Books:-

1. Business law for management

2. Elements of mercantile law by N.D. Kapoor ( Reference )
3. Business law for management by Bulchandani ( Reference )

Business Law

Business:- All those activities which are aimed at transfer of goods & services from the
production centre to consumption centre carried out by an entrepreneur by optimally utilizing
resources at his command i.e. money, man, material & machine with a view to maximize profit.

Law:- Rules & Regulations which has a force of authority, passed by legislative bodies.

LAWS

Constitutional Law Criminal Law Civil Law International Law

(Relating to rights, (Crime & Punishment) (Business & Property (Dealing between
duties of citizen’s matters) citizens of two
towards the state countries)
& administration)

Contract Act

Contract:- Agreement enforceable by Law.

Agreement:- It is every promise or a set of promises forming consideration for each other. It is
a result of intention to create legally binding relationship.

Promise:- Proposal when accepted becomes promise.

Proposal:- When a person signifies to another his willingness to do or not to do something with
a view to obtain assent of that other person, the person is said to have made a proposal.

Proposal + Acceptance = Promise

Promise * Promise = Agreement
Agreement + Enforceability = Contract
Q1. Discuss essential ingredients of a valid contract? Or All contracts are agreements but
all agreements are not contracts.
Ans.
1. Intention to create legally binding relationship
2. Offer and Acceptance
3. Two or more persons
Section 10 – All agreements are contracts if they are made by
• Free consent
• Parties competent to contract
• For lawful consideration
• And lawful object
• And not expressly declared to be void
4. Competence of parties to the contract – Every person is competent to contract if
• He attends the age of majority according to which he is subject of
• He is of sound mind
• Not disqualified under law
5. Lawful consideration
6. Free consent of parties – Consent is free if it is not caused by
• Coercion (Force) – use of physical force
• Undue Influence – use of dominant position
• Misrepresentation – false statement
• Fraud – cheating
• Mistake – erroneous state of affairs
7. Lawful Object
8. Certainty of performance
9. Not ambiguous / vague(the agreement must be certain)
10. Legal Formalities
11. Not declared to be void

Q2. Offer and Acceptance

Ans.
Rules for a valid offer:-
1. Offer should be capable of creating legally binding relationships
2. Offer should be backed by willingness to perform. Mere intention is not an offer
3. Offer should be communicated – e.g. Lalman Shukla (Civil – Plaintiff, Criminal –
Complainant) v/s Gauri Datt (Civil – Defendant, Criminal – Accused if guilty is called
convict if not guilty then is called acquit)(PPS Gogna Pg no.20)
4. Objective of the offer is to obtain approval / acceptance of offeree
5. Offer should be differentiated from
• Intention
• Invitation to offer for e.g.
 a) Super Bazaar
b) Prospectus
c) Tender
d) Auction Notice
6. Offer may be conditional
7. Offeror cannot dictate terms

Acceptance:- When a person to whom offer is made signifies his assent there to he is said to
have accepted the offer/proposal.

Rules for valid Acceptance:-

1. Acceptance to be valid must be absolute and unconditional
2. Acceptor must be willing to perform his obligation
3. Acceptance must be communicated to the offeror
4. Acceptance must be communicated within a reasonable time
5. Acceptance must be in the manner prescribed
6. Acceptance must be communicated before offer lapses / withdrawn
• Lapse of offer – offer no longer valid
• Expiry / Lapse of time
• Revocation – Cancellation of offer by offeror
a) Notice of revocation
b) Communication in same channel
• Conditional acceptance / qualified acceptance / counter offer
• Non compliance of terms and conditions
• Death – in respect of contracts of personal skill
• Rejection

Rules as to communication of offer & acceptance :-( better in PPSG Pg. no.27)
1. Offer:- Communication of offer is complete when it comes to the knowledge of the
person to whom it is made.
2. Acceptance:- Communication of acceptance is complete
o To against offeror – when communication of acceptance is put into transmission
so as to be beyond the control of acceptor
o As against acceptor – when it comes to the knowledge of offeror.

