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AEREN FOUNDATIONS

Maharashtra Govt. Reg. No.: F-11724

AN ISO 9001 : 2008 CERTIFIED INTERNATIONAL B-SCHOOL


MARKS: 80
COURSES: GDM

SUB: CORPORATE LAW


N.B.: 1)

Attempt any Twelve Questions

2) Last two Questions are compulsory


Q.1.

In the following statements only one is correct statement. Explain

Briefly?

(5)

Q.2.

i)

An invitation to negotiate is a good offer.

ii)

A quasi-contract is not a contract at all.

iii)

An agreement to agree is a valid contract.

A ship-owner agreed to carry to cargo of sugar belonging to A from Constanza to


Busrah. He knew that there was a sugar market in Busrah and that A was a
sugar merchant, but did not know that he intended to sell the cargo, immediately
on its arrival. Owning to Shipments default, the voyage was delayed and sugar
fetched a lower price than it would have done had it arrived on time. A claimed
compensation for the full loss suffered by him because of the delay. Give your
decision. Explain Briefly?

Q.3.

(5)

The proprietors of a medical preparation called the Carbolic Smoke Ball


published in several newspapers the following advertisement:-

1000 reward will be paid by the Carbolic Smoke Ball Co. to any person who
contracts the increasing epidemic influenza after having used the Smoke Ball
three times daily for two weeks according to printed directions supplied with each
ball. 1000 is deposited with the Alliance Bank showing our sincerity in the
matter.
On the faith in this advertisement, the plaintiff bought a Smoke Ball and used it
as directed. She was attacked by influenza. She sued the company for the reward.
Will she succeed? Explain Briefly

(5)

Solution:
In Carbolic Smoke Ball Co.s case (supra), the patent-medicine company
advertised that it would give a reward of 100 to anyone who contracted influenza
after using the smoke balls of the company for a certain period according to the
printed directions. Mrs. Carlill purchased the advertised smoke ball and
contracted influenza in spite of using the smoke ball according to the printed
instructions. She claimed the reward of 100. The claim was resisted by the
company on the ground that offer was not made to her and that in any case she
had not communicated her acceptance of the offer. She filed a suit for the recovery
of the reward.

Held: She could recover the reward as she had accepted the offer by complying
with the terms of the offer.

The general offer creates for the offerer liability in favour of any person who
happens to fulfill the conditions of the offer. It is not at all necessary for the
offeree to be known to the offerer at the time when the offer is made. He may be a
stranger, but by complying with the conditions of the offer, he is deemed to have
accepted the offer.

Q.4.

Fazal consigned four cases of Chinese crackers at Kanpur to be carried to


Allahabad on the 30th May, 1987.

He intended to sell them at the Shabarat

festival of 5th June 1987. The railway discovered that the consignment could not
be sent by passenger train and asked Fazal either to remove them or authorize
their dispatch by goods train.

He took no action and the goods arrived at

Allahabad a month after they were booked.


Fazal filed a suit against Railways for damages due to late delivery of the goods
which deprived him of the special profits at the festival sale. Decide & explain
briefly?

(5)

Solution
Fazal shall not be entitled to any special damages since railways were not informed of the
special circumstances. Moreover, Railway informed Fazal of the changed circumstances and
his failure to remove the goods as per Railways request may be deemed to be an implied
approval for their transportation by goods train

Q.5.

Lifeoy Soap company advertised that it would give a reward of Rs. 2000 who
contracted skin disease after using the Lifeoy soap of the company for a certain
period according to the printed directions. Mrs. Jacob purchased the advertised
Lifeboy and contracted skin disease inspite of using this soap according to the
printed instructions. She claimed reward of Rs. 2000. The claim is resisted by
the company on the ground that offer was not made to her and that in any case
she had not communicated her acceptance of the offer.

Decide whether Mrs.

Jacob can claim the reward or not. Give reasons. Explain briefly?

(5)

Solution
Mrs. Jacob can claim the reward. General offer may be accepted by anybody
[Carlill vs. Carbolic Smoke Ball Co.].

Q.6.

In each set of statements, only one is correct. State the correct statements &
Explain briefly?

a)

i)

A bailee has a general lien on the goods bailed.

ii)

The ownership of goods pawned passes to the pawnee.

iii)

A gratuitous bailment can be terminated by the bailor even


before the stated time.

b)

i)

A substituted agent is as good an agent of the agent as a subagent.

Q.7.

ii)

An ostensible agency is as effective as an express agency.

iii)

A principal can always revoke an agents authority. (5)

A, an unpaid seller, sends goods to B by railway. B becomes insolvent


And A sends a telegram to Railway authorities not to deliver the goods to B. B.
goes to the Parcel office of Railway Yard and by presenting R. R.

