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Definition
y A promissory note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a
certain person or to the bearer of the
t he instrument
(iii) "I promise to pay B Rs. 500 seven days after my marriage
marriage with C."
Essential
s or Characteri stic s of a Promi ssory Note
y From the definition, it i s clear that a promissory note must have the following essential elements.
(1) In writing - A promissory
promissory note must be i n writing. Writing includes print and typewriting.
typewriting.
(2) Promise It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of
to pay -
indebtedness is not sufficient.
Notice that the use of the word `promise' is not essential to constitute an instrument as promissory
note.
(3) Unconditional - The
promise to pay must not be conditional. Thus, instruments payable on performance
or non-performance of a particular act or on the happening or non-happening of an event are not
promissory notes.
(4) Signed by the Maker ± The promissory note must be signed by the maker, otherwise it is of no effect.
(5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory
note.
(6) Certain sum of money - The sum payable must be certain or capable of being made certain.
(7) Promise to pay money only - If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note.
(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable
immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on
expiry of 3 years from the date it bears.
(11) It cannot be made payable to bearer on demand or even payable to bearer after a certain period
(12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisit e amount
must have been affixed on the instrument
i nstrument and duly cancelled either before or at the time of its execution. A
promissory note, which is not so stamped, is a nullity.
BILL OF EX CHANGE
Characteri s
stic Feature s of a Bill of Ex change
change
1. It must be in writing.
1) There are only two parties ± the maker (debtor) and 1) There are three parties ± the drawer, the drawee
the payee (creditor). and the payee- although any two of these capacities
may be filled by one and the same
sa me person.
2) It contains an unconditional order to the drawee to
2) A note contains an unconditional promise by the pay according to the drawer`s directors.
maker to pay the payee. 3) A bill payable `after sight` must be accepted by the
3) No prior acceptance is needed. drawee or his agent before it is presented for
payment.
4) The liability of the drawer is secondary and
conditional upon non-payment by the drawee.
5) Notice of dishonour must be given by the holder to
4) The liability of the
t he maker or drawer is primary and the drawer and the intermediate endorsers to hold
absolute. them liable thereon.
5) No notice of dishonour
di shonour need be given. 6) The maker or drawer does not stand in immediate
relation with the acceptor drawee.
Negotiable instruments may be defined as written documents which can be transferred from
one person to another to make payments until the final payment is made. In India, the
Negotiable Instruments Act, 1881 contains the rules relating to negotiable instruments.
According to Section, 13 of this Act, a negotiable instrument means ³ a promissory note, bill
of exchange or cheque, payable either to order or to bearer whether the words ³order ´ or
³ bearer ´ appear on the instrument or not. ´
e) An unstamped negotiable instrument signed but blank in some respect is called an inchoate
instrument.
a) Crossing of cheque
Cro ssing of cheque s
y Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the
paying banker and also its negotiable character. It is a peculiar method of modifying the instrument to the
banker for payment of the cheque.
y Cro ssing on a cheque is a di r ection t o the paying banke r by the d ra
wer that payment should not be made
acro ss the counter. The payment on a crossed cheque can be collected only through a banker.
y Crossing of a cheque is effected by drawing two parallel transverse lines with or without the words 'and
company' or any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.
S ignificance of cro ssing
y As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a
measure of safety against theft or loss of cheques in transit.
ype s
T of cro ssing
y Crossing may be either
(1) Gener al - to mean as where a cheque bears across its face an addition of the words 'and company' or
any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines
simply, either with or without the words 'not negotiable', that addition shall be deemed a crossing and
the cheque shall be deemed to be crossed generally
(2) Special - implies the specification of the name of the banker on the face of the cheque
y The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through
the particular bank mentioned therein. Thus, it makes the cheque system still safer.
y An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payee¶s
account and in none else. The addition of 'A/c payee' to a crossing has no legal sanctity and the paying
banker may ignore such a direction without being liable for any damages.