Open letter dated 01-08-2005

Letter received by offeree 05-08-2005 Communication of offer is
complete
Letter of acceptance dropped 08-08-2005 Communication of
on acceptance is complete as
against proposal
Letter of acceptance received 10-08-2005 Communication of
on acceptance is complete
 against acceptance

Competence of Parties to contract:-

(Legal Competence)

Whether a person has

o Power In Law
o Authority

Every person is competent to contract open letter dated 01-08-2005 if

1. he has the age of majority according to the law to which he is subject
2. he is of sound mind
3. he is not disqualified under the law

- a person has attained the age of majority incase where guardians have been appointed
under guardianship law.

Legal Position of Contracts with Minor:-

Who is Minor:- A person who has not attained the age of majority
Validity:- Contracts with minor are void-ab-initio (from the very beginning)
e.g. Mohori Bibi v/s Dharmodas Ghose

1. Anyone who contracts with minor does it on his own risk

2. No ratification (no regulation)
3. Contracts with minor cannot be rectified even after he has attained the age of majority.
What is required is to sign a fresh contract
A & B (jointly contract with) C (Major)
- Contract is void between B & C. The manager i.e. A has to take full responsibility of
minor B and his actions.
4. Minor deliberately misleading his age
• Contract remains void
• Court may take cognigence & award compensation
5. Minor cannot become a partner in partnership firm. However if all the partners agree
minors may be admitted to benefit of the firm
6. Minor cannot become member of a company unless
• Articles of Association of the company permit
• Shares are fully paid
7. Minor can act as an agent
• Minor will have no personal liability
 •
8. Minor cannot be declared insolvent
9. No degree of specific performance against minor
10. Anyone who provides necessaries to minor can recover the amount from minor even by
attaching his property

Sound Mind:-

Every person is of sound mind (for the purpose of entering into contract) if at the time of
making contract he understands
• Terms & conditions of the contract
• Impact of terms & conditions on his personal interest
If he can understand this then he is said of sound mind.

Idiot Person:- Person whose mental capacity is permanently affected. Such person can never
enter a contract.
Schizophrenia Epetopsey:- Mental capacity is temporarily under an attack of a disease. Such a
person can contract during the period of normalcy

Drunk Person:- Such a person don’t contract under influence of intoxication

Lawful Consideration:-

Basis
Price
Something in return – Quid Pro Quo

Right, interest, benefit, or profit accruing to someone as against responsibility, detriment,

sacrifice or loss suffered or incurred by someone else.

Q3. No Consideration, No Contract – Discuss giving Exceptions.

Definition of Consideration:- When at the desire of promisor, promise or other person has
done or abstained, does or abstained, promises to do or abstained from doing something. Such
an act or abstinence is called consideration & contract without consideration is void.

Essential Features of Consideration:-

1. Consideration must move at the request of promisor – desire of promisor cannot be
ignored. E.g. Durga Prasad v/s Baldeo
2. Consideration may move from promisee or any other person. E.g. Chinnaya v/s
Ramaiya
3. Consideration can be past, present & future.
4. Absence of act, forbearance or sacrifice may also be a good Consideration.
 5. Consideration need be real & not imaginary/illusory.
6. Consideration need not be adequate.
7. Consideration must be lawful
• If it does not violate the provisions of the law
• If it is not forbidden by law
• If it does not result into injury to person or property
• If it is not against public policy

Circumstances where contract without Consideration may not be void:-

1. Contracts made under natural love & affection provided agreement is in writing,
registered & between parties in near relation. E.g. Raj lukhee Debee v/s Bhootnath
2. Promise to compensate for past voluntary service rendered – service must be voluntary
& not a legal duty
3. Promise to pay time barred debt
• Must be in writing
• Must be signed by debtor
4. Gift – Donation without consideration
5. Charitable contribution – e.g. Kedarnath v/s Gauri Mohammed

Coercion:- Consent is obtained by coercion when it is obtained by:-

1. Committing or threatening to commit
2. Offense punishable under Indian Penal Code
3. Detaining or threatening to detain unlawfully property of a person

Features of Coercion:-
1. Use of physical force
2. Violent in nature
3. Even a threat is enough
4. Offense may be committed or threatened is punishable under Indian Penal Code
5. Threat to commit suicide is punishable & it can result in coercion. E.g. Amiraju v/s
Shesamma

Consequences of Coercion:-
1. Consent is not free
2. Contract is voidable
• Person who gave consent under coercion can avoid or cancel the contract

Undue Influence:- Consent is induced by undue influence when relationship subsisting

between the parties are such that one is in a position to dominate the will of another & uses that
position to obtain unfair advantage over the other.