(Railway

Receipt) takes delivery of the goods and starts putting them in the cart.
Meanwhile the Station Master comes running with the telegram in hand and
takes possession of the goods from B. Discuss the rights of A and B to the goods
in possession of Railway authorities. (5)

Q.8.

X needs Rs. 10,000 but cannot raise this amount because his credit is not good
enough. Y whose credit is good accommodates. X by giving him a pronote made
out in favour of X, though Y owes no money to X. X endorses the pronote to Z for
value received. Z who is holder in due course the pronote to Z for value received.
Z who is holder in due course demands payment from Y. Can refuse and plead
the arrangement between him and X Explain briefly?

(5)

Solution:
According to Section 120 of the Negotiable Instruments Act, in a suit by holder in due course,
maker of a promissory note and no drawer of a bill of exchange or cheque are not permitted to

deny the validity of the instrument, as originally made or drawn. Thus, Z is entitled to receive
payment on the instrument

Q.9.

Will C has the right of further negotiation in the following cases: (B signs the
endorsements)

Explain briefly?

i)

Pay C for my use

ii)

Pay C)

iv)

Pay C or order for the account of B

(5)

Q.10. A promissory note was made without mentioning any time for payment. The
holder added the words on demand on the face of the instrument. State whether
it amounted to material alteration and explain the effect of such alteration.
Explain briefly?

(5)

Answer:
This is not a material alteration as a Promissory Note where no date of payment
is specified will be treated as payable on demand. Hence adding the words on
demand does not alter the business effect of the instrument.

Q.11. State whether the following instruments are valid promissory notes:
i)

I promise to pay Rs. 5000 to B on the dearth of Bs uncle provided that D


in his will gives me a legacy sufficient for the promise of payment of the
said sum.

ii)

I hereby acknowledge that I owe X Rs. 5,000 on account of rent due and I
agree that the said sum will be paid be me in regular installments.

iii)

I acknowledge myself indebted to B in Rs. 5000 to be paid on demand for


value received.

(5)

Solution
(i) It is not a promissory note because it does not contain an unconditional promise, the amount being
payable only if uncle leaves sufficient legacy.
(ii) Again, it is not a valid promissory note because the amount of monthly installment is not
specified.
(iii) It is a valid promissory note since it fulfils all the requirements of a promissory note as per
Section 4 of the Negotiable Instruments Act.
Q.12. A Payee holder of a bill of exchange. He endorses it in blank and delivers it to B.
B endorses in full to C or order. C without endorsement transfers the bill to D.
State giving reasons whether D as bearer of the bill of exchange is entitled to
recover the payment from A or B or C. Explain briefly?

(5)

Solution
Under Section 55 of the Negotiable Instrument Act, if an instrument after having
been endorsed in blank is endorsed in full, the endorsee in full does not incur the
liability of an endorser, so the amount of it cannot be claimed from him. It means
if an endorsement in blank is followed by an endorsement in full, the instrument
still remains payable to bear and negotiable by delivery as against all parties
prior to the endorse in full, though the endorser in full is only liable to a holder
who made title directly through his endorsement and the person deriving title
through such holder. In the ensuing case, in view of section 55, D as the bearer of
the instrument can receive payment of sue the drawer, acceptor, or A who
endorsed the bill in blank; but he cannot sue B or C. But there is an exception to
the above rule contained in Section 55. The person to whom it has been endorsed
in full, or anyone who derives little through him, can claim the amount from the
endorser in full.

Q.13. Write a short note on the Doctrine of Indoor Management? Explain briefly?

(5)

Solution
The doctrine of constructive notice throws a burden on people entering into
contracts with the company that they are presumed to have read the documents,
though in fact, they might not have read them. On the other hand, the doctrine of
indoor management allows all those who deal with the company to assume that
the provisions of the articles have been observed by the officers of the company. In
other words, they are not bound to enquire into the regularity of internal
proceedings. An outsider is not expected to see that the company carries out its
internal regulations.
Example:

The directors of a company were authorised by the articles to borrow on bond such sums of money as
should from time to time, by a resolution of the company in general meeting, be authorised to be
borrowed. The directors gave a bond to T without the authority of any such resolution. The question
arose whether the company was liable on the bond.
Held: The company was liable on the bond, as T was entitled to assume that the resolution of the
company in general meeting had been passed [The Royal British Bank vs Turquand (1856)6 E & B
327].
Certain observations of Indian Courts on this doctrine may be worth noting:
Even where the directors exceed their powers or infringe the restrictions imposed on them, the
company may be bound; for an outsider dealing with the company is only bound to see that the
transaction is apparently regular and consistent with the articles [Dewan Singh vs Minerva Films Ltd.
(1959) 29 Comp.Cas. 263 (Punj)].
Though strangers to a company have constructive notice of the memorandum and articles, they are
entitled to assume that the provisions therein contained have been complied with by the officers of
the company [Sree Meenakshi Mills Ltd. vs Callianjee & Sons (1935) 5 Comp. Cas. 103 (Mad.)].
A third party dealing with a director or a manager in good faith is protected even if director/manager
exercises his power irregularly [Ram Baran Singh vs Muffasil Bank Ltd. AIR 1925 All. 206].
It would hardly be conducive to facility of business if outsiders were compelled to search the register
and find for themselves whether a person permitted to act as a director of the company for some
length of time was also its director de jure [D. Pudumjee & Co. vs N.H. Moos AIR 1976 Bom. 28].
Lenders to a company should acquaint themselves with memorandum and articles, but they cannot be
expected to remark upon an investigation as to legality, propriety and regularity of acts of directors
[Official Liquidator, Manasube & Co. (P) Ltd. vs Commissioner of Police (1968) 38 Comp. Cas. 884
(Med.)].

Q.14. The shareholders at an annual general meeting passed a resolution for the
payment of dividend at a rate higher than that recommended by the Board of
Directors. Examine the validity of the resolution. Explain briefly?

(5)

Solution
Dividend: According to Regulation 85 of Table A of the Companies Act, 1956, a company in general
meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board
of Directors of the company. The shareholders at an Annual General Meeting may reduce the amount
of dividend recommended by the Board of Directors of the company, but they cannot increase it.
Hence the resolution passed at the Annual General Meeting for payment of dividend at a rate higher
than that recommended by the Board of Directors is not valid.
Revocation of declared dividend:
Ordinarily, a dividend once declared at Annual General Meeting, cannot be revoked, except, with the
consent of the shareholders, for a declaration of dividend creates a debt to the shareholders in whose
favour it is declared. If a dividend is declared and the amount is paid or credited to the shareholders
as dividend, the character of the credit or payment as dividend cannot be altered by a subsequent
resolution (Kishanchand Chellaram VCIT (1962) 32 Company cases 1046,105C ( SC).
But where a dividend has been illegally declared, or where, due to events intervening after the
declaration, such as fire destroying the companys property, or the outbreak of a war, or the
imposition of new heavy tax burden or other causes diminishing the assets of the company makes it
advisable to conserve the remaining assets, the Board of Directors will be justified in revoking the
declaration of dividend.

Q.15. In a prospectus issued by a company the Managing Director stated that the
company had paid dividend every year during 1921 27, which was a fact.
However, the company had sustained losses during the relevant period and had
paid dividends out of secret reserves accumulated in the past.

Examine the

consequences of the observation made by the Managing Director. Explain briefly?


(5)

Q.16. In a prospectus issued by a company the Managing Director stated that the
company had paid dividend every year during 1921-27, which was a fact.
However, the company had sustained losses during the relevant period and had

dividends out of secret reserves accumulated in the past.

Examine the

consequences of the observation made by the Managing Director. Explain briefly?


(5)

Q.17. A buys from B 400 shares in a company on the faith of a share certificate issued
by the company. A tender to the company a transfer deed duly executed together
with Bs share certificate. The company discovers that the certificate in the name
of B has been fraudulently obtained and refuses to register the transfer. Advise A.
Explain briefly? (5)

Q.18. A insured his house against fire. Later while insure, A killed his wife, severely
injured his only son, set fire to the house and died in the fire. The son survived
and sued the insurer for the fire loss, advice the insurer. Explain briefly?

(5)

Solution
Because the fire was set deliberately they won't cover the cost. It was not accidental and as the son
did not insure himself, the insurance company will not pay out and I believe they won't because it
wasnt a tenant, therefore, they wouldn't cover any loss of property or life. But if the son had his own
personal insurance to cover himself for any injury, loss of property, they would have paid out. I thinks
its because he lives in the same house and a relative, and the fire was arson, they will not pay, then
again it depends on the insurance policy.

Q.19. a) Satrang Singh admitted his only infant son in a private nursing home. As a
result of strong dose of medicine administered by the nursing attendant, the child
has become mentally retarded. Satrang Singh wants to make a complaint to the
District Forum under the Consumer Protection Act, 1986 seeking relief by way of
compensation on the ground that there was deficiency in service by the nursing
home. Does his complaint give rise to a consumer dispute? Who is the consumer
in the instant case? Explain

briefly?

b)

Smart booked a motor vehicle through one of the dealers.

