FINAL

FINAL
AUDIT
DTLaw
Foundation
PRACTICE
100 IMPORTANT
QUESTIONS
50 Important questions
QUESTIONS
CHAPTER 2
 Business laws

50 important questions

Q-1: When a company is registered, it is clothed with a legal personality. Explain.

Ans:- When a company is registered, it is clothed with a legal personality. It comes to have
almost the same rights and powers as a human being. Its existence is distinct and separate from
that of its members. A company can own property, have bank account, raise loans, incur
liabilities and enter into contracts.

a) It is at law, a person different altogether from the subscribers to the memorandum of

association. Its personality is distinct and separate from the personality of those who compose
it.

b) Even members can contract with company, acquire right against it or incur liability to it. For
the debts of the company, only its creditors can sue it and not its members.

A company is capable of owning, enjoying and disposing of property in its own name. Although
the capital and assets are contributed by, the shareholders, the company becomes the owner
of its capital and assets. The shareholders are not the private or joint owners of the company's
property.

Q-2: Define OPC (One Person Company) and state the rules regarding its membership. Can it be
converted into a non-profit company under Section 8 or a private company?

Ans:- Section 2(62) defines an OPC as a company which has only one person as a member.
Rules regarding its membership:

a. Only one person as member.

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b. The memorandum of OPC shall indicate the name of the other person, who shall, in the
event of the subscriber's death or his incapacity to contract, become the member of the
company.

c. The other person Whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at the time
of incorporation.

d. Such other person may be given the right to withdraw his consent.

e. The member of OPC may at any time change the name of such other person by giving notice
to the company and the company shall intimate the same to the Registrar.

f. Any such change in the name of the person shall not be deemed to be an alteration of the
memorandum.

g. Only a natural person who is an Indian citizen and resident in India (person who has stayed in
India for a period of not less than 182 days during the immediately preceding one calendar
year).

 shall be eligible to incorporate a OPC;

 shall be a nominee for the sole member of a OPC.

h. No person shall be eligible to incorporate more than one OPC or become nominee in more
than one such company.

i. No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.

An OPC may be converted into a private or a public company after two years from the date of
incorporation. However it can never convert into a section 8 company. If the paid up share
capital of an OPC fifty lakh rupees or its average annual turnover during the relevant period
exceeds two crore rupees such OPC must convert into a private or a public company.

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Q-3: Briefly explain the doctrine of "ultra vires" under the Companies Act, 2013. What are the
consequences of ultra vires acts of the company?

Ans:- The term ultra vires means "beyond the powers". The rule of ultra vires is applicable to
acts done in excess of the legal powers of the doers.

The fundamental rule of Company Law is that the objects of a company as stated in its
memorandum can be departed from only to the extent permitted by the Act, thus far and no
further. In consequence, any act done or a contract made by the company which travels
beyond the powers not only of the directors but also of the company is wholly void and
inoperative in law and is therefore not binding on the company. A company can be restrained
from employing its fund for purposes other than those sanctioned by the memorandum.
Likewise, it can be restrained from carrying on a trade different from the one it is authorized to
carry on.

In the case of Ashbury Railway Carriage and Iron Company V. Richie the company was
incorporated with the objects of:

 To make, sell or lend on hire railway carriages and wagons

 To carry on the work of mechanical engineers and general contractors.
 To purchase, lease, sell and work mines.
 To purchase and sell as merchants or agents, coal, timber, metals, etc.

The directors of the company contracted with Richie for financing the construction of railway
line in Belgium. The company ratified the act of the directors by passing a special resolution.
Later the company canceled the contract. Richie sued the company. The court held that the
contract was void. The term general contractors was to be interpreted to mean work associated
with mechanical engineers.

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it. Since the Memorandum is a "public document", it is open to
public Inspection. Therefore, when one deals with a company one is deemed to know about the

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powers of the company. An act which is ultra vires the company being void, cannot be ratified
by the shareholders of the company. Sometimes, act Which is ultra 'Ares can be regularised by
ratifying it subsequently.

Q-4: The Articles of Association of XYZ Ltd. provides that Board of Directors has authority to
issue bonds provided such issue is authorized by the shareholders by a necessary resolution in
the general meeting of the company. The company was in direct need of funds and therefore, it
issued the bonds to Mr. X without passing any such resolution in general meeting. Can Mr. X
recover the money from the company? Decide referring the relevant provisions of the
Companies Act, 2013.

Ans:- According to the Doctrine of Indoor Management, if an act is authorised by the articles or
memorandum, an outsider is entitled to assume that all the detailed formalities for doing that
act have been observed. As per the case of the Royal British Bank vs. Turquand [1856] 6E & B
327, the directors of R.B.B. Ltd. gave a bond to T. The articles empowered the directors to issue
such bonds under the authority of a proper resolution. In fact, no such resolution was passed.
Notwithstanding that, it was held that T could sue on the bonds on the ground that he was
entitled to assume that the resolution had been duly passed. This is the doctrine of indoor
management, popularly known as Turquand Rule.

Since, the given question is based on the above facts, accordingly here in this case Mr. X can
recover the money from the company considering that all required formalities for the passing
of the resolution have been duly complied.

Q-5: Ravi Private Limited has borrowed ` 5 crores from Mudra Finance Ltd. This debt is ultra
vires to the company. Examine, whether the company is liable to pay this debt? State the
remedy if any available to Mudra Finance Ltd.?

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Ans:- As per the facts given, Ravi Private Limited borrowed ` 5 crore from Mudra Finance Ltd.
This debt is ultra vires to the company, which signifies that Ravi Private Limited has borrowed
the amount beyond the expressed limit prescribed in its memorandum. This act of the company
can be said to be null and void.

In consequence, any act done or a contract made by the company which travels beyond the
powers not only of the directors but also of the company is wholly void and inoperative in law
and is therefore not binding on the company.

So is being the act void in nature, there being no existence of the contract between the Ravi
Private Ltd. and Mudra Finance Ltd. Therefore, the company Ravi Private Ltd. is liable to pay
this debt amount upto the limit prescribed in the memorandum.

Remedy available to the Mudra Finance Ltd.: The impact of the doctrine of ultra vires is that a
company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the
memorandum is a “public document”, it is open to public inspection. Therefore, a company
which deals with the other, is deemed to know about the powers of the company.

So, Mudra Finance Ltd. can claim for the amount within the expressed limit prescribed in its
memorandum.

Q-6: State the limitations of the doctrine of indoor management under the Companies Act,
2013.

Ans:- According to the Doctrine of Indoor Management, if an act is authorised by the articles or
memorandum, an outsider is entitled to assume that all the detailed formalities for doing that
act have been observed. Held in the case of Royal British Bank V. Turquand. However this rule is
subject to certain limitation that is it is inapplicable in the following cases:

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i. Actual or constructive knowledge of irregularity: The rule does not protect any person when
the person dealing with the company has notice, whether actual or constructive, of the
irregularity.

ii. Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently.
Where the person dealing with the company is put upon an inquiry, for example, where the
transaction is unusual or not in the ordinary course of business, it is the duty of the outsider to
make the necessary enquiry.

iii. Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction, but it cannot apply to forgery which must be regarded as nullity.

Q-7: Describe about Section 8 company.