3. The Banker, in whose favour the cheque has been crossed specially.
y The word 'negotiable' means transferable from one person to another, and the term 'instrument' means 'any
written document by which a right is created in favour of some person.' Thus, the negotiable instrument is a
document by which rights vested in a person can be transferred to another person in accordance with the
provisions of the Negotiable Instruments Act, 1881.
y The term 'negotiable instrument' has been defined as - A 'negotiable instrument' means a promissory note,
bill of exchange or cheque payable either to order or to bearer."
(2) B yusage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and
treasury bills
1) A s t o Consider ation - Every negotiable instrument is deemed to have been made, drawn, and accepted
endorsed, negotiated or transferred for consideration.
2 ) A s t o date- Every negotiable instrument bear the date on which it is made or drawn.
3) A s t o Acceptance- Every bill of exchange was accepted within a reasonable time after the date mentioned
therein and before the date of its maturity.
4) A s t o T r ansfer - Every transfer of a negotiable instrument was made before the date of its maturity in case
of an instrument payable otherwise than on demand.
5) A s t o the or der o f End or sements - The endorsements appearing on it were made in the order in which they
appear thereon.
Where an instrument has been lost or destroyed, that it was duly stamped and the
6) A s t o l o st Inst r uments -
stamp was duly cancelled.
7) A s t o holder -in-due cour se - The holder of the instrument is a holder in due course.
8) A s t o dishonour - If a suit is filed upon an instrument, which has been dishonoured, the Court
shall, on proof of the protest, presume the fact of dishonour unless it is disproved
SL.
Act Sale Bailment
No.
In sale title and possession both get transfered while in contract of bailment only
possession get transfered. Sale is governed by the Transfer of property Act and latter
by the Indian Contract Act1872
Both words are related with transfer of immovable asset. But sale deed is money based while
Gift deed is not based on cash transaction... For an example Father or mother give the asset
through Gift Deed and depends on State Governments gives registration amount deduction
for Gift Deed.
Even though relatives and the Gift deed has been registered, the sale deed is powerful.
Government earns through the registration amount. So, to avoid to loose the money, if both
parties or non relatives, Govt wont accept the registration under Gift Deed.
a) Earnest Money
It's a good faith deposit but not to be confused with a down payment. When buyers
execute a purchase contract, the contract specifies how much money the buyer is
initially putting up to secure the contract, to show "good faith," and how much money
all together will be deposited as a down payment. The balance is generally financed as
a mortgage or a combination of mortgages. An earnest money deposit says to the
seller: "Yes, I am ser ious enough about buying your house that I 'm
willing t o put my
money wher e my mouth is."
Because there is no set amount, it varies from market to market and across the
country. Where I work in California, deposits are generally 1 to 3 percent of the sales
price. Buyers here do not often put down more than 3% since most sign a liquidated
damages clause that limits the seller to 3% of the purchase price as damages in the
event of a default. But it's not unusual for a buyer purchasing a $300,000 home to put
down $1,000, especially if the buyer is obtaining 100% financing. In those scenarios,
the deposit is most often refunded to the buyer and subsequently used as a credit
toward closing costs because the financing makes up the entire purchase price.
If it's a seller's market, with many buyers fighting over limited inventory, it makes
logical sense for the buyer to put down a much larger earnest money deposit to entice
the seller to accept the offer. In buyer's markets, a larger earnest money deposit might
entice a seller to accept a much lower purchase price. So you see, it all depends.
A reader from New Brunswick, Canada, Sylvie Schriver, claims she lost her $2,500
earnest money deposit by handing it over to an individual who professed to be a real
estate broker. She says the broker stole a brokerage's logo and business supplies to
make it appear that he was legitimate; however, he vanished when Sylvie called to ask
questions about her mortgage. When she reported the crook to the police, she then
discovered that others had filed complaints. Sadly, at that point, Sylvie's money was
gone.
First, read your contract. Laws vary from state to state. In California, standard C.A.R.
purchase contracts allow for the return of the earnest money deposit to the buyer
within a specified time period, by default 17 days, should the buyer elect to cancel the
transaction. If, at that point, the seller refused to return the deposit without cause, the
seller could end up paying a $1,000 civil penalt y to the buyer.