Relationship where undue influence may be presumed:-

1. Where there is real or apparent authority e.g. master & slave, father & son.
 2. When the parties stand in fiduciary relationship. E.g. CA & client, lawyer & client, guru
& disciple
3. Where mental capacity is temporarily affected on account of age & disease e.g. doctor
& patient

Consequences of Coercion:-
1. Consent is not free
2. Contract is voidable

Coercion Undue Influence

Meaning Use of physical force Use of dominant force
Nature Violent May not be violent
Relationship Not required There must be relationship
Only by parties under
Who can exercise Third parties can exercise relationship

Misrepresentation:-
1. False statement by a person who believes it to be true
2. Breach of duty without intention to deceive, giving unfair advantage
3. Causing however innocently, party to make a mistake regarding subject matter of
contract e.g. Rex v/s Kylsant

Effects of Misrepresentation:-
1. Consent is not free
2. Contract is voidable
3. Person who gave consent can cancel the right of cancellation / rescission
• Person must have depended
• Cancellation must be within a reasonable time
• Person should not have affound the contract or taken benefit of the contract

Fraud:- Means & includes any of the following with intention to deceive
1. False statement by a person who does not believe it to be true
2. Active concealment of facts
3. Promise without intention to perform
4. Anything fitted to deceive
5. Anything which law may declare to be fraudulent

- Mere silence is not fraud, unless there is duty to speak

- Negligence is no fraud e.g. Derry v/s Peek

Misrepresentation Fraud
Intention No intention to cheat There is intention to cheat
Knowledge of false statement Person making false statement Person making false statement
does not know statement is does know statement is false
 false
Claim for damages No claim for damages available Claim for damages available

Mistake:- Error or erroneous state of affair. When a party intending to do one thing, by error,
does something else.

LAWS

Mistake of Law Mistake of Fact

Indian Law Foreign Law Bilateral Unilateral

(Ignorence of law (Treated as mistake (Both parties are (Only one party at
not excused) of fact) at mistake – Void mistake –
Contract Contract)
isn’t void)
two exceptions

Identity of person contracted with Nature of contract signed

Contract becomes void

e.g. Cundy v/s Lindsay

Agreements expressly declared to be void:-

1. Agreement with parties incompetent to contract
2. Contract without consideration
3. Contract with unlawful consideration
4. Contract with unlawful object
5. Contract with mutual mistake of fact
6. Contracts in restraint of marriage
 7. Contracts in restraint of trade:- Any agreement which takes away the freedom it would
amount to restraint of trade/void.
Reasonable Restrictions

Sale of Goodwill Partnership agreements Trade/Business Consideration Service

Contract

8. Contracts in restraint Legal Proceedings

o Right to seek legal remedy – if refused Void
o Agreement where period of limitation is reduced
o Exception – Reference to arbitration

9. Contracts the meaning of which is uncertain

10. Contracts by way of Wager
11. Contracts contingent on uncertain event when event becomes impossible
12. Contracts to do impossible things

Agreement by way of Wager:-

Betting / Expenditure Agreement:- Promise to pay or money’s worth if an uncertain event

turns one way & if the event turns otherwise, person will receive instead of paying.

Uncertain Transactions which are not wagers:-

• Lottery
• Cross word puzzles – games
• Horse racing – Sports event
• Stock exchange trading – Investment Science
• Insurance – socially beneficial

Agreement to impossible acts (void):-

Contingent Contracts:- Contract to perform or not to perform if an uncertain future event

collateral to the contract does or does not happen.

Q. Rules relating to enforceability of contingent contract

1. Contract contingent on happening of an event –

• Such contract cannot be enforced until the event takes place
• If the event becomes impossible contract is void
 2. Contract contingent on non-happening of an event – such contract cannot be enforced
until it is clear that the event shall never take place
3. Contract contingent on future behavior of an individual – event shall be considered
impossible if a person behaves in such a way that he cannot come back to the original
position
4. Contract contingent on happening of an event within a specified time – Such contract
cannot be enforced until the event takes place within a specified time
5. Contract contingent on non-happening of an event - such contract cannot be enforced
until it is clear that the event shall never take place within a specified time
6. Contract contingent on impossible events

Quasi Contracts:- Circumstances in which there is no offer, no acceptance or no formal

contract but law enforces duty. This duty is as good as contract (as if contract was signed)
• Based on Principles of Equity & Justice
• No one shall be permitted to be unjustly enriched at the expense of another

