it.

4. Right to Sue for Small Claims:

o A firm can file a suit to claim a set-off if the value of the claim does not exceed ₹100.

Conclusion:

While registration of a partnership firm is not mandatory under the Indian Partnership Act, the
consequences of non-registration, especially the inability to enforce contractual rights in a court of law,
make registration crucial for effective legal protection.

Q4. Nov 20 Exam (4 Marks)

Explain in detail the circumstances which lead to the liability of the firm for misapplication by partners
as per the provisions of the Indian Partnership Act, 1932.

Answer:

Liability of the Firm for Misapplication by Partners (Section 27 of the Indian Partnership Act, 1932):

As per Section 27, the firm is liable for the misapplication of money or property by any of its partners in the
following circumstances:

1. When a partner, acting within his apparent authority, receives money or property from a third party and
misapplies it:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 231

o If a partner, due to his position and authority in the firm, receives money or property from a third party and
misuses or misapplies it, the firm is held liable for the resulting loss.

o In this case, the misapplication is a consequence of the partner's authority as a representative of the firm.

o It is not necessary for the money or property to have come into the custody of the firm for the firm to be
held liable.

2. When the firm, in the course of its business, receives money or property from a third party, and it is
misapplied by any partner while in the custody of the firm:

o If the money or property is received directly by the firm (not just the partner) during its regular course of
business, and any of the partners misapplies it while it is in the custody of the firm, the firm is held liable for
the loss.

Analysis of Section 27:

The two clauses in Section 27 highlight the distinction between the scenarios where the firm becomes liable:

• Clause (a): This applies when a partner, acting within his apparent authority, misapplies money or property
received from a third party.

o Here, the focus is on the partner’s role and authority, irrespective of whether the money came into the firm's
custody.

• Clause (b): This applies when money or property is received by the firm itself in the course of its business
and is misapplied by any of the partners while in the firm’s custody.

o In this case, it is necessary that the money or property was within the firm's custody at the time of
misapplication.

Conclusion:

In both cases, the firm is liable to make good the loss incurred by the third party due to the misapplication of
money or property. This ensures the protection of third parties dealing with the firm and establishes the
principle of joint liability within the partnership.

Q5. Nov 19 Exam (4 Marks)

With reference to the provisions of the Indian Partnership Act, 1932, explain the various effects of
insolvency of a partner.

Answer:

Effects of Insolvency of a Partner (Section 34 of the Indian Partnership Act, 1932):

1. Insolvent Partner Cannot Continue as a Partner:

o When a partner is adjudicated as insolvent, they can no longer continue as a partner in the firm.

o This is because insolvency makes the partner incapable of performing contractual obligations.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 232

2. Ceasing to be a Partner:

o The insolvent partner will cease to be a partner from the very date the order of adjudication (the legal
declaration of insolvency) is made.

3. Liability for Acts of the Firm After Insolvency:

o The estate of the insolvent partner will not be liable for any acts of the firm done after the date of the order
of adjudication.

o Similarly, the firm is not liable for any acts done by the insolvent partner after that date.

4. Possible Dissolution of the Firm:

o Ordinarily, the insolvency of a partner may lead to the dissolution of the firm.

o However, the remaining partners may agree among themselves that the adjudication of a partner as
insolvent will not cause the dissolution of the firm.

Q6. Nov 18 Exam (4 Marks)

“Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of
partnership."

Answer:

(i) Rights of a Minor Partner under the Indian Partnership Act, 1932:

A minor, though not capable of becoming a partner in a firm, can be admitted to the benefits of
partnership as per Section 30 of the Indian Partnership Act, 1932. Here are the rights that a minor partner
can enjoy:

1. Right to share in profits:

The minor partner is entitled to his agreed share of the profits of the firm as per the partnership agreement.
However, the minor is not personally liable for the losses of the firm.

2. Right to inspect and copy accounts:

The minor has the right to inspect the books of the firm and copy the accounts. This gives the minor
transparency in understanding the financial dealings of the firm.

3. Right to sue for accounts or payment of share:

If the minor decides to sever his connection with the firm, he has the right to sue the partners for accounts
or for the payment of his share. However, this right is available only when the minor ceases to be a partner
and not during the period of his association with the firm.

4. Right to elect on attaining majority:

Upon attaining majority, the minor partner has six months to elect whether he wants to continue as a
partner or not.

o If he elects to become a partner, he is entitled to the same share he had as a minor.

o If he elects not to become a partner, his share is no longer liable for the acts of the firm after the date of the
public notice he serves, stating his decision.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 233

Q7. Nov 18 Exam (2 Marks)

State the liabilities of a minor partner both:

(i) Before attaining majority:

1. Limited Liability:
The liability of a minor partner is restricted to his share in the profits and property of the firm. He is not
personally liable for the firm's debts incurred during his minority.

2. No Personal Liability for Firm's Debts:

The minor partner cannot be held personally liable for the debts of the firm, which means creditors cannot
claim any amount from the minor’s personal assets.

3. Insolvency:
A minor partner cannot be declared insolvent. However, if the firm becomes insolvent, the minor's share in
the firm will vest in the Official Receiver or Assignee.

(ii) After attaining majority:

1. Decision to Become a Partner:

After attaining majority, the minor must decide whether to continue as a partner or not. This decision must
be made within 6 months of attaining majority or from the time he learns that he has been admitted to the
benefits of the partnership.

2. Failure to Give Notice:

If the minor fails to give public notice within 6 months stating that he does not wish to become a partner, he
will automatically become a partner in the firm.

3. Liability after Becoming a Partner:

If the minor partner elects to continue, he becomes personally liable for the debts and obligations of the
firm from the date he becomes a partner. If he chooses not to become a partner, his share in the firm will no
longer be liable for the firm's future acts after giving the notice.

Q8. Nov 18 Exam (2 Marks)

State the legal position of a minor partner after attaining majority:

(i) When he opts to become a partner of the same firm:

If the minor decides to become a partner, either by his own choice or by failing to give a public notice within
the specified time (6 months), his legal position is as follows:

1. Personal Liability to Third Parties:

The minor becomes personally liable for all acts of the firm that have occurred since he was admitted to
the benefits of partnership.

2. Share in Profits and Property:

His share in the property and profits of the firm remains the same as it was when he was a minor partner.

(ii) When he decides not to become a partner:

If the minor chooses not to become a partner, his legal position is as follows:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 234

1. Rights and Liabilities as a Minor:

His rights and liabilities continue as those of a minor up until the date of giving public notice that he has
elected not to become a partner.

2. No Liability for Future Acts:

His share will not be liable for any acts or debts of the firm that occur after the date of the notice.

3. Entitlement to Sue for Share:

The minor is entitled to sue the remaining partners for his share of the property and profits. Additionally, he
must notify the Registrar that he has elected not to become a partner.

Q9. Nov 21 RTP

Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a minor in
the partnership firm.

Under the Indian Partnership Act, 1932, a minor cannot be a full partner in a firm because a minor cannot
enter into a contract, as any contract involving a minor is void and not merely voidable. Since a partnership is
based on a contract, a minor cannot be bound by the terms of a partnership agreement. However, a minor
can be admitted to the benefits of partnership under Section 30 of the Indian Partnership Act, 1932, with
the consent of all partners.

In such cases, the minor is given a share in the profits of the partnership, but the minor is not personally
liable for the debts of the firm. The rights and liabilities of the minor partner are governed by Section 30 as
follows:

Rights of a Minor Partner:

1. Right to Share of Profits: The minor partner has the right to receive his agreed share of the profits of the
firm, as determined by the partnership agreement.

2. Right to Access Firm's Accounts: The minor has the right to inspect and copy the accounts of the firm to
ensure transparency in the firm’s operations.

3. Right to Sue Partners for Accounts: The minor partner can sue the partners for accounts or for the
payment of his share of the profits. However, this right can only be exercised when the minor severs his
connection with the firm, meaning if he decides to leave the partnership.

4. Option to Become a Partner upon Majority: Upon attaining the age of majority, the minor has the option to
elect whether to become a full partner in the firm or not. This decision must be made within 6 months of
attaining majority or after obtaining knowledge of being admitted to the benefits of partnership, whichever is
later.

o If the minor chooses to become a partner, he is entitled to the share he was entitled to as a minor.

o If the minor chooses not to become a partner, his share in the firm is not liable for any acts of the firm
done after the public notice has been given.

Conclusion:

• While a minor cannot be a partner, he can be admitted to the benefits of the partnership.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 235

• The minor has rights to profit, access to accounts, and the ability to sue for his share.

• Upon attaining majority, the minor has the option to become a partner or disassociate from the firm.

Q10. May 21 RTP

Explain in detail the circumstances which lead to liability of the firm for misapplication by partners as
per the provisions of the Indian Partnership Act, 1932.

Liability of Firm for Misapplication by Partners (Section 27 of the Indian Partnership Act, 1932)

Section 27 of the Indian Partnership Act, 1932, holds the firm liable for any misapplication of money or
property by its partners, under the following circumstances:

1. Partner Acting Within Apparent Authority: If a partner, acting within their apparent authority, receives
money or property from a third party and misapplies it, the firm is liable to make good the loss. This is true
even if the partner does not have actual authority to misapply the property. The firm is still held responsible
for any misapplication of money or property.

2. Misapplication by Partners in the Course of Firm’s Business: If the firm, while conducting its business,
receives money or property from a third party, and any partner misapplies it (i.e., uses it for unauthorized
purposes), the firm is liable for the loss caused. In this case, the firm’s liability arises even if the property has
come into the firm’s custody.

Analysis of Section 27

Section 27 distinguishes between two scenarios:

• Clause (a): Partner acting within authority:

This provision applies when a partner receives money or property from a third party within their authority as a
partner, but misapplies it. The firm is liable to compensate for the loss, even if the property or money never
came into the firm’s physical custody. The critical factor here is the partner’s authority to receive the
property and their subsequent misuse.

• Clause (b): Misapplication after the property comes into firm’s custody:
This provision applies when money or property has actually come into the firm’s custody and is then
misapplied by any partner. In this scenario, the firm is liable to compensate for the loss, regardless of which
partner misapplies the property.

Conclusion:

The firm is liable for any misapplication of money or property by its partners in the following two cases:

• When a partner, acting within their authority, misapplies money or property received from a third party.

• When money or property has been entrusted to the firm, and a partner misapplies it in the course of
the firm’s business.

In both situations, the firm is responsible for making good the loss incurred by the third party.

Q11. Nov 19 RTP

State the legal consequences of the following as per the provisions of the Indian Partnership Act, 1932:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 236

I. Retirement if partner
II. Insolvency of partner

Answer:

(i) Retirement of a Partner (Section 32)

1. A partner may retire under the following circumstances:

o With the consent of all other partners.

o In accordance with an express agreement made by the partners.

o Where the partnership is at will, by giving notice in writing to all other partners of his intention to retire.

2. Discharge from liability: A retiring partner may be discharged from any liability to third parties for acts of the
firm done before his retirement. This discharge is possible through an agreement between the retiring
partner, the remaining partners, and any third party. Such an agreement may be implied by the subsequent
dealings between the third party and the reconstituted firm after the retiring partner has given notice of his
retirement.

3. Liability after retirement: Despite retiring, the retiring partner and the remaining partners continue to be
liable for acts done by the firm that would have been an act of the firm before the retirement. This continued
liability holds until public notice of the retirement is given. However, the retiring partner will not be liable to
any third party who deals with the firm without knowledge of his retirement.

4. Notices of retirement: The notice of retirement may be given either by the retiring partner or by any partner
of the reconstituted firm.

(ii) Insolvency of a Partner (Section 34)

1. No continuation as a partner: An insolvent partner cannot continue as a partner in the firm.

2. Date of cessation as a partner: The partner is considered to have ceased to be a partner from the date the
order of adjudication (declaring the partner as insolvent) is made.

3. Liability of the insolvent partner's estate: The estate of the insolvent partner is not liable for any acts of
the firm done after the order of adjudication.

4. Firm's liability: The firm is also not liable for any acts of the insolvent partner after the date of the order of
adjudication.

5. Effect on the partnership: Ordinarily, the insolvency of a partner leads to the dissolution of the firm.
However, the partners can mutually agree that the adjudication of a partner as insolvent will not lead to the
dissolution of the firm.

Q12. Nov 22 MTP (4 Marks)

Subject to agreement by partners, state the rules that should be observed by the partners in settling
the accounts of the firm after dissolution under the provisions of the Indian Partnership Act, 1932.

Answer:

Mode of Settlement of Partnership Accounts:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 237

As per Section 48 of the Indian Partnership Act, 1932, in settling the accounts of a firm after dissolution,
the following rules shall, subject to agreement by the partners, be observed:

1. Settlement of Losses:

o Losses, including deficiencies of capital, shall be paid in the following order:

▪ First, out of profits.

▪ Next, out of capital.

▪ Lastly, if necessary, by the partners individually in the proportions in which they were entitled to share
profits.

2. Application of Firm's Assets: The assets of the firm, including any sums contributed by the partners to
make up deficiencies of capital, must be applied in the following manner and order:

o (a) Paying the debts of the firm to third parties.

o (b) Paying to each partner rateably what is due to him from capital.

o (c) Paying to each partner rateably what is due to him on account of capital.

o (d) The residue, if any, shall be divided among the partners in the proportions in which they were entitled
to share profits.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 238

Chapter 3 – The Indian Partnership Act ,1932

UNIT 3 : REGISTRATION AND DISSOLUTION OF FIRM

PART 1 – CASE LAW QUESTIONS

Q1. Jun 23 RTP

X and Y were partners in a firm. The firm was dissolved on 12th June, 2022, but no public notice was given.
Thereafter, X purchased some goods in the firm’s name from Z. Z was ignorant of the fact of dissolution of the
firm. X became insolvent, and Z filed a suit against Y for recovery of his amount. State with reasons whether
Y would be liable under the provisions of the Indian Partnership Act, 1932.

Provision under the law:

Under Section 45 of the Indian Partnership Act, 1932, the liability of partners continues even after the
dissolution of the firm, unless a public notice is given of the dissolution. Specifically, this section provides
that:

• After the dissolution of a partnership, the partners remain liable to third parties for acts done by any
partner on behalf of the firm, which would have been an act of the firm before the dissolution, until public
notice of the dissolution is given.

Application to the Case:

• Dissolution of Firm: The firm between X and Y was dissolved on 12th June, 2022, but no public notice was
given of the dissolution.

• X's Actions: After the dissolution, X purchased goods in the firm’s name from Z, and Z was unaware that the
firm had been dissolved.

• X's Insolvency: X became insolvent, and Z filed a suit for recovery of the amount against Y, who was a
partner in the dissolved firm.

As per Section 45, since no public notice of the dissolution was given, the partners X and Y are still liable
for acts done by X on behalf of the firm. Z, being unaware of the dissolution, is entitled to recover the
amount from Y, the surviving partner.

Conclusion:

Yes, Y would be liable to Z under the provisions of Section 45 of the Indian Partnership Act, 1932, because
no public notice of the dissolution was given, and therefore, the dissolution does not affect the liability of the
partners to third parties like Z.

Q2. Nov 22 RTP

G, I, and S were friends, and they decided to form a partnership firm and trade in a particular type of
chemicals. After three years of partnership, a law was passed that banned the trading of such chemicals. As
per the provisions of the Indian Partnership Act, 1932, can G, I, and S continue the partnership, or will their
partnership firm get dissolved?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 239

Answer:

Under Section 41 of the Indian Partnership Act, 1932, a partnership firm is compulsorily dissolved in the
following cases:

1. Event making the business unlawful: A firm must be compulsorily dissolved if an event occurs that makes
it unlawful for the business to be carried on or for the partners to continue the business in partnership.

Application to the Case:

• In this case, the firm was trading in a particular type of chemical, and a law was passed that banned the
trading of such chemicals.

• As a result, the business of the firm becomes unlawful, as the activity is no longer permitted by law.

Conclusion:

Since the business of the partnership is now unlawful due to the ban, the firm will be compulsorily
dissolved under Section 41 of the Indian Partnership Act, 1932. Therefore, G, I, and S cannot continue the
partnership.

Q3. May 22 RTP

M/s XYZ & Company is a partnership firm. The firm is an unregistered firm. The firm has purchased some iron
rods from another partnership firm M/s LMN & Company which is also an unregistered firm. M/s XYZ &
Company could not pay the price within the time as decided. M/s LMN & Company has filed the suit against
M/s XYZ & Company for recovery of price. State under the provisions of the Indian Partnership Act, 1932;
Whether M/s LMN & Company can file the suit against M/s XYZ & Company?

a) What would be your answer, in case M/s XYZ & Company is a registered firm while M/s LMN & Company is
an unregistered firm?
b) What would be your answer, in case M/s XYZ & Company is an unregistered firm while M/s LMN &
Company is a registered firm?

Provision under the Law

Section 69 of the Indian Partnership Act, 1932 states that:

1. Unregistered Firms: An unregistered firm cannot file a suit against a third party to enforce any right arising
from a contract, such as for the recovery of price of goods supplied.

2. Third-Party Rights: However, this section does not prohibit a third party from filing a suit against the
unregistered firm or its partners.

Analysis of the Given Case

• Scenario 1: M/s XYZ & Company is an unregistered firm, and M/s LMN & Company is also an unregistered
firm.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 240

o As per Section 69, M/s LMN & Company, being an unregistered firm, cannot file a suit against M/s XYZ &
Company for the recovery of price since both firms are unregistered. However, M/s XYZ & Company can still
be sued by M/s LMN & Company or any third party.

• Scenario 2: M/s XYZ & Company is a registered firm, and M/s LMN & Company is an unregistered firm.

o In this case, the answer remains the same. M/s LMN & Company, being an unregistered firm, cannot file a
suit against M/s XYZ & Company, as per the provisions of Section 69.

• Scenario 3: M/s XYZ & Company is an unregistered firm, and M/s LMN & Company is a registered firm.

o Here, the answer changes. M/s LMN & Company, being a registered firm, can file the suit against M/s XYZ &
Company, as the restriction under Section 69 only applies to unregistered firms.

Conclusion

• In the first case, where both firms are unregistered, M/s LMN & Company cannot file the suit.

• In the second case, where M/s XYZ & Company is a registered firm, M/s LMN & Company, an unregistered
firm, still cannot file the suit.

• In the third case, where M/s LMN & Company is a registered firm, it can file the suit against M/s XYZ &
Company.

Q4. Nov 21 RTP

MN partnership firm has two different lines of manufacturing business. One line of business is the
manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food. Another line of business is the
manufacture of paper plates & cups. One fine day, a law is passed by the Government banning Ajinomoto’s
use in food and to stop its manufacturing, making it an unlawful business because it is injurious to health.

Should the firm compulsorily dissolve under the Indian Partnership Act, 1932? How will its other line of
business (paper plates & cups) be affected?

Provision under the Law

Section 41 of the Indian Partnership Act, 1932 states:

A firm is compulsorily dissolved by:

• The adjudication of all the partners, or all but one, as insolvent.

• The happening of any event which makes it unlawful for the business of the firm to be carried on, or for the
partners to carry it on in partnership.

However, if a firm carries on more than one separate adventure or undertaking, the illegality of one does not
automatically cause the dissolution of the firm concerning its lawful undertakings.

Analysis of the Given Case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 241

• Scenario: The firm, MN, operates two different businesses — one related to the manufacturing of
Ajinomoto, and the other related to the production of paper plates and cups.

• Legality of Ajinomoto Business: The law passed by the government has made the Ajinomoto business
unlawful. Therefore, according to Section 41, the firm would need to dissolve the unlawful business of
Ajinomoto.

• Effect on Paper Plates & Cups Business: Since the business of manufacturing paper plates and cups is
lawful and unrelated to the unlawful Ajinomoto business, the illegality of the Ajinomoto line does not affect
the legality of the paper plates and cups business. As per the provision, the firm need not dissolve the
lawful business, and MN can continue operating its paper plates and cups line.

Conclusion

• The Ajinomoto business must be terminated due to the law banning its use, making it unlawful.

• The firm does not need to dissolve entirely as it can continue with the lawful business of manufacturing
paper plates and cups.

• The other line of business (paper plates & cups) remains unaffected and can continue without any issues.

Q5. Nov 22 MTP (6 Marks)

P & Co. is registered as a partnership firm in 2018 with A, B, and P as partners dealing in the sale and
purchase of motor vehicles. In April 2019, A dies. Now, only B and P continue the firm and the same business
with the same firm name, P & Co.

In December 2019, the firm felt the need for expansion and decided to hire a new partner, S, with mutual
consent. Hence, in December 2019, the firm took in S as a new partner.

The firm supplied a large amount of material to one of the clients, Mr. X, for business purposes. Despite
regular reminders, X failed to pay the debts due to the firm.

In January 2020, the firm filed a case against X in the name and on behalf of P & Co. without a fresh
registration. With reference to the Indian Partnership Act, 1932, discuss if the suit filed by the firm is
maintainable.

Provision under the Law

Section 69 of the Indian Partnership Act, 1932 states:

• Non-registration of partnership firms: If a partnership firm is not registered, the following disabilities
apply:

1. The firm or its partners cannot file a suit against a third party for breach of contract.

2. The partners cannot claim set-offs if the suit exceeds ₹100 or pursue other proceedings to enforce contract
rights.

3. Partners of an unregistered firm cannot take legal action against each other, except for cases like
dissolution or accounts.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 242

4. A third party can sue the firm, even if the firm is unregistered.

Analysis of the Given Case

1. Registration Status:

o The firm P & Co. was originally registered in 2018 with partners A, B, and P.

o After A’s death in April 2019, the firm continued with partners B and P.

o In December 2019, a new partner S was introduced into the firm. However, the firm did not re-register after
the introduction of S.

2. Suit Against Mr. X:

o The firm P & Co. did not update its registration after the addition of S.

o As a result, the firm is considered unregistered after the change in partnership structure.

o Since the firm is unregistered, Section 69 applies, which means the firm cannot file a suit against a third
party for breach of contract (i.e., Mr. X’s failure to pay).

3. Consequence of Non-registration:

o According to Section 69, a non-registered firm cannot file a suit against a third party for enforcement of
rights under a contract, such as claiming payment from Mr. X.

Conclusion

• The suit filed by the firm P & Co. against Mr. X is not maintainable as the firm failed to re-register after
introducing the new partner S.

• Since the firm is unregistered post-expansion, Section 69 of the Indian Partnership Act, 1932 bars the firm
from filing a suit against Mr. X for recovery of the debt.

Q6. Jan 21 Exam (6 Marks)

M, N, and P were partners in a firm. The firm ordered furniture from JR Limited. P dies, and M and N
continue the business in the firm's name. The firm did not give any notice about P's death to the public
or the persons dealing with the firm. The furniture was delivered to the firm after P's death, and the fact
about his death was known to them at the time of delivery. Afterwards, the firm became insolvent and
failed to pay the price of the furniture to JR Limited.

Explain with reasons:

1. Whether P's private estate is liable for the price of furniture purchased by the firm?

2. Does it make any difference if JR Limited supplied the furniture to the firm believing that all three
partners are alive?

Answer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 243

According to Section 35 of the Indian Partnership Act, 1932, where under a contract between the partners
the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of
the firm done after his death.

Further, it is not necessary to give any notice to the public or the persons dealing with the firm for the estate
of the deceased partner to be absolved from liability for future obligations of the firm.

In the given case:

1. P's Private Estate's Liability:

o Since the furniture was delivered after P's death, and P's estate was not liable for any act of the firm
after his death, P's estate is not liable for the price of the furniture purchased by the firm.

o A suit for goods sold and delivered cannot be filed against P's representatives because there was no debt
due in respect of the goods during P's lifetime. Therefore, P's estate is absolved from liability for the
future obligations of the firm.

2. Effect of JR Limited Supplying Furniture Believing All Partners Are Alive:

o It does not make any difference that JR Limited supplied the furniture to the firm believing all the partners
were alive.

o It is not necessary for the firm to give a notice to the public or to persons dealing with the firm regarding the
death of P. Therefore, the estate of the deceased partner is still absolved from liability for any future
obligations of the firm, regardless of JR Limited's belief about the partners being alive.

PART 2 – DIRECT QUESTIONS

Q1. Jun 22 Exam (4 Marks), Nov 18 Exam (4 Marks), Nov 18 RTP

Explain the grounds on which court may dissolve a partnership firm in case of any partner files a suit
for the same.

Answer:

According to Section 44 of the Indian Partnership Act, 1932, the court may, at the suit of a partner, dissolve
a firm on any of the following grounds:

1. Insanity/Unsound Mind:

o If a partner (other than a sleeping partner) has become insane or of unsound mind, the court may dissolve
the firm at the suit of the other partners or by the next friend of the insane partner.

o Note: Temporary sickness is not a ground for dissolution.

2. Permanent Incapacity:

o If a partner (other than the one filing the suit) has become permanently incapable of performing his duties
as a partner, such as due to physical disability or illness, the court may dissolve the firm.

3. Misconduct:

o If a partner (other than the one filing the suit) is guilty of misconduct that is likely to prejudicially affect the
firm's business, the court may dissolve the firm.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 244

o The nature of the business will be taken into account.

4. Persistent Breach of Agreement:

o If a partner (other than the one filing the suit) wilfully or persistently breaches the agreements related to the
management of the firm or its business, or behaves in a way that makes it impractical for the other partners
to continue the business with him, the court may dissolve the firm.

o Examples of breach of agreement include:

▪ Embezzlement,

▪ Keeping erroneous accounts,

▪ Holding excessive cash,

▪ Refusal to show accounts despite repeated requests, etc.

5. Transfer of Interest:

o If a partner (other than the one filing the suit) has transferred his entire interest in the firm to a third party or
has allowed his share to be sold by the court in the recovery of land revenue arrears, the court may dissolve
the firm at the instance of the other partner.

6. Continuous/Perpetual Losses:

o If the firm’s business is such that it cannot be carried on except at a loss in the future, the court may order
the dissolution of the firm.

7. Just and Equitable Grounds:

o The court may also dissolve the firm on any other grounds that it considers just and equitable. Some
examples include:

▪ Deadlock in management,

▪ Partners not on talking terms,

▪ Loss of substratum of the firm,

▪ Gambling by a partner on a stock exchange.

Q2. Jul 21 Exam (4 Marks)

Subject to agreement by partners, state the rules that should be observed by the partners in settling
the accounts of the firm after dissolution under the provisions of the Indian Partnership Act, 1932.

Answer:

Mode of Settlement of Partnership Accounts:

As per Section 48 of the Indian Partnership Act, 1932, in settling the accounts of a firm after dissolution,
the following rules shall, subject to agreement by the partners, be observed:

1. Payment of Losses:

o Losses, including deficiencies of capital, shall be paid in the following order:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 245

1. First, out of the profits of the firm.

2. Next, out of the capital.

3. Lastly, if necessary, by the partners individually in the proportions in which they were entitled to share
profits.

2. Application of Assets: The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, must be applied in the following manner and order:

a) Paying the debts of the firm to third parties.

b) Paying each partner rateably what is due to him from capital.
c) Paying each partner rateably what is due to him on account of capital.
d) The residue, if any, shall be divided among the partners in the proportions in which they were entitled to
share profits.

Q3. Nov 19 Exam (4 Marks)

"Dissolution of a firm is different from dissolution of partnership." Discuss.

Answer:

DISSOLUTION OF FIRM VS. DISSOLUTION OF PARTNERSHIP

S.
Basis of Difference Dissolution of Firm Dissolution of Partnership
No.

Does not affect the

Continuation of Involves discontinuation of continuation of business; it
1
Business business in partnership. involves only reconstitution
of the firm.

Involves winding up of the

Involves only reconstitution
firm and requires realization
2 Winding Up and requires revaluation of
of assets and settlement of
assets and liabilities.
liabilities.

A firm may be dissolved by Dissolution of partnership is

3 Order of Court
the order of the court. not ordered by the court.

It necessarily involves It may or may not involve

4 Scope
dissolution of partnership. dissolution of the firm.

Final Closure of Involves final closure of Does not involve final

5
Books books of the firm. closure of the books.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 246

Q4. May 19 Exam (4 Marks), May 18 Exam (4 Marks), May 21 RTP

"Indian Partnership Act does not make the registration of firms compulsory nor does it impose any
penalty for non-registration." Explain. Discuss the various disabilities or disadvantages that a non-
registered partnership firm can face in brief?

Answer:

Under the Indian Partnership Act, 1932, the registration of firms is optional. Unlike English law, which
makes the registration of firms compulsory and imposes penalties for non-registration, the Indian law does
not mandate firm registration nor does it impose any penalty for not registering.

A partner cannot compel another partner to register the firm, and it is not essential to register a firm from the
very beginning. However, Section 69 of the Indian Partnership Act outlines several disabilities or
disadvantages for non-registered partnership firms:

1. No Suit Against Third Parties

The firm or any partner cannot bring an action against a third party for breach of contract unless the firm is
registered, and the partners suing are listed in the register of firms. In other words, only a registered firm
can file a suit against a third party.

2. No Relief for Set-off of Claims

If a third party brings a suit against the firm, the firm or its partners cannot claim any set-off if the suit is
valued over ₹100 or pursue any legal action to enforce rights arising from a contract. This restriction applies
only to non-registered firms.

3. Aggrieved Partners Cannot Sue

A partner of an unregistered firm cannot bring a legal action against the firm or other partners for any dispute
arising between them. This limits the legal recourse available to partners in case of disputes.

4. Third Parties Can Sue the Firm

Despite the firm being unregistered, third parties can still sue the firm. The disability mainly restricts the
firm and its partners from filing suits or enforcing claims against others.

Q5. Nov 18 Exam (4 Marks)

State any four grounds on which Court may dissolve a partnership firm in case any partner files a suit
for the same.

Answer:

Under Section 44 of the Indian Partnership Act, 1932, the court may dissolve a partnership firm on the
following grounds, at the suit of any partner:

1. Insanity/Unsound Mind
If a partner (other than a sleeping partner) has become of unsound mind, the court may dissolve the firm on
the suit of the other partners or by the next friend of the insane partner.

