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CS Foundation Growth and Challenges of Entrepreneurial Venture Notes

CS Foundation Growth and Challenges of Entrepreneurial Venture Notes

→ Planning in emerging firms:
Main objective of business planning is to provide and implement business plans. Two elements of business planning

→ Strategic planning:
This used to be called “long-range planning”. The term “strategic planning” is now used to express the analytic and comprehensive elements of this type of planning. The strategic plan aims to focus an organisation’s vision and priorities in response to a changing environment and to ensure that members of the organisation are working toward the same goals. The planning process encourages organisations to re-examine their established directions and strategies for contemporary relevance and practical results, asking questions like Do we need to change our mission? Have the needs of our target community changed?

→ Operational planning:
Operational planning translates your high level strategic plan into a more detailed plan of who will do what and when. Operational plans usually relate to the short to medium term, maybe one to three years and may relate to your whole organisation, or a particular project or area of work or day to day affairs.

→ Entrepreneurial opportunities and economic development:

  • Entrepreneur plays an important role in the economy. These are the people who are not only providing employment for themselves but for others also.
  • Entrepreneurship and economic growth are very closely and positively linked together. An increase in the number of entrepreneurs leads to an increase in economic growth. This effect is a result of the concrete expression of their skills and more precisely, their propensity to innovate. Through his innovative activity, the entrepreneur seeks to create new profit opportunities.
  • These opportunities can result from productivity increases, in which case, their relationship to economic growth appears quite clearly. Therefore, more entrepreneurs means more growth, which in turn leads to more entrepreneurs. The phenomena seem to be self-feeding. Entrepreneurs are promoted by giving them tax incentives and other facilities which gives an encouragement.

Looking at the past of entrepreneurship Adam Smith, David Ricardo and Stuart Mill termed entrepreneurship by the term “business management”. It was Alfred Marshall who first recognized the entrepreneurship. Marshall’s entrepreneur should be able to foresee changes in supply and demand. On the other end Knight claims that an entrepreneur will be able to bear the risk in case it sees the chances of profit. Modem school of thought the role of entrepreneur is that of innovator.

But in less developed countries entrepreneurs are not innovators but actually they imitate the things made in developed’countries. This process which occurs in developed countries also is called creative imitation.

→ Basic types of Entrepreneurship:
Entrepreneurship may be classified as:

  1. Opportunity based Entrepreneurship: Such entrepreneur perceives a business opportunity and chooses to pursue it as an active career
  2. Necessity based Entrepreneurship: Such entrepreneur is entrepreneur by compulsion and not by choice.

→ Creating Indian Entrepreneurship:
After liberalization, business opportunities in India were manifold. A good number of entrepreneurs seized them and grew from small-scale contractors to large real estate developers and from distributors to manufacturers. Success became the result of efficient capital allocation, strong execution and a customer orientation.

These entrepreneurs needs to nurtured. For the development of entrepreneurs India should look into four areas o Creating the right environment – In India the business of an entrepreneur starts on very little capital. Initial investment is with the help of friends and family unlike developed countries where the idea of an entrepreneur takes shape with the help of a venture capitalist and in a large form. India has to create some of the areas of excellence so that the entrepreneurs from this field can develop and gr’ow like IT industry so there should be proper education facilities provided so that more and more people can come up and take over in this field o Ensure that entrepreneurs have access to right skill – an Indian entrepreneur has no access to proper skill as per a survey conducted.

Thus education system has to be reformed so that more and more skilled entrepreneurs come.
o Entrepreneurs should have access to Smart Capital – One of the basic requirement for any business, although venture capital has entered into our market but still there is deficiency. More of VCs are required, o Networking – There should be a proper networking facility so that entrepreneurs can get in touch with each other.

→ Financing Entrepreneurial Business:
Financing constraints are one of the biggest concerns impacting potential entrepreneurs around the world. Given the important role that entrepreneurship is believed to play in the process of economic growth, alleviating financing constraints for would-be entrepreneurs is also an important goal for policymakers worldwide. In this particular context of the current economic crisis, entrepreneurship seems to offer a fundamental solution to create jobs and growth, but at the same time the crisis has induced a tightening on credit that affects negatively innovative SMEs. Some of the finances thought required are-

  • Resource assessment: an entrepreneur should firstly allocate the resources from where he can get finance. It could be loans, self finance etc.
  • Working capital: this by far the biggest capital requirement for a business. Working capital requirement for a factory could be more then a service industry, o Funds flow – it is a day-to-day funds requirement
  • Sources of finance: there are two types of sources of finance which are internal or external. External may be finance from friends, relatives or banks etc. o Means of finance – means by which budget deficit is financed or surplus is used.

→ Growth and challenges of Entrepreneurship:

  • Entrepreneurship is a core area of expertise in today’s dynamic economy; particularly managing innovation, risk, uncertainty and growth.
  • Entrepreneurship is unique because it is fully engaged in cutting edge knowledge relevant for ambitious owner managers derived from both practice and research at every stage of a new venture’s development.
  • An entrepreneur is someone who is willing to bear the risk of a business venture where there is a significant chance for making profit. Entrepreneurship is basically the practice of starting a business in order to earn profit on new found opportunities. Entrepreneurship is a challenging task as many businesses which start fail to take off

When organisation grow they face following things to survive

  • speed and uncertainty
  • changing technology
  • loyalty will erode
  • demographics will dictate
  • employment will disappear
  • work will be done anywhere, anytime

→ Modernisation:
A constant modernisation will be required in the business with the passage of time. First step towards for this modernisation will be research of the pros and cons of production, second will to have a look at the finance resources cause every modernisation requires money and the last one is to have an approach towards modernisation.

In order for data to be useful, you must analyze it.
Analysis techniques vary and their effectiveness depends on the types of information you are collecting and the type of measurements you are using. Because they are dependent on the data collection, analysis techniques should be decided before this step.

→ Expansion:
In business meaning growth and expansion are two different terms.Growth is having the connotation of an interenal or vertical surge whereas expansion refers to external or horizontal growth such as that exhibited by a firm that successfully engages in mergers and acquisitions.

→ Diversification:
The term ‘diversification’ means the introduction of a new product or service to meet the needs of an old market. Expansion, modernisation, diversification all attempt to increase sales and expansion of sale is a key goal in firm’s growth phase.

→ Marketing Research Report:
The marketing research process culminates with the research report. This report will include all of your information, including an accurate description of your research process, the results, conclusions and recommended courses of action.

  • The report should provide all the information the decision-maker needs to understand the project.
  • It should also be written in language that is easy to understand. It’s important to find a balance between completeness and conciseness. You don’t want to leave any information out; however, you can’t let the information get so technical that it overwhelms the reading audience.
  • One approach to resolving this conflict is to prepare two reports: the technical report and the summary report. The technical report discusses the methods and the underlying assumptions. In this document, you discuss the detailed findings of the research project.
    The summary report, as its name implies, summarizes the research process and presents the findings and conclusions as simply as possible.
  • Another way to keep your findings clear is to prepare several different representations of your findings. Power Point presentations, graphs and face-to-face reports are all common methods for presenting your information. Along with the written report for reference, these alternative presentations will allow the decision maker to understand all aspects of the project.

CS Foundation Entrepreneurship – Creativity and Innovation Notes

CS Foundation Entrepreneurship – Creativity and Innovation Notes

→ Entrepreneur and its tools:
Creativity – “Creativity is the capability or act of conceiving something original or unusual.”
Entrepreneurs are naturally creative individuals who are constantly coming up with new ideas. This is a never-ending process; once the business is up and running and products or services are being sold, an entrepreneur studies consumer reaction, conducts market research, and works to improve what his business is offering to stay successful.

Principles of creativity:

  • Expertise: All the knowledge and skills the person is having
  • Creative thinking skills: approaching problems and trying to find the solutions to it.
  • Motivation: desire to do something
  • Innovation: “Innovation is the implementation of something new. Innovation in New Product Development could include upgrading an existing product or developing a totally new concept to create an original and innovative.
  • Product: This is also true for services and processes, thus innovation is recognized in the literature as ranging from incremental to radical. We tend to think of innovation as a new product but you can innovate with a new process, method, business model, partnership, route to market, or marketing method.

Seven principles of Innovation given by Steve Jobs
1. Do what you love. Think differently about your career. Steve Jobs followed his heart his entire life and that, he said, made all the difference. Innovation cannot occur in the absence of passion and, without it, you have little hope of creating breakthrough ideas.

2. Put a dent in the Universe. Think differently about your vision. Jobs attracted like-minded people who shared his vision and who helped turn his ideas into world-changing innovations. Passion fuelled Apple’s rocket and Jobs’ vision created the destination.

3. Kick start your brain. Think differently about how you think. Innovation does not exist without creativity and for Steve Jobs, creativity was the act of connecting things. Jobs believed that a broad set of experiences broadened the understanding of the human experience.

4. Sell dreams, not products. Think differently about your customers. To Jobs, people who bought Apple products were never “consumers.” They were people with dreams, hopes and ambitions. Jobs built products to help them fulfill their dreams.

5. Say no to 1,000 things. Think differently about design. Simplicity is the ultimate sophistication, according to Jobs. From the designs of the iPod to the iPhone, from the packaging of the Apple’s products to the functionality of the Apple Website, innovation means eliminating the unnecessary so that the necessary may speak.

6. Create insanely great experiences. Think differently about your brand experience. Jobs made Apple stores the gold standard in customer service. The Apple store has become the world’s best retailer by introducing simple innovations any business can adopt to make deep, lasting emotional connections with their customers.

7. Master the message. Think differently about your story. Jobs were a great corporate storyteller, turning product launches into an art form. You can have the most innovative idea in the world, but if you cannot get people excited about it, it doesn’t matter

→ Environmental Scanning
Careful monitoring of an organization’s internal and external environments for detecting early signs of opportunities and threats that, may influence its current and future plans.

Objectives of an environmental scanning system

  • Detecting scientific, technical, economic, social and political trends and events important to the institution
  • defining the potential threats, opportunities, or changes for the institution implied by those trends and events
  • promoting a future orientation in the thinking of management and staff and alerting management and staff to trends that are converging, diverging, speeding up, slowing down, or interacting.

1. SWOT analysis
The SWOT analysis begins by conducting an inventory of internal strengths and weaknesses in your organization. You will then note the external opportunities and threats that may affect the organization, based on your market and the overall environment. The name says it: Strength, Weakness, Opportunity, Threat. A SWOT analysis guides you to identify the positives and negatives inside your organization (S-W) and outside of it, in the external environment (O-T). The primary purpose of the SWOT analysis is to identify and assign each significant factor, positive and negative, to one of the four categories, allowing you to take an objective look at your business. The SWOT analysis will be a useful tool in developing and confirming your goals and your marketing strategy.

Strengths:
What are your own advantages, in terms of people, physical resources, finances? What do you do well? What activities or processes have met with success?
Weaknesses:
What could be improved in your organization in terms of staffing, physical resources, funding? What activities and processes lack effectiveness or are poorly done?

Opportunities:
What possibilities exist to support or help your effort– in the environment, the people you serve, or the people who conduct your work? What local, national or international trends draw interest to your program? Is a social change or demographic pattern favourable to your goal?
Is a new funding source available? Have changes in policies made something easier? Do changes in technology hold new promise?

Threats:
What obstacles do you face that hinder the effort-in the environment, the people you serve, or the people who conduct your work? What local, national or international trends favour interest in other or competing programs? Is a social change or demographic pattern harmful to your goal?
Is the financial situation of a major funder changing? Have changes in policies made something more difficult? Is changing technology threatening your effectiveness?

2. Pestle Analysis
The term PESTLE has been used regularly in the last 10 years and its true history is difficult to establish.
PESTEL stands for:

  • P – Political
  • E – Economic
  • S – Social
  • T – Technological
  • E – Environmental
  • L – Legal

A PESTLE analysis is a useful tool for understanding the ‘big picture’ of the environment in which an organisation is operating. Specifically a PESTLE analysis is a useful tool for understanding risks associated with market. The six elements form a framework for reviewing a situation and can also be used to review a strategy or position, direction of a company, a marketing proposition, or idea.

→ Political Factors:
(a) political factors refer to the stability of the political environment and the attitudes of political parties or movements
(b) government influence on tax policies, or government involvement in trading agreements.
(c) freedom of press
(d) environmental and consumer protection legislation
(e) trade restrictions

Economic Factors:
(a) economic growth rates,
(b) levels of employment and unemployment
(c) costs of raw materials such as energy, petrol and steel,
(d) interest rates and monetary policies
(e) exchange rates and inflation rates.

→ Social Factors:
(a) culture of the society that an organization operates within.
(b) demographics
(c) age distribution
(d) population growth rates
(e) level of education
(f) distribution of wealth
(g) social classes, living conditions and lifestyle.

→ Technological Factors:
(a) the effect of new and emerging technology
(b) changes in information and mobile technology,
(c) changes in internet and e-commerce or even mobile commerce
(d) and government spending on research.
(e) Technological developments on digital and internet-related areas, but it should also include materials development and new methods of manufacture, distribution and logistics.

→ Legal Factors:
(a) the effect of legislation
(b) employment laws
(c) foreign transaction laws
(d) tax laws

→ Environmental Factors:
(a) environmental legislation
(b) issues such as limited natural resources,
(c) waste disposal and recycling procedures.
(d) energy available and costs

3. Porter’s Approach:
Michael E. Porter while working for the Harvard Business School and the Boston Consulting group applied the principles of microeconomics and business strategy to analyze requirements in individual sectors. Developing the five forces in line with the business goals of utilizing an organizations/projects limited resources on its greatest potential opportunities. Porter identified five factors that act together to determine the nature of competition within an industry.

These-are the:
1. Threat of new entrants to a market:

  • If new entrants move into an industry they will gain market share and rivalry will intensify
  • The position of existing firms is stronger if there are barriers to entering the market.
  • If barriers to entry are low then the threat of new entrants will be high and vice versa

2. Bargaining power of suppliers:

  • If a firm’s suppliers have bargaining power they will
  • Exercise that power
  • Sell their products at a higher price Squeeze industry profits

3. Bargaining power of customers (“buyers”):
Customers tend to enjoy strong bargaining power when:

  • There are only a few of them
  • The customer purchases a significant proportion of output of an industry
  • They possess a credible backward integration threat – that is they threaten to buy the producing firm or its rivals
  • They can choose from a wide range of supply firms
  • They find it easy and inexpensive to switch to alternative suppliers

4. Threat of substitute products:
The extent of the threat depends upon
– The extent to which the price and performance of the substitute can match the industry’s product
– The willingness of customers to switch
– Customer loyalty and switching costs

5. Degree of competitive rivalry:
If there is intense rivalry in an industry, it will encourage businesses to

  • engage in Price wars (competitive price reductions)
  • Investment in innovation and new products
  • Intensive promotion

→ Environmental Scanning process:
Careful monitoring of an organization’s internal and external environments for detecting early signs of opportunities and threats that may influence its current and future plans is Environmental Scanning.The goal of environmental scanning is to alert decision-makers to potentially significant changes before they crystallize so that decision makers have sufficient lead time to react to the change.

Types of environmental scanning

  • Passive scanning: ongoing scanning is passive scanning. It has been traditionally the major source of information about the external world.
  • Active scanning: the resources to be scanned are specially selected it involves the conscious selection of continuous resources and supplementing them with existing resources as needed
  • Directed scanning: active scanning of an existing resource for a specific item is directed scanning.

→ Market assessment:

  • To penetrate a market, the usual starting point is to undertake a market assessment which would assess market attractiveness and potential of the product by looking at the size, distribution channels, patterns growth/decline and trends.
  • Marketing is the process of developing and implementing a plan to identify, anticipate and satisfy consumer demand, in such a way as to make a profit.

Various steps involved in market research are:

  • Defining the problem: Formulating a problem is the first step in the research process. Thus you should know the object of market analysis before beginning the research
  • Analysing the situation: it is actually trying to find whatever information is available regarding the problem that is being faced. The purpose of the situation analysis is to indicate to a company about the organizational and product position, as well as the overall survival of the business, within the environment.
  • Obtaining data specific to the problem: next step is to gather all the information to make a market strategy. Data can be collected in many ways like survey, observation etc. The purpose is to collect the data and to see how the market will react to particular product.
  • Data analysis: thus the data which has been collected is analyses which involves statistics. Conclusions are to be drawn with the help of data. This is the time of the entry of experts cause one wrong analysis could lead to major loss.
  • Fostering ideas: The summary report, as its name implies, summarizes the research process and presents the findings and conclusions as simply as possible. These ideas are now to be used for marketing decisions.
  • Marketing Plan: Thus by making a marketing plan a real and focused plan can be made by a business owner for selling his product.

Business Plan:
As soon as a company initiates development strategy and planning activities, the time is right to start thinking about the creation of a business plan. Developing a business plan is an intense and time-consuming process and yet can have many significant benefits:

  • A Business Plan identifies key areas of your business so you can maximize the time you spend on generating income.
  • Key investors will want to look at your Business Plan before providing capital.
  • A Business Plan helps you start and keep your business on a successful path.
  • You should prepare a Business Plan, although, in reality, many small business owners do not.
  • A Business Plan is a written document that defines the goals of your business and describes how you will attain those goals.

→ A Business Plan is worth your considerable investment of time, effort and energy.

  • A Business Plan sets objectives, defines budgets, engages partners and anticipates problems before they occur.
  • It has four different phases Identify and evaluate the opportunity
  • Before investing time and money into a business it is important to have as clear as possible of a picture of what an entrepreneur is getting into. An entrepreneur has to see if it’s worth his time and money to pursue an idea. He has to see if the idea is good and there is possible opportunity then the first stage towards the development of a business plan starts.

Whether the business is being started as a new business or a new venture of an existing business, opportunity does not arise in a day it has to be constantly monitored so that a hit can be made at the best time. Thus survey is a basic source to look out for opportunities.

Once the purpose of the business plan has been clearly defined and the target audience has been identified, innovators should tap into their networks to clearly understand what the target audience looks for in a business plan. Opportunity assessment includes o Description of product or services

  • Assessment of opportunity
  • Details about the entrepreneur and team (success factors)
  • Details of all the resources needed
  • Source of finance

→ Developing a business plan:
A good business plan is to use the opportunity and look out for the resources for bringing the business into action. The critical first step, an entrepreneur should do is to create a business plan to communicate this opportunity. This document serves various purposes. First and perhaps most importantly, it forces the entrepreneur to answer the difficult questions and nail down the key elements of his or her concept. The business plan is also the operating guideline for the new venture; it articulates the goals, as well as the means for achieving them. The plan serves as the means of communication with potential sources of funding, describing both the business and the entrepreneur’s ability to organize and conceptualize the details.

→ Determine the resources required:
Develop a cash flow statement so you understand what your needs are now and will be in the future. Although there are many investors across much of the country, their desire for privacy makes them difficult to identify and contact. It takes much less time, on average, to meet with and receive funds from a private investor than a venture capital firm.

While many investors take a board position or an important advising role, funded entrepreneurs can be dissatisfied with the level of involvement. Venture capitalists often provide considerably more support in the management of the business, setting of targets and staffing.

Before accepting angel financing, the entrepreneur should understand the investor’s motivations and goals and establish guidelines for their respective roles.
An entrepreneur should try that at the beginning of the business most of the ownership should be with him so that he has greater freedom for taking decisions.

→ Manage the enterprise:
The operational problems of the enterprise should be looked upon. A control system must be established so that problems can be identified.

  • This section should include who’s on the board (if you have an advisory board) and how you intend to keep them there. What kind salary and benefits package do you have for your people? What incentives are you offering? How about promotions? Reassure your reader that the people you have on staff are more than just names on a letterhead Entrepreneural motivation
  • Entrepreneurial Motivation is the drive of an entrepreneur to maintain an entrepreneurial spirit in all their actions. Motivation has its origin from Latin word “movere” meaning to move. Thus a spirit to move brings into picture entrepreneur. He is the person who is ready to take a risk for his dreams. Motivation may be diverse, multiple and dynamic.
  • It is not just the money which attracts the people for becoming entrepreneur. The reasons are autonomy that is People want to be their own boss. The other is identity fulfilment, which is more about people having a vision about a product or a service. But their employers do not give them the freedom to develop within the company structure. That is a key driver. Other is to do something that you love and making money out of it is simply an extremely liberating thing to do.”
  • It is not just motivation which forces people to become entrepreneur but other things which are also a part of the person becoming an entrepreneur are:

Self Efficacy:
it is the believe in himself or herself, self-efficacy is self-confidence based on an individual’s perceptions of their own skills and abilities. They are the people with strong efficacy.this characteristic is must for entrepreneur because the environment is very difficult and even hostile for entrepreneurs.
Entrepreneurial self-efficacy is best seen as a multidimensional construct made up of goal and control beliefs and propositions for how these two different dimensions will play a role during phases in the process of starting-up a new business are developed.