He was informed

subsequently that the procedure for purchasing the motor vehicle had changed
and was called upon to make further payment to continue the booking before
delivery. On being aggrieved, Smart filed a complaint with the State Commission
under the Consumer Protection Act, 1986. Will he succeed? Explain briefly?
c)

Brittle and Company, a small-scale industry, sought nursing and financing


facilities from its bankers by means of grant of further advances and adequate
margin money in anticipation of good demand for its products.

In failing to

obtain this and having become sick, it proceeds against its bankers under the
Consumer Protection Act, 1986, Will it succeed? Explain briefly?
(5)

Q.20. X who was working as a truck driver had taken a general insurance policy to
cover the risk of injuries for a period from 1.11.1998 to 30.11.1999. He renewed
the policy for a further period of one year on 10.11.1999. On the same day, he met
with an accident and suffered multiple injuries including fractures. X submitted
the claim along with documents to the insurance company. The insurance
company repudiated the claim on the ground that the premium for the renewed
policy was received in the office only at 2.30 p.m. on 10.11.1999, while the
accident had taken place at 10.00 a.m. on that day and hence there was no policy
at the time of accident.

Will X succeed if he files a complaint against the

insurance company for this claim? Explain briefly?


(5)

Q.21. Avinash booked his goods with Superfast Freight Carriers at Delhi for being
carried to Ferozabad. The goods receipt note mentioned that all the disputes
would be subject to jurisdiction of the Mumbai Court.

Avinash lodged a

complaint for certain deficiency in service against the transporter in the District
Forum at Delhi. Superfast Carriers contested that District Forum at Delhi had
no jurisdiction to entertain the complaint as the head office of the transporter
was at Mumbai and the jurisdiction has been clearly stated in the goods receipt
not. Is the contention of the transporter tenable? Explain briefly?

(5)

Q.22. With reference to the provisions of the Consumer Protection Act, 1986, decide the
following giving reasons in support of your answer.
i)

Sukh Dukh Ltd. dispatched certain consignments of goods by road through


Fastrack Roadways Ltd. The goods were unloaded and stored in a godown
enroute on the suggestion of consignee. A fire broke out in the neighbouring
godown spread to the godown and goods were destroyed. The Fastrack Roadways
Ltd. claimed that there was neither negligence nor deficiency in service on their
part and goods were being carried at Owner risk and since no special premium
was paid, they were not responsible for the loss caused by fire. Whether Fastrack
Roadways Ltd. is liable to pay damages to consignor?

ii)

Life Insurance Corporation (LIC) formulated a scheme called salary saving


scheme under which employees of an organisation could buy an insurance policy.
Premium due on each policy was collected by the employer from the salary of the
employees nor did it issue any premium notice. When the widow of the deceased
employee made a claim to LIC on the death of her husband, the LIC repudiated
the claim on the ground that four installments of premium had not been paid.
The widow was approached the consumer forum for redressal. Is the LIC liable
for deficiency in service? Explain?

iii)

Raman booked a ticket from Delhi to New York by Lufthansa Airlines.

The

airport authorities in New Delhi did not find any fault in his visa and other
documents. However, at Frankfurt airport authorities instituted proceedings of
verification because of which Raman missed his flight to New York.

After

necessary verification, Raman was able to reach New York by the next flight. The
airline authorities tendered apology to Raman for the inconvenience caused to
him and also paid as goodwill gesture a sum of Rs. 5,000. Raman intends to
institute proceedings under the Consumer Protection Act, 1986 against
Lufthansa Airlines for deficiency in service. Will he succeed?

(10)