Q. Why should law impose duty?

Circumstances in which law imposes duty:-

• Reimbursement of amount spent towards necessaries supplied to a person incompetent

to contract
• Reimbursement of payment due from someone else but person paying is interested in
such payment
• Reimbursement of act done or service rendered non gratuitously, not out of charity & on
commercial terms
• Responsibility of finder of goods – a person who finds goods belonging to another and
takes them into his custody is placed with responsibility of a bailee
• The article delivered price paid under coercion or mistake

Discharge of Contract:- Contractual relationship comes to an end & nothing remains the same

1. By Performance
• Actual
• Attempted
2. By Agreement
• Novation – New agreement is substituted in place of old
• Alteration – Existing agreement is modified
• Rescission – Right to cancel agreement
• Remission – Accepting less than in agreement in final settlement
• Merger – Right to receive & right to pay both come in the same hands
• Waiver – Withdrawal of contractual terms
3. By Operation of Law
 • Death
• Insolvency
• Merger
4. By Impossibility of Performance
• At the Time of Contract – Void
• Subsequent
i. Permitted as excuse
 Distribution of subject matter
 Outbreak of war
 Change of law
 Change of state of affairs
ii. Not Excused – Difficult to perform
5. Breach of Contract
• Actual Breach of Contract
• Anticipatory Breach of Contract

Breach of Contract:- Contractual obligations not carried out in agreed manner.

Actual (On due date of Anticipatory (Before the actual due date intention not to perform is
performance) communicated)
The other party can The other party can wait till actual due date
treat this
communication as
breach of contract on
the date of receipt of
communication
We can perform on due If we fail it will be
date (alternative breach of contract on
arrangement) actual due date
Consequences of Breach of Contract:-

Suit for Damages Suit for Specific Injunction Quantum Meruit

(Estimate of monetary Performance Court order restricting - As much as is
loss suffered on the parties merited
account of non - Where contract
performance) is abandoned or
Normal – Arising out cancelled
of normal course of - Contract
business becomes void
Special – Parties had - When contract
estimated or is voidable &
convisaged party decides to
Exemplary – Puritive cancel
– by way of - In the mean
punishment time part of the
Nominal – Taken but contract is
in recognition of rights already
of the party performed
payment is
required to be
made to the
extent of
performance

Guidelines for determining damages:-

- Damages to be on account of proximate cause & not remote cause e.g. Headley vs
Baxandle
- Damages must arise out of & during the normal course of business
- Person claiming damages must show his sincerity in mitigating the losses
- Amount of damages claimed can never exceed the actual loss suffered

Companies Act

Company:-
• Association of person
• Registered under the companies act 1956
• By contributing to capital which is
• divided into shares
• which are transferable
• & with limited liability
• having perpetual existence
• common seal
• & being an independent / artificial juridical person
• can own, posses, dispose of property
• can sue & be sued

Essential features of Companies Act:-

1. Association of person registered under the act having separate legal entity – the
company has separate legal entity different from members e.g. Solomon vs. Solomon &
Company Ltd.
 2. Limited Liability – Liability is limited to extent of uncalled / unpaid amount of
shares
3. Transferability of Shares – Shares of the company are transferable & members
can sell them any time when they want. A person can cease to be a member whenever he
desires to quit
4. Perpetual Existence – Company never dies except through due process of law
5. Common Seal – Seal is signature of a company
6. Property can be purchased in the company name. Company can own, posses /
dispose of the property
7. Can Sue – Company can file suit against own name & can be sued against

All 7 points together is termed as Corporate Entity / Veil which acts as a curtain

Q. What do you understand by corporate veil & under what circumstances the corporate
veil can be pierced?

Circumstances under which corporate veil can be pierced:-

1. Loss Of Revenue to the State – e.g. Dinshaw Maneckji Petit vs CIT

2. Company assuming enemy character – e.g. Daimler & Company Ltd vs
Continental Tyres & Rubbers Company
3. Improper Conduct – e.g. Gil Ford Motor Company vs Harne
4. Fraud
5. Statutory provisions:-
• Membership is reduced below minimum & business is carried on for 6 months or more
then all the members are personally liable
• Misdescription of Name
• Misfeasance Proceedings – Criminal breach of trust