Upon cancellation, the sellers and buyers are asked to sign mutual release instructions.
If an agreement cannot be reached, the party holding the earnest money deposit will
continue to hold it until an agreement is reached. If no agreement has been reached
after a few years, escrow companies then send the parties a certified letter asking for
mutual instructions. The letter says if nobody responds within a certain time period,
then escrow will return the money to the buyer. If the seller contests the action then,
after 3 years, escrow will send the money to the state of California, presumably to
help balance our budget deficit.
Case in Point
A buyer's $1,000 was deposited into escrow two years ago. Unknown to the seller or
real estate agent, a week before closing escrow, the buyer decided to buy another
property and entered escrow at a different title company. A few days before she was
scheduled to close on the first property, the buyer completed her final walk-
through and declared there were water stains on the ceiling. There was no evidence of
water stains on the ceiling. But that didn't stop the buyer from canceling the escrow.
The sellers believe the buyer has forfeited her deposit. The buyer believes it should be
returned. Two years later, the money is still sitting in escrow.
b) Caveat Emptor
Caveat Emptor:
Ans: Section 16 of the Indian Sale of Goods Act begins with the enunciation of the
principle involved in the maxim caveat emptor. It states that subject to the
provisions of the Act and any other law for the time being in force, there is no
implied warranty or condition as to the quality of fitness for any particular purpose
of the goods supplied under the contract of sale. The principle of Caveat Emptor
(let the buyer beware) lays down that it is the duty of the buyer to satisfy himself
before purchasing the article, that the article which he buys, is the one he wants.
i)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 sellers skill
or judgement; and
ii)the goods are of a description which the seller supplies in the course of his
business (whether he himself manufactures them or not).
c) Unpaid seller
Ans: An unpaid seller is one who is not paid for the goods sold by him. Any seller
would be deemed to be an unpaid seller if:
-.The credit period allowed has passed and the payment is due.
i)Right of lien.
iii)Right of resale.
Ans: If the goods are delivered to the buyer, the unpaid seller has a right to sue the
buyer for recovery of price, including costs of suit, customary interest and
damages, if any.
If the buyer takes the delivery of the goods from the seller, by issuing a cheque and
later the cheque gets bounced, the unpaid seller can sue the buyer under the
Negotiable Instruments Act, 1881. Such a buyer is liable for punishment with
imprisonment or a fine.
Ans: Sellers lien refers to the sellers right to retain the possession of goods until
certain charges due in respect of them are paid. The unpaid seller of goods who is
in possession of them is entitled to retain possession of them until payment or
tender of the price in the following cases:
Where the goods have been sold without any stipulation as to credit;
Where the goods have been sold on credit but the term of credit has expired;
Ans: Stoppage in transit is one of the rights of an unpaid seller. This right consists
of stopping the goods while they are in the possession of a carrier or lodged at any
place in the course of transmission to the buyer. The seller can resume the
possession of the goods and retain until the price is tendered or paid.
c)The goods must be in transit or in possession of a middleman for the purpose of
transit.
d)The sellers right of stoppage in transit can be exercised as long as the goods are
in transit and not yet delivered to the buyer.
e)The seller may retain the goods until price is tendered or paid.
Q.6 Discuss the conditions and warranties under Sale of Goods Act
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 a right to reject the goods and
treat the contract as repudiated.
Ans: X sells food-stuff to Y. The contract between X and Y states that the food to
be sold should be fit for consumption and this is the essential term in the contract.
So, if it contains any poisonous substance, Y is entitled to reject the food-stuff and
to repudiate the contract This essential term is called a condition.
On the other hand, if the contract stipulates that the food-stuff should be packed in
1 kilo box but the seller packs it in half-kilo box, only an auxiliary or minor term
of the contract is broken, Y may be able to claim compensation in respect of its
breach, but not avoid the contract. Such an auxiliary term is called warranty.
b)If a contract of sale is not severable and the buyer has accepted the goods partly,
this is called part-performance. In such a case, it cannot be treated as a breach of
condition by the seller but it can be treated as a breach of warranty.
