Yogesh Kumawat:, Assistant Professor, Sit Legal Aspect of Business Notes

YOGESH KUMAWAT, ASSISTANT PROFESSOR, SIT LEGAL ASPECT OF BUSINESS NOTES
INDIAN CONTRACT ACT, 1872

Agreement- Every promise and every act promises forming a consideration for each other is an
agreement. Contract comes after the existence of agreement.
Contract
1. According to William Anson, A legally binding agreement between two or more persons by
which rights are acquired by one or more to act on the part of the others.
2. According to Salmond, A contract is an agreement creating and defining obligations between
parties.
Conclusive definition- Law of contract is the branch law which determines the circumstances in which
promises made by the parties to contract shall be legally binding on them.
Consideration- When as the desire of the promisor, the promise or any other person had done or
abstained from doing, or does or abstains from doing, or promises to do or abstains from doing
something, such an act or promise is called a consideration for the promise.
Essential elements of Valid Contract-

1. Lawful offer and its acceptance
2. Legal capacity
3. Free consent
4. Lawful consideration
5. Lawful object
6. Lawful agreements
7. Certainty of terms
8. Possibility of performance of promise
9. Lack of legal relationship
1. Lawful offer and its acceptance- There must be an agreement based on a lawful offer made by a
person to another and a lawful acceptance of that offer made by the latter.
2. Legal capacity- The parties must have the legal capacity to make contracts. Under Section 11, a
person become competent to make contracts if he is a major by age, that is above the age of 18
years in general, he is of sound mind and is not disqualified by any other Indian Law from making
contracts.
3. Free Consent- It means one must not pressurize or mislead the other as to the subject matter of
the agreement. A contract is not made for free consent when it is brought about by coercion,
undue influence, fraud, misrepresentation of the parties.
4. Lawful consideration- Each party must give lawful consideration for the promise made by the
other. If Ram agrees to sell a property to Shyam. Shyam must give something in return to make
the agreement a valid contract. Shyam promise to pay the price will be taken as consideration for
Ram promise.
5. Lawful object- Illegal agreements those that defeat any other law, fraudulent agreements and those
that defame third parties, immoral agreements and those that are opposed to public policy.
6. Lawful agreements- The agreements must not be such that the Contract Act, expressly regards it
as void. Agreements that seek to restrain persons from marriage from any lawful business or
profession or from legal proceeding and wagering agreements.
7. Certainty of terms- Certainty of terms is an important element of valid contracts. E.g. if Ram
agrees to sell 50 litres of oil to Shyam for Rs. 2500. The agreement is still uncertain because the
type of oil is not specified, unless the seller is dealer in a particular type of oil only.
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8. Possibility of performance of promise- Possibility of the performance of the promise made by

the parties is another important element of valid contract. If Ram promises to make treasure for
Shyam by magic, the agreement is not valid.
9. Lack of legal relationship- Agreement loses its validity if the parties have no intention to create a
legal relationship between them.
“All contracts are agreements but all agreements are not contracts”.
According to Holland, there are three very essential elements in term law are:-
1. Law is the rule that relates to the action of humans.
2. It is a regulator of the external actions of human beings.
3. It is enforced by the State (government).
The law of contract deals with the contracts made by two or more parties. A contract is an agreement
made between two or more parties, which the law will enforce. Pollock has defined a contract in the
following words. Every agreement and promise enforceable by law is a contract. This definition makes it
clear that every agreement cannot be a contract, but all contracts are agreements. Social and domestic
agreements cannot be called contracts, because they do not possess lawful enforceability. For
example, a husband promises to pay his wife Rs. 200 per month for her own expenditure. Later he
refuses to pay her the said amount. His wife cannot file a suit against him and however, the money, as that
promise is domestic agreement.
The agreement can be called a contract which has enforceability of law. Suppose, Ram agrees to
sell his bicycle to Shyam for Rs. 150. If Ram later refuses to sell his bicycle to Shyam for the said
amount, Shyam can go to the court and recover his loss, because Ram‟s promise to Shyam is a contract.
One more important assumption is necessary for an agreement to be converted into law. The
parties to the contract must have agreed upon the subject matter of the contract in the same sense
and at the same time. This important assumption is described by the legal “Consensus-ad-idem”. For
example, X owes two cars- A and B. He is selling his car A to Shyam . But Shyam takes if that he is
purchasing car B. There can be no contract in this position.
The above discussion explains that all contracts are agreements, but all agreements are not
contracts. The agreement can become a contract if it bears enforceability. It the agreement does not have
any enforceability; it does not become a contract.
Objectives of Indian Contract Act,1872

1. Protect the injured party after the party filed a suit against the offender.
2. To punish the offending party with appropriate penalties.

3. To certify and examine the purpose of the agreement and to provide compensatory benefits to the
injured party.
4. To examine whether the parties agreeing to enter into an agreement are competent to do so and
whether the main aim of agreement is that of free consent or the party is guilty of coercion and
other related offences.
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Types of Contract
1. Express contracts
2. Implied contracts
3. Executed contracts
4. Executory contracts
5. Unilateral & Bilateral contracts
6. Valid contracts
7. Void contract
8. Voidable contracts
1. Express contracts: When contracts are made by the parties thereto in writing or by word of
mouth, they are called express contracts. E.g.- if Ram makes a proposal to sell his house to Shyam
for Rs 50000 and Shyam accepts this offer, the contract entered into by Ram and Shyam is called
as express contract.
2. Implied contracts: The proposal or acceptance is made otherwise than in words, the promise is
said to be implied. E.g.- If Ram gets into a bus and occupies a seat, there is an implied contract
that he will pay for his ticket.
3. Executed contracts: When both the parties to the contract fulfill their respective obligation, such
contract is called as executed contract. E.g.- Ram agrees to sell his motorcycle to Shyam for Rs
5000 and Shyam accepts the proposal and accordingly Shyam pays Rs 5000 to Ram and purchases
his motorcycle. Here, both the parties have performed their respective obligations and hence, this
is an executed contract.
4. Executory contract: When one or both the parties to the contract do not perform their obligations
fully and something is remained to be done, such contracts are called executory contracts. E.g.- if
Shyam agrees to pay Rs. 5000 towards the price of the motorcycle and Ram also agrees to sell the
same at this agreed price of Rs. 5000 but Shyam has yet to pay the price of the motorcycle and
Ram has yet to hand over the motorcycle to Shyam, the contract is said to be executory contracts.
5. Unilateral and Bilateral contracts: An unilateral contract is one where one party performs his
obligation either before the contract comes into existence or at the time when it comes into
existence and the obligation of the other party remains to be fulfilled at the time of formation of
the contract. E.g.- if Ram a coolie, acts Shyam‟s hold all in his vehicle, the contract comes into
existence on putting Shyam‟s hold all in his vehicle by Ram. Now Shyam‟s obligation will be
complete on paying coolie charges to Ram. This is a unilateral contract.
Bilateral contracts are very similar that of
executory contracts and therefore, they are also called as contracts with executory consideration.
E.g.- Shyam promises Ram that he will purchase Ram house after months and Ram also promises
to pay the value of Shyam‟s house to Ram sale-deed. This contract is Bilateral because the
performance of the obligations of Ram and Shyam , who are the parties of the contract, are
outstanding at the time of formation of the contract.
6. Valid contracts: All contracts which satisfy all these essential elements are enforceable in a court
of law and are termed as valid contracts.
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7. Void contracts: A contract which cannot be enforceable by law becomes void contracts. It is
because of either impossibility of performance due to outbreak of war or any other natural
calamity or due to any other reason or change of law.
8. Voidable contracts: A voidable contract is one which can be avoided or set aside at the option of
any party to the contract. An agreement which is enforceable by law at the option of one or more
of the parties thereto, but not at the option of the other or others, is a voidable contract.
Conditions of Valid Offer/Proposal

According to Section 2 (a) of the Indian Contract Act,1872, a person is said to have made a offer,
when he lets another to know his willingness to do or to abstain from doing a thing with a view to
obtaining the assent or consent of the other person. E.g.- Ram desires to sell his car to Shyam for Rs.
30000. Ram asks Shyam that “Will you purchase my car for Rs. 30000? This is a offer or proposal made
by Ram to Shyam.
1. Legality
2. Definite
3. Not merely an Intention and Invitation
4. Proper communication
5. Lawful consent
6. Exclude the term Non-Compliance

7. A statement of price is not an offer
1. Legality: Offer is capable of being accepted and gives rise to a legal relationship. The offer must
have legal relations. A social proposal cannot be an offer till its legal relations are not clearly
defined.
2. Definite: The offer must be definite and contain certain unambiguous terms. E.g.- A contract was
made to take a house on lease for three years at Rs. 28500 per annum if the house was repaired
and the drawing rooms properly decorated. This contract was held void on the ground that the
qualifying clause in the agreement has imparted uncertainty into it.
3. Not merely an Intention and invitation: The offer must be distinguished as a declaration of
intention and invitation. A declaration regarding an offer which is going to take place in future is
not an offer. An invitation to do some business or transaction does not become an offer. There
must be a distinction between an offer and an invitation. For example- The shopkeeper keeps his
goods in a decorated manner in his window with price labels on them. But, that act of the
shopkeeper is not an offer to pedestrians. It is only an invitation, Quotations, catalogues and
advertisements do not constitute an offer.
4. Proper communication: There must be a communication between the offerer and the offeree. An
offer which is not communicated cannot be complete. E.g.- Ram had offered a reward to the
person who would bring his lost son back to him. Shyam brought Ram‟s son back but he had not
heard of the offer made by Ram, so , he is not entitled to demand that reward from Ram.
5. Lawful Assent: An offer must be made with a view to obtaining the assent or consent. The offerer
should not think that once he has made the offer he has disclosed his intention. He must obtain the
offeree‟s consent.
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6. Exclude the term „Non-Compliance‟: An offer should not contain the term non-compliance of
which may be assumed to amount to acceptance. The offerer cannot say that if the acceptance is
not communicated before a fixed date, the offer must be considered as accepted. E.g.- Ram writes
to Shyam , I will sell you my motorcycle for 25000. If you do not reply by the 20th of this month. I
shall presume that you have accepted by offer. No contract will be formed if Shyam does not
answer this letter within the stipulated period.
7. A statement of price is not an Offer: The price of certain goods or articles is not considered as
an offer.
Acceptance- According to Section 2(b) of the Indian Contract Act,1872, When the person to whom
the proposal is made, signifies his consent or assent thereto, the proposal is said to be accepted.
E.g.- Ram makes a proposal to Shyam to sell his scooter for Rs. 10000. Ram consents and tells Ram, Yes,
I am willing to buy your scooter for Rs. 10000. In this case Shyam has accepted Ram‟s proposal and an
agreement is termed between Ram and Shyam regarding the sale of Ram‟s scooter for Rs. 10000.
Legal conditions of a valid acceptance
1. The acceptance must be absolute and unqualified.

2. The acceptance must be communicated to the offerer.
3. The acceptance must be according to the prescribe mode or system.
4. The acceptance must be given within the stipulated time.
5. The acceptance cannot precede the offer.
6. The acceptance must show an intention on the part of the offeree to fulfill the terms of the
promise.
7. The party to whom the offer is intended must sent his acceptance to the offerer.
8. The acceptance must be given before the offer is withdrawn by the offerer.
9. Silence cannot be considered as acceptance of the offer.
Consideration: According to Section 2(d) of the Indian Contract Act, When, at the desire of the
promisor, the promise or any other person has done or abstained from doing, such an act or abstinence or
promise is called a consideration for the promise.
Consideration must result in a benefit for the person who gives a promise, or the promisor, and a
detriment or a loss to the promisee. A promisor must lose something for obtaining that promise.
Features of the Consideration:
1. Consideration must be given at the desire of promisor.