2. Permanent Incapacity
If a partner (other than the one filing the suit) becomes permanently incapable of performing his duties as a
partner, the court may dissolve the firm. This incapacity can result from physical disability, illness, or other
factors that prevent the partner from performing his duties.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 247

3. Misconduct
If a partner (other than the one filing the suit) is guilty of misconduct that is likely to adversely affect the
business, the court may dissolve the firm. The nature of the business and the seriousness of the misconduct
are considered.

4. Persistent Breach of Agreement

If a partner (other than the one filing the suit) willfully or persistently breaches agreements related to the
management of the firm or the conduct of its business, making it unreasonable for the other partners to
continue the business in partnership, the court may dissolve the firm. Examples of breach include:

o Embezzlement

o Keeping erroneous accounts

o Holding more cash than allowed

o Refusal to show accounts despite repeated requests

Q6. Jun 23 RTP

State the modes by which a partner may transfer his interest in the firm in favour of another person
under the Indian Partnership Act, 1932. What are the rights of such a transferee?

Answer:

As per Section 29 of the Indian Partnership Act, 1932, a partner may transfer his interest in the firm by the
following modes:

1. Sale

2. Mortgage

3. Any other method of transfer

Although a partner’s share in the partnership is transferable like any other property, the partnership
relationship is based on mutual confidence. Therefore, the assignee (transferee) of a partner's interest does
not enjoy the same rights and privileges as the original partner.

Rights of the Transferee:

1. During the Continuance of the Partnership: The transferee of a partner’s interest is not entitled to:

o (a) Interfere with the conduct of the business.

o (b) Require accounts.

o (c) Inspect the books of the firm.

The transferee is only entitled to receive the share of profits that the transferring partner was entitled to.
However, the transferee must accept the profits as agreed upon by the existing partners and cannot
challenge the accounts.

2. On the Dissolution or Retirement of the Partner: The transferee will be entitled, against the remaining
partners, to:

o (a) Receive the share of the assets of the firm that the transferring partner was entitled to.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 248

o (b) Receive an account from the date of dissolution for ascertaining the share.

Additionally, Section 31 of the Act states that no person can be introduced as a partner without the consent
of all the existing partners. This means a partner cannot make someone else a partner just by transferring his
interest unless the other partners agree to accept that person as a partner. However, a partner is not
restricted from transferring his interest; his interest is considered an existing property that can be assigned.

Q7. May 21 RTP

“Indian Partnership Act does not make the registration of firms compulsory nor does it impose any
penalty for non-registration.” In light of the given statement, discuss the consequences of non-
registration of the partnership firms in India?

Answer:

It is true that under the Indian Partnership Act, 1932, the registration of firms is not compulsory, nor does it
impose any penalty for non-registration. However, non-registration leads to several disabilities or
consequences for the firm and its partners. These are outlined in Section 69 of the Act, and they
significantly limit the legal rights and privileges that the firm and its partners can exercise. Below are the key
consequences of non-registration of a partnership firm:

1. No Suit in a Civil Court by the Firm or Co-Partners Against Third Parties:

A non-registered firm, or any partner acting on behalf of the firm, cannot file a suit against a third party for a
breach of contract unless the firm is registered and the partners suing are listed in the Register of Firms.
This means a registered firm is the only entity that can take legal action against a third party for any issues
arising from contractual breaches.

2. No Relief for Set-Off of Claims:

If a third party brings a suit against the unregistered firm, neither the firm nor the partners can claim a set-
off if the suit is valued at more than ₹100. This restriction significantly limits the rights of the firm or its
partners to defend themselves in disputes related to contracts or other claims.

3. Aggrieved Partner Cannot Bring Legal Action Against Other Partners or the Firm:
A partner in a non-registered firm (or anyone acting on his behalf) cannot initiate legal proceedings
against the firm or any other partner for matters related to the firm. However, the partner may still sue for
dissolution of the firm or for settling accounts if the firm is dissolved.

4. Third Party Can Sue the Firm:

Despite the restrictions on legal action by the firm or its partners, a third party can still bring a suit against a
non-registered firm. This means that the firm is still vulnerable to legal claims from external parties, even
though it cannot take legal action in return unless it is registered.

Q8. Nov 19 RTP

When does dissolution of a partnership firm take place under the provisions of the Indian Partnership
Act, 1932? Explain.

Answer:

The dissolution of a firm refers to the termination of the partnership relationship between all the partners of
the firm. It does not necessarily occur when one partner retires or becomes incapacitated (e.g., due to

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 249

death, insolvency, or insanity). In such cases, the firm may continue with the remaining partners, but the
specific relationship between the outgoing partner and the rest is dissolved.

The dissolution of a firm under the Indian Partnership Act, 1932 can occur in the following ways:

1. Dissolution by Agreement (Section 39):

• A partnership firm can be dissolved if all the partners agree to dissolve the firm. This is a mutual decision and
requires the consent of all partners.

2. Compulsory Dissolution (Section 41):

A partnership firm can be dissolved compulsorily under the following circumstances:

• Insolvency of Partners: If all the partners, or all but one, are adjudicated insolvent, the firm must dissolve.

• Illegality of Business: If the business of the firm becomes unlawful due to changes in law or circumstances,
the firm must dissolve.

3. Dissolution by the Occurrence of Specific Contingencies (Section 42):

The partnership may be dissolved upon the occurrence of certain events as per the agreement between the
partners:

• Efflux of Time: If the partnership was formed for a specific duration, it dissolves once that time period
expires.

• Completion of the Venture: If the firm was established to complete a specific venture, it dissolves upon the
completion of that venture.

• Death of a Partner: The death of a partner can lead to the dissolution of the firm unless there is an
agreement stating otherwise.

• Insolvency of a Partner: If a partner becomes insolvent, the firm may be dissolved, unless the other
partners agree to continue the business.

4. Dissolution by Notice (Section 43):

In the case of a partnership at will, any partner can dissolve the firm by giving notice of his intention to do
so. The dissolution takes effect from the date mentioned in the notice or, if no date is mentioned, from the
date the notice is communicated to the other partners.

5. Dissolution by Court (Section 44):

The court may order the dissolution of a partnership firm in the following situations:

• Unsound Mind: If a partner becomes of unsound mind.

• Permanent Incapacity: If a partner becomes permanently incapable of fulfilling their duties due to illness or
disability.

• Misconduct: If a partner is guilty of misconduct that adversely affects the business.

• Breach of Agreement: If a partner wilfully or persistently breaches the partnership agreement.

• Transfer of Interest: If a partner transfers their entire interest in the firm to a third party, the firm may be
dissolved.

• Inability to Continue Due to Loss: If the business cannot continue except at a loss.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 250

• Other Equitable Grounds: The court may dissolve the firm on any other grounds that are deemed just and
equitable.

Q9. May 19 RTP

(i) What is the procedure for registration of a partnership firm under the Indian Partnership Act, 1932?
(ii) What do you mean by “implied authority” of the partners in a firm? Point out the extent of a partner’s
implied authority in case of emergency, referring to the provisions of the Indian Partnership Act, 1932.

(i) Procedure for Registration of a Partnership Firm (Section 58)

The registration of a partnership firm is not compulsory under the Indian Partnership Act, 1932, but it may
be done voluntarily. The registration procedure involves the following steps:

1. Application for Registration:

o A firm can apply for registration by submitting a statement to the Registrar of Firms in the area where the
firm's principal place of business is situated or is proposed to be situated. This statement can be delivered
or sent by post.

2. Contents of the Statement: The statement must include the following details:

o Firm's name

o Principal place of business of the firm

o Other places where the firm carries on business

o Date when each partner joined the firm

o Full names and permanent addresses of the partners

o Duration of the firm

3. Signature and Verification:

o The statement must be signed by all the partners or by an agent authorized by them.

o The person signing the statement must verify it in the prescribed manner.

4. Payment of Fee:

o The statement should be accompanied by the prescribed fee.

5. Restrictions on Firm's Name:

o The firm's name must not contain certain words such as "Crown," "Emperor," "Queen," or any words implying
government sanction or approval unless the state government gives written consent.

(ii) Implied Authority of Partners in a Firm (Section 19)

Implied Authority refers to the authority of a partner to bind the firm by their acts while carrying out the
usual business of the firm. According to Section 19 of the Indian Partnership Act, 1932:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 251

1. Implied Authority:

o A partner has the implied authority to do acts necessary to carry on the business of the firm in the usual
manner.

o This authority arises from the nature of the business and the relationship of mutual agency between the
partners.

2. Limitations on Implied Authority: The implied authority does not empower a partner to:

o Submit any dispute to arbitration.

o Open a bank account in the partner's name on behalf of the firm.

o Compromise or relinquish claims or portions of claims by the firm.

o Withdraw any suit or legal proceeding filed by the firm.

o Admit liability in a suit or proceeding against the firm.

o Acquire immovable property on behalf of the firm.

o Transfer immovable property of the firm.

o Enter into a partnership on behalf of the firm.

3. Acts in Emergency (Section 19):

o In cases of emergency, a partner may have the implied authority to act in a manner that is necessary to
preserve the firm’s business interests.

o The scope of implied authority may extend to actions in emergency situations that are essential to the firm’s
functioning or protection. However, these actions still need to align with the firm's overall business interests.

4. Mode of Binding the Firm (Section 22):

o For an act or instrument to bind the firm, it must be executed in the firm's name or in a manner that clearly
indicates the intention to bind the firm.

Q10. Nov 18 RTP

(i) State the modes by which a partner may transfer his interest in the firm in favour of another person
under the Indian Partnership Act, 1932. What are the rights of such a transferee?
(ii) State the grounds on which a firm may be dissolved by the Court under the Indian Partnership Act,
1932.

(i) Transfer of Interest in a Partnership and Rights of a Transferee (Section 29)

A partner can transfer their interest in the partnership to another person by the following modes:

• Sale

• Mortgage

• Assignment (in any other manner)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 252

However, since a partnership is based on mutual trust and confidence, the assignee of a partner’s interest
does not acquire the full rights of the original partner. The rights of the transferee are limited as follows:

1. During the continuance of the partnership:

o The transferee cannot:

▪ Interfere with the business operations.

▪ Demand accounts.

▪ Inspect the books of the firm.

o The transferee is only entitled to receive the share of profits that the transferring partner would have
received. The transferee cannot challenge the firm's accounts or operations.

2. On the dissolution of the firm or the retirement of the transferring partner:

o The transferee has the right to:

▪ Receive the share of the firm’s assets that the transferring partner was entitled to.

▪ Obtain an account from the date of the dissolution or the retirement of the transferring partner.

Conditions Related to Transfer:

• Under Section 31, no one can be introduced as a new partner without the consent of all existing partners.

• A partner can transfer their interest, but cannot make anyone else a partner unless the other partners agree.

• The transfer of interest does not automatically make the transferee a partner in the firm; it only gives them
the financial interest of the partner transferring it.

(ii) Grounds for Dissolution of a Firm by the Court (Section 44)

A firm may be dissolved by the Court on any of the following grounds:

1. Insanity/Unsound Mind:

o If a partner (other than a sleeping partner) has become of unsound mind, the Court may dissolve the firm
upon the suit of the other partners or by the next friend of the insane partner.

2. Permanent Incapacity:

o If a partner, other than the one suing, becomes permanently incapable of performing their duties due to
physical disability or illness, the Court may dissolve the firm.

3. Misconduct:

o If a partner, other than the one suing, is guilty of misconduct that prejudicially affects the business, the
Court may dissolve the firm. Misconduct need not necessarily be related to the business itself, but must
affect the business negatively. Examples include:

▪ Fraud or dishonesty

▪ Moral misconduct

4. Persistent Breach of Agreement:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 253

o If a partner, other than the one suing, persistently breaches the agreement regarding the management of the
firm, the Court may dissolve the firm. Examples of breaches include:

▪ Embezzlement

▪ Keeping erroneous accounts

▪ Holding more cash than allowed

▪ Refusal to show accounts

5. Transfer of Interest:

o If a partner, other than the one suing, transfers their entire interest in the firm to a third party or allows their
share to be sold due to legal action (e.g., recovery of land revenue), the Court may dissolve the firm.

6. Continuous/Perpetual Losses:

o If the firm’s business can only be carried on at a loss in the future, the Court may dissolve the firm.

7. Just and Equitable Grounds:

o The Court may dissolve the firm on any other grounds it considers to be just and equitable. Examples of just
and equitable grounds include:

▪ Deadlock in management

▪ Breakdown of trust between partners

▪ Loss of substratum (e.g., when the main purpose of the firm is no longer achievable)

▪ Gambling by a partner on a stock exchange

Q11. OCT 19 (4 Marks)

Question: What is the conclusive evidence of partnership? State the circumstances when partnership is not
considered between two or more parties.

Answer:

Conclusive Evidence of Partnership:

The existence of mutual agency is considered a key and conclusive indicator of a partnership. In a
partnership, each partner acts both as a principal and as an agent for the other partners. This mutual
agency means that the actions of one partner, carried out in the course of the partnership's business, legally
bind all the other partners.

For example, if one partner enters into a contract on behalf of the firm, it is binding on the other partners as
well. If such mutual agency exists and the partners are engaged in a business with the intent to earn profits,
a partnership is deemed to exist. This is the cardinal principle of partnership law, used to determine the
formation of a partnership.

Circumstances When Partnership is Not Considered:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 254

While mutual agency is a key aspect of a partnership, certain circumstances might lead to the conclusion
that a partnership does not exist between two or more parties, despite some business relationship. The
following are some key indicators:

1. No Record of Terms and Conditions of Partnership:

If the parties involved do not have any formal or written record outlining the terms and conditions of their
partnership, it can lead to the conclusion that there is no partnership. Partnerships generally require a clear
agreement on roles, responsibilities, and profit-sharing.

2. No Accounts Maintained for the Business:

If the partnership business does not maintain any separate accounts that are open to inspection by all the
partners, this can indicate that the relationship is not a partnership. Proper record-keeping and transparency
in accounts are fundamental aspects of a partnership.

3. No Bank Account in the Name of the Partnership:

If the partnership does not have a bank account in its name, it could be a sign that the business is not
operating as a partnership. A partnership should generally have its own account for conducting business
transactions.

4. No Written Intimation to Relevant Authorities:

If there is no written communication to the appropriate authorities, such as the Deputy Director of
Procurement (in certain sectors), regarding the creation of the partnership, this could suggest that the
partnership is not formally recognized.

Q12. OCT 19 (4 Marks)

Question: What is the conclusive evidence of partnership? State the circumstances when partnership is not
considered between two or more parties.

Answer:

Conclusive Evidence of Partnership:

The existence of mutual agency is the cardinal principle of partnership law and serves as conclusive
evidence of a partnership. Under mutual agency:

• Each partner acts as both a principal and an agent for the other partners.

• The act of one partner done on behalf of the firm binds all the partners.

• If this mutual agency relationship exists between the parties, who have formed a group with the intention of
earning profits through a business, a partnership is deemed to exist.

Circumstances When Partnership Is Not Considered Between Two or More Parties:

Judicial pronouncements highlight the following factors that indicate no partnership exists between the
parties:

1. Lack of Written Record:

The parties have not retained any record of the terms and conditions of the partnership.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 255

2. No Accounts Maintained:
The partnership business has not maintained any accounts of its own, and such accounts are not open to
inspection by both parties.

3. No Bank Account:
No account of the partnership has been opened with any bank.

4. No Notification to Authorities:
No written intimation has been conveyed to the Deputy Director of Procurement regarding the newly
created partnership.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 256

Chapter 4 – The Limited Liability partnership Act ,2008

PART 1 – CASE LAW QUESTIONS – 0

PART 2 – DIRECT QUESTIONS

Q1. Jun 22 Exam (5 Marks), May 18 Exam (5 Marks)

Question: Explain the incorporation by registration of a Limited Liability Partnership and its essential
elements under the LLP Act, 2008.

Answer:

Incorporation by Registration (Section 12 of LLP Act, 2008):

1. Registrar's Role:

o When the requirements of clauses (b) and (c) of sub-section (1) of section 11 are met, the Registrar will:

▪ Retain the incorporation document.

▪ If clause (a) is also satisfied, within 14 days, the Registrar shall:

a) Register the incorporation document.
b) Issue a certificate confirming the LLP’s incorporation under the specified name.

2. Acceptance of Statement:

o The Registrar may accept the statement delivered under clause (c) of sub-section (1) of section 11 as
sufficient evidence that the requirement of clause (a) has been complied with.

3. Certificate of Incorporation:

o The certificate issued under clause (b) will be signed by the Registrar and authenticated with the official seal.

o The certificate serves as conclusive evidence that the LLP is incorporated under the specified name.

Essential Elements to Incorporate Limited Liability Partnership (LLP):

The following elements are essential for forming an LLP in India under the LLP Act, 2008:

1. Incorporation Document:

o Complete and submit the incorporation document in the prescribed form electronically with the Registrar.

2. Minimum Two Partners:

o At least two partners are required for incorporating an LLP. These partners can be individuals or body
corporate.

3. Registered Office:

o The LLP must have a registered office in India for all communications.

4. Designated Partners:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 257

o A minimum of two designated partners must be appointed to handle various duties required by the LLP.

o At least one designated partner must be a resident of India.

5. Designated Partner Identification Number (DPIN):

o Each designated partner (individual or nominee of body corporate) must hold a Designated Partner
Identification Number (DPIN) issued by the Ministry of Corporate Affairs.

6. Partnership Agreement:

o A partnership agreement must be executed between the partners or between the LLP and its partners.

o If no agreement is made, the provisions in the First Schedule of the LLP Act, 2008 will apply.

7. LLP Name:

o The name of the LLP must be chosen and registered as per the guidelines under the LLP Act.

Q2. Dec 21 Exam (5 Marks)

Question: State the rules regarding the registered office of a Limited Liability Partnership (LLP) and change
therein as per provisions of the Limited Liability Partnership Act, 2008.

Answer:

Registered Office of LLP and Change Therein (Section 13 of the LLP Act, 2008):

1. Registered Office Requirement:

o Every LLP must have a registered office to which all communications and notices are addressed and where
they shall be received.

2. Service of Documents:

o A document may be served on an LLP, its partner, or designated partner by:

▪ Sending it by post under a certificate of posting, by registered post, or by any other prescribed manner, to
the registered office.

▪ Any other address specifically declared by the LLP for receiving communications must also be noted.

3. Change of Registered Office:

o An LLP may change the place of its registered office.

o The LLP must file a notice of such change with the Registrar, following the prescribed form and conditions.

o The change will take effect only once the notice is filed with the Registrar.

4. Penalties for Non-compliance:

o If an LLP contravenes any provisions of this section, both the LLP and its partners will be liable to a fine:

▪ Not less than ₹2,000 and up to ₹25,000.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 258

Q3. Jul 21 Exam (5 Marks)

Question: Limited Liability Partnership (LLP) gives the benefits of limited liability of a company on one hand
and the flexibility of a partnership on the other. Discuss.

Answer:

Benefits of Limited Liability Partnership (LLP)

1. Limited Liability:

o Every partner in an LLP is the agent of the LLP for business purposes, but not for other partners (Section 26
of the LLP Act, 2008).

o The liability of partners is limited to their agreed contribution in the LLP.

o The LLP itself is responsible for the full extent of its assets, meaning that the personal assets of partners are
protected from the liabilities of the LLP.

2. Flexibility of a Partnership:

o The LLP structure offers flexibility similar to a partnership, allowing its members to organize their internal
structure based on mutual agreements.

o Entrepreneurs, professionals, and enterprises in service sectors or engaged in scientific and technical
fields can form an LLP that is commercially efficient and suited to their specific needs.

o Due to its flexible nature, LLP is an ideal vehicle for small enterprises and is also attractive for venture
capital investment.

Q4. Jan 21 Exam (4 Marks)

Question: State the circumstances under which an LLP and its partners may face unlimited liability under
the Limited Liability Partnership Act, 2008.

Answer:

As per Section 30 of the Limited Liability Partnership Act, 2008, an LLP and its partners may face
unlimited liability in the following circumstances:

• Fraudulent Acts:
The liability arises if an act is carried out by the LLP or any of its partners:

o With intent to defraud creditors of the LLP,

o Or with intent to defraud any other person,

o Or for any fraudulent purpose.

• Extent of Liability:

o The liability of the LLP and partners who acted with fraudulent intent shall be unlimited for all or any of the
debts or other liabilities of the LLP.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 259

o However, if such an act is carried out by a partner, the LLP will be liable to the same extent as the partner,
unless it is proven that the act was done without the knowledge or authority of the LLP.

• Compensation for Fraudulent Conduct:

o If the LLP, a partner, or an employee has conducted the affairs of the LLP fraudulently, they shall be liable to
pay compensation to any person who suffers loss due to such conduct.

o This is in addition to any criminal proceedings that may arise under applicable laws.

Q5. Nov 20 Exam (5 Marks), May 20 RTP, Mar 21 MTP (5 Marks)

Question: State the circumstances under which an LLP may be wound up by the Tribunal under the Limited
Liability Partnership Act, 2008.

Answer:

As per Section 64 of the Limited Liability Partnership Act, 2008, an LLP may be wound up by the Tribunal
under the following circumstances:

1. Voluntary Decision:
If the LLP decides that it should be wound up by the Tribunal.

2. Reduction in Number of Partners:

If, for more than six months, the number of partners of the LLP is reduced below two.

3. Inability to Pay Debts:

If the LLP is unable to pay its debts.

4. Acting Against National Interests:

If the LLP has acted against the interests of:

o The sovereignty and integrity of India,

o The security of the State,

o Public order.

5. Non-compliance in Filing Documents:

If the LLP has made a default in filing the Statement of Account and Solvency or annual return with the
Registrar for any five consecutive financial years.

6. Just and Equitable Grounds:

If the Tribunal is of the opinion that it is just and equitable to wind up the LLP.

Q6. Nov 19 Exam (5 Marks)

Question: Discuss the conditions under which an LLP will be liable and not liable for the acts of the partner.

Answer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 260

Conditions under which LLP will be liable

As per Section 27(2) of the LLP Act, 2008, the LLP is liable for the acts of a partner if:

• A partner of the LLP commits a wrongful act or omission in the course of the LLP's business or with the
LLP's authority.

• The act is done within the scope of the business of the LLP or with the express or implied authority of the
LLP.

Conditions under which LLP will not be liable

As per Section 27(1) of the LLP Act, 2008, an LLP will not be bound by an act of a partner if:

1. Lack of Authority:
The partner does not have authority to act for the LLP in the specific matter.

2. Knowledge of the Third Party:

The third party knows that the partner lacks authority, or does not know or believe the individual to be a
partner of the LLP.

Q7. May 19 Exam (5 Marks), May 22 RTP

Question: "LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership." Explain.

Answer:

Limited Liability

• Under Section 26 of the LLP Act, 2008, each partner in an LLP is an agent of the LLP, but not of the other
partners.

• The liability of the partners is limited to their agreed contribution to the LLP.

• The LLP itself is liable for the full extent of its assets, but the partners’ personal assets are protected from
business debts.

Flexibility of a Partnership

• An LLP provides the flexibility of organizing its internal structure like a partnership through an agreement
between the partners.

• It enables entrepreneurs, professionals, and enterprises in various sectors (scientific, technical, service-
based) to form commercially efficient vehicles suited to their specific business needs.

• Due to its flexible structure, the LLP is particularly suited for small enterprises and venture capital
investments.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 261

Q8. Nov 18 Exam (5 Marks)

Question: Explain the essential elements to incorporate a Limited Liability Partnership and the steps
involved therein under the LLP Act, 2008.

Answer:

Essential Elements to Incorporate Limited Liability Partnership (LLP)

Under the LLP Act, 2008, the following elements are essential to form an LLP in India:

1. Incorporation Document:

o Complete and submit the incorporation document in the prescribed form electronically with the Registrar.

2. Minimum Two Partners:

o At least two partners (individuals or body corporate) are required for incorporation.

3. Registered Office:

o The LLP must have a registered office in India to which all communications will be made and received.

4. Designated Partners:

o At least two designated partners must be appointed. They are responsible for fulfilling the obligations of the
LLP, and at least one must be a resident of India.

5. Designated Partner Identification Number (DPIN):

o A person or nominee of a body corporate intending to be appointed as a designated partner must hold a
Designated Partner Identification Number (DPIN), which is allotted by the Ministry of Corporate Affairs.

6. Partnership Agreement:

o A partnership agreement must be executed between the partners or between the LLP and its partners.

o In the absence of a partnership agreement, the provisions of the First Schedule of the LLP Act, 2008, will
apply.

7. LLP Name:

o The LLP must choose an appropriate name for the business.

Steps to Incorporate LLP

1. Name Reservation:

o The first step is to reserve the name of the LLP.

o This is done by filing e-Form 1, which checks the availability and reserves the LLP business name.

2. Incorporate LLP:

o After name reservation, the next step is to file e-Form 2 for incorporating the LLP.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 262

o e-Form 2 includes details of the LLP, its proposed partners/designated partners, and their consent to act as
such.

3. LLP Agreement:

o As per Section 23 of the LLP Act, 2008, the LLP agreement must be executed and filed with the Registrar in
e-Form 3.

o This agreement should be submitted within 30 days of incorporation.

Q9. Jun 23 RTP, Nov 22 MTP (5 Marks)

Question: Explain the Small Limited Liability Partnership under the LLP Act, 2008.

Answer:

Small Limited Liability Partnership [Section 2(ta) of the LLP Act, 2008]

A Small Limited Liability Partnership (LLP) is defined as an LLP that meets the following criteria:

1. Contribution Limit:

o The contribution of the LLP does not exceed ₹25 lakh or such higher amount, not exceeding ₹5 crore, as
may be prescribed.

2. Turnover Limit:

o The turnover of the LLP, as per the Statement of Accounts and Solvency for the immediately preceding
financial year, does not exceed ₹40 lakh or such higher amount, not exceeding ₹50 crore, as may be
prescribed.

3. Other Requirements:

o The LLP may also meet other specific requirements and fulfil terms and conditions as prescribed by the
authorities.

Q10. Nov 22 RTP

Question: What is the procedure for maintenance of books of account, other records, and audit of Limited
Liability Partnership under the LLP Act, 2008?

Answer:

Maintenance of Books of Account, Other Records, and Audit (Section 34 of LLP Act, 2008)

1. Maintenance of Books of Account:

o The LLP is required to maintain proper books of account related to its affairs for each year of its existence.

o These books must be maintained either on cash basis or accrual basis, according to the double entry
system of accounting.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 263

o The books of account must be kept at the registered office of the LLP for such a period as prescribed by the
regulations.

2. Preparation of Statement of Account and Solvency:

o Every LLP is required to prepare a Statement of Account and Solvency within six months from the end of
each financial year.

o The Statement must be prepared as of the last day of the financial year and signed by the designated
partners of the LLP.

3. Filing with Registrar:

o The Statement of Account and Solvency must be filed with the Registrar within the prescribed time limit.

o It must be filed in the specified form and manner and accompanied by the required fees.

4. Audit of Accounts:

o The accounts of the LLP are required to be audited in accordance with the rules prescribed under the LLP
Act, 2008.

Q11. May 22 RTP

Question: “LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership”. Explain.

Answer:

LLP as an Alternative Corporate Business Form

An LLP (Limited Liability Partnership) combines the limited liability of a company with the flexibility of a
partnership. This structure is ideal for small and medium-sized enterprises (SMEs) and professional
services businesses.

1. Limited Liability:

o In an LLP, every partner is an agent of the LLP but not of other partners, as per Section 26 of the LLP Act,
2008.

o The liability of partners is limited to their agreed-upon contribution in the LLP. This means that personal
assets are protected.

o The LLP itself is liable for the full extent of its assets, offering protection to the partners from business debts
beyond their contributions.

2. Flexibility of a Partnership:

o The LLP provides flexibility in organizing its internal structure. The partners can decide how the business
will be run based on a mutual agreement, similar to a traditional partnership.

o This form enables entrepreneurs, professionals, and enterprises to organize their business in a way that
suits their operational and financial needs.

o The LLP structure is particularly suited for businesses offering services in sectors like science, technology,
and other professional fields.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 264

o It allows small enterprises to access venture capital while maintaining a simple and flexible operational
structure.

Q13. May 21 RTP, Nov 20 RTP

Question: What do you mean by Designated Partner? Is it mandatory to appoint a Designated Partner in an
LLP?

Answer:

Designated Partner

As per Section 2(j) of the LLP Act, 2008, a Designated Partner is defined as a partner who is designated as
such under Section 7 of the Act. Designated partners are primarily responsible for the management and
compliance of the LLP. They hold specific legal duties and obligations to ensure the smooth functioning of
the LLP, including the maintenance of accounts, filing documents with the Registrar, and ensuring statutory
compliance.

Mandatoriness of Appointing Designated Partners

According to Section 7 of the LLP Act, 2008, the appointment of Designated Partners is mandatory:

1. Number of Designated Partners:

o Every LLP must have at least two designated partners, both of whom must be individuals.

o At least one designated partner must be a resident in India.

2. For LLPs with corporate partners:

o If all partners in the LLP are bodies corporate or if one or more partners are bodies corporate, at least two
individuals, either from the bodies corporate or as their nominees, must be appointed as designated
partners.

3. Definition of Resident in India:

o A resident in India is a person who has lived in India for at least 182 days during the immediately
preceding one year.

Q14. May 20 RTP

Question: What is the procedure for changing the name of a Limited Liability Partnership (LLP) under the LLP
Act, 2008?

Answer:

Change of Name of LLP (Section 17 of the LLP Act, 2008)

The procedure for changing the name of an LLP is as follows:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 265

1. Government Direction for Name Change:

o If the Central Government is satisfied that an LLP has been registered under a name which:

▪ Contravenes Section 15(2) (for example, using an undesirable name or an offensive name), or

▪ Resembles too closely the name of another LLP, body corporate, or other entity in a way that could cause
confusion or lead to the name being mistaken for it,

o The government may direct the LLP to change its name.

2. Time Period for Compliance:

o Upon receiving the direction from the Central Government, the LLP must change its name within 3 months
from the date of the direction or within any longer period granted by the government.