Creativity:
creativity is producing something new, improving the product, using the same product to cater new needs, painting, writing, sculpting etc. Entrepreneurs have always relied on their creativity to produce wealth, but the modem creative entrepreneurs goes further. John Howkins defines creative entrepreneurs as people who ‘use creativity to unlock the wealth that lies within themselves’ (may emphasis) rather than external capital. The value they create lies not in their physical products (if any) but in intangible assets such as their brand, reputation, network and intellectual property. They are adept at projecting a desired image and creating a personal brand, both online and offline.

Risk taking:
these are the people who are taking risk in business. Starting a new venture in market is a calculated risk. Entrepreneurs do recognize potential risks and they prepare themselves to face and prepare effective strategies to deal with them. Entrepreneurs also design “contingency plans”, or alternative courses of action. Contingency plans show that the entrepreneur is sensitive to important risks and is prepared to handle risks as they occur.

Leadership:
Entrepreneurial Leadership is the ability of an entrepreneur to think strategically and creatively in order to implement changes within an organization. Some of the big entrepreneurs are not great leaders but successful mangers need to have some part of leadership.

Entrepreneur communication:
Communication is necessary for the establishment, survival and growth of anyentrepreneurship. Communication is defined as the activity of conveying meaningful information. It requires a sender, message and an intended recipient. He should be able to present his lengthy business plan in a way that can be easily understood As well as impressive. So these people have great communication skills.

CS Foundation Entrepreneurship Notes

CS Foundation Entrepreneurship Notes

Entrepreneurship is about seeing opportunities and bringing about change. An entrepreneur is actually a French word that means “undertake”. The English understanding of this term is someone who wants to start a business or enterprise. An individual who, rather than working as an employee, runs a small business and assumes all the risk and reward of a given business venture, idea, or good or service offered for sale. The entrepreneur is commonly seen as a business leader and innovator of new ideas and business processes.

→ Four key elements of entrepreneur
In many countries, the term entrepreneur is often associated with a person who starts his own new business. The early history of entrepreneurship in India came from the culture, custom and tradition of the Indian people. The entrepreneur is the one who undertakes to organize, manage and assume the risks of a business. In recent years entrepreneurs have been doing so many things that it is necessary to broaden this definition. Today, an entrepreneur is an innovator or developer who recognizes and seizes opportunities; converts those opportunities into workable/marketable ideas

The elements of entrepreneurship are Innovation

  • Risk taking
  • Vision
  • Organising skills

→ Characterstics of entrepreneurs

  • Entrepreneur are Person who owns and develops his business
  • Entrepreneurs have Talent
  • Entrepreneurs have a way of thinking in innovative ways about ordinary things that leads to their ability to create new value
  • Entrepreneurs have an ability to acquire the necessary skills and expertise to push their new ventures forward
  • Entrepreneurs have strong urge to be independent
  • Entrepreneur is commonly seen as a business leader
  • Entrepreneurs have a ability to fight competitiveness
  • Entrepreneurs are risk taking
  • Entrepreneur organises their business to earn higher profits
  • Entrepreneur takes personal responsibility
  • Entrepreneur converts a situation into opportunity
  • Entrepreneur looks at the world differently rather than the way it is
  • Entrepreneur identifies an opportunity ’
  • Entrepreneur pursues that opportunity beyond your current resources
  • Entrepreneur believes that the opportunity^can be achieved.

→ Who is an Entrepreneur?
Entrepreneur is derived from the French word which means one who takes an endeavour.
He has no age, income level, gender, differ in education level and experience. Entrepreneur have some personal attributes which is common to all. These are

  • Creativity: Entrepreneurship is about creativity. They are the people who develops new product or new ways to do business. Entrepreneurs use innovation and hardwork to overcome obstacles to their success. They are the people whom can be called continuous thinkers.
  • Determination: Entrepreneurs are not thwarted by their defeats. They look at defeat as an opportunity for success. They are determined to make all of their endeavours succeed, so will try and try again until it does. Successful entrepreneurs do not believe that something cannot be done.
  • Dedication: The successful entrepreneur will often be the first person to arrive at the office and the last one to leave. These are the people who work 12 hours a day, seven days in a week. Their mind is constantly on their work, whether they are in or out of the workplace.
  • Flexibility: They are the people who have the ability to mould themselves as per the changing environment.
  • Leadership: It is their ability to create rules and to set goals. They have the ability to look at everything around them and focus it toward their goals. They are disciplined enough to take steps every day toward the achievement of their objectives.
  • Passion: Passion is the most important trait of the successful entrepreneur. They genuinely love their work. They are willing to put in those extra hours to make the business succeed because there is a joy their business gives which goes beyond the money.
  • Self-confidence: The entrepreneur does not ask questions about whether they can succeed or whether they are worthy of success. They are confident with the knowledge that they will make their businesses succeed. They exude that confidence in everything they do.
  • “Smarts”: They have common sense joined with knowledge or experience in a related business or endeavour

→ Why Entrepreneurship?
The advantages which promote the people to be entrepreneur are

  • Do what you enjoy: What you get out of your business in the form of personal satisfaction, financial gain, stability and enjoyment will be the sum of what you put into your business. So if you don’t enjoy what you’re doing, in all likelihood it’s safe to assume that will be reflected in the success of your business or subsequent lack of success. In fact, if you don’t enjoy what you’re doing, chances are you won’t succeed.
  • Freedom: Entrepreneurship is about freedom. Few things in life are as empowering as being able to determine what work you will do, when, where and with whom you will do it. Freedom does not mean freedom to take vacations or so because early years of business demands lot of hard work.
  • Income potential: They will able to get much more from what they would have got in case they were working for someone else. There is no one to decide their salary cause their salary is dependent on the market conditions and not on the board members.
  • Recognition and self-fulfilment: Entrepreneurs bring ideas to life. They are involved from the creation to the sales of a business. A new thing developed gives a sense of prestige.
  • Own boss: They are their own boss and they are not required to take instructions from anyone. They can choose to work from a home office, a leased office or the beaches of the world.
  • Innovation: entrepreneurs enjoy the creative freedom associated with calling their own shots. That freedom includes, “the freedom to create authentically, to create a life, job, relationships and greater purpose that represents your deepest values and to create without fear, self-recrimination, or judgments. Steve Jobs is an example of an Entrepreneur.

→ Types of entrepreneur:

  • Idealist: The idealist entrepreneur is the most common type of entrepreneur. He/She likes innovation and enjoys working on something new or creative or something personally meaningful.
  • Optimizers: The optimizer entrepreneur comes in a close second and is content with the personal satisfaction of simply being a business owner.
  • Hard workers
  • Improver: If you operate your business predominately in the improver mode, you are focused on using your company as a means to improve the world.
  • Sustainer; The sustainers entrepreneur category consists of people who like the thought of the balancing work and apersonal life. Most often they do not wish the business to grow too large where it will cut into their personal life too much. They do not do new things.
  • Advisor: This business personality type will provide an extremely high level of assistance advice to customers. The advisor’s motto is : the customer is right and we must do everything to please them.
  • Artiste: Often found in businesses demanding creativity such as web design and ad agencies. As an artist type you’ll tend to build your business around the unique talents and creativities you have.
  • Superstar: Here the business is centred around the charisma and high energy of the Superstar CEO. This
    personality often will cause you to build your business around your own personal brand.
  • Visionary: Visionaries are entrepreneurs driven by a desire to change the world – and the capacity to imagine how to do so.
  • Analyst: If you run a business as an Analyst, your company is focus on fixing problems in a systematic way.
  • Jugglers: The juggler entrepreneur likes the concept that the business gives them a chance to handle everything themselves. They are usually people with lots of energy and exist on the pressure of meeting deadlines, paying bills and of course making payroll.
  • Fireball: A business owned and operated by a Fireball is full of life, energy and optimism. Your company is life-energizing and makes customers feel the company has a get it done attitude in a fun playful manner.
  • Hero: You have an incredible will and ability to lead the world and your business through any challenge. You are the essence of entrepreneurship and can assemble great companies.
  • Healer: If you are a Healer, you provide nurturing and harmony to your business. You have an uncanny ability to survive and persist with an inner calm.

→ Differences between entrepreneur and manager
Although manager and entrepreneur look same but they are very much different from each other.

The main differences between manager and entrepreneur are:

  • Entrepreneur is the person who starts the business and develops it while manager is the person who provides services to the entrepreneur.
  • Entrepreneurs have a certain set of skills that is superior to that of a manger in terms of productivity and profitability.
  • Entrepreneur has more income uncertainty than manager
  • Entrepreneur is a person who attempts to profit by risk and initiative while managers do not have that risk
  • Entrepreneur is opportunistic, innovative, self-confident and acts proactive and decisive. He is highly self-motivated by his vision and is therefore willing to take even greater risks and can live with a high uncertainty while manager is administrating, or in other words managing, an entity that does not belong to him.
  • Entrepreneur is not involved in fraudulent behaviour while a manager may involve himself by not working hard
  • Entrepreneur can be manager but manager cannot be an entrepreneur

→ Intrapreneurship:
Intrapreneurs are employees thinking and acting as entrepreneurs, but within a company. They are aware of and accept the goals of the company. Within their scope of responsibilities they do their best to actively contribute to the achievement of these goals.

The word intrapreneur comes from Intra – corporate and preneur- entre. Intrapreneurs and entrepreneurs are essentially the same thing. Having either title requires that an individual be remarkably innovative, patient and resourceful. Both types of “preneurs” must be willing to be inventive and take risks. The biggest difference between the two is where they decide to use their skills. An intrapreneur is someone with entrepreneurial ability who utilizes his or her creative streak within a bigger company. Intrapreneurs take existing businesses and transform them. Whereas an entrepreneur would take an idea and build a business around it,

Key characteristics of Intrapreneur:

  • Intrapreneurship is a novel way of making organizations more profitable where imaginative employees .
    entertain entrepreneurial thoughts
  • An intrapreneur thinks like an entrepreneur looking out for opportunities, which profit the organization.
  • It is in the interest of an organization to encourage intrapreneurs.
  • Intrapreneurship is a significant method for companies to reinvent themselves and improve performance.
  • In intrapreneurship there is backing from the headquarters so there is less chances of failure.
  • Intrapreneurs create wealth for Company
  • Intrapreneurs are responsible for keeping companies current.

→ Differences between Intrapreneur and Entrepreneur

  • An entrepreneur is an independent person .who starts his venture and bears full risk of his failure and enjoys the fruit of his success whereas intrapreneur is partially independent and is sponsored by the corporation in which he is working. He is also not liable to bear the losses in case of his failure.
  • An entrepreneur raises the finance from various source and also guarantees their return whereas an intrapreneur does not own the responsibility to raise the capital or to return it.
  • An entrepreneur has no relation with any organization whereas an intrapreneur operates within the organization where he is working. ‘

CS Foundation Entrepreneurship Notes 1

CS Foundation Negotiable Instruments Act, 1881 Notes

CS Foundation Negotiable Instruments Act, 1881 Notes

→ Negotiable Instrument
According to Section 13(a) of the Negotiable Instruments Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appears on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it”.

A Negotiable Instrument is a:

  1. written instrument,
  2. signed by the maker or drawer of the instrument
  3. it is freely transferable
  4. the person who obtains it in good faith and for value should get it free from all defects and be entitled to recover the money of the instrument in his own name to a specific person, or to order, or to its bearer
    • The holder has a right to sue on the instrument in his own name
    • The holder of the instrument is presumed to be owner

→ Classification of Negotiable Instruments:

  • Order Instrument: A negotiable instrument that is payable “to the order of’ an identified person or “to” an identifiable person “or order.”
  • Bearer Instrument: A negotiable instrument payable “to bearer” or to “cash,” rather than to an identifiable payee.
  • Bearer: The person possessing a bearer instrument.

Any instrument payable to the following is a bearer instrument:

  • “Payable to the order of bearer”
  • “Payable to Jane Smith or bearer”
  • “Payable to bearer”
  • “Pay cash” or
  • “Pay to the order of cash.”

Inland Instruments:
A promissory note, bill of exchange, or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument.

Foreign Instruments:
A promissory note, bill of exchange, or cheque drawn outside India and made payable in. India or outside India shall be deemed to be a foreign instrument or it may be drawn in India and is payable outside India.

Demand Instruments:
If no time for payment is specified, a negotiable instrument is presumed to be payable on demand

Time Instruments:
An instrument is payable at a definite time if it states that it is payable

  • on a specified date,
  • within a definite period of time, or
  • on a date or at a time readily ascertainable at the time the promise or order is made.

Ambiguous Instruments:
Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either and the instrument shall be thenceforward treated accordingly.

Incomplete instrument:
Incomplete instrument means a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.

Under Section 13 of the Act, 3 types of negotiable Instruments are recognized
1. Promissory Note:
Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

Parties to the Promissory note

  • Maker – who makes or executes the note
  • payee – one to whom note is payable
  • holder – payee or other person whom the note is endorsed
  • endorser
  • endorsee

Like most agreements, promissory notes can be tailored to meet your needs. There are, however, certain essential elements of a promissory note.

  • writing – Promissory notes must be in writing. There is no such thing as a “verbal” promissory note for Money. A promissory note is valid only if it is a promise to pay money.
  • unconditional – The borrower’s payment cannot depend on an event or any other possibility. It must be unconditional.
  • specific Amount – The note must indicate a specific amount owed that will be paid.
  • express promise – There must be an express undertaking to pay. A mere acknowledgment is not enough
  • signed – The person who promise to pay must sign the instrument even though it might have been written by the promisor himself.
  • payee must be certain – The instrument must point out with certainty the person to whom the promise has been made

2. Bills of Exchange:
A bill of exchange is a written acknowledgement of the debt, written by the creditor and accepted by the debtor

The Parties to a Bill of Exchange:

  • The Drawer – Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller.
  • The Drawee – Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the buyer.
  • The Payee – Is the party to whom the Bill is payable; usually the seller or their bankers.

Essential conditions of a bill of exchange

  • It must be in writing.
  • It must be signed by the drawer.
  • The drawer, drawee and payee must be certain.
  • The sum payable must also be certain.
  • It should be properly stamped.
  • It must contain an express order to pay money and money alone.
  • The order must be unconditional.

→ Types of Bill
(a) Inland bill: Inland bill: A bill is, named as an inland bill if: (a) it is drawn in India on a person residing in India, whether payable in or outside India, or (b) it is drawn in India on a person residing outside India but payable in India.
(b) Foreign Bill: A bill that is not an inland bill is a foreign bill
(c) Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as a “trade bill”.
(d) Bills in sets: The foreign bills are generally drawn in sets of three and each sets is termed as a ‘via’
(e) Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an “accommodation bill”
(t) Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable “after date” is a time bill.
(g) Demand bill: A bill payable at sight or on demand is termed as a demand bill.
(h) Duplicate Bill: where Bill of Excharge was lost before it was overdue, the person who was the holder to it may apply to the drawer for another Bill of same tenor.
(f) Bank Draft: It is Bill of Exchange drawn by one Bank on another Bank, or by itself on another branch. It is very much similar to cheque but the difference is that it can be drawn by one bank on another Bank. It cannot be made payable to bearer.

Distinction Between Bill of Exchange and Promissory Note:
1. Parties: There are three parties to a bill of exchange, rtamely, the drawer, the drawee and the payee; while in a promissory note there are only two parties – maker and payee.

2. Nature of payment: In a bill of exchange, there is an unconditional order to pay, while in a promissory note there is an unconditional promise to pay.

3. Payment to the Maker: A promissory note cannot be made payable the maker himself, while in a bill of exchange to the drawer and payee or drawee and payee may be same person.

4. Acceptance: A bill of exchange requires an acceptance of the drawee before it is presented for payment, while a promissory note does not require any acceptance since it is signed by the persons who is liable to pay.

5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional.

6. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note.

7. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.

8. Notice of dishonour.- In case of dishonour of bill of exchange either due to non-payment or non-acceptance, notice must be given to all persons liable to pay. But in the case of a promissory note, notice of dishonour to the maker is not necessary.

→ Bill of Exchange example:
“Please pay Rs. 500 to the order of ‘A’”

Promissory note example:
“I promise to pay B or order Rs. 500”

→ Cheque:
A” cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Cheque plays an important role in the mechanism of banking. Therefore, cheques are deeply rooted in the relationships of the bank and the customer.

For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely:
“Cheque”: A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation I. For the purposes of this section, the expression
(a) “a cheque in the electronic form” means a cheque that contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric cryptosystem;

(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearinghouse or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II. For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.’

→ Drawer:
Drawee. The maker of a bill of exchange or cheque is called the drawer”; the person thereby directed to pay is called the “drawee”.

Essential elements of a cheque are:

  • cheques are Bills of Exchange
  • drawn on a banker
  • payable on demand.
  • no stamp is required to be fixed on the cheque
  • cheque is usually to be presented within some fix months (6 months in case of India)
  • cheque can be drawn on bank where the drawer has an account
  • banker is liable only to the drawer

→ A cheque is overdue after three years from its due date of issue Difference between Cheque and Bill of Exchange

  • A check is always drawn on a banker although a bill can be drawn on any person or banker.
  • A check can only be drawn on demand, although a bill may be drawn payable on demand or on the expiry of a certain period after a specific date.
  • In the case of a payment through a check, it does not require any acceptance by the drawee before the payment is demanded. But a bill requires the acceptance by drawee before he is made liable upon it.
  • The drawer of a check can make a countermand of payment. But the payment of a bill cannot be countermanded by the drawer.
  • A bill of exchange must be duly stamped though the check does not require any stamp.
  • Grace period of 3 days is allowed for payment in case of time bills but no grace period in case of cheques.
  • No notice of dishonour in case of cheques but a notice of dishonour required in case of bill

→ Banks rights and duties

  • Duty to receive money and to collect cheques for his customer’s account
  • Duty to honour his customer’s cheques and not to pay without a valid authority
  • Duty of secrecy – customer’s accounts
  • to honour his customer’s cheques provided that
    1. Drawn in the proper form
    2. Credit to an amount sufficient to pay them
  • the bankers may only exercise the right of set off when all the relevant accounts are held in the same right
  • obligation to give reasonable notice to the customer if the banker wishes to close the account
  • obligation to keep proper record of transactions with the customer.

→ Circumstances when Banker may refuse to honour cheques

  • when the banker has not sufficient funds of the drawer with him and there is no communication between the bank and the customer to honour the cheque
  • cheque is post-dated and the cheque is presented before that date
  • payer has stopped the cheque
  • When the cheque is not duly presented, e.g., it is presented after banking hours.
  • When the cheque is presented at a branch where the customer has no account
  • When some persons have joint account and the cheque is not signed jointly by all or by the survivors of them.
  • When the cheque has been allowed to become stale

→ When Banker must Refuse Payment
In the following cases he must refuse to honour cheques issued by the customer:
(a) When a customer countermands payment Le., where or when a customer, after issuing a cheque issues instructions not to honour it, the banker must not pay it.
(b) When customer has been adjudged an insolvent.
(c) When the banker receives notice of customer’s insanity.
(d) When an order (e.g., Garnishee Order) of the Court, prohibits payment.
(e) When the customer has given notice of assignment of the credit balance of his account.
(f) When the holder’s title is defective and the banker comes to know of it.
(g) When the banker receives notice of customer’s death.
(h) When the customer has given notice for closing his account .

→ Payment in Due Course:
As per section 10 of the Act, Payment in due course” means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

Important provisions relating to payment in due course are the following.

  • The payment should be made in accordance with the apparent tenor of the instrument i.e. according to the true intentions of the parties.
  • The payment should be made in good faith and without negligence.
  • The payment should be made to the person in possession of the instrument in circumstances, which do not arouse suspicion about his title to possess the instrument and to receive payment thereof.

→ Collecting Banker:
The bank undertakes to receive money and to collect bills for its customer’s account.” “Bills”, of course, included cheques since the cheque was and is, a special form of the bill of exchange.

It is for the bank to establish the defence under Section 131. In order to do so, it must show that it collected the cheque:

  • for a customer
  • in good faith
  • without negligence
  • it collected a crossed cheque

→ Crossing of cheques:
A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque as only the collecting banker credits the proceeds to the account of the payee of the cheque.

Types of Crossing:
There are two types of negotiable instruments:

  • General Crossing
  • Special Crossing
  • Account Payee or Restrictive Crossing
  • ‘Not Negotiable’ Crossing

General Crossing: Where a cheque bean across its face ah addition of:
(a) The words “and company” or any abbreviation thereof between two parallel transverse lines, either with or without the words ” not negotiable or

(b) Two parallel transverse lines simply, either with or without the words “not negotiable”

  • Special crossing: Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable,” that addition constitutes a crossing and the cheque is crossed specially and to that banker.
  • Account Payee or Restrictive Crossing: This crossing can be made in both general and special crossing by adding the words Account Payee. In this type of crossing the collecting banker is supposed to credit the amount of the cheque to the account of the payee only.
  • Not Negotiable Crossing: The words Not Negotiable’ can be added to General as well as Special crossing and a crossing with these words is known as Not Negotiable crossing. The effect of such a crossing is that it removes the most important characteristic of a negotiable instrument i.e. the transferee of such a crossed cheque cannot get a better title than that of the transferor

→ Maturity of negotiable instruments:
Maturity date is the date on which the payment of an instrument falls due. Every instrument which is payable on specific date has a grace period of 3 days thus if the instrument is payable on 2nd of July then it becomes payable on 5th of July. In case maturity date is on Sunday then the payable date becomes Saturday and not Monday. Grace period of 3 days is not valid for cheques cause they are payable on demand.