Ans:- Meaning: When a person or an AOP wants to be registered as a limited company and it

i. Has in its objects the promotion of Commerce, Arts, Sports, Education, Research, Social
welfare, Religion, Charity, Protection of Environment or any such other object.

ii. Intends to apply its profit or other income on promoting its objectives

iii. Intends to prohibit the payment of any dividend to its members.

Characteristics, advantages and disadvantages:

 The Central Government may permit such registration as a limited company under this
section.(Section.8)without addition of words “Limited” and “Private Limited”.
 A firm can be a member of such company.
 The MOA and AOA of this company cannot be altered without government’s prior approval.
 Central Government can also revoke the license so granted after giving an opportunity of
being heard to the company.
 Government can also pass order of winding up of such company.

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 Government can also pass order for amalgamation of such company.

Q-8: Describe about Incorporation Process of company.

Ans:- Section 7 of the Companies Act, 2013 provides for the procedure to be followed for
incorporation of a company.

1. Filing of the documents and information with the registrar

For the registration of the company following documents and information are required to be
filed with the registrar within whose jurisdiction the registered office of the company is
proposed to be situated-

 the memorandum and articles of the company duly signed by all the subscribers to the
memorandum.
 a declaration by person who is engaged in the formation of the company (an advocate, a
chartered accountant, cost accountant or company secretary in practice), and by a person
named in the articles (director, manager or secretary of the company)
 a declaration from each of the subscribers to the memorandum and from persons named as
the first directors, if any, in the articles stating that-

i. he is not convicted of any offence in connection with the promotion, formation or

management of any company, or

ii. he has not been found guilty of any fraud or misfeasance or of any breach of duty to any
company under this Act or any previous company law during the last five years,

iii. and that all the documents filed with the Registrar for registration of the company contain
information that is correct and complete and true to the best of his knowledge and belief;

 the address for correspondence till its registered office is established

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 the particulars of every subscriber to the memorandum along with proof of identity, and in
the case of a subscriber being a body corporate, such particulars as may be prescribed.
 the particulars of the persons mentioned in the articles as the subscribers to the
Memorandum, Director Identification Number and such other particulars including proof of
identity as may be prescribed;

i. the particulars of the interests of the persons mentioned in the articles as the first directors of
the company in other firms or bodies corporate along with their consent to act as directors of
the company in such form and manner as may be prescribed.

2. Issue of certificate of incorporation on registration

The Registrar on the basis of documents and information filed, shall register all the documents
and information in the register and issue a certificate of incorporation in the prescribed form to
the effect that the proposed company is incorporated under this Act.

3. Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the
certificate of incorporation, the Registrar shall allot to the company a corporate identity
number, which shall be a distinct identity for the company and which shall also be included in
the certificate.

4. Maintenance of copies of all documents and information: The company shall maintain and
preserve at its registered office copies of all documents and information as originally filed, till
its dissolution under this Act.

5. Furnishing of false or incorrect information or suppression of material fact at the time of

incorporation (i.e. at the time of Incorporation): If any person furnishes any false or incorrect
particulars of any information or suppresses any material information, of which he is aware in
any of the documents filed with the Registrar in relation to the registration of a company, he
shall be liable for action for fraud under section 447.

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6. Company already incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact (i.e. post Incorporation):

Where, at any time after the incorporation of a company, it is proved that the company has
been got incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or
made for incorporating such company, or by any fraudulent action,

 the promoters, the persons named as the first directors of the company and the persons
making declaration under this section shall each be liable for action for fraud under section 447.
 the Tribunal may, on an application made to it, on being satisfied that the situation so
warrants,-
 pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the
interest of the company and its members and creditors; or
 direct that liability of the members shall be unlimited; or
 direct removal of the name of the company from the register of companies; or
 pass an order for the winding up of the company; or
 pass such other orders as it may deem fit:

Provided that before making any order,-

 the company shall be given a reasonable opportunity of being heard in the matter; and
 the Tribunal shall take into consideration the transactions entered into by the company,
including the obligations, if any, contracted or payment of any liability.

Q-9: What are the implied conditions in a contract of ‘Sale by sample’ under the Sale of Goods
Act, 1930? State also the implied warranties operatives under the said Act

Ans: 1. The following are implied conditions in a contract of sale by sample in accordance with
Section 17 of the Sale of Goods Act, 1930

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a) that the bulk shall correspond with the sample in quality

b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.

c) that the goods shall be free from any defect, rendering them merchantable, which would not
be apparent on a reasonable examination of the sample [Section 17(2)].

2. Implied Warrants under The Sale of Goods Act, 1930 are as follows:

a) Warranty of quiet possession [Section 14(b)]: In a contract of sale, unless there is a contrary
intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of
the goods. If the buyer is in any way distributed in the enjoyment of the goods in consequence
of the seller’s defective title to sell, he can claim damages from the seller.

b) Warranty of freedom from encumbrances [Section 14(c)]: The buyer is entitled to a further
warranty that the goods are not subject to any charge or encumbrance in favour of a third
party. If his possession is in any way disturbed by reason of the existence of any charge or
encumbrances on the goods in favour of any third party, he shall have a right to claim damages
for breach of this warranty.

c) Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied warranty as

to quality or fitness for a particular purpose may be annexed by the usage of trade.

d) Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that
the goods are inherently dangerous or they are likely to be dangerous to the buyer and that the
buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise he
will be liable in damages.

Q-10: Referring to the provisions of the Sale of Goods Act, 1930, state the circumstances under
which when goods are delivered to the buyer “on approval” or “on sale or return” or other
similar terms, the property therein passes to the buyer.

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Ms. Preeti owned a motor car, which she handed over to Mr. Joshi on sale or return basis. After
a week, Mr. Joshi pledged the motor car to Mr. Ganesh. Ms. Preeti now claims back the motor
car from Mr. Ganesh. Will she succeed? Referring to the provisions of the Sale of Goods Act,
1930 decide and examine what recourse is available to Ms. Preeti.

Ans:- As per the provisions of section 24 of the Sale of Goods Act, 1930, when goods are
delivered to the buyer on approval or “on sale or return" or other similar terms, the property
therein passes to the buyer-

a) when the buyer signifies his approval or acceptance to the seller or does any other act
adopting the transaction

b) if he does not signify his approval or acceptance to the seller but retains the goods without
giving notice of rejection, then, if a time has been fixed for the return of the goods, on the
expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time
or

c) He does something to the good, which is equivalent to accepting the goods, e.g. he pledges
or sells the goods.

Facts of Case:

Since, Mr. Joshi, who had taken delivery of the Motor car on Sale or Return basis and pledged
the motor car to Mr. Ganesh, has attracted the third condition that he has done something to
the good which is equivalent to accepting the goods e.g. he pledges or sells the goods.
Therefore, the property therein (Motor car) passes to Mr. Joshi.

Ans:- Now in this situation, Ms. Preeti cannot claim back her Motor Car from Mr. Ganesh, but
she can claim the price of the motor car from Mr. Joshi only.

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Q-11: Explain the “condition as to Merchantability” and “condition as to wholesomeness”
under the Sale of Goods Act, 1930.

Ans:- 1. Condition as to Merchantability [Section 16(2) of the Sale of Goods Act, 1930]: Where
goods are bought by description from a seller who deals in goods of that description (whether
he is the manufacturer or producer or not), there is an implied condition that the goods shall be
of merchantable quality.