3. Penalty for Non-Compliance:

o If the LLP fails to comply with the direction to change its name, it will be penalized with a fine ranging from
₹10,000 to ₹5 Lakhs.

o The designated partner of the LLP will also be subject to a fine ranging from ₹10,000 to ₹1 Lakh.

Q15. May 20 RTP

Question: Explain the circumstances in which LLP may be wound up by the Tribunal under the LLP Act,
2008.

Answer:

Under Section 64 of the LLP Act, 2008, a Limited Liability Partnership (LLP) may be wound up by the Tribunal
in the following circumstances:

1. LLP's Decision:

o If the LLP decides that it should be wound up by the Tribunal.

2. Reduction in Number of Partners:

o If, for more than six months, the number of partners in the LLP falls below two.

3. Inability to Pay Debts:

o If the LLP is unable to pay its debts.

4. Acts Against National Interests:

o If the LLP has acted against the sovereignty and integrity of India, the security of the state, or public
order.

5. Default in Filing with Registrar:

o If the LLP has failed to file the Statement of Account and Solvency or annual return with the Registrar for
five consecutive financial years.

6. Just and Equitable Grounds:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 266

o If the Tribunal considers it just and equitable to wind up the LLP.

Q16. Nov 19 RTP

Question: Who are the individuals that shall not be capable of becoming a partner of a Limited Liability
Partnership?

Answer:

Under Section 5 of the Limited Liability Partnership Act, 2008, any individual or body corporate can be a
partner in an LLP. However, an individual shall not be capable of becoming a partner of an LLP if:

1. Unsound Mind:

o The individual has been found to be of unsound mind by a court of competent jurisdiction and the finding
is still in force.

2. Undischarged Insolvency:

o The individual is an undischarged insolvent.

3. Pending Insolvency Application:

o The individual has applied to be adjudicated as an insolvent and the application is still pending.

Q17. Nov 19 RTP

Question: What are the effects of registration of LLP?

Answer:

As per Section 14 of the Limited Liability Partnership Act, 2008, upon registration, an LLP shall, by its
name, be capable of:

1. Suing and Being Sued:

o The LLP can engage in legal actions, either as a plaintiff (sue) or a defendant (be sued).

2. Acquiring and Managing Property:

o The LLP can acquire, own, hold, develop, or dispose of property, whether movable or immovable, tangible
or intangible.

3. Having a Common Seal:

o The LLP may choose to have a common seal to represent itself in official matters, though this is optional.

4. Carrying Out Legal Acts:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 267

o The LLP can perform any other acts or things that bodies corporate (companies, corporations) are legally
allowed to do.

Q18. May 19 RTP

Question: What is the meaning of the Limited Liability Partnership? State the various characteristics of it.

Answer:

Meaning of Limited Liability Partnership (LLP):

A Limited Liability Partnership (LLP) is a unique form of business entity that combines the benefits of
limited liability with the flexibility of a partnership. It allows partners to organize the internal structure of
their business like a traditional partnership while enjoying limited liability protection, where the liability of
the partners is restricted to their agreed contribution in the LLP. The LLP itself is a separate legal entity from
its partners, meaning the LLP is liable to the full extent of its assets, but the partners' liability is limited.

An LLP is considered a hybrid between a company and a partnership due to its mix of characteristics from
both forms of business structures.

Characteristics of LLP:

1. LLP is a Body Corporate:

o An LLP is a separate legal entity from its partners, having perpetual succession. The existence of the LLP is
not affected by changes in the partners. The LLP continues irrespective of changes like death, retirement, or
insolvency of partners.

2. Perpetual Succession:

o The LLP can continue its existence even if there are changes in partners. This ensures that the business will
survive beyond the life or involvement of individual partners.

3. Separate Legal Entity:

o The LLP is a distinct entity from its partners. It can own property, enter contracts, and is responsible for its
liabilities. The partners' liability is limited to their agreed contributions to the LLP.

4. Mutual Agency:

o Each partner is an agent of the LLP but not of other partners. This means that individual partners cannot
bind the LLP or other partners through unauthorized actions.

5. LLP Agreement:

o The rights and duties of the partners are governed by an LLP Agreement, which allows for flexibility in
organizing the internal structure. In the absence of an agreement, the provisions of the LLP Act, 2008 apply.

6. Artificial Legal Person:

o LLP is an artificial legal person with its own rights and responsibilities, similar to an individual but not
capable of actions like marriage or taking an oath. It can perform almost all activities that a natural person
can, except for specific human actions.

7. Common Seal:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 268

o An LLP may choose to have a common seal, although it is not mandatory. If it does, it must be affixed in the
presence of at least two designated partners.

8. Limited Liability:

o The liability of the partners is limited to their agreed contribution in the LLP. The LLP, as an entity, is
responsible for its own liabilities.

9. Management of Business:

o All partners are entitled to manage the business, but only designated partners are responsible for ensuring
compliance with legal requirements.

10. Minimum and Maximum Number of Partners:

o The LLP must have at least two partners and at least two designated partners, with one being a resident
of India. There is no limit on the maximum number of partners.

11. Business for Profit Only:

o LLPs must be formed to conduct lawful business with the objective of making a profit. It cannot be formed
for charitable or non-economic purposes.

12. Investigation:

o The Central Government can investigate the affairs of an LLP if necessary.

13. Compromise or Arrangement:

o Provisions for mergers, amalgamations, and compromises among LLPs are available under the LLP Act,
2008.

14. Conversion into LLP:

o Existing firms, private companies, or unlisted public companies can convert into an LLP as per the
provisions of the LLP Act.

15. E-Filing of Documents:

o All documents, forms, and applications related to an LLP must be filed electronically through the MCA
portal.

16. Foreign LLPs:

o A foreign LLP is one that is formed or registered outside India but has established a place of business within
India. Foreign LLPs can become partners in Indian LLPs.

Q19. Nov 22 MTP (5 Marks)

Question: What is Small Limited Liability Partnership as per the Limited Liability Partnership (Amendment)
Act, 2021?

Answer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 269

As per the Limited Liability Partnership (Amendment) Act, 2021, a Small Limited Liability Partnership
(Small LLP) is defined under Section 2(ta) of the LLP Act, 2008. It is an LLP that satisfies the following
criteria:

1. Contribution:
The total contribution of the LLP does not exceed ₹25 lakh, or such higher amount, not exceeding ₹5 crore,
as may be prescribed by the government.

2. Turnover:
The turnover of the LLP, as per its Statement of Accounts and Solvency for the immediately preceding
financial year, does not exceed ₹40 lakh, or such higher amount, not exceeding ₹50 crore, as may be
prescribed by the government.

3. Other Requirements:
The LLP must also meet any other criteria and conditions as may be prescribed by the government.

Q20. Mar 21 MTP (5 Marks)

Question: Enumerate the circumstances in which LLP may be wound up by Tribunal.

Answer:

A Limited Liability Partnership (LLP) may be wound up by the Tribunal under Section 64 of the LLP Act,
2008 in the following circumstances:

1. Voluntary Decision:
If the LLP itself decides that it should be wound up by the Tribunal.

2. Reduction in Number of Partners:

If, for a period of more than six months, the number of partners in the LLP is reduced below two.

3. Inability to Pay Debts:

If the LLP is unable to pay its debts.

4. Actions Against National Interests:

If the LLP has acted against the interests of the sovereignty, integrity of India, the security of the state, or
public order.

5. Default in Filing Statutory Documents:

If the LLP has defaulted in filing the Statement of Account and Solvency or the annual return with the
Registrar for any five consecutive financial years.

6. Just and Equitable Grounds:

If the Tribunal is of the opinion that it is just and equitable to wind up the LLP.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 270

Chapter 5–The Companies Act, 2013

PART 1 – CASE LAW QUESTIONS

Q1. Jun 22 Exam (4 marks), May 19 Exam (4 marks)

The Articles of Association of Aarna Limited empowers its managing agents to borrow loans on behalf of the
company. Ms. Anika, the director of the company, borrowed ₹18 Lakhs in the name of the company from
Quick Finance Limited, a non-banking finance company. Later on, Aarna Limited refused to repay the money
borrowed on the pretext that no resolution authorizing such loan had been passed by the company and
therefore the company is not liable to pay such loan.

Decide whether the contention of Aarna Limited is correct in accordance with the provisions of the
Companies Act, 2013?

Provision under the Law

Doctrine of Indoor Management:

• According to the Doctrine of Indoor Management, persons dealing with the company are not required to
inquire whether internal proceedings related to the contract have been properly followed.

• Once a transaction is in accordance with the company's memorandum and articles of association,
outsiders are entitled to presume that all internal formalities have been completed.

• The doctrine helps protect third parties from the company by ensuring they are not required to investigate
the company's internal processes, such as meetings or resolutions, before entering into a contract.

• This doctrine is based on the principle that what happens inside the company (internally) is not public
knowledge and outsiders cannot be expected to know all the details of a company’s internal processes.

Analysis of the Given Case

1. Aarna Limited's Contention:

o Aarna Limited claims that no resolution authorizing the loan was passed by the company, and therefore, it is
not liable to repay the ₹18 Lakhs loan borrowed by Ms. Anika.

2. Quick Finance Limited's Position:

o Quick Finance Limited, as an external party, is not expected to inquire whether the necessary internal
procedures (like passing a resolution) were followed by the company.

o According to the Doctrine of Indoor Management, Quick Finance Limited can presume that all internal
requirements were met based on the company's Articles of Association, which empower the managing
agents to borrow loans.

3. Implications:

o If Aarna Limited is claiming that no internal resolution was passed, the company is still bound to the loan
repayment due to the protections offered by the Doctrine of Indoor Management.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 271

o The company cannot escape liability by claiming that internal procedures were not followed, as the external
party (Quick Finance Limited) is entitled to assume that internal formalities were correctly carried out.

Conclusion

The contention of Aarna Limited is incorrect. According to the Doctrine of Indoor Management, Quick
Finance Limited, as an external party, is entitled to presume that all internal processes and resolutions were
properly followed. Therefore, Aarna Limited is bound to repay the loan of ₹18 Lakhs, even if it claims that no
resolution authorizing the loan was passed.

Q2. Jun 22 Exam (3 marks), Nov 21 RTP, Nov 22 MTP (4 marks)

Mr. R is an Indian citizen, and his stay in India during the immediately preceding financial year is for 130 days.
He appoints Mr. S, a foreign citizen, as his nominee, who has stayed in India for 125 days during the
immediately preceding financial year.

Is Mr. R eligible to be incorporated as a One-Person Company (OPC)? If yes, can he give the name of Mr. S in
the Memorandum of Association as his nominee? Justify your answers with relevant provisions of the
Companies Act, 2013.

Provision under the Law

As per the provisions of the Companies Act, 2013, the following criteria apply to the incorporation of a One-
Person Company (OPC):

1. Eligibility to Incorporate an OPC:

o Only a natural person, who is an Indian citizen and resident in India, is eligible to incorporate an OPC.

o A person is considered a resident in India if they have stayed in India for a period of not less than 120 days
during the immediately preceding financial year.

2. Nominee for OPC:

o The nominee for the sole member of an OPC must also be a natural person, an Indian citizen, and a
resident in India as per the above criteria.

Analysis of the Given Case

1. Eligibility of Mr. R:

o Mr. R is an Indian citizen, and his stay in India during the immediately preceding financial year is 130 days,
which is more than the required 120 days.

o Hence, Mr. R fulfills the criteria and is eligible to incorporate an OPC.

2. Nomination of Mr. S:

o Although Mr. S has stayed in India for 125 days (meeting the residency requirement), he is a foreign citizen.

o As per the Companies Act, 2013, the nominee for an OPC must also be an Indian citizen.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 272

o Therefore, Mr. S cannot be named as the nominee in the Memorandum of Association.

Conclusion

• Mr. R is eligible to incorporate an OPC as he satisfies the criteria of being an Indian citizen and a resident in
India.

• However, Mr. S cannot be nominated as the nominee in the Memorandum of Association because he is a
foreign citizen and does not meet the citizenship requirement under the Companies Act, 2013

Q3. Dec 21 Exam (4 marks)

AK Private Limited has borrowed ₹36 crores from BK Finance Limited. However, as per the Memorandum of
Association of AK Private Limited, the maximum borrowing power of the company is ₹30 crores.

Examine whether AK Private Limited is liable to pay this debt. State the remedy, if any, available to BK
Finance Limited.

Answer

Doctrine of Ultra Vires

This case is governed by the Doctrine of Ultra Vires. According to this doctrine:

• Any act or contract made by a company beyond the powers conferred upon it by its Memorandum of
Association is void and inoperative in law.

• Such acts or contracts are not binding on the company, as the Memorandum of Association (MOA) serves
as the company's charter, defining its constitution and scope of powers.

• A company cannot deviate from its MOA, even if the necessity for such deviation is compelling.

Liability of AK Private Limited

1. As per the given facts:

o AK Private Limited has a maximum borrowing limit of ₹30 crores under its Memorandum of Association.

o The company borrowed ₹36 crores from BK Finance Limited, which exceeds this limit.

2. Since the borrowing of ₹36 crores is beyond the powers specified in the Memorandum, the transaction is
ultra vires the company and therefore void.

3. Conclusion:

o AK Private Limited is not liable to pay the debt of ₹36 crores, as the transaction is void under the Doctrine of
Ultra Vires.

Remedy Available to BK Finance Limited

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 273

While the company is not liable, BK Finance Limited may seek the following remedies:

1. Action Against Directors:

o The directors who authorized the borrowing beyond the company’s limits may be held personally liable to
restore the borrowed amount, as they acted outside their authority.

2. Injunction:

o BK Finance Limited may seek an injunction to prevent the company from utilizing the funds borrowed in
excess of the limit, if feasible.

Conclusion

• The borrowing of ₹36 crores is ultra vires the Memorandum of Association, and hence AK Private Limited is
not liable to pay the debt.

• BK Finance Limited may take action against the directors personally or pursue other remedies, such as
seeking an injunction.

Q4. Jan 21 Exam (4 marks)

ABC Limited was registered as a public company with 245 members. The details of the members are as
follows:

Number of
Category
Members
Directors and their relatives 190
Employees 15
Ex-employees (shares allotted
20
when they were employees)
Others (including 10 joint holders
holding shares jointly in the name of 20
father and son)

The Board of Directors proposes to convert the company into a private company.

Advise whether reduction in the number of members is necessary for conversion.

Answer

Legal Provisions

As per Section 2(68) of the Companies Act, 2013, a private company is defined as a company that:

1. By its Articles, restricts the number of its members to 200, excluding:

o Persons who are in the employment of the company; and

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 274

o Persons who, having been formerly in employment, were members of the company while in employment
and continued as members after ceasing employment.

2. For joint holders, two or more persons holding shares jointly are treated as a single member for the
purpose of this limit.

Analysis of Membership Count

In the given case:

1. Directors and their relatives:

o These 190 members are included in the count.

2. Employees:

o These 15 members are excluded from the count, as employees are not included in the membership count
for the purpose of Section 2(68).

3. Ex-employees:

o These 20 members are excluded from the count, as they were members while in employment and
continued as members after ceasing employment.

4. Others:

o These 20 members include 10 joint holders, who are treated as single members for this purpose. Hence,
they are counted as 10 members.

Final Membership Count

Counted
Category
Members
Directors and their relatives 190
Employees Excluded
Ex-employees Excluded
Others (including joint holders) 10

Total Counted Members = 190 + 10 = 200 members.

Conclusion

As per the requirement for conversion into a private company, the maximum number of members must not
exceed 200. Since ABC Limited’s counted members already meet this limit, no reduction in the number of
members is necessary for conversion into a private company.

Q5. Jan 21 Exam (3 marks), May 21 RTP

SK Infrastructure Limited has a paid-up share capital divided into 6,00,000 equity shares of INR 100 each.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 275

2,00,000 equity shares of the company are held by the Central Government, and 1,20,000 equity shares are
held by the Government of Maharashtra. Explain with reference to relevant provisions of the Companies Act,
2013, whether SK Infrastructure Limited can be treated as a Government Company.

Answer:

Government Company Definition (Section 2(45) of the Companies Act, 2013)

A Government Company is defined under Section 2(45) of the Companies Act, 2013, as a company in
which not less than 51% of the paid-up share capital is held by:

• The Central Government, or

• Any State Government(s), or

• Partly by the Central Government and partly by one or more State Governments.

Additionally, the section also includes a company that is a subsidiary company of such a government
company.

Analysis of SK Infrastructure Limited

• The total paid-up share capital of SK Infrastructure Limited is 6,00,000 equity shares of INR 100 each.

• The Central Government holds 2,00,000 equity shares.

• The Government of Maharashtra holds 1,20,000 equity shares.

The total equity shares held by both the Central Government and the Government of Maharashtra is:
2,00,000 + 1,20,000 = 3,20,000 shares.

Percentage of Government Holding

• The total paid-up capital is 6,00,000 shares.

• The government holding is 3,20,000 shares, which represents:

320000/600000 * 100 = 53.33%

• This is more than 51%, which satisfies the condition for a Government Company under Section 2(45).

Conclusion

Since the Central Government and the Government of Maharashtra together hold more than 51% of the
paid-up share capital of SK Infrastructure Limited, it qualifies as a Government Company under Section
2(45) of the Companies Act, 2013.

Q6. Nov 20 Exam (4 marks), Nov 20 RTP

ABC Limited has allotted equity shares with voting rights to XYZ Limited worth Rs 15 Crores and issued Non-
Convertible Debentures worth Rs 40 Crores during the Financial Year 2019-20. After that, the total Paid-up
Equity Share Capital of the company is Rs 100 Crores, and Non-Convertible Debentures stand at Rs 120
Crores. Define the meaning of Associate Company and comment on whether ABC Limited and XYZ Limited
would be called an Associate Company as per the provisions of the Companies Act, 2013?

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 276

Answer:

Definition of Associate Company (Section 2(6) of the Companies Act, 2013)

As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to another company
means a company in which that other company has significant influence, but which is not a subsidiary of
the company having such influence. It also includes a joint venture company.

• Significant influence means the ability to control at least 20% of the total share capital or control
business decisions under an agreement.

• The Total Share Capital means the aggregate of:

o Paid-up equity share capital, and

o Convertible preference share capital.

Analysis of the Relationship Between ABC Limited and XYZ Limited

In the given scenario:

• XYZ Limited has been allotted equity shares with voting rights worth Rs 15 Crores.

• The Total Paid-up Equity Share Capital of ABC Limited is Rs 100 Crores.

To determine if ABC Limited and XYZ Limited qualify as Associate Companies, we need to check if XYZ
Limited has significant influence over ABC Limited, which requires holding at least 20% of the total share
capital of ABC Limited.

• 20% of Rs 100 Crores = Rs 20 Crores.

• XYZ Limited holds Rs 15 Crores worth of shares, which is less than 20% of the total share capital of ABC
Limited (Rs 20 Crores).

Conclusion

Since XYZ Limited holds less than 20% of the share capital of ABC Limited (Rs 15 Crores out of Rs 100
Crores), it does not have significant influence over ABC Limited. Therefore, as per the provisions of the
Companies Act, 2013, ABC Limited and XYZ Limited would not be considered associate companies.

Additionally, the issuance of Non-Convertible Debentures does not impact the calculation of significant
influence because debentures do not count toward equity share capital when determining the presence of
significant influence

Q7. Nov 20 Exam (3 Marks)

Question:
Mike Limited, a company incorporated in India, has a liaison office in Singapore. Explain in detail the
meaning of "Foreign Company" and analyze whether Mike Limited would be called a Foreign Company, given
that it established a liaison office in Singapore, according to the provisions of the Companies Act, 2013.

Answer

A Foreign Company under the Companies Act, 2013, is defined in Section 2(42) as follows:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 277

• A company or body corporate that is incorporated outside India, which has a place of business in India
(either by itself or through an agent) and conducts any business activity in India in any other manner.

Analysis of Mike Limited's Situation

Mike Limited is a company incorporated in India. According to the definition provided in Section 2(42), a
Foreign Company must be incorporated outside India. Since Mike Limited is incorporated in India, it does
not meet the criteria of a foreign company, regardless of whether it has a liaison office in Singapore or
elsewhere.

The liaison office of a company, in this case, situated in Singapore, does not change the company's
domicile or place of incorporation. A liaison office typically represents the company for specific purposes
such as communication, marketing, or support, but it does not carry out business activities or generate
revenue.

Conclusion

Since Mike Limited is incorporated in India, it cannot be considered a foreign company under the
provisions of the Companies Act, 2013, even though it has a liaison office in Singapore. The liaison office
does not alter the fact that the company is Indian-incorporated. Therefore, Mike Limited would not be
classified as a Foreign Company.

Q8. Nov 19 Exam (3 marks)

A, an assessee, had large income in the form of dividend and interest. In order to reduce his tax liability, he
formed four private limited companies and transferred his investments to them in exchange for their shares.
The income earned by the companies was taken back by him as pretended loan. Can A be regarded as
separate from the private limited company he formed?

Provision under the Law

As per the judgment in Salomon vs. Salomon & Co. Ltd., the House of Lords held that a company is a
person distinct and separate from its members and, therefore, it has an independent legal existence
from its members who have constituted the company. However, under certain circumstances, the separate
entity of the company may be ignored by the courts.

When such circumstances arise, the courts may disregard the corporate entity of the company, look
behind the corporate façade, and hold the persons controlling its management liable for the company’s
actions. This principle is also known as lifting the corporate veil.

In cases where a company is formed solely for the purpose of evading taxes, the courts have the
discretion to disregard its separate legal personality and assess the tax liability in the hands of the real
person behind the company. This principle was upheld in the Dinshaw Maneckjee Petit case, where it was
concluded that the company was a sham, and the individual behind it was treated as the real owner of the
income.

Analysis of the Given Case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 278

In the given case, A (the assessee) formed four private limited companies and transferred his investments
(earning dividend and interest income) to them in exchange for their shares. The income earned by these
companies was subsequently taken back by A in the form of pretended loans.

The purpose of forming these companies was clearly to reduce tax liability. The companies were merely
used as a vehicle to transfer income back to A while avoiding taxes. The companies were not involved in
any genuine business activity, and the whole arrangement appeared to be a mere façade to evade tax.

Under the principles established in the Salomon vs. Salomon & Co. Ltd. case and the Dinshaw Maneckjee
Petit case, the courts can disregard the separate legal identity of companies formed solely for tax
avoidance. In this case, A’s companies were formed with the sole intention of evading taxes by splitting his
income into multiple parts and routing it through the companies, which were nothing more than a façade.

Conclusion

Given that the private limited companies formed by A were used solely for tax avoidance and did not
engage in any genuine business activities, the corporate veil can be lifted in this case. Therefore, A cannot
be regarded as separate from the private limited companies he formed, and the income earned through
these companies will be taxed in A's hands as if he himself earned it

Q9. May 19 Exam (3 marks)

Popular Products Ltd. is a company incorporated in India, having a total Share Capital of Rs 20 Crores. The
Share capital comprises of 12 Lakh equity shares of Rs 100 each and 8 Lakhs Preference Shares of Rs 100
each. Delight Products Ltd. and Happy Products Ltd. hold Rs 2,50,000 and 3,50,000 shares respectively in
Popular Products Ltd. Another company, Cheerful Products Ltd., holds Rs 2,50,000 shares in Popular
Products Ltd. Jovial Ltd. is the holding company for all the above three companies, namely Delight Products
Ltd., Happy Products Ltd., and Cheerful Products Ltd. Can Jovial Ltd. be termed as a subsidiary company of
Popular Products Ltd. if it controls the composition of directors of Popular Products Ltd.? State the related
provision in favor of your answer.

Provision under the Law

Section 2(87) of the Companies Act, 2013 defines a subsidiary company. According to this section, a
company is considered a subsidiary of another company if:

• The other company controls the composition of the board of directors of the company.

• The other company holds more than 50% of the voting power of the company, either through shareholding or
otherwise.

• The company is a subsidiary as per the definition under the Act.

Analysis of the Given Case

In this case:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 279

• Popular Products Ltd. has a total share capital of Rs 20 Crores, consisting of 12 Lakh equity shares and 8
Lakh preference shares.

• Delight Products Ltd., Happy Products Ltd., and Cheerful Products Ltd. collectively hold Rs 8,50,000
shares (2,50,000 + 3,50,000 + 2,50,000) in Popular Products Ltd., which amounts to less than 50% of the
total share capital of Popular Products Ltd.

• Jovial Ltd. is the holding company of Delight Products Ltd., Happy Products Ltd., and Cheerful Products
Ltd., but holds no direct shares in Popular Products Ltd.

Although Jovial Ltd. does not hold more than 50% of the share capital of Popular Products Ltd., it controls
the composition of the board of directors of Popular Products Ltd. This control over the board
composition, as per Section 2(87) of the Companies Act, is sufficient to make Jovial Ltd. the holding
company of Popular Products Ltd., not the other way around.

Conclusion

Since Jovial Ltd. controls the composition of the board of directors of Popular Products Ltd., it qualifies as
the holding company of Popular Products Ltd., and thus cannot be termed as a subsidiary of Popular
Products Ltd. The related provision under Section 2(87) of the Companies Act, 2013 confirms this analysis.

Q10. Nov 18 Exam (4 marks), Oct 19 MTP (4 marks)

A company registered under section 8 of the Companies Act, 2013, earned huge profit during the financial
year ended on 31st March, 2018 due to some favorable policies declared by the Government of India and
implemented by the company. Considering the development, some members of the company wanted the
company to distribute dividends to the members of the company. They approached you to advise them
about the maximum amount of dividend that can be declared by the company as per the provisions of the
Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013 and advise the members
accordingly.

Provision under the Law

Section 8 of the Companies Act, 2013 specifically deals with the formation and regulation of companies
that are established for charitable or not-for-profit purposes.

• Section 8(1) states that a company formed under this section must be for promoting objects related to:

o Commerce, art, science, sports, education, research, social welfare, religion, charity, or the protection of
the environment, among others.

o The company must apply its profits or other income towards the promotion of its objects and prohibits the
payment of dividends to its members.

• Section 8(2) mandates that the company must apply its profits exclusively for promoting its objects and
cannot distribute dividends to its members.

Analysis of the Given Case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 280

In this case, the company is registered under Section 8 of the Companies Act, 2013, and has earned huge
profits during the financial year ending on 31st March 2018.

The company, as per the provisions of Section 8, is formed for charitable or not-for-profit purposes and,
therefore, is prohibited from distributing any profits or dividends to its members. The section specifically
outlines that:

• The profit must be used exclusively to further the company's objectives, which might include activities such
as social welfare, education, or environmental protection.

• Any payment of dividends is prohibited under this section, as the primary objective is not to benefit
members financially.

Thus, despite the company's profitable performance, the members' request for a dividend is not permissible
under the law.

Conclusion

A company registered under Section 8 of the Companies Act, 2013, is prohibited from declaring dividends
to its members, as its profits must be used solely for promoting its objects. Therefore, the members' request
for a dividend is not valid, and they cannot be advised to expect any dividend from the company.

Q11. Nov 18 Exam (3 marks), Apr 21 MTP (4 marks)

Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period of one month was allowed
to Mr. X. Before the due date, Mr. X went to the company and wanted to repay the amount due from him. He
found only Mr. Z there, who was the factory supervisor of the company. Mr. Z told Mr. X that the accountant
and the cashier were on leave, and he was in charge of receiving money. Mr. Z issued a money receipt under
his signature. After two months, M/s ABC Limited issued a notice to Mr. X for non-payment of the dues within
the stipulated period. Mr. X informed the company that he had already cleared the dues and he is no longer
responsible for the same. He also contended that Mr. Z is an employee of the company to whom he had
made the payment, and being an outsider, he trusted the words of Mr. Z as the duty distribution is a job of the
internal management of the company. Analyze the situation and decide whether Mr. X is free from his
liability.

Provision under the Law

Doctrine of Indoor Management:

The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. It states that
outsiders dealing with a company are not expected to know the internal workings of the company. Therefore,
they can assume that all internal procedures and formalities are being properly followed unless there is an
obvious reason to believe otherwise.

• Constructive Notice implies that a person dealing with a company is deemed to know its internal rules as
specified in the company’s memorandum and articles of association. However, the Doctrine of Indoor
Management protects outsiders, allowing them to assume that the company’s internal procedures have
been properly carried out.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 281

• The doctrine provides that if a company’s officers or employees appear to have authority, outsiders can
assume their acts are valid, even if the internal formalities are not followed. In other words, an outsider is
entitled to assume that a person dealing with the company has the authority to do so, even if the internal
distribution of duties does not explicitly grant them this authority.

Analysis of the Given Case

In this case, Mr. X made the payment to Mr. Z, the factory supervisor, who claimed that he was in charge of
receiving money because the accountant and cashier were on leave. Mr. Z issued a receipt for the payment
under his signature.

According to the Doctrine of Indoor Management, Mr. X is entitled to assume that Mr. Z, an employee of the
company, was authorized to receive the payment, even though Mr. Z was not officially designated as the
person to handle payments. The doctrine protects outsiders like Mr. X from being aware of the company’s
internal arrangements or any internal discrepancies in duty allocation.

Since Mr. Z was acting within the apparent scope of his authority (being an employee of the company) and
provided a receipt for the payment, Mr. X can reasonably assume that the payment was properly made.

Conclusion

Based on the Doctrine of Indoor Management, Mr. X is free from liability for the payment of goods
purchased from M/s ABC Limited, as he made the payment to an employee (Mr. Z) of the company who
appeared to be authorized to accept the payment. The company cannot hold Mr. X liable for non-payment,
as the payment was made in good faith to someone who, by his position, seemed authorized to accept it.

Q12. May 18 Exam (4 marks)

Ravi Private Limited has borrowed Rs 5 crores from Mudra Finance Ltd. This debt is ultra vires to the
company. Examine, whether the company is liable to pay this debt? State the remedy if any available to
Mudra Finance Ltd.?