  • Holder (Section 8) – The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.
  • Holder in due course Section 9 – One holding a negotiable instrument, received for value (he/she paid for it), in good faith and with no suspicion that it might be no good (claimed by another, overdue, or previously dishonoured (a bank had refused to pay since the account was overdrawn). Such a holder is entitled to payment by the maker of the check or note.

→ Liability in case of negotiable instruments

  • ection 32. Laibility of maker – The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor and admits the existence of the payee and his then capacity to indorse.
  • Section 30. Liability of Drawer – The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been give to, or received by, the drawer as hereinafter provided.
  • Section 31. Liability of drawee of cheque – The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.
  • Section 35 Liability of endorser – In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without in such endorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such endorser as hereinafter provided.
  • Section 36 – Liability of prior parties to holder in due course – Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.
  • Section 41 -Acceptor bound, although endorsement forged – An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to believe the endorsement to be forged when he accepted the bill.
  • Section 42 – Acceptance of bill drawn in fictitious name – An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an endorsement by the same hand as the drawer’s signature and purporting to be made by the drawer.

Negotiation:
When 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.

Endorsement:
When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same and is called the “endorser”.

→ Various types of endorsement:
(a) Blank or General: If the indorser signs his name only, the indorsement is said to be in blank

(b) Full or Special: if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be in full and the person so specified is called the” endorsee” of the instrument.

(c) Restrictive: when he further adds that it should be paid only to a specific person like Pay A.

(d) Conditional: when the endorsement is conditional which limits the liability of endorser on that particular condition.

  • Presentment for acceptance: A bill of exchange payable after sight must, if no time or place is specified therein for
  • presentment, be presented to the drawee thereof for acceptance. If the holder fails to present the bill then all the endorsee are discharged from the liability to pay him. The bills which are required to be payable on specific date or on demand are not required to be presented.

Presentment for payment:
Promissory notes, bill of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf or the holder as hereinafter provided. In default of such presentment, the other parties thereto are not liable thereon to such holder.

Discharge from liability:
The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon by cancellation, by release, by payment, by operation of law, by allowing drawee more than 48 hours of bill, by material alteration Dishonour

Dishonour by non-acceptance:
A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawee not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted.

Dishonours by non-payment:
A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.

→ Hundis:
A Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers. They were used

  • as remittance instruments (to transfer funds from one place to another),
  • as credit instruments (to borrow money [lOUs]),
  • for trade transactions (as bills of exchange).

→ Types of Hundis:

  • Shah Jog Hundi: payable only to a respectable holder, as opposed to a hundi payable to bearer.
  • Jokhmi Hundi: always drawn on or against goods shipped.
  • Jawabee Hundi: used for remitting money from one place to another
  • Nam jog Hundi: It is a hundi payable to the party named in the bill or his order
  • Darshani hundi: This is a hundi payable at sight
  • Miadi Hundi: payable after a specified period of time.

CS Foundation Sale of Goods Act, 1930 Notes

CS Foundation Sale of Goods Act, 1930 Notes

As per Section 4 in a contract of sale seller transfers or agrees to transfer the goods for money. The expression “contract of sale” includes both a sale where the seller transfers the ownership of the goods to the buyer and an agreement to sell where the ownership of goods is to be transferred at a future time or subject to some conditions to be fulfilled later on.

→ Essentials of a Valid Contract of Sale:

  • There must be Two parties-There must be at least two parties, i.e. one buyer and the other seller. A person cannot buy his own goods
  • The subject matter of Sale must be “goods” -The subject matter of the contract of sale must be movable goods
  • Transfer of property in the goods: It is the ownership that is transferred in a Contract of sale.
  • Consideration in Price: Consideration in a contract of sale has necessarily to be money.

→ Distinction between Sale and agreement to sale Sale:

  • Transfer of ownership of goods takes place immediately
  • It is an executed contract because nothing remains to be done,
  • Buyer gets a right to enjoy the goods.
  • Transfer of risk of loss of goods takes place immediately because ownership is transferred. As a result, in case of destruction of goods, the loss shall be borne by the buyer even though the goods are in the possession of the seller.
  • On buyers breach a seller can claim for the price of goods, o In case of sellers breach buyer has a personal remedy.

→ Agreement to Sale

  • Transfer of ownership of goods is to take place at a future time or subject to fulfillment of some condition,
  • It is an executory contract because something remains to be done
  • Buyer does not get such right to enjoy the goods
  • Transfer of risk of loss of goods does not take place because ownership is not transferred. As a result, in case of destruction of goods, the loss shall be borne by the seller even though the goods are in the possession of the buyer.
  • On buyers breach the seller can claim only for damages.
  • In case of seller breach the buyer can claim only for damages.

→ Sale and Bailment
A contract of sale is a straight forward contract where a person may buy goods, services or property from a seller in exchange for remuneration, usually in the form of money. Essentially, in abailment contract, the bailor gives the goods, assets or property to the bailee for a specific amount of time. However, the goods, assets or property still belongs to the bailor.

→ Sale and Hire Purchase Agreement
Sale is a type of contract in which the goods passes from seller to buyer on payment of price
Hire purchase agreements are a type of contract in which the goods are passes on hire. Under a hire purchase agreement, the creditor remains the legal owner of the goods until you have repaid the sums due under the agreement. At the end of the agreement, you as the debtor have the option purchase the goods or return them to the creditor.

Since the hirer is not the owner of the goods so he can not transfer the title of the goods to anyone else.
In case of hire purchase agreement the risk involved with the goods remain with the owner on a condition that reasonable care has been taken by hirer while in case of sale the risk is with the buyer even if the goods are purchased on instalments.

→ Subject matter of Contract:
Goods -” goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

Existing Goods:
Goods which are physically in existence and which are in seller’s ownership and or possession, at the time of entering the contract of sale are called ‘existing goods. Goods which are identified and agreed upon at the time of making of the contract of sale are called ‘specific goods’ while the goods which are not separately identified or ascertained at the time of making of the contract are known as ‘unascertained goods’.

Future Goods:
future goods means goods to be manufactured or produced or acquired by the seller after the making of the contract of sale.

Contingent Goods:
Goods, the acquisition of which by the seller depends upon an uncertain contingency are called contingent goods. For example, A sell a thing to B subject that A gets that thing from C thus if the condition is fulfilled then only the sale contract is enforceable.

Goods perishing before making of contract:
Where there is a contract for the sale of specific goods, the contract is void if the goods without the knowledge of the seller have, at the time when the contract was made, perished or become so damaged as no longer to answer to their description in the contract.

Goods perishing after agreement to sell:
Where there is an agreement to sell specific goods and subsequently the goods without any fault on the part of the seller or buyer perish or become so damaged as no longer to answer to their description in the agreement before the risk passes to the buyer, the agreement is thereby avoided.

Price:
price” means the money consideration for a sale of goods.

  • The price in a contract of sale may be fixed by the contract, may be left to he fixed in manner thereby agreed or may be determined by the course of dealing between the parties.
  • Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

→ Conditions and warranties

  • A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.
  • A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
  • A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
  • Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract.

→ Condition to be treated as warranty:

  • Where buyer waives the condition
  • When buyer treats the condition as warranty
  • Where the contract is indivisible and the buyer has accepted the goods the breach of condition can be treated as breach of warranty
  • Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility of otherwise.

→ Implied conditions/warranties
Those conditions are not included in the contract but the law presumes their existence in the contract are called implied conditions.

In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is
(a) an implied warranty that the buyer shall have and enjoy quiet possession of the goods
(b) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party.
(c) if the goods are dangerous then seller must warn buyer regarding it.

Implied undertaking as to tile:
In a contract of sale, unless the circumstances of the contract are such as to show a different intention there is an implied condition in the case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass.

Implied condition in Sale by description:
Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description,

Implied condition as to quality or fitness:
There is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, excepts

  • Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller’s skill or judgement and the goods are of a description which it is in the course of the seller’s business to supply, there is an implied condition that the goods shall be reasonably fit for such purpose.
  • Where goods are bought by description from a seller who deals in goods of that description), there is an implied condition that the goods shall be of merchantable quality. Provided that, if the buyer has examined the goods, there shall be no implied conditions as regards defects which such examination ought to have revealed.
  • An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.
  • An express warranty or conditions does not negatively a warranty or condition implied by this Act unless inconsistent therewith.

→ Doctrine of Caveat Emptor:
Caveat emptor means let the buyer beware or the buyers should examine check for themselves things which they intend to purchase. According to the doctrine of caveat emptor, the buyer is encouraged to “examine, judge and test for him/herself.” This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act.

→ Exceptions to Doctrine of Caveat Emptor:

  1. Seller actively conceals the defect
  2. Seller makes a false statement
  3. Goods are bought by description
  4. When buyer has expressly communicated his purpose to seller looking into the judgement and skill of seller
  5. Transfer of property means transfer of goods ownership. While transfer of possession of goods refers to the custody of goods.
    • The ownership of the goods may pass to the buyer but possession may remain with the seller.
    • In other case possession may pass to the buyer but ownership remain with the seller.

→ Transfer of property in specific or ascertained goods

  • Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
  • For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

→ Transfer of property in unascertained goods:
Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained

→ Transfer of property in Specific goods:
Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred

→ The common law principle of Nemo dat quod non-habet
Subject to this Act, where goods are sold by a person who is not their owner and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of goods is by his conduct precluded ffpm denying the seller’s authority to sell.
In effect a person cannot give a better title than the one he/she has.

Exceptions:

  • sale by an agent o sale under voidable title o seller in possession after sale
  • Buyer in possession after sale.
  • Sale by co-owner o Saleby unpaid seller
  • Estoppel

Delivery (Section 33):
Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf. Rules governing delivery

  • Delivery should have the effect of putting the buyer in possession o Seller is to deliver the goods when buyer applies for delivery o Place of delivery is usually stated in the contract
  • Seller has to bear the cost of delivery .
  • Unless otherwise agreed the buyer is not bound to accept delivery in instalments
  • Where the goods, at the time of sale, are in the possession of a third person, there is no delivery by seller to buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf

Acceptance of goods by buyer:

  • Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so delivered he shall pay for them at the contract rate, accept the quantity ordered and reject the rest
  • Presumed to be accepted if buyer does not intimate the seller within reasonable time regarding his rejection Delivery in instalments
  • Where there is a contract for the sale of goods to be delivered by stated instalments which are to be separately paid for and the seller or buyer makes a breach then it is a question in each case, depending on the terms of the contract and the circumstances of the case, whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated.

→ Suits for breach of Contract:

  • Where, under a contract of sale, the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.
  • Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price.
  • Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance.
  • Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

→ Anticipatory Breach of Contract:
A breach of contract caused by a party’s unequivocally repudiating the contract, i.e. indicating that he will not perform when performance is due. In such case the other party may either treat as still subsisting and wait for delivery or may treat the contract rescinded and sue for damages.

→ Unpaid seller
“Unpaid seller” is defined as
The seller of goods is deemed to be an” unpaid seller” within the meaning of this Act
(a) when the whole of the price has not been paid or tendered;
(b) when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.

Unpaid seller’s rights:
(1) Subject to the provisions of this Act and of any law for the time being in force, 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

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

Lien of unpaid seller: Subject to this Act, the unpaid seller of goods who is in possession of them is entitled to r 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 terms of credit have expired;
(c) where the buyer becomes insolvent.

Loss of lien: The unpaid seller of goods loses his lien or right of retention thereon
(a) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods;
(b) when the buyer or his agent lawfully obtains possession of the goods;
(c) by waiver thereof.

→ Auction sales:
In the case of sale by auction,
(a) where goods are put up for sale by auction in lots, each lot is prima facie deemed to be the subject of a separate contract of sale;
(b) a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner and, until such announcement is made, any bidder may retract his bid;
(c) where a sale by auction 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
(d) a sale by auction may be notified to be subject to a reserved or upset price and a right to bid may also be reserved expressly by or on behalf of the seller
(e) where a right to bid is expressly reserved, but not otherwise, the seller, or any one person on the sellers behalf, may bid at the auction

→ Trading contract involving sea and rail route:
Contracts dealing with goods to be shipped often include an F.O.B.or C.I.F. clause

  • F.O.B.- FOB stands for Free On Board. With the FOB type of shipping agreement, the seller or shipper arranges for goods to be moved to a designated point of origin.
  • C.I.F.- CIF stands for Cost, Insurance and Freight – shipping agreement is used, the seller has responsibility for the cost of the goods in transit, providing minimum insurance and paying freight charges to move the goods to a destination chosen by the buyer. From the point of delivery at the destination, the buyer assumes responsibility for unloading charges and any further shipping costs to a final destination.
  • F.O.R. – Stands for free on rail. The conditions are similar to F.O.B.
    Ex -Ship – Here the seller has to make arrangement of the shipment of the goods to port or inland place specified by buyer

CS Foundation Indian Contract Act, 1872 Notes

CS Foundation Indian Contract Act, 1872 Notes

→ Indian Contract Act is the most important branch of Mercantile or Commercial Law contract is an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. According to Salmond, a contract is “An agreement creating and defining obligations between the parties”

  • Section 2(e) defines agreement as “every promise and every set of promises, forming the consideration for each other.”
  • Again Section 2(b) defines promise in these words: “when the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. Proposal when accepted, becomes a promise.”
  • Contract = Agreement + Enforceable by law

→ Essentials of valid contract
A contract is actually an agreement that is entered into voluntarily by two or more parties, with the intention of creating one or more legal obligations among them.

Essential elements of valid contract are:

  • There must be atleast two parties
  • There should be an agreement between the parties
  • There should be a consent between the parties
  • Parties entering into contract should be capable of making contract.
  • A valid contract must be supported by consideration
  • There should be free and fair consent between the parties which are making contract.
  • Contract should be made for lawful purpose only.
  • Contracts are almost always legally binding. In order for an agreement to become a contract, it is expected to meet three conditions:
  • Offer and Acceptance,
  • intention to create legal relation, and
  • consideration.

A. Offer or Proposal and Acceptance:
An offer is something that is communicated by the offeror so that the offeree will know that his acceptance is invited and will complete the agreement. Proposal is defined under section 2(a) of the Indian contract Act, 1872 as “when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer”. Thus, for a valid offer, the party making it must express his willingness to do or not to do something. But mere expression of willingness does not constitute an offer.

Rules governing offers are:

  • The offer must show an obvious intention on the part of the offerror.
  • An offer must be clear, definite, complete and final.
  • mere declaration of intention and announcement is not an offer.
  • There must be two (or) more persons to an agreement because one person cannot enter into an agreement with himself.
  • The communication of an offer may be made by express words oral or written
  • The communication of offer may be by General Offer which is made to public in general, or. Special Offer. which is made to a definite person.
  • An invitation to treat is not an offer, but an indication of a person’s willingness to negotiate a contract.
  • The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer. The holding of a public auction will also usually be regarded as an invitation to treat.
  • A mere communication of information in the course of business is not offer

→ Lapse of offer (Section 6 of the Act).
A proposal is revoked:

  • by the communication of notice of revocation by the proposer to the other party
  • by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance
  • by the failure of the acceptor to fulfil a condition precedent to acceptance
  • by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.
  • The offeree makes a counter offer which amounts to rejaection of offer and the counter offer may be accepted or rejected.
  • An offer may be revoked at time before acceptance.

Acceptance:
According to Section 2(b), “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.”

Rules governing Acceptance

  • Acceptance must be absolute and unqualified. For example “A” says to “B” “I offer to sell my car for Rs.
    60,000. “B” replies “I will purchase it for Rs. 45,000”. This is not acceptance and hence it amounts to a counter offer.
  • The offer and acceptance should relate to same thing in the same sense.
  • Acceptence may be express i.e. by words spoken, written or implied from the conduct of the parties be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted; and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner and not otherwise; but; if he fails to do so, he accepts the acceptance.
  • Acceptance must be in the mode prescribed. If the acceptance is not according to the mode prescribed or some usual and reasonable mode (where no mode is prescribed) the offeror may intimate to the offeree within a reasonable time that acceptance is not according to the mode prescribed and may insist that the offer be accepted if he prescribed mode only. If he does not inform the offeree, he is deemed to have accepted the offer. For example “A” makes an offer to “B” says to “B” that “if you accept the offer, reply by voice. “B” sends reply by post. It will be a valid acceptance, unless “A” informs “B” that the acceptance is not according to the prescribed mode.
  • Mere silence is no acceptance. Thus offeror cannot frame the contract in such a way that silence of the offeree shows acceptance. Offeree and offeror must have consent

→ Standing order
A standing offer is not a contract. A standing offer is an offer from a potential supplier to provide goods and/or services at pre-arranged prices, under set terms and conditions, when and if required. It is not a contract. Standing offers are used to meet recurring needs when departments or agencies are repeatedly ordering the same goods or services. They may also be used when a department or agency anticipates a need for a variety of goods or services for a specific purpose; however, the actual demand is not known and delivery is to be made when a requirement arises. When a standing offer is issued to your company, you are offering to provide certain goods or services at specified prices over a specified period of time. If and when the call-up against your standing offer, is done, only then do you have a contract for the amount indicated in the call-up.

→ Tickets:
In contract law ticket cases are a series of cases that stand for the proposition that if you are handed a ticket or another document with terms and conditions written on it and you retain the ticket or document, then you are bound by those terms. Whether you have read the terms or not is irrelevant and in a sense, using the ticket is analogous to signing the document. But there is a condition that the notice of the conditions that are related to the contract is existing at the time when contract was made. The person owning the ticket is bound by the conditions printed on the tickets even if he is illiterate.

→ Contracts made by post:

  • A rule of contract law that makes an exception to the general rule that an acceptance is only created when communicated directly to the offeror.
  • An acceptance is binding and the contract is said to be perfected when the acceptor places this acceptance in the mail box. For an offeror the acceptance by the offeree is a contract.

Example
On October 1, an offer to sell was mailed. It was received on October 11 and was accepted by telegram sent on October 11, confirmed by letter mailed October 15. But on October 8, a letter was sent by the offeror revoking the offer (the offeror received the letter of acceptance on October 20).
The court decided that the revocation was inoperative.

→ Contracts over telephone
In the law of contract there are two things. Firstly, one party makes an offer to another party, he is called the offeror and the person to whom he makes the offer is called the offeree. In order for the contract to be concluded and thus be binding on the parties, the offeree has to convey his acceptance of the offer made. It is not enough to say that you find the offer to be “agreeable”; you must “accept” the offer. It must also be brought to the direct attention of the offeror before a valid contract exists.

Thus in case of telephone contracts if the acceptance is given on the phone which is loud and clear and the line goes dead the contract is binding.

B. Intention to create legal relation
Apart from offer, acceptance and consideration, the final ingredient for a contract to be entered into which is enforceable at law is that the parties must have an intention to create legal relations. Without it there is no binding contract. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties. If two persons agree to assist each other by rendering advice, in the pursuit of virtue, science or art, it cannot be regarded as a contract.

Generally it is assumed that in social and domestic type of agreements this type of intention is absent, but parties do intend to create legal relations in commercial agreements

C. Consideration
For a contract to be binding, there must be valid consideration. Consideration is the promise given by both parties as the “price” of entering into the agreement.
Sir Fredrick Pollock has defined consideration “as an act or forbearance of one party, or the promise thereof is the price for which the promise of the other is bought.”

Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from going, something, such act or abstinence or promise is called a consideration for the promise”.

For consideration to be valid, it must have a value.

→ Rules of consideration

  • The promise amounts to a gift it is not a consideration.
  • It must move at the desire of the promisor
  • Consideration may be past, present or future.
  • Consideration must be real.
  • An existing public duty will not amount to valid consideration.
  • Consideration need not be adequate, provided it is for some value.

→ Kinds of Consideration:
Consideration may be:

  • Executory or, future which means that it makes the form of promise to be performed in the future
  • Past which means a past act or forbearance, that is to say, an act constituting consideration which took place and is wholly executed before the promise is made.
  • Executed or present in which it is an act or forbearance made or suffered for a promise.

Whether Gratuitous Promise can be Enforced:
A gratuitous promise to subscribe to a charitable cause cannot be enforced, but if the promises is put to some detriment as a result of his acting on the faith of the promisee and the promisor knew the purpose and also knew that on the faith of the subscription an obligation might be incurred, the promisor would be bound by promise (Kedar Nath v. Gorie Mohan 64).

Valid Contract:
A valid contract is a ‘contract which satisfies all the requirements of the Act’. Such a contract creates rights in personam and is legally enforceable.