However, if the parties have an express contract, the seller is liable for the breach
of condition and not for breach of warranty.
Explain the various implied conditions and warranties governing the transaction of
sale of goods.
ii)In the case of agreement to sell, he will have the right to sell the goods as the
time when the property is to pass.
An implied warranty that the buyer shall have and enjoy quiet possession of the
goods.
An implied warranty that the goods shall be free from any charge or encumbrance,
not known or declared to the buyer.
- the buyer does not see the goods physically, he trusts the description;
- the law implies a condition precedent that the goods which the seller has offered
to deliver or delivered, should answer to the description
iii)The buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
iv)The goods shall be free from any defect that would not be apparent on
examination of the sample.
v)If the seller supplies the bulk that does not correspond with the sample in quality,
it is a clear breach of condition.
Condition as to wholesomeness.
Implied warranties:
Caveat E mptor - The principle termed as µcaveat empt or¶ means µbuyer be aware¶. Generally, buyer is expected
to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This
principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other
law, there is no implied condition or warranty as to quality or fitness of goods for any particular purpose. As per
section 2(12), ³Quality of goods´ includes their state or condition.
of property a s between seller and buyer - Transfer of general property is required in a sale. µProperty¶
T ran s fer
means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine
rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in
goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of
goods even if in the meanwhile buyer has become insolvent. - - - 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. [section 18].
P ro per ty passes when intended t o pass - 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. [section 19(1)]. 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. [section 19(2)]. Unless a
different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to pass to the buyer. [section 19(3)].
Specific g oods in a deliver able state - Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial
whether the time of payment of the price or the time of deli very of the goods, or both, is postponed. [section 20].
Auction sale - Auction sale is special mode of sale. The sale is made in open after making public announcement.
Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually,
auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when
auctioneer accepts a bid.- - - In the case of a sale by auction² (1) where goods are put up for sale in lots, each
lot is pr ima facie deemed to be the subject of a separate contract of sale; (2) the sale 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; (3) a right to bid may be reserved expressly by or on
behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person
on his behalf may, subject to the provisions hereinafter contained, bid at the auction; (4) where the sale is not
notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or
to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any
such person; and any sale contravening this rule may be treated as fraudulent by the buyer; (5) the sale may be
notified to be subject to a reserved or upset price; (6) if the seller makes use of pretended bidding to raise the
price, the sale is voidable at the option of the buyer. [section 64].
Delivery of good s to buyer - The A ct makes elaborate provisions regarding delivery of goods to buyer. It is the
duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms
of the contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the
buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for
possession of the goods. [section 32]. - - Note that this is µunless other wise ag re ed ¶, i.e. buyer and seller can
agree to different provisions in respect of payment and delivery.
Acceptance of good s by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance
of goods by buyer. µ Acceptance¶ does not mean mere receipt of goods. It means checking the goods to ascertain
whether they are as per contract. - - - Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of
examining them for the purpose of ascertaining whether they are in conformity with the contract. [section
41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on
request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining
whether they are in conformity with t he contract. [section 41(2)].
Buyer¶ s and S eller¶ s dutie s - The Act casts various duties and grants certain rights on both buyer and seller.
Right
sof unpaid seller again st the good s - After goods are sold and property is transferred to buyer, the only
remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession
of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller
if his dues are not paid.
S uit
sfor breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In
addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of
breach of contract.
M ea surefor compen sation and damage s ± The Sale of Goods Act does not specify how to measure damages.
However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as
provided in sections 73 and 74 of Contract Act.
Q.7 State with reasons whether following statements are true or false:
a) No consideration----No contract
Consideration:-
Consideration for a particular promise exists where some right, interest, profit or benefit
accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss
or responsibility that has been given, suffered or undertaken by the promisee. T he
consideration must be executor or executed, but not past. Consideration is executor.