Provision under the Law

Ultra Vires Doctrine:

The doctrine of ultra vires refers to actions taken by a company or its directors that are beyond the powers
granted by the company's Memorandum of Association (MOA). If a company enters into a contract or
performs an act that exceeds its powers as defined in the MOA, such an act is considered "ultra vires" and is
void and inoperative.

Under the Companies Act, 2013, if an act is ultra vires to the company, it cannot be legally binding on the
company, and the company is not liable for any such contract unless the act has been ratified by the
company through the proper procedures.

Analysis of the Given Case

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 282

In this case, Ravi Private Limited has borrowed Rs 5 crores from Mudra Finance Ltd. However, the loan is
described as ultra vires to the company, which means the company has borrowed an amount beyond its
prescribed limits or powers stated in its Memorandum of Association (MOA). As a result, the transaction of
borrowing this amount is considered void.

Since the act of borrowing exceeds the company’s powers, it cannot be enforced against the company.
Therefore, Ravi Private Limited is not liable to repay the loan for the amount borrowed beyond the
prescribed limits of the MOA. The company is only liable for the debt within the limits allowed in the MOA.

Conclusion

Ravi Private Limited is not liable to pay

Q13. Nov 22 RTP

Question:
A transport company wanted to obtain licences for its vehicles but could not obtain licences if applied in its
own name. It, therefore, formed a subsidiary company and the application for the licence was made in the
name of the subsidiary company. The vehicles were to be transferred to the subsidiary company. Will the
parent and the subsidiary company be treated as separate commercial units? Explain in the light of the
provisions of the Companies Act, 2013.

Answer

If a subsidiary company is formed to act as an agent of the parent company, it may lose its individuality in
favor of the parent company. In such cases, the corporate veil can be lifted, and the parent company will be
held liable for the actions of the subsidiary company.

The facts of this case are similar to the Merchandise Transport Limited vs. British Transport Commission
(1982), where a transport company could not obtain licenses for its vehicles in its own name. To circumvent
this, the company formed a subsidiary, applied for the licenses in the subsidiary's name, and transferred the
vehicles to the subsidiary. The court ruled that the parent and subsidiary companies were treated as a single
commercial unit, and the application for licenses was rejected.

In this case, the parent and subsidiary companies will not be treated as separate commercial units. The
intention behind forming the subsidiary company was to circumvent the licensing requirement, which led to
the lifting of the corporate veil.

Q14. Nov 22 RTP

ABC Pvt Ltd has been overstating expenditures in their Profit & Loss account for the past few years. On
inquiry, it was found that the sole purpose was to avoid tax. However, there was no fraudulent intention.
Should the corporate veil of the company be lifted? Kindly justify.

Answer

Corporate veil refers to the legal distinction between the company and its members, meaning that the
company's actions are generally separate from the personal liability of its shareholders or directors.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 283

However, under certain circumstances, the principle of separate corporate personality may be disregarded,
and the corporate veil may be lifted.

Circumstances for Lifting the Corporate Veil

Corporate veil can be lifted by the courts or authorities in the following situations:

1. To determine the character of the company: When the company is used to disguise the true nature of
activities, especially to deceive the authorities or third parties.

2. To protect revenue or tax: If a company uses its corporate structure to evade taxes or commit tax fraud, the
corporate veil can be lifted to hold the company and its members accountable.

3. To avoid legal obligations: If a company is formed to avoid legal duties or to engage in illegal activities, the
courts can lift the veil to ensure justice is served.

4. Formation of subsidiaries to act as agents: If a subsidiary is formed to act as an agent of the parent
company for improper purposes, the veil may be lifted.

5. Company formed for fraud or improper conduct: In case of fraudulent conduct or improper objectives,
such as using the corporate form to defraud creditors, the veil may be lifted.

Application to the Present Case

In the case of ABC Pvt Ltd, although there was no fraudulent intention, the company was overstating
expenditures solely to avoid tax. This action constitutes a form of tax evasion, which is generally
considered improper conduct under company law. Even though the intention was not to commit fraud, the
primary purpose of the overstated expenses was to protect revenue by evading tax obligations.

Thus, the company was attempting to use its corporate structure to circumvent legal tax obligations and
gain an improper advantage.

Conclusion

In this case, the company used its corporate structure to avoid tax, which aligns with the circumstances
under which the corporate veil can be lifted. Even though the intention was not to commit fraud, tax
avoidance is still a violation of legal norms. Therefore, the corporate veil should be lifted, and the
company's actions should be scrutinized to hold it accountable for evading taxes

Q15. Nov 22 RTP

A company registered under Section 8 of the Companies Act, 2013, has been consistently making profits for
the past 5 years after a major change in the management structure. A few members contended that they are
entitled to receive dividends. Can the company distribute dividends? If yes, what is the maximum
percentage of dividend that can be distributed as per the provisions of the Companies Act, 2013? Also, to
discuss this along with other regular matters, the company kept a general meeting by giving only 14 days’
notice. Is this valid?

Answer

1. Dividend Distribution by Section 8 Company:

A company registered under Section 8 of the Companies Act, 2013 is specifically prohibited from paying

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 284

dividends to its members. The primary objective of such companies is to promote charitable or non-profit
purposes, and any profits earned must be used solely to further these objectives, not for distribution among
members.
Conclusion: The contention of the members to receive dividends is incorrect. The company cannot
distribute any dividends.

2. Notice Period for General Meeting:

Section 8 companies are allowed to call a general meeting with 14 days' notice instead of the regular 21
days as stipulated for other companies under the Companies Act, 2013. This flexibility is specifically
allowed for Section 8 companies, which often focus on promoting charitable, social, or public interest
objectives.
Conclusion: The decision to give only 14 days' notice for the general meeting is valid as per the provisions
for Section 8 companies.

Q16. Nov 22 RTP

No Limit Private Company is incorporated as an unlimited company having a share capital of Rs. 10,00,000.
One of its creditors, Mr. Samuel, filed a suit against a shareholder, Mr. Innocent, for recovery of his debt
against No Limit Private Company. Mr. Innocent has given his plea in the court that he is not liable as he is
just a shareholder. Explain, whether Mr. Samuel will be successful in recovering his dues from Mr. Innocent?

Provision under the law

Section 2(92) of the Companies Act, 2013 defines an unlimited company as a company that does not have
any limit on the liability of its members. The liability of each member extends to the whole amount of the
company’s debts and liabilities, and the member is entitled to claim contribution from other members. If the
company has share capital, the Articles of Association must specify the amount of share capital and the
amount of each share.

As long as the company is a going concern, the liability on the shares is the only liability that can be enforced
by the company. In case of winding up, the creditors may institute proceedings, and the official liquidator
can call upon the members to contribute to the liabilities of the company.

Analysis of the given case

In this case, No Limit Private Company is incorporated as an unlimited company with a share capital of Rs.
10,00,000. One of its creditors, Mr. Samuel, has filed a suit against Mr. Innocent, a shareholder, for recovery
of debt owed by the company.

• As per the provisions of Section 2(92), since the company is an unlimited company, the liability of its
members is unlimited. This means that each member’s liability extends beyond the amount of share capital
they hold.

• However, Mr. Innocent is a shareholder, and his liability is limited to the unpaid amount of his share capital.
Therefore, Mr. Innocent is liable to contribute to the company’s liabilities only if the company is being
wound up and the official liquidator calls upon the members for contributions.

• Mr. Samuel, being a creditor, cannot directly claim the amount due from Mr. Innocent as a shareholder at
this stage. The shareholder's unlimited liability comes into effect only during the winding-up process.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 285

Conclusion

Mr. Samuel will not be successful in directly recovering his dues from Mr. Innocent at this stage. Mr.
Innocent’s liability as a shareholder will only arise if the company is wound up, and the official liquidator
calls for contributions from the members towards the debts of the company. Therefore, Mr. Samuel's claim
cannot be enforced against Mr. Innocent directly under the present circumstances.

Q17. May 22 RTP

Jagannath Oils Limited is a public company and has 220 members. Of which 25 members were employees
of the company during the period from 1st April 2006 to 28th June 2016. They were allotted shares in
Jagannath Oils Limited for the first time on 1st July 2007, which were sold by them on 1st August 2016. After
some time, on 1st December 2016, each of those 25 members acquired shares in Jagannath Oils Limited
which they are holding till date. Now the company wants to convert itself into a private company. State with
reasons: a) Whether Jagannath Oils Limited is required to reduce the number of members.
b) Would your answer be different if the above 25 members were employees of Jagannath Oils Limited for the
period from 1st April 2006 to 28th June 2017?

Provision under the law

Section 2(68) of the Companies Act, 2013 defines a "Private company" as a company that:

1. Has a minimum paid-up share capital as prescribed.

2. Restricts the right to transfer its shares (except in the case of One Person Company).

3. Limits the number of its members to 200 (excluding employees).

o If two or more persons hold shares jointly, they are treated as a single member.

o Employees who are members, or former employees who became members during their employment and
continued to be members after the cessation of employment, are not counted in the limit of 200 members.

Analysis of the given case

a) Reduction of number of members

Jagannath Oils Limited currently has 220 members, including 25 employees.

• According to Section 2(68), employees who are members of the company are excluded from the count of
members for the purpose of the 200-member limit, but this exclusion only applies if they were employees at
the time of acquiring the membership or if they became members during their employment and continued
to hold shares after employment ceased.

• The 25 employees were allotted shares on 1st July 2007, and they ceased to be employees before they
acquired their current membership on 1st December 2016. Since they were no longer employees when they
acquired the shares, they will be counted as regular members for the purpose of the 200-member limit.
Therefore, Jagannath Oils Limited will need to reduce the number of members to comply with the 200-
member limit before it can convert itself into a private company.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 286

b) Difference if the 25 members were employees until 28th June 2017

• If the 25 members were still employees until 28th June 2017, they would have been employees when they
acquired their shares on 1st December 2016.

• In this case, the employees would not be counted in the 200-member limit, as they are specifically
excluded from the count under Section 2(68).

• Hence, the total number of members, excluding the employees, would be 195, and Jagannath Oils Limited
would not need to reduce the number of members before converting itself into a private company.

Conclusion

a) Since the 25 employees were no longer employed by the company when they acquired their shares in
December 2016, Jagannath Oils Limited will need to reduce the number of members to 200 before it can
convert itself into a private company.
b) If the 25 members were still employees until June 2017, they would be excluded from the 200-member
count, and therefore, Jagannath Oils Limited would not need to reduce the number of members before
converting into a private company.

Q18. May 22 RTP

A, B, and C have decided to set up a new club named ABC Club with the objective of promoting the welfare
of the Christian society. They planned to do charitable work or social activity for promoting the art of the
economically weaker section of the Christian society. The company obtained the status of a Section 8
company and started operating from 1st April 2017 onwards. However, on 30th September 2019, it was
observed that ABC Club was violating the objects of its objective clause due to which it was granted the
status of a Section 8 Company under the Companies Act, 2013. Discuss what powers can be exercised by
the central government against ABC Club in such a case?

Provision under the law

Section 8 of the Companies Act, 2013 deals with the formation of companies that are established for
charitable objects such as commerce, art, science, education, sports, etc. These companies intend to apply
their profits to promote their objects and cannot distribute profits among members.
The companies registered under Section 8 must obtain a license from the Central Government, and this
license is issued subject to compliance with certain conditions.

Analysis of the given case

In the case of ABC Club, which obtained the status of a Section 8 company but was observed to be violating
its object clause, the following powers can be exercised by the Central Government:

1. Revocation of License

o The Central Government has the power to revoke the license of a Section 8 company if the company
contravenes the requirements or conditions under which the license was granted, or if the company is
conducting its affairs in a fraudulent manner, violates the objects of the company, or acts in a manner
prejudicial to public interest.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 287

o Before revocation, the company must be given a written notice of the intention to revoke the license and an
opportunity to be heard.

o Upon revocation, the Registrar will change the company's name to either Limited or Private Limited in the
register.

2. Winding Up or Amalgamation

o If the Central Government is satisfied that it is essential in the public interest, it may order the winding up of
the company or its amalgamation with another company that is also registered under Section 8 and has
similar objects.

o The company must be given a reasonable opportunity to be heard before such an order is made.

3. Amalgamation with Another Section 8 Company

o The Central Government can also direct the amalgamation of the company with another company
registered under Section 8, having similar objects, if it is in the public interest.

o This amalgamation can be ordered notwithstanding anything to the contrary in the Companies Act, and the
new company will have its own constitution, properties, powers, rights, liabilities, duties, and obligations as
specified in the order.

Conclusion

In the case of ABC Club violating its object clause, the Central Government can exercise the following
powers:

• Revocation of the Section 8 license, with a change of the company's name to either "Limited" or "Private
Limited" upon revocation.

• Winding up the company or ordering its amalgamation with another similar Section 8 company if it is
deemed necessary in the public interest. The company will be given an opportunity to be heard before any
such actions are taken

Q19. May 22 RTP

An employee, Mr. Karan, signed a contract with his employer company ABC Limited that he will not solicit
the customers after leaving the employment with the company. But after Mr. Karan left ABC Limited, he
started up his own company, PQR Limited, and he began soliciting the customers of ABC Limited for his own
business purposes.
ABC Limited filed a case against Mr. Karan for breach of the employment contract and for soliciting their
customers for his own business. Mr. Karan contended that there is a corporate veil between him and his
company, and he should not be personally held liable for this.
In this context, the company ABC Limited seeks your advice on the meaning of the corporate veil and when
the veil can be lifted to make the owners liable for the acts done by a company.

Provision under the law

Corporate Veil refers to the legal concept that a company, being a separate legal entity, is distinct from its
shareholders, members, or directors. The principle of corporate personality means that the company's acts

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 288

are separate from the individuals involved in the company, and thus, they are not personally liable for the
company's actions or debts.
However, the law allows for lifting or piercing the corporate veil in certain exceptional circumstances. This
means that the courts may disregard the company's separate legal personality and hold its members
personally liable in the following situations:

1. To determine the character of the company - For example, to determine whether a company is being used
to hide the identity of its real owner.

2. To protect revenue/tax - When a company is used for tax evasion or avoidance.

3. To avoid a legal obligation - When the company is used to avoid personal responsibilities or obligations.

4. Formation of subsidiaries to act as agents - When subsidiaries are created for improper purposes, such as
evading legal responsibility.

5. Company formed for fraud/improper conduct or to defeat the law - When a company is formed for
fraudulent activities or to circumvent the law.

Analysis of the given case

In this case, Mr. Karan created PQR Limited and began soliciting the customers of ABC Limited, which was a
clear violation of the contract he had signed with his former employer. Mr. Karan contends that there is a
corporate veil between him and his new company, PQR Limited, and therefore, he should not be personally
liable for the breach of contract.

However, the corporate veil is not absolute, and it can be lifted when the company is used for improper
conduct or to avoid legal obligations.
In this scenario, Mr. Karan created PQR Limited with the clear intention of avoiding the legal obligations
arising from the contract he had with ABC Limited, specifically the non-solicitation clause. The creation of
PQR Limited appears to be a fraudulent action designed to circumvent the contractual restriction he had
agreed to.

According to the leading case law of Gilford Motor Co. vs. Horne, the court held that the corporate veil
could be lifted when a company is formed to avoid legal obligations or to commit a wrongful act.
Since Mr. Karan's formation of PQR Limited is for the purpose of soliciting customers of ABC Limited and
breaching his employment contract, the veil between Mr. Karan and PQR Limited should be lifted. Mr.
Karan should be personally liable for the acts of PQR Limited, as the company was used to circumvent his
contractual obligations.

Conclusion

In this case, Mr. Karan's contention that he is shielded by the corporate veil between him and PQR Limited is
not valid. The corporate veil can be lifted when a company is used for fraudulent purposes or to avoid legal
obligations. Since PQR Limited was created to breach the contractual terms of ABC Limited, the veil
between Mr. Karan and PQR Limited will be lifted, and Mr. Karan will be personally held liable for the acts of
PQR Limited.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 289

Q20. Nov 21 RTP

Mr. Dhruv was appointed as an employee in Sun Moon Timber Private Limited on the condition that if he were
to leave his employment, he would not solicit customers of the company. After some time, he was fired from
the company. He set up his own business under a proprietorship and undercut Sun Moon Timber Private
Limited’s prices. On the legal advice of his consultant, to avoid breach of contract, he formed a new
company named Seven Stars Timbers Private Limited. In this company, his wife and a friend of Mr. Dhruv
were the sole shareholders and directors. They took over Dhruv’s business and continued it.
Sun Moon Timber Private Limited filed a suit against Seven Stars Timbers Private Limited for violation of the
contract. Seven Stars Timbers Private Limited argued that the contract was entered into between Mr. Dhruv
and Sun Moon Timber Private Limited, and since the company has a separate legal entity, Seven Stars
Timbers Private Limited has not violated the terms of the agreement.
Explain with reasons whether the separate legal entity between Mr. Dhruv and Seven Stars Timbers Private
Limited will be disregarded.

Provision under the law

The doctrine of separate legal entity is a fundamental principle of company law, which establishes that a
company is a distinct legal entity, separate from its shareholders and directors. This means that the
company has its own legal personality and can own property, enter into contracts, and sue or be sued in its
own name.

However, in certain cases, the corporate veil (the separation between the company and its members) can
be pierced or disregarded by the courts. This can occur when a company is used for fraudulent purposes or
to avoid legal obligations. The concept of piercing the corporate veil has been recognized in various cases,
most notably in Gilford Motor Co. v. Horne, where the court disregarded the separate legal personality of a
company formed to evade an existing contractual obligation.

Analysis of the given case

In this case, Mr. Dhruv was bound by a contract with Sun Moon Timber Private Limited not to solicit
customers upon leaving the company. After being fired, Mr. Dhruv set up his own business, undercutting Sun
Moon Timber Private Limited’s prices. To avoid breaching the contract, he formed a new company, Seven
Stars Timbers Private Limited, where his wife and a friend became the sole shareholders and directors.

The creation of Seven Stars Timbers Private Limited appears to be a clear attempt by Mr. Dhruv to evade
his contractual obligations. The company was formed for the sole purpose of continuing the business Mr.
Dhruv was previously running and violating the terms of his contract with Sun Moon Timber Private Limited.
In such cases, courts have disregarded the separate legal entity principle when the company is used as a
mere device or sham to avoid legal duties or commit fraud.

The case of Gilford Motor Co. v. Horne is directly applicable here, where the court held that if a company is
formed to evade legal obligations, it can be treated as a mere cloak or sham, and the corporate veil can be
lifted. The court will look at the intention behind the formation of the company, and if it was formed to avoid
an existing contractual commitment, the corporate veil can be disregarded.

Conclusion

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 290

In this case, Seven Stars Timbers Private Limited was formed with the primary intention of evading the
contractual obligation of Mr. Dhruv not to solicit customers from Sun Moon Timber Private Limited. The
company was merely a device to avoid legal responsibility, and therefore, the separate legal entity of
Seven Stars Timbers Private Limited should be disregarded. The court is likely to pierce the corporate veil
and hold Mr. Dhruv personally liable for the breach of contract, as the company was used to circumvent his
legal obligations.

Q21. Nov 21 RTP

Narendra Motors Limited is a government company. Shah Auto Private Limited is a private company having a
share capital of ten crores in the form of ten lakh shares of Rs 100 each. Narendra Motors Limited is holding
five lakh five thousand shares in Shah Auto Private Limited. Shah Auto Private Limited claimed the status of a
Government Company.
Advise as a legal advisor, whether Shah Auto Private Limited is a government company under the provisions
of the Companies Act, 2013.

Answer

To determine whether Shah Auto Private Limited qualifies as a government company, we need to examine
the provisions of the Companies Act, 2013.

Provisions of the Companies Act, 2013:

1. Definition of Government Company:

o As per Section 2(45) of the Companies Act, 2013, a Government Company is defined as a company in
which:

▪ Not less than 51% of the paid-up share capital is held by:

▪ The Central Government, or

▪ Any State Government(s), or

▪ Both the Central Government and State Government(s) together.

▪ This includes a subsidiary company of such a government company.

2. Definition of Subsidiary Company:

o Section 2(87) defines a subsidiary company as a company in which the holding company (Narendra
Motors Limited) exercises or controls more than half of the total voting power. This control can be through
direct holding or through a combination of the holding company and its subsidiaries.

Analysis of the Case:

• Narendra Motors Limited is a government company, meaning that the government holds at least 51% of
its share capital.

• Shah Auto Private Limited has a total share capital of ten crores (ten lakh shares of Rs 100 each). Narendra
Motors Limited holds five lakh five thousand shares in Shah Auto Private Limited. This represents 50.5% of
the total shareholding of Shah Auto Private Limited.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 291

Since Narendra Motors Limited holds more than half of the share capital in Shah Auto Private Limited
(50.5%), it exercises control over more than half of the voting power of Shah Auto Private Limited.

• As per Section 2(87), since Narendra Motors Limited is the holding company and holds more than 50% of
the voting power, Shah Auto Private Limited is a subsidiary company of Narendra Motors Limited.

• According to Section 2(45), since Shah Auto Private Limited is a subsidiary of a government company, it is
automatically classified as a government company as well.

Conclusion:

Yes, Shah Auto Private Limited is a government company under the provisions of the Companies Act, 2013,
as it is a subsidiary of Narendra Motors Limited, which is a government company.

Q22. Nov 21 RTP

Mr. A is an Indian citizen and his stay in India during the immediately preceding financial year is for 115 days.
He appoints Mr. B as his nominee, who is a foreign citizen but has stayed in India for 130 days during the
immediately preceding financial year.

1. Is Mr. A eligible to be incorporated as a One Person Company (OPC)? If yes, can he give the name of Mr. B in
the Memorandum of Association as his nominee to become the member after Mr. A’s incapacity to become a
member?

2. If Mr. A has contravened any of the provisions of the Act, what are the consequences?

Answer

1) Eligibility of Mr. A to Incorporate an OPC:

According to the provisions of Section 2(62) of the Companies Act, 2013, to incorporate a One Person
Company (OPC), the following conditions must be met:

• The sole member must be a natural person.

• The sole member must be an Indian citizen and resident in India.

o Resident in India is defined as a person who has stayed in India for a period of not less than 120 days
during the immediately preceding financial year.

In this case:

• Mr. A is an Indian citizen, but his stay in India during the preceding financial year is only 115 days.

• As per the requirement, the stay should be 120 days or more to qualify as a resident in India. Hence, Mr. A is
not eligible to incorporate an OPC.

Regarding the nominee:

• While Mr. B meets the stay requirement (130 days), he is a foreign citizen. As per the law, the nominee of an
OPC must also be an Indian citizen. Hence, Mr. B cannot be appointed as the nominee, as he is not an
Indian citizen.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 292

Thus, Mr. A is not eligible to incorporate an OPC, and Mr. B's name cannot be included as a nominee in the
Memorandum of Association.

2) Consequences for Contravention:

If Mr. A contravenes the provisions and proceeds with incorporating an OPC despite being ineligible, he will
face the following consequences:

• Penalty: Mr. A will be punishable with a fine which may extend to ₹10,000.

• Additionally, there will be a further fine which may extend to ₹1,000 for each day the contravention
continues after the first occurrence.

Therefore, Mr. A will be liable to a fine for contravening the provisions related to the incorporation of an OPC.

Q23. Nov 19 RTP

Some of the creditors of Pharmaceutical Appliances Ltd. have complained that the company was formed by
the promoters only to defraud the creditors and circumvent the compliance of legal provisions of the
Companies Act, 2013. In this context, they seek your advice as to the meaning of corporate veil and when
the promoters can be made personally liable for the debts of the company.

Provision under the law

Corporate Veil:
The concept of the corporate veil refers to the legal separation between a company and its members
(shareholders), whereby the company is recognized as a distinct entity. This means that the members of the
company are typically not liable for the company's debts or obligations.

As per Company Law, members enjoy the protection of the corporate veil, meaning they are shielded from
the consequences of the company’s actions unless there are exceptional circumstances where the
corporate veil is lifted. In such cases, the court may disregard the separate legal identity of the company
and hold its promoters or those in control personally liable for the company’s actions.

Analysis of the given case

The question presents a situation where creditors allege that Pharmaceutical Appliances Ltd. was formed
with the intent to defraud creditors and circumvent legal compliance. In such a case, the promoters of the
company may be personally liable if the corporate veil is lifted.

The corporate veil can be disregarded under the following exceptional circumstances:

1. To determine the character of the company: For example, the court may examine whether the company is
a friend or a foe, i.e., whether it is acting in the interests of the public or against it.

2. To protect revenue/tax: If the company is being used to avoid tax or evade revenue obligations, the veil may
be pierced.

3. To avoid legal obligations: If the company was formed with the primary intent of evading legal obligations,
the veil may be lifted.

4. Formation of subsidiaries to act as agents: If the company is created or used as an agent to evade laws or
obligations, the veil may be lifted.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 293

5. Company formed for fraud/improper conduct or to defeat law: This is the most relevant point for this
case. If the promoters of Pharmaceutical Appliances Ltd. created the company with the intent to defraud
creditors, the corporate veil may be lifted, and the promoters may be held personally liable for the debts of
the company.

Conclusion

In the case of Pharmaceutical Appliances Ltd., if it is proven that the promoters formed the company with
the intent to defraud creditors or circumvent legal compliance, the court may lift the corporate veil. In
such a case, the promoters can be held personally liable for the company's debts. The corporate veil will be
disregarded because the company was formed with the objective of fraudulent or improper conduct,
which allows the court to pierce the veil and hold the promoters accountable.

Q24 May 19 RTP

Flora Fauna Limited was registered as a public company. There are 230 members in the company as noted
below:
a) Directors and their relatives: 190
b) Employees: 15
c) Ex-Employees (Shares were allotted when they were employees): 10
d) 5 couples holding shares jointly in the name of husband and wife: 10 (5*2)
e) Others: 5

The Board of Directors of the company proposes to convert it into a private company. Also, advise whether
reduction in the number of members is necessary.

Provision under the law

As per Section 2(68) of the Companies Act, 2013, a private company is defined as a company that:

1. Has a minimum paid-up share capital as prescribed.

2. Limits the number of its members to 200, except in the case of a One Person Company (OPC).

Additionally, the following persons are not counted when determining the number of members:

• Persons in employment of the company.

• Persons who were in employment but became members while employed and continued to be members
after employment ceased.

Also, when two or more persons hold shares jointly, they are considered as a single member for the
purposes of the member count.

Analysis of the given case

In the given case, Flora Fauna Limited is considering converting into a private company. The current number
of members is 230, but we need to exclude certain categories:

• Directors and their relatives (190 members): These members are valid.

• Employees (15 members): These members will not be counted because they are in employment.

• Ex-Employees (10 members): Since they were employees and still hold shares, they are not counted in the
member total.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 294

• Couples holding shares jointly (10 members): Since these are joint holdings, they count as 5 members.

• Others (5 members): These members are valid.

Total count of members:

• Directors and their relatives: 190

• Couples (counted as 1 member per couple): 5

• Others: 5

Total members: 200

Conclusion

Since the total number of members in Flora Fauna Limited after considering the exclusions is exactly 200,
which is the maximum limit for a private company, there is no need to reduce the number of members.
The company is eligible to convert into a private company without any further action regarding the reduction
of members.

Q25. May 19 RTP, Nov 22 MTP, part i (6 mark), part ii (4 mark)

i. F, an assessee, was a wealthy man earning huge income by way of dividend and interest. He formed three
Private Companies and agreed with each to hold a block of investment as an agent for them. The dividend
and interest income received by the companies was handed back to F as a pretended loan. This way, F
divided his income into three parts in a bid to reduce his tax liability.
Decide, for what purpose the three companies were established? Whether the legal personality of all the
three companies may be disregarded.

ii. Can a non-profit organization be registered as a company under the Companies Act, 2013? If so, what
procedure does it have to adopt?

Provision under the law

i. The House of Lords in Salomon Vs Salomon & Co. Ltd. established that a company is a person distinct
and separate from its members and thus has an independent and separate legal existence. However, in
certain circumstances, the courts can disregard the separate legal personality of the company. This is
typically done when a company is formed purely to evade taxes or for fraudulent purposes. When this
happens, courts may "pierce the corporate veil" and hold the persons controlling the company liable for the
company's actions.

ii. Section 8 of the Companies Act, 2013 allows the formation of companies that aim to promote charitable
objects such as commerce, art, science, sports, education, research, social welfare, religion, charity, or the
protection of the environment. The key provisions include:

• The company must apply its profits solely for promoting its objects and must prohibit the payment of
dividends to its members.

• The Central Government has the authority to grant a license for registering such a company.

• A Section 8 company can be registered without adding the words "Limited" or "Private Limited" to its name,
but must meet the conditions set by the government.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 295

Analysis of the given case

i.
The three companies formed by F were created solely for the purpose of tax avoidance. The companies
acted merely as a façade to distribute F's income under the guise of pretended loans. In this case, the
companies were not created for legitimate business purposes but only to split F's income into parts to evade
tax.
Since the companies were established with the primary intent of tax evasion and did not perform any
substantial business activities, they are treated as sham entities. The courts may disregard the legal
personality of the companies because they were formed to evade legal obligations, as seen in cases like Re
Sir Dinshaw Maneckji Petit (AIR 1927 Bom 371) and Juggilal vs. Commissioner of Income Tax (AIR 1969
SC 932).

ii.
A non-profit organization can be registered as a company under Section 8 of the Companies Act, 2013.
The key provisions for this include:

• The company must be formed for promoting charitable objects and must use its profits solely for
promoting its objects.

• The company must prohibit the payment of dividends to its members.

• The Central Government can issue a license to register the company as a Section 8 company without the
addition of the words "Limited" or "Private Limited" to its name.

• The company will have limited liability and will enjoy the privileges and obligations of a limited company.

Conclusion

i. The three companies were established by F solely to avoid tax liability, and their formation was merely a
means to split his income. The legal personality of these companies may be disregarded, and the courts
may pierce the corporate veil because the companies were formed for fraudulent purposes, as there was
no legitimate business conducted.

ii. Yes, a non-profit organization can be registered as a company under Section 8 of the Companies Act,
2013. The company must meet the specific requirements for charitable purposes and must obtain a license
from the Central Government for registration. The company will operate without the words "Limited" or
"Private Limited" in its name.