2. Consideration must be real and substantial and must not be illusionary or unreal.
3. Consideration must be adequate.
4. Consideration may be given by the promise or by another person.
5. Consideration may be present, future or past.
1. Consideration must be given at the desire of promisor: It means that whatever the promise
gives as the consideration must be a benefit done to the promisor for the sacrifice made by him.
2. Consideration must be real and substantial and must not be illusionary or unreal: A law year
demanded a certain amount as his fees and an additional amount if he wins the case for the client.
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The court held that his winning the case was not extra consideration given by him since he took up
the case with a view to try and win it. Hence, no extra money was to be paid to lawyer by the
client. His promise to win the case looked like additional consideration, but it was not really so.
3. Consideration must be adequate: E.g. – Ram agrees to sell a plot of land in Kolkata to Shyam at
Rs. 100 per bighas, the consideration is very low but the agreement is valid.However, if Ram can
prove in court later that he was forced by Shyam to make the agreement, the court may consider
the point that the amount is very low and then decide whether or not to cancel the contract.
4. Consideration may be given by the promisee or by another person: E.g- Ram sells a motorcar
to Shyam, either Shyam or Satish may give consideration. If Satish gives consideration, Shyam
will be called the stranger to consideration, but not a stranger to a contract.
5. Consideration may be present, future or past: Present or executed consideration is given with
the promise, that is , as soon as the contract is made. Contracts to travel by a bus or tram or to buy
goods for cash in the daily market are examples of agreements with present consideration. Future
or executory consideration is given after the promise, that is, after contract is made between the
parties. If goods are purchased on credit, the buyer gives future consideration. Past consideration
is that which is given before the promise, that is, before the contract is made. For example, Ram
saves Shyam‟s property from destruction by fire. This is purely a voluntary act and there is no
agreement between the parties. If Shyam later promises to give Ram a reward for his good work.
Shyam promise becomes a new agreement in which such voluntary act will be regarded as past
consideration.
Exception to the rule that „Agreements without consideration are void‟. Or
„No consideration, No contract‟
1. Love and Affection 5. Complimentary gifts

2. Compensation for voluntary services
3. Promise to pay a time-barred debt
4. Agency
1. Love and Affection: If an agreement is in a written and registered form and is based on natural love
between close relatives, it is enforceable by law, without having any consideration. If however natural
love and affection exists between the parties, a close relationship is also not necessarily needed.
2. Compensation for voluntary services: A promise to pay for a past voluntary service is binding on the
promisor even though there is no consideration. For example, Ram saved Shyam from an accident.
Shyam said to Ram, “You saved my life at the risk of your own life. I promise to pay you Rs. 1000”.
Such promise can be regarded as contract.
3. Promise to pay a time-barred debt: Such a promise can be given by a debtor to a money-lender. Two
things are very essential for this promise to be enforced as a contract. The debtor must make the promise
in writing and he must sign it. The promise may be made to pay the whole or a part of the time-barred
debt.
4. Agency: There is no consideration is necessary for creation of agency.
5. Complimentary gifts: Complimentary gifts are exempted from the rule “No consideration, no
contracts”.
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Consent:
According to Section 13 of the Indian Contract Act, 1872, Consent means when the parties agree upon
something in their agreement and in the same sense, they are said to be consenting to each other. They
must be „ad-idem‟ with each other or of the same idea about the agreement. E.g.- If Ram understand that
Shyam wants to buy his motorcar and Shyam believes that he will buy a car of that of Ram, there is a
consent between the parties.
For a valid contract, the consent of the parties must be freely given i.e. free consent. Section 14
says, consent will not be taken as free when the agreement is brought about by coercion (threatening),
undue influence, fraud, misrepresentation or mistake.
Coercion:
According to Section 15 of Indian Contract Act, 1872, Coercion a the committing or threatening to
commit any act forbidden by the Indian Penal Code & unlawful detaining, or threatening to detain, any
property, to the prejudice of any person to enter into an agreement. It is immaterial whether the Indian
Penal Code is or is not in force in the place where the coercion takes place.
1. The committing or threatening to commit an act forbidden by the Indian Penal Code is one type of
coercion.
2. The unlawful detaining or threatening to detain any property is another type of coercion.
A threat to commit suicide is also coercion. When consent to agreement is caused by coercion, the
agreement is a contract voidable at the option of the party whose consent was so caused.
COERCION UNDUE INFLUENCE
The undue influence is given by a person who is so

1. The consent is given under the threat of an offence. situated in relation to another that the other person is in
a position to dominate his will.
2. Coercion is mainly of a physical character. Undue influence is of a moral character.
3. It mostly involves the use of violent force. It involves the use of moral force or mental pressure.
Modes of discharging the contract:

1. Discharge by performance
2. Discharge by agreement
3. Discharge by impossibility of performance
4. Discharge by lapse of time
5. Discharge by operation of law

6. Discharge by breach of contract
1. Discharge by performance- The contract comes to an end by this way as all the parties fulfill
their obligations in the specified time and at the prescribed place. When the fulfillment of duties
takes place, the parties are discharged and so the contract comes to an end.
a) Actual performance- When these parties carry their promises, the contract comes to an end.
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b) Attempted performance- When the offer of the promisor is refused by the promisee, the
contract becomes equivalent to the actual performance.
2. Discharge by agreement- As the contract comes into existence by the making of an agreement, it
can be discharged by the making another agreement. If the parties to a contract agree to substitute
a new contract for their original contract or to rescind or alter it, the original contract need not be
performed. There are two main types of discharge done by an agreement: a) express contract
b) implied contract. The implied consent has some sub-parts as below:-
i) Novation- The term novation means substitution. When a new contract substituted for an
old contract, between the same parties or different parties, the old contract is regarded as
ended.
ii) Rescission- This term indicates the cancellation of all or some of the terms of a contract.
iii) Alteration- When one or more terms of a contract are altered by the mutual consent of the
parties to the contract, the contract is said to be altered. In alteration, the parties remain the
same. But in novation along with the terms, the parties too can be changed.
iv) Remission- It means the acceptance of a fewer fulfillment of the promise made by the
party to a contract. A party may accept a smaller amount than what was contracted for.
v) Waiver- When the parties mutually decide that they shall not remain parties to the contract,
waiver is said to be existing.
3. Discharge by impossibility of performance- Contracts which are impossible to be performed are
discharged. Discharge by impossibility of performance of contract classified into the following:-
a) Impossibility existing at the time of the formation of the contract: When known to the
parties, the impossibility of performance is absolute the contract is void. Putting life into a
dead body is an example of an absolute impossibility. When the parties are ignorant of
impossibility at the time of making the contract, the contract is regarded as void on the ground
of mutual mistake.
b) Impossibility arising subsequent to the formation of a contract: This impossibility arises

subsequent to the formation of a contract. When the circumstances cause this impossibility and
when it goes beyond the capacity of the parties, they are discharged from further
performances. This type of impossibility arises, when destruction of the subject matter of a
contract occurs, non-existence of a particular state of things, death or incapacity for personal
services, change of law & outbreak of war.
4. Discharge of Lapse of time- A contract must be performed within a limited or reasonable time. If
a contract is not performed within the prescribed time limit and if no action is taken by te promise
in a court of law, he is deprived of his remedy of law the contract gets terminated in such a case.
5. Discharge by Operation of Law- A contract may be discharged by the operation of law
independently. The are death, merger, insolvency, unauthorized alteration of the terms, vesting of
rights & liabilities in the same person.
6. Discharge by Breach of contract- Whenever a party to a contract does not fulfill his obligations
or makes it impossible to be fulfilled by his way of conduct, the contract is said to be breached.
There are two types of breach of contract are:
a) Actual breach
b) Anticipatory breach: An anticipatory breach of contract takes place when one party to a
contract declares his intention of non-performance before the due time of performance.
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Anticipatory breach of contract

An anticipatory breach of a contract takes place when one party to the contract declares his intention of
non-performance before the due time of performance. The promisor can declare so in two ways: He can
act out the anticipatory breach by expressly renouncing the contract or by doing some act which would
make his performance of the promise impossible.
Remedies of Anticipatory breach of contract

1. Rescission of the contract.
2. Suit for damages
3. Suit of quantum meruit

4. Suit for the specific performance of the contract
5. Suit for injunction
1. Rescission of the contract- When one party breaks a contract, the other party can sue to rescind
the contract and also refuse further performance. In this case, the other party is absolved from all
his obligation under the contract. The court may grant rescission:
a) Where the contract is voidable at the option of the plaintiff
b) Where the contract is unlawful for causes not apparent on its face and the defendant is more to
blame than the plaintiff.
2. Suit for damages- The party who is not active in the breach of the contract can sue for the
damages he has suffered. The court allows monetary compensation to the injured party to the
contract for the loss or the injury which he has suffered. The compensation is given to the injured
party to put him back in his original financial condition which he would have been in, if the
contract would have been performed completely.
3. Suit for Quantum meruit- Quantum meruit means “as much as merited” or “as much as is
earned”. The law of contracts which implies that a party is entitled to claim payment as much as
an amount he has earned. It should be noted that this right is available to a party in addition to a
right to claim damages in case of breach of contract. Quantum meruit arises when the contract is
terminated by breach, when an agreement is discovered to be void or contract becomes void, when
something done or things supplied non-gratuitously, when something done under a contract but
consideration not fixed, when part performance is accepted in case of divisible contract and when
the performance is poor.
4. Suit for specific performance- The court sometimes directs the party in breach to carry out his
promise according to the terms of the contract. Damages are not compensated in such cases. These
cases are known as specific performances of contracts. The following are the cases where the
court may direct specific performances: a) The party is advised to fulfill his obligation when the
act agree it to be done such that compensation in money for its non-performance is not adequate
relief. b) When there is no standard by which the actual damage can be ascertained the court
directs the party to carry out his promise. c) When it is impossible to compensate the damage
caused by the breach of contract by the use of money, the party is asked to perform his promise
according to the contractual conditions.
5. Injunction- An injunction is an order of a court prohibiting a party to a contract from doing a
particular thing or from doing something against the terms of the contract. When a party makes a
breach of contract, the injured party can, under certain circumstances, apply to the court for
issuing of an injunction.
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NEGOTIABLE INSTRUMENTS ACT, 1881