Consideration can be anything of value (such as an item or service), which each party to a
legally-binding
contract must agree to exchange if the contract is to be valid. If only one party offers
consideration, the agreement is not legally a binding contract. In its
traditional form, consideration is expressed as the requirement that in order for parties to be
able to enforce a promise, they must have given something for it (quid pro quo): something
must be given or promised in exchange or return for the promise.
contract:-
A contract is an exchange of promises between two or more parties to do or refrain from
doing an act which is enforceable in a court of law. It is where an unqualified
offer meets a qualified acceptance and the parties reach Consensus In Idem. The parties must
have the necessary capacity to contract and the contract must not be either trifling,
indeterminate, impossible or illegal.
Hence by watching both definitions you can understand that contract required benefit for both
parties. If there is no consideration for one party it means that party is not getting any benefit
so. If there is no benefit for both party it means why they will make contract. And if benefit is
only for one party then that is no contract because it is not full feeling contract first essential
of exchange of promises, goods, services or something worth full for both parties.
All contracts are agreement but all agreement are not contracts
Answer; A contract is a legally binding agreement or relationship that exists between two or
more parties to do or abstain from performing certain acts. A contract can also be defined as a
legally binding exchange of promises between two or more parties that the law will enforce.
For a contract to be formed an offer made must backed acceptance of which there must be
consideration. Both parties involved must intend to create legal relation on a lawful matter
which must be entered into freely and should be possible to perform.
An agreement is a form of cross reference between different parties, which may be written,
oral and lies upon the honor of the parties for its fulfillment rather than being in any way
enforceable.
According to section 2(h) of the Indian Contract Act: " An agreement enforceable by law is a
contract." A contract therefore, is an agreement the object of which is to create a legal
obligation i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two elements: (1) An
agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine
these elements detail.
As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a
duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law.
It is not a contract.
Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend's
house or to take a walk together are not contracts because they are not likely to create a duty
enforceable by law for the simple reason that the parties never intended that they should be
attended by legal consequences
The parties to an agreement must be competent to contract. But the question that arises now
is that what parties are competent and what are not. The contracting parties must be of the age
of majority and of sound mind and must not be disqualified by any law to which they are
subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy,
drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g.,
in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be
reimbursed from their estate (sec 68).
. According to the Indian contract Act, a contract to be valid, must be in writing and
registered. For example, it requires that an agreement to pay a time barred debt must be in
writing and an agreement to make a gift for natural love and affection must be in writing and
registered to make the agreement enforceable by law which must be observed.
A] Ramesh promises his wife to bring a beautiful sari if she sings a song. The wife obliges
and sings a song. But, Ramesh refuses to buy the sari for her. His wife Ruchi wants to sue her
husband for his failure. Decide.
Ans- Ruchi, wife of Ramesh cannot bring legal action against her husband Ramesh for failure
of performance. The agreement lacks the intention to create legal relationship. In the family
relationship of husband and wife, there is no legal relationship.
B] Srinivas agrees to pay Rs.50,000/- to Mahesh if the later brings God before him. Mahesh
agrees to pay the same amount, in the event of his failure. This agreement is executed on a
stamped paper, with two witnesses. Mahesh has failed to perform. Srinivas plans to go to a
court of law for recovering the amount, executed on a stamp paper. Decide.
Answer: The agreement between Srinivas and Mahesh is not a valid contract. It is a void
agreement as per Section 56 of Indian Contract Act, 1872 as ³An agreement to do an
impossible act in itself is void. ´ The agreement is void from the beginning as bringing God in
physical form is an impossible act
A] Coercion
"Coercion" is the committing, or threatening to commit, any act forbidden by the Indian
Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice
of any person whatever, with the intention of causing any person to enter into an agreement.
(45 of 1860.)
Positive or direct coercion takes place when a man is by physical force compelled to do an
act contrary to his will; for example, when a man falls into the hands of the enemies of his
country and they compel him, by a just fear of death, to fight against it.
B] Undue Influence
(1) A contract is said to be induced by "under influence" where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generally of the foregoing principle, a person is
deemed to be in a position to dominate the will of another -
(a) where he hold a real or apparent authority over the other, or where he stands in a fiduciary
relation to the other; or
(b) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a contract
with him, and the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue influence
shall be upon the person in a position to dominate the will of the other.