Types Of Companies:-
Types of Companies
On the basis of Statute(act)
Companies formed under
special charter – East India
Company
Co-formed under special
statute act – RBI
Co-Registered under Liability Company with limited Liability
companies act – Reliance Ltd. Company with unlimited liability
– Kotak Mahindra Capital
Company
Capital Contribution With Share Capital
May not have share capital –
Liability limited by
 guarantee(Indian Institute of
Bankers)
Number of Members Public Ltd Marketability
Company – of shares
Min 7 & Max Unlisted Listed
∞ (no upper (Closely
limit) Held)
Private Ltd Company – Min 2
& Max 50 (Excluding
present/past employees who are
shareholders)
Basis of Control Holding Company
- which controls
appointment of majority
of directors in other
company
- which holds majority of
shares of other companies
- Subsidiary of Subsidiary
is subsidiary of holdings
Subsidiary Company
Basis of Government - Audited by
involvement – Government CAG(Comptroller &
Company Auditor General of India)
- Annual report is placed
before the parliament
- 51% of capital is held by
government(Central,
State, Other Govt. Co. –
PSU’s if registered under
companies act)
Geographic Parameter Foreign Companies (All MNC’s)
(Place of Incorporation)

• Face Value – As may be issued by the company as Re. 1, 5, 10, 100.

• Book Value – (Paid up Capital + Reserves & Surplus – Accumulated Losses) / No. of
shares issued
• Market Value – As quoted in the Market

Incorporation of a Company

Promoter:- One who promotes the company. One who conceives the idea of setting up business
in the form of a company.
Name:-
• Application for availability of name
• Form No. I A
• Payment fee of Rs. 500/-
• Suggest the name by which he would like his company to be incorporated with 3 other
alternative names

Names which are not Available / not Desirable

• Names of existing companies
• Phonetic Similarity e.g. J.K. Industries LTD. & Jay Kay Industries
• Cannot use international bodies / national bodies
• Relevance of business name & business should be maintained
• Relevance between name & size of authorized capital
NAME AUTHORISED CAPITAL
If Coporation 5 crores
International / Globe / Global / Asia / Asiatic / 1 crore
Intercontinental
Above words used in between name 50 lacs
Hidustan / Bharat / India as first name 50 lacs
Above words used in between name 5 lacs
Industry / Udyog 1 crore
Enterprise / Products / Manufacturing 10 lacs

Documents to be submitted for Registration

1. Memorandum Of Association To be stamped according to the value of
authorized
2. Articles Of Association capital
3. List of Directors on Form 32 (In Duplicate)
4. Consent of persons who have agreed to become Director on Form 29 (only in respect of
Public LTD Companies)
5. Declaration that provisions of Company Law have been complied with Form I (signed
by Director / Advocate / CA / PCS)
6. Particulars of registered office on From 18
7. Registration Fee

Certificate of Incorporation
• Issued by Registrar of Companies (ROC)
• on satisfying that requirements of company law have been complied with
• Conclusive evidence as regards
i. Registration of Company
ii. Compliance to Company Law
• Birth certificate of Company – Corporate features become operative from this date
 • If the company is Private LTD Company then it can commence its business
immediately on incorporation
• If company is Public LTD Company then it has to obtain additional certificate –
Certificate of Commencement of Business

Certificate of Commencement of Business

• Company must have to raised minimum subscription to commence its business
Minimum Subscription – Is the amount which in the opinion of Directors of the Company
sufficient to commence the business
In respect of IPO / Subsequent public offer – Minimum subscription is 90% of the amount
of public offer of an issue of shares (if minimum subscription is not raised entire
application amount is to be refunded)
• Approval from the stock exchanges at which the shares of the company are proposed to
be listed must be obtained (If stock exchanges refuse listing, the application amount will
have to be refunded)
• Directors should have taken & paid qualification shares if any
• Audited receipt & expenditure account since incorporation
• Declaration by Director that Company Law has been complied with

Memorandum Of Association (MOA)