Void Agreement:
X is an agreement not enforceable by law. It is void ab initio because it lacks one or more of the essentials of a valid contract. Such an agreement does not create any legal relations. However, it is different from unlawful agreements which are forbidden by the law. An illegal agreement must necessarily be void but a void agreement need not be illegal.

The following agreements that have been declared void by the Contract Act:
Agreements by incompetent persons
Section 11 of The Indian Contract Act specifies that every person is competent to contract provided:

  • He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years in normal case and 21 years if guardian is appointed by the Court.
  • He should be of sound mind while making a contract. A person who is usually of unsound mind, but occasionally of sound mind, can make a contract when he is of sound mind. Similarly if a person is usually of sound mind, but occasionally of unsound mind, may not make a valid contract when he is of unsound mind.
  • He is not a person who has been personally disqualified by law to which he is subject.

Minors contract:

  • According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the age of 18 years. In case a guardian has been appointed to the minor or where the minor is under the guardianship of the Court of Wards, the person continues to be a minor until he completes his age of 21 years.
  • Things to be remembered in case of minor’s contract
  • Minors (those under the age of 18) lack the capacity to make a contract. So a minor who signs a contract can either honor the deal or void the contract.
  • Since the contract is void ab initio, it cannot be ratified by the minor on attaining the age of majority.
  • A minor is not stopped from doing his previous act thus if a minor has made some contract showing him to be a major then he can deny for that contract as he has the benefit of being minor but there is an exception that the contract should not be made by fraudulent representation.
  • Since a minor is never personally liable, he cannot be adjudicated as an insolvent.
  • An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for his benefit or is for legal necessity.

Lunatics agreement:
A person who is mentally incompetent lunatic lacks the capacity to make a contract. If the person does not have the mental capacity to understand that a contract is being made or the general nature of the contract, the person lacks contractual capacity. A person who is mentally incompetent may ordinarily avoid a contract in the same manner as a minor.

But if he makes a contract when he is ofsound mind, i. e., during lucid intervals, he will be bound by it. The cause of the mental incompetency is immaterial. It can be the result of a mental illness, excessive use of drugs or alcohol, etc.

If a contract entered into by a lunatic or person of unsound mind is for his benefit, it can be enforced (for the benefit) against the other party.

→ Other provisions related to contract are

  • Land Revenue Act provides that where a person in Oudh is declared as a ‘disqualified proprietor’ under the Act, he is incompetent to alienate his property.
  • A person who is not an Indian citizen is an alien. On the declaration of war between his country and India he becomes an alien enemy. A contract with an alien enemy becomes unenforceable on the outbreak of war.
  • In England, barristers-at-law are prohibited by the etiquette of their profession from suing for their fees. So also are the Fellow and Members of the Royal College of Physicians and Surgeons. But they can sue and be sued for all claims other than their professional fees. In India, there is no such disability and a barrister, who is in the position of an advocate with liberty both to act and plead, has a right to contract and to sue for his fees (Nihal Chand v Oilawar Khan, 1933 All. L.R. 417).
  • Foreign Sovereign Governments can enter into contracts through agents residing in India. In such cases the agent becomes personally responsible for the performance of the contracts.
  • A corporation when incorporated can sue and can be sued in its own name but it cannot marry being an artificial person. Further, its capacity and powers to contract are limited by its charter or memorandum of association.
  • In India there is no difference between the contracts made by man or women. A married man and woman both have a right to contract

Void Contract:
contract which ceases to be enforceable by law becomes void. In other words, an agreement may be enforceable initially and due to certain circumstances may become void subsequently. Thus a contract is not void from its inception. Some of such circumstances which makes a contract void are
An agreement without lawful consideration becomes void

  • A contingent contract to do or not to do something on the happening of an event becomes void when the event becomes impossible
  • When the party, whose consent is not free, repudiates the contract, etc.

Voidable Contract:
A voidable contract is ‘an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others’. In such a contract, the consent of one of the parties is not free and the law regards it as an aggrieved party. The aggrieved party has the option to either affirm or rescind the contract within a reasonable time. The other party does not have any such right. However, the aggrieved party is entitled to recover from the other party the damages which it may have suffered but it must restore the benefits received by it.

→ Mistakes
An erroneous belief about something may be termed as a mistake.
Section 20 of the Indian Contract provides:
“Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void”

Mistake may be of two types:

  1. Mistake of Law
  2. Mistake of Fact (7) Mistake of Law

It is based no the principle of ‘Ignorantia Juris Non Excusat’ which means ignorance of law is no excuse if the contract is of land (India) A party is not entitled to any relief on the plea that an act has been done in ignorance of the law. But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are excusable.

→ Mistake of fact:
It may be either a bilateral mistake or even a unilateral mistake. In an agreement where both the parties are under a mistake as to a matter of fact essential to the agreement, it is deemed to be a case of bilateral mistake. In a contract where only one of the parties has committed a mistake regarding the subject-matter or any legal effect or consequence of such agreement or in understanding or expressing any terms or conditions of the contract, the mistake is said to be a unilateral mistake. ‘

Some common forms of mistake are enumerated herein below:

  • Mistakes as to the quality of the thing contracted for raises difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties and as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.
  • There may be a mistake as to quantity or extent of the subject matter which will render the contract void even if the mistake was caused by the negligence of a third-party.
  • Where both parties believe the subject matter of the contract to be in existence but in fact, it is not in existence at the time of making the contract, there is mistake
  • Where the parties are of the confusion regarding the subject of the contract then it is mistake

→ What is a Unilateral Mistake in a Contract?
In a contract setting, a mistake is an error in the meaning of words, laws, or facts which causes one or both parties to enter into the contract without fully understanding the outcomes or responsibilities implied by the contract. A “unilateral mistake” is such an error that is held by only one party and not shared by the other party. It can be

  • Mistake as to identity
  • Mistake as to Nature of the Contract

→ Mistake as to identity:
Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if:

  • the identity is for material importance to the contracts; and
  • the mistake is known to the other person
  • Example Cundy v. Lindsay

→ Mistake as to Nature of the Contract:
A mistake may be avoided provided the mistake was due to either
(a) the blindness, illiteracy, or senility of the person signing, or (h) a trick or fraudulent misrepresentation as to the nature of the document.
Example In Foster v. Mackinnon

→ Misrepresentation:
A misrepresentation means a misstatement or an inaccurate statement pertaining to any material fact in the contract. A contract where the consent is obtained by misrepresentation is voidable at the option of the aggrieved party.

Section 18 of the Indian Contract Act states “Misrepresentation means and includes:
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. Any breach of duty which, without any 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; 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.

  • Any party who has entered into a contract by misrepresentation may avoid the agreement
  • insist that the contract be performed

But in the following cases, damages are obtainable

  • From a promoter or director who makes innocent misrepresentation in a company prospectus ‘
  • Negligent representation made by one person to another, like that of a solicitor and client
  • Against an agent who commits a breach of warranty of authority
    Chap. 10 Indian Contract Act, 1872 137

→ Fraud
According to the section 17 of Indian Contract Act, 1872, fraud means and includes of any of the following acts committed by a party to a contract or with his connivance, or by his agent with intend to deceive another party thereto or his agent, or to induce him to enter into the contract.

According to section 17 of Indian contract act 1872, there are some essential of fraud:

  • There should be false statement of fact by person who himself does not believe the statement to be true.
  • The statement should be made with a wrongful intention of deceiving another party and inducing them into enter into an contract.
  • The other party must have suffered the loss.
  • There must be any of the acts of fraud mention in section 17 be performed.

→ Uberrimae Fidei Contract:
In Latin Ubeerrimae Fidei means for, utmost good faith. A contract in which all parties must make full disclosure of material facts in order for the contract to be effective. It is most relevant in insurance, in which the potential policyholder must declare all illnesses, injuries or other facts would change the policy’s level of risk. Other examples are company prospectus, contract for sale of land coercion

→ Coercion:

  • Section 15. Defines coercion as follows – Coercion is committing or threatening to commit an act that is prohibited by IPC, or any unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with an intention of causing any person into entering a contract. It is immaterial whether IPC is in operation at a place where such Act took place.
  • When coercion is employed then contract becomes voidable at the option of aggrieved party.

→ Undue Influence:
Section 16. Defines Undue Influence as follows – A contract is said to be induced by Undue Influence when the relationship between the parties is such that one party is able to dominate his will on the others and uses that position to gain an unfair advantage. A person is deemed to be in the position of dominating the will of the other if-

  • the person holds a real or apparent position of power
  • stands in a fiduciary relationship with the other.
  • the other person is mentally weak because of sickness, disease, or economic distress Parda nishin women

In case of a contract between parda nishin and a person, person has to prove that no undue influence was used and she had independent advice and fully understood the contents of contract.

→ Contracts which are legal:

  • Section 10 of the Indian Contract Act, 1872, provides, “All agreements are contracts if they are made by free consent of parties competent to contract for a lawful consideration and with a lawful object. “
  • Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is lawful unless it is
    • forbidden by law; or,
    • it is of such nature that if permitted it would defeat the provisions of law; or (Hi) is fraudulent; or
    • involves or implies injury to the person or property or another; or
    • the Court regards it an immoral or opposed to public policy

Void Agreement:
It is an agreement not enforceable by law. It is void ab initio because it lacks one or more of the essentials of a valid contract. Such an agreement does not create any legal relations. However, it is different from unlawful agreements which are forbidden by the law. An illegal agreement must necessarily be void but a void agreement need not be illegal.

The following agreements that have been declared void by the Contract Act:

  • Agreements by incompetent persons .
  • Agreements made with persons who are not eligible to contract
  • Agreements wherein consideration and objects are unlawful
  • Agreements which are immoral
  • Agreements in restraint of trade ‘
  • As per section 27 if any agreement restrains from doing any lawful trade or business it is void

→ Wagering Agreements:

  • In India wagering contracts that is betting is void and in Mumbai it is illegal Agreements which are against the public policy
  • Some of the agreements which come under public policy are depriving a person of his parental rights, marriage brokerage, etc.

→ Restitution:
The general term restitution describes the apt of restoration. The basic purpose of restitution is to achieve fairness and prevent the unjust enrichment of a party. For example If A has received some advance from B for some contract which becomes void at a later stage then B is entitled to get back that money advanced to A

→ Contingent Contract:
As per Section 31 “Contingent contract” defined.- A” contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration A contracts to pay B Rs. 10, 000 if B’s house is burnt. This is a contingent contract.

→ Essential characteristics of Contingent Contract

  • The performance must depend upon the happening or non happening of an event.
  • If the event becomes impossible, the contract becomes void – Section 32.
  • Contingent contract to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible and not before. (Sec. 33)
  • Where a contract is contingent upon the way 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. (Sec. 34)
  • Contract contingent on the happening of an event within a fixed time becomes void if such event does not happen or the event becomes impossible before the time fixed.
  • Contracts contingent on the non-happening of an event within a fixed time may be enforced by law if such event does not happen, or it becomes impossible before the expiry of fixed time. (Sec. 35).
  • Contingent agreements to do or not to do anything if an< impossible event happens are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. (Sec. 36).

→ Quasi contract:
A quasi contract is a contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good or service.

The following types of quasi-contracts have been dealt within the Indian Contract Act
(a) Necessaries supplied to person incapable of contracting or to anyone whom he is illegally bound to support – Section 68.
(b) Suit for money had and received – Sections 69 and 72.
(c) Quantum Meruit (Latin “as much as is earned” ). Courts also use the term quantum meruit to describe the process of determining how much money the charging party may recover in an implied contract.
(d) Obligation of person enjoying benefit of a non-gratuitous act. Section.70
(e) Obligations of a finder of goods

→ Section 71
Discharge of a contract relates to the circumstances in which the contract is brought to an end. Where a contract is discharged, each party is freed from their continuing obligations under the contract. A contract may be discharged in one of the following ways
1. Discharge by Performance

  • A contract becomes discharged through performance where both parties have fully performed their contractual obligations.
  • But if only one party performs his promise, he aloes is discharged and the guilty party may be taken to the task for breach of contract.

Tender of Performance:
In case of some contracts, Where a promisor has made an offer of performance (tender) and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. A promisee, as well as an assignee of the rights and benefits under a contract, may demand performance by the promisor,

A promisor personally or through his agent, legal representative or third person can fulfill the promise.
“When two or more persons have made a joint promise, all such persons must jointly fullfil the promise, unless a contrary intention appears from it”.

Under Section 43 of the Indian Contract Act when two or more persons made a joint promise, the promisee may, in the absence of an express agreement to the contrary compel anyone or more of such joint promisors to perform the whole of the promise.

To be valid, a tender must fulfil the following conditions
(a) it must be unconditional; .
(b) if must be made at a proper time and place;
(c) it must be made under circumstances enabling the other party to ascertain that the party by whom it is made is able and willing then and there to do the whole of what he is bound, to do by his promise.
(d) if the tender relates to delivery of goods, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver:
(e) tender made to one of several joint promisees has the same effect as a tender to all of them

Section 39 provides that when a party to a contract has refused to perform or disabled himself from performing his promise in its entirety the promisee may put an end to the contract unless he had signified by words or conduct his acquiescence in its continuance.

2. Discharge by mutual agreement or consent
Sections 62 and 63 provide for the following methods of discharging a contract by mutual agreement Novation: “Novation occurs when a new contract is substituted for an existing contract, either between same parties or between different parties, the consideration mutually being the discharge of the old contract.” Alteration: Alteration of a contract means change in one or more of the material terms of a contract.

  • Rescission: A contract may be discharged, before the date performance, by agreement between the parties to the effect that it shall no longer bind them. Such an agreement amounts to ‘rescission’ or cancellation of the contract.
  • Remission: Section 63 lays down that a promise may give up wholly or in part, the performance of the promise made to him and a promise to do so is binding though there is no consideration for it.
  • Waiver: Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, whereupon the other party to the contract is released from his obligation.

3. Discharge by Lapse of Time:
The Limitation Act provides that a contract should be performed within a specified period i.e. period of limitation. If the contract is not performed and if no legal action is taken by the promisee within the period of limitation, he is deprived of his remedy at law.

4. Discharge by operation of Law:
A contract may be discharged by operation of law when a person is declared insolvent, any party makes any material alteration in the terms of the contract without the approval of the other party, by merger.

5. Discharge by impossibility or frustration:
As per Section 56 an act which is impossible to be performed is void. Thus if the contract is imposible to be performed then it is considered to be discharged. The effects of the impossibility of the performance of a contract may be discussed under the following two heads:
(a) Effects of Initial Impossibility – Initial impossibility means impossibility at the time of formation of the contract.
(b) Effects of Supervining Impossibility – conditions in which discharge is because of supervining impossibility

  • Sometimes a contract is capable of being performed when entered into, but some subsequent event renders the performance impossible.
  • Where the subject -matter of the contract is destroyed before the contract is performed the contract is discharged.
  • On Death or personal incapacity of the parties

(c) Effects of Supervining Illegality
A subsequent change in law may render the contract illegal and in such cases, the contract is deemed discharged.
In the following cases contracts are not discharged on the ground of supervening Impossibility

  • Difficulty of performance
  • Strikes, lock-outs and civil disturbance
  • Commercial impossibilities

6. Discharge by Breach
A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. A breach of contract may occur in the following two ways:
(a) Anticipatory Breach of Contract Anticipatory breach of contract occurs when party declares his intention of not performing the contract before the performance is due.
(b) Actual” Breach’ occurs when a party fails to perform his obligation upon the date fixed for performance by the contract

→ Remedies for Breach
(1) Remedies for Breach of Contracts describes that in any situation in which there is a right, there is also a remedy and a contract gives rise to correlative rights and obligation remedy is the means given by the law for the enforcement of a right.

Remedies for Breach of Contracts include;

  • Damages – as one of the Remedies for Breach of Contracts are monetary compensation allowed to the injured party of the loss for the injures suffered by him or her as a result of the breach of contract
  • Quantum meruit – determines the amount to be paid for services when no contract exists
  • Specific Performance – It means carrying out the contract as agreed.
  • Injection – It is a court order restraining a person from doing a particular act.
  • Rescission – It occurs when the aggrieved party decides not to perform his part of the contract
  • damages for breach of contract – As per Section 73 when a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

A contracts to buy B’s ship for 60, 000 rupees, but breaks,his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.

These are of 2 types
→ Liquidated and unliquidated damages
Liquidated Damages:
Where the parties agree the level of damages for a breach of contract to be paid then it is enforceable to be paid. Suppose A promises to pay Rs 1000 in case of breach of contract to B then in case of breach A is required to pay that amount to B. Unlike UK where the damages can be recovered only on condition that the purpose of the liquidated damages clause should be compensatory and not a deterrent.

Unliquidated damages:
These are of following types

  • Ordinary Damages: These are restricted to pecuniary compensation to put the injured party in the position he would have been had the contract been performed. For example, in a contract for the sale of goods, the damages payable would be the difference between the contract price and the price at which the goods are available on the date of the breach.
  • Special Damage: Special damages are a specific type of damages available for breach of contract. When a contract is breached, special damages may be awarded to reimburse the non-breaching party for damages that result indirectly from, or that “flow from” the breach. For example, Damage or harm to business reputation
  • Exemplary damages: Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. Dishonour of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque, Breach of contract to marry, as it hurts both feelings and reputation.
  • Nominal damages: where there may be a breach of contract but with no loss suffered and the damages are nominal, although token award may still be awarded.
  • Specific Performance: Basically a decree requiring the breaching party to perform their part of the bargain in the contract. For example, if one party has paid for delivery of goods, but the other party did not ship them, a specific performance decree might require the goods to be properly delivered.

Specific performance will not be ordered:
(a) where monetary compensation is an adequate remedy;
(b) where the Court cannot supervise the execution of the contract, e.g., a building contract;
(c) where the contract is for personal service; and
(d) where one of the parties is a minor.

(2) Injunction: An injunction is another coercive legal remedy which can be used in some breach of contract cases where a direct order is required to stop a party ftom continuing an ongoing breach, such as misuse of leased premises.

→ Contract of Indeminity:
As per Section 124 It is defined in the following words, “A contract by which one party promises to save the other from the loss caused to him by the contract of the promisor himself or by the conduct of other person.” There are two parties involved in this Contract. A person who gives the indemnity of protection to other person is called indemnifies. On the other hand a person whom protection is provided is called indemnity holder. :

Example:

  • A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
  • Insurance contracts are the common examples of indemnity.

→ Rights of Indeminity holder:
Following are the important rights of indemnity holder:

  • A Rights of Loss Recovery A Compromise Cost Recovery
  • A Suit Expenditure Recovery A Rights of Indemnifies
  • A Contract of Guarantee

As per Section 126 a “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor” and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

Example:
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

Differences between Contract of Indemnity and Guarantee

  • Number of Parties:
    In a contract of indemnity only two parties are involved, whereas in a contract of guarantee, three parties are involved.
  • Purpose:
    A contract of indemnity is formed to provide compensation of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money.
  • Nature of Liability:
    In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor. The principal debtor owes the primary liability and the surety owes the secondary liability. ‘

→ Types of Guarantee

  • Specific Guarantee- which is given for specific debt and expires when the debt guarantee is paid.
  • Continuous Guarantee – A continuing guarantee is one which extends to a series of transactions (Section 129). The liability of surety in continuous guarantee extends to all transactions contemplated.

Rights of the Surety:
There are three parties in a contract and there are three contracts. So the parties are the debtor, creditor and the surety. So the surety has got some rights

  • Surety’s Rights Against Debtor – when a surety makes the payment to the creditor and creditor is out of the scene now, therefore now surety will deal with the debtor in a manner as if he is a creditor
  • Rights of a Surety Against Creditor – he can claim certain securities from the creditor. Under Section 141 a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into whether the surety knows of the existence of such security or not; and, if the creditor losses or, without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security.
  • Surety’s rights gains co-sureties – When we say co sureties it means in a contract of guarantee there are more than one surety. Sometime in the contract, it happens that one person does not want to take the coriiplete liability in terms of the surety in a contract. When a surety has paid more than his share of debt to the creditor, he has a right of contribution from the co-sureties who are equally bound to pay with him

→ Discharge of surety

  • Surety will be free from the responsibility by giving a notice to the creditor by death of the surety
  • if debtor and the creditor after entering into a contract change the contract without the consent of the surety
  • when creditor discharges the debtor from the liability if the debtor and the creditor enter into a composition
  • if creditor does something which diminishes the right of the surety, which reduces right of the surety
  • when creditor gives more time to the debtor.

→ Bailment:
Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, the deliverer of the asset is the bailor and the receiver is the bailee. In a bailment transaction, ownership is never transfered and the bailor is generally not entitled to use the property while it’s in possession of the bailee.

  • Gratuitous bailment – A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration
  • Bailment for Reward – This is for the mutual benefit of both the bailor the bailee. Bailee gets the reward.