According to KC Willis, Negotiable instrument is a one of the property in which is acquired by
any one who takes it bonafide and for value not withstanding any defect of title in the person
from whom he took it.
According to Section 13 of the Negotiable Instrument Act, 1881, A negotiable instrument
means a promissory payable either to order or bearer.
Features of Negotiable Instrument
1. Easy transferability
2. Good title
3. Rights
4. Payable to order
5. Payable to bearer
6. Payment
7. Consideration
1. Easy transferability- The negotiable instruments are easily transferable from person to
person. In case of bearer instrument the ownership of property in the instrument may be
passed on by mere delivery. In case of an order instrument, it can be passed by
endorsement and delivery.
2. Good title- A negotiable instrument gives absolute and good title on the transferor. But
the transferee has to take it in good faith, for value and without notice of the fact that the
transferor was having defective title to it. E.g. ownership come from stolen goods, are
defective.
3. Rights- Holder in due course possesses the right to sue upon the instrument in his own
name though original title may be defective. He can recover the amount of the instrument
from the party liable to pay thereon. All prior parties are liable to him.
4. Payable to order- A negotiable instrument is payable to order which is expressed to be so
payable or which is expressed to be payable to a particular person. An instrument which
does not restrict its transferability is negotiable.
5. Payable to bearer- A negotiable instrument is payable to bearer which is expressed to be
so payable, or if a last endorsement is an endorsement in blank.
6. Payment- A negotiable instrument may be made payable to two or more payees jointly,
or it may be made payable in the alternative one or two, or some several payees.
7. Consideration- In negotiable instrument, the consideration is presumed.
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Promissory Note
According to Section 4 of the Negotiable Instrument, 1881, An instrument in writing (not being a
bank note or a currency note) containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money only to, or the order of certain person or to the bearer of the
instrument.
The debtor draws and signs the promissory note. He promises to pay the creditor a
certain sum of money. The person promising to pay is called the maker. The person who is
promised to pay is called Payee.
Feature of Promissory note
1. Writing
2. Undertaking to pay
3. Unconditional
4. Signature
5. Certain persons
6. Specific sum
7. Money only
8. Stamping
1. Writing- It must be in writing. The oral promise to pay is not considered as a promissory
note.
2. Undertaking to pay- The words promise to pay are not necessary but the intention of
unconditional undertaking to pay the amount must be clearly shown.
a) I acknowledge to pay on demand Rs. 10000 for value received or I promise to pay
Y or order Rs 10000. These are promissory note.
b) I acknowledge receipt of Rs 10000. This is not the promissory note.
3. Unconditional- It must contain definite and unconditional undertaking to pay. Promise
should be without any condition. A conditional instrument is invalid. It must be certain of
payment. A conditional promissory note like “I promise to pay Y Rs. 10000 one month
after C marriage is invalid.
4. Signature- the instrument must be signed by the maker.
5. Certain persons- The maker and the payee must be certain and definite persons. A
promissory note can not be made by two persons payable by either in their alternative.
6. Specific sum- The promised to be paid should be certain and specific i.e. I promise to
pay Y Rs. 10000 and all other sums due to him. This is not a promissory note because a
sum is not specific.
7. Money only- The promise must be of payment of money only. The promise to pay
anything other than legal tender in full or part is not a promissory note. I promise to pay
Rs 10000 washing machines, is not a promissory note.
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8. Stamping- The promissory note without any sufficient stamp or full stamp is not
admissible in evidence. Stamps should have signature of the maker.
Bill of Exchange
According to Section 5 of the Negotiable Instrument Act, 1881, An instrument in writing

containing an unconditional order, signed by the maker, directing certain persons to pay a
certain sum of money only to or to the order of a certain person or the bearer of the instrument.
A bill of exchange contains an order from the drawer i.e. creditor, to the drawer i.e. debtor to pay
specified amount to a person mentioned therein.
Essential elements of Bills of Exchanges
1. Written document
2. parties
3. Order to pay
4. Unconditional
5. Signature
6. Certain person
7. Amount of money
8. Certain payee
9. Sufficient stamps
1. Written document- They are written in any language or form.

2. Parties- There are three parties to the bill of Exchange i.e. Drawer, Drawee and Payee.
A person drawing the bill is a drawer. The person on whom the bill is drawn is a drawee.
The person to whom money is to be paid is Payee.
3. Order to pay- The bill should contain an order by seller to the purchaser to make
payment in future. A mere request by the seller to the buyer for payment in future does
not become the bill of exchange.
4. Unconditional- The order in the bill should be unconditional. A bill containing the order
with condition is not the bill of exchange.
5. Signature- A drawer of the bill must sign the bill of exchange.
6. Certain person- The order for payment must be directed towards a certain person. For
presentation of the bill for payee the drawee should be a certain person.
7. Amount of money- The order by the drawer for payment of money should be in a certain
amount. It should not be in goods.
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8. Certain payee- A bill must be payable to certain person or his order.

9. Sufficient Stamps- The bill must have sufficient stamps according to the Stamp Act of
the state except bill on demand.
Difference between the Bill of Exchange and Promissory note
S. Bill of Exchange Promissory note

No.
1. There are three parties : drawer, drawee There are only two parties : promissory
and payee and promise.
2 It contains an order to pay. It contains a promise to pay.
3 The liability of the drawer is secondary The liability of the maker is primary and
and conditional. absolute.
4 Presentment for payment and notice of Presentment for payment and notice of
dishonor are required. dishonor are not required.
5 A bill of exchange can be accepted A promissory note cannot be made

conditionally conditional.
6 Drawer of a bill of exchange stands in Drawer of a promissory note stands in

immediate relation with the acceptor. immediate relation with the payee.
7 Bill can be drawn in sets. Promissory note cannot be drawn in sets.
8 A bill of exchange can be made payable Promissory notes need not be protested
to bearer. for dishonor.
Cheque
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand. It is also called a pay order or cash order.
Types of Cheque
1. Bearer cheque
2. Order cheque
3. Crossed cheque
4. M.I.C.R. Cheque
1. Bearer cheque- This cheque gives the bearer of a cheque the specified amount
contained in the cheque on a certain date. A cheque is payable only in the bank on which
it is drawn.
2. Order cheque- If the amount of money contained in the cheque is to be given to the
specified person or to the order of that person after the presentation of the cheque to the
bank on which the cheque is drawn, it is known as order cheque.
13
3. Crossed cheque- It is the safest mode of issuing a cheque. By drawing two parallel lines
on the face of a cheque any cheque can be crossed. Such cheques are presented
through payee‟s banker and the amount is credited to his account.
4. M.I.C.R. cheque- It is a new type of cheque for spreading up the clearing
Difference between the Cheque and Bill of Exchange
Basis of Cheque Bill of Exchange

Distinction
1. A cheque is always drawn on a bank A bill of exchange is usually drawn on

some person or firm including of course
bank
2. A cheque is always payable on A bill of exchange may be payable on

demand. demand or on the expiry of a fixed
period
3. A cheque does not require acceptance Acceptance is necessary before

payment can be asked..
4. No days of grace are allowed for Three days of grace are allowed for
payment on cheque. It is immediately payment on a time bill of exchange but
payable on demand not on demand.
5 A cheque can be crossed Crossing of bill is not allowed
6 Notice of dishonor is not necessary. Notice of dishonor is necessary to hold

the parties liable thereon.
7 A cheque payable on demand to bearer A bill of exchange cannot be drawn

is valid. payable to bearer
8 Payment on cheque can be stopped by Payment cannot be stopped or counter

the drawer minded by the drawer
9 A cheque is not to be noted or protested A bill is noted and protested to establish

in case of dishonor dishonor
10 A cheque does not require stamp. A bill of exchange must be properly

stamped.
Classification of Negotiable Instruments
1) Inland Instrument-
A promissory note, bill of exchange or cheque which is
14
1) both drawn or made in India and made payable in India, or
2) drawn upon any person resident in India, is deemed to be an inland instrument. A bill of
exchange drawn upon a resident in India is an inland bill irrespective of the place where it was
drawn.
2) Foreign Instrument-
An instrument, which is not an inland instrument, is deemed to be a foreign instrument. Foreign

bills must be protested for dishonor if such protest is required by the law of the place where they
are drawn. But protest in case of inland bills is optional.
3) Insruments payable on demand-
A cheque is always payable on demand and it cannot be expressed to be payable otherwise

than on demand. A promissory note or bill of exchange is payable on demand-
1. when no time for payment is specified in it.
2. when it is expressed to be payable „on demand‟, or „at sight‟ or „on presentment‟. The
words „on demand‟ is usually in a promissory note, the words „at sight‟ are in a bill of
exchange.
4) Ambiguous Instrument-
When an instrument owing to its faulty drafting may be interpreted either as a promissory note
or a bill of exchange, it is called an ambiguous instrument. Its holder has to elect once for all
whether he wants to treat it a as a promissory note or a bill of exchange. Once he does so he
must abide by his election.
5) Forged Instrument-
An instrument is a forged when it is drawn, made or alternated in writing to prejudice another

man‟s rights. The most common form of forgery is signing another person‟s signature, signing
the name of fictitious or none existing person. Fraudulently writing the name of an existing
person is also forgery. Forgery is a nullity and, therefore, it passes no title. No holder of a
forged instruments acquires any right on the instruments. Even a holder in due course gets no
title if he comes into the possession of a forged instrument. A person has to pay money on a
forged instruments by mistake, can recover it from the person to whom he has paid it.
6) Bearer And Order Instruments-An instrument is a bearer instrument when the amount
payable thereon is payable to the bearer and he as a holder and in lawful possession thereof is
entitled to enforce payment due on it
15
Accommodation bill-
This type of bill of exchange most commonly used in Australian financial markets. The
accommodation bill grew out of the trade-related bills of exchange which had been widely used
since the last century in financing world trade. At present, accommodation bills are a means of
providing finance (lending) without necessarily having an underlying trade transaction (whereas
trade bills are based on specific transactions). Accommodation parties are defined under the
Bills of Exchange Act 1909 - 1973 thus: 'Accommodation party to a bill is a person who has
signed a bill as drawer, without receiving value thereof, and for the purpose of lending his name
to some other person.' The idea behind the accommodation bill is to lend the weight of the
stronger party's name (through accepting/drawing/endorsing the bill) to another party whose
name is less marketable.
Illustration:
- A is in need of Rs. 5000, approaches friend B to
borrow money.
- B suggests A to draw bill on him which he accepts.
- A gets bill discounted with the banker.
- Meets his requirements.
- On due date, A pays Rs. 5000 to B.
- B would honor the bill.
- Thus B would honor the bill.
- Thus, B has accommodated A.
FICTITIOUS BILL:
A bill is fictitious when both the drawer and payee are fictitious persons. Where the drawer is
also the payee of the bill, without any intention that payment shall be in conformity with the
instrument, the instrument is fictitious. Also when payee is non-existing, the instrument is
fictitious. A fictitious bill in the hands of a holder in due course becomes a good bill. The
acceptor is liable to a holder in due course, if the holder in due course can show that the
signature of the supposed drawer and that of the first endorser or payee are under the same
hand. The liability of the holder in case of a fictitious bill is only towards the holder in due
course.
ESCROW:
A bill delivered conditionally is called an escrow. Where a bill or note is delivered conditionally,
16
the liability of the party delivering does not commence till the happening of the event or the
fulfillment of the condition. Such a bill may also be delivered for a special purpose as collateral
security. It is to be noticed that though a conditional delivery is valid, the condition attaches
exclusively to the delivery and this does not affect the rule that the bill or note must be made
conditional.
Illustration of ESCROW:
A makes a note in favour of his servant and hands it to his solicitor telling to retain the note till
his death and then to hand it to the servant if he should still continue in service. If this condition
are complied with and the solicitor hands over the instrument to the servant, the servant can
claim the amount of the note from the administrators of his master‟s estate.
HUNDI:-
Bills of exchange drawn in vernacular language called „hundis‟ are covered by the Act. The word
'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the
Sanskrit root 'hundi' meaning 'to collect' and well expresses the purpose to which instruments
were utilized in their origin. The Act does not affect any local usage relating to any instrument in
an oriental language. In the absence of any custom or usage governing such instruments,
provisions of the Act will be extended to such other instruments, for example, hundis, bills of
landing, railway receipt, etc. The act does not affect the transfer of instruments under ordinary
law otherwise than by negotiation, for e.g. by assignment. A bonafide transferee of a negotiable
instrument for value, without notice of any defect acquires the instrument free of any defects. He
acquires a better title than that of the transferor irrespective of the transferor‟s title being
defective.
Holder In Due Course:

„Holder‟ : Holder of negotiable instrument means as regards all parties prior to himself, a
holder of an instrument for which value has at any time been given.
„Holder in due course‟ : (i) In the case of an instrument payable to bearer means any person
who, for consideration became its possessor before the amount of an instrument payable. (ii)
In the case of an instrument payable to order, „holder in due course‟ means any person who
17
became the payee or endorsee of the instrument before the amount mentioned in it became
payable. (iii) He had come to possess the instrument without having sufficient cause to believe
that any defect existed in the title of transferor from whom he derived his title.
It means any person who, for consideration became its possessor before the amount mentioned
in it became payable. In the case of an instrument payable to order, 'holder in due course'
means any person who became the payee or endorsee of the instrument before the amount
mentioned in it became payable. In both the cases, he must receive the instrument without
having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title. In other words, holder in due course means a holder who takes the instrument
bona fide for value before it is overdue, and without any notice of defects in the title of the
person, who transferred it to him. Thus a person who claims to be 'holder in due course' is
required to prove that:
1. on paying a valuable consideration, he became either the possessor of the instrument if

payable to order;
2. he had come into the possession of the instrument before the amount due there under
became actually payable; and
3. he had come to possess the instrument without having sufficient cause to believe that
any defect existed in the title of transferor's from whom derived his title.
Distinction between Holder & Holder in Due Course:
1. A holder may become the-possessor or payee of an instrument even without

consideration, whereas a holder in due course is one who acquires possession for
consideration.
2. A holder in due course as against a holder, must become the possessor payee of the
instrument before the amount thereon become payable.
3. A holder in due course as against a holder, must have become the payee of the
instrument in good faith i.e., without having sufficient cause to believe that any detect
existed in-the transferor's title.
18
“Once a bearer instrument always a bearer instrument.”
A bearer instrument is one, which can change hands by mere delivery of the instrument. The
instrument may be a promissory note or a bill of exchange, or a cheque. It should be

expressed to be so payable or on which the last endorsement is in blank
Under Section 46 where an instrument is made payable to bearer, it is transferable merely by

delivery, i.e. without any further endorsement thereon. But this character of the Instrument can
be subsequently altered. Section 49 provides that a holder of negotiable instrument endorsed
in blank (i.e. bearer) may, without signing his own name, by writing above the endorser‟s
signature, direct that the payment of the instrument be made to another person. Thus the
character of the instrument is changed and the instrument cannot be negotiated by mere
delivery.
But in the case of a Cheque, however, the law is a little different from the one stated above.
According to the provisions of Section 85 (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,
despite any endorsement whether in blank or full appearing thereon not with standing that any
such instrument purported to restrict or exclude further negotiation. In other words, the original
character of the cheque is not altered so far as the paying bank is concerned, provided the
payment is made in due course. Hence the proposition that once a bearer instrument always a
bearer instrument.
Meaning of holder
The „holder‟ of a negotiable instrument means any person entitled in his own name:
(i) to the possession thereof, and
(ii) to receive or recover the amount due thereon from the parties threat.
Where the instrument is lost or destroyed, its holder is the person so entitled at the lime of
such loss of destruction.
19
Privileges of a Holder in Due Course:
1. A person signing and delivering to another a stamped but otherwise inchoate instrument
is debarred from asserting, as against a holder in due course, that the instrument has
not been filled in accordance with the authority given by him, the stamp being sufficient
to cover the amount, (Section 20).
2. In case of a bill of exchange is drawn payable to the drawer‟s order in a fictitious name
and is endorsed by the same hand as the drawer‟s signature, it is not permissible for
acceptor to allege as against the holder in due course mat such name is fictitious.
3. In case of a bill or note is negotiated to a holder in due course, the other parties to the
bill or note cannot avoid liability on the ground that the delivery of the instrument was
conditional or for a special purpose only (Section 42 and 47).
4. The person liable in a negotiable instrument cannot set up against the holder in due
course the defences that the instrument had been lost or obtained from the former by
means of an offence or fraud or for an unlawful consideration (Section 58).
5. „No maker of a promissory note, and no drawer of a bill or cheque and no acceptor of a
bill for the honour of the drawer shall, in a suit thereon by a holder in due course he
permitted to deny the validity of the instrument as originaity made or drawn. (
No maker of a promissory note and no acceptor of a bill payable to order shall, in a suit
thereon by a holder in due course, be permitted 10 deny the payee‟s capacity at the date of
the note or bill, to endorse the same (Section 121). In short, a holder in due course gets a
good title to the bill.
Meaning of Negotiation:
According to Section 14 of the Negotiable Instrument Act, 1881when a promissory-note, bill of

exchange or cheque is transferred to any person so as to constitute that person the holder
thereof, the instrument is said to be negotiated.
20
Crossing of Cheques:
Meaning: Crossing of cheque means putting on the cheque two parallel transverse lines with
or without the words (& Co.) written between the lines. Therefore, crossing is a direction to the
drawee banker to pay the amount of money on the crossed cheque generally to a banker or a
particular banker so that the party who obtains the payment of the cheque can be easily
traced.
Object of crossing: The object of crossing cheque is to provide safety to the cheque. In order
to prevent the losses which might be incurred if a cheque is an open one, (i.e.- without crossing)
and going to wrong hands, the crossing has been introduced.
Implications of crossing:
(i) Restrictive Crossing: In this type of crossing the words „ Account Payee‟ are added to
the general or special crossing. Sometime, words like „Account Payee & Not Negotiable‟
or „Bank of India (it could be any Bank) Account Mr. X‟ may be added. The words
„Account Payee‟ on a cheque are a direction to the collecting banker that the amount
collected on the cheque is to be credited to the account of the payee. Such cheques are
negotiable.
(ii) Not Negotiable crossing : The implication of this kind of crossing is that, the title of
transferee of such a cheque cannot be better than of its transferor. The use of the words “not
negotiable” in a crossed cheque does not render the cheque non-negotiable but only
affects one of the main features of negotiability. Cheques with not negotiable crossing
are negotiable so long as their title is good. Once the title of the transferor or endorser
becomes defective the title of the transferee is also affected by such defect and the
transferee cannot claim the right of a holder in due course. In other words, nobody can
pass on a title better than what he himself has. Anyone who takes a cheque marked
“not negotiable” takes at his own risk.
21
Dishonour of Cheque
A banker is justified to dishonour a cheque in the following circumstances:
1. If a cheque is undated.
2. If it is stale - i.e. not been presented within reasonable period.
3. If the instrument is inchoate or not free from reasonable doubt.
4. When cheque presented before ostensible date.
5. When customer‟s funds are not properly applicable.
6. When customers draws cheque upon another branch of the same bank.
7. If the banker receives notice of customer‟s insolvency or lunacy.
8. If the customer countermands the payment of cheque.
9. If the court has given order to the Banker not to make payments.
10. If the customer dies and there is notice to the Banker.
11. If notice in respect of closure of the account is served by either party on the other.
12. If it contains material alteration.
Notice of Dishonour
Following are the cases in which the Notice of Dishonour is excused:
(i) When notice of dishonour is dispensed with by the party entitled thereto;
(ii) In order to charge the drawer, when he has countermanded payment;
(iii) When the party charged could not suffer damage for want of notice;
(iv) When the party entitled to notice cannot after due search be found; or the party bound
to give notice is, for any other reason, unable without any fault of his own to give it;
(v) To charge the drawers, when the acceptor is also a drawer;
(vi) When the promissory note is not negotiable;
(vii) When the party entitled to notice of dishonour, knowing the facts unconditionally
promises to pay the amount due on instrument.
22
In the following cases in which a banker is bound or justified to dishonour cheques:
(i) A banker is justified to dishonour a cheque in reference to payment of a post-dated
cheque presented for payment before its ostensible date;
(ii) The banker is bound to pay a cheque only when it has „sufficient funds of the drawer in
his hands‟ otherwise not.
(iii) The banker is bound to honour his customer‟s cheque only when the funds of the
customers in his hands are „properly applicable to the payment of such cheques‟
otherwise not.
(iv) A banker is justified in refusing to honour a cheque which is irregular, or ambiguous, or
drawn in a form of doubtful legality;
(v) A banker is justified in refusing payment of a cheque drawn by a customer having credit
with one branch of the bank, where the cheque is drawn upon another branch in which he
has no account or in which his account is overdrawn.
(vi) When the customer becomes insolvent, or an order of adjudication has been made
against him, all his assets vest in the official assignee, and the banker should thereafter
refuse to pay his customer‟s cheques.
(vii) The duty and authority of a banker to pay a cheque drawn on him by his customer is
determined by the customer countermanding payment;
(viii) Notice of death of the customer determines the authority of the banker to dishonour a
cheque, but if the banker pays a cheque before he receives notice of his customer‟s
death, payment is valid.
(ix) If garnishee or other legal order from a court attaching or otherwise dealing with money
in the hands of the banker, is served on the banker.
(x) If it contains material alterations, irregular signature or irregular endorsement.
(xi) If it is stale, that is if it has not been presented within reasonable period.
23
COMPANIES ACT, 1956
According to Prof. Haney, a company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal.
According to Marshall, a corporation is an artificial person being invisible, intangible, existing
only in contemplation of the law. Being a mere creation of law, it possesses only the properties
which the Charter of its creation confers upon it, either expressly or as incidental to its very
existence.
“A company is a voluntary association of persons formed and registered under the present
Companies act, or under any previous laws In the eyes of law, it is an artificial person having
separate entity from its members, with perpetual succession and a common seal. The capital of
the company is divided into transferable shares and shareholders are members.
Characteristics of Company
1. Registered voluntary association
2. Members
3. Artificial person
4. Separate legal entity
5. Perpetual succession
6. Common seal
7. Limited liability
8. Share capital
9. separate property
10. Capacity to sue and be sued
1. Registered voluntary association- A company is a voluntary association of persons

registered or incorporated under the company act. It comes into existence only when a
group of persons get it registered under the Companies Act.
2. Members- For registration of a company minimum number of persons are required. At

least seven persons in case of a public company and two in case of a private company,
are required. The persons who agree to form a company and form the company, are
members of the company. The maximum number of member in a private company may
be 50, but in public company there is not limit for no. of members.
3. Artificial person- Company is an artificial person created by law. It has no physical

body, no soul and no conscience. But, it is not a fictitious person. It is a real person and
exists only in contemplation of law. It is clothed with legal personality.
4. Separate legal entity- A company is a separate and distinct legal entity from its
subscribers or members or directors. It has its own legal existence independent of its
24
member. It has its own name. It can enter into contracts and sue and be sued by its
members as well as outsiders.
5. Perpetual succession- A company is a legal entity with perpetual succession. It never

dies. Law creates it and law alone can dissolve it. Its existence is even not affected by
the retirement, death or insolvency of its members.
6. Common seal- Every company is required by law to have a common seal. The name of
the company is engraved on it. When this seal is affixed on any document, it is usually
presumed to be an authenticated one and legally binding on the company.
7. Limited liability- Generally, companies are formed to take advantage of limited liability.
In the case of a company limited by shares, the liability of a members is limited to the
nominal value of shares held by him. No member is liable to contribute anything more
than the unpaid nominal value of the shares held by him. In a company limited by
guarantee, the liability of a member is limited to the extent of the amount guaranteed by
him. He is liable to contribute the guaranteed amount only in the event of winding up of
the company. However, companies may also be formed with unlimited liability of the
members.
8. Share capital- A company is required by law to have a share capital. At present, a public
company is required to have a minimum paid-up capital of Rs. Five lak and Rs. One lak
in case of a private company. The shares can also be transferred.
9. Separate property- A company can acquire and have property in the own name. No
member has either individually or jointly a right to the assets of the company during its
existence or on its winding up.
10. Capacity to sue and be sued- A company can enter into a contract only through some
human agency but it can sue on others in its corporate name. similarly, others can also
sue the company in its own name.
Lifting or Piercing the Corporate Veil
From the juristic point of view, a company is a legal person distinct from its members
[Salomanv. Saloman & Co. Ltd .].Corporate veil can be lifted, The companies Act itself has
provided for certain cases making the members or directors personally liable. Over a century
ago, in Saloman vs. Saloman & Co. Ltd case, it was laid down that a company is a juristic
person distinct and separate from its members. This principle casts a veil between a company
and its members. This veil is called as corporate veil or the veil of incorporation. But sometimes,
the courts may lift or pierce the corporate veil or veil of incorporation and disregard the separate
legal entity of the company. The various cases in which the corporate veil is lifted may be put
under two categories:
a) Under statutory provisions- In this, court can lift the corporate veil in cases like
reduction of membership, misstatement in prospectus, failure to refund application
money or excess money, non-disclosure of name, investigation of the ownership of the
company etc.
25
b) Under judicial interpretations- In this, court can lift the corporate veil in cases like for
protection of revenue, prevention of fraud or improper conduct, preventing or avoiding
legal obligations, determination of character of the company, company acting as agent or
trustee of the shareholders etc.
Under statutory provisions
1. Reduction in membership : If a company carries not business of more than six months
after the number of its members has been reduced below seven in case of a public
company and two in case of private company, every person who was a member of the
company during the time when it carried on business after those six months and who was
aware of this fact shall be severally liable for all debts contracted after six months.
2. Mis-description of the company: The name of the company should be fully and properly
mentioned on all documents, instruments, etc. If an officer of a company or any other
person acts on its behalf and enters into a contract or signs a negotiable instrument
without fully writing the name of the company then such officer or person shall be
personally liable.
3. Fraudulent trading: Where in the course of winding up of a company it appears that the
business of the company has been carried on with intent to defraud creditors of the
company or any other person or for any fraudulent purpose, all those who were aware of
such fraud shall be personally liable without any limitation of liability.
4. Holding act subsidiary company: In the eyes of law, the holding company and its
subsidiary company have separate legal entities. It has been held that even a hundred per
cent subsidiary is a separate legal entity and its holding company is not liable for its acts.
Under Section 212 (1),a holding company is required to attach with its final accounts, a
copy of the balance sheet, profit and loss account, directors report of each subsidiary.
Sometimes the court may refuse to treat the subsidiary company as a separate entity and
treat it as only a branch of the holding company.
5. Failure to Refund application money: If the application money of those applicants to