• Character / Constitution of the Company
• Fundamental Document

Contents of MOA

Q. Discuss significance of object clause in MOA & Doctrine of ultra vires vis-à-vis the
object clause

1. Name Clause – Name of the Company is ____________________

2. Registered Office Clause – The registered office of the company is located in the state
of _____________________
3. Object Clause –
• Main objectives the company will pursue on its incorporation
• Objects ancillary to main objects
• Other objects
* Need for Object Clause –
• Positively Speaking – Object Clause specifies the areas of operations in which the
company will deploy its funds
• Negatively Speaking – Company will not deploy its funds in the areas beyond what is
stated in the object clause
• Comfort of investors / members
• Creditors
Anything beyond the object clause is ultra vires
 • Ultra Vires contract is invalid
• Company is not bound
• Directors may incur personal liability
4. Liability Clause – e.g. Asbury Railway Carriage & Iron Company vs Riche. Liability of
members of the company is limited
5. Capital Clause – Specifies the maximum amount company is authorized to raise e.g.
Authorized Capital of the company is Rs. 50 crore divided in 5 crore equity shares of Rs
.10 each
6. Subscription / Association Clause – Names, Addresses, Undertaking to the shares,
Signature duly witnessed

Alteration of Memorandum Of Association

1. Change of Name –
Compulsory Voluntary
• Where existing company object the name to • When the members of the company want
similar / identical to change
• ROC to issue order - availability of new name to be checked
- First show cause notice up
- Hearing - approval of members to change name at
- Order AGM / EOGM
- File copy of Resolution with ROC
- ROC to issue fresh certificate of
Incorporation with new name
- Newspaper Advertisement

2. Change of Registered Office –

- Change of office from one area to another within same town
 First decision at meeting of Board of Directors
 Board resolution / record of decision to be filed with ROC
 Form 18 for change of address to be filed with ROC
 Advertisement
- Change of office from one town to another within same state
 First decision at meeting of Board of Directors
 Approval of members with special resolution (3/4th of members present
& voting) at AGM / EOGM
 Form 18 for change of address to be filed with ROC
 Advertisement
- Change of office from one state to another
 First decision at meeting of Board of Directors
 Approval of members with special resolution (3/4th of members present
& voting) at AGM / EOGM
 Form 18 for change of address to be filed with ROC
 Application to CLB at the Regional Director of Zone for approval
  Publication of hearing before CLB
 Inviting objections (from state government, workers or creditors)
 Order will be issued approving change of registered office
 Filing of CLB order with ROC
 Advertisement
3. Change of Object Clause –
• Why Change of Object Clause
- New Technology
- New Products / Services which could be simultaneously undertaken
- Amalgamation / Merger of different companies with objectives
Take Over / Acquisition Merger / Amalgamation
Gujarat Ambuja ACC with majority Indian Rayon, Indo Gulf Fertilizer & Birla
shareholding of ACC Finance became Birla Nuo
- Cancellation of any objects
• Procedure –
- Decision by Board Of Directors
- Approval of Members at AGM / EOGM – by passing special resolution
for amending object clause
- Approval to be obtained from ROC
 Advertisement inviting objections if any
 Hearing if required
 ROC will give approval
 ROC to give certificate approving change in object clause
4. Liability Clause – never amended
5. Capital Clause – can be changed / amended
Procedure for change in capital clause
i. Decision by Board of Directors
ii. Approval of members at AGM / EOGM
a. By passing ordinary resolution – simple majority if there is power to amend
capital clause in the AOA
b. By passing special resolution – if there is no provision of alteration of capital
clause in the AOA, 75% majority in favor of change
iii. Filing with ROC Form no. 5 duly stamped & additional registration fee
6. Association / Subscription Clause – Not Ammended

Articles of Association (AOA)

Q. What do you understand by Doctrine of Indoor Management? Discuss significance &

relevance of AOA

• Bye Laws / Rules & Regulations for company law requirements

• Internal Procedure to be followed by a company
 • While MOA is compulsory for all the companies, AOA is optional for public LTD
companies. In case of Public Ltd company does not prepare AOA, Table A (Model Bye
Laws / AOA for Public Ltd Companies) of Schedule II of Companies Act will apply

Contents of AOA
1. Procedure relating to
• Share Capital
• Issue of share certificate
• Issue of duplicate share certificate
• Transfer Shares
• Transmission
• Forfeiture of shares
2. Matters relating to
• Meetings of the members
• Types of meetings
• Procedure at meetings
 Issue of notice
 Quorum requirement
 Proxy
 Voting
 Resolution
3. Provisions relating to Directors
• Meeting of Directors
• Powers of Directors
• Powers of Chairman / Managing Director
• Borrowing Powers of the company
• Accounts & Audit
• Seal
4. Significance of AOA
• Bye Laws / Rules governing internal company law requirement
• Doctrine of Indoor Management