2. Provided that, if the buyer has examined the goods, there shall be no implied condition as
regards defects which such examination ought to have revealed .

3. The expression “merchantable quality”, though not defined, nevertheless connotes goods of
such a quality and in such a condition a man of ordinary prudence would accept them as goods
of that description. It does not imply any legal right or legal title to sell.

Example: If a person orders motor horns from a manufacturer of horns, and the horns supplied
are scratched and damaged owing to bad packing, he is entitled to reject them as un
merchantable.

4. Condition as to wholesomeness: In the case of eatables and provisions, in addition to the

implied condition as to merchantability, there is another implied condition that the goods shall
be wholesome.

Example: A supplied F with milk. The milk contained typhoid germs. F’s wife consumed the milk
and was infected and died. Held, there was a breach of condition as to fitness and A was liable
to pay damages.

Q-12: Classify the following transactions according to the types of goods they are:

a) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and these
bales were selected and set aside.

b) A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop.

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c) T agrees to sell to S all the oranges which will be produced in his garden this year.

Ans:- a) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and
these bales were selected and set aside. On selection the goods becomes ascertained. In this
case, the contract is for the sale of ascertained goods, as the cotton bales to be sold are
identified and agreed after the formation of the contract.

b) If A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his
shop, it is a sale of unascertained goods because it is not known which packet is to be delivered.

c) T agrees to sell to S all the oranges, which will be produced in his garden this year. It is
contract of sale of future goods, amounting to 'an agreement to sell

Q-13: M/s Woodworth & Associates, a firm dealing with the wholesale and retail buying and
selling of various kinds of wooden logs, customized as per the requirement of the customers.
They dealt with Rose wood, Mango wood, Teak wood, Burma wood etc.

Mr. Das, a customer came to the shop and asked for wooden logs measuring 4 inches broad
and 8 feet long as required by the carpenter. Mr. Das specifically mentioned that he required
the wood which would be best suited for the purpose of making wooden doors and window
frames. The Shop owner agreed and arranged the wooden pieces cut into as per the buyers
requirements.

The carpenter visited Mr. Das's house next day, and he found that the seller has supplied
Mango Tree wood which would most unsuitable for the purpose. The carpenter asked Mr. Das
to return the wooden logs as it would not meet his requirements.

The Shop owner refused to return the wooden logs on the plea that logs were cut to specific
requirements of Mr. Das and hence could not be resold.

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(i) Explain the duty of the buyer as well as the seller according to the doctrine of “Caveat
Emptor”.

(ii) Whether Mr. Das would be able to get the money back or the right kind of wood as required
serving his purpose?

Ans 1. Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of sale of
goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their
goods in the open market, it is for the buyers to make a proper selection or choice of the goods.
If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way
responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in
the goods which he is selling.

2. Duty of the seller according to the doctrine of “Caveat Emptor”: The following exceptions to
the Caveat Emptor are the duties of the seller:

a) Fitness as to quality or use

b) Goods purchased under patent or brand name

c) Goods sold by description

d) Goods of Merchantable Quality

e) Sale by sample

f) Goods by sample as well as description

g) Trade usage

h) Seller actively conceals a defect or is guilty of fraud

Ans:- As Mr. Das has specifically mentioned that he required the wood which would be best
suited for the purpose of making wooden doors and window frames but the seller supplied
Mango tree wood which is most unsuitable for the purpose. Mr. Das is entitled to get the

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money back or the right kind of wood as required serving his purpose. It is the duty of the seller
to supply such goods as are reasonably fit for the purpose mentioned by buyer. [Section 16(1)
of the Sale of Goods Act, 1930]

Q-14: Nemo Dat Quod Non Habet”–“None can give or transfer goods what he does not himself
own.” Explain the rule and state the cases in which the rule does not apply under the provisions
of the Sale of Goods Act, 1930.

Ans:- The term means, “None can give or transfer goods what he does not himself own”.
Exceptions to the rule and the cases in which the Rule does not apply under the provisions of
the Sale of Goods Act, 1930 are enumerated below:

1. Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods or document of
title to goods would pass a good title to the buyer in the following circumstances, namely

a) if he was in possession of the goods or documents with the consent of the owner

b) if the sale was made by him when acting in the ordinary course of business as a mercantile
agent and

c) if the buyer had acted in good faith and has at the time of the contract of sale, no notice of
the fact that the seller had no authority to sell. (Proviso to Section 27).

2. Sale by one of the joint owners: If one of the several joint owners of goods has the sole
possession of them with the permission of the others the property in the goods may be
transferred to any person who buys them from such a joint owner in good faith and does not at
the time of the contract of sale have notice that the seller has no authority to sell. (Section 28)

3. Sale by a person in possession under voidable contract: A buyer would acquire a good title
to the goods sold to him by seller who had obtained possession of the goods under a contract

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voidable on the ground of coercion, fraud, misrepresentation or undue influence provided that
the contract had not been rescinded until the time of the sale (Section 29).

4. Sale by one who has already sold the goods but continues in possession thereof: If a person
has sold goods but continues to be in possession of them or of the documents of title to them,
he may sell them to a third person, and if such person obtains the delivery thereof in good faith
without notice of the previous sale, he would have good title to them, although the property in
the goods had passed to the first buyer earlier. A pledge or other deposition of the goods or
documents of title by the seller in possession are equally valid. [Section 30(1)]

5. Sale by buyer obtaining possession before the property in the goods has vested in him:
Where a buyer with the consent of seller obtains possession of the goods before the property
in them has passed to him, he may sell, pledge or otherwise dispose of the goods to a third
person, and if such person obtains delivery of the goods in good faith and without notice of the
lien or other right of the original seller in respect of the goods in good faith and without notice
of the lien or other right of the original seller in respect of the goods, he would get a good title
to them. [Section 30(2)].

6. Sale by an unpaid seller: Where on unpaid seller who had exercised his right of lien or
stoppage in transit resells the goods, the buyer acquires a good title to the goods as against the
original buyer [Section 54(3)].

7. Sale under the provisions of other Acts:

a) Sale by an official Receiver or liquidator of the company will give the purchaser a valid title.

b) Purchase of goods from a finder of goods will get a valid title under circumstances.

c) Sale by a pawnee under default of pawnor will give valid title to the purchaser.

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Q-15: What is the conclusive evidence of partnership? State the circumstances when
partnership is not considered between two or more parties.

Ans:- The cardinal principle of partner, mutual agency is the conclusive evidence of partner.
Existence of this principle helps to decide whether two or more persons are partners or not.
Each partner carrying on the business is the principal as well as an agent of other partners. So,
the act of one partner done on behalf of firm, binds all the partners. If the element of mutual
agency relationship exists between the parties constituting a group formed with a view to earn
profits by running a business, a partnership is deemed to exist.

Circumstances when partnership is not considered between two or more parties:

Various judicial pronouncements have laid to the following factors leading to no partnership
between the parties:

i. Parties have not retained any record of terms and conditions of partnership.

ii. Partnership business has maintained no accounts of its own, which would be open to
inspection by both parties.

iii. No account of the partnership was opened with any bank

iv. No written intimation was conveyed to the Deputy Director of Procurement with respect to
the newly created partnership.

Q-16: Who is a nominal partner under the Indian Partnership Act, 1932? What are his liabilities?

Ans:- A person who lends his name to the firm, without having any real interest in it, is called a
nominal partner.