→ Duties of Bailee

  • Duty to take reasonable care
  • Duty not to make unauthorized use (Section 154)
  • Right of Lien
  • Not to set adverse title to goods
  • To keep his goods separate from bailed

→ Duties of Bailor:

  • To bear extra ordinary expenses of bailment
  • To disclose all the known faults in the goods
  • To indentify the bailee for any cost or costs which the bailee may incur because of the defective title of the bailor of the goods bailed

→ Things relevant to Bailment:
A. Finder of Lost Goods – the finder-of goods in a public or quasi public place is only a bailee; he keeps the article in trust for the real owner. As against everyone else, the property in the goods vests in the finder on his taking possession of it

B. General Lien – a general lien is the right retain the property of another for a general balance of accounts

C. Particular Lien – A particular lien is one which is available only against that property of which the skill and labour have been’ exercised A bailee’s lien is a particular lien.

D. Termination of Bailment – Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may determine the bailment (Section 153.)

E. Carrier as Bailee – A common carrier undertakes to carry goods of all persons who are willing to pay his usual or reasonable rates.

→ Pledge:
Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a prqmise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [Section 172],

→ Law of Agency:
An ‘Agent’ is a person employed to do any act or to represent another in dealings with third persons. The person who employs the agent and for whom such act is done, or who is so represented, is called the ‘principal’. The relation between the agent and the principal is called ‘Agency’. It is only when a person acts as a representative of the other in the creation, modification or termination of contractual obligations, between that order and third persons, that he is an agent. The essence of a contract of agency is the agent’s representative capacity coupled with a power to affect the legal relations of the principal with third persons.

Important Kinds of an Agent:

  • Broker: merchantile agent whose ordinary course of business is to make contract with other parties for commission
  • Factors: who sell goods which are in his possession for his principal.
  • Decredere Agent: receives remuneration for taking guarantee to his principal that a person who has bought on credit will pay
  • Auctioneer: who sells goods by auction.
  • Bankers: relationship is as of debtor and creditor
  • Partners: in partnership firm every partner is agent

→ Rights, Duties and Liabilities between Principal and Agent
An agent’s primary duties are:

  • act on behalf of and be subject to the control of the principal;
  • act within the scope of authority or power delegated by the principal;
  • discharge his/her duties with appropriate care and diligence; and
  • avoid conflict between his/her personal interests

Other duties of an agent include:

  • not to acquire any material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent
  • to act with the care, competence and diligence normally exercised by agents in similar circumstances
  • to take action only within the scope of the his/her actual authority
  • to comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal
  • to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise
  • A principal owes certain contractual duties to his/her agent.
  • To compensate the agent as agreed; and ‘
  • To indemnify and protect the agent against claims, liabilities and expenses incurred in discharging the duties assigned by the principal

→ Termination of agency An agency is terminated by

  • the principal revoking his authority; or by the agent renouncing the business of the agency;
  • by the business of the agency being completed
  • by either the principal
  • agent dying or becoming of unsound mind
  • by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors, [section 201],
  • In following cases, an agency cannot be revoked
  • Agency coupled with interest (section 202)
  • Agent has already exercised his authority (section 203)
  • Agent has incurred personal liability, section 204

CS Foundation Indian Partnership Act, 1932 Notes

CS Foundation Indian Partnership Act, 1932 Notes

Partnerships are a form of business association between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill and expects to share in the profits and losses of the business.

As per Section 4 of The Indian Partnership Act, 1932 “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all Persons who have entered into partnership with one another are called individually, “partners” and collectively “a firm” and the name under which their business is carried on is called the “firm-name”.

→ Salient features of partnership:

  • For partnership there must be two or more people who are eligible to contract, partners may be natural person or artificial person.
  • In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership’s operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership.
  • In a partnership the liability of partners is unlimited. Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership’s debt, the other partners can be held individually liable by the creditor requiring payment.
  • The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such are not partners in such business.
  • As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Thus if a person is being repaid the money that it has advanced to the partnership firm from the profits of the firm then it does not become a partner.
  • Sharing of profit means sharing of losses too.
  • Partnership should be there to carry on some business.

→ Formation of partnership:
As per the partnership Act there should be a contract between the partners of a partnership firm. This contract is called partnership agreement. Partnership must have all the characteristic features of contract except that a minor may be given the benefits of a partner when all the partners agree to it.

→ Partnership agreement:
Partnership agreement may be written or oral but it is always advisable to have it written and detailing all the rights and liabilities of each partner.

→ Contents of partnership deed:

  • Name of firm: includes the name of the business entity.
  • The names and addresses of partners who compose it.
  • Business to be done: includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes
  • Commencement of partnership: includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.

→ The duration of partnership:
The amount of capital to be contributed by each partner and the methods of raising finance in future if so required. Division of profits and losses – includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners’ debts, including their own).

The ratio of sharing profits and losses:

  • Salaries, commissions etc., if any, payable to partners.
  • Division of task and responsibility, i.e., the duties, powers and obligations of all the partners.
  • Ending of the business – includes what happens when the business winds down.
  • The mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be express or may be implied by a course of dealing. Such contract may be varied
  • by consent of all the partners and such consent may be express or may be implied by a course of dealing.
  • Expulsion of partners in case of gross breach of duty or fraud.
  • Accounting period and the date on which the accounts are to be prepared.

→ Classification of partnership Partner ship-at- WILL:
As per section 7 of the Act where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership-at-will”. This partnership can be dissolved by any partner by giving notice. Partnership is dissolved from the date which is mentioned on the notice but in case no date is mentioned then it is dissolved at the date when communication regarding the notice is given.

Particular Partnership:
As per section 8 of the Act A person may become a partner with another person in particular adventures or undertakings. Such partnership is between two or more persons for some adventure or undertaking and it may be for one undertaking only.

→ Difference between co-ownership and partnership:
In the co-ownership property is owned jointly without any intention to carry on business while it is the relation between persons who have agreed to share the profit and losses of a business.

Below mentioned are the differences between co-ownership and partnership under the following headings
1. Profit Sharing:

  • Partnership: In the partnership profit sharing the basic object of the partnership formation.
  • Co-Ownership: In the Co-ownership there is no concept of profit and loss sharing

2. Creation:

  • Partnership: Agreement or contract is essential for partnership.
  • Co-Ownership: Agreement is not essential for co-ownership.

3. Agent:

  • Partnership: Every partner is an agent of other partner in the partnership.
  • Co-Ownership: One co-owner is not the agent of other co-owner.

4. Limit for Members:

  • Partnership: In the partnership there is restriction for the maximum number of partners.
  • Co-Ownership: In the co-ownership there is no restriction for the maximum number of co-owners.

5. Transfer of Rights:

  • Partnership: In the partnership a partner cannot transfer his rights to another person without consulting the other partners.
  • Co-Ownership: In a co-ownership a co-owner can transfer his rights to any one without consultation.

6. Legal Claim:

  • Partnership: In a partnership a partner has legal claim on the property of partnership.
  • Co-Ownership: In a co-ownership a co-owner has a legal claim on the joint property.

7. Division of Property:

  • Partnership: In a partnership a partner has no right to demand the partition of property. He can only demand the share of profit. ‘
  • Co-Ownership: In a co-ownership a co-owner can demand the division of property .

8. Dissolution Risk:

  • Partnership: Partnership is affected by the death, insolvency or retirement of any partner.
  • Co-Ownership: Co-ownership can not be dissolved due to above reasons.

→ Difference between HUF and Partnership:

  • Partnership is the result of an agreement or act of parties. HUF is created by operation of law,
  • Each partner is personally liable for the debts and liabilities of the firm to an unlimited extent. In HUF only Karta or manager is liable for its debts and liabilities.
  • Death of a partner automatically dissolves the partnership whereas death of a member does not affect HUF.
  • A minor can not be a partner in a partnership firm but a minor acquires membership in HUF by his birth.

→ Difference between company and Partnership:

  • A limited company is a legal entity, run by directors and owned by shareholders, while partnerships are owned and run by individual partners.
  • Each company must publish its annual accounts, although small organisations need only provide a basic financial summary. Partnerships do not have to publish or audit their accounts, however large they get.
  • In a company the liability of members is limited while in partnership the liability of partners is unlimited.
  • In company disclosure of information compulsory as per various Acts. In partnership it is not required.
  • In company it is not dissolved with the death of a member while in partnership a death of partner leads to the dissolution of Partnership.

→ Constitution of the firm:
Circumstances which lead to change in constitution of firm are

  • As per Section 31 introduction of a new partner.
  • As per section 32 retirement of partner.
  • As per section 33 expulsion of a partner.
  • As per section 34 insolvency of a partner.
  • As per section 35 liability of estate of deceased partner

→ Partnership property:
Property originally brought into the partnership stock, or acquired on account of the firm, are to be held as partnership assets and the same applies to property bought with partnership money. It should be clearly mentioned in the agreement whether the property belongs to firm or to individual partners.
Section 14 of the Indian Partnership Act, 1932 deals with properties which are deemed to be the properties of the firm.

They are as follows:

  • Properties directly purchased by the firm in its own name become the properties of the firm.
  • Properties which are brought into a partnership firm by the partners as their respective capital contributions become properties of the firm. Such properties may include immovable properties also.
  • If a partner brings in property at the time of formation of the partnership firm, it does not require registration. It is to be noted that the property should have been brought into the firm only at the time of the formation and not any time later when the firm has already come into existence.

→ Types of partners:
Various types of partners are
Active Partner or Actual or Ostensible Partner:
A person who provides his share in capital and also takes active part in the management. The development of business depends upon the active partners.

Sleeping Partner or Dormant partner:
A sleeping partner is a partner in a partnership business who does not play an active role, especially one who supplies capital and whose association with the enterprise is not public knowledge. He has share in profit and loss of business

Nominal Partner:
These partners do not share the profit and loss the firm. These do not participate in the management of a firm. A firm only uses the name and goods reputation of the partners. So these are called nominal partners.
Partner in profit only: If a partner is entitled to receive certain share of profit and is not held liable for the losses, he is known as partner in profit only. He is not allowed to take part in the management of the business.

Sub partner:
If a partner agrees to share his profit with a third person then he becomes a Sub Partner

Partner by Estoppel or bolding out:
If person styles the character of a partner in a business before a third party (outsiders) by words or in writing or by his act, he is called a partner by estoppel. The third party mistaking him as a partner in the business advances loans on his creditability, that person would be personally responsible for the liability attaching to the position of a partner The partner by estoppel would, however, not be entitled to any right like other partners in the business.

Similarly, if a person is declared to be a partner by a partner of a firm and such person remained silent without denying it, he also considered a partner by holding out. Thus, such persons are liable to outsiders partners on the principle of estoppel or holding out because on faith of their representation action outsiders have granted credit to the firm.

A partner by estoppel though has the personal liability for the debts of the firm but he can recover the amount from the partners only if they are solvent.

Exceptions to the doctrine of holding out are

  • In case of Torts committed by partners
  • In case the holding out partner is declared insolvent
  • It does not bind the estate of the deceased partner in case when the business is being carried after the death of partner in the old firm name.

Minor Partner:
Partnership arises from contract and a minor is not competent to enter into contract. Therefore, strictly speaking, a minor cannot be a full-fledged partners. But with the consent of all the partners he can be admitted into partnership for benefits only. He is not personally liable to third parties for the debts of the firm, on attaining majority, if he continues as a partner, his liability will become unlimited with effect from the date of hi original admission into the firm. When a minor becomes major then within 6 months of his attaining the majority he has to elect whether he wants to be a partner or not he may give a public notice regarding his wish to be a partner or not but if he fails to give any notice then he is deemed to be a partner.

→ Rights and Duties of partners:
Every partner has right to take part in planning, implementation and control activities of the firm

  • Section 12 (b) -every partner is bound to attend diligently to his duties in the conduct of the business
  • Section 12(c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners.
  • Section 12(d) every partner has a right to have access to and to inspect and copy any of the books of the firm.
  • Section 12(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm.
  • Section 13(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business.
  • Section 13(b) the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm.
  • Section 13(c) where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits.
  • Section 13(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent, per annum.
  • Section 13(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him
    • in the ordinary and proper conduct of the business; and
    • in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and
  • Section 13(1) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm
    • It is the duty of every partners to share the loss occurred in a firm
    • It is the duty of every partners to work honestly and faithfully and work for common benefit of all partners and firm
    • It is the duty of every partners to work and make decisions within the authority
  • Section 15 Subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.
    • It is the duty of every partners to maintain the financial status of the firm. –
    • It is the duty of every partners to stop the leakage in firm. There should not make any secret profit,
  • Section 16(a) if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he shall account for that profit and pay it to the firm.
  • Section 16(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business. It is the duty of every partners to compensate on the loss and damage of firm.

→ Relation of Partners:
Partners as agents:
Every partner is an agent of the firm and his other partners for the purposes of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

→ Partners authority:
Partner can have two types of authority

  1. Express authority: Authority which is given by words spoken or written. The acts of the partner done under his express authority bind the firm with him. Thus even if the acts of the partner are beyond the scope of partnership business but have been given to partner by express authority then the firm is bound by all such acts.
  2. Implied Authority: Subject to the provisions of section 22, the act of a partner which is done to carry on. in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his implied authority.

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him

  • to-submit a dispute relating to the business of the firm to arbitration
  • open a banking account on behalf of the firm in his own name
  • compromise or relinquish any claim or portion of a claim by the firm
  • withdraw a suit or proceeding filed on behalf of the firm
  • admit any liability in a suit or proceeding against the firm
  • acquire immovable property on behalf of the firm
  • transfer immovable property belonging to the firm
  • enter into partnership on behalf of the firm.

Section 25.
Liability of a Partner for Acts of the Firm. – 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.

Section 26.
Liability of the Firm for Wrongful Acts of a Partner. – Where, by the wrongful act or omission of a partner acting 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 therefore to the same extent as the partner.

Section 32.
Retirement of a Partner. – A retiring partner is liable for the debts that contracted when he was partner. A retiring partnep may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. A partner is no longer liable for any debts if a public notice is given of the retirement as per the manner laid down in section 72 of the Act.

Section 34.
Insolvency of a Partner. – Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.

→ Dissolution:
The dissolution of a partnership is the process during which the affairs of the partnership are wound up (where the ongoing nature of the partnership relation terminates).

An existing partnership dissolves whenever the reconstitution of the existing firm is caused by

  • admission
  • retirement,
  • if entered into for a fixed term by the expiration of that term
  • if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership
  • Death of a partner
  • if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking;

However, the dissolution of partnership does not lead to the dissolution of the firm since the two situations are
different. In case of dissolution of partnership, the firm continues, only the partnership relation is reconstituted, but in case of dissolution of firm, not only partnership is dissolved but the firm also loses its existence, implying thereby that the firm ceases to operate as a partnership firm (Section 39 of the Partnership Act, 1932). After dissolution of firm, the firm does not remain in business.

→ Dissolution by the Court
At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:—
(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner.

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner.

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business;

(d) that a partner, other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;

(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner.

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

→ Effect of dissolution
Continuing authority of partners:
After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution.

Apportionment of premium:
Where one partner has paid a premium to another on entering into a partnership for a fixed term and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued

→ Rule for distribution of assets on final settlement of accounts:
In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:
(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:

(byThe assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

  • In paying the debts and liabilities of the firm to persons who are not partners therein:
  • In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:
  • In paying to each partner rateably what is due from the firm to him in respect of capital:
  • The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible

→ Sale of Goodwill after Dissolution:
In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets and it may be sold either separately or along with other property of the firm.
Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.

→ Registration of Firm:
Under Section 58 of the Act, a firm may be registered at any time (not merely at the time of its formation but subsequently also ) by filing an application with the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated.

The application shall contain:

  • Name of the firm
  • Place or principal place of business
  • Names of any other places where the firm carries on business.
  • Date on which each partner joined the firm
  • Name in full and permanent address of partners.
  • Duration of the firm

Application shall be signed and verified by all the partners or their duly authorized agents.
→ Effect of non registration of Firm
Partnership Act, 1932 does not provide for compulsory registration of firms. It is optional for partners to set the firm registered and there are no penalties for non-registration.
However, Section 69 of the Act which deals with the effects of non-registration denies certain rights to an unregistered firm.

→ Under the Act:

  • A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.
  • No suits to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.
  • An unregistered firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts owned by the disputant parties to one another) or other proceedings in a dispute with a third party.
    Hence, every firm finds it advisable to get itself registered sooner or later.

→ Suit for Libel Slander:
A firm is a collection of partners so a firm cannot bring a suit for libel slander against any firm. Libel is any defamation that can be seen, such as a writing, printing, effigy, movie, or statue. Slander is any defamation that is spoken and heard. But a partner can bring a suit for libel slander against any firm.

CS Foundation Elements of Company Law-II Notes

CS Foundation Elements of Company Law-II Notes

→ Director is a person who directs as the head of an organized group. Section 2(34) of the Companies Act, 2013 prescribed that “director” means a director appointed to the Board of a company. A director is a person appointed to perform the duties and functions of director of a company in accordance with the provisions of the Companies Act, 2013.

→ Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.

→ Provisions regarding person to be appointed as director:

  • Under the Companies Act, only an individual can be appointed as a Director; a corporate, association, firm or other body with artificial legal personality cannot be appointed as a Director.
  • The Companies Act does not prescribe any qualifications for Directors of any company but certain disqualifications have been given in the Act.
  • A person appointed as director shall not act as director unless he gives his written consent to hold office of director and such consent has been filed with the registrar within thirty days of his appointment.

Section 149(3) of the Companies Act, 2013 has provided for residence of a director in India as a compulsory i.e. every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

The Act imposes a specific obligation on listed companies to have at least one third of the total number of directors as independent directors

The following class or classes of companies shall have at least two directors as independent directors

  • the Public Companies having paid up share capital often crore rupees or more; or
  • the Public Companies having turnover of one hundred crore rupees or more; or
  • the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees

Section 149(6) of the Act prescribes the criteria for independent directors which are as follows

  • such individuals must possess integrity and relevant industrial expertise;
  • such individuals must not have any material or pecuniary relationship with the company or its subsidiaries;
  • they or their relatives should not have had any pecuniary’ relationship with the company or its subsidiaries, amounting to 2% or more of its gross turnover or total income or INR 5 million (approximately US$ 80,645), whichever is less, during the two immediately preceding financial years or in the current financial year;
  • such appointees or their relatives should not have any key managerial position in the company or its subsidiary companies during any of the three preceding financial years;
  • such persons or their relatives should not have been an employee of the company or its subsidiary companies during any of the three preceding financial years;
  • they or their relatives must not be a director of a nonprofit organization, which receives 25% or more of its receipts from the company or its subsidiary companies or its promoters/directors or from anyone who holds 2% of voting rights in such companies;
  • such individuals must not be a promoter of the company or its subsidiaries;
  • they must not hold more than 2% voting rights in the company either by themselves or together with their relatives.

Duties of independent directors: Companies Act, 2013 includes a guide to professional conduct for independent directors, which crystallizes the role of independent directors by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments and taking an objective view on performance evaluation of the board. Independent directors are additionally required to satisfy themselves on the integrity of financial information, to balance the conflicting interests of all stakeholders and, in particular, to protect the rights of the minority shareholders.

→ Appointment of director
Director may be appointed in the following ways:

  1. By the articles as regards first directors.
  2. By the company in general meeting.
  3. By the directors,
  4. By small shareholders
  5. By third parties

→ First directors:
First Directors of the company is appointed by either subscribers of the Memorandum (if the Articles so provide), or in the absence of any such clause, the individuals who are subscriber to the Memorandum of Association (MOA) will be first directors of the Company till the appointment of directors in the general meeting.

→ Appointment by company in general meeting:
Appointment of subsequent directors is made at every annual general meeting of the company. At the annual general meeting of a public company one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment. The remaining directors of such a company and the directors generally of a purely private company must also be appointed by the company in general meeting.

→ Appointment by Directors:
The directors are empowered to appoint

  • Additional directors.
  • Alternate directors.
  • Directors filling casual vacancy.

The director to be appointed by board of directors exercising the power so conferred in them by the Articles of the company should not be such a person who has failed to get appointed as a director in a general meeting.

→ Appointment of Directors by Small shareholders:
(1) A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by the small shareholders: Provided that nothing in this sub-rule shall prevent a listed company to opt to have a director representing small shareholders suo motu.

→ Appointment by third parties:
Companies Act, 2013 defines nominee director as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by the Government or any other person to represent its interests. Companies Act, 2013 states that a nominee director cannot be an independent director.

→ Additional compliance requirements for private companies:
There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:

  • Appointment of director to be voted individually
  • Option to adopt principle of proportional representation for appointment of directors
  • Ineligibility on account of non-compliance with section 274(1 )(g) now extended for appointment or reappointment as a director in a private limited company also.

→ Duties of directors:
Companies Act, 2013 has set out the following duties of directors:

  • To act in accordance with company’s articles;
  • To act in good faith to promote the objects of the company for benefit of the members as a whole and the best interest of the company, its employees, shareholders, community and for protection of the environment;
  • Exercise duties with reasonable care, skill and diligence and exercise of independent judgment;
    The director is not permitted to:
  • Be involved in a situation in which he may have direct or indirect interest that conflicts, or may conflict, with the interest of the company;
  • Achieve or attempt to achieve any undue gain or advantage, either to himself or his relatives, partners or associates.