Q26. Nov 22 MTP (4 Marks)

Mr. Mohan had purchased some goods from Sunflower Limited on credit. A credit period of one month was
allowed to Mr. Mohan. Before the due date, Mr. Mohan went to the company and wanted to repay the amount
due from him. He found only Mr. Ramesh there, who was the factory supervisor of the company. Mr. Ramesh
told Mr. Mohan that the Accountant and the cashier were on leave, he was in charge of receiving money, and
Mr. Mohan may pay the amount to him. Mr. Ramesh issued a money receipt under his signature. After two
months, Sunflower Limited issued a notice to Mr. Mohan for non-payment of the dues within the stipulated
period. Mr. Mohan informed the company that he had already cleared the dues and he was no longer
responsible for the same. He also contended that Mr. Ramesh was an employee of the company whom he

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 296

had made the payment to, and being an outsider, he trusted the words of Mr. Ramesh, as duty distribution is
a job of the internal management of the company. Analyse the situation and decide whether Mr. Mohan is
free from his liability.

Provision under the law

Doctrine of Indoor Management:

The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. While the
Doctrine of Constructive Notice assumes that an outsider is deemed to know the internal affairs and
formalities of a company, the Doctrine of Indoor Management allows an outsider to assume that the internal
formalities of a company have been properly followed, especially when dealing with officers or agents of the
company who appear to have the authority to carry out certain acts.

Under this doctrine, an outsider dealing with a company is entitled to assume that the acts of its directors,
officers, or employees, within their apparent authority, are validly performed. This is irrespective of whether
or not the internal formalities have been strictly complied with, provided that the act itself is within the
scope of the apparent authority.

Analysis of the given case

In this case, Mr. Mohan, the buyer, went to Sunflower Limited to repay the amount due for goods purchased
on credit. Upon finding Mr. Ramesh, the factory supervisor, who informed him that he was in charge of
receiving money in the absence of the accountant and cashier, Mr. Mohan made the payment to Mr.
Ramesh.

Mr. Ramesh, in turn, issued a receipt under his signature, acknowledging the payment. This situation
involves the Doctrine of Indoor Management, which allows an outsider like Mr. Mohan to assume that Mr.
Ramesh had the authority to receive the payment on behalf of the company. As a factory supervisor, Mr.
Ramesh held a position that would reasonably imply some level of authority, and the receipt issued further
reinforced this assumption.

Therefore, Mr. Mohan can rightfully assume that Mr. Ramesh was authorized to receive payments for the
company, even though he was not the cashier or accountant. The internal management structure of the
company, which Mr. Mohan had no reason to question, should not affect the validity of the payment.

Conclusion

Mr. Mohan is free from liability. Under the Doctrine of Indoor Management, Mr. Mohan is entitled to
assume that Mr. Ramesh had the authority to receive the payment, as he was an employee of Sunflower
Limited. The company cannot hold Mr. Mohan responsible for non-payment, as he made the payment to the
person whom he reasonably believed to be authorized to receive it on behalf of the company.

Q27. Nov 22 MTP (4 Marks)

Articles of Association of XYZ Private Limited provides that the Board of Directors can take a loan up to
₹50,00,000 for the company by passing the Board Resolution. In the case where the loan amount exceeds
this limit, a Special Resolution is required to be passed in a general meeting. Due to an urgent need for

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 297

funds, the Board of Directors applied for a loan of ₹60,00,000 from a reputed bank without passing the
Special Resolution in the general meeting. The Board of Directors gave an undertaking to the bank that the
Special Resolution had been passed for such a loan. The bank, trusting the undertaking, lent the money.
Upon demanding repayment of the loan, the company denied payment, claiming that the act was ultra vires
to the company. Advise.

Provision under the law

Doctrine of Indoor Management:

The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. Under this
doctrine, an outsider dealing with a company is entitled to assume that all internal formalities, as required
by the company's Articles of Association, have been properly followed, even if those formalities have not
been strictly complied with.

This was established in the landmark case of Royal British Bank v. Turquand, where it was held that
outsiders dealing with the company are not obliged to inquire about the internal management of the
company. If an officer or director of the company appears to be acting within their authority, the outsider is
entitled to assume that the action is valid.

Analysis of the given case

In this case, the Articles of Association of XYZ Private Limited specify that the Board can borrow up to
₹50,00,000 by passing a Board Resolution, but for loans exceeding this amount, a Special Resolution must
be passed in a general meeting. Despite this, the Board of Directors applied for a loan of ₹60,00,000 from a
bank without passing the Special Resolution.

The Board, however, gave an undertaking to the bank that the Special Resolution had been passed. The
bank, relying on this undertaking, lent the money.

As per the Doctrine of Indoor Management, the bank is entitled to assume that the internal formalities,
such as the passing of the Special Resolution, have been followed correctly, even though they were not. The
bank was acting in good faith by trusting the undertaking of the Board, and it is not required to verify whether
the Special Resolution was actually passed.

Therefore, the bank has a right to claim repayment from the company because it is protected by the
doctrine. The company's denial of payment based on the transaction being ultra vires would not hold in this
situation, as the doctrine allows the bank to rely on the Board's representation without further inquiry.

Conclusion

The bank can claim repayment of the loan from XYZ Private Limited. Under the Doctrine of Indoor
Management, the bank was entitled to rely on the Board's undertaking that the Special Resolution had been
passed, and there was no obligation on the bank to verify the internal proceedings of the company.
Therefore, the company's attempt to deny payment on the grounds that the loan was ultra vires is not valid.

Q28. Nov 22 MTP (3 Marks)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 298

Mr. Sunny sold his business of cotton production to a cotton production company, CPL Private Limited, in
which he held all the shares except one, which was held by his wife. He is also a creditor in the company for
a certain amount. Mr. Sunny got the insurance for the stock of cotton of CPL Private Limited but in his own
name, not in the name of the company. After one month, all the stocks of cotton of CPL Private Limited were
destroyed by fire. Mr. Sunny filed the claim for such loss with the insurance company. State with reasons
whether the insurance company is liable to pay the claim.

Provision under the law

Separate Legal Entity (Salomon v. Salomon & Co. Ltd.):

The principle established in Salomon v. Salomon & Co. Ltd. affirms that a company is a separate legal
entity distinct from its members. This means that the company has its own legal identity, independent of its
shareholders or creditors.

Insurable Interest (Macaura v. Northern Assurance Co. Ltd.):

In Macaura v. Northern Assurance Co. Ltd., it was held that a shareholder or creditor of a company does
not have an insurable interest in the property of the company. Insurable interest refers to a financial interest
in the property that is at risk. In the case of a company, its property belongs to the company, not its
shareholders or creditors, and thus they cannot insure it in their own name.

Analysis of the given case

In this case, Mr. Sunny is the owner of CPL Private Limited with the exception of one share held by his wife.
He has also insured the cotton stocks of the company in his own name, not in the company's name.

• Under the principle of separate legal entity, Mr. Sunny and CPL Private Limited are treated as two distinct
entities, even though he holds nearly all the shares.

• Macaura v. Northern Assurance Co. Ltd. clearly establishes that Mr. Sunny, despite being the major
shareholder and a creditor of the company, does not have an insurable interest in the company's property.
The company, as a separate legal entity, owns the stock of cotton, not Mr. Sunny.

• Since Mr. Sunny does not have an insurable interest in the cotton stock belonging to CPL Private Limited, the
insurance company is not liable to pay the claim to him for the loss of stock in the fire.

Conclusion

The insurance company is not liable to pay the claim to Mr. Sunny. Since he does not have an insurable
interest in the property of CPL Private Limited (as the company is a separate legal entity), he cannot claim
ownership or compensation for the destruction of the cotton stock.

Q29 MTP Nov 22

The paid-up capital of Ram Private Limited is ₹10 Crores in the form of 7,00,000 Equity Shares of ₹100 each
and 3,00,000 Preference Shares of ₹100 each. Lakhan Private Limited is holding 3,00,000 Equity Shares and
3,00,000 Preference Shares in Ram Private Limited. State with reason whether Ram Private Limited is a
subsidiary of Lakhan Private Limited.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 299

Provision under the law

Section 2(87) of the Companies Act, 2013 – Definition of Subsidiary Company:

A subsidiary company is a company in which the holding company:

1. Controls the composition of the Board of Directors; or

2. Exercises or controls more than one-half of the total voting power either on its own or together with one
or more of its subsidiaries.

For the purposes of this section:

• The composition of the Board of Directors is deemed to be controlled if the holding company can appoint
or remove the majority of the directors.

• Voting power includes both equity and preference shares, provided the preference shares carry voting rights
equivalent to those of equity shares.

Analysis of the given case

• Ram Private Limited's Paid-up Capital:

o 7,00,000 Equity Shares of ₹100 each = ₹7,00,00,000

o 3,00,000 Preference Shares of ₹100 each = ₹3,00,00,000

o Total Paid-up Capital = ₹10,00,00,000

• Lakhan Private Limited's Holdings:

o 3,00,000 Equity Shares = ₹3,00,00,000

o 3,00,000 Preference Shares = ₹3,00,00,000

• It is not clear whether the preference shares have voting rights similar to equity shares. If they do not have
voting rights, then Lakhan Private Limited holds:

o 3,00,000 Equity Shares, which is 42.86% of the total equity share capital (3,00,00,000 / 7,00,00,000).

o In this case, Lakhan Private Limited would not control more than 50% of the voting power, because the
preference shares are not assumed to be voting shares.

If the preference shares do have voting rights equal to equity shares, then Lakhan would hold:

• 3,00,000 Equity Shares + 3,00,000 Preference Shares = 60% of the total voting power.

• In this case, Lakhan Private Limited would control more than one-half of the voting power, and Ram Private
Limited would be a subsidiary of Lakhan Private Limited.

Conclusion

• If preference shares do not have voting rights, Ram Private Limited is not a subsidiary of Lakhan Private
Limited, as Lakhan does not control more than 50% of the voting power.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 300

• If preference shares do have voting rights, Ram Private Limited is a subsidiary of Lakhan Private Limited,
as Lakhan would then control more than 50% of the total voting power.

Given the lack of information on voting rights of the preference shares, it can be assumed that Ram Private
Limited is not a subsidiary of Lakhan Private Limited based on the current facts.

Q30. Mar 22 MTP (4 Marks)

Mr. Raj formed a company with a capital of ₹50,000. He sold his business to another company for ₹40,000.
For the payment of sale, he accepted shares worth ₹30,000 (3000 shares of ₹1 each). The balance ₹10,000
was considered as a loan, and Mr. Raj secured the amount by issuing debentures. His wife and three
daughters took one share each. Owing to a strike, the company was wound up. The assets of the company
were valued at ₹6,000. The debts due to unsecured creditors were ₹8,000.
Mr. Raj retained the entire sum of ₹6,000 as part payment of the loan. To this, the other creditors objected.
Their contention was that a man could not own any money to himself, and the entire sum of ₹6,000 should
be paid to them.
Examine the rights of Mr. Raj and other creditors. Who will succeed?

Provision under the law

Separate Legal Entity / Corporate Veil:

The concept of Separate Legal Entity or Corporate Veil is derived from the landmark case of Salomon v/s
Salomon & Co. Ltd. (1897), which established that a company is a distinct legal entity separate from its
members.
The corporate veil shields members (shareholders) from liabilities associated with the company's actions
or debts. As a result, the members are not personally liable for the company's debts or legal issues. This
separate legal personality of a company protects its members from being held responsible for the
company’s obligations, except in cases of fraud or other exceptional circumstances.

Analysis of the given case

• Mr. Raj’s Position:

o Mr. Raj formed a company with ₹50,000 capital and sold his business to the company for ₹40,000.

o He accepted ₹30,000 worth of shares (3000 shares of ₹1 each) and the remaining ₹10,000 was treated as a
loan, secured by issuing debentures.

o Mr. Raj’s wife and daughters took one share each in the company.

o When the company was wound up due to a strike, its assets were valued at ₹6,000, and the debts to
unsecured creditors amounted to ₹8,000.

o Mr. Raj, as a secured creditor, retained the entire sum of ₹6,000 as part payment of the loan.

• Objection by Unsecured Creditors:

o The unsecured creditors objected, arguing that Mr. Raj could not own money owed to himself. They
contended that the entire ₹6,000 should be used to pay off the outstanding debts of the company.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 301

o The creditors’ objection is based on the idea that Mr. Raj and the company are the same, which is incorrect
under the concept of separate legal entity.

Conclusion

• Rights of Mr. Raj:

o As a secured creditor, Mr. Raj is entitled to retain the ₹6,000 from the assets of the company as part
payment for the loan he provided.

• Rights of Other Creditors:

o The unsecured creditors have no legal ground to claim the money that Mr. Raj has retained, as they are
subordinate to the secured creditors. Mr. Raj’s rights as a secured creditor supersede the claims of
unsecured creditors.

• Who Will Succeed?

o Mr. Raj will succeed in retaining the ₹6,000, as he is a secured creditor and has the legal right to recover the
amount from the company’s assets before unsecured creditors are paid. The creditors' objection is
unfounded, as the company and Mr. Raj are separate legal entities.

Q31. Nov 21 MTP (3 Marks)

Manicar Limited has allotted equity shares with voting rights to Nanicar Limited worth ₹10 Crores and issued
Non-Convertible Debentures worth ₹30 Crores during the Financial Year 2017-18. After that, the total Paid-
up Equity Share Capital of the company is ₹100 Crores and Non-Convertible Debentures stand at ₹150
Crores.
Define the meaning of Associate Company and comment on whether Manicar Limited and Nanicar Limited
would be called Associate Company as per the provisions of the Companies Act, 2013?

Provision under the law

Section 2(6) of the Companies Act, 2013:

• An Associate Company in relation to another company means a company in which the other company has
significant influence, but which is not a subsidiary company of the company having such influence.

• Significant Influence means control of at least 20% of the total share capital, or control of business
decisions under an agreement.

Total Share Capital includes:

• Paid-up equity share capital.

• Convertible preference share capital.

Analysis of the given case

• Manicar Limited's Allocation to Nanicar Limited:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 302

o Equity shares worth ₹10 Crores were allotted to Nanicar Limited.

o The total Paid-up Equity Share Capital of Manicar Limited is ₹100 Crores.

o Significant Influence requires control of at least 20% of the total share capital.

Calculation:

o 20% of ₹100 Crores = ₹20 Crores.

o Nanicar Limited has been allotted ₹10 Crores worth of equity shares, which is less than the required 20% of
the total share capital of ₹100 Crores.

o Hence, Nanicar Limited does not have significant influence over Manicar Limited, as it holds less than 20%
of the share capital.

• Non-Convertible Debentures:

o The issuance of Non-Convertible Debentures amounting to ₹30 Crores has no impact on determining
whether Nanicar Limited has significant influence, as debentures do not count towards the equity share
capital for this purpose.

Therefore, the allotment of debentures does not affect the analysis of significant influence.

Conclusion

Based on the provisions of the Companies Act, 2013:

• Manicar Limited and Nanicar Limited do not qualify as Associate Companies.

• Nanicar Limited holds less than 20% of the share capital of Manicar Limited, and therefore does not have
significant influence over Manicar Limited.

• The issuance of non-convertible debentures is irrelevant in determining whether the companies are
associate companies

Q32. Mar 21 MTP (4 Marks)

PQR Private Ltd. is a company registered under the Companies Act, 2013 with a Paid Up Share Capital of ₹40
lakh and turnover of ₹2.5 crores.
Explain the meaning of the "Small Company" and examine whether PQR Private Ltd. can avail the status of
small company in accordance with the provisions of the Companies Act, 2013.

Provision under the law

Section 2(85) of the Companies Act, 2013 and Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014:

• A Small Company means a company, other than a public company, that satisfies the following conditions:

1. Paid-up Share Capital does not exceed ₹4 Crores.

2. Turnover as per the last profit and loss account for the immediately preceding financial year does not
exceed ₹40 Crores.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 303

• Exceptions: The provisions regarding small companies do not apply to:

o A holding company or a subsidiary company.

o A company registered under Section 8 (non-profit companies).

o A company or body corporate governed by any special Act.

Analysis of the given case

• Paid-up Share Capital of PQR Private Ltd. is ₹40 lakh.

o This is well within the limit of ₹4 Crores specified for a small company.

• Turnover of PQR Private Ltd. is ₹2.5 Crores.

o This is also within the limit of ₹40 Crores specified for a small company.

• Since both the conditions related to Paid-up Share Capital and Turnover are met, PQR Private Ltd.
qualifies as a small company under the provisions of the Companies Act, 2013.

• There is no indication that PQR Private Ltd. is a holding company, subsidiary company, or a company
registered under Section 8, nor is it governed by a special Act. Hence, the exceptions do not apply.

Conclusion

PQR Private Ltd. meets the criteria of a Small Company as per Section 2(85) of the Companies Act, 2013:

• It has a Paid-up Share Capital of ₹40 lakh (below the ₹4 crore limit).

• It has a Turnover of ₹2.5 Crores (below the ₹40 crore limit). Therefore, PQR Private Ltd. can avail the status
of a small company under the provisions of the Companies Act, 2013

Q33. Dec 21 Exam (3 Marks), Nov 22 MTP (3 Marks)

BC Private Limited and its subsidiary KL Private Limited are holding Rs. 90,000 and Rs. 70,000 shares,
respectively, in PQ Private Limited. The paid-up share capital of PQ Private Limited is Rs. 30 Lakhs (3 Lakhs
equity shares of Rs. 10 each, fully paid). Analyze with reference to the provisions of the Companies Act,
2013, whether PQ Private Limited is a subsidiary of BC Private Limited.

What would be your answer if KL Private Limited is holding 1,60,000 shares in PQ Private Limited and no
shares are held by BC Private Limited in PQ Private Limited?

Answer

Relevant Provision:

Section 2(87) of the Companies Act, 2013 defines a "subsidiary company" in relation to any other company
(referred to as the "holding company") as a company:

1. Where the holding company controls the composition of the Board of Directors, or

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 304

2. Exercises or controls more than one-half of the total voting power, either:

o On its own, or

o Together with one or more of its subsidiary companies.

Important Clarification:
For the purposes of determining a subsidiary relationship:

• If the control referred to above is exercised by another subsidiary of the holding company, the company
shall still be deemed a subsidiary of the ultimate holding company.

Case 1:

BC Private Limited holds 90,000 shares and its subsidiary KL Private Limited holds 70,000 shares in PQ
Private Limited.

• Total Shareholding of BC and KL combined:

o BC: 90,000 shares

o KL: 70,000 shares

o Combined Total: 1,60,000 shares.

• Voting Power:
The total paid-up share capital of PQ Private Limited is Rs. 30 Lakhs, i.e., 3,00,000 equity shares of Rs. 10
each.

o 1,60,000 shares held by BC and KL together represent 53.33% of the total voting power (more than 50%).

Conclusion:
Since BC Private Limited, along with its subsidiary KL Private Limited, holds more than one-half of the total
voting power of PQ Private Limited, PQ Private Limited becomes a subsidiary of BC Private Limited under
Section 2(87) of the Companies Act, 2013.

Case 2:

KL Private Limited holds 1,60,000 shares in PQ Private Limited, and BC Private Limited holds no shares.

• KL Private Limited's Shareholding:

o KL holds 1,60,000 shares, which is 53.33% of the total voting power.

• Relationship Analysis:

o KL Private Limited controls more than one-half of the voting power of PQ Private Limited, making PQ Private
Limited a subsidiary of KL Private Limited.

o Since KL Private Limited is itself a subsidiary of BC Private Limited, PQ Private Limited becomes a subsidiary
of BC Private Limited through a chain relationship.

Conclusion:
In this case as well, PQ Private Limited is a subsidiary of BC Private Limited by virtue of the chain
relationship between BC Private Limited, KL Private Limited, and PQ Private Limited.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 305

PART 2 – DIRECT QUESTIONS –

Q1. June 22 Exam (6 Marks), May 20 RTP

Question: Explain the 'Doctrine of Ultra Vires' under the Companies Act, 2013. What are the consequences
of 'Ultra Vires' acts of the company?

Answer

Doctrine of Ultra Vires

The term ultra vires means “beyond (their) powers.” The legal phrase refers to acts that are performed
beyond the powers legally granted to the doer. Under the Companies Act, 2013, the Doctrine of Ultra Vires
applies to acts that are beyond the scope of the powers granted to a company in its Memorandum of
Association (MOA).

Key principles of the doctrine:

1. Limited Powers:

o Unlike an ordinary citizen who is free to do anything not expressly forbidden by law, a company can only act
within the powers conferred by its MOA.

o Actions that exceed these powers are considered ultra vires and are void.

2. Legal Precedent:

o This doctrine was established in the landmark case of Ashbury Railway Company Ltd. vs. Riche. It holds
that a company cannot go beyond the objectives stated in its MOA.

3. Void Nature of Ultra Vires Acts:

o Any act or contract that goes beyond the powers of the company is void ab initio (void from the beginning)
and cannot bind the company.

4. Restraining the Company:

o A company can be legally restrained from engaging in activities or utilizing funds for purposes that are
beyond the objectives outlined in its MOA.

Consequences of Ultra Vires Acts of the Company

1. Void Transactions:

o Any ultra vires act or contract is void and unenforceable. Neither the company nor the other party can sue or
be sued on such transactions.

2. Deemed Knowledge of Public Documents:

o Since the company's MOA is a public document available for inspection, third parties dealing with the
company are presumed to know its powers. If they engage in ultra vires transactions, they cannot enforce
these against the company.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 306

3. No Ratification Possible:

o An ultra vires act cannot be ratified even by unanimous consent of the shareholders because it is beyond the
company’s powers.

4. Exceptions for Regularization:

o Certain ultra vires acts may be regularized if they are not inherently void:

▪ Ultra vires the directors: Shareholders can ratify the act.

▪ Ultra vires the Articles of Association: The company can amend its articles to validate the act.

▪ Within company powers but irregularly performed: Shareholders can validate such acts.

Q2. Dec 21 Exam (1+5 = 6 Marks)

What do you mean by the term Capital? Describe its classification in the domain of Company Law.

Answer

1. Meaning of Capital:

The term capital has various meanings, but in relation to a company limited by shares, it specifically refers
to share capital.

• Share Capital: This represents the capital of a company expressed in terms of rupees, divided into shares of
a fixed value. It is the fund raised by the company through the issue of shares, which serves as the financial
foundation of the business.

2. Classification of Capital in Company Law:

The classification of share capital under Company Law is as follows:

1. Nominal Capital (Authorized or Registered Capital):

o This is the maximum amount of share capital that a company is authorized to issue as stated in its
Memorandum of Association (MOA).

o It is the upper limit beyond which a company cannot issue shares unless authorized by law.

2. Issued Capital:

o It refers to the portion of the nominal/authorized capital that the company issues to shareholders for
subscription.

o Example: If a company has authorized capital of ₹10 crore and issues shares worth ₹6 crore, the issued
capital is ₹6 crore.

3. Subscribed Capital:

o It is the portion of the issued capital that has been subscribed or agreed to be taken up by the
shareholders.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 307

o Example: If the company issues shares worth ₹6 crore and shareholders agree to subscribe for shares worth
₹5 crore, the subscribed capital is ₹5 crore.

4. Called-Up Capital:

o It is the part of the subscribed capital that the company has called upon shareholders to pay.

o Example: If the subscribed capital is ₹5 crore, but the company calls for payment of only ₹3 crore, the
called-up capital is ₹3 crore.

5. Paid-Up Capital:

o It is the portion of called-up capital that shareholders have actually paid to the company.

o Formula: Paid-Up Capital = Called-Up Capital − Calls in Arrears.

o Example: If ₹3 crore is called up and ₹2.8 crore is received (₹0.2 crore being unpaid), the paid-up capital is
₹2.8 crore.

Q3. Jul 21 Exam (4 Marks), May 20 RTP

Question:
Y incorporated a "One Person Company (OPC)" making his sister Z as the nominee. Z is leaving India
permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of nomination in
the said OPC.

Taking into consideration the provisions of the Companies Act, 2013, answer the following:

1. Is it mandatory for Z to withdraw her nomination in the said OPC if she is leaving India permanently?

2. Can Z continue her nomination in the said OPC if she maintains the status of a Resident of India after her
marriage?

Answer

1. Withdrawal of nomination if Z is leaving India permanently:

As per the provisions of the Companies Act, 2013, a natural person who is an Indian citizen, whether
resident in India or otherwise, can be a nominee in a One Person Company (OPC).

o If Z maintains her Indian citizenship, she is not required to withdraw her nomination in the OPC even if she
is leaving India permanently. This is because the law now permits Non-Resident Indians (NRIs) to act as
nominees in an OPC.

Conclusion: It is not mandatory for Z to withdraw her nomination in the OPC if she retains her Indian
citizenship.

2. Continuation of nomination if Z maintains Resident of India status after marriage:

The critical requirement for being a nominee in an OPC is that the individual must be an Indian citizen,
regardless of their residential status (resident or non-resident). Z's residential status does not affect her
eligibility as long as she retains her Indian citizenship.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 308

Conclusion: Z can continue her nomination in the OPC even if she is a Non-Resident Indian (NRI), provided
she maintains her status as an Indian citizen. Resident status is no longer relevant for being a nominee in an
OPC

Q4. Jul 21 Exam (6 Marks)

Question:
Explain the classification of companies on the basis of control as per the Companies Act, 2013.

Answer

In line with the Companies Act, 2013, companies can be classified on the basis of control into the following
categories:

(a) Holding and Subsidiary Companies

These terms are relative in nature.

1. Holding Company [Section 2(46)]:

A company is termed as a "holding company" if it has one or more subsidiary companies.

o For this clause, the term "company" includes any body corporate.

2. Subsidiary Company [Section 2(87)]:

A company is a subsidiary company in relation to a holding company if:

o The holding company controls the composition of its Board of Directors, OR

o The holding company exercises or controls more than half of its total voting power, either directly or
through one or more of its subsidiary companies.

Additional Provisions:

o A company will be considered a subsidiary even if the control is exercised through another subsidiary
company of the holding company.

o The Board of Directors of a company is deemed to be controlled by another company if the latter has the
discretion to appoint or remove all or a majority of the directors.

o Certain classes of holding companies are restricted from having layers of subsidiaries beyond the
prescribed limit.

o The term "company" includes any body corporate.

o The term "layer" refers to a holding company's subsidiary or subsidiaries.

(b) Associate Company [Section 2(6)]

An associate company in relation to another company refers to a company:

• In which the other company has significant influence, but

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 309

• Is not a subsidiary company of the company having such influence, and

• Includes a joint venture company.

Explanation:

1. Significant Influence:

o It refers to the control of at least 20% of the voting power, OR

o Control of or participation in business decisions under an agreement.

2. Joint Venture:

o A joint venture is a joint arrangement where the parties that have joint control over the arrangement have
rights to its net assets.

3. Total Share Capital:

o This refers to the aggregate of:

▪ Paid-up equity share capital, and

▪ Convertible preference share capital.

Q5. Jul 21 Exam (3 Marks)

What is the main difference between a Guarantee Company and a Company having Share Capital?

Answer

The main differences between a Guarantee Company [Section 2(21)] and a Company having Share
Capital [Section 2(22)] are as follows:

1. Liability of Members:

o Guarantee Company:
The liability of members arises only after the commencement of winding up, and that too, subject to
specific conditions.

o Company with Share Capital:

Members may be called upon to discharge their liability at any time, either during the company’s lifetime or
during its winding up.

2. Source of Funds:

o Guarantee Company:
Such companies do not raise their initial working capital from members. Instead, funds are obtained from
endowments, fees, charges, donations, or other sources. These companies are generally suited for non-
profit objectives or cases where minimal working funds are required.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 310

o Company with Share Capital:

These companies raise their working capital by issuing shares to members or the public.

3. Nature of Membership:

o Guarantee Company:
Membership in such companies may carry special privileges different from ordinary shareholders, such as
membership rights defined by specific conditions.

▪ For example, as stated in Narendra Kumar Agarwal vs. Saroj Maloo, a guarantee company may refuse to
accept the transfer of a member's interest on grounds different from those applicable to a company limited
by shares.

o Company with Share Capital:

Membership is determined by ownership of shares, which are transferable as per the company’s articles
and statutory provisions.

Q6. Jan 21 Exam (6 Marks), Nov 20 RTP, Nov 19 RTP

Explain the Doctrine of 'Indoor Management' under the Companies Act, 2013. Also, state the circumstances
where the outsider cannot claim relief on the ground of 'Indoor Management.'

Answer

Doctrine of Indoor Management (Companies Act, 2013)

The Doctrine of Indoor Management protects outsiders (third parties) who deal with the company.
According to this doctrine:

1. Outsiders are presumed to know the contents of the company’s public documents, such as the
Memorandum and Articles of Association (as per the doctrine of "constructive notice").

2. However, outsiders are not required to inquire into the company’s internal procedures or compliance
with internal regulations. They can assume that all internal formalities have been properly followed by the
company.

The principle of this doctrine was established in the Royal British Bank v. Turquand case. It limits the
application of the doctrine of constructive notice and provides protection to third parties against internal
irregularities of the company.

Thus, if an act appears valid based on the company’s public documents, the outsider is not held responsible
for any internal procedural lapses of the company.

Exceptions to the Doctrine of Indoor Management

The doctrine does not apply in the following circumstances:

(a) Actual or Constructive Knowledge of Irregularity

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 311

• If the outsider has actual knowledge of the irregularity or constructive knowledge (i.e., the outsider should
have reasonably known about the irregularity), they cannot claim protection under this doctrine.

• Example: If a director is acting beyond their authority and the outsider is aware of this, they cannot rely on
the doctrine.

(b) Suspicion of Irregularity

• If the circumstances of the transaction are unusual, suspicious, or not in the ordinary course of business,
the outsider is required to make inquiries. Failure to do so negates the application of the doctrine.

• Example: If a company secretary signs a document requiring board approval without evidence of such
approval, the outsider must verify its validity.