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Liabilities: He is not entitled to share the profits of the firm, neither he invests in the firm nor
takes part in the conduct of the business. He is, however liable to third parties for all acts of the
firm.

Q-17: Master X was introduced to the benefits of partnership of M/s ABC & Co. with the
consent of all partners. After attaining majority, more than six months elapsed and he failed to
give a public notice as to whether he elected to become or not to become a partner in the firm.
Later on, Mr. L, a supplier of material to M/s ABC & Co., filed a suit against M/s ABC & Co. for
recovery of the debt due. In the light of the Indian Partnership Act, 1932, explain:

i. To what extent X will be liable if he failed to give public notice after attaining majority?

ii. Can Mr. L recover his debt from X?

Ans:- As per the provisions of Section 30of the Indian Partnership Act, 1932, a minor can be
admitted to the benefits of the firm. At any time within six months of his attaining majority, or
of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever
date is later, such person may give public notice that he has elected to become or that he has
elected not to become a partner in the firm, and such notice shall determine his position as
regards the firm. If he fails to give such notice, he shall become a partner in the firm on the
expiry of the said six months.

If the minor becomes a partner by his failure to give the public notice within specified time, his
rights and liabilities as given in Section 30(7) are as follows:

a) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.

b) His share in the property and the profits of the firm remains the same to which he was
entitled as a minor.

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In the above case X was introduced to the benefits of partnership of M/s ABC & Co. After
attaining majority he failed to give notice. Since X has failed to give a public notice, he shall
become a partner in the firm. Mr. L, a supplier filed a case against the firm for recovery of debt.

Thus

i. X will be personally liable to Mr. L.

ii. Mr. L can recover his debt from X in the same way as he can recover from any other partner.

Q-18: Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.

Ans:- As per section 27 of Indian Partnership Act, 1932,where-

a) a partner acting within his apparent authority receives money or property from a third party
and misapplies it, or

b) a firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm, the
firm is liable to make good the loss.

Clause (a) covers the case where a partner acts within his authority and due to his authority as
a partner, he receives money or property belonging to a third party and misapplies that money
or property. For this provision to be attracted, it is not necessary that the money should have
actually come into the custody of the firm. On the other hand, the provision of clause (b) would
be attracted when such money or property has come into the custody of the firm and it is
misapplied by any of the partners. The firm would be liable in both the cases.

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Q-19: Discuss the liability of a partner for the act of the firm and liability of firm for act of a
partner to third parties as per Indian Partnership Act, 1932.

Ans:- As per section 25 of the Indian Partnership Act, 1932, every partner is liable, jointly with
all the other partners and also severally, for all acts of the firm done while he is a partner. The
partners are jointly and severally responsible to third parties for all acts which come under the
scope of their express or implied authority. This is because that all the acts done within the
scope of authority are the acts done towards the business of the firm. The expression ‘act of
firm’ connotes any act or omission by all the partners or by any partner or agent of the firm,
which gives rise to a right enforceable by or against the firm. In order to bring a case under
Section 25, it is necessary that the act of the firm, in respect of which liability is brought to be
enforced against a party, must have been done while he was a partner.

As per sections 26 & 27 of the Indian Partnership Act, 1932,where, by the wrongful act or
omission of a partner in the ordinary course of the business of a firm, or with the authority of
his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is
liable thereof to the same extent as the partner. A partner acting within his apparent authority
receives money or property from a third party and misapplies it, or a firm in the course of its
business receives money or property from a third party, and the money or property is
misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make
good the loss.

Q-20: Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st
October, 2018, Mr. P retired from partnership, but failed to give public notice of his retirement.
After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired about some
refrigerators with latest techniques. Mr. X, who was exhibiting his refrigerators with the new
techniques was impressed with the interactions of Mr. P and requested for the visiting card of
the firm. The visiting card also included the name of Mr. P as a partner even though he had
already retired. Mr. X. supplied some refrigerators to the firm and could not recover his dues

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from the firm. Now, Mr. X wants to recover the dues not only from the firm, but also from Mr.
P.

Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and
decide whether Mr. P is liable in this situation.

Ans:- As per the provisions of the Indian Partnership Act, 1932, a partner when retiring firm the
firm must give a public notice of his retirement. If notice of retirement is not given then the
partner shall be liable for the acts of the firm even after his retirement. However if the
existence of a partner was not known then even if he retires without giving any public notice he
shall not be liable for the subsequent acts of the firm.

In the above case M, N and P are the partners of the firm. Partner P retired from the firm but
failed to give notice of retirement. After retirement P visited a fair along with the other
partners and the firm gave their card to a dealer in which P’s name was also printed. The dealer
sold some refrigerators to the firm and could not recover the dues. X wants to sue P also. As P
was a partner whose existence was known to the third parties and he retired without giving any
public notice he shall also be liable.

Thus P is also liable to X for the refrigerators sold.

Q-21: State the grounds on which a firm may be dissolved by the Court under the Indian
Partnership Act, 1932?

Ans:- U/s 44 of the Partnership Act, 1932 court may, at the suit of the partner, dissolve a firm
on any of the following ground:

1. Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound
mind, the court may dissolve the firm on a suit of the other partners or by the next friend of the
insane partner. Temporary sickness is no ground for dissolution of firm.

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2. Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, then the court may dissolve the
firm. Such permanent incapacity may result from physical disability or illness etc.

3. Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on of business, the court may order for dissolution of
the firm, by giving regard to the nature of business. It is not necessary that misconduct must
relate to the conduct of the business. The important point is the adverse effect of misconduct
on the business. In each case nature of business will decide whether an act is misconduct or
not.

4. Persistent breach of agreement: Where a partner other than the partner suing, wilfully or
persistently commits breach of agreements relating to the management of the affairs of the
firm or the conduct of its business, or conducts himself in matters relating to the business that
it is not reasonably practicable for other partners to carry on the business in partnership with
him, then the court may dissolve the firm at the instance of any of the partners. Following
comes in to category of breach of contract:

i. Embezzlement,

ii. Keeping erroneous accounts

iii. Holding more cash than allowed

iv. Refusal to show accounts despite repeated request etc.

5. Transfer of interest: Where a partner other than the partner suing, has transferred the
whole of his interest in the firm to a third party or has allowed his share to be charged or sold
by the court, in the recovery of arrears of land revenue, the court may dissolve the firm at the
instance of any other partner.

6. Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at
a loss in future also, the court may order for its dissolution.

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7. Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases for
the just and equitable grounds-

i. Deadlock in the management.

ii. Where the partners are not in talking terms between them.

iii. Loss of substratum.

iv. Gambling by a partner on a stock exchange.

Q-22: What do you mean by Limited Liability Partnership (LLP)? What are the advantages for
forming a LLP for doing business?

Ans:- LLP is a new form of legal business entity with limited liability. It is an alternative
corporate business vehicle that not only gives the benefits of limited liability at low compliance
cost but allows its partners the flexibility of organising their internal structure as a traditional
partnership. The LLP is a separate legal entity and, while the LLP itself will be liable for the full
extent of its assets, the liability of the partners will be limited.

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership. Since LLP contains elements of both 'a corporate
structure' as well as 'a partnership firm structure' LLP is called a hybrid between a company and
a partnership.