→ Powers of Board
Board means Board of Directors who are entitled to do all such acts as the company is authorised to exercise and do. Subject to the provisions of the Act, the Board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorised to exercise and do.

Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.

No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.

Thus a director can do all the acts which a company can do under its memorandum and is infra vires the company. A director cannot do any act which is intra vires the company but is outside the powers of the director. Section 179 of the Companies Act, 2013 provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board:
(a) the power to make calls on shareholders in respect of money unpaid on their shares;
(b) the power to authorize the buy-back securities under section 68.
(c) the power to issue debentures;
(d) the power to borrow moneys otherwise than on debentures;
(e) the power to invest funds of the company;
(f) the power to make loan;
(g) the power to approve financial statement and the Board’s report;
(h) the power to diversify the business of the company;
(i) the power to approve amalgamation, merger or reconstruction;
(j) the power to take over a company or acquire a controlling or substantial stake in another company;
(k) the power to make political contributions;
(l) the power to appoint or remove key managerial personnel (KMP);
(m) the power to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;
(n) the power to appoint internal auditors and secretarial auditor;
(o) the power to take note of the disclosure of director’s interest and shareholding;
(p) the power to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid-up share capital and free reserves of the investee company;
(q) the power to invite or accept or renew public deposits and related matters;
(r) the power to review or change the terms and conditions of public deposit;
(s) the power to approve quarterly, half yearly and annual financial statements or financial results as the case may be.

→ Board Meetings
Section 173 of the Companies Act, 2013 deals with Meetings of the Board. The provisions related to board meeting are as under:

  • First board meeting of a company to be held within 30 (thirty) days of incorporation;
  • Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board meetings may be given by electronic means. However, board meetings may be called at shorter notice to transact “urgent business” provided such meetings are either attended by at least 1 (one) independent director or decisions taken at such meetings on subsequent circulation are ratified by at least 1 (one) independent director.
  • One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting.
  • If due to resignations or removal of director(s), the number of directors of the company is reduced below the quorum as fixed by the Articles of Association of the company, then, the continuing Directors may act for the purpose of increasing the number of Directors.
  • Companies Act, 2013 has permitted directors to participate in board meetings through video conferencing or other audio visual means which are capable of recording and recognising the participation of directors. Participation of directors by audio visual means would also be counted towards quorum.
  • Minimum 4 (four) meetings have to be held each year, with a gap of not more than 120 (one hundred and twenty) days between 2 (two) board meetings.
  • In case of One Person Company (OPC), small company and dormant company, at least one Board meeting should be conducted in each half of the calendar year and the gap between two meetings should not be less than Ninety days
  • Certain new actions have been identified, that require approval by directors in a board meeting. These include issuance of securities, grant of loans, guarantee or security, approval of financial statement and board’s report, diversification of business etc.
  • Approval of circular resolution will be by a majority of directors or members who are entitled to vote on the resolution, irrespective of whether they are present in India or otherwise.

→ Managing Director and Manager:
As per Section 2(54) of the Companies Act, 2013 The term “Managing Director” mans a director who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board or by virtue of its memorandum or articles of association, is entrusted with substantial powers management which would not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called.

Section 2(53) contains the definition of – “manager11, means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of the company and includes a director or any other person occupying the position of a manager, by whatever name called and whether under contract of service or not.

→ Whole-time director, Chief Financial Officer, Chief Executive Officer and Company Secretary

  • Section 2 (94) of the Companies Act, 2013 defines “whole-time director” as a director in the whole-time employment of the company.
  • Section 2(19) of the Companies Act, 2013 defined “Chief Financial Officer” means a person appointed as Chief Financial Officer of a company
  • Section 2(18) of the Companies Act, 2013 defined “Chief Executive Officer” means an officer of a company, who has been designated as such by it.
  • Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act

→ Appointment of key managerial personnel:
The term Key Managerial Personnel is contained in Section 2(51) of the Companies Act, 2013. The said Section states as under: “key managerial personnel”, in relation to a company, means
(a) the Chief Executive Officer or the managing director or the manager;
(b) the company secretary;
(c) the whole-time director;
(d) the Chief Financial Officer; and
(e) such other officer as may be prescribed;

As per section 203 of the Companies Act, 2013 Act provides for mandatory appointment of following whole time key managerial personnel for every listed company and every other company having a paid-up share capital of ten crore INR or more:

  • Managing director, or chief executive officer or manager and in their absence, a whole-time director
  • Company secretary
  • Chief financial officer

Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.

→ Manner of Appointment of KMP:

  • Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.
  • If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy.

→ Company Secretary:

  • A Company Secretary is a senior position in a private sector company or public sector organisation, normally in the form of a managerial position or above.
  • Company Secretary is an important member of corporate management and acts as an advisor to the management of a company on legal and business matters. Company Secretary is an indispensable professional in the efficient management of an organization, whose affairs are conducted by board of directors or a council or any other corporate structure. As per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that a company which has a paid up capital of
  • Five crore rupees or more shall have a whole-time company secretary.
  • Only those persons who are Company Secretaries within the meaning of Section 2( 1 )(c) of the Companies Secretaries Act, 1980 and individuals possessing the prescribed qualifications can be appointed as Secretary of a Company.

→ Functions of Company Secretary:
The functions of the company secretary shall include:

  • to report to the Board about compliance with the provisions of this Act, the rules made there under and other laws applicable to the company;
  • to ensure that the company complies with the applicable secretarial standards;
  • to discharge such other duties as may be prescribed.

→ Role of Secretary in a company can be divided into three heads

  • As a statutory officer: Secretary is required to comply with the various laws. According to Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mandates the appointment of Key Managerial Personnel and makes it obligatory for a listed company and every other public company having a paid up share capital of rupees ten crores or more, to appoint whole-time key managerial personnel.
  • As a coordinator: Secretary has to ensure that the policies laid down by the board are effectively followed. He is not only the communicating channel between the Board and the executives but he also co-ordinates the actions of other executives vis-a-vis the Board
  • As an administrative officer: Secretary has to ensure that the company is running within company’s policies. The role of company secretary as an administrative can be subdivided into organisational, financial, office and personnel administration.

→ Member’s Meetings:
A company is composed of members, though it has its own entity distinct from members. A company is required to hold meetings of the members to take approval of certain business items, as prescribed in the Act.

Difference between members and shareholders

  • A registered shareholder is a member but a registered member may not be shareholder because the company’ may not have share capital.
  • A person who owns a beare share warrant is a shareholder but not a member as his name does not appear in the register of members. This means a person can be a share holder without being a member.
  • A legal representative of a deceased member is not a member until he applies for registration. He is a shareholder but not a member as his name does not appear in register of members

→ Members meetings are classified into

  1. Annual General Meeting
  2. Extraordinary General Meeting
  3. Class Meeting

1. Annual General Meeting:
As the term denotes, annual general meeting is the meeting which has to be held annually. It is the meeting of the members through which they get the opportunity to express their views on the management of the company. Through this meeting, the shareholders can exercise control over the affairs of the company. The ‘Annual General Meeting’ is sometimes called “Ordinary General Meeting” as it usually deals with the so-called ‘Ordinary Business’.
Every company is required to hold this meeting. But, there are certain legal provisions which have to be followed, relating to the annual general meeting.

These are

  • The annual general meeting must be held once in each year in addition to other meeting.
  • First annual general meeting of the company should be held within 9 months from the closing of the first financial year. Hence it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation
  • The members of the company have to get at least 21 days before the meeting is held. The notice may be given either in writing or through electronic mode.
  • A general meeting may be called after giving a shorter notice also if consent is given in writing or by electronic mode by not less than 95% of the members entitled to vote at such meeting.
  • The meeting must be held during the business hours and on any day which should not be a National holiday.
  • Subsequent annual general meeting of the company should be held within 6 months from the closing of the financial year.
  • The Registrar may extend the time period for holding Annual General Meeting maximum upto 3 months for any special reason.
  • The gap between two annual general meetings should not exceed 15 months.
  • A statement of the business to be transacted at the general meeting should be given in the notice. In case, the meeting is to transact a special business, a explanatory statement should be attached about such item.
  • A company may give notice through electronic mode.
  • Section 99 of the Companies Act, 2013 provides that if any default is made in complying or holding a meeting of the company, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 1 lakh.

The main purpose to hold this meeting are, like

  • To submit the annual account, balance sheet, director’s report and auditor’s report.
  • To declare the dividend.
  • To appoint auditors and fix their remuneration.
  • To elect directors are that liable to retire by rotation.

Special business – any other business other than specified above to be transacted will be deemed special business likes

  • To increase share capital
  • To alter Article of Association

2. Extraordinary General Meeting
A General meeting other than the statutory meeting and the annual general meeting is called ‘Extraordinary General Meeting’. Due to some urgent or special business purpose, the extraordinary general meeting is held between two consecutive annual general meetings. Here, ‘special business’ means, all the business transacted at any meeting except in the annual general meeting. But, every ‘Extraordinary General Meeting’ has to be informed to the members through a notice accompanied by an ‘Explanatory Statement’, which explains the objective of the meeting.

All general meetings other than annual general meetings are called extraordinary general meetings. Extraordinary General Meetings shall called by:

  • By Board:
    Board my call EGM whenever it deems fit and required
  • By Board on requisition of shareholders:
    Board may call EGM on the requisition of members
    (a) in the case of a company having a share capital: members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share- capital of the company as on that date carries the right of voting;
    (b) in the case of a company not having a share capital: members who have, on the date of receipt of the requisition, not less than one-tenth of the total voting power of all the members having on the said date a right to vote
  • By Requisitionists:
    If Board does not call meeting within 21 days of receiving a valid requisition than the requisitionists themselves may call meeting not later than 45 days from the date of receipt of such requisition. However in such case, the meeting should be held within a period of 3 months from the date of the requisition.
  • By Tribunal:
    Section 98 of the Companies Act, 2013 provides that if for any reason it is impracticable to call a meeting of a company or to hold or conduct the meeting of the company, the Tribunal may, either suo motu or on the application of any director or member of the company who would be entitled to vote at the meeting.

3. Class Meetings:
Class meetings are those meetings which are held by holders of a particulars class of shares/debenture holders/creditors. Class meeting are basically held for taking consent of a particular class of shareholders. Through this meeting, the rights and privileges of the shareholders can be altered, or conversion of one class to another can be done. If the article permits, the right of the different classes of the shareholders can be altered from the class of holder of that share, only when a resolution is passed in a separate meeting.

→ E-governence
The Government of India launched the National e-Govemance Plan (NeGP) with the intent to support the growth of e-govemance within the country. With the launch of this programme many government services were available to the citizens of India via electronic media.

There are many electronic governance projects run by government of India. The Ministry of Corporate Affairs (MCA), Government of India, has initiated the MCA21 project, which enables easy and secure access to MCA services in an assisted manner for corporate entities, professionals and general public.

MCA 21 has helped in the following way:

  • Enable the business community to register a company and file statutory documents quickly and easily.
  • Public will get easy access to relevant records and get their grievances redressed effectively.
  • Professionals will be able to offer efficient services to their client companies.
  • Financial institutions will find registration and verification of charges easy.

CS Foundation Elements of Company Law-I Notes

CS Foundation Elements of Company Law-I Notes

→ Literally, the word company means a group of persons associated with any common object such as business, charity, sports and research, etc. Company is derived from Latin (Com means together and Panis which means Bread), thus originally it meant people who had their bread together. It may be assumed that business discussions must have started on these meals which were done together.

→ A company is a person, artificial, invisible, intangible and existing only in the contemplation of the law. Section 3(1) of the Companies Act, 2013 defines a company as “a company formed and registered under this Act or an existing company”. As per Companies Act, 2013 states that “an existing company means a company formed and registered under any of the previous company laws”.

→ In India, Company gets its legal existence through a Company Legislation which is Companies Act, 2013 or by a special Act of Parliament. In legal sense Company is an association of both artificial persons and natural persons. The company can sue and be sued. It has its own name and a separate legal entity, distinct from its members who constitute it. A company has its own name and a separate legal entity, distinct from its members who constitute it. A company has its own property, the members (shareholders) can not claim the property of the company as their own property.

→ Characteristics of Company:
Legal Entity:
Upon incorporation, a company becomes a separate legal entity, distinct from its members. Thus it acquires rights, obligations and duties which are different and distinct from those of its members. It has its own seal and its own name, its assets and liabilities are separate and distinct from its members. It is capable of owning property, incurring debt, borrowing money, employing people, having a bank account, entering into contracts and can sue and be sued. The seminal case which established the concept of registered company having a corporate personality is Salomon v Salomon and Company (1897)

The outcome of this case was that a legal person can be created through the observance of the Companies Act regardless of the fact that there is only one person involved. Thus it proved that company and the person who makes company are two individual separate identity as per Companies Act

Limited Liability:
The liability of members is limited to contribution to the assets of the company upto the face
value of shares held by him. A member is liable to pay only the uncalled money due on the shares held by him.

Perpetual Succession:
A company does not cease to exist unless the task for which it was created has been
completed. Membership of company may keep on changing from time to time but that does not affect the life of the company. Insolvency or death of a member does not affect the existence of the company.

Separate property:
A company is a distinct legal entity. The company’s property belongs to the company. A member can not claim to be the owner of the property of company during the existence of the company.

Transferability of Shares:
Shares in a company are freely transferable, subject to certain conditions, such that
no shareholder is permanently or necessarily wedded to a company. When a member transfers his share to
another person, the transferee steps into the shores of the transferor and acquires all the rights of the transferor in respect of those shares.

Common seal:
A company is an artificial person and does not have a physical presence, thus it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of company. The common seal is the official signature of the company.

Capacity to sue and be sued:
As company is distinct from its members who make it, thus it can sue and be sued in its own name.

Separate Management:
A company is administered and managed by its managerial personnel i. e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not necessarily be the mangers of the company.

→ Distinction between Company and Partnership:
The major difference between companies and partnerships may be considered under the following headings

Formation:
A company is created by registration under the Companies Act. A partnership is created by agreement which may be express or implied from the conduct of the partners and is subject to the Indian Contracts Act. No special form is required, though partnership terms are usually written.

Status at Law:
Company is an artificial legal person with perpetual succession. Partnership is not a legal person but can be sued and can sue.

Transfer of Shares:
Shares of a company can be transferred with ease. Partner can transfer his share but the assignee does not become a partner. He is only entitled to share of Profits.

Relation of members with company:
In company member is not an agent of company or of other members. Partner is an agent of firm and other partners.

Minimum paid up capital:
Private limited company shall have a minimum paid up capital of Rupees 1,00,000 (Rupees One Lakh Only) and public limited company of Rs. 5,00,000 (Rupees Five Lakh Only). There is no minimum paid up capital for a partnership firm.

Number of Members:
A private company must have at least two members and maximum 200 members. A partnership cannot consist of more than 100 persons.

Management:
Members of a company are not entitled to take part in the management of the company unless they become directors of the company. Partners are entitled to share in the management of firm unless the articles provide otherwise.

Dissolution:
A single member cannot wind up a company. A partnership may be dissolved by any partner at any time.

Agency:
A member of a company is not an agent of the company or that of other members and he cannot bind a company by his acts. Each partner is an agent of the firm and his partners and may bind the firm by his acts.

Liability of Members:
The liability of a member of a company may be limited by shares or by guarantee. The liability of a partner is unlimited.

Powers:
The affairs of accompany are closely controlled by the Companies Act, 1956 and the company can only operate within the objects laid down in the memorandum of association, though these can be altered to some extent by special resolution. Partners may carry on any business as they please so long as it is not illegal and make whatever arrangements they wish with regard to the running of the firm from time to time.

Binding by Act:
Member cannot bind company by his act. Partner can bind firm by his act.

→ Difference between Company and LLP

  • A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act,) whereas for an LLP it would be by a contractual agreement between partners.
  • The management-ownership divide inherent in a company is not there in a limited liability partnership.
  • LLP will have more.flexibility as compared to a company.
  • Every company will have its own seal while a LLP may have a common seal if it decides to have it.
  • LLP will have lesser compliance requirements as compared to a company.
  • LLP should have a suffix ‘LLP’ or ‘Limited Liability partnership’ while a Company must have a suffix ‘Private Limited’ or ‘Limited’
  • Each Director in a company is required to have a Director Identification Number (DIN) before being appointed as a Director of any company while Each Designated partner required to have a DPIN before being appointed as a Designated Partner of LLP.

→ Difference between HUF and Company

  • Hindu Undivided Family (HUF) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly; joint in food, estate and worship. A company may consist of members from any family thus heterogenous members.
  • In HUF Karta has the sole right of making contract for the purpose of business. This is not true for Company
  • For carrying on business HUF is not required to get itself registered while Company has to get itself registered

→ Difference between Company and club

  • Club is unincorporated association/organisation. Company is an incorporated organisation.
  • Club is non-trading organisation while Company is trading organisation

→ Difference between Company and Corporation

  • Body corporate is given in section 2(7). As per the interpretation the word corporate includes company registered under Indian as well as foreign law. Whereas company means a company registered under Companies Act, 1956.
  • The term corporate is much wider than company

→ Advantages of Incorporation
1. Independent corporate existence:
The outstanding feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of and distinct from its members. A company is a legal person. The decision of the House of Lords in Salomon v Salomon and Co. Ltd. (1897 AC 22) is an authority on this principle.

2. Limited liability:
Limited liability is often cited as an important benefit of incorporation. After they have paid for their shares, the members of the company have no further liability to contribute towards debts incurred by the business.

3. Continuity of management:
The management of a company might be separate from its ownership. Management of the business can then continue in spite of any changes in shareholders. Employees can be promoted to senior management positions without necessarily holding any shares in the company. They can also be given shares as an incentive.

4. Access to funds:
Some suppliers and providers of finance might prefer to deal with companies rather than with individuals or partnerships because the company can be sued as a separate entity. Financial institutions offer finance to companies at various stages of development.

5. Capacity for suits:
A company can sue and be sued in its own name.

6. Professional management:
A company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of business or executive class.

→ Disadvantages of incorporation
1. Lifting of corporate veil
Though for all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the
persons behind the corporate veil.
(a) Determination of character:
The House of Lords in Daimler Co Ltd. v. Continental Tyre and Rubber Co., held that a company though registered in England would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.

(b) For benefit of revenue:
The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes.:Sir Dinshaw Maneckjee, Re/Commissioner of Income Tax v. Meenakshi Mills Ltd.

(c) Fraud or improper conduct:
ln Gilford Motor Co v. Horne, a company was restrained from acting when its principal shareholder was bound by a restraint covenant and had incorporated a company only to escape the restraint.

(d) Agency or Trust or Government company:
The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v.Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.

(e) Under statutory provisions:
The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum, when contract is made by misdescribing the name of the company, when business is carried on only to defraud creditors.

2. Companies must comply with Companies Act regulations:
A company is bound by many rules and regulations that are required to be fulfilled. The obligation to file annual accounts with the Registrar of Companies means that the accounts are open to inspection by third parties. Small and medium-size companies, as defined by the Companies Act, can file abbreviated accounts, so that some information that could be useful to competitors, such as gross profit margins, does not have to be revealed. Sole traders and partnerships (other than limited liability partnerships) do not have to file any information.

Companies pay corporation tax whereas individuals, whether sole traders, partners pay income tax.
Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs.

→ Various types of companies Private Limited Company
“Private company” is defined in section 2(68) of the Companies Act, 2013 and it means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed and by its articles restricts the right to transfer its shares, if any. Some other features of Private Company are

  • It restricts the number of members to 200 except in one person company, not including persons who are in employment of the company and the persons who have been in employment with the company and were/are also members of the company and continue to be members of the company even after the employment is ceased.
  • Private company prohibits any invitation to the public for subscription of shares.
  • It prohibits any invitation or acceptance of deposits from persons other than its members, directors and their relatives.
  • For calculating the number of members if two or more persons hold one or more shares in a company jointly than they shall be treated as one that is a single member.
  • Minimum number of members in a private limited company will be 2 and maximum number of members will be 200.

Advantages:

  • Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.
  • Continuity of existence: business not affected by the status of the owner.
  • Minimum number of shareholders need to start the business are only 2.
  • More capital can be raised in comparison to proprietorship as the maximum number of shareholders allowed is 200.
  • Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.

Disadvantages:

  • Growth may be limited because maximum shareholders allowed are only 200.
  • The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders

→ Public Company:
Public company is defined in section 2(71) of the Companies Act, 2013 and it means a company which is not a private company; has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed. A company is deemed to be a Public Company (even if it has incorporated itself as a Private Company) which is a subsidiary of a company which is not a private company. Some other features of Public Limited company are

  • A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited.
  • The difference between Pvt Ltd. and Public Ltd. company is in the no. of shareholders and transferability of shares. In Pvt Ltd the minimum no. of shareholders is 2 and maximum is 200 excluding the past and present employees who holds shares. Whereas in public limited the minimum no. of shareholders is 7 and there is no maximum limit.
  • In the case of Public Limited Company, the shares are freely transferable but it is not so in private limited company.
  • Minimum number of directors in a Private Limited Company are 2 while in Public Limited Company minimum number of directors are 3
  • A Public Company can invite public deposits while a Private Company cannot invite from public.