(c) Forgery

• The doctrine does not cover cases involving forgery. Forged documents or unauthorized signatures are
treated as nullities and cannot bind the company.

• Example: If the company seal is forged on a contract, the doctrine cannot be invoked to enforce the contract
against the company.

Q7. Nov 20 Exam (6 Marks)

What are the significant points of Section 8 Company that are not applicable to other companies? Briefly
explain with reference to the provisions of the Companies Act, 2013.

Answer

A Section 8 Company under the Companies Act, 2013, is formed with the primary objective of promoting
commerce, art, science, religion, charity, protection of the environment, sports, etc. It is a special type of
company that is formed for non-profit purposes and operates under certain provisions that distinguish it
from other companies.

Significant Points of Section 8 Company

1. Objective-Based Formation

o The primary objective of a Section 8 Company is the promotion of charitable activities, social welfare, art,
science, religion, environmental protection, or similar non-profit activities. This distinguishes it from other
companies, which may be formed for profit-making purposes.

2. No Requirement of Minimum Share Capital

o Unlike other companies (such as private or public companies) that require a minimum share capital (Rs. 1
lakh for a private company and Rs. 5 lakhs for a public company), Section 8 companies do not have a
minimum share capital requirement.

3. Utilization of Profits

o A Section 8 company cannot declare dividends to its members. Any profits earned by the company must
be used for the furtherance of its objects and cannot be distributed among its members.

4. Special Licence from Central Government

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 312

o Section 8 companies must operate under a special license issued by the Central Government. This license
is granted subject to certain conditions, and failure to comply with these conditions can lead to revocation
of the license.

5. Name Restrictions

o A Section 8 company is not required to include the terms "Ltd." or "Pvt. Ltd." in its name. Instead, it can
adopt names such as "Club," "Chamber of Commerce," etc., that are more aligned with its charitable or
non-profit objectives.

6. Revocation of License and Consequences

o If the company contravenes the conditions of its license, the Central Government may revoke the license.
Upon revocation, the company may be directed to:

▪ Convert its status and change its name,

▪ Wind up the company, or

▪ Amalgamate with another company having similar objectives.

7. Shorter Notice for General Meeting

o Unlike other companies, which must give a minimum 21 days' notice for holding a general meeting, a
Section 8 company is allowed to give only a 14-day notice.

8. Relaxation on Director Requirements

o The requirement for the minimum number of directors and independent directors does not apply to
Section 8 companies, making their governance structure more flexible.

9. Exemption from Nomination and Remuneration Committee

o A Section 8 company is not required to **constitute a Nomination and Remuner

Q8. Nov 19 Exam (6 Marks), Jun 22 MTP (4 Marks)

"The Memorandum of Association is a charter of a company." Discuss. Also, explain in brief the contents
of the Memorandum of Association.

Answer

The Memorandum of Association (MOA) is considered the charter of a company as it defines the
constitution and the scope of powers granted to the company. It serves as the foundation on which the
entire structure of the company is built.

Key Points: The Memorandum of Association as the Company's Charter:

• Defines Constitution: The MOA outlines the legal identity of the company, specifying its powers,
objectives, and the boundaries within which it can operate.

• Foundation of the Company: It serves as the base for the company's existence and operation under the
law.

Object of Registering the Memorandum:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 313

1. Defines the Object of the Company:

o It states the object(s) for which the company is formed, thus setting the limits within which the company
can operate.

o It ensures that the company’s actions remain within the scope of its stated objectives.

2. Informs Shareholders and Creditors:

o It helps shareholders, creditors, and others dealing with the company understand the powers of the
company and its scope of activities.

o This is crucial for anyone entering into contracts with the company.

3. Public Document:

o The memorandum is a public document under Section 399 of the Companies Act, 2013.

o This implies that everyone dealing with the company is presumed to have knowledge of its provisions.

4. Guides Shareholders' Investments:

o Shareholders must understand the purposes for which their money will be used and the risks involved.

5. Limits on Company's Actions:

o A company cannot act beyond the powers conferred by its memorandum.

o Any act beyond its powers is considered ultra vires (beyond its powers) and is void.

Contents of the Memorandum of Association:

The Memorandum of Association must state the following:

1. Name Clause:

o The name of the company must be stated.

o In the case of a public limited company, the name must end with the word “Limited”.

o In the case of a private limited company, it must end with the words “Private Limited”.

o This clause is not applicable to companies formed under Section 8 (non-profit companies).

2. Registered Office Clause:

o The state where the company’s registered office is located must be mentioned.

3. Object Clause:

o The main objects for which the company is formed must be outlined.

o It may also include any matter deemed necessary for achieving the objects.

4. Liability Clause:

o This specifies whether the liability of the members is limited or unlimited.

5. Capital Clause:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 314

o This clause states the authorized capital of the company, which is divided into shares of fixed amounts.

o The number of shares taken by the subscribers to the memorandum should also be stated (not less than
one share).

6. Association Clause:

o This clause shows the intention of the subscribers to form the company.

o Each subscriber must take at least one share and must mention the number of shares taken against their
name.

Q9. May 19 Exam (6 Marks)

What do you mean by "Companies with charitable purpose" (Section 8) under the Companies Act, 2013?
Mention the conditions of the issue and revocation of the licence of such company by the government.

Answer

Formation of Companies with Charitable Purpose (Section 8 of the Companies Act, 2013)

A Section 8 company is formed for promoting charitable purposes and certain other objectives, without
the intention of earning profits for its members. The company must be formed with a purpose to promote:

• Commerce

• Art

• Science

• Sports

• Education

• Research

• Social welfare

• Religion

• Charity

• Protection of the environment, etc.

Such a company is intended to apply its profits solely for promoting its charitable objectives and
prohibits the payment of any dividends to its members.

Examples of Section 8 companies include:

• FICCI (Federation of Indian Chambers of Commerce & Industry)

• ASSOCHAM (Associated Chambers of Commerce and Industry of India)

• National Sports Club of India

• CII (Confederation of Indian Industry)

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 315

Power of the Central Government to Issue the License

1. Issuance of License:

o Under Section 8, the Central Government has the power to grant a license for the registration of a company
formed for charitable purposes.

o The company is registered with limited liability but is not required to include the words ‘Limited’ or
‘Private Limited’ in its name.

o The Government issues a license with conditions it deems fit for such registration.

2. Registration:

o Upon receiving the license, the registrar registers the person or association of persons as a company under
this section.

o After registration, the company enjoys the same privileges and obligations as a limited company.

Revocation of License

The Central Government has the authority to revoke the license of a Section 8 company under the following
circumstances:

1. Contravention of Conditions:

o If the company contravenes any of the requirements or conditions of Section 8, under which the license
was issued.

2. Fraudulent Activities:

o If the company is found to be conducting its affairs fraudulently or in violation of its objectives or in a
manner that is prejudicial to the public interest.

3. Procedure for Revocation:

o Before revoking the license, the Central Government must issue a written notice to the company informing
it of the intention to revoke the license.

o The company is given an opportunity to be heard on the matter.

o Upon revocation, the Registrar must add the word ‘Limited’ or ‘Private Limited’ to the company’s name in
the official records.

Q10. Nov 18 Exam (6 Marks)

There are cases where company law disregards the principle of corporate personality or the principle that
the company is a legal entity distinct from its shareholders or members. Elucidate.

Answer

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 316

The Corporate Veil is a legal concept where the company is recognized as a distinct legal entity, separate
from its shareholders or members. However, this principle can be disregarded or lifted by the courts in
certain situations, meaning the company is no longer treated as a separate legal person, and its members or
managers may be held accountable for its actions.

The lifting of the corporate veil refers to circumstances where the courts look beyond the company's legal
existence and focus directly on the individuals behind the company, typically its members, directors, or
managers. This is done when the company is being used in ways that may contravene public policy or
involve misuse of the corporate structure.

The courts are generally cautious about lifting the corporate veil, and it is done only in appropriate
circumstances, often when matters of control (not just ownership) are involved.

Situations Where the Corporate Veil May Be Lifted:

1. Trading with the Enemy:

o If the company is found to be involved in transactions that threaten public interest, such as trading with
enemy countries during wartime, the courts may lift the corporate veil.

2. Tax Evasion:

o The veil can be lifted when a company is used to evade taxes or to circumvent tax obligations by adopting an
artificial structure.

3. Agency Relationships:

o If a company forms other companies as its subsidiaries or agents to avoid obligations or shield its actions,
the courts may disregard the corporate personality and treat the entities as one.

4. Circumventing Employee Welfare Laws:

o If a company is set up with the intent to bypass legal protections meant for employees, such as statutory
benefits or rights, the veil may be lifted.

5. Illegal or Improper Purpose:

o If the company is incorporated for illegal purposes or to defraud creditors, or if it is used to avoid legal
obligations, the courts may disregard its separate legal personality. For example:

▪ Defeating the law: The company is used to circumvent legal provisions.

▪ Fraudulent purposes: The corporate structure is misused to defraud creditors or avoid paying debts.

Q11. May 18 Exam (6 Marks)

Define OPC (One Person Company) and state the rules regarding its membership. Can it be converted into a
non-profit company under Section 8 or a private company?

Answer

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 317

One Person Company (OPC)

As per Section 2(62) of the Companies Act, 2013, a One Person Company (OPC) is a company that has
only one person as a member.

Rules Regarding Membership of OPC:

• Single Member: Only one person can be the member of the OPC.

• Nominee Requirement: The memorandum of OPC must indicate the name of another person who will
become the member in the event of the subscriber’s death or incapacity to contract.

• Prior Written Consent: The nominated person must give prior written consent in the prescribed form, which
should be filed with the Registrar of Companies (RoC) at the time of incorporation.

• Nominee Withdrawal: The nominee may have the right to withdraw their consent.

• Change of Nominee: The member can change the nominee by notifying the company, which in turn will
inform the Registrar. This change will not be treated as an alteration of the memorandum.

• Eligibility Criteria for the Member and Nominee:

o Only a natural person who is an Indian citizen (whether resident or non-resident) can incorporate an OPC
or be a nominee.

o Resident in India: A person is considered a resident if they have stayed in India for at least 120 days during
the preceding financial year.

o Limitations:

▪ A person can only incorporate one OPC or be a nominee in only one OPC.

▪ Minors are not allowed to become members or nominees of an OPC or hold shares with beneficial interest
in it.

Conversion of OPC:

• Conversion into Section 8 Company:

OPC cannot be incorporated or converted into a company under Section 8 of the Companies Act, as
Section 8 companies are non-profit organizations.

• Conversion into Private or Public Company:

An OPC can be converted into a private or public company under certain conditions:

o The OPC cannot voluntarily convert into any other type of company unless two years have passed since its
incorporation, except when:

▪ The paid-up share capital exceeds Rs. 50 lakh.

▪ The average annual turnover exceeds Rs. 2 crore during the relevant period.

Q12. May 18 Exam (3 Marks)

State the limitations of the doctrine of indoor management under the Companies Act, 2013.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 318

Answer

The doctrine of Indoor Management has several limitations. It does not apply in the following situations:

1. Actual or Constructive Knowledge of Irregularity:

The doctrine does not protect a person who is dealing with the company if they have actual or constructive
knowledge of any irregularity within the company. In such cases, the person cannot claim protection under
this doctrine.

2. Suspicion of Irregularity:
The doctrine does not protect those who act negligently. If a person is dealing with the company and notices
something unusual or out of the ordinary (for example, a transaction that is not in the usual course of
business), they have a duty to make further inquiries. If they fail to do so, they cannot invoke the doctrine of
indoor management.

3. Forgery:
The doctrine of indoor management does not apply to situations involving forgery. Any document or
transaction that involves forgery is considered a nullity, and the doctrine does not protect such fraudulent
activities.

Q13. Nov 20 RTP

Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies registered under
the Companies Act, 2013. Explain the circumstances in which an outsider dealing with the company cannot
claim any relief on the ground of ‘Indoor Management’.

Answer

Doctrine of Indoor Management (under the Companies Act, 2013)

The Doctrine of Indoor Management is designed to protect outsiders dealing with a company. Under this
doctrine, when an outsider enters into a transaction with a company, they are entitled to assume that the
internal procedures and formalities within the company have been complied with, even if they have not
personally verified them. The company is expected to adhere to its internal rules (as laid out in the
Memorandum and Articles of Association), and the outsider can rely on this assumption unless they have
knowledge of irregularities.

The doctrine is based on the rule in Royal British Bank v. Turquand and is a limitation to the doctrine of
"constructive notice". This rule provides that outsiders are not required to investigate whether the company
has followed its internal procedures when entering into a transaction, as long as the transaction is not
inconsistent with the company's registered documents.

Circumstances When Relief Cannot Be Claimed on the Ground of ‘Indoor Management’

There are several exceptions to the doctrine of indoor management, where an outsider cannot claim relief:

1. Actual or Constructive Knowledge of Irregularity:

If the outsider has actual or constructive knowledge of an irregularity in the company’s internal procedures,
the doctrine of indoor management does not protect them. For example, if the outsider knows that the
company has not followed its internal processes, they cannot rely on the doctrine.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 319

2. Suspicion of Irregularity:
The doctrine does not protect those who act negligently. If an outsider is put on inquiry due to unusual
circumstances or transactions that are not in the ordinary course of business, it is their responsibility to
make the necessary inquiries. For instance, if the outsider suspects something unusual in the company’s
dealings, they must investigate further and cannot claim protection under the doctrine if they fail to do so.

3. Forgery:
The doctrine of indoor management does not apply in cases of forgery. If a document or transaction is
forged, it is a nullity, and the outsider cannot claim protection under the doctrine. Forged documents cannot
be assumed to be valid, regardless of whether they appear to be in accordance with the company's internal
procedures.

Q14. May 20 RTP

Naveen incorporated a “One Person Company” (OPC) making his sister Navita as the nominee. Navita is
leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of
nomination in the said One Person Company. Taking into consideration the provisions of the Companies Act,
2013, answer the questions given below.

1. Is it mandatory for Navita to withdraw her nomination in the said One Person Company if she is leaving
India permanently?

2. If Navita maintained the status of Resident of India after her marriage, can she continue her
nomination in the said One Person Company?

Answer

1. Is it mandatory for Navita to withdraw her nomination in the said One Person Company if she is leaving
India permanently?
Yes, it is mandatory for Navita to withdraw her nomination in the OPC. As per the provisions of the
Companies Act, 2013, the nominee in a One Person Company must be a natural person who is an Indian
citizen and a resident in India. Since Navita is leaving India permanently, she would no longer fulfill the
criteria of being a resident in India, and therefore, she must withdraw her consent as a nominee.

2. If Navita maintained the status of Resident of India after her marriage, can she continue her
nomination in the said One Person Company?
Yes, Navita can continue her nomination in the OPC if she maintains the status of a Resident of India even
after her marriage. As per the Companies Act, 2013, a person can still be a nominee if they meet the
residency requirement of staying in India for at least 182 days during the immediately preceding financial
year, regardless of their marriage abroad. Hence, if Navita maintains this residency status, she can continue
her role as a nominee.

Q15. May 20 RTP

Examine the following statements and determine whether they are correct or incorrect, along with reasons:

a. A company being an artificial person cannot own property and cannot sue or be sued.
b. A private limited company must have a minimum of two members, while a public limited company must
have at least seven members.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 320

Answer

a) A company being an artificial person cannot own property and cannot sue or be sued.

Incorrect:
A company, although an artificial person (created by law), is considered a legal entity distinct from its
members. As a legal entity, a company has the capacity to own property, enter into contracts, and incur
liabilities. It can also sue and be sued in its own name. This ability to act as a separate legal entity is one of
the key characteristics of a company. While it cannot perform certain personal activities (e.g., marriage or
taking an oath), it enjoys all the rights of an individual in the legal sense. Therefore, the statement is
incorrect.

b) A private limited company must have a minimum of two members, while a public limited company
must have at least seven members.

Correct:
As per Section 3 of the Companies Act, 2013, the minimum number of members for a company differs
based on whether it is private or public. A private limited company must have at least two members, and a
public limited company must have at least seven members. These are the minimum requirements for the
constitution of the company. The statement is correct based on the provisions of the Companies Act.

Q16. May 20 RTP

Briefly explain the doctrine of “ultra vires” under the Companies Act, 2013. What are the consequences of
ultra vires acts of the company?

Answer

Doctrine of Ultra Vires:

The term ultra vires is Latin for “beyond the powers.” In the context of company law, it refers to acts that are
beyond the legal powers of the company, which are defined by its memorandum of association and the
Companies Act, 2013.

• The memorandum of association outlines the company's objectives and powers, and any act or contract
that goes beyond these powers is considered ultra vires.

• The doctrine establishes that a company is only authorized to do those acts that are mentioned in its
memorandum. Any act beyond these powers is void and inoperative in law, meaning the company is not
bound by such acts.

Consequences of Ultra Vires Acts:

1. Void and Inoperative:

An ultra vires act is not legally binding on the company. If the company enters into a contract or engages in
activities outside its stated powers, such actions are void, meaning they have no legal effect.

2. Cannot Be Enforced:
The company cannot be sued for an ultra vires act, and conversely, it cannot sue on such an act either. The
transaction cannot be enforced by the company or against the company in a court of law.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 321

3. No Ratification:
Since the act is void, it cannot be ratified by the shareholders, even if they agree to it subsequently. This
prevents the company from retrospectively making an ultra vires act valid through shareholder approval.

4. Restricting Company’s Activities:

The company can be restrained from engaging in activities that are beyond the scope of its authorized
objectives. For example, if a company carries on a trade or business not listed in its memorandum, it can be
restrained from doing so.

5. Public Knowledge of Powers:

The memorandum of association is a public document and open to inspection. Anyone dealing with the
company is presumed to have knowledge of its powers. If a person knowingly enters into an ultra vires
transaction, they cannot enforce it against the company.

Q17. Nov 19 RTP

Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies registered under
the Companies Act, 1956. Explain the circumstances in which an outsider dealing with the company cannot
claim any relief on the ground of ‘Indoor Management’.

Answer

Doctrine of Indoor Management:

The doctrine of indoor management (also known as the Turquand Rule) applies to companies and is based
on the principle that outsiders dealing with a company are entitled to assume that the internal procedures
and regulations of the company, as outlined in its Memorandum and Articles of Association, have been
properly followed. This rule protects outsiders from the internal irregularities of the company, as they are not
expected to investigate the company's internal management processes in detail.

• Outsiders (such as third parties) are assumed to have knowledge of the company's legal existence and are
required only to ensure that their dealings with the company are consistent with its public documents (such
as the Memorandum of Association).

• However, the outsider is not expected to verify the company's compliance with internal management
procedures (such as board resolutions, powers of officers, etc.). They are entitled to assume regularity in
these matters.

This doctrine is a limitation of the doctrine of constructive notice, which suggests that an outsider should be
aware of the company's public documents. In contrast, the doctrine of indoor management protects
outsiders from being penalized for relying on the company's apparent authority.

The Turquand Rule has its limitations, and there are certain circumstances where an outsider dealing with
the company cannot claim relief based on the doctrine of indoor management:

Circumstances Where an Outsider Cannot Claim Relief on the Ground of Indoor Management:

1. Actual or Constructive Knowledge of Irregularity:

o If the outsider has actual or constructive knowledge of an internal irregularity (such as a failure to follow
required procedures), they cannot claim the protection of the doctrine.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 322

o Example: In Howard v. Patent Ivory Manufacturing Co., the directors could not defend the issue of
debentures to themselves because they should have known that the extent of their lending required the
approval of the general meeting, which had not been obtained.

o Similarly, in Morris v. Kansseen, a director who participated in an invalidly constituted meeting could not
defend the allotment of shares to himself, as the meeting did not follow proper procedures.

2. Suspicion of Irregularity:

o The doctrine does not protect outsiders who behave negligently or fail to inquire when there are signs of
irregularity.

o If the transaction is unusual or outside the ordinary course of business, the outsider is expected to make
further inquiries.

o Example: In Anand Bihari Lal v. Dinshaw & Co., the transfer of a company's property by an accountant
without the proper authority was deemed void because the outsider should have inquired about the
authority of the accountant.

o In Haughton & Co. v. Nothard, Lowe & Wills Ltd., a transaction involving money from one company to settle
debts of another was unusual enough that the plaintiff should have made further inquiries about the
authority of the persons involved in the transaction.

3. Forgery:

o The doctrine does not apply to cases of forgery. If a document is forged, it is considered a nullity and cannot
be treated as part of the company's internal management.

o Example: In Ruben v. Great Fingall Consolidated, a share certificate was issued with forged signatures of
directors. The court held that the Turquand Rule does not extend to cover forgery, as forgery is not an
irregularity that can be protected under the doctrine of indoor management.

Conclusion:

While the doctrine of indoor management generally protects outsiders dealing with a company from the
company's internal procedural irregularities, it does not offer protection in cases where the outsider has
actual or constructive knowledge of irregularities, has suspicions about the authority behind a transaction,
or encounters a situation involving forgery. These limitations ensure that the doctrine does not shield those
who fail to act diligently or who engage in transactions that are clearly improper.

Q18. Nov 18 RTP

a) Death of All Members of a Private Company:

Question:
ABC Pvt. Ltd., is a Private Company with five members. All the members of the company died in a car
accident while traveling to Mumbai for business purposes. Does the existence of the company come to an
end under the Companies Act, 2013?

Answer:
No, the company does not cease to exist due to the death of all its members. Under the Companies Act,
2013, a company is a separate legal entity distinct from its shareholders and directors. The death of all the
members does not automatically bring the company to an end.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 323

1. Perpetual Succession: The key feature of a company is its "perpetual succession," meaning that its
existence is not affected by the death, insolvency, or retirement of its members or directors. The company
continues to exist until it is wound up through a legal process.

2. Transmission of Shares: In the case where all members pass away, the shares of the deceased members
will pass to their legal heirs or successors through the transmission of shares process. The company can
continue to operate with the new members taking up the shares of the deceased shareholders.

3. Winding Up: The company will cease to exist only when it is legally wound up. This process requires formal
procedures under the Companies Act, 2013, such as filing for voluntary winding-up or being directed by the
Tribunal to wind up.

Therefore, ABC Pvt. Ltd. will not cease to exist simply because all of its members have died. The company
will continue as long as the proper legal steps, such as transferring shares to heirs, are followed.

b) One Person Company (OPC) and Its Membership Rules:

Question:
Define OPC (One Person Company) and state the rules regarding its membership. Can an OPC be converted
into a non-profit company under Section 8 or a private company?

Answer:
One Person Company (OPC):
As per Section 2(62) of the Companies Act, 2013, a One Person Company (OPC) is a company that has only
one member. It is a unique type of company structure that provides the benefits of limited liability to a single
person who wants to start a business while still maintaining full control.

Rules Regarding OPC Membership:

1. Single Member: An OPC can have only one member who holds the sole share of the company.

2. Nominee: The memorandum of the OPC must specify the name of another person who will become the
member in case the sole member passes away or becomes incapacitated. This person must give written
consent to act as a nominee at the time of the company's incorporation.

3. Eligibility of the Nominee: The nominee must be an Indian citizen, and whether they are a resident or not,
they must have lived in India for at least 182 days during the previous financial year.

4. Other Rules:

o The member can change the nominee by giving notice to the company, and the company will inform the
Registrar of Companies (RoC).

o The member cannot incorporate more than one OPC or be a nominee in more than one OPC.

o A minor cannot be a member or nominee of an OPC.

Conversion of OPC:

• Non-Profit Company (Section 8): An OPC cannot be incorporated or converted into a non-profit company
under Section 8 of the Companies Act, 2013. Section 8 companies are formed for charitable purposes, and
an OPC does not fit this structure.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 324

• Private or Public Company: An OPC can be converted into a private or public company, but this can only
occur after two years from its incorporation. The conversion is allowed if the OPC’s paid-up share capital
exceeds ₹50 lakh or its average annual turnover exceeds ₹2 crore during the relevant period.

Q19. Nov 18 RTP

a) Briefly explain the doctrine of “ultra vires” under the Companies Act, 2013. What are the consequences of
ultra vires acts of the company?

b) Examine the following statements and state whether they are correct or incorrect along with reasons:

1. A company, being an artificial person, cannot own property and cannot sue or be sued.

2. A private limited company must have a minimum of two members, while a public limited company must
have at least seven members.

Answer:

a) Doctrine of Ultra Vires:

Explanation:
The term ultra vires means “beyond (their) powers.” In the context of company law, it refers to acts or
transactions that are beyond the powers conferred on a company by its Memorandum of Association (MOA)
or by law.

Doctrine of Ultra Vires under the Companies Act, 2013:

It is a fundamental principle in company law that the actions of a company are limited to the objects
specified in its MOA. A company cannot engage in activities outside the scope defined in its MOA. If the
company does so, the act is considered ultra vires, i.e., beyond its legal power.

Consequences of Ultra Vires Acts:

1. Void and Inoperative: An ultra vires act or contract is considered void and cannot be enforced by the
company or against the company. It is not legally binding on the company.

2. No Enforcement: The company cannot be sued for an ultra vires transaction, nor can it enforce such a
contract. Since the MOA is a public document, anyone dealing with the company is deemed to have
knowledge of the company’s powers and limits.

3. No Ratification: Shareholders cannot ratify an ultra vires act because the act itself is void. However, in
certain circumstances, the company can regularize an ultra vires act through a formal resolution, if
permitted by law.

4. Restraint on Funds: A company can be legally restrained from using its funds for purposes outside its
authorized objects, as outlined in its MOA.

In summary, ultra vires acts are outside the scope of the company’s powers and are not enforceable.

b) Examination of Statements:

1. A company being an artificial person cannot own property and cannot sue or be sued.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 325

Incorrect:
While it is true that a company is an artificial person, created by law, it is not correct to say that it cannot own
property or sue or be sued.

• A company has the capacity to own property, enter into contracts, raise loans, and incur liabilities, just like a
natural person.

• As a legal entity, a company can sue and be sued in its own name. It can also acquire rights against others,
and incur liabilities to others.

• The only things a company cannot do, compared to a natural person, include getting married, taking an oath,
or practicing a learned profession. Otherwise, it enjoys the same rights and responsibilities as any individual.

Thus, the statement is incorrect because a company, being a legal person, can own property and sue or be
sued.

Q20. Jun 22 MTP (4 Marks)

Five persons are the only members of a private company, Flower Fans Limited. All of them go on a boat
on a pleasure trip into the open sea. The boat capsizes, and all five die being drowned.

(a) Is the private company Flower Fans Limited no longer in existence?

(b) Further, is it correct to say that a company, being an artificial person, cannot own property and
cannot sue or be sued? Explain with reference to the provisions of the Companies Act, 2013.

Answer:

(a) Existence of the Company:

A company, once incorporated, is considered a separate legal entity with perpetual succession. This means
that the existence of a company does not depend on the lives of its members or shareholders. The company
continues to exist even if all of its members die, as the company’s life is not directly tied to the members'
lives.

In this case, the five members of the private company Flower Fans Limited have tragically died in the boat
accident. However, the company will not cease to exist. The company will continue as a separate legal
entity because it has perpetual succession. The death of all its members does not affect its legal existence.
The company’s existence will remain unaffected until it is wound up through a legal process, which is a
separate matter.

Therefore, the company Flower Fans Limited will continue to exist despite the death of all its members.

(b) Artificial Person and Its Capacity to Own Property, Sue, and Be Sued:

The statement that a company, being an artificial person, cannot own property or sue or be sued is
incorrect.

A company is considered an artificial person, meaning it is created by law rather than through natural birth.
Although it is not a natural person, it is still treated as a legal person. As a separate legal entity, the company
has the capacity to:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 326

1. Own Property: A company can own property in its own name, which is distinct from the ownership of its
members.

2. Enter into Contracts: The company can enter into contracts, borrow money, incur liabilities, and engage in
business activities in its own name.

3. Sue and Be Sued: The company can initiate legal actions or be sued in its own name. It is treated as a
person in terms of its legal rights and obligations.

The company, as a legal entity, can perform any activities that a natural person can, except for actions that
are specific to humans (such as getting married or going to jail). Therefore, the company can own property,
sue, and be sued in its own name.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 327

CHAPTER 6 - THE NEGOTIABLE INSTRUMENTS ACT, 1881

Q1 [Nov 2005, May 2015] [Sec 26]

A, a major, and B, a minor, executed a promissory note in favour of C. Examine, with reference to the
provisions of the Negotiable Instruments Act, 1881, the validity of the promissory note and whether it is
binding on A and B.

Solution:

Validity of the Promissory Note:

The promissory note is valid. Under Section 26 of the Negotiable Instruments Act, 1881, a negotiable
instrument does not become invalid merely because one of the parties to it (whether the maker, payee,
endorser, or endorsee) is a minor.

Liability of A and B:

1. B (Minor):
B is not liable because a minor is not legally competent to contract under Section 11 of the Indian
Contract Act, 1872. Hence, a minor cannot be held liable on a negotiable instrument.

2. A (Major):
A is liable. As per Section 26, all parties to the negotiable instrument, except the minor, are liable for the
obligations arising from the instrument.

Conclusion:

• The promissory note is valid.

• B (the minor) is not liable.

• A (the major) is liable for the promissory note executed in favour of C.

Q2 [Nov 2004] [Sec 43]

A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without
consideration. C transferred it to D for value.

Decide:
i. Whether D can sue the prior parties of the bill.
ii. Whether the prior parties, other than D, have any right of action inter se.

Give your answer with reference to the provisions of the Negotiable Instruments Act, 1881.

Solution:

i) Whether D can sue the prior parties of the bill:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 328

• As per Section 43 of the Negotiable Instruments Act, 1881, if a negotiable instrument is made, drawn,
accepted, endorsed, or transferred without consideration, it creates no obligation of payment between the
parties unless consideration exists at some subsequent stage.

• However, when a holder acquires the instrument for value, they become a holder for value and are entitled
to sue all prior parties.

• In this case, D has acquired the bill for value and is a holder for value.

Conclusion:
D can recover the amount of the bill from all the prior parties (A, B, and C).

ii) Whether the prior parties, other than D, have any right of action inter se:

• A negotiable instrument creates no obligation of payment between parties if it was made, drawn, accepted,
endorsed, or transferred without consideration.