Advantages of LLP form:

1. LLP is organized and operates on the basis of an agreement

2. It provides flexibility without imposing detailed legal and procedural requirements

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3. It enables professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient Manner.

4. It is easy to form

5. In LLP form, all partners enjoy limited-liability

6. Flexible capital structure is there in this form

7. It is easy to dissolve

Q-23: LLP is an alternative corporate business fork' that gives the benefits of limited liability of a
company and the flexibility of a partnership". Explain.

Ans:- Every partner of a LLP is, for the purpose of the business of LLP, the agent of the LLP, but
not of other partners (Section 26 of the 'LLP Act, 2008). The liability of the partners will be
limited to their agreed contribution in the LLP, while the LLP itself will be liable for the full
extent of its assets.

Flexibility of a partnership: The LLP allows its members the flexibility of organizing their
internal structure as a partnership based on a mutually arrived agreement. The LLP form
enables entrepreneurs professionals and enterprises providing services of any kind or engaged
in' scientific and technical disciplines, to form commercially efficient Vehicles suited to their
requirements. Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for
small enterprises and for investment by venture capital.

Q-24: What is the procedure for changing the name of Limited Liability Partnership (LLP) on the
order of the Central Government under the LLP Act, 2008?

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Ans:- As per section 17 of LLP Act, 2008 where the Central Government is satisfied that a LLP
has been registered under a name which —

i. Is undesirable; or .

ii. is identical with or too nearly resembles the name .of any other LLP or body Corporate or a
registered trademark Or other name. as to-be likely to be mistaken for it,

the Central Government may direct such LLP to change its name, and the LLP shall comply with
the said direction within 3 months after the date of the direction or such longer period as the
Central Government may allow.

Any LLP which fails to comply with a direction shall be punishable with fine which shall not be
less than 10,000 but Which may extend to 5 Lakhs. The designated partner of such LLP shall be
punishable with fine which shall not be less than 10,000 but which may extend to 1 lakh.

Q-25: Point out with reason whether the following agreements are valid or void:

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

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

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

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

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

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Ans:- a) The agreement is void. As per Section 23 of the Indian Contract Act, 1872, an
agreement is void if the object or consideration is against the public policy.

b) The agreement is void. As per Section 20 of the Indian Contract Act, 1872 the contracts
caused by mistake of fact are void. There is mistake of fact as to the existence of subject-
matter.

c) The agreement is void. As per Section 27 of the Indian Contract Act, 1872 an agreement in
restraint of trade is void. However, a buyer can put such a condition on the seller of good will,
not to carry on same business. However, the conditions must be reasonable regarding the
duration and the place of the business. In the above case the condition is not reasonable.

d) The agreement is void. An agreement in restraint of legal proceedings is void as per Section
28 of the Indian Contract Act. 1872.

e) The agreement is valid. An agreement with alien friend is valid, but an agreement with alien
enemy is void.

Q-26: State the Difference between Void and Illegal Agreement?

Ans:-

Basis of Void agreement Illegal agreement

difference
Scope A void agreement is not necessarily An illegal agreement is always void.
illegal.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal agreements are liable for
punishment under the law. punishment.
Collateral It’s not necessary that agreements Agreements collateral to illegal
Agreement collateral to void agreements may agreements are always void.

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 also be void. It may be valid also.

Q-27: Comment on the following statements:

a) Acceptance must be absolute and unqualified.

b) Acceptance must be in the prescribed mode.

Ans:- a) Acceptance must be absolute and unqualified: As per section 7 of the Indian Contract
Act, 1872 acceptance is valid only when it is absolute and unqualified and is also expressed in
some usual and reasonable manner unless the proposal prescribes the manner in which it must
be accepted. If the proposal prescribes the manner in which it must be accepted, then it must
be accepted accordingly.

Example: 'A' enquires from 'B', "Will you purchase thy car for 2 lakhs?" If 'B' replies "I shall
purchase your car for 2 lakhs, if you buy my motorcycle for 50000/ here 'B' cannot be
considered to have accepted the proposal. If on the other hand 'B' agrees to purchase the car
from 'A' as per his proposal subject to availability of valid Registration Certificate / book for the
car, then the acceptance is in place though the offer contained no mention of R.C. book. This is
because expecting a valid title for the car is not a condition. Therefore, the acceptance in this
case is unconditional.

b) Acceptance must be in the prescribed mode: Where the mode of acceptance is prescribed in
the proposal, it must be accepted in that manner. But if the proposer does not insist on the
proposal being accepted in the manner Prescribed after it has been accepted otherwise, i.e.,
not in the prescribed manner, the proposer is presumed to have consented to the acceptance.
Example: If the offer or prescribes acceptance through messenger and offeree sends
acceptance by email, there is no acceptance of the offer if the offer or informs the offeree that

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the acceptance is not according to the mode prescribed. But if the offer or fails to do so, it will
be presumed that he has accepted the acceptance and a valid contract will arise.

Q-28: A stranger to a contract; cannot sue, however in some cases even a stranger to contract
may enforce a claim. Explain.

Ans:- Doctrine of privity of contract states that only the party to the contract can sue and be
sued, third party cannot sue. If a contract is entered between two parties which is later
breached the other party to the contract has a right to enforce this contract that is sue the
other party but a third party cannot enforce the same contract.

This rule is however, subject to certain exceptions. In other words, even a stranger to a contract
may enforce a claim in the following cases:

1. In the case of trust, a beneficiary can enforce his right under the trust, though he was not a
party to the contract between the settler and the trustee.

2. In the case of a family settlement, if the terms of the settlement are reduced into writing,
the members of family who originally had not been parties to the settlement may enforce the
agreement.

3. In the case of certain marriage contracts, or arrangements, a provision may be made for the
benefit of a person. The person may enforce the agreement though he is not a party to the
agreement.

4. In the case of assignment of a contract, when the benefit under a contract has been
assigned, the assignee can enforce the contract.

5. Acknowledgement or estoppel - where the promisor by his conduct acknowledges himself as

an agent of the third party, it would result into a binding obligation towards third party.

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6. In the case of covenant running with the land, the person who purchases land with notice
that the owner of land is bound by certain duties affecting land, the covenant affecting the land
may be enforced by the successor of the seller.

7. Contracts entered into through an agent: The principal can enforce the contracts entered by
his agent where the agent has acted within the scope of his authority and in the name of the
principal.

Q-29: Explain the term "coercion" and describe its effect on the validity of a contract?

Ans:- As per section 15 of the Indian Contract Act, 1872 "Coercion" is the committing or
threatening to commit any act forbidden by the Indian Penal Code 1860, or the unlawful
detaining or threatening to detain any property, to the prejudice of any person whatever, with
the intention of causing any person to enter into an agreement. It is immaterial whether the
Indian Penal Code is or is not in force at the place where the coercion is employed.

According to section 19 of the Act, when consent to an agreement is caused by coercion, the
contract is voidable at the option of the party, whose consent was so caused. The aggrieved
party, whose consent was so caused can enforce the agreement or treat it as void and rescind
it. The injured party might insist on being placed in the same position in which he might have
been had the vitiating circumstances not been present.

As per section 64 where a contract is voidable and the party entitled to avoid it decides to do so
by rescinding it, he must restore any benefit which he might have received from the other
party. He cannot avoid the contract and at the same time enjoy the benefit under the
rescinded/avoided contract.