→ Company limited by shares:
The liability of each member of such company is limited to the unpaid amount of shares and premium, if any, held by him.

→ Company Limited by guarantee:
The special feature of such type of organisation is that the liability of the members arise only at the time when company is being wound up.

→ Unlimited Company:
The special feature of this type of organisation is that the liability of the members of such organisation is unlimited. In such organisation the liability of members is only for the debts of the company and when asked by liquidator. An unlimited company can change to limited only when the change doesn’t affect any liabilities etc. associated with the unlimited company.

→ One Person Company:

  • The concept of One Person Company [OPC] is a new vehicle/form of business, introduced by Section 2(62) of The Companies Act, 2013, thereby enabling Entrepreneur(s) carrying on the business in the Sole-Proprietor form of business to enter into a Corporate Framework.
  • One Person Company is a hybrid of Sole-Proprietor and Company form of business and has been provided with concessional/relaxed requirements under the Act.

Some of the features of One Person Company are:

  • Only a natural person, who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company.
  • The Shareholder shall nominate another person who shall become the shareholders in case of death/incapacity of the original shareholder. Such nominee shall give his/her consent and such consent for being appointed as the. Nominee for the sole Shareholder.
  • No minor can be a member of OPC nor can he be a nominee.
  • Such Company cannot be incorporated or converted into a company under section 8 of Companies Act, 2013
  • Must have a minimum of One Director, the Sole Shareholder can himself be the Sole Director. The Company may have a maximum number of 15 directors.
  • Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporates.
  • No person can incorporate more than one OPC or be a nominee of more than one OPC.
  • DIN is required for all the directors.
  • The director and shareholder can be same person
  • In a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding.
  • No such company can convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

→ Company with Charitable objects
Any person or an association of persons intending to be registered as a limited company for charitable purpose can apply for registration of section 8 company. Section of the Companies Act, 2013 provides for the formation of companies with charitable objects. However, it shall prove to the satisfaction of the Central Government that:
(a) its objects includes promotion of commerce, art, science, sports, education, research, social welfare, religion, charity , protection of environment or any such other object;

(b) the company on incorporation intends to apply its profits, if any, or other income in promoting such object; and

(c) the company intends to prohibit the payment of any dividend to its members. After perusal, the Central Government may issue license with such conditions as it deems fit and allow the registration of such person or association of persons as a limited company without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”.

Thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under section 8.
Features of Company with Charitable objects are

  • To incorporate a new company under section, an application shall be made in Form no. INC. 12.
  • The company registered under section 8 shall enjoy all the privileges and be subject to all the obligations of limited companies
  • A firm can be a member of a section 8 company
  • To alter the provisions of its memorandum or articles of association, section 8 company will have to obtain the previous approval from the Central Government

The Central Government may, by order, revoke such licence granted under section 8, if:
(a) the company contravenes section 8; or
(b) the company contravenes the conditions subject to which licence is issued; or
(c) affairs of the company are conducted in a fraudulent manner or in violation of object of the company or
prejudicial to the interest of the public. ‘

  • As per section 8(7), where a license is revoked by the Central Government if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
  • If a company makes any default in complying with any of the requirements laid down in section 8, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine.

→ Association not for profit:
Companies which are formed for the following purpose are known as Section 25 Companies or Association not for Profit

  • For the purposes of promoting commerce, art, science, religion, charity to any other useful object.
  • With intention to apply its profits or other income for promoting its objects, and
  • Which prohibits payment of any dividend to its members.

→ Small Company:
The concept of “Small Company” has been introduced for the first time by the Companies Act, 2013.
Section 2(85) define a small company as a company other than a public company,

  • paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
  • turnover of which as per its last profit and loss account does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.

For qualifying as a small company, it is enough if either the capital is less than rupees fifty lakhs or turnover is less than rupees twenty crores. It is sufficient if either one of the requirement is met without meeting the other requirement. However, these limits may be raised but not exceeding rupees five crores in case of capital and rupees twenty crores in case of turnover.

→ Government Company:
As per Section 2(45) of the Companies Act, 2013 Government company means any company in which not less than fifty-one per cent. Of the paid up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company as thus defined.

  • Where the Central Government is a member of a Government company, the Central Government shall cause an annual report on the working and affairs of that company to be prepared within three months of its annual general meeting and laid before both Houses of Parliament together with a copy of the audit report and comments upon or supplement to the audit report, made by the Comptroller and Auditor-General of India.
  • Where only State Government is a member of Government Company then it should prepare annual report as early as possible and lay it before house or both houses of State Legislature.
  • Where along with Central Government State Government is also member in Government Company then annual report should be laid before the House or both Houses of the State Legislature together with a copy of the audit report and the comments upon or supplement to the audit report, made by the Comptroller and Auditor General of India.

→ Foreign Company:
Foreign company is defined in Section 2(42) of the Companies Act and it means a company which is incorporated outside India and has established a place of business within India or conducts any business in India.

→ Holding Company and Subsidiary Company:
As per Section 2(46) of the Companies Act, 2013, holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.
Section 2(87) of the Companies Act, 2013 defines a subsidiary company. A company is a subsidiary of another if and only if: That other company controls the composition of its Board of Directors; or That other

  • Where the first mentioned company is an existing company in respect of which the holders of Preference shares issued before the commencement of this Act have the same voting Rights in all respect as the holders of Equity shares exercises or controls more than half of the total voting power of such company.
  • Where the first mentioned company is any other company, holds more than half in nominal value of its Equity share capitals. OR
  • The company is a subsidiary of any company which is that other company’s subsidiary.

→ Producer Company:
Section 465(1) provides that the provisions of Part IXA of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies. In view of the above provision, Producer Companies are still governed by the Companies Act, 1956.

A producer company is a body corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act.

→ Salient features of Producer Company are:

  • only certain categories of persons can participate in the ownership of such companies.
  • The members have necessarily to be ‘primary producers’, that is, persons engaged in an activity connected with, or related to, primary’ produce.
  • Any ten or more individuals, each of them being a producer, that is, any person engaged in any activity connected with primary produce, any two or more producer institutions can incorporate Producer company.
  • The companies shall be termed as limited and the liability of the members will be limited to the amount, if any, unpaid on the shares.

→ Incorporation of a Company:
Persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. Such persons are called ‘promoters’. Section 2(69) of the Companies Act, 2013 defines the term ‘promoter’. The promoter is a person who brings a company into existence. A promoter is not an agent for the company which he is forming because a company cannot have an agent before it comes into existence. At this moment a promoter stands in a fiduciary position towards the company.

  • It is the duty of promoter not to make any secret profit while incorporating a company but if it make then a promoter can be compelled by the company to hand over any secret profit which he has made without full disclosure to the company.
  • A director or officer or employee of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter.
  • Before incorporating a company, choose the type of company that best suits your company’s purposes. For a public company, the minimum number of members is seven, while it is two in the case of a private company. The promoter has to gather the required number for subscribing to the Memorandum of Association.

→ Steps for Incorporation of company:
The following are the steps for the incorporation of a company:
1. Application for Availability of Name: A company cannot be registered in the name of an existing company. It also cannot be registered in a name, which is undesirable in the opinion of the Central Government. Therefore, it is necessary for the promoters to find out the availability of the name of the company from the Registrar of Companies. The first step in the formation of a company is the approval of the name by the Registrar of Companies (ROC).

After name approval, along with the application for incorporation, the Memorandum and Articles of Association in addition to other necessary prescribed documents has to be submitted with the ROC.

2. Memorandum of Association: According to Section 2(56) of the Companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed and altered from time to time in pursuance of any previous company law or this Act. The Memorandum of Association stipulates the constitution and objects of the company.

The memorandum of association of every company must contain the following clauses:

  • The name of the company with ‘limited’ as the last word of the name in the case of a public limited company and with ‘private limited’ as the last word in the case of a private limited company.
  • The state in which the registered office of the company is to be situated.
  • The objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance
  • The liability of members is limited if the company is limited by shares or by guarantee.
  • In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount.
  • In the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company

→ Articles of Association:
Articles of Association is a document in which rules and regulations are written which governs the internal administration of a company. In other words, it is concerned with the procedural matters in the routine conduct of the affairs of the company.

In the case of a private company, articles must contain provisions which
(a) Restrict the right to transfer its shares;
(b) Limit the number of its member to fifty excluding past and the present employees of the company;
(c) Prohibit any invitation to the public to subscribe for any share in or debenture of the company.

→ Contents of Articles of Association
The articles usually contain the following matter:

  1. Number and value of shares.
  2. Allotment of shares.
  3. Calls on shares.
  4. Lien on shares.
  5. Transfer and Transmission of shares.
  6. Forfeiture of share.
  7. Alteration of capital.
  8. Share certificates.
  9. Conversion of share into stock.
  10. Voting rights and proxies.
  11. Meeting.
  12. Directors their appointment etc.
  13. Borrowing powers.
  14. Dividends and reserves.
  15. Accounts and audit.
  16. Winding up.
  17. Adoption of preliminary contracts
  18. Seal
  19. Capitalisation of reserves.
  20. Audit Committee

→ Vetting of Memorandum and Articles:
Before getting the memorandum and articles printed it is good to get them vet by ROC specially if the promoters are new. Memorandum and articles should be divided into paragraphs and numbered consecutively.

Memorandum and Articles should be signed by the subscribers with their address, description and occupation. An agent can also sign the memorandum and articles on behalf of subscribers. These should be stamped as per the stamp act of the state where the company is having its registered office. Promoters may appoint attorney who will do all the work required for the incorporation formalities of the company. They are to be appointed by giving power of attorney on a non judicial stamp paper.

→ Incorporation of Company:

  • Apply in Form No. INC. 1 for availability of name. The same shall be reserved for a period of 60 days
  • MoA shall be in respective form as prescribed in Table A, B, C, D and E of Schedule I as may be applicable
  • AOA should be followed by the tables F,G,H,I and J prescribed in SCHEDULE-1 to be signed by subscribers in Articles all the bye laws of the company corresponding to Companies Act, 2013 have to be considered. The names of First Director are mandatory to be given in AOA.
  • File with ROC Form No. INC.7 (INC 2 in case of One Person Company) along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 for registration of company.
  • The Memorandum and Articles of the company duly signed by all subscribers
  • A declaration in Form No.INC.8 by an advocate or Practicing professional (CA, CS, CA) who is engaged in
    incorporation and a person named in director as Director, Manager or Secretary, that all requirements related to incorporation has been complied with
  • Pursuant to section 7(1 )(c) of the Companies Act, 2013 and rule 15 of the Companies (Incorporation) Rules, 2014 it Requires to take affidavit from Subscribers and First Directors of Company. An affidavit in Form No. INC.9 from each subscriber and from each person named as first director in the articles is required to be taken.
  • The specimen signature of the subscriber and latest photograph duly verified by the banker or notary shall be in the prescribed Form No.INC.10.
  • Every person who is to be appointed as director before appointment furnish to the company a consent in writing to act as such in form DIR-2.
  • Form No. INC 22 should be filed mentioning the location of the registered office.
  • Director should file Declaration with ROC in Form No. INC.21 for commencement of business duly verified by Practicing Company Secretary, Chartered Accountant or Cost Accountant within 180 days of incorporation.

→ Other Documents Require to File with ROC:
(a) POA, if any, executed by any subscriber authorizing a person to sign the Memorandum and Articles on his behalf.
(b) Where subscriber is body corporate, Certified True Copy (CTC) of resolution of the Board of Directors authorizing a person to sign the Memorandum and Articles on its behalf.
(c) POA in favour of person (professional) authorizing to make any correction at the time of registration.

→ Issue of certificate of incorporation by Registrar:
Section 7(2) of the Companies Act, 2013 states that the Registrar on the basis of documents and information filed under sub-section (1) of section 7, shall register all the documents and information referred to in that subsection in the register and issue a certificate of incorporation in the prescribed form INC 21 to the effect that the proposed company is incorporated under this Act.

CS Foundation Introduction to Law Notes

CS Foundation Introduction to Law Notes

→ Law is a broad and often misapplied term tossed around various schools of philosophy, science, history, theology and law. However, while it would be very difficult to argue that the law is not an important part of everyday life, it would be slightly easier to make the point that finding out proper information about the law and legal issues can sometimes be a very difficult thing indeed. Despite the difficulty, many different legal schools of thought that have shaped our current system today have classified law into five broad classes

→ Natural School:
Among the Roman jurists, natural law designated those instincts and emotions common to man and the lower animals, such as the instinct of self-preservation and love of offspring. As per Hindu view law is a part of “dharma”. Natural Law is a moral theory of jurisprudence, which maintains that law should be based on morality and ethics. Natural Law holds that the law is based on what’s “correct.” Natural Law is “discovered” by humans through the use of reason and choosing between good and evil. Therefore, Natural Law finds its power in discovering certain universal standards in morality and ethics.

→ Positivistic:
school of jurisprudence whose advocates believe that the only legitimate sources of law are those written rules, regulations and principles that have been expressly enacted, adopted, or recognized by a government body, including administrative, executive, legislative and judicial bodies. It is often contrasted with Natural Law, Austin considered the law as commands from a sovereign that are enforced by threat of sanction. In determining ‘a sovereign’, Austin recognized it is one whom society obeys habitually.

→ Historical Definition of Law:
Savigny, the pioneer of historical school advocated that the meaning and content of existing bodies of law be analyzed through research into their historical origins and modes of transformation. As per this thought, law must be made to conform with the well-established, but unwritten, customs, traditions and experiences that have evolved over the course of history.

→ Sociological Definition of Law:
Sociological jurisprudence is a term coined by the American jurist Roscoe Pound to describe his approach to the understanding of the law. This philosophical approach to law stresses the actual social effects of legal institutions, doctrines and practices. It examines the actual effects of the law within society and the influence of social phenomena on the substantive and procedural aspects of law. This is also known as sociology of law.

→ Realist Definition of Law:

  • Oliver Wendell Holmes gave the realistic definition of law as “”The prophecies of what the courts will do. Are what I mean by the law”.
  • As per Realistic Definition Law is a mechanism that is to maintain harmony amongst people and for maintaining this harmony there are regulations which can be enforced.

Laws may be mandatory which means to be followed on compulsory basis that is it is affirmative like payment of tax, prohibitive law which means that certain acts are prohibited like not to drink and drive and permissive laws which means that it does not forbid an action but allows certain conduct of it.
1. Sources of Indian Law:
Sources of law means the origin from which rules of human conduct come into existence and derive legal force or binding characters. It also refers to the sovereign or the state from which the law derives its force or validity.

The main sources of modem Indian Law, as administered by Indian courts, may be divided into broad categories:

  1. Primary sources and,
  2. secondary sources.

The primary sources of Indian law are:
(a) customs,
(b) judicial precedents
(c) statutes
(d) personal law.

The secondary sources of Indian law are:
(a) English Law
(b) Justice, equity and good conscience.

1. Primary Sources of Indian Law:
(a) Customs or Customary Law: Custom is the oldest form of law-making. Briefly speaking, custom is a continuing course of conduct observed by the community. “The word custom is used to apply to the totality of behaviour patterns which are carried by tradition and lodged in the group as contrasted with the more random personal activities of the individual.”

Most of the Laws given in Smritis and the Commentaries have their origin from Customs. Sunnis interpreted many provisions of Law on the basis of customs.

Customs are divided into two classes:
Customs without sanction – these are non-obligatory and are observed due to pressure of public opinion. Customs having sanctions- these are the customs which are enforced by the State.

It is further divided into

  1. Legal Customs
  2. Conventional Customs

1. Legal Customs:
These are the customs that have been recognized by the Court and thus are binding by Law. It is further divided into local customs and general Customs. Local Customs are those Customs that prevail in some definite locality and these Laws are for these particular locality but sometimes the people of a locality keep moving and thus the laws related to them are also moving. Thus it can be classified into Geographical Local Customs and Personal Local Customs.

2. Conventional Customs:
These Customs are binding due to contract which is not for any fixed period and is reasonable. It is also divided into General and Local Conventional Customs.

Essentials of Valid Custom

  • Antiquity: It should be ancient. Custom should be observed for a long time.
  • Continuity: Continuity is as essential as antiquity. Discontinuity will destroy a custom.
  • Certainly: Custom must be certain and clear, not vague. One has to prove what exactly the custom is and how far it is applicable with a reasonable amount of certainty.
  • Reasonability: It should not be unreasonable. Of course, what is reasonable and unreasonable is a matter of social values.
  • It should not be opposed to public policy: A custom opposed to public policy is (yoid.)?????
  • Morality- An immoral custom is void. Like the standard of reasonability, the standard of morality may differ from time to time and from society to society.
  • It should not be opposed to law-A custom must not be opposed to statutory law.
  • Peaceful Enjoyment – Custom should be enjoyed peacefully without any dispute.

(b) Judicial Decisions or Precedents:
Precedent means some set pattern guiding the future conduct. The precedent on an issue is the collective body of judicially announced principles that a court should consider when interpreting the law. The doctrine of precedent declares that cases must be decided the same way when their materials facts are the same. Obviously it does not require that all the facts should be the same.

Characteristic Features of Doctrine of Precedents:

  • The doctrine of judicial precedent is based on stare decisis. That is the standing of previous decisions. Once a point of law has been decided in a particular case, that law must be applied in all future cases containing the same material facts.
  • Decision of High Court is binding on all subordinate courts and tribunals
  • In High Court a single judge constitutes smallest Bench.
  • A Bench of two judges is called division Bench.
  • Three or more constitute a Full Bench.
  • Supreme Court is the highest Court and its decisions are binding on all courts and Tribunals
  • Decision of one High Court is not binding on other High Court and have persuasive value only.
  • Supreme Court is not bound by its earlier decision but in practice it does not depart from its earlier decisions unless there are some special reasons.

Kinds of Precedents:
Original Precedents and Declaratory Precedents

  • An original precedent is one which creates and applies a new rule. Where there is no previous decision on a point of law that has to be decided by a court, then the decision made in that case on that point of law is an original precedent.
  • A declaratory precedent is one which is merely the application of an already existing rule of law.
  • Declaratory precedents merely follow the original precedents. Declaratory precedent is also a good source of law. However, when it is compared with original precedent. It comes second to it.

Persuasive precedents:
Persuasive precedent means precedent which a judge is not obliged to follow. Persuasive precedents assist the decision maker in determining a case. Decisions of lower courts and foreign courts can be persuasive precedents. In India decisions of High Court are Persuasive in nature in other High Court.

Absolutely Authoritative Precedents:
As per it a past decision is binding on judges whether they accept it or not. The earlier decision made by a court above the present court in the hierarchy is binding on the present court. It is a legal source of Law unlike Persuasive precedent which is historical.

Conditionally Authoritative Precedents:
A conditional authoritative precedent is one which though ordinarily binding on the court to which it is cited, but is liable to be disregarded in certain circumstances. For example the decisions of the single judge of a High Court is absolutely authoritative for the subordinate judiciary but is only conditionally authoritative, if cited before the Division bench of the High Court.

Doctrine of Stare Decisis:
A Latin term meaning “to stand by that which is decided”. The main principle of precedent is known as ‘stare decisions’ or let the decision stand. This simply means that the court should not change the law, or challenge another court’s decision unless extremely necessary.

The court must uphold prior decisions. In essence, this legal principle dictates that once a law has been determined by the appellate court to be relevant to the facts of the case, future cases will follow the same principle of law if they involve considerably identical facts. Although generally the doctrine is strictly followed but is not universally applicable.

Obiter Dicta:
Obiter Dicta literally means ‘things said by the way’. Obiter dictum remarks instead provide some explanation of how the judge interpreted the facts and legal principles to reach his or her decision. It is used for statements, remarks or observations made by a judge that are incidental or supplementary in deciding a base, upon a matter not essential to the decision. Thus, although they are included in the body of the court’s opinion, such statements do not form a necessary part of the court’s decision. They are not binding or persuasive precedent, but can provide important information and guidance for future judges.

Ratio Decidendi:
Ratio decidendi is a latin maxim meaning “the reasons for the decision”. They are the principles a judge will use when making his judgment and afterwards they will create a binding precedent which means that courts lower in the hierarchy will have to follow the same decision if a case with facts sufficiently similar is presented to them. It is any rule expressly or impliedly treated by the judge as a necessary step in reaching his conclusion.

(c) Statutes or Legislation:
Legislation refers to the preparation and enactment of laws by a legislative body through its lawmaking process. It is a law enacted by the legislative branch of a government.
The executives which have to enforce the law are sometimes given power to make laws, such subordinate legislation is known as executive or delegated legislation. Sometimes state also allow autonomous bodies like universities to make bylaws.