whom s hares have not bee n allotted, is not repaid within 130 days of the date of issue of
the prospectus, then the directors shall be jointly and severally liable to repay that money
with interest @ 6% p.a.
6. Ultra vires acts: Directors of a company shall be personally liable for all such acts which
they have done on behalf of the company if they are ultra vires the company or ultra vires
the directors and the company does not ratify their acts.
Under judicial interpretations
a. For determining the character or status of a company: When it is suspected that the
company is owned or controlled by enemies of the country, the court may lift the corporate
veil and examine the character of persons in the real control of company.
b. For the protection of revenue: If a company is used as a means to evade tax, the courts
may disregard the corporate veil. In Juggilal Kamlapat Vs. Commissioner of Income Tax,
U.P. the Supreme Court held that the court is entitled to lift the mask of corporate entity if it
26
is used for tax evasion or to circumvent tax obligations. In such a shareholders may be
held liable to pay income tax.
c. For preventing fraud or improper conduct: - The court may also lift the corporate veil of
a company where it appears that the company was formed only of some fraudulent
purpose, to defraud creditors or to avoid legal obligations. In such cash cases
shareholders were held to be persons who actually work for the corporation.
d. Where the doctrine conflicts with policy: Where the corporate veil conflicts with public
policy, the court lifts the veil for protecting the public policy. A Company not citizen.
Though, a company is regarded as a legal person, it is not a citizen under the citizenship
Act 1955 or the constitution of India. In State Trading Corporation of India Ltd. V. C.T.O.
the Supreme Court held that STC though a legal person, was not a citizen, therefore, a
company does not have the right of citizenship. However certain fundamental rights
enshrined in the constitution of India for protection of person, e.g., right to equality are
available to a company. In Bennet Coleman Co. v. Union of India the Supreme Court
observed the fundamental rights of shareholders as citizens are not lost when the
associate to form a company.
TYPES / KINDS OF COMPANIES
A. On the basis of number of members
B. On the basis of liability of members
C. On the basis of control
D. On the basis of ownership
A. On the basis of number of members
7. Public company- A public company means a company which-
a) is not a private company.
b) Has a minimum paid up capital of Rs. 500000 or such higher paid up

capital, as may be prescribed.
c) Is a private company which is a subsidiary of a company which is not a

private company, i.e. a private company which is a subsidiary of a public
company.
The provision of minimum paid up capital shall not apply to a public company
former for the promotion of arts, commerce, science or ther useful purpose under
Section 25.
8. Private company- A private company means a company which has a minimum

paid up capital of Rs. One lakh or more as may be prescribed and a company
such a company by its articles provided for the following:
27
a) Restrictions on transfer of its shares.
b) Limitation on the number of members to fifty excluding the present and

former employee members.
c) Prohibition on invitation to public for its shares or debentures.
d) Prohibition on invitation or acceptance of public deposits.
B. On the basis of Liability of Members
1. Companies with limited liability- The companies with limited liability or limited
companies may be of two types:
a) Companies limited by shares- A company is said to be limited by

shares when the liability of its members is limited to the amount unpaid on
the shares held by them. No member of such a company can be called
upon to pay more than the unpaid nominal amount of the shares held by
him. If the shares fully paid, the member is required nothing more to pay.
Only in case of partly paid shares the unpaid amount maybe called up at
any time during the existence or winding up of the company.
b) Companies limited by guarantee- A company is said to be a company

limited by guarantee when the liability of its members is limited to such
amount which the members of it undertake (guarantee) to contribute to
the assets of the company in the even of its being wound up. In other
words, in a company limited by guarantee, the liability of its members is
limited to a fixed sum guaranteed by them and beyond which they cannot
be called upon to pay.
2. Unlimited companies- A company not having any limit on the liability of a

member is said to be an unlimited company. In case of such a company, the
liability of each member extends to the whole amount of the company‟s debts but
he will be entitled to claim contribution from other members of the company in
proportion to their respective interest in the company. Thus, in such a company,
liability of members is similar to that of partners. But the creditor cannot directly
sue against the individual members. Creditors have to file a petition for winding up
of the company and the official liquidator can call upon any one or more members
to pay the debts without any limit. The members making payment of debts will be
entitled to claim contribution from the other members of the company in proportion
of their respective interest in the company.
C. On the basis of Control
1. Holding company- A holding company is the company which ahs a subsidiary

company. A company shall be deemed to be the holding company of another if, but
only if, that other is its subsidiary. In simple words, where a company has control over
another company, the controlling company is known as the holding company.
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2. Subsidiary company- Where one company is controlled by another company, the

former is known as subsidiary company. In other words, the company over which
control is exercised by any other company, is called the subsidiary company.
3. One-man or family companies- One man or family company is a company in which

one- man practically holds the entire share capital of the company. The other members
statutorily required to form the company hold only the minimum or negligible number of
shares in the company. The other members, in fact, are usually family members and
mere nominees or dummies to sign as subscribers to the memorandum in order to get
the company registered under the Act.
D. On the basis of Ownership
1. Government companies- A government company means any company in which not

less than fifty one per cent of the paid up share capital is held by the following:
a) by the central government
b) by any state government or governments
c) partly by the central government and partly by one or more State
governments.
A subsidiary of a government company is also a government company.
2. Non-government companies- A company in which 51 per cent or more of the paid up

capital is held by one or more entrepreneurs or by public or a group of persons other than
government is said to be a non government company.
3. Association not for profit or Charitable Company- Any association for the object
other than earning profit is called an association not for profit. In other workds, any
association formed for promoting art, science , commerce, religion, sports or any other
social purpose is known as association not for profit.
Incorporation/ Formation of a Company
The formation or incorporation of a company may be divided into the following four stages:
1. Promotion stage
2. registration or incorporation stage
3. Capital subscription stage
4. commencement of business stage
1) Promotion of a company- Promotion is the process of discovery and investigation of

business opportunities, planning and organization of physical, financial and human
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resources with a view to forming a company. This process begins with the conception of
an idea about some business activities and ends with the translation of the idea into a
reality with the help of an incorporated company. A promoter is a person or a group of
persons who conceives the idea of formation of a company and takes necessary steps
for its incorporation, raising of capital and making it a going concern. Every person
connected with the formation of a company cannot be called a promoter.
2) Registration or incorporation of company- For registration of a company following

steps are necessary:-
a) Preliminary steps
b) Delivery of document to the Registrar
c) Scrutiny of documents by the Registrar
d) Obtaining certificate of incorporation
a) Preliminary Steps- In order to get a company registered, following preliminary steps

are taken by the promoters:
1. Deciding the type of company- a promoter is required to decide the type of

company he wants to get registered. Under the companies act, a public as well
as a private company may be registered.
2. Deciding the place of registered office- a promoter must decide the place of
the registered office of the company. If exact place cannot be decided, he will
have to decide the state in which registered office of the company will be
situated. This is necessary in order to identify the Registrar who is to register
the company.
3. Selecting the name of company- The promoter is required to select the name
of the proposed company. But before selecting a name, the promoter should
decide upon four alternative names in order of preference. Then, an application
should be made to the Registrar of companies to decide about the availability
of the name out of the list of four alternative names.
4. Drafting memorandum- Then, the promoter drafts the memorandum of the

proposed company. Schedule I contains formats of memorandum for different
type of companies. The relevant format should be considered while drafting the
memorandum.
5. Drating articles- The other important document of the company is articles of

association. It contains rules and regulations of internal management of
company. It is not compulsory for a public company to prepare its own articles.
6. Signature by the subscribers- The memorandum should be signed by each

subscriber or member. Each subscriber or member should al add his address,
description, occupation in the presence of at least one witness. The witness
shall attest the signature and other descriptions.
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7. Statutory declaration- The promoter also has to get a statutory declaration as

to compliance of legal formalities in connection with registration of the
company.
8. Getting consent of suitable persons for act as a director of the company.
9. Getting undertaken to take the qualification shares
b) Delivery of documents to the Registrar- The following documents are required to

be delivered to the Registrar for Registration of the company:-
1. Memorandum of association- Every company is required to file a

memorandum of association of the company. It should be in triplicate. It must
be printed or computer laser printed, divided into paragraphs and signed by
each subscriber by adding necessary particulars in the presence of one
witness.
2. Articles of association- Three copies of the printed or computer printed

articles of the company must also be filed with the Registrar. These copies
must also be signed by the subscribers in the presence of one witness.
However, a public limited company may not have its own articles. But all other
companies are required to have their own articles and shall deliver the same to
the Registrar.
3. Agreement with managing director- The promoter must also file the
agreement, which the company proposes to enter into with any individual for
appointment as its managing or whole time director.
4. Statutory declaration- A statutory declaration to the effect that all

requirements of the companies Act and the rules made there under have been
complied with in respect of registration shall be filed with the Registrar.
5. List of directors- The list of persons, who will act as a director of the
company.
6. Written consent of directors- A written and signed consent of every

proposed director shall be submitted to the Registrar.
7. Undertaking to take qualification shares
8. Intimation of registered office
9. Copy of the letter confirming availability of the name
10. Power of attorney to make corrections- Sometimes, the power of attorney is

executed by the subscriber authorizing any person to sign the memorandum
and articles on his behalf. Such power of attorney is essential in case of a
corporate subscriber.
11. Evidence of payment of fees
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c) Scrutiny of documents by the Registrar- After delivery of documents of the