Q-30: Define Fraud. Whether "mere silence will amount to fraud" as per the Indian Contract
Act, 1872?

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Ans:- U/S 17 of the Indian Contract Act 'Fraud' means and includes any of the following acts
committed by a party to a contract, or with his connivance, or by his agent, with an intent to
deceive another party thereto or his agent, or to induce him to enter into the contract:

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

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

iii. a promise made without any intention of performing it;

iv. any other act fitted to deceive;

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

Under the Indian Contract Act mere silence is not fraud. A party to the contract is under no
obligation to disclose the whole truth to the other party. 'Caveat Emptor' i .e. let the purchaser
beware is the rule applicable to contracts. There is no duty to speak in such cases and silence
does not amount to fraud. Similarly, there is no duty to disclose facts which are within the
knowledge of both the parties. However there are cases where silence shall be treated as fraud:

1. Duty of person to speak: Where the circumstances of the case are such that it is the duty of
the person observing silence to 'peals. Following contracts come within this category:

i. Fiduciary Relationship

ii. Contracts of Insurance

iii. Contracts of marriage

iv. Contracts of family settlement

v. Share Allotment contracts,

2. Where the silence itself is equivalent to speech: For example, A says to B "If you do not deny
it, I shall assume that the horse is sound." A says nothing. His silence amounts Speech.

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Q-31: State the difference between coercion and Undue Influence?

Ans:- DISTINCTION BETWEEN COERCION AND UNDUE INFLUENCE

Basis of Coercion Undue Influence

Difference
Section Section 15 Section 16
Nature Coercion involves use of physical Undue influence involves use of moral
force/threat. pressure.
Criminal Coercion involves committing or In case of Under Influence, there is no such
Action threatening to commit any act act involved.
which is forbidden by Indian
Penal Code or
detaining/threatening to detain
any property belonging to the
other.
Intention Coercion is exercised to compel Under Influence is exercised to obtain an
the other party to enter into a unfair advantage over the other.
contract.
Relationship In Coercion, there may be In Undue Influence, there must be some
strangers involved, i.e. there may kind of relation between the parties.
not be any relation between
parties.
Restitution In case of Coercion, if the In case of Undue Influence, the Court has
contract is rescinded by the discretion whether to pass orders for
aggrieved party, then any restoration of any such benefit, or not.
amount of benefit received has
to be restored back.

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Q-32: Mr. Sonumal a wealthy individual provided a loan of 80,000 to Mr. Datumal on
26.02.2019. The borrower Mr. Datumal asked for a further loan of 1,50,000. Mr. Sonumal
agreed but provided the loan in parts at different dates. He provided 1,00,000 on 28.02.2019
and remaining 50,000 on 03.03.2019. On 10.03.2019 Mr. Datumal while paying off part 75,000
to Mr. Sonumal insisted that the lender should adjusted 50,000 towards the loan taken on
03.03.2019 and balance as against the loan on 26.02.2019. Mr. Sonumal objected to this
arrangement and asked the borrower to adjust in the order of date of borrowal of funds.

Now you decide:

a) Whether the contention of Mr. Datumal correct or otherwise as per the provisions of the
Indian Contract Act, 1872?

b) What would be the answer in case the borrower does not insist on such order of adjustment
of repayment?

c) What would the mode of adjustment/appropriation of such part payment in case neither Mr.
Sonumal nor Mr. Datumal insist any order of adjustment on their part?

Ans:- In case where a debtor owes several debts to the same creditor and makes payment
which is not sufficient to discharge all the debts, the payment shall be appropriated (i.e.
adjusted against the debts) as per the provisions of Section 59 to 61 of the Indian Contract Act,
1872.

U/s 59 of the Act, where a debtor owing several distinct debts to one person, makes a payment
to him either with express intimation or under circumstances implying that the payment is to
be applied to the discharge of some particular debt, the payment, if accepted, must be applied
accordingly.

U/s 60 of the Act, where the 'debtor has omitted to intimate and there are no other
circumstances indicating to which, debt the payment is to be applied, the creditor may ,apply it'

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at-his discretion to any lawful debt actually due and payable to him from the debtor, including a
time bared debt.

U/s 61 of the Act, where neither party makes any appropriation, the payment shall be applied
in discharge of the debts in order of time, whether they are or are not barred by the law in
force for the time being as to the limitation of suits. If the debts are of equal standing, the
payments shall be applied in discharge of each proportionately.

In the above case Mr. Datumal had taken various loans from Mr. Sonumal on various dates. Mr.
Datumal pays a part of the debt specifying the debt to be set off. Mr. Sonumal objected and
asked the borrower to adjust in the order of date of borrowal of funds. Since the debtor has
specified the order of settlement the creditor has to accept it.

Thus

a) The contention of Mr. Datumal is correct and he can specify the manner of appropriation of
repayment of debt.

b) In case where Mr. Datumal fails to specify the manner of appropriation of debt on part
repayment, Mr. Sonumal the creditor, can appropriate the payment as per his choice.

c) In case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of appropriation of
debt on part repayment, the appropriation can be made in proportion of debts.

Q-33: Pick out the correct answer from the following and give reason:

Promises to paint a picture for B by certain day, at a certain price. A dies before the day. The
contract:

(I) can be enforced by A’s representative

(2) can be enforced by B

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(3) can be enforced either by A's representative or by B

(4) cannot be enforced either b A's representative or b B

Ans:- Correct answer is option (4): The Contract cannot be enforced either by A's representative
or by B. To paint a picture is a personal contract and may be performed only personally. A
personal contract cannot be performed by anybody other than the promisee. Hence, if A dies,
the contract cannot be enforced.

Q-34: X, a minor was studying in M.Com. in a college. On 1st July, 2019 he took a loan of
1,00,000 from B for payment of his college fees and to purchase books and agreed to repay by
31st December, 2019. X possesses assets worth 9 lakhs. On due date, X fails to pay back the
loan to B. B now wants to recover the loan from X out of his (X's) assets. Referring to the
provisions of Indian Contract Act 1872 decide whether B would succeed.

Ans:- According to section 68 of Indian Contract Act, 1872, if a person, incapable of entering
into a contract, or any one whom he is legally bound to support, is supplied by another person
with necessaries suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person. In the above case X, a
minor, took a loan of 1,00,000 from B for payment of his college fees and to purchase books.
On due date, X fails to pay back the loan to B. Since the loan given to X is for the necessaries
suited to the conditions in life of the minor, his assets can be sued to reimburse B.

Thus B would succeed.

Q-35: Explain the meaning, of Contingent Contracts' and state the rules relating to such
contracts.

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Ans:- A contract may be absolute or 'contingent. As per section 31 a contingent contract "is a
contract to do-or not to do something, if some event, collateral to such contract does or 'does
not happened. It is a contract in which the performance becomes due only upon the happening
of some event which may or may not happen. For example, A contracts to pay B 10,000 if he is
elected President of a particular association. This is a contingent contract. The essential
characteristics of a contingent contract are:

i. There must be a contract to do or not to do something,

ii. The performance of the contract must depend upon the happening or non happening of
some event.

iii. The happening of the event is uncertain.

iv. The event on which the performance is made to depend upon is an event collateral to the
contract i.e. it does not form part of the reciprocal promises which constitute the contract. The
event should neither be a performance promised, nor the consideration for the promise.

v. The contingent event should not be the mere will of the promisor. However, where the event
is within the promisor's will, but not merely his will, it may be a contingent contract.