C] Fraud
The suggestion that a fact is true when it is not so and the person making the suggestion is
ware of its falsehood;
Active concealment of a fact by a person who has knowledge or belief of the fact;
Promise made without any intention of performing it;
Any other act fitted to deceive;
Any such act or commission that the law declares as fraudulent.
D] Misrepresentation
E] Mistake
ii.Where a contract is not voidable merely because it was by one of the parties to it being
under a mistake as to a matter of fact. In other words, mistake must be mutual and not
unilateral. Both the parties must be labouring under such a mistake.
b) Mistake of law: This provides that a contract is not voidable because it was not caused by a
mistake as to any law in force in India. This is based on the maxim Ignorantia juris non
excusat.
Distinguish between Mistake of law and mistake of fact.
Mistake of law
Mistake of fact
2. Where there is mutual mistake as to an existing fact material to the agreement, the contract
is void.
2. In most cases the contract is not voidable.
Q.10 State with reasons whether following statements are true or false:
A company is a artificial person and does not have a physical presence. Therefore, 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 the company. The common seal is
the official signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be accepted as
authentic and may not have any legal force.
Promotion refers to the entire process by which a company is brought into existence. It
starts with the conceptualization of the birth of a company and determination of the
purpose for which it is to be formed. The persons who conceive the company and invest
the initial funds are known as the promoters of the company. The promoters enter into
preliminary contracts with vendors and make arrangements for the preparation,
advertisement and the circulation of prospectus and placement of capital. However, a
person who merely acts in his professional capacity on behalf of the promoter (eg lawyer,
CA, etc) for drawing up the agreement or other documents or prepares the figures on
behalf of the promoter and who is paid by the promoter is not a promoter.
A promoter of a Company is the person who takes preliminary steps for the purpose of
formation and incorporation of a Company. A promoter may be an individual,
association, partner or a company.
In terms of Section 3(1)(iii) of the Companies Act, 1956 and articles of association of the
Company, the characteristics of a Private Company are :-
Restricts the right of members to transfer its shares
Limits the number of its members to fifty. In determining this number of 50, employee-
members and ex-employee members are not to be considered.
Prohibits an invitation to the public to subscribe to any shares in or the debentures of the
company
Any invitation or acceptance of deposits from persons other than its members, directors or
relatives is hereby prohibited.
Once company is registered, the only method to end it is through the process of winding
up. T he certificate of incorporation cannot be cancelled by the Registrar of Companies,
even if irregular.
A company is regarded as a legal entity in its own right and , as such , its members have
limited liability for its debts and obligations. The company is able to own property in its
own name and issue shares to raise capital. It is able to sue debtors and similarity be sued
by its creditors. besides, shareholders and directors cannot be considered as the agents or
trustees of a company. Finally, a fundamental characteristic of corporate separate
personality is that of perpetual succession, which results in a continuation of the
company¶s existence regardless of its members.
In common usage, µCompany¶ means an association of persons associated for some common
purpose. The common object may be business, charity, research etc. The persons are united
for achieving a common objective, normally, for earning profits, which are shared by the
investors.
Definition of Company: Section 3 (1) (i) of the Companies Act, 1956 defines a company as:
³A company registered and formed under this Act or an existing company. ´
The above definition does not give clear description about the company. The definition
provided by Haney gives a better view about the essential elements of a company. According
to Haney,
³A company is an incorporated association which is an artificial person created for by law,
having a separate entity, with a perpetual succession and a common seal. ´
T hecharacteristics of the company give a better picture about the essential elements
mentioned in the above definition. Let us discuss those characteristics that describe the
company, comprehensively.
1.3 CHAR ACTERIS TICS OR ESSENTIAL FEATURES OF A COMP A NY
1. Registration: A company is to be compulsorily registered under the Companies Act.
Q.12 Discuss the case of Solomon Vs. Soloman and Co.Ltd.State the principle laid down
in the said case.