Registrar, he scrutinizes the documents. He may however, accept the declaration as
to compliance of legal formalities as sufficient evidence of compliance of all formalities
under the Act and the rules there under. But its is at his discretion to scrutinize every
document and to satisfy himself as to compliance of all legal formalities in respect of
registration.
d) Obtaining Certificate of Incorporation- When all the formalities necessary for the
formation of a company are complied with and the Registrar is satisfied, the company
is entitled to be registered under the Act. The Registrar shall retain and register the
memorandum articles and other documents. On registration, the Registrar shall issue
a certificate of incorporation of the company.
3. Capital subscription stage
A public company has to pass through the capital subscription stage. Only then the
company can obtain a certificate of commencement of business. There are two ways of
raising the capital:
a) From private sources, i.e., from directors, members and their relatives.
b) From public- where the company arranges capital from private sources it is required to
file a statement in lieu of prospectus with the Registrar at least three days before the
allotment of shares.
Where the company opts to invite public for subscription for shares in the company, it will
have to issue a prospectus.
4. Commencement of Business
A private company or a company without share capital can commence its business
immediately after obtaining certificate of incorporation of business. But a public company having
share capital cannot commence any business until it has obtained the certificate of
commencement of business. In order to obtain the certificate, company must comply with the
following provisions:
a) Where the company has issued prospectus- Where a company has issued a
prospectus, it shall not commence any business or exercise borrowing powers until
the following conditions are satisfied:
1. The company must have received the minimum subscription and shares
must have been allotted up to the amount of minimum subscription.
2. Every director of the company must have paid to the company in cash the
application and allotment money on the shares contracted to be taken in
the same proportion as is payable by the public.
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3. The company must not be liable for refund of application money due to
the failure to apply for or to obtain the permission for shares to be dealt in
on any stock exchange.
4. The company must have filed with the Registrar a declaration as to the
compliance of above stated three conditions with the declaration must be
duly verified by one of the directors or the secretary or where the
company has not appointed a secretary, a secretary in whole time
practice in the prescribed form.
b) Where the company has not Issued Prospectus- Where a company having
share capital, has not issued a prospectus, the company shall not commence any
business or exercise borrowing powers until the following conditions are satisfied:
9. The company must have filed with the Registrar a statement in lieu of
prospectus.
10. Every director of the company must have paid to the company on the
shares contracted to be taken, in cash, in the same proportion as is
payable on application and allotment of such shares.
11. The company must have filed with Registrar a declaration as to the
compliance of above stated two conditions. The declaration must be duly
verified by one of the directors or secretary or where the company has not
appointed a secretary, in whole time practice in the prescribed.
Issue of Certificate- Where the above stated conditions are satisfied by the
company, the Registrar shall certify that the company is entitled to commence
business. This certificate shall be conclusive evidence that the company is so
entitled.
Penalty- If any company commences business or exercises borrowing powers in

contravention of this Section, every person who is responsible for the
contravention shall, without prejudice to any other liability be punishable with fine
which may extend to Rs. 5000 for every day during which the contravention
continues.
Failure to Commence business- If a company does not commence its business within
a year from its incorporation or suspends business for a whole year, the company may
be wound up by the court. It mean that a public company must obtain the certificate of
commencement of business within a year of its incorporation. At the same time a public
as well as a private company must also commence its business within one year of its
incorporation.
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Promoters
A promoter is a person who does the necessary preliminary work incidental to the formation of a
company. It is a compendious term used for a person who undertakes, does and goes through
all the necessary and incidental preliminaries, keeping in view the object, to bring into existence
an incorporated company. Chronologically, the first persons who control a company‟s affairs are
its promoters.
Functions
1. The promoter of a company decides its name and ascertains that it will be accepted by
the Registrar of Companies.
2. He settles the details of the company‟s Memorandum and Articles, the nominations of
directors, solicitors, bankers, auditors and secretary and the registered office of the
company.
3. He arranges for the printing of the Memorandum and Articles, the registration of the
company, the issue of prospectus, where a public issue is necessary. He is responsible for
bringing the company into existence for the object which he has in view.
Quasi-trustee-a promoter is neither an agent nor a trustee of the company under incorporation
but certain fiduciary duties have been imposed on him under the Companies Act, 1956.He is not
an agent because there is no principal born at the time and he is not a trustee because there is
no trust in existence. Hence he occupies the peculiar position of a quasi-trustee.
Duties or Liability
1. Not to make any profit at the expense of the company -the promoter must not
make,either directly or indirectly, any profit at the expense of the company which is being
promoted. If any secret profit is made in violation of this rule, the company may, on
discovering it, compel him to account for and surrender such profit.
2. To give benefit of negotiations to the company - the promoter must, when once he has
begun to act in the promotion of a company, give to the company the benefit of any
negotiations or contracts into which he enters in respect of the company. Thus where he
purchases some property for the company, he cannot rightfully sell that property to the
company at a price higher than he have for it. If he does so, the company may, on
34
discovering it, rescind the contract and recover the purchase money.
3. To make a full disclosure of interest or profit -if the promoter fails to make a full
disclosure of all the relevant facts, including any profit and his personal interest I a
transaction with the company, the company may sue him for damages for breach of his
fiduciary duty and recover from him any secret profit made even though rescission is not
asked or is impossible.
4. Not to make unfair use of position -the promoter must not make an unfair or t take care
to avoid any unreasonable use of his position and must take care to avoid anything which
has the appearance of undue influence or fraud
Further, a promoter cannot relive himself of his liability by making provisions to that
effect in the Articles of the company.
5. Duty of promoter as regards prospectus -the promoter must see, in connection with the
prospectus, if any is issued, that the prospectus –
(a) contains the necessary particulars
(b) does not contain any untrue or misleading statements or does not omit any material
fact.
Remuneration
A promoter has no right to get compensation from the company for his services in promoting
the company unless there is a contact to that effect. In practice, a promoter takes
remuneration for his services in one of the following ways-
1. He my sell his own property at a profit to the company for cash or fully- paid shares
provided he makes a disclosure to this effect
2. He may be given an option to buy a certain number of shares in the company at par.
3. He may take a commission on the shares sold
4. He may be paid a lump sum by the company.
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Memorandum of Association
Contents of Memorandum [Section 13]
1. Name clause- Name of every company limited by shares or by guarantee must end by the
word 'Ltd.' or 'Pvt. Ltd.' except companies exempted. The name must not be undesirable
or most not resemble the name of any other registered company.
2. Registered office clause- Must contain the name of state is which registered office is
situated. Actual address of registered office is notified to ROC within 30 days of
incorporation.
3. Object clause- Sets out object or vires of the company. The objects not be illegal. Not be
against the provision of the companies Act. Not against public. Not be ambiguous. Must be
divided in to two parts main objects and other objects.
4. Liability clause- States that liability of members is limited to the amount unpaid on their
shares and in case of company limited by guarantee the amount which every member
undertakes to contribute to the assets of the company in the even if its winding up.
5. Capital clause- Every company having a share capital, the amount of share capital with
which the company is proposed to be registered and the division of its shares into a fixed
denomination. There is Authorised capital, Subscribed capital, Issued capital, Paid up
capital , Partly paid up capital
6. Association or subscription clause- In this clause the subscribers declare that they
desire to be formed into a company and agree to take shares stated against their names.
Every subscriber must take at least one share.
ALTERNATION OF MEMORANDUM
Alteration in name clause

1. Pass a special resolution and get approval of central Govt.
2. But no approval is required for deletion or addition of 'Pvt.' from the name.
3. File copy of resolution with ROC with them 30 days of passing the resolution.
4. If name is identical to another existing co.
5. By ordinary resolution and with the permission central govt.
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6. If name is identical to another existing co. then central govt. will issue order to change
the name to the company within 12 months from incorporation of the company.
7. Then company must comply the direction of the govt, within 3 months and change name
by ordinary resolution and with the permission central govt.
8. However, central government has no power to issue direction under Section 22 after
expiry of 12 months from incorporation.
9. ROC will issue fresh certificate of incorporation then only change become effective.
10. Change of name shall in no way affect the rights and obligations of the company or
render defective any legal proceeding by or against the company.
B. Alteration is registered office clause.
a) Within same city
No change in memorandum
Pass a board resolution
File notice to ROC within 30 days
b) Within same state
No change in memorandum.
Pass a special resolution.
File a copy of resolution to ROC in 30 days
File notice of new address within 30 days of shifting.
c) One state to other state
Possible only if such change is for the following purpose.
(i) To carry on its business more economically or more efficiently.
(ii) To attain its main purpose by new or improved means.
(iii) To enlarge or change its local area of its operation.
(iv) To carry on new business which can be suitably combined with the
present business.
(v) To restrict or abandon any of the objects.
(vi) To amalgamate the company with any other company.
(vii) To sell or disposal of the whole or any part of its undertakings.
37
Procedure:
1. Pass special resolution and fill it within 30 days to ROC.
2. Get confirmation from Central govt.
3. Fill copy of Central govt. confirmation together with new memorandum with ROC of
Each state within three month.
4. The ROC shall issue a fresh certificate of resignation within one month of the filing
of the documents.
Section 17A to provide that confirmation by the Regional Director will be necessary for
changing registered office of a company from one place of registrar of Companies to the
jurisdiction of another Registrar of Companies within the State. Order of Regional Director shall
be filed with ROC within 2 months from the date of order, together with a printed copy of
memorandum as altered and ROC shall register the same and certify the registration under his
hand within one month from the date of filing of such document.
C. Alteration of Object Clause:
Object can be altered only for the purposes stated above in Section 17(1).
Procedure:
1. Pass a special resolution and fill within 30 days to ROC
2. Confirmation from NATIONAL COMPANY LAW TRIBUNAL under Section 17(2) shall no
longer be necessary.
3. The registrar will register the documents and issue, within one month, a certificate which
will be conclusive evidence that everything required has been done .
D. Alteration of liability clause
1. Liability of shareholders can be increased by express approval of each and every member.
2. However in case the company is a club or similar association and alteration in the
memorandum requires the member to pay recurring charge at a higher rate, although he
does- not agree in writing to be bound by the alteration.
3. Liability of directors, MD or managers can be made unlimited by passing a special
resolution if the article so permit and getting consent of such officer.
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4. Unlimited liability of shareholders can be made limited by.
5. Pass a special resolution and fill it within 30 days.
6. Obtain tribunal sanction and fill it within 3 months of the date of order.
7. Alteration will be effective from date of registration.
E. Alteration of capital clause
(i) Alteration of share capital [Section 94]
If article provides, by passing an ordinary resolution, following can be altered-
(a) Increase in authorized capital
(b) Consolidate or sub-divide the whole or any part of existing shares into shares of larger
Or smaller denominations.
(c) Convert its fully paid up shares into stock or vice -versa.
(d) Cancel its unsubscribe shares by diminishing authorized capital.
If article doesn't provide, first alter the article by passing special resolution. File copy of
resolution and altered memorandum within 30 days to ROC.
DOCTRINE OF ULTRA VIRES

Ultra vires means doing an act beyond the powers. The ultra vires acts can be divided into the
following categories:-
(i) An act ultra vires the directors.
(ii) An act ultra vires the articles of associations.
(iii) An act ultra vires the memorandum of association; and
(iv) An act ultra vires the companies Act.
All the acts which are outside the ambit of the objects clause of memorandum are deemed to
beyond powers (ultra vires) of the company. This doctrine was first applied in 'Ashbury Railway
carriage & Iron C o, Ltd. vs. Riche (1875) '. The purpose of this doctrine is to protect the
interest of shareholders and creditors. A Company can pursue all the main objects mentioned in
the memorandum and all those, which are incidental or ancillary to the attainment of the main
objects. But it cannot pursue objects mentioned in other objects clause unless the requirements
of Section 149 are duly completed with. The object of this doctrine is to restrict the use of funds
of the company in unauthorized activities and protect the interest of the creditors and
shareholders.
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Effects:
(i) All such transactions are wholly null and void.
(ii) Such transactions can never be rectified even all shareholders give consent for it.
(iii) Company cannot sue or be sued
Exceptions
(1) If an act is ultra vires the directors of a company but is intra vires the company, the
company may ratify it.
(2) If an act is ultra vires the Articles of a company, the Articles may be altered to include the
Act within the powers of the company.
(3) If an act is intra vires a company, but is irregularly done, the shareholders may ratify it.
(4) If a person borrows money from a company under a contract which is ultra vires the
company the company can sue him for the recovery of the money.
(5) If an act is ultra vires the company, the rights arising independently of the act are not
affected.
(6) If a company has purchased some property from a third party under an ultra vires
contract or has taken an ultra vires loan, the third party has the right to follow his property
or money if it exists in specie. He may also obtain an injunction from the Court
restraining the company from parting with that property or money.
(7) If a company takes an ultra vires loan and uses it to payoff intra vires debts, the lender
who has lent money under the ultra vires contract is substituted in place of the creditor
who has been paid off and as such he can recover the money.
(8) If a company has taken an ultra vires loan through some misrepresentation of fact by the
director, the lender has the right to make the directors personally liable on the ground of
breach of implied warranty of authority.
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Articles of Association:
The Articles of Association are the rules and regulations or the bye-laws which govern the
internal management of the company. They defines the duties, rights, powers and authority of
the shareholders and the directors in their respective capacities and of the company, and the
mode and form in which the business of the company is to be carried out.
Every private limited company, a company limited by guarantee and an unlimited
company must have Articles of association. It is however not obligatory for public companies
limited by shares to have their own articles. The rules and regulations will apply to that
company. The Articles of an unlimited company must state the number of members with which
the company is to be registered and if it has a shares capital the amount of share capital with
which it is to be registered. The Articles of a company limited by guarantee must state the
numbers with the company is to be registered.
Contents of Articles of Association
(1) The exclusion whole or in part, of table A;