The rules regarding the contingent contract are as follows:

1. Contingent contract dependent on the happening of an uncertain future cannot be enforced

until the event has happened. If the event becomes impossible, such contracts become void.

2. Where a contingent contract is to be performed if a particular event does not happening

performance can be enforced only when happening of that event becomes impossible.

3. If a contract is contingent upon, how a person will act at an unspecified time the event shall
be considered to become impossible; when such person does anything which renders it
impossible that he should so act within any definite time or otherwise than under further
contingencies.

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4. The contingent contracts to do or not to do anything if an impossible event happens, are void
whether or not the fact is known to the parties.

Q-36: State briefly the essential element of a contract of sale under the Sale of Goods Act,
1930.

Ans:- The following elements must co-exist so as to constitute a contract of sale of goods under
the Sale of Goods Act, 1930.

(i) There must be at least two parties, buyer and seller. Buyer is the person who buys or agrees
to buy and seller is the person who sells or agrees to sell. The contract of sale is made by an
offer to buy or sell goods for a price by one party and the acceptance of such offer by other.

(ii) The subject matter of the contract mush necessarily be goods. Goods means any moveable
goods. It may be either existing goods, owned or possessed by the seller or future goods.

(iii) The transfer of goods must take place for a price. The consideration in case of sale of goods
must always be in money. However it may also be partly in cash and partly in goods.

(iv) Transfer can be only of general property and not of special property.

(v) A contract of sale may either be absolute or conditional.

(vi.) All other essential elements of a valid contract must be present in the contract of sale, e.g.
competency of parties, legality of object and consideration etc.

Q-37: Define the word Document of Title to goods and Document showing title to goods.

Ans:- Document of Title to goods [sec 2(4)]:

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(a) A Document of Title to Goods is One which enables its possessor to deal with the goods
described in it as if he were the owner, It is used in the ordinary course of business as proof of
the possession or control of goods. It authorizes either by endorsement or by delivery, its
possessor to transfer or receive goods represented by it. [Sec.2 (4)]

(b) Document of Title to Goods includes- (i) Bill of Lading, (ii) Dock Warrant, (iii) Warehouse
keeper's Certificate, (iv) Wharfinger's Certificate, (v) Railway Receipt, (vi) Multimodal Transport
Document, (vii) Warrant or Order for the delivery of Goods by delivery, the possessor of the
document, to transfer or receive Goods thereby represented.

Document showing Title to goods:

A Document of Title enables a person named therein to transfer the property by mere
endorsement and delivery, whereas a document showing title does not confer any right to
transfer by way of endorsement and delivery. e.g. A Shares Certificate shows that the person
named therein is entitled to the shares represented by it, but does not allow transfer of shares
by mere endorsement and delivery of the certificate.

Q-38: For the purpose of making uniform for the employees, Mr. Yadav bought dark blue
coloured cloth from Vivek, but did not disclose to the seller the purpose of said purchase. When
uniforms were prepared and used by the employees, the cloth was found unfit. However, there
was evidence that the cloth was fit for caps, boots and carriage lining. Advise Mr. Yadav
whether he is entitled to have any remedy under the sale of Goods Act, 1930?

Ans:- As per section 16 of the Sale of Goods Act, 1930, an implied condition in a contract of sale
that an article is fit for a particular purpose only arises when

(i) the purpose for which the goods are supplied is known to the seller,

(ii) the buyer relied on the seller's skills or judgement and

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(iii) seller deals in the goods in his usual course of business.

If the following conditions are not fulfilled the seller has no obligation to supply goods which
are suitable for the buyer's purpose but it the buyer's duty to see the goods are as per his
requirement. If he fails to check the suitability of the goods he cannot hold the seller liable and
shall be bound by the contract.

In the above case Mr. Yadav bought blue colour cloth from Vivek for making uniforms however
he failed to inform the seller the reason for the purchase. The uniforms were stitched and the
cloth was found unfit for the purpose. As the buyer had failed to inform the seller about the
reason of his purchase the condition as to quality and fitness does not arise in this case. The
buyer is responsible for the wrong selection and the contract shall be valid.

Hence, the buyer will not succeed in getting any remedy from the seller.

Q-39: What are the rules related to Acceptance of Delivery of Goods?

Ans:- Acceptance is deemed to take place when the buyer-

(i) intimates to the seller that he had accepted the goods; or

(ii) does any act to the goods, which is inconsistent with the ownership of the seller; or

(iii) retains the goods after the lapse of a reasonable time, without intimating to the seller that
he has rejected them (Section 42).

Ordinarily, a seller cannot compel the buyer to return the rejected goods but the seller is
entitled to a notice of the rejection. Where the seller is ready and willing to deliver the goods
and requests the buyer to take delivery, and the buyer does not take delivery within a
reasonable time, he is liable to the seller for any loss occasioned by the neglect or refusal to
take delivery, and also reasonable charge for the care and custody of the goods.

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Q-40: Referring to the provisions of the Sale of Goods Act, 1930, state the rules provided to
regulate the "Sale by Auction."

Ans:- Section 64 of the Sale of Goods Act, 1930 provides the following rules to regulate the sale
by auction:

(i) Where goods are sold in lots: Where goods are put up for sale in lots, each lot is prima facie
deemed to be subject of a separate contract of sale.

(ii) Completion of the contract of sale: The sale is complete when the auctioneer announces its
completion by the fall of hammer or in any other customary manner and until such
announcement is made, any bidder may retract from his bid.

(iii) Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf of the
seller and where such a right is expressly reserved, but not otherwise, the seller or any one
person on his behalf may bid at the auction.

(iv) Where the sale is not notified by the seller: Where the sale is not notified to be subject to
a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to
employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the
seller or any such person; and any sale contravening this rule may be treated as fraudulent by
the buyer.

(v) Reserved price: The sale may be notified to be subject to a reserve or upset price; and

(vi) Pretended bidding: If the seller makes use of pretended bidding to raise the price, the sale
is voidable at the option of the buyer.

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Q-41: What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?
Ans:- As per the provisions of Section 46 of the Sale of Goods Act, 1930, notwithstanding that
the property in the goods may have passed to the buyer, the unpaid seller of goods, as such,
has by implication of law-

a) a lien on the goods for the price while he is in possession of them;

b) in case of the insolvency of the buyer, a right of stopping the goods in transit after he has
parted with the possession of them;

c) a right of re-sale as limited by this Act.

Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to
his other remedies, a right of withholding delivery similar to and co extensive with his rights of
lien and stoppage in transit where the property has passed to the buyer.

These rights can be exercised by the unpaid seller in the following circumstances:

1. Right of lien (Section 47): The unpaid seller of goods who is in possession of them is entitled
to retain possession of them until payment or tender of the price in the following cases,
namely:-

a) where the goods have been sold without any stipulation as to credit;

b) where the goods have been sold on credit, but the term of credit has expired;

c) where the buyer becomes insolvent.

2. Right of stoppage in transit (Section 50): When the buyer of goods becomes insolvent, the
unpaid seller who has parted with the 'Possession of the goods has the right of stopping them
in transit, that is to say, he may resume possession of the goods as long as they are in the
course of transit, and may retain them until paid or tendered price of the goods.