(d) Personal Law:
Part of law that deals with matters pertaining to a person and his or her family. Sometimes court has to use personal laws in certain cases when the cases do not come under any statutory law. In case of Hindus personal Law is found in SHRUTI which includes four Vedas. The three main Smritis are the code of Manu, Yajnavalkya, Narada.

On the basis of these laws, matters related to marriage, succession, etc. Related to Hindus are decided.
In case of Muslims the laws that govern their personal laws are found in Holy Kuran. These laws decide about the marriage, divorce related matters of Muslims.

→ Secondary source of Indian law:
(a) Justice, Equity and Good Conscience
In India, the doctrine of ‘justice, equity and good conscience’ was introduced, for the first time, in the presidency of Bengal, in the year 1780 when the laws are silent about any matter then they should be decided on the basis of justice, equity and conscience, we can say that it is the ‘will of the people’ that is the prima facie governing factor and henceforth to say that principle of natural justice in some sense of the terms define the sense justice because they range so close to human conscience.

(b) Sources of English law:
A. Common Law:

  • The common law originates from the original laws and legal customs of England.
  • These original laws slowly merged and developed into a single system of law referred to as ‘the common law’.
  • The common law is a judge-made system of law because it was the judges who over many centuries were responsible for merging and developing the original laws and legal customs into this single system of law.
  • Today, the term common law is regarded as including all case law.

B. Principle of equity:

  • Equity means “fairness” in ordinary language.
  • As a legal term it began as a set of special rules founded and administered by the old Court of Chancery.
  • It was created because the original common law often failed to ensure fairness or justice and people would appeal to the King’s Chancellor who as “keeper of the King’s conscience” could help.
  • The Chancellor dealt with such appeals in the Court of Chancery. This court decided cases in the light of justice and fairness rather than the strict letter of the law.

C. Law Merchant:

  • Principles and rules, drawn chiefly from custom, determining the rights and obligations of commercial transactions.
  • A body of rules for regulating the relations of merchants engaged in trade, consisting of certain principles of equity and usages of trade which general convenience and a common sense of justice have established to regulate the dealings of merchants in all the commercial countries of the civilized world.

D. Statute law:

  • Statutes are the laws derived from Legislation.
  • Legislation over-rides all common law and equity.
  • Although legislation is the main source of new law today, but even today legislation forms a comparatively small part of the bulk of our laws and the common law still remains the basis of our legal system.

2. Mercantile law or Commercial law:
Mercantile Law is known as commercial law or business law”. It is a branch of law which governs and regulates trade and commerce. At the beginning it was not recognized as a law but later on it was recognized and accepted by the common law. The traders established their own tribunals consisting of merchants themselves. The rules pronounced by the tribunal, became the law popularly known as the law merchant which was recognized by the common law.

3. Sources of Indian Mercantile law:
Mercantile laws in India is taken from the English law. So it follows the English laws to a considerable extent with some modifications and reservations to suite with the Indian conditions and practices.

Following are the main source of the Indian mercantile laws:
1. English Mercantile Law:
English laws which developed and come into existence through the customs and usage of traders and merchants in England is the main source of the Indian Mercantile laws. It is unwritten and are based on customs, precedents and usages. The law of contracts which is a part of Common law in England is one of the most important part of Mercantile law. Although few changes were made in the mercantile law of India as per the trade customs of India but still the major part of it comes from English Merchantile law.

2. Indian Statute Law:
Another main source of Indian Mercantile law is the Acts passed by the Indian Legislature. Indian Contract Act, 1872, The Sale of Goods Act, 1930, The negotiable Instrument Act 1881, The Companies Act, 1956 are some of the Acts passed by the Indian Legislature.

3. Judicial Decisions:
Another important source of mercantile laws are the Judicial decisions of the Courts. Disputes settled by the courts earlier have persuasive and guiding value. The judge has to decide the case, where there is the law is silent on a point it is done according to the principle of equity, justice and good conscience. For interpreting the Indian Statutes and deciding various cases, English court decisions are frequently referred as precedents.

4. Customs and Usages:
Another important source of Indian Mercantile laws are the customs and usages of that particular trade currently followed by the traders. These practices play the vital role in developing the mercantile law. It is important that these customs or usages must be reasonable, widely known, constant and must not be inconsistent with the law. The Indian Contract Act accept this practice by providing the clause/wording that “nothing contained therein shall affect any usage or custom of trade.

Some of the Legal terms and their meanings:

  • ab initio – from the beginning
  • ad valorem – According to value
  • bona fide – in good faith
  • de facto – in fact
  • de jure – in law
  • in personam – against the person
  • inter alia – amongst other things
  • intra vires – within the powers
  • ipso facto – by the mere fact
  • locus standi – signifies the right to be heard
  • mutatis mutandis- with the necessary changes in points of detail, with such change as may be necessary
  • ratio decidendi — reasons for deciding
  • stare decisis – to stand by things decided
  • sub judice – before a judge or court
  • ultra vires – beyond one ’ s power

→ Case Citation:
Case Name. Usually, the first name identifies who is bringing the court action and the second name is the person against whom action is being brought

  • 204 – Volume Number
  • AIR – Name of reporter
  • 209 – Beginning page
  • 1980 – Year of decision
  • Roy – Person who is bringing the court action
  • Amit – Person against whom action is being brought

→ Names of some reporters of India:

  • AIR — All India Reports
  • SCC — Supreme Court Cases
  • CLJ — Company Law Journal
  • LR — Labour Reports
  • ITR — Income tax reports

CS Foundation Business Functions Notes

CS Foundation Business Functions Notes

→ Business Functions:
A process or operation that is performed routinely to carry out a part of the mission of an organization. Once a business has been properly established and has taken on a reasonable number of employees, the organisational structure will involve the business being splits into number of different departments, each of which has a specific job or task to do – these are called ‘functions’. Business functions describe in greater detail the specific activity that a firm performs in order to produce its product, provide its service, or otherwise achieve its objective.
Business process is also called Business Function. These processes are grouped into core business processes and support business processes. Core business processes relate most directly to the basic business of the firm, with operations representing the key industry activity of the company. Support business processes facilitate core business processes.

→ Strategy:
Strategy has been derived from the Greek word “Strategies” which means “the art of the general “Primarily strategy term was associated with war. As for business strategy, Johnson and Scholes (define strategy as follows “Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations”.

In other words, strategy is about

  • Where is the business trying to get to in the long-term direction.
  • How can the business perform better than the competition in those markets?
  • Which markets should a business compete in and what kind of activities are involved in such markets?
  • What external, environmental factors affect the business’s ability to compete?
  • What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete?
  • What management has to do to handle all the circumstances that affect the business?

→ Strategy at Different Levels of a Business
Strategies exist at several levels in any organisation-ranging from the overall business (or group of businesses) through to individuals working in it.

Corporate Strategy: is concerned with the selection of business in which company should compete. It is a crucial level since it is a deciding factor for investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a “mission statement”.

Business Unit Strategy: Business unit strategies are essentially positioning strategies whereby businesses tend to secure for themselves an identity and position in the market. The aim here is to increase the business value for the corporate and stakeholders by increasing the brand awareness and value perceived by the customers.

Operational Strategy: The final level is both the most difficult and the most exciting, because it involves the way things actually get done. Operational strategies can be short-term to medium-term, ranging from a few months to several years to execute. There can be dozens or even hundreds going on at once.

→ Planning:
Planning is deciding in advance what is to be done, how it is to be done and when it is to be done. It involves projecting the future course of action for the business as a whole and also for different sections within it. Planning is an intellectual process and signifies the use of a rational approach to the solution of a problem. In a more concrete sense, the planning process comprises determination and laying down of objectives, policies, procedures, rules, programmes, budgets and strategies.

Planning is the important and primary function of management. It sets all other functions into action. It is the beginning of process of management. A manager must plan before coming in action. It is concerned in deciding in advance what to do? How to do? When to do? Why to do? Where to do? And who to do?

→ Planning is

  • thinking about organization’s prosperity and helps analysis of information.
  • involves a predetermined course of action.
  • concerned with future and it helps the management to develop strategy
  • a problem of choosing from the alternative courses of action
  • involves both decision-making and problem solving.

→ Budgetory control:
It is a Methodical control of an organization’s operations through establishment of standards and targets regarding income and expenditure and a continuous monitoring and adjustment of performance against them.
Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as: “The establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision”.

A budget is a forward financial plan. It provides a prediction of expected flows of money in and out of the firm in the immediate future. Normally, a budget will be prepared in advance of a period of time, usually a year but could be on a monthly or quarterly basis. Budgets are plans and budgetary control are the comparisons of plans with the actual performance.

Advantages of budgeting and budgetary control:
There are a number of advantages to budgeting and budgetary control:

  • Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system.
  • Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.
  • Promotes coordination and communication.
  • Clearly defines areas of responsibility.
  • Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.
  • Provides a basis for performance appraisal (variance analysis).
  • A budget is basically a yardstick against which actual performance is measured and assessed.
  • Control is provided by comparisons of actual results against budget plan.
  • Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.
  • Enables remedial action to be taken as variances emerge.
  • Motivates employees by participating in the setting of budgets.
  • Improves the allocation of scarce resources.
  • Economises management time by using the management by exception principle.

→ Research and Development (R and D):
Research and development is one of the means by which business can experience future growth by developing new products or processes to improve and expand their operations. Research and development strategies allow companies to create strong marketing campaigns and advertising strategies. The two work together very well. At its core, research and development is about innovation, about offering consumers something they have never seen before.

→ Location of Business:
The location of a business is the place where it is situated. There are a number of factors that need to be considered in choosing a location for a business. One of the earliest decisions any entrepreneur has to make is where to locate his or her business. In order to do this, he or she has to make a careful assessment of costs. The ideal location would be one where costs are minimised. The entrepreneur would need to look at the benefits which each area had to offer as well as any government help which might be available.

The main factors affecting location are:
(a) Raw materials
If the raw materials are bulky and expensive to transport it will clearly be in the entrepreneur’s interest to locate near to them

(b) Market
The nearness of the market and the cost of delivering the goods are likely to be important factors.

(c) Transport costs:
The two major influences are the pull of the market and the pull of the raw materials and these are determined by whether or not the industry is bulk-increasing or bulk-decreasing.

(d) Land
Land costs vary considerably nationally and some firms, e.g. wholesalers, might need a large square-footage. They might, therefore, be influenced by the cheaper rents and property prices found in some areas.

(e) Labour
The availability of labour might well attract firms to an area, particularly if that labour force has the skills they require.

(f) Safety
Some industries have to locate their premises well away from high density population levels and their choice of location is limited.

(g) Waste disposal
Certain industries produce considerable waste and the costs associated with the disposal of this might affect their location.

(h) Government
It is advantageous to put certain business at some location because of advantages and special favours like tax free zone etc. are provided by Government for the development of business at that particular place.

(i) Overseas location decisions
Setting up a business overseas involves a number of challenges including Cultural and language barriers, Legal issues, Exchange rate

→ Supply Chain Management.
The concept of Supply Chain Management is based on two core ideas. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to, collectively as the supply chain. Supply chain management has emerged as a powerful managerial concept for delivering value to the customer.

A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters warehouses, retailers and customers themselves.

Companies in any supply chain must make decisions individually and collectively regarding their actions. Supply chain management flow can be divided into

  1. Production: What products does the market want? How much of which products should be produced and by when? This activity includes the creation of master production schedules that take into account plant capacities, workload balancing, quality control and equipment maintenance.
  2. Information: How much data should be collected and how much information should be shared? Timely and accurate information holds the promise of better coordination and better decision-making. With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it.
  3. Finance: The financial flow consists of credit terms, payment schedules and consignment and title ownership arrangements.

→ The Objective of a Supply Chain:

  • The objective of every supply chain is to maximize the overall value generated.
  • The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request.

→ Production Management
“Production management deals with the decision-making related to production process of that the resulting goods and service is produced according to specifications in the amounts and at the scheduled demanded and at minimum cost” – Elwood Butta. ’

Job Method: In this system Products are manufactured to meet the requirements of a specific order. The quality involved is small and the manufacturing of the product will take place as per the specifications given by the customer. It is used when a product is produced with the labour of one or few workers and is scarcely used for bulk and large scale production. Thus this process is always non-standardised.

Batch Production: Batch Production is the manufacture of number of identical products either to meet the specific order or to satisfy the demand. When the Production of plant and equipment is terminated, the plant and equipment can be used for producing similar products This technique is probably the most commonly used method for organizing manufacture and promotes specialist labour, as very often batch production involves a small number of persons.

Flow Production: Flow production (Process Production) is also a very common method of production. Flow production is when the product is built up through many segregated stages; the product is built upon at each stage and then passed directly to the next stage where it is built upon again. The production method is financially the most efficient and effective because there is less of a need for skilled workers.

Job Production Method Batch Production Method:
Job shop production are This production is characterized by the manufacture of limited number of one or few quantity of products produced at regular products intervals.

→ Business Finance:
Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Business finance refers to the funds and monetary support required by an entrepreneur for carrying out the various activities relating to his/her business organisation. It is needed at every stage of a business life cycle.

→ Financial Management:
According to J. L. Massie, “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”

According to J. F. Bradley, “Financial management is the area of business management devoted to the judicious use of capital and careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”

Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. Businesses has many areas to manage and to keep things working smoothly. Finance is just one of these areas. Because finances impact virtually everything else the company does, it’s probably the most important thing a manager must address.

Main features of financial management:

  • Management should have Analytical Thinking
  • Basis of Managerial Decisions should be specified
  • It should be a Continuous Process
  • Maintaining Balance between Risk and Profitability
  • Coordination between various Process of business
  • It should be of Centralized Nature

→ Financial Management Decisions:
Managers have to take financial decisions to make use of finances in a best proper manner. There are three types of financial management decisions
1. Capital budgeting is the process of planning and managing a firm’s long-term investments. The key to capital budgeting is size, timing and risk of future cash flows is the essence of capital budgeting. Investment decisions can be short-term or long-term.
Working Capital Management refers to a firm’s short-term assets, such as inventory and its short-term liabilities, such as money owed to suppliers. This is more of a day to day activity.
Capital Structure refers to the specific mixture of long-term debt and equity the firm uses to finance its operations.
Decisions related to capital once taken cannot be reversed thus such decisions are to be taken with high care

2. Financing decisions relate to raising fund from long-term as well as short-term sources. Financial decisions comprise two decisions financial planning and capital structure decisions. Financial planning involves to estimate sources and application of funds whereas capital structure decisions involves the source of funding.

3. Distribution of profits relates to division of profit amongst reinvestment and distributing it as dividend. Thus it is to be planned by management how much of the profit is to be retained by the company for reinvestment and how much to be distributed amongst investors.

→ Financial Planning:
It is a step-by-step process to ensure that you plan and invest in a way so” that you are constantly in sight of your goals and the effort that is required to achieve them. It can also be defined as long-term profit planning aimed at generating greater return on assets, growth in market share and at solving foreseeable problems.

→ Marketing Management:
Market comprises of buyers, sellers and all those who are concerned with the sale and purchase of goods and Marketing Management communicates the best strategic thinking to meet the decision-making needs of knowledgeable executives.

The old marketing concept focuses on selling what is being produced, while new marketing concentrates on producing what can be sold or consumed. Traditional marketing has a very outward orientation, while new marketing is much more inwardly focused. I refer to new marketing as turning traditional marketing on its ear.

→ Marketing Mix:
Marketing involves a number of activities. To begin with, an organisation may decide on its target group of customers to be served. Once the target group is decided, the product is to be placed in the market by providing the appropriate product, price, distribution and promotional efforts. These are to be combined or mixed in an appropriate proportion so as to achieve the marketing goal. Such mix is known as ‘Marketing Mix’. The 4Ps is one way – probably the best-known way of defining the marketing mix. The 4Ps are Product (or Service) Place Price Promotion.

→ Elements of the Marketing Mix by Borden
1. Product Planning – policies and procedures relating to:
(a) Product lines to be offered: qualities, design, etc.
(b) Markets to sell: whom, where, when and in what quantity.
(c) New product policy: research and development program.

2. Pricing – policies and procedures relating to:
(a) Price level to adopt.
(b) Specific prices to adopt (odd-even, etc.).
(c) Price policy, e.g., one-price or varying price, price maintenance, use of list prices, etc.
(d) Margins to adopt – for company; for the trade.

3. Branding – policies and procedures relating to:
(a) Selection of trademarks.
(b) Brand policy-individualized or family brand.
(c) Sale under private label or unbranded.

4. Channels of Distribution – policies and procedures relating to:
(a) Channels to use between plant and consumer.
(b) Degree of selectivity among wholesalers and retailers.
(c) Efforts to gain the cooperation of the trade.

5. Personal Selling – policies and procedures relating to:
(a) Burden to be (placed on personal selling and the methods to be employed in:
(a) Manufacturer’s organization.
(b) Wholesale segment of the trade.
(c) Retail segment of the trade.

6. Advertising policies and procedures relating to: Amount to spend – i.e., the burden to be placed on advertising.
(a) Copy platform to adopt:
(b) Product image desired.
(c) Corporate image desired.
(d) Mix of advertising: to the trade; through the trade; to consumers.

7. Promotions – policies and procedures relating to:
(a) Burden to place on special selling plans or devices directed at or through the trade.
(b) Form of these devices for consumer promotions, for trade promotions.

8. Packaging – policies and procedures relating to:
(a) Formulation of package and label.

9. Display – policies and procedures relating to:
(a) Burden to be put on display to help effect sale.
(b) Methods to adopt to secure display.

10. Servicing – policies and procedures relating to:
Providing service needed.

11. Physical Handling – policies and procedures relating to:
(a) Warehousing.
(b) Transportation.
(c) Inventories.

12. Fact-Finding and Analysis – policies and procedures relating to:
Securing, analysis and use of facts in marketing operations.

→ Human Resources
Human Resources is the group of individuals who make up the workforce of an organization. Human Resource Management (HRM) is the function within an organization that focuses on recruitment of, management of and providing direction for the people who work in the organization. HRM can also be performed by line managers.

→ Objectives of Management
The objectives of management are narrated as under.
1. Organisational objectives: Management is expected to work for the achievement of the objectives of the particular organisation in which it exists. Organisational objectives include:
(a) Reasonable profits so as to give a fair return on the capital invested in business
(b) Survival and solvency of the business, i.e., continuity.
(c) Growth and expansion of the enterprise
(d) Improving the goodwill or reputation of the enterprise.

2. Personal objectives: An organisation consists of several persons who have their own objectives. These objectives are as follows:
(a) Fair remuneration for work performed
(b) Reasonable working conditions
(c) Opportunities for training and development
(d) Participation in management and prosperity of the enterprise
(e) Reasonable security of service.

3. Social objectives: Management is not only a representative of the owners and workers, but is also responsible to the various groups outside the organisation. It is expected to fulfil the objectives of the society which are given below:
(a) Quality of goods and services at fair price to consumers.
(b) Honest and prompt payment of taxes to the Government.
(c) Conservation of environment and natural resources.
(d) Fair dealings with suppliers, dealers and competitors.
(e) Preservation of ethical values of the society.

→ Human Resource Management: Scope
The scope of HRM is very wide:

  1. Personnel aspect: This is concerned with manpower planning, recruitment, selection, placement, promotion, training and development, remuneration, incentives etc.
  2. Industrial relations aspect: This covers union-management relations, collective bargaining, grievance and disciplinary procedures etc.
  3. Welfare aspect: It deals with working conditions and amenities such as canteens, creches, rest and lunch rooms, housing, transport, medical assistance, education, health and safety, etc.

Other Various Services that are the part of organisation are:
Secretarial Services: There are several regulatory/secretarial functions to be adopted by a company in accordance with the statutory legislations. Some of the important secretarial services are conducting Board meetings, conducting annual general meetings, representing before various government organisations.

Legal Services:
Law department is responsible for providing legal services and advice to the company, its divisions and employees. The department office faces a great number of different legal matters. These matters include: business development, contract management, real estate transactions, customer claims against the company for product damages and defects, litigation, employment law, sales and leases matters, debt collection, bankruptcy and much more.

All these activities create the workflow of Legal department. The main functions of the legal department are Providing legal advice and guidance, Prosecution of cases in courts and litigation management, Documentation preparation and drafting. In large MNC’S the legal department may be too big to accommodate lawyers from various countries to tackle the issues of business in all the countries where the company is working.

Accounting:
The finance department of a business takes responsibility for organising the financial and accounting affairs including the preparation and presentation of appropriate accounts and the provision of financial information for managers. The main areas covered by the financial department include preparation of balance sheet, providing management advice etc.

Information and Technology Department:
Information Technology is the use of computers and software to manage information. The Information Technology department of a large company would be responsible for storing information, protecting information, processing the information, transmitting the information as necessary and later retrieving information as necessary.

Administration Department:
It is the management of the Business. The main functions of an administration department of an organization are Organizing any deliveries or suppliers coming into the offices for the day for any reason, To process paperwork for external suppliers, Looking after the internal communications so that all members of the organization are aware of what is going on within the organization.