(2) Share capital;
(3) Rights of different classes of shareholders;
(4) Allotment of shares;
(5) Call on share;
(6) Lien on shares;
(7) Forfeiture of shares;
(8) Transfer of shares;
(9) Surrender of shares;
(10) Share certificate;
(11) Issue of share warrants;
(12) Increase of decrease of share capital;
(13) Conversion of shares into stock;
(14) Consolidation and sub-division of shares;
(15) Borrowing powers
(16) General meeting proceedings thereof and votes proxies and polls.
(17) Appointment of manage rial personal e.g., directors their remuneration qualifications
powers an proceedings of board meetings;
(18) Appointment and remuneration of auditors;
(19) Dividends and reserves;
(20) Accounts and audit;
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(21) Adoptions of execution of preliminary contracts, if any;

(22) Capitalization of profits;
(23) Notices; Common seal; and Winding up.
Alteration of Articles of Association –

Section 31 empowers every company to alter its articles at any time with the authority of a
special resolution of the company and filing copy with the Registrar. Since it is a statutory power
a company will not be deprived of the power of alteration by a contract wit anyone.
The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to
two restrictions-
a) It must not be in contravention with the provisions of the Act.
b) It is subject to the conditions contained in the memorandum of association.
The proviso to sub-section (1) says that an alteration which has the effect of converting a
public company into a private company would not have any effect unless it is approved by the
Central Government.
Alteration against memorandum - in Hutton v. Scarborough Cliff Hotel Co, a resolution was
passed in a general meeting of a company altered the articles by inserting the power to issue
preference shares which did not exist in the memorandum. It was held inoperative. However,
after Andrews v. Gas Meter Co Ltd this view has been changed where a company was
allowed by changing articles to issue preference shares when its memorandum was silent on
the point.
The power of alteration of art is subject only to what is clearly prohibited by the memorandum,
expressly or impliedly.
Alteration in breach of contract - a company may change its articles even if the alteration
would operate as a breach of contract. If the contract is wholly dependant on the articles, the
company would not be liable in damages if it commits breach by changing articles. But if the
contract is independent of the articles, the co will be liable in damages if it commits breach by
changing articles. Thus in Southern Foundries Ltd v. Shirlaw, where a Managing Director was
appointed for a term of ten years, but was removed earlier under the new articles on
amalgamation with another company, the company was held liable for breach of contract.
Alteration as fraud on minority shareholders - an alteration must not constitute a fraud on

the minority. It should not be an attempt to deprive the company or its minority shareholders of
something that in equity belongs to them.
Alteration increasing liability of members - no alteration can require a person to purchase

more shares in the company or to increase his liability in any manner except with his consent in
writing. Thus, the power of alteration should be exercised in absolute good faith in the interest of
the company.
Difference between Articles of Association and Memorandum of Association
1) The memorandum contains the fundamental condition upon which alone the company is
allowed to be incorporated. The articles are for the internal regulation and management of
the company.
2) Memorandum defines the scope of the activities of the company, or the area beyond
42
which the actions of the company cannot go. Articles are the rules for carrying out the
objects of the company as set out in the memorandum.
3) Memorandum being the character of the company, is the supreme document. Art are
subordinate to the memorandum. If any conflict between them, the memorandum
prevails.
4) Every company must have its own memorandum. A company limited by shares need not
have articles of its own.
5) An action of the company outside the scope of its memorandum is void and incapable of
ratification. An act of the company outside the scope of its articles can be confirmed by
the shareholders.
6) There are strict restrictions on its alteration. The change of name requires the prior
permission of central government and change of registered office to another state
requires the prior approval of the Company Law Board. Articles can be altered by a
special resolution, to any extent, provided they do not conflict with the memorandum and
the Companies Act.
Doctrine of Constructive Notice
Section 610 provides that MOA & AOA on registration these documents become public
documents. These documents are available for public inspection either in the office of the
company or in the office of the registrar of companies on payment of Rs.50 for each inspection.
Every person who deals with the company whether shareholder or an outsider is
presumed to have read these documents and understood them in their true perspective. This is
known as Doctrine of constructive notice.
Introduction
Every person who enters into any contract with a company will be presumed to know the
contents of the memo of ass and the articles of ass. This is known as the doctrine of
constructive notice.
The memorandum and the articles of association of every company are registered with
the Registrar of Companies. The office of the Registrar is a public office. Hence, the memo and
the articles of ass become public documents. It is therefore the duty of person dealing with a
company to inspect its public documents and make sure that his contract is in conformity
withtheir provisions.
As observed by Lord Hatherley, “…whether a person actually reads them or not, he is to be in

the same position as if he had read them”. Every person will be presumed to know the contents
of the documents.
The practical effects of this rule can be observed in Kotla Venkataswamy v. Ramamurthy- The
articles of a company provided that its deeds etc should be signed by the managing director, the
secretary and a working director on behalf of the co. the plaintiff accepted a deed of mortgage
executed by the secretary and a working director only. The plaintiff could not claim his deed. It
was held that, “notwithstanding, therefore, she may have acted in good faith and the money
may have been applied for the purposes of the company, the bond is nevertheless invalid.”
Another effect of this rule is that a person dealing with the company is taken not only to
have read the documents but also to have understood them according to their proper meaning.
Further, there is a constructive notice not merely of the memo and art, but also of all the
documents, such as special resolutions and particulars of charges which are required by the Act
43
to be registered with the Registrar. But there is no notice of documents which are filed only for
the sake of record, such as returns and account.
Thus, the doctrine of constructive notice seeks too protect the company against the outsider
by deeming that such an outsider had the notice of the public documents of the company.
However, in India the courts with a view to protect the innocent third parties acting in good faith
have not relied upon the doctrine seriously.
Doctrine of Indoor management
The doctrine of indoor management is an exception to the rule of constructive notice. The rule
was first laid down in The royal British bank Vs. Turquand.
The doctrine of indoor management is of great practical value this rule is based on
business convenience and justice firs t no business could possibly be carried on it a person
before dealing with the company was required to find out whether all the internal rules and
regulations have been duly complied with, Secondly an outsider dealing with the company is
presumed to know the constitution of the company but not what may or may not have taken
place within the doors that are closed to him
The rule is based on public convenience and justice and the following obvious reasons:
1. The internal procedure is not a matter of public knowledge. An outsider is presumed to

know the constitution of a company, but not what may or may not have taken place within
the doors that are closed to him.
2. The lot of creditors of a limited company is not a particularly happy one; it would be
unhappier still if the company could escape liability by denying the authority of officials to
act on its behalf.
Exceptions
1) Knowledge of irregularity A person who has actual knowledge of the internal