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3. Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to re- sell the
goods under the following conditions:

a) Where the goods are of a perishable nature

b) Where he gives notice to the buyer of his intention to re-sell the goods

c) Where an unpaid seller who has exercised his right of lien or stoppage in transit retells OW
goods.

Q-42: Explain the essential elements to incorporate a Limited Liability Partnership and the steps
involved therein under the LLP Act, 2008.

Ans:- Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed with the Registrar
electronically;

(ii) To have at least two partners for incorporation of LLP [Individual or body corporate];

(iii) To have registered office in India to which all communications will be made and received;
(iv) To appoint minimum two individuals as designated partners who will be responsible for
number of duties including doing of all acts, matters and things as are required to be done by
the LLP. At least one of them should be resident in India.

(v) A person or nominee of body corporate intending to be appointed as designated partner of

LLP should hold a Designated Partner Identification Number (DPIN) allotted by MCA.

(vi) To execute a partnership agreement between the partners inter se or between the LLP and
its partners. In the absence of any agreement the provisions as set out in First

(vii) Schedule of LLP Act, 2008 will be applied.

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(viii) LLP Name.

Steps to incorporate LLP:

1. Name reservation:

➢ The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of LLP.
➢ Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of a
LLP business.

2. Incorporate LLP:

➢ After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership (LLP).

➢ e-Form 2 contains the details of LLP proposed to be incorporated, partners' / designated

partners' details and consent of the partners/designated partners to act as partners/
designated partners

3. LLP Agreement

➢ Execution of LLP Agreement is mandatory as per Section 23 of the Act

➢ LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP.

Q-43: Discuss the conditions under which LLP will be liable and not liable for the acts of the
partner.

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Ans:- As per section 27(2) of the LLP Act, 2008, the LLP is liable if a partner of an LLP is liable to
any person as a-result of a wrongful act or omission on his part in the course of the business of
the LLP or with its authority.

However under section 27(1) of the LLP Act, 2008, an LLP is not bound by anything done by a
partner in dealing with a person if—

i. the partner in fact has no authority to act for the LLP in doing a particular act; and

ii. the person knows that he has no authority or does not know or believe him to be a partner of
the LLP.

Q-44: Explain the following kind of partnership under the Indian Partnership Act, 1932:

i. Partnership at will

ii. Particular Partnership

Ans:- Partnership at will: According to Section 7 of the Indian Partnership Act, 1932,
partnership at will is a partnership when:

(i) no fixed period has been agreed upon for the, duration of the partnership; and

(ii) there is no provision made as to the determination of the partnership.

These two conditions must be satisfied before a partnership can be regarded as a partnership
at will.

A partnership at will may be dissolved by any partner by giving notice in writing to all the other
partners of his intention to dissolve the same.

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Particular partnership: A partnership may be organized for the prosecution of a single
adventure as well as for the conduct of a continuous business. Where a person becomes a
partner with another person in any particular adventure or undertaking the partnership is
called 'particular partnership'. A partnership, constituted for a single adventure or undertaking
is, subject to any agreement, dissolved by the completion of the adventure or undertaking.

Q-45: Indicate points of difference between partnership and association?

Ans:-

Basis of difference Partnership Association

Meaning Partnership means and involves Association evolve out of social
setting up relation of agency cause where there is no
between two or more persons who necessarily motive to earn and
have entered into a business for share profits. The intention is not
gains, with the intention to share the to enter in a business for gains.
profits of such a business.
Examples Partnership to run a business and Members of charitable society or
earn profit thereon. religious association or an
improvement scheme or building
corporation or a mutual insurance
society or a trade protection
association.

Q-46: What is Partnership deed? What are the particulars that the partnership deed may
contain?

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Ans:- Partnership is the result of an agreement. No particular formalities are required for an
agreement of partnership. It may be in writing or formed verbally but it is desirable to have the
partnership agreement in writing to avoid future disputes. The document in writing containing
the various terms and conditions as to the relationship of the partners to each other is called
the 'partnership deed'. It should be drafted with care and be stamped according to the
provisions of the Stamp Act, 1899. Where the partnership of comprises immovable property,
the instrument of partnership must be in writing, stamped and registered under the
Registration Act.

Partnership deed may contain the following information:

1. Name of the partnership firm.

2. Names of all the partners.

3. Nature and place of the business of the firm.

4. Date of commencement of partnership.

5. Duration of the partnership firm.

6. Capital contribution of each partner.

7. Profit Sharing ratio of the partners.

8. Admission and Retirement of a partner.

9. Rates of interest on Capital, Drawings and loans.

10. Provisions for settlement of accounts in the case of dissolution of the firm.

11. Provisions for Salaries or commissions, payable to the partners, if any.

12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.

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A partnership firm may add or delete any provision according to the needs of the firm.

Q-47: A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to
20% of the partnership property and profits. A retires from the firm and dies after 15 days. B
and C continue business of the firm without settling accounts.

What are the rights of A's legal representatives against the firm under the Indian Partnerships
Act, 1932?

Ans:- As per section 37 of the Indian Partnership Act, 1932 where a partner dies or otherwise
ceases to be a partner and there is no final settlement of account between the legal
representatives of the deceased partner or the firms with the property of the firm, then, in the
absence of a contract to the contrary, the legal representatives of the deceased partner or the
retired partner are entitled to claim either.

(i) Such shares of the profits earned after the death or retirement of the partner which is
attributable to the use of his share in the property of the firm; or

(ii) His share shall be treated as advance and he shall be entitled to interest on the amount of
his share in the property. The rate of interest shall be rate agreed in the contract and if nothing
is agreed @6%.

In the above case A retires from the firm and is later dead. The other partners continue the
business without settling the account.

Thus A's legal representatives shall be entitled, at his option to:

a) 20% shares of profits (as per the partnership deed); or

b) Interest at the rate of 6b/o per annum on the amount of A's share in the property.

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Q-48: Subject to agreement by partners, state the rules that should be observed by the
partners in settling the accounts of the firm after dissolution under the provisions of the Indian
Partnership Act, 1932.

Ans:- Subject to a contract between the partners while settling the accounts of a firm after
dissolution, the following rules shall be observed:

(i) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital,
and, lastly, if necessary, by the partners individually in the proportions in which they were
entitled to share profits.

(ii) The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, must be applied in the following manner and order:

a. in paying the debts of the firm to third parties;

b. in paying to each partner rateably what is due to him from capital;

c. in paying to each partner rateably what is due to him on account of capital; and

d. the residue, if any, shall be divided among the partners in the proportions in which they were
entitled to share profits.

Q-49: A sends an offer to B to sell his second-car for Rs. 40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition?
What shall be the position if B communicates his acceptance after one week?

Ans:- Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it
is expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated

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that his silence amount to acceptance, it cannot be taken as valid acceptance. So in the given
problem, if B remains silent, it does not amount to acceptance.

The acceptance must be made within the time limit prescribed by the offer. The acceptance of
an offer after the time prescribed by the offeror has elapsed will not avail to turn the offer into
a contract. (Ramsgate Victoria Hotel (v) Montefiore).

Q-50: Explain the concept of 'misrepresentation' in Matters, of contract.

Ans:- Misrepresentation: According to Section 18 of the Indian Contract Act, 1872,

misrepresentation means and includes-

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

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

iii. Causing, however, innocently, a party to an agreement to make a mistake as to the

substance of the thing which is the subject of the agreement.

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