One Man Company: When a single person holds almost all the shares of the company, it is
called µOne Man Company¶. Such a company has a legal personality, if it complies with the
necessary requirements of registration (Solomon Vs A. Solomon & Co. Ltd.). Such
companies may be public or private companies. Usually, they are private companies.
Solomon Vs A. Solomon & Co. In Solomon Vs A. Solomon & Co. Ltd. (1897) AC
Ltd.:
22, it has been held that in common law, a company is a µlegal person or has a legal entity
separate from its members and is capable of surviving beyond the lives of its members.¶
In this case, one Solomon was a shoe manufacturer. He incorporated a company named
Solomon and Co. Ltd. He took over the entire business of a running concern. Solomon and
theF ormation and Incorporation of Companies seven subscribers to the memorandum were he
and his family members. Solomon and his two sons were the Directors of the Company. The
business of the company was transferred for £30,000. Solomon took 20,000 share of 1 £ each
and debentures worth 10,000 in consideration.
The Company went into liquidation, within a year. On winding up, the unsecured creditors
contended that the company was not having independent existence as Solomon was the
Managing Director of the company and the entire company was under his control. They
further contended that Solomon was holding majority of the shares and therefore, the
company was merely a sham. Their contention was that the limited firm was only a guise to
conceal the real identity of the persons who own. However, it was held that Solomon and Co.
Ltd. fulfilled all the requirements of the legislature. Further, it was held that the company
cannot be equated with the members comprising it. The company was not the agent of
Solomon. It was therefore, treated as a company, distinct and independent corporation. A
company has, therefore, a separate legal existence, and is altogether a different person even
from its directors and members.
Corporate Veil: On incorporation, a company assumes a separate personality of its own,
called the µCorporate veil¶. On incorporation, the veil is drawn between the company and its
members. The advantages of the incorporation ±separate entity ± were allowed only to those
who make an honest use of the µcompany¶.
Lifting Corporate Veil: T here may be circumstances in which the privileges of µseparate
entity, may be misused. In such cases, the court, may disregard the corporate veil. Ignoring
separate entity or overlooking corporate personality is known as the phenomenon of lifting
corporate veil¶. Lifting corporate veil is an exception to the decision in Solomon¶s case.
In the case of dishonest and fraudulent use of the facility of corporation, the law lifts the
corporate veil and identifies the persons who are behind the scene and responsible for the
perpetration of the fraud. (Life Insurance Corporation of India Vs. Escorts Ltd. (1986).
Overlooking the corporate personality or separate entity is known as ³the phenomenon of
lifting the corporate veil. ´
Conclusion
1. The question of whether the negative aspects of the decision in Salomon's case
outweigh the good ones is best left unanswered for it is far too broad. One is inclined
towards the view that the principle of separate legal entity established in Salomon's
case has been instrumental in the development of modern capitalism and the immense
social and economic wealth which it has generated. The House of Lords extended the
principle so far as to cover small private enterprises. This move has had several
negative consequences over time. However, it is also true that these have been largely
neutralised by joint legislative and judicial action.
2. Indeed, "the legislature can forge a sledgehammer capable of cracking open the
corporate shell." And, even without statutory assistance, the courts have often been
ready to draw aside the veil and impose legal liability on members and directors
where to apply the Salomon principle strictly would lead to injustice, inconvenience
or damage to government finances.
3. Similarly, it should be pointed out that, following Salomon's case, all Australian
jurisdictions, in a desire to ameliorate legal facilities for small commercial enterprises,
introduced provisions for private companies into their corporate law. Experience since
Salomon's case demonstrated that there was no reason why the benefit of limited
liability should apply only to groups of business entrepreneurs. The Corporations Act
takes this to its logical conclusion and sanctions the registration of one-person
companies. In 1995, the First Corporate Law Simplification Act amended the
Corporations Act to permit a proprietary company to be set up with one or more
shareholders. Under another amendment, the minimum number of directors needed to
be designated in a proprietary company was cut from two to one. Moreover, the
Corporations Act states that any sort of company, not just a proprietary company, may
be established with only one member and may continue to exist with only one
member (section 114). It would appear then that the overall balance is positive and
that the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good
decision.
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