• In this case, all the parties prior to D (i.e., A, B, and C) have transferred the bill without consideration.

Conclusion:
No party prior to D (A, B, or C) can recover the amount of the bill from any other prior party since the
transaction between them was without consideration.

Q3 [May 2008] [Sec 43]

A draws a bill of exchange payable to himself on X, who accepts the bill without consideration just to
accommodate 'A'. 'A' transfers the bill to 'P' for good consideration.

Decide:

1. The rights of 'A' and 'P'.

2. Would the answer be different if 'A' transferred the bill to 'P' after maturity?

Solution:

Rights of 'A':

• As per Section 43 of the Negotiable Instruments Act, 1881, if there is no consideration between parties to
the transaction, no obligation of payment exists.

• In this case, X accepted the bill without consideration (as an accommodation acceptance for 'A').

• Therefore, 'A' cannot sue X since there is no consideration between them.

Conclusion:
'A' is not entitled to sue X.

Rights of 'P':

• 'P' is a holder for good consideration since he acquired the bill from 'A' by paying value.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 329

• As per the Negotiable Instruments Act, a holder for consideration has the right to recover the amount from
the transferor for consideration (i.e., 'A') and every party prior to him (i.e., 'X').

• 'P' can sue both 'A' and 'X' for payment.

Conclusion:
'P' is entitled to sue both 'A' and 'X', as he is a holder for consideration.

If 'A' transferred the bill to 'P' after maturity:

• If 'P' acquires the bill after maturity, he will no longer be considered a holder in due course, but he will still
be a holder for consideration.

• The rights of a holder for consideration remain the same, even if the bill is obtained after maturity.

• Hence, 'P' will still be entitled to sue both 'A' and 'X' for payment.

Final Answer:

1. Rights of 'A': 'A' cannot sue 'X' since there is no consideration between them.
Rights of 'P': 'P' can sue both 'A' and 'X', as he is a holder for consideration.

2. The answer would not change if 'A' transferred the bill to 'P' after maturity. 'P' would still have the right to sue
both 'A' and 'X'.

Q4 [Nov 2010] [Sec 44]

P draws a bill on Q for INR 10,000. Q accepts the bill. On maturity, the bill is dishonoured by non-payment. P
files a suit against Q for the payment of INR 10,000. However, Q proves that the bill was accepted for a value
of INR 7,000 and as an accommodation to P for the balance amount of INR 3,000.

Question:
Referring to the provisions of the Negotiable Instruments Act, 1881, decide whether P would succeed in
recovering the whole amount of the bill.

Solution:

As per Section 44 of the Negotiable Instruments Act, 1881:

When consideration is absent either wholly or in part, the holder of the negotiable instrument is entitled to
recover only the amount for which consideration exists.

Application to the Given Case:

• In this case, Q proved that the bill was accepted for a value of INR 7,000 only, and the remaining INR 3,000
was an accommodation provided to P without any consideration.

• Since consideration was absent for the INR 3,000 portion of the bill, P cannot recover that amount.

• Therefore, P is entitled to recover only INR 7,000, the amount for which valid consideration exists.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 330

Final Answer:

P would succeed in recovering only INR 7,000, as the remaining INR 3,000 lacks consideration

Q5 [May 2007] [Sec 44]

A owes an unspecified amount of money to B. Since A does not know the exact amount, he issues a blank
cheque in favor of B, signs it, and delivers it with a request to fill in the amount due. However, B fraudulently
fills in an inflated amount and endorses the cheque to C to settle his own dues. The cheque is dishonored.

Question:
Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of B and C.

Solution:

Rights of B:

• B is entitled to recover only the amount that was actually payable by A.

This is because:

o B, as the payee, stands in immediate relation with A (the drawer).

o The amount filled in the cheque is fraudulent, and consideration was originally absent for the excess
amount.

o Under Section 44 of the Negotiable Instruments Act, 1881, where consideration is absent in part, the payee
can recover only the valid portion of the amount for which consideration exists.

Rights of C:

• C is entitled to recover the full amount of the cheque.

This is because:

o C, as a holder in due course, has acquired the cheque for consideration and in good faith.

o A holder in due course is protected under Section 44 of the Negotiable Instruments Act, 1881, and is entitled
to recover the entire amount written on the negotiable instrument, irrespective of the absence of
consideration between the original parties.

Final Answer:

• B can recover only the amount that was originally payable by A.

• C can recover the entire amount of the cheque as a holder in due course.

Q6 [Nov 2015] [Sec 9]

Mr. A is the payee of an order cheque. Mr. B steals the cheque, forges Mr. A’s signature, and endorses the
cheque in his own favor. Mr. B further endorses the cheque to Mr. C, who takes the cheque in good faith and

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 331

for valuable consideration.

Examine the validity of the cheque as per the provisions of the Negotiable Instruments Act, 1881, and also
determine whether Mr. C can claim the privileges of a Holder in Due Course (HDC).

Solution:

• Mr. C is not a Holder in Due Course (HDC):

o Forgery as a Nullity:
A forged endorsement is a nullity. As Mr. A's signature was forged by Mr. B, the endorsement made by Mr. B is
invalid and void. This means Mr. B never legally acquired any title to the cheque.

o No Title Transfer:
Since Mr. B's endorsement was forged and invalid, Mr. C, who accepts the cheque from Mr. B, does not
receive any title or ownership to the cheque through that endorsement.

o Mr. B’s Lack of Title:

Mr. B, who stole the cheque and forged the endorsement, had no legal right or title to endorse the cheque to
Mr. C. Therefore, Mr. C cannot claim any title or rights as the holder or endorsee of the cheque based on Mr.
B’s forged endorsement.

o Holder in Due Course (HDC) Requirements:

According to Section 9 of the Negotiable Instruments Act, 1881, a Holder in Due Course is a person who
acquires a negotiable instrument in good faith, for value, and without notice of any defects or claims.
However, since Mr. C acquired the cheque through a forged endorsement, he cannot be a HDC, as his title to
the cheque is based on an invalid endorsement.

Q7 [Nov. 2006] [Sec 9]

B obtains A’s acceptance to a bill of exchange by fraud. B endorses the bill to C, who is a holder in due
course (HDC). C, in turn, endorses the bill to D, who knows of the fraud.
Referring to the provisions of the Negotiable Instruments Act, 1881, decide whether D can recover the
money from A in the given case.

Solution:

1. D is a Holder in Due Course (HDC):

o Satisfies Conditions of Section 9:

Section 9 of the Negotiable Instruments Act, 1881 defines a Holder in Due Course as a person who
acquires the negotiable instrument:

▪ For value.

▪ In good faith.

▪ Without notice of any defect in the title of the instrument.

Since C is a Holder in Due Course (HDC), and D received the instrument from C, D can inherit C’s rights,
provided the title of C was not defective.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 332

2. Knowledge of Fraud by D:

o It is immaterial that D had knowledge of the fraud that occurred when B initially obtained A’s acceptance. As
long as D was not a party to the fraud and acquired the bill from C who was an HDC, D retains the privileges
of a Holder in Due Course.

3. Right to Recover from A:

o Holder in Due Course’s Rights:

A Holder in Due Course has the right to recover the amount of the negotiable instrument from all prior
parties. Therefore, D, as the current holder (who is a HDC), can recover the money from A.

This is true even though D knew of the fraud. The right of D to claim the amount from A is not impacted by D's
knowledge of the fraud, as long as D was not involved in it directly.

Q8 [May 2010] [Sec 9, 36, and 120]

J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over the
proceeds to J. K, having failed to discount it, returned the bill to J. J tore the bill in two pieces with the
intention of canceling it and threw the pieces in the street. K picked up the pieces, pasted them together in
such a way that the bill seemed to have been folded for safe custody rather than canceled. K put the bill into
circulation, and it eventually reached L, who took it in good faith and for value.
Is J liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881?

Solution:

1. L is a Holder in Due Course (HDC):

o Acquisition in Good Faith and for Value:

L acquired the bill in good faith and for value, and under Section 9 of the Negotiable Instruments Act, L is
considered a Holder in Due Course (HDC).

2. J Cannot Deny the Validity of the Bill:

o Section 120:
Under Section 120, a drawer or acceptor of a bill cannot deny the validity of the bill in a suit brought by a
Holder in Due Course. In this case, despite J’s action of tearing the bill with the intention of canceling it,
since L is a Holder in Due Course, J cannot argue that the bill was invalid.

▪ The fact that K repaired the bill after picking up the pieces and placed it into circulation does not affect L's
rights. L's title to the bill is valid as long as L acquired it in good faith and for value.

3. L’s Right to Recover Payment:

o Section 36:
Under Section 36, a Holder in Due Course has the right to recover the amount of the bill from all prior
parties. Since L is a Holder in Due Course, L is entitled to recover the payment from J (the acceptor) and all
prior parties in the chain, including K.

Q9 [Nov. 2014] [Nov. 2016] [Sec 53]

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 333

S, by inducing T, obtains a Bill of Exchange from him fraudulently in his (S') favor. Later, S enters into a
commercial deal and endorses the bill to U in exchange for consideration for the deal. U takes the bill as a
Holder-in-Due-Course (HDC). U subsequently endorses the bill to S for value, as consideration for another
deal.
On maturity, the bill is dishonoured. S sues T for the recovery of the money.
Will S succeed in the case?

Solution:

1. S Cannot Recover the Money from T:

o Fraudulent Origin of the Bill:

S originally obtained the bill from T fraudulently. Under Section 53 of the Negotiable Instruments Act, a
holder who derives their title from a Holder-in-Due-Course (HDC) can claim the same rights as the HDC,
but only if they themselves were not involved in fraud or illegality at any stage of the bill's journey. In this
case, since S was a party to the fraud in obtaining the bill from T, S cannot claim the same rights as an HDC.

o S's Title and Rights:

While U, the Holder-in-Due-Course, had a valid right to transfer the bill to S, the fraudulent origin of the bill
means that S’s right to enforce it is tainted by the fraud at the initial stage. Therefore, S cannot recover the
money from T.

o Section 53:
Section 53 states that a holder who obtains a negotiable instrument through fraud (or any illegal act) cannot
recover money from a party to the fraud, even if they later endorse the bill to someone else who is an HDC.
S's involvement in the fraud prevents him from succeeding in recovering money from T.

Conclusion:

S will not succeed in recovering the money from T. Since S was a party to the fraud in obtaining the bill
from T, Section 53 of the Negotiable Instruments Act prevents S from claiming rights as a Holder-in-Due-
Course, even though the bill passed through U, a legitimate Holder-in-Due-Course.

Q10 [Nov. 2002] [Sec. 85 and 131]

The drawer, ‘D’, is induced by ‘A’ to draw a cheque in favor of ‘P’, who is an existing person. ‘A’, instead of
sending the cheque to ‘P’, endorses the cheque in his favor by forging the signature of ‘P’ and gets it
encashed by D’s banker.
Explain whether D’s banker is liable to P.

Solution:

1. D’s Banker (Paying Banker):

o Not Liable to P.
A paying banker is not liable even if it is subsequently found that an endorsement on the cheque was forged,
provided that the banker made the payment in due course.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 334

▪ Due Course refers to the payment made in the regular and proper course of banking operations, without
knowledge of any irregularities (such as a forged endorsement).

▪ Section 85 of the Negotiable Instruments Act protects the banker from liability if payment is made in due
course, even if a forged endorsement exists on the cheque.

2. A's Banker (Collecting Banker):

o Not Liable to P.
A collecting banker is also not liable for any loss caused to the true owner (P) due to the defective title of the
holder (A in this case), provided the collecting banker acted in good faith and without negligence while
collecting the amount of the crossed cheque.

▪ Section 131 protects the collecting banker if they act as an agent of the owner (P) and follow the usual
banking procedures without negligence or bad faith.

Q11 [Nov. 2004] [Sec. 85 and 131]

A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’s
endorsement, and collected the proceeds through his bank. B, the drawer, now wants to recover the amount
from C’s banker.

Referring to the Negotiable Instruments Act, 1881, answer the following:

(i) Whether B, the drawer, can recover the amount of the cheque from the bankers?
(ii) Whether C is the fictitious payee?
(iii) Would your answer still be the same if C were a fictitious person?

Solution:

1. (i) Whether B, the drawer, can recover the amount of the cheque from the bankers?

o B’s Banker (Paying Banker): Not Liable.

▪ A paying banker is not liable even if it is later found that an endorsement on the cheque was forged, as long
as the banker made the payment in due course.

▪ Section 85 protects the paying banker if the payment is made in good faith and without knowledge of any
irregularity.

▪ Therefore, B cannot recover the amount from the paying banker.

o A’s Banker (Collecting Banker): Not Liable.

▪ A collecting banker is also not liable for any loss caused to the true owner (B) due to the defective title of the
holder (A), provided the banker acted in good faith and without negligence while collecting the amount of
the crossed cheque.

▪ Section 131 protects the collecting banker when acting as an agent for collection.

▪ Therefore, B cannot recover the amount from the collecting banker either.

o C’s Banker: Not Liable.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 335

▪ C’s banker is not involved in this transaction as they have neither collected nor paid the cheque. Hence, C’s
banker is not liable.

2. (ii) Whether C is the fictitious payee?

o C is not a fictitious payee.

▪ Since C is a real, existing person, even though C’s endorsement was forged, the payee cannot be considered
fictitious.

▪ Therefore, C is not a fictitious payee in this case.

3. (iii) Would your answer still be the same if C were a fictitious person?

o Yes, the answer remains the same.

▪ Protection under Section 85 for the paying banker and Section 131 for the collecting banker applies
irrespective of whether the payee (C) is fictitious or not.

▪ Since both paying and collecting bankers acted in good faith and without negligence, they are protected
under the Act.

Q12 [May 2003, May 2005, May 2008, May 2014] [Sec. 84]

A cheque is issued by the drawer in favor of the payee. At the time when the cheque should have been
presented, the drawer has sufficient funds in the account. However, the cheque is not presented to the bank
within a reasonable time, and in the meantime, the bank becomes insolvent. Can the payee recover the
money from the drawer under the provisions of the Negotiable Instruments Act, 1881?

Solution:

1. The drawer is discharged from liability:

o As per Section 84 of the Negotiable Instruments Act, 1881, the drawer is discharged from liability if:

▪ The cheque is not presented for payment within a reasonable time.

▪ At the time the cheque ought to have been presented, the drawer had sufficient funds in the bank to honor
the cheque.

▪ The drawer suffers actual damages due to the delay in presentation (e.g., the bank becoming insolvent
before the cheque is presented).

2. Holder's default in presenting the cheque within a reasonable time:

o It is the responsibility of the holder (payee) to present the cheque for payment within a reasonable period.
Failure to do so results in a loss of the holder’s right to claim the payment from the drawer if the delay causes
the drawer actual harm (such as the bank’s insolvency).

3. Damages suffered by the drawer:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 336

o In this case, the drawer had sufficient funds to honor the cheque at the time it ought to have been presented.
However, the bank failed before the cheque was presented. The drawer has suffered actual damages due to
the holder's failure to present the cheque on time.

4. Conclusion:

o The drawer is discharged from liability because:

▪ The cheque was not presented for payment within a reasonable time.

▪ The drawer suffered actual damages due to the insolvency of the bank.

o The payee (holder) cannot recover the money from the drawer in this situation.

Q13 [Nov 2006] [Sec. 138 and 141]

J, a shareholder of a company, purchased goods for his personal use on credit from a mall. Instead of using
his personal cheque, J sent a cheque drawn on the company's account to the mall for full payment. The
cheque was dishonored by the company's bank. J was not a director or a person in charge of the company.
Can J be held liable under Section 138 of the Negotiable Instruments Act, 1881, and is he responsible for the
payment of the goods purchased?

Solution:

1. Company's Liability under Section 138:

o Section 138 of the Negotiable Instruments Act, 1881, states that a company can be held liable for dishonor
of a cheque issued to discharge its debt or liability.

o In this case, the cheque was dishonored, and the company can be held liable under Section 138.

2. Person Liable under Section 141:

o Section 141 of the Act specifies that if a company commits an offense under Section 138 (dishonor of
cheque), the company and every officer in charge or responsible for its conduct can be held liable.

o However, J is not a director or an officer in charge of the company. Therefore, J cannot be held liable for
the dishonor of the cheque under Section 138 or Section 141.

3. J's Personal Liability for Payment of Goods:

o While J is not liable under Section 138, he is still responsible for the payment of goods purchased on credit.

o By purchasing goods on credit, J entered into a contract to pay for them. The use of a company's cheque
does not absolve him of his liability to pay, as the purchase was made for his personal use, and the company
had no obligation to settle the bill.

Conclusion:

• J has not committed an offense under Section 138 of the Negotiable Instruments Act, 1881, as he is
neither a director nor a person in charge of the company.

• The company is liable under Section 138 for dishonor of the cheque.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 337

• J is personally liable to pay for the goods purchased from the mall, as he contracted to pay the price and
used the company's cheque improperly to settle his personal liability.

Q14 [May 2016] [Sec. 138 and 141]

Mr. Bean, a promoter of a company, took a loan on behalf of the company. He sent a cheque from the
company's account to discharge its legal liability. The cheque was dishonored, and a complaint was filed
against him. Mr. Bean is neither a director nor a person in charge of the company. Can Mr. Bean be held
liable for an offense under Section 138 of the Negotiable Instruments Act, 1881?

Solution:

1. Company's Liability under Section 138:

o Section 138 of the Negotiable Instruments Act, 1881, imposes liability on the company if a cheque issued to
discharge a debt or liability is dishonored.

o In this case, the company is liable for dishonor of the cheque since the cheque was issued to discharge the
company's legal liability.

2. Liability of Individuals under Section 141:

o Section 141 states that in cases where the company commits an offense under Section 138, every person in
charge of, or responsible for, the conduct of the company's business at the time the offense was committed,
is also liable.

o However, Mr. Bean is neither a director nor a person in charge of the company’s business. Being a
promoter does not automatically make him responsible for the company's conduct or liable under Section
141.

3. Mr. Bean's Liability:

o Mr. Bean, as a promoter, acted on behalf of the company to issue the cheque. However, since he is not in
charge of or responsible for the company’s affairs, he cannot be held liable for the dishonor of the cheque
under Section 138 or Section 141.

Conclusion:

• The company is liable under Section 138 for dishonor of the cheque.

• Mr. Bean is not personally liable under Section 138 or Section 141 since he is neither a director nor a
person responsible for the conduct of the company’s business.

Q15 [May 2007, May 2008, May 2017, May 2018] [Sec. 138]

X (or the drawer of a cheque) issues a cheque in favor of Y and subsequently:

1. Informs Y not to present the cheque for payment.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 338

2. Gives a stop payment request to the bank for the same cheque.

Does this act constitute an offense under Section 138 of the Negotiable Instruments Act, 1881?

Solution:

1. Offense under Section 138:

o As per Section 138 of the Negotiable Instruments Act, 1881, if a cheque is returned unpaid by the bank due
to insufficiency of funds or any other reason, it constitutes an offense, provided the conditions specified in
Section 138 are satisfied (e.g., legal notice served, non-payment within the stipulated period, etc.).

2. Stop Payment Requests:

o The Supreme Court of India in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi has held that:

▪ The phrase "cheque is returned unpaid due to insufficiency of funds" should be given a wide interpretation.

▪ This includes cases where the drawer gives a stop payment instruction to the bank after issuing the
cheque.

3. Wide Interpretation of Section 138:

o A drawer cannot escape liability under Section 138 by instructing the bank to stop payment or by requesting
the payee not to present the cheque.

o The reason for dishonor (e.g., stop payment request) does not matter. If the cheque is dishonored and all
conditions under Section 138 are met, the drawer is still liable.

4. Judgment Reference:

o In the Modi Cements Ltd. v. Kuchil Kumar Nandi case, it was ruled that the liability under Section 138 arises
because of the issuance of the cheque, not the subsequent stop payment instructions.

Conclusion:

• Yes, the drawer has committed an offense under Section 138.

• The dishonor of a cheque due to a stop payment order given by the drawer to the bank or a request not to
present the cheque to the drawee is treated as equivalent to dishonor due to insufficiency of funds.

Q16 [June 2009] [Sec. 138 and 139]

V issues a cheque of INR 10,000 as a gift to W. Later, V:

1. Informs W not to present the cheque for payment.

2. Informs the bank to stop payment of the cheque.

Does V's act constitute an offense under Section 138 of the Negotiable Instruments Act, 1881?

Solution:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 339

1. Liability under Section 138:

o As per Section 138, a drawer is liable for dishonor of a cheque only if:

▪ The cheque was issued to discharge a legally enforceable debt or other liability.

▪ The cheque is dishonored due to insufficiency of funds or any other reason.

2. Cheque as a Gift:

o In this case, the cheque was issued as a gift and not to settle any legally enforceable debt or liability.

o Since no debt or liability existed, the provisions of Section 138 are not applicable.

3. Presumption of Consideration (Section 139):

o Section 139 provides that every cheque is presumed to be issued for consideration unless the contrary is
proved.

o However, V can rebut this presumption by proving that the cheque was issued as a gift, which is not
supported by legal enforceability.

4. Legal Interpretation:

o The cheque being a gift does not establish any legal obligation on V's part to honor the cheque.

o Stopping payment or informing the payee not to present the cheque in such circumstances does not
constitute an offense under Section 138.

Conclusion:

• No, V is not liable for an offense under Section 138 of the Negotiable Instruments Act, 1881.

• The cheque was not issued for discharging a legally enforceable debt or liability but as a gift.

• Therefore, V’s actions of instructing W and the bank to stop payment do not constitute an offense under
the Act.

Q17 [Nov 2007] [Sec 87]

State whether the following alterations are material alterations under the Negotiable Instruments Act,
1881:

1. The holder of a bill inserts the words "or order" in the bill.

2. The holder of a bearer cheque converts it into an account payee cheque.

3. A bill payable to X is converted into a bill payable to X and Y.

Solution:

1. Insertion of the words "or order"

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 340

• Not a material alteration:

o The instrument continues to remain an order instrument, even after the insertion.

o No substantial change is made to the nature or negotiability of the instrument.

2. Conversion of a bearer cheque to account payee cheque

• Material alteration:

o This alteration restricts the right of the holder to:

1. Receive payment in cash.

2. Negotiate the cheque further.

o However, such alteration is authorized under the Negotiable Instruments Act, 1881, and therefore, no
party is discharged due to this alteration.

3. Conversion of a bill payable to X into a bill payable to X and Y

• Material alteration:

o The right to receive payment is substantially altered:

▪ Before alteration: X had the sole right to receive payment.

▪ After alteration: Payment can now only be received jointly by X and Y.

o This change is significant and impacts the rights of the parties involved.

Q18 [June 2009] [Sec 87 and 125]

A issues an open bearer cheque for INR 10,000 in favor of B. B strikes out the word "Bearer" and crosses the
cheque. The cheque is later negotiated to C and D. When D presents it to his banker, the cheque is
dishonored with the remark "Payment countermanded by drawer". In response to D's legal notice, A
argues that the cheque was altered after it was issued and, therefore, he is not bound to honor it.

Solution:

1. Effect of striking out the word "Bearer"

• Material alteration:

o Striking off the word "Bearer" converts the cheque into an order cheque.

o This alteration is classified as a material alteration because it changes the negotiability of the cheque.

o However, such an alteration is authorized under the Negotiable Instruments Act, 1881, and does not
render the cheque invalid.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 341

2. Effect of crossing the cheque

• Material alteration:

o Crossing the cheque converts it into a crossed cheque, meaning it can only be deposited into a bank
account and cannot be encashed over the counter.

o This is also considered a material alteration under the Act.

o However, such an alteration is authorized and does not invalidate the cheque.

3. A's Argument

• A’s argument that the cheque is invalid due to material alteration is not valid:

o The reason for dishonor is not the material alteration but "Payment countermanded by drawer", meaning A
gave instructions to the bank to stop payment.

o Material alterations authorized by law (e.g., striking "Bearer" or crossing a cheque) do not discharge the
instrument.

4. A’s Liability

• Section 138 of the Negotiable Instruments Act, 1881:

o A cheque is considered dishonored under Section 138 if:

1. The cheque is returned unpaid for reasons such as stop payment orders by the drawer, insufficient funds,
or exceeding the arrangement.

2. The cheque was issued to discharge a legally enforceable debt or liability.

• In this case:

o The dishonor was due to payment countermanded by drawer.

o A is liable for the payment of the cheque, as the reason for dishonor is covered under Section 138.

Q19 [May 2007] [Sec 86]

Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following:
"A bill of exchange originally drawn by M for a sum of INR 10,000 but acceptance by R only for INR 7,000."

Solution:

• Acceptance is Valid:

o The acceptance is valid for INR 7,000, as the acceptor (R) has agreed to pay a portion of the sum.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 342

• Qualified Acceptance:

o This constitutes a qualified acceptance because the acceptor has accepted only a part of the amount
mentioned in the bill (INR 7,000 instead of INR 10,000).

• Liability of Other Parties:

o No other party shall be liable on the bill unless it has consented to the qualified acceptance.

• Holder's Right:

o The holder of the bill is entitled to object to the qualified acceptance and treat the bill as dishonoured by
non-acceptance. In such a case, all prior parties to the bill shall be liable to the holder.

Q20 [June 2009] [Sec 86]

Referring to the provisions of the Negotiable Instruments Act, 1881, examine whether acceptance of a bill of
exchange in the following situations shall be treated as qualified acceptance:

1. The acceptor undertakes to pay INR 2,000 for a bill drawn for INR 5,000.

2. The acceptor declares the payment to be independent of any other event.

3. The acceptor writes: Accepted payable at ABC Bank.

Solution:

1. Acceptance for Part of the Sum (INR 2,000 for a bill of INR 5,000):

o Qualified Acceptance

▪ The acceptance is qualified since the acceptor has agreed to pay only a part of the sum mentioned in the
bill (INR 2,000 instead of INR 5,000).

2. Acceptance Without Condition or Qualification (Payment Independent of Other Events):

o Not Qualified Acceptance

▪ The acceptance is not qualified as it is given without any condition or qualification. The declaration that
payment is independent of any other event indicates a general acceptance.

3. Acceptance with a Specific Payment Location (Payable at ABC Bank):

o Not Qualified Acceptance

▪ The acceptance is not qualified because the acceptance to pay at a particular place (ABC Bank) is treated
as general acceptance. However, if it was expressly stated that the bill is to be paid at that specified place
and nowhere else, it would amount to a qualified acceptance.

Q21 [Nov 2008][May 2017] [Sec 42]

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 343

X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly
accepted by Y. M obtains the bill from X, thus becoming its holder in due course. Can Y avoid payment of the
bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881.

Solution:

• Y is liable to M for the payment of the bill.

o Reasoning:

▪ Under the Negotiable Instruments Act, 1881, where a bill is signed by the drawer in a fictitious name, the
acceptor (Y) cannot argue against a holder in due course (M) that the drawer is fictitious.

▪ It can be proven that the signature of the person signing as the drawer and the person signing as the
endorser are in the same handwriting. This indicates that Y's acceptance of the bill, despite the fictitious
name of Z, is binding.

Q22 [Nov 2009][Nov 2017][Sec 40]

N is the holder of a bill of exchange made payable to the order of P. The bill of exchange contains the
following endorsements in blank:

• First endorsement: P

• Second endorsement: Q

• Third endorsement: R

• Fourth endorsement: S

N strikes out, without S's consent, the endorsement by Q and R.

Question: Is N entitled to recover anything from S under the provisions of the Negotiable Instruments Act,
1881?

Alternatively, consider:
E is the holder of a bill of exchange made payable to the order of F. The bill contains the following
endorsements in blank:

• First endorsement: F

• Second endorsement: G

• Third endorsement: H

• Fourth endorsement: I

E strikes out, without I's consent, the endorsements by G and H.

Question: Is E entitled to recover anything from I under the provisions of the Negotiable Instruments Act,
1881?

Solution:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 344

• Effect of Striking off the Name of an Endorser:

o When the holder cancels the name of any party liable on the negotiable instrument, such a party and all
parties subsequent to him are discharged from liability.

• In the case of N:

o S is Discharged – Since the holder N has struck off the names of Q and R, and S is a party subsequent to Q
and R.

o N is not entitled to recover anything from S – As S has been discharged due to the cancellation of the
endorsement by Q and R.

• In the case of E:

o I is Discharged – Since E struck off the endorsements by G and H, and I is a party subsequent to G and H.

o E is not entitled to recover anything from I – As I is discharged due to the cancellation of the endorsements
by G and H.

Q23

‘K’ is an employee of ‘Summit’. He fraudulently obtains from Summit a cheque crossed ‘not negotiable’. He
later transfers the cheque to ‘D’ who gets the cheque encashed from XYZ Bank, which is not the drawee
bank. Summit comes to know about the fraudulent act of ‘K’ and sues XYZ Bank for the recovery of the
money.

Question:
Examine with reference to the relevant provisions of the Negotiable Instruments Act, 1881, whether Summit
will be successful in his claim. Would your answer be the same if ‘K’ does not transfer the cheque and gets it
encashed from XYZ Bank himself?

Solution:

• Section 130 of the Negotiable Instruments Act, 1881:

o According to this section, a cheque crossed ‘not negotiable’ shall not allow the holder to have a better title to
the cheque than the title of the person from whom they took it.

o In other words, if the title of the transferor (in this case, K) is defective, the title of the transferee (either D or
XYZ Bank) will also be defective.

o This means that the defective title of K (since it was fraudulently obtained) will affect the rights of D and
XYZ Bank, as they cannot claim a better title than what K had.

• Scenario 1: K transfers the cheque to D

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 345

o Since K obtained the cheque fraudulently, he has no title to it and cannot pass on a valid title to D.

o D receives a defective title and thus cannot claim a better title from XYZ Bank.

o XYZ Bank is liable for the amount of the cheque because they encashed a cheque that had been
fraudulently obtained, and D’s defective title vitiates their claim as a holder in due course.

o Summit will be successful in the claim against XYZ Bank, as K had no valid title to the cheque.