irregularity cannot claim the protection of this rule, because he could have taken steps for
selfprotection. A person who himself is a party to the inside procedure, such as a director
is deemed to know the irregularities, if any.
T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd. - Company A lent money to
Company B on a mortgage of its assets. The procedure laid down in the articles for such
transactions was not complied with. The directors of the two companies were the same.
Held, the lender had notice of the irregularity and hence the mortgage was not binding.
2) Negligence and suspicion of irregularity : where a person dealing with a company
Could discover the irregularity if he had made proper inquiries, he cannot claim the benefit
of the rule of indoor management. The protection of the rule is also not available where
the circumstances surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.
3) Forgery : The rule in Turquand‟s case does not apply where a person relies upon a
document that turns out to be forged since nothing can validate forgery. In Ruben v. Great
Fingall Ltd, a co was not held bound by a certificate issued by tit secretary by forging the
signature of two directions. However, in Official Liquidator v. Commr of Police, the
Madras High Court held the company liable where the Managing Director had forged the
44
signature of two other directors.
4) Representation through articles : A person who does not have actual knowledge of the
company‟s articles cannot claim as against the company that he was entitled to assume
that a power which could have been delegated to the directors was in fact so delegated. In
Rama Corporation v. Proved Tin and General Investment Co, the plaintiffs contracted
with the defendant co and gave a cheque under the contract. The director could have been
authorized but in fact, was not. The plaintiffs had not read the articles. The director
misappropriated the cheques and plaintiff sued. Held, director not liable as it was outside
his authority.
PROSPECTOUS
A prospectus means any document described or issued as prospectus and includes any notice
circular advertisement or other document inviting deposits from the public or inviting offers from
the public for the subscription or purchase of any shares in or debentures of a body corporate.
Issue of prospectus not compulsory
(i) A private company is not required to issue a prospectus.
(ii) Public company if the promoters or directors feel that they can mobilize resources through
personal relationship and contacts.
(iii) A company-may issue any form of application for shares or debentures of a company
accompanies by a memorandum containing the prescribed salient features of a
prospectus.
(iv) Where the application form is issued in connection with a bonafide invitation to a person
to enter into an underwriting agreement with respect to the shares or debentures.
(v) In case of rights issue.
(vi) Where the issue relates to s hares or debentures which are, or to be uniform in all
respects with shares or debentures previously issued and dealt in or quoted on a
recognized stock exchange.
Statement in lieu of prospectus
1. Where a public company does not invite public to subscribe for its shares but arranges to
Get money from private sources, it need not issue a prospectus to the public.
2. The promoters are required to prepare a draft prospectus known as a 'statement in lieu of
prospectus' which should contain the information given in Schedule III of the Act.
45
3. A company having a share capital which does not issue a prospe ctus shall not allot any of
its shares or debentures unless at least three days before the allotment, there has been
delivered to the Registrar for registration a 'statement in lieu of prospectus'.
4. The statement shall be signed by every person who is named therein as a Director;
Proposed director; or His agent authorized in writing.
5. A private company is not required to file a 'statement in lieu of prospectus' at the time of
allotment.
"Shelf prospectus" means a prospectus issued by any financial institution or bank for one or
more issues of the securities or class of securities specified in that prospectus.
" Red herring prospectus" means a prospectus which does not have complete particulars on
the price of the securities offered and the quantum of securities offered.
DEEMED PROSPECTUS provides that all documents containing offer of shares or debentures
for sale shall be included within the definition of the term prospectus and shall be deemed as
prospectus by implication of law.
Mis-statements in a prospectus [Section 65]
(i) A statement included in prospectus shall be deemed to be untrue if the statement is
Misleading in the context in which it is included and.
(ii) Where the omission from a prospectus of any matters is calculated to mislead the
Prospectus shall deemed in respect of such omission to be a prospectus which an untrue
statement is included.
Liable for mis-statements:
(i) Company
(ii) Promotes
(iii) Directors and
(iv) Experts
46
Liabilities in case of mis-statement:
(i) Civil liability and
(ii) Criminal liability
Civil liability
(i) Remedies against the company, and
(ii) Remedies against the directors, promoters and experts.
(iii) The shareholder should have relied on the contents of the prospectus.
Remedies against the company
1. Rescission of the contract to take shares:
(i) To avail the is right, the allotted must prove that
(ii) The prospectus was issued by or on behalf of the company. There was a material
misrepresentation of fact.
However the right to rescind the contract is lost in the following circumstances:
(i) If the allotted does not take steps to set aside the contract within a reason able time after
he comes to know of the mis-representation.
(ii) By affirmation of the contract by the allottee after he discovers the misrepresentation
i.e. by selling shares, appearing in general meeting, accepting dividends etc.
(iii) If the company goes into liquidation. In such a case if repayment is allowed it will injured
the interest of creditors and the law always favour creditors at the expense of members.
2. Claim damages:
The right of the allotee against company is to sue for damages for deceit. In order to succeed,
the allotee must in addition to the three facts maintained above in connection with the rescission
of contract), prove;
(i) That those acting on behalf of the company acted fraudulently;
(ii) That those purporting to act on behalf of the company were authorised to act in its
Behalf.
(iii) That he suffered a loss or damages.
47
Remedies against the promoters directors and experts
Damages [Section 62] : Liable to pay compensation to every person who subscribes for any
shares or debentures on the faith of the prospectus for any loss or damage sustained by reason
of any untrue statement included therein.
Defense available to directors or promoters
(i) Withdraw his consent before the issue of prospectus and that. it was issued without his
consent.
(ii) Issued without knowledge. That it was issued without his knowledge or cons ent and that
On becoming aware of its issue, he forthwith gave public notice that it was issued without
His knowledge or consent.
(iii) Ignorance of untrue nature of the statement. That he believed, on reasonable grounds,
that the statement was true.
(iv) Official documents. That the statement was a correct and fair representation of a public
Official document or was based on the authority of an official person.
(v) Statement of expert. That the statement was made on the authority of an expert who was
competent to make it and that person has given the consent and has not withdrawn it.
Criminal liability [Section 63]
Imprisonment for a term which may extend to 2 years or with fine which may extend to Rs.
50,000 or both.
Defense:
(i) That the statement was immaterial, or
(ii) That he had reasonable ground to believe and did up to the time of the issue of the
Prospectus believe the statement was true.
However, an expert is not criminally liable in respect of misstatements in the prospectus.
Expert includes an engineer a valuer an accountant and any other person whose profession on
gives authority to a statement made by him.
48
Section 68 further provides that any person who either knowingly or by recklessly, making any
statement promises or forecasts which is false, deceptive or misleading or any dishonest
concealment of material facts induces or attempts to induce another person to enter into or to
offer to enter into any agreement of for or with a view to acquiring disposing of, subscribing for,
underwriting shares or debenture shall be punishable with imprisonment for a term which may
extend to 5 years or with may extend to 1,00,000 rupees or with both.
Directors- Powers, Duties and Position
A company in the eyes of the law is an artificial person. It has no physical existence. It has
neither soul nor a body of its own. As such, it cannot act in its own person. The directors are
the brain of a company. They occupy a pivotal position in the structure of the company. They
are in fact the mainspring of the company.
Definition
„Director‟ includes any person occupying the position of director, by whatever name called.
The important factor to determine whether a person is or not a director is to refer to the nature of
the office and its duties. Thus a director may be defined as a person having control over the
direction, conduct, management or superintendence of the affairs of the company.
Only individuals can be directors-no body corporate, association or firm can be appointed
director of a company. Only an individual can be so appointed.
Position of directors
1. Directors as agents -a company, as an artificial person, acts through directors who are
elected representatives of the shareholders. They are, in the eyes of the law, agents of
the company for which they act-Ferguson v Wilson. The general principles of the law of
principal and agent regulate in most respects the relationship between the company and
its directors.
2. Directors as servants -they are not servants of the company. A director may, however,
become a servant in a different capacity. For example, the creator and controller of an air
farming company was also working as its pilot. He died in an accident. His widow was
allowed workman‟s compensation –Lee v Lee’s Farming Ltd.
3. Directors as officers - a director is an officer of the company. As such they are liable to
certain penalties if the provisions of the Companies Act are not strictly complied with.
4. Director as trustees -
(a) Directors as trustees of the company’s money and property in the sense that they
49
Must account for all the company‟s money and property over which they exercise
control. Directors are, however, not trustees in the real sense of the world because
they are not vested with the ownership of the company‟s property. It is only as regards
some of their obligations to the company and certain powers that they are regarded as
trustees of the company.
(b) Directors as trustees of the power entrusted to them in the sense that they must
exercise their powers honestly and in the interest of the company and the
shareholders and not in their own interest. Trustees of the company-directors are
trustees for the company and not for the third party who have made contracts with the
company or for the individual shareholders.
Quasi-trustees-directors are only quasi-trustees because-
(i) they are not vested with ownership of the company‟s property
(ii) their functions are not the same as those of trustees
(iii) their duties of care are not as onerous as those of trustees.
Powers of directors
General Powers of the Board
The powers of the Board of directors are co-extensive with those of the company. This
proposition is, however, subject to two conditions:
First, the Board shall not do any act which is to be done by the company in general meeting
Second, the Board shall exercise its powers subject to the provisions contained in the
Companies Act, or in the Memorandum or the Articles of the company or in any regulations
made by the company in general meeting.
Powers to be exercised at Board meetings
The Board of directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at the meetings of the Board, viz, the power to-
(a) make calls on shareholders in respect of money unpaid on their shares
(b) issue debentures
(c) borrow money otherwise than on debentures

50
(d) invest the funds of the company
(e) make loans
Powers to be exercised with the approval of company in general meeting
(a) sale or lease of the company‟s undertaking
(b) extension of the time for payment of a debt due by a director
(c) investment of compensation received on acquisition of the company‟s assets in securities
other than trust securities
(d) borrowing of money beyond the paid-up capital of the company
(e) contributions to any charitable fund beyond Rs.50,000 in one financial year or 5% of the
average et profits during the preceding three financial years, whichever is greater.
Duties of the Directors
1. Fiduciary duties -as fiduciaries, the directors must-
a) exercise their powers honestly and bona fide for the benefit of the company as a
whole; and
(b) not place themselves in a position in which there is a conflict between their duties
to the company and their personal interests. They must not make any secret profit
out of their position. If they do, they have to account for it to the company.
2. Duties of care, skill and diligence - directors should carry out their duties with
Reasonable care and exercise such degree of skill and diligence as is reasonably
expected of persons of their knowledge and status. He is not bound to bring any special
qualifications to his office. Standard of care-the standard of care, skill and diligence
depends upon the nature of the company‟s business and circumstances of the case. They
are various standards of the care depending upon:
(a) the type and nature of work
(b) division of powers between directors and other officers
(c) general usages and customs in that type of business; and
(d) whether directors work gratuitously or remuneratively
51
3. Duty to disclose interest -where a director is personally interested in a transaction of the
company, he is required to disclose his interest to the board. An interested director is
neither to vote on the matter of his interest nor his presence shall count for the purposes
of quorum.
4. Duty to attend board meetings -the Act only says that the office of a director is
automatically vacated if he fails to attend three consecutive meetings of the board or all
meetings for a period of 3 months, whichever is longer. Moreover, a director‟s habitual
absence may become evidence of negligence.
5. Duty not to delegate - a director should not delegate his functions to another person. But
delegation of functions may be made to the extent to which it is authorized by the Act or
the constitution of the company.
Quorum (Section 174)
„Quorum‟ means the minimum number of members who must be present in order to
constitute a valid meeting and transact busies thereat. The quorum is generally fixed by the
Articles. If the Articles of a company do not provide for a large quorum, the following rules
apply:
1.) Quorum for public company-5 members personally present
Quorum for other companies-2
For the purpose of quorum a person may be counted as 2 or more members if he holds
shares in different capacities.
2. if within half an hour a quorum is not present, the meeting, if called upon the requisition of
members, shall stand dissolved. In any other case, it shall stand adjourned to the same
day, place and time in the next week. The Board of Directors may adjourn the meeting to
52
be convened on any particular day, time and place to b fixed on the date of the meeting
itself or at least before the commencement of the same in the next week. Where the Board
of directors fails to do so, the meeting stands statutorily adjourned to the same day in the
next week.
The Articles may provide for a large quorum-The Articles cannot provide for a quorum
smaller than the statutory minimum. For the purpose of quorum, only members present in
person and not proxies are to be counted.
53

Yogesh Kumawat:, Assistant Professor, Sit Legal Aspect of Business Notes

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Yogesh Kumawat:, Assistant Professor, Sit Legal Aspect of Business Notes

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YOGESH KUMAWAT, ASSISTANT PROFESSOR, SIT LEGAL ASPECT OF BUSINESS NOTES

INDIAN CONTRACT ACT, 1872

Essential elements of Valid Contract-

8. Possibility of performance of promise- Possibility of the performance of the promise made by

Objectives of Indian Contract Act,1872

2. To punish the offending party with appropriate penalties.

Conditions of Valid Offer/Proposal

6. Exclude the term Non-Compliance

Legal conditions of a valid acceptance

1. The acceptance must be absolute and unqualified.

Features of the Consideration:

1. Consideration must be given at the desire of promisor.

Exception to the rule that „Agreements without consideration are void‟. Or

„No consideration, No contract‟

1. Love and Affection 5. Complimentary gifts

The undue influence is given by a person who is so

2. Coercion is mainly of a physical character. Undue influence is of a moral character.

Modes of discharging the contract:

5. Discharge by operation of law

b) Impossibility arising subsequent to the formation of a contract: This impossibility arises

Anticipatory breach of contract

Remedies of Anticipatory breach of contract

3. Suit of quantum meruit

NEGOTIABLE INSTRUMENTS ACT, 1881

Features of Negotiable Instrument

Feature of Promissory note

According to Section 5 of the Negotiable Instrument Act, 1881, An instrument in writing

Essential elements of Bills of Exchanges

1. Written document- They are written in any language or form.

8. Certain payee- A bill must be payable to certain person or his order.

Difference between the Bill of Exchange and Promissory note

S. Bill of Exchange Promissory note

2 It contains an order to pay. It contains a promise to pay.

5 A bill of exchange can be accepted A promissory note cannot be made

6 Drawer of a bill of exchange stands in Drawer of a promissory note stands in

7 Bill can be drawn in sets. Promissory note cannot be drawn in sets.

Difference between the Cheque and Bill of Exchange

Basis of Cheque Bill of Exchange

1. A cheque is always drawn on a bank A bill of exchange is usually drawn on

2. A cheque is always payable on A bill of exchange may be payable on

3. A cheque does not require acceptance Acceptance is necessary before

5 A cheque can be crossed Crossing of bill is not allowed

6 Notice of dishonor is not necessary. Notice of dishonor is necessary to hold

7 A cheque payable on demand to bearer A bill of exchange cannot be drawn

8 Payment on cheque can be stopped by Payment cannot be stopped or counter

9 A cheque is not to be noted or protested A bill is noted and protested to establish

10 A cheque does not require stamp. A bill of exchange must be properly

Classification of Negotiable Instruments

A promissory note, bill of exchange or cheque which is

1) both drawn or made in India and made payable in India, or

An instrument, which is not an inland instrument, is deemed to be a foreign instrument. Foreign

3) Insruments payable on demand-

A cheque is always payable on demand and it cannot be expressed to be payable otherwise

1. when no time for payment is specified in it.

An instrument is a forged when it is drawn, made or alternated in writing to prejudice another

Holder In Due Course:

1. on paying a valuable consideration, he became either the possessor of the instrument if

Distinction between Holder & Holder in Due Course:

1. A holder may become the-possessor or payee of an instrument even without

“Once a bearer instrument always a bearer instrument.”

instrument may be a promissory note or a bill of exchange, or a cheque. It should be

Under Section 46 where an instrument is made payable to bearer, it is transferable merely by