Solution
1. The present problem is based on Nath Bros. Exim International Ltd. v. Best Roadways Ltd.,
2000(2) Scale 517, where the National Commission dismissed the claim. The Supreme Court
allowed the appeal and held that the liability of the carrier is that of an insurer and is absolute
in terms in the sense that the carrier has to deliver the goods at the destination indicated by the
consignor safe, without causing any damage and without any loss to them. So long as the
goods were in the custody of the carrier it would be his duty to take care as he would have
taken of his own goods. Even if the goods had been carried at owners risk the carrier would
not be fully absolved of its liability if the loss or damage was occasioned on account of its
negligence or that of its agents and servants.
Based on the above stated case, it can be inferred that Fastrack Roadways Ltd. is liable to pay
damages to Sukh Dukh Ltd.
2. LIC is liable for deficiency in services. In the instant case the employer had implied authority
to collect premium on behalf of the corporation. There is no gainsaying the fact that if the
employer had, after deducting the stipulated amount from the employees salary, failed to
remit the premium to the Corporation it was clearly the fault of the agent of the Corporation.
So, LIC has wrongly discharged its liability under the policy.
The present problem is similar to Delhi Electric Supply Undertaking v. Basanti Devi, 1999(6)
Scale 236 where it was held that since the burden of collecting the premium and remitting it to
the corporation was on the employer, it was not the responsibility of the employee to intimate
the Corporation about non-remittance of the premium.
3. The present problem is similar to Ravneet Singh Bagga v. KLM Royal Dutch Airlines, 1999(7)
Scale 43.
In the present problem, Lufthansa Airlines could not be held to be guilty of deficiency in service.
Although Raman had been subjected to harassment, it is equally true that none of the respondents
would be held guilty of deficiency in service. The airline authorities tendered apology to Raman
for the inconvenience caused to him and also paid him token of compensation. Deficiency of
service could not be alleged without attributing fault, imperfection or shortcoming or inadequacy
in the quality, nature and manner of performance which is required to be performed by a person in
pursuance of a contract or otherwise in relation to any service. So, Raman will not succeed if he
institute proceeding under Consumer Protection Act, 1986.

Q.23. With reference to the provisions of the Consumer Protection Act, 1986, decide the
following giving reasons in support of your answer.
i)

Sohn sent all relevant documents in an envelope regarding consignment of goods


to a buyer in the USA through Fast Service Couriers. The documents did not
reach the buyer as a consequence of which the buyer could not take delivery of
the goods. By the time the duplicate copies of the document had been received by
the buyer, the season of the goods was over. He claimed that he had suffered a
loss of US $ 5,000 as a result of the negligence of the courier.

The State

Commission ordered the payment to be made by the Fast Service Couriers, but
the National Commission in appeal reversed the order and ordered payment of
US $ 100 only as per the receipt issued by the Fast Service Courier to the
consignor at the time of the dispatch of the latter. Advise Sohan.
ii)

Mahesh purchased a machine from Astute Ltd. to operate it himself for earning
his liverhood. He took the assistance of a person to assist him in operating the
machine. The machine developed fault during the warranty period. He filed a
claim in the consumer forum against the company for deficiency in service.
Astute Ltd. alleged that Mahesh did not operate the machine himself but had
appointed a person exclusively to operate the machine. Will Mahesh succeed?

iii)

Pillai purchased a car by taking a loan from Kerala cooperative Bank Ltd. and
gave post-dated cheques to the bank not only in respect of repayment of loan
instalments but also of premium of insurance policy for two succeeding years. On
the expiry of the policy. Pillais car met with an accident. Will Pillai succeed in
getting a claim against the
Bank ?

(10)

Solution
1. The facts given in the problem are similar to the case of Bharathi Knitting Co. v. DHL
Worldwide Express Courier Division of Airfreight Ltd. [1996 (5) SCALE 142 (SC)] wherein
the Supreme Court upheld the decision of the National Commission that in view of the terms
and conditions of contract between the parties, the National Commission was right in limiting

the liability undertaken in the contract and in awarding compensation to the extent stated there
in.
Therefore, in the present case Sohan will not succeed and Fast Service Couriers liability will
be limited to US $ 100.As per IATA Regulations, any valuable document sent by courier shall
be insured as a precautionary measure. It is the duty of the consigner to declare the value.
Otherwise, the courier services will be put to heavy loss for no fault of theirs.
2. The present problem is based on the leading case Laxmi Engineering Works v. P.S.G.
Industrial Institute [(1995) II LPR 11 (SC)] where the Supreme Court held that if a person
purchased a machine to operate himself for earning his livelihood, he would be a consumer. If
such person took the assistance of one or two persons to assist him in operating the machine,
he would still be a consumer. But if a person purchases a machine and appoint or engage
another person exclusively to operate the machine, then such person would not be a
consumer. Therefore in the given case Mahesh will succeed.
Moreover, the complainant will succeed even if he engages somebody to operate the machine
exclusively on the ground that the defect took place during the warranty period. This is the
case of deficiency of service (See J.K. Puri v. Mohan Breweries).
3. The facts given in the problem are similar to the facts in Pradeep Kumar Jain v. Citibank
[1999 (4) SCALE 662] wherein the Supreme Court held that there is no deficiency in service
because the obligation to renew the policy is on the owner of the car alone. Merely passing on
cheques towards premium of insurance policy for two succeeding years would not absolve
him of his liability to renew the policy. He has certain duties to discharge in the matter of
obtaining the policy and cannot merely pass the blame on someone else. Thus, Pillai will not
succeed in getting a claim against the Bank.