• Scenario 2: K encashes the cheque himself at XYZ Bank

o In this case, K directly presents the cheque to XYZ Bank for encashment. Since K obtained the cheque
fraudulently, he still holds no valid title to it.

o As XYZ Bank encashes the cheque without verifying its validity or ownership, they are liable for the amount
of the cheque.

o Summit will still be successful in the claim against XYZ Bank, as K’s fraudulent act prevents him from
transferring any valid title to the cheque.

Q24 [RTP May 2018]

‘E’ is the holder of a bill of exchange made payable to the order of ‘F’. The bill contains the following
endorsements in blank:

• First endorsement: ‘F’

• Second endorsement: ‘G’

• Third endorsement: ‘H’

• Fourth endorsement: ‘I’

‘E’ strikes out, without ‘I’s consent, the endorsements by ‘G’ and ‘H’. Decide with reasons whether ‘E’ is
entitled to recover anything from ‘I’ under the provisions of the Negotiable Instruments Act, 1881.

Solution:

• Section 40 of the Negotiable Instruments Act, 1881:

o According to this section, if the holder of a negotiable instrument, without the consent of an endorser,
destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to
the holder to the same extent as if the instrument had been paid at maturity.

o Furthermore, any party liable on the instrument may be discharged by the intentional cancellation of his
signature by the holder.

• Application to the case:

o In this case, E (the holder) strikes out the endorsements made by G and H without obtaining I’s consent.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 346

o G and H were originally liable on the bill, but E's action of striking out the endorsements destroys G's and H's
remedy against the prior parties (specifically F and E).

o According to Section 40, this action of striking out the endorsements releases G and H from their liability to
E.

o Since H is the principal debtor to G and I is a surety for H, by releasing H, I is also discharged as a surety.

Q25 [RTP Nov 2018]

A bill of exchange has been dishonoured by non-payment. Now, Mr. Sandip, the holder, wants a certificate of
protest for such a dishonoured bill. Advise Mr. Sandip whether he can get the certificate of protest. Also,
advise him regarding the provisions of Protest for better security.

Solution:

• Protest (Section 100 of the Negotiable Instruments Act, 1881):

o When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the
holder may, within a reasonable time, cause the dishonour to be noted and certified by a notary public.

o This certificate issued by the notary public is called a protest.

o Therefore, Mr. Sandip can obtain a certificate of protest by following the prescribed procedure under Section
100, which allows him to get the dishonour noted and certified by a notary public within a reasonable time.

• Protest for Better Security (Section 101 of the Negotiable Instruments Act, 1881):

o When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached
before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand
better security from the acceptor.

o If the acceptor refuses to provide better security, the holder may, within a reasonable time, cause the facts
to be noted and certified by the notary public. This certificate is called a protest for better security.

Q26

Give the answer to the following as per the provisions of the Negotiable Instruments Act, 1881:

a) A draws a cheque in favour of M, a minor. M endorses the same in favour of X. The cheque is dishonoured
by the bank on grounds of inadequate funds. Discuss the rights of X.

b) A promissory note was made without mentioning any time for payment. The holder added the words “on
demand” on the face of the instrument. Does this amount to material alteration?

c) A draws a cheque for Rs. 1000 and hands it over to B by way of gift. Is B a holder in due course? Explain
whether he has the right to receive the proceeds of the cheque. [ICAI May 2018]

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 347

d) A cheque is drawn payable to “B or order”. It is stolen and the thief forges B’s endorsement and endorses it
to C. The banker pays the cheque in due course. Whether B can recover the money from the banker?

Solution:

• a) Rights of X (Section 26 of the Negotiable Instruments Act, 1881):

A minor may draw, endorse, deliver, and negotiate a negotiable instrument, but he is not liable on the
instrument. Therefore, since M is a minor, M is not liable for the dishonour of the cheque. X, however, can
still proceed against A, the drawer, for recovery of the amount of the cheque, as A is liable on the instrument.

• b) Material Alteration (Section 64 of the Negotiable Instruments Act, 1881):

The addition of the words "on demand" to a promissory note that initially did not specify a time for payment
is not a material alteration. In such cases, a promissory note made without specifying the time for payment
is treated as payable on demand by default. Therefore, adding the words "on demand" does not alter the
business effect of the instrument and does not constitute a material alteration.

• c) B as a Holder in Due Course (Section 9 of the Negotiable Instruments Act, 1881):

B is not a holder in due course because he received the cheque as a gift and did not provide value or
consideration in exchange. A holder in due course must take the instrument for value and in good faith.
Since B received the cheque without consideration, he is not a holder in due course. However, as a holder, B
is still entitled to receive Rs. 1000 from the bank on which the cheque is drawn, as his title to the cheque is
good and bona fide.

• d) Recovery from Banker (Section 85 of the Negotiable Instruments Act, 1881):

According to Section 85, a drawee bank is discharged when it pays a cheque that is payable to order and
the cheque is purported to be endorsed by or on behalf of the payee. Even though B’s endorsement is
forged by the thief, the bank is protected and discharged from liability. As a result, B cannot recover the
money from the drawee bank, as the payment made by the bank was in due course.

Q27 [ICAI SM] [RTP May 2019]

M owes money to N. Therefore, he makes a promissory note for the amount in favour of N. For safety of
transmission, he cuts the note in half and posts one half to N. He then changes his mind and calls upon N to
return the half of the note which he had sent. N requires M to send the other half of the promissory note.
Decide how rights of the parties are to be adjusted.

Answer:

The key issue in this problem is whether the promissory note is considered complete when one half of the
note is delivered to N.

Legal Provisions Under the Negotiable Instruments Act, 1881:

• According to Section 46 of the Negotiable Instruments Act, 1881, the making of a promissory note is
completed by delivery (whether actual or constructive).

• Delivery refers to the entire instrument. It is important to note that delivery of only half of an instrument
does not qualify as a constructive delivery of the entire instrument. This means that the instrument is not
considered complete unless both halves (or the entire document) are delivered.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 348

Application to the Case:

In this case:

1. M creates a promissory note in favour of N.

2. To ensure safety, M cuts the note in half and sends one half to N.

3. M then changes his mind and asks for the return of the half of the note already sent.

4. N demands that M send the other half to complete the promissory note.

Based on the legal provision mentioned above, the promissory note is not considered complete when only
one half is delivered to N. The delivery of just half the note does not constitute delivery of the whole
instrument. Therefore, N does not have any claim to the other half of the note.

Conclusion:

• M is justified in demanding the return of the half he already sent to N.

• N's claim for the other half of the note is not valid since the promissory note is incomplete without the full
delivery.

• M can change his mind and refuse to send the other half.

Thus, the rights of the parties are adjusted as follows:

• M can recall the first half of the note, and N has no legal right to compel M to send the second half.

Q28 [MTP May 2019]

Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in favour of Umesh.
For safety of transmission, he cuts the note in half and posts one half to Umesh. He then changes his mind
and calls upon Umesh to return the half of the note which he had sent. Umesh requires Manoj to send the
other half of the promissory note. Decide how rights of the parties are to be adjusted.
Give your answer in reference to the provisions of the Negotiable Instruments Act, 1881.

Answer:

The issue here revolves around whether the promissory note is considered complete when only one half of
the note has been delivered to Umesh.

Legal Provisions Under the Negotiable Instruments Act, 1881:

• Section 46 of the Negotiable Instruments Act, 1881, states that the making of a promissory note is
completed by delivery, whether actual or constructive.

• However, delivery refers to the entire instrument, not just a part of it. The delivery of half of a promissory
note does not qualify as constructive delivery of the whole instrument. This means that the promissory
note is not validly made when only one half is delivered.

Application to the Case:

1. Manoj makes a promissory note in favour of Umesh.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 349

2. For safety in transmission, Manoj cuts the note in half and posts one half to Umesh.

3. Manoj changes his mind and calls for the return of the half of the note he already sent.

4. Umesh demands that Manoj send the other half to complete the promissory note.

As per Section 46 of the Negotiable Instruments Act, the promissory note is not considered complete when
only half of it is delivered. Delivery refers to the whole instrument. Since the promissory note is incomplete
with only one half delivered, Umesh does not have a legal claim to the other half.

Conclusion:

• Manoj is justified in demanding the return of the first half of the note.

• Umesh has no legal right to demand the other half of the note, as the promissory note is incomplete
without the full delivery.

• Manoj has the right to change his mind and refuse to send the second half of the promissory note.

Thus, the rights of the parties are adjusted as follows:

• Manoj can recall the half he sent to Umesh and is not required to send the other half.

• Umesh's claim to receive the other half is not maintainable under the provisions of the Negotiable
Instruments Act, 1881.

Q29 [MTP May 2019]

On a Bill of Exchange for Rs. 1 lakh, X’s acceptance to the Bill is forged. A takes the Bill from his customer
for value and in good faith before the Bill becomes payable. State with reasons whether A can be considered
as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from X.

Solution:

According to Section 9 of the Negotiable Instruments Act, 1881, a ‘holder in due course’ is defined as any
person who for consideration becomes the possessor of a promissory note, bill of exchange, or cheque (if
payable to bearer or to the payee or endorsee, if payable to order), before the amount in it becomes payable
and without having sufficient cause to believe that any defect existed in the title of the person from whom
he derived his title.

Analysis of the case:

• A in this case prima facie became a possessor of the Bill for value and in good faith before the Bill became
payable. Therefore, A can be considered as a holder in due course.

However, when a signature on a negotiable instrument is forged, it renders the instrument a nullity. The
holder of a forged instrument cannot enforce payment thereon. If the holder manages to obtain payment
despite the forgery, he cannot retain the money.

Legal Principle:

This principle is universal, meaning that even a holder in due course is not exempt from it. A holder in due
course is generally protected when there is a defect in the title, but no title exists when there is an entire
absence of title, such as in the case of forgery.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 350

Conclusion:

Since X’s acceptance is forged, A cannot receive the amount on the Bill. The true owner of the Bill may sue
A for the amount paid under tort law. Thus, A cannot enforce the Bill and cannot receive the amount from X.

Q30 [MTP May 2019]

Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due by
endorsing the cheque in favour of Mrs. A, the owner of the house in which he stayed. The cheque was
dishonoured when Mrs. A presented it for payment on grounds of inadequacy of funds. Advise Mrs. A on
how she can proceed to collect her dues, referencing the provisions of the Negotiable Instruments Act,
1881.

Solution:

Capacity to make, etc., promissory notes, etc. (Section 26 of the Negotiable Instruments Act, 1881):

• Section 26 of the Negotiable Instruments Act, 1881 states that every person capable of contracting
according to the law to which they are subject, may bind themselves and be bound by the making, drawing,
acceptance, endorsement, delivery, and negotiation of a promissory note, bill of exchange, or cheque.

• However, a minor may draw, endorse, deliver, and negotiate such instruments so as to bind all parties
except himself.

Analysis of the Situation:

• In this case, M, being a minor (16 years old), endorsed the cheque in favour of Mrs. A to settle his rental
dues.

• As per the provisions of Section 26, although M can draw, endorse, deliver, and negotiate the cheque, he is
not liable due to his minority. This means M cannot be held responsible for the dishonour of the cheque.

Mrs. A’s Course of Action:

• Since M is not liable due to his minority, Mrs. A can proceed against Mr. S Venkatesh (the drawer of the
cheque), as he is liable for the payment of the cheque.

• Mrs. A can take legal action to claim her dues from Mr. S Venkatesh, as he is the party who drew the cheque
and remains liable for payment despite the dishonour.

Q31 [MTP May 2019]

P draws a bill on Q for Rs. 10,000. Q accepts the bill. On maturity, the bill was dishonoured by non-payment.
P files a suit against Q for payment of Rs. 10,000. Q proves that the bill was accepted for a value of Rs. 7,000
and as an accommodation to the plaintiff for the balance amount, i.e., Rs. 3,000. Referring to the provisions
of the Negotiable Instruments Act, 1881, decide whether P would succeed in recovering the whole amount
of the bill.

Solution:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 351

Section 44 of the Negotiable Instruments Act, 1881:

• According to Section 44, when the consideration for which a person signed a promissory note, bill of
exchange, or cheque consisted of money and was originally absent in part or has subsequently failed in
part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him
is proportionally reduced.

Explanation:

• The drawer of a bill of exchange stands in immediate relation with the acceptor.

• The maker of a promissory note, bill of exchange, or cheque stands in immediate relation with the payee.

• The endorser stands in immediate relation with his endorsee.

• Other signers may by agreement stand in immediate relation with a holder.

Application to the Given Case:

• In this case, P files a suit to recover Rs. 10,000 from Q. However, Q proves that the bill was accepted for Rs.
7,000 (the actual value) and Rs. 3,000 was accepted as an accommodation to P.

Conclusion:

• Based on the provisions of Section 44, since the consideration for the bill was only Rs. 7,000 (and the rest
was an accommodation), P can only recover Rs. 7,000 from Q, not the entire Rs. 10,000. The remaining Rs.
3,000 is not recoverable as it was not a legitimate consideration for the bill.

Q32 [ICAI SM]

M drew a cheque amounting to INR 2 lakh payable to N and subsequently delivered it to him. After receipt of
the cheque, N endorsed the same to C but kept it in his safe locker. After some time, N died, and P found the
cheque in N's safe locker. Does this amount to indorsement under the Negotiable Instruments Act, 1881?

Solution:
No, P does not become the holder of the cheque as the negotiation was not completed by the delivery of the
cheque to him. According to Section 48 of the Negotiable Instruments Act, 1881, the negotiation of a
negotiable instrument is only completed by delivery.

Since N endorsed the cheque to C, but the cheque was kept in his safe locker, there was no delivery of the
cheque to C. Therefore, the endorsement was incomplete, and P, who later found the cheque, does not
become the holder under the provisions of the Act.

Q33 [ICAI SM]

Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the cheque and was not aware
of the loss. The person who found the cheque forged the signature of Mr. Vyas and endorsed it to Mr.
Parshwanath as consideration for goods bought by him from Mr. Parshwanath. Mr. Parshwanath encashed
the cheque from the drawee bank on the very same day. Mr. Vyas intimated the drawee bank about the theft
of the cheque after three days. Examine the liability of the drawee bank.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 352

Solution:

Cheque payable to order [Section 85 of the Negotiable Instruments Act, 1881]

1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.

2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in
due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing
thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

In the present case:

• The cheque was drawn payable to Mr. Vyas or order.

• Mr. Vyas lost the cheque and was unaware of its loss.

• The person who found the cheque forged Mr. Vyas's signature and endorsed it to Mr. Parshwanath, who
encashed it from the drawee bank.

• Mr. Vyas informed the drawee bank about the theft three days later, by which time the bank had already
made the payment.

Analysis:
According to Section 85 of the Negotiable Instruments Act, 1881, the drawee bank is discharged when it
makes payment against a cheque payable to order, provided the cheque is purported to be endorsed by or
on behalf of the payee.

Even though Mr. Vyas's signature was forged, the drawee bank is protected and discharged because the
payment was made to the person who purportedly held the cheque. Mr. Vyas, as the true owner, cannot
recover the money from the drawee bank since the bank made the payment in due course to the forged
endorsee, and the bank is not liable for the forgery.

Q34 [ICAI SM]

Rama executes a promissory note in the following form:

"I promise to pay a sum of INR 10,000 after three months."
Decide whether the promissory note is a legal promissory note.

Answer:

• The promissory note is an unconditional promise in writing.

• In the given case, the amount (INR 10,000) is certain, but the date and the name of the payee are missing.
This makes the instrument a bearer instrument.

As per the Reserve Bank of India (RBI) Act, a promissory note cannot be made payable to bearer, whether
on demand or after a certain period.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 353

Since the payee's name is missing and it is essentially a bearer instrument, the instrument is considered
illegal under the RBI Act. As a result, it cannot be legally enforced.

Concept Problem 4 [Nov 2005] [Sec 24]

Problem:
Ascertain the date of maturity of a bill payable 120 days after date. The bill of exchange was drawn on 1st
June 2005.

Solution:

1. Date of the Bill:

1st June 2005

2. Nature of the Bill:

Time bill – Payable 120 days after date

3. Exclusion of the Date of Drawing:

As per Section 24 of the Negotiable Instruments Act, 1881, the date on which the bill is drawn (1st June
2005) is excluded from the calculation.

4. Calculating 120 Days from 1st June 2005:

o Remaining days in June: 29 days (June has 30 days; 1 day already passed)

o Days in July: 31 days

o Days in August: 31 days

o Remaining days to complete 120 days: 29 days in September

120th day ends on 29th September 2005.

5. Adding Days of Grace:

As per the Negotiable Instruments Act, 3 days of grace are added to the due date.

29th September + 3 days = 2nd October 2005.

6. Adjusting for Public Holiday:

Since 2nd October 2005 is a public holiday (Gandhi Jayanti), the maturity date will be the preceding
business day.

Date of Maturity: 1st October 2005 (Saturday).

Q35 [Nov 2007] [Sec 24]

Problem:
Calculate the date of maturity of the following bills of exchange, explaining the relevant rules relating to
determination of the date of maturity as provided in the Negotiable Instruments Act, 1881.

Solution:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 354

i) A bill of exchange dated 31st August 2007 is made payable three months after date.

1. Date of the Bill:

31st August 2007

2. Nature of Bill:
Time bill – Payable 3 months after date

3. Rule for Calculating the Due Date:

o As per Section 24 of the Negotiable Instruments Act, 1881, the maturity date is determined by adding the
stated number of months to the date of the bill.

o The corresponding day of the third month is 30th November 2007 (the corresponding day rule applies).

o If the corresponding day does not exist in the relevant month, the last day of the month is taken.

4. Adding Days of Grace:

o As per the Act, 3 days of grace are added to the due date.

o 30th November 2007 + 3 days = 3rd December 2007.

5. Final Date of Maturity:

3rd December 2007.

ii) A bill of exchange drawn on 15th October 2007 is payable twenty days after sight, and the bill is
presented for acceptance on 31st October 2007.

1. Date of the Bill:

15th October 2007

2. Nature of Bill:
Time bill – Payable 20 days after sight

3. Date of Presentation for Acceptance:

31st October 2007

4. Rule for Excluding the Date of Presentation:

o The date on which the bill is presented for acceptance is excluded in the calculation.

o Start counting 20 days from 1st November 2007.

5. Calculating the Due Date:

o Adding 20 days: 20th November 2007.

6. Adding Days of Grace:

o As per the Act, 3 days of grace are added to the due date.

o 20th November 2007 + 3 days = 23rd November 2007.

7. Final Date of Maturity:

23rd November 2007.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 355

Final Answer:

i) Date of maturity: 3rd December 2007

ii) Date of maturity: 23rd November 2007

Q36 [Nov 2002] [May 2004] [Sec 4]

Referring to the provisions of The Negotiable Instruments Act, 1881, examine the validity of the
following promissory notes:

(i) "I owe you a sum of Rs 1,000." A tells B.

(ii) X promises to pay Y a sum of Rs 10,000 six months after Y’s marriage with Z.

Solution

(i) "I owe you a sum of Rs 1,000."

This is not a valid promissory note, as it does not contain a clear promise to pay. Merely acknowledging a
debt (stating "I owe you") is insufficient to constitute a valid promissory note under Section 4 of the
Negotiable Instruments Act, 1881. A promissory note must include an express promise or undertaking to
pay a definite amount of money.

(ii) "X promises to pay Y a sum of Rs 10,000 six months after Y’s marriage with Z."
This is not a valid promissory note, as the promise to pay is conditional. Under Section 4, a valid
promissory note must have an unconditional promise to pay. In this case, Y’s marriage with Z is an uncertain
future event, and thus, the condition makes the note invalid.

Q37 [Nov. 2007] [Sec 4]

Whether the following notes may be considered as valid promissory notes under the Negotiable
Instruments Act, 1881:

(i) "I promise to pay INR 5,000 or 7,000 to Mr. Ram."

(ii) "I promise to pay Mohan INR 500 if he secures 60% marks in the examination."
(iii) "I promise to pay INR 3,000 to Ravi after 15 days of the death of A."

Answer

(i) "I promise to pay INR 5,000 or 7,000 to Mr. Ram."

This is not a valid promissory note, as the amount payable is not certain. Under Section 4 of the
Negotiable Instruments Act, 1881, a promissory note must contain an unambiguous and certain sum of
money to be paid. The uncertainty of whether INR 5,000 or INR 7,000 is payable renders this note invalid.

(ii) "I promise to pay Mohan INR 500 if he secures 60% marks in the examination."
This is not a valid promissory note, as the promise is conditional. A promissory note must have an

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 356

unconditional promise to pay. Since it is uncertain whether Mohan will secure 60% marks, the note fails to
meet the requirement of certainty and unconditionality.

(iii) "I promise to pay INR 3,000 to Ravi after 15 days of the death of A."
This is a valid promissory note, as the promise is not conditional. The death of A is a certain event, though
the timing is uncertain. As per Section 4, a promissory note may specify a time of payment dependent on an
event that is certain to occur, making this note valid.

PART 2 – DIRECT QUESTIONS

Q1 [May 2007] [Sec 130]

Problem: Examine the validity of the statement:

"A cheque marked 'Not Negotiable' is not transferable."

Solution:

• Cheque Marked 'Not Negotiable':

A cheque marked as "Not Negotiable" is still transferable. The key distinction lies in the rights of the
transferee.

• Impact of the 'Not Negotiable' Marking (Sec. 130):

Under Section 130 of the Negotiable Instruments Act, 1881, a negotiable instrument (including a cheque)
can still be transferred, even if it is marked "Not Negotiable." However, the transferee does not acquire a
better title than the transferor. This means that if the transferor had a defective title or there were any issues
with the instrument (e.g., fraud), the transferee will inherit those issues and cannot claim a better right or
title than the transferor.

• Rights of the Transferee:

Even if the transferee acquires the cheque in good faith and without negligence, they will not have a better
title than the one held by the transferor due to the "Not Negotiable" marking. Essentially, the transferee's title
is subject to the same limitations as the transferor's title.

Q2 [May 2003] [Sec 86]

Problem: An acceptor accepts a bill of exchange but writes on it:

“Accepted, but payment will be made when goods delivered to me are sold.”
Decide the validity.

Solution:

1. Validity of Acceptance

o The acceptance is valid, and the acceptor is liable.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 357

o Reason: It amounts to qualified acceptance, as the acceptance is subject to a condition (i.e., payment will
be made when goods are sold).

2. Qualified Acceptance

o Since the acceptance is subject to a condition, it is qualified acceptance.

o Key Point: No other party shall be liable on the bill unless they have consented to the qualified acceptance.

3. Rights of the Holder

o The holder has the right to:

▪ Object to the qualified acceptance and treat the bill as dishonoured by non-acceptance.

▪ If the holder rejects the qualified acceptance, all prior parties shall be liable towards the holder (Sec. 86).

Q3 [May 2003] [Sec 7]

Problem:
Examine the validity of the following in light of the provisions of the Negotiable Instruments Act, 1881.
i. An oral acceptance.
ii. An acceptance by mere signature without writing the word "accepted."

Solution:

1. i. Oral Acceptance

o Not Valid

▪ Reason: An oral acceptance is not valid since it is not in writing and is not signed, which is required under
the Negotiable Instruments Act, 1881.

2. ii. Acceptance by Mere Signature without Writing the Word "Accepted"

o Valid

▪ Reason: The acceptance is valid since the drawee has signed the bill.

▪ Key Point: Writing the word "accepted" is not a statutory requirement for acceptance as long as the
drawee signs the bill.

Q4 [MTP Nov 2018]

Power of Court for Trial of Cases Summarily under the Negotiable Instruments Act, 1881

Answer:

As per Section 143 of the Negotiable Instruments Act, 1881, the trial of offences under this Act is
conducted summarily by a Judicial Magistrate of the first class or a Metropolitan Magistrate. The

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 358

provisions of sections 262 to 265 of the Code of Criminal Procedure, 1973 (CrPC) shall apply to such trials,
with specific exceptions and modifications as follows:

1. Trial of Offence:

o Summary Trial:
Despite anything in the CrPC, all offences under the Negotiable Instruments Act are tried summarily. In the
case of a conviction under a summary trial, the Magistrate has the power to pass a sentence of
imprisonment for up to one year and/or a fine of not exceeding ₹5,000.

o Change in the Nature of the Case:

If at the start of the trial, or during its progress, it appears to the Magistrate that the nature of the case may
require a sentence of imprisonment exceeding one year or if it is undesirable to continue the case as a
summary trial for any reason, the Magistrate can convert the trial to a regular trial. The Magistrate must
record an order stating this, recall any witnesses who may have been examined, and proceed according to
the CrPC.

2. Speedy Trial:

o The trial shall, as far as practicable and consistent with the interests of justice, be continued from day to
day until it is concluded, unless the Magistrate finds it necessary to adjourn the trial. Any adjournment must
be recorded in writing with valid reasons.

3. Efficient Disposal:

o The trial must be conducted expeditiously, and there is an endeavour to conclude the trial within six
months from the date of filing the complaint.

Q5 [ICAI SM]

Question:

State briefly the rules laid down under the Negotiable Instruments Act for determining the date of maturity of
a bill of exchange. Ascertain the date of maturity of a bill payable hundred days after sight and which is
presented for sight on 4th May, 2017.

Answer:

Rules for Determining the Date of Maturity of a Bill of Exchange:

The Negotiable Instruments Act, 1881 provides specific rules for determining the maturity of a bill of
exchange. These rules are as follows:

1. Maturity of Bills Not Payable on Demand or at Sight:

o The maturity is determined by the third day after the day on which the bill is expressed to be payable.

o Three days of grace are allowed for such bills.

2. Maturity of Bills Payable at a Stated Number of Months After Date:

o The maturity will fall on the day of the month corresponding to the date on which the instrument is dated.

3. Maturity of Bills Payable at a Stated Number of Months After Sight:

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 359

o The maturity is determined based on the day of the month corresponding to the day on which the bill is
presented for acceptance or sight or protested for non-acceptance.

4. Maturity of Bills Payable After a Stated Number of Months After a Certain Event:

o The period will end on the day corresponding to the day on which the event happens.

5. Maturity for Bills Accepted for Honour:

o For bills payable after a stated number of months after sight and accepted for honour, the maturity falls on
the day corresponding to the day on which it was accepted.

6. When the Corresponding Day Does Not Exist:

o If the month in which the maturity falls has no corresponding day (e.g., February 30), the maturity will fall on
the last day of that month.

7. Exclusion of the Presentment Day:

o The day of presentment for acceptance or sight, the day of protest for non-acceptance, or the day of the
event happening, is excluded from the calculation of maturity.

8. Three Days of Grace:

o Three days of grace are allowed after the stated maturity day, except for bills payable on demand, at sight, or
on presentment.

9. Public Holiday:

o If the last day of grace falls on a public holiday, the maturity is moved to the next preceding business day.

Q6 [MTP May 2019]

Explain the meaning of ‘Negotiation by delivery’ with the help of an example. Give your answer as per the
provisions of the Negotiable Instruments Act, 1881.

Solution:

Negotiation by Delivery

According to Section 47 of the Negotiable Instruments Act, 1881, subject to the provisions of Section 58,
a promissory note, bill of exchange, or cheque payable to bearer is negotiable by delivery thereof.

Exception:
A promissory note, bill of exchange, or cheque delivered on the condition that it is not to take effect except
in a certain event is not negotiable (except in the hands of a holder for value without notice of the
condition), unless such event happens.

Example:

A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The
instrument has been negotiated.

This example demonstrates negotiation by delivery, as the instrument, payable to bearer, is transferred by
delivery without any formal endorsement or additional conditions.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 360

Q7 [Nov 2008] [Nov 2016] [Sec 8]

Problem:
Discuss whether the following persons can be called a Holder under the Negotiable Instruments Act, 1881
with appropriate reasons:

Solution:

Explanation of the term "Holder" [Section 8]:

A "Holder" under the Negotiable Instruments Act, 1881, is a person:

1. Who is entitled in their own name to the possession of the negotiable instrument; and

2. Who has the right to receive or recover the amount due on it.

Case-wise Analysis:

a) X, who obtains a cheque drawn by Y by way of gift:

• X is a Holder.

o X is entitled in his own name to possess the cheque.

o X has the right to receive or recover the amount on the cheque as per Section 8.

o The mode of transfer (gift) does not impact the definition of "Holder."

b) A, the payee of the cheque, prohibited by a court order from receiving the amount:

• A is not a Holder.

o Although A is entitled to possession of the cheque, the court order prohibits him from recovering the
amount.

o A person who cannot recover the amount is not considered a Holder as per Section 8.

c) M, who finds a bearer cheque on the road and retains it:

• M is not a Holder.

o Possession alone does not make M a Holder; M must also be entitled to possession.

o As per Section 58, a finder of a lost negotiable instrument is not entitled to receive the amount unless the
instrument is negotiated to him.

d) B, the agent of C, entrusted with an instrument without endorsement by C (the payee):

• B is not a Holder.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation

 361

o Although B is entitled to possess the instrument, it is not in his own name, but in his capacity as an agent.

o A "Holder" must have entitlement in their own name to be considered as such.

e) D, who steals a blank cheque of A and forges A’s signature:

• D is not a Holder.

o D is in wrongful possession of the cheque, which cannot confer the status of Holder.

o Additionally, a cheque with a forged drawer’s signature is a nullity and conveys no title or rights to any
person.

Alternate Scenario:

1. M, the payee of the cheque, prohibited by a court order from receiving the amount:

• M is not a Holder.

o The court order barring M from recovering the amount means M fails to meet the second condition of Section
8 (the right to receive the amount).

2. M, the agent of Q, entrusted with an instrument without endorsement by Q (the payee):

• M is not a Holder.

o M, as an agent, holds the cheque on behalf of Q and not in his own name.

o A Holder must be entitled to the cheque in their own name, which M is not.

Conclusion:

• X: Holder.

• A: Not a Holder.

• M: Not a Holder.

• B: Not a Holder.

• D: Not a Holder.

CA Arun Anbu www.youtube.com/@CA_Arunanbu CA Foundation