Doctrine of Constructive Notice

• Office of ROC is Public office
• Whatever is filed with ROC can be inspected by the public by paying inspection fee
• Information filed with ROC is deemed to have been given to public
• Every person who deals with company is presumed to know whatever is filed with ROC
but nothing beyond this. Therefore a person can presume that company has complied
with all the procedural requirements
• He is not required to investigate whether the company has in fact complied with such
requirements e.g. Royal British Bank vs. Turquand
Limitations to the Doctrine of Indoor Management
• Knowledge of Irregularity
• Forgery
• Circumstances giving rise to Suspicion

Raising The Resource for the Company

Short Term Long Term

- Working Capital facility from bank • Capital – Equity & Preference
- Sundry Creditors • Debentures (Bonds)
- Outstanding Expenses • Term Loans
- Public Deposit maturing within one year • Public Deposit maturing after 1 year (Max. 3
- Commercial Papers years)
- Inter-corporate Loans
- Factoring Limit

GDR – Global Depository Receipt – Shares not issued, only certificate issued in other than
dollar, listed on foreign exchanges
ADR – American Depository Receipt
FCCB – Foreign Currency Convertible Bonds
ECB – External Commercial Borrowing

Raising Long Term Funds through Equity

• How much / what amount of Equity
• Size of Project
 Detailed Financial plan with focus on its predetermined activity with specified
investment ensuring desired monetary return

- Detailed Project Report – Details of investment on land, building, plant &

machinery, furniture & fixtures, installation, contingency provision, margin for
working capital
- Means of Finance – Capital 30 crores (Equity – 10 crores; IPO through
prospectus & Debt – 20 crores)

IPO – Through issue of Prospectus

Legal Aspects
1. Companies Act – Provisions relating to prospectus
2. SEBI Act 1992 – Disclosure for SEBI guidelines
3. Securities Contract Regulation Act – Listing guidelines of exchange
Coordination can be done by Merchant Bankers (Tie up Means of Finance)

Entry Norms Of SEBI

Only Public Ltd companies have access to capital market
- Track record of dividend payment in 3 - Newly incorporated company / in
out of 5 preceding financial years Greenfield project
- Net worth of the company should be not - Project has to approved by Financial
be less than 1 crore in last five financial Institution / Banks
years - Approving Authority must have
- IPO cannot exceed an amount more than participated to the extent of 10%
5 times its net worth - There should be compulsory market
making for 2 years

Draft Prospectus
Primary Responsibility – Merchant Banker companies Secretarial / Finance Department to
provide necessary output
• Contents of Prospectus – Companies Act (Section 62)
• It should also follow disclosure norm of SEBI – for investors to take informed decisions
• Also keep in mind listing guidelines of the stock exchanges where the shares are
prepared to be traded in 2 parts
Part 1 (General Information)
• Name
• Registered office
• Main objectives of the company
• Authority for the issue
• Terms of issue (no. of shares, Price – Fixed price or Market price to be discovered
through book building process). Payment to be made on application or allotment.
Issue Program – Issue Opens on, Issue Closes on, Earliest Closing
• Lead Managers or Co-Managers
• Bankers to the issue
• Brokers to the issue
• Registrars for the issue
• Underwriters for the issue (optional)
All these agencies have to give their written consent to be enclosed & filed with
prospectus when it is filed with ROC

Part 2
• Background of the Company & the management
 • Board of Directors – Names, Addresses, educational qualification & experience as
well as details of other directorship
• Other group companies under the same management
• Objectives of the issue
• Details of the project – cost of project, means of finance, availability of raw material
• Utilities
• Marketing / Selling Arrangements
• Schedule of implementation
• Outstanding litigation
• Stock exchange data
• Risk factors affecting the business
• Management perception in respect of risk factors
• Audited financial performance for last 5 years

Draft prospectus to be filed with

• SEBI
• Stock exchange where shares are proposed to be listed
After SEBI clearance prospectus is filed with ROC

Red Herring Prospectus

• Where price / no. of shares issued by the company is not mentioned in the prospectus
• Price is discovered through book building
 Lead managers – lead book runners
 Other members – syndicate members
• Price band – (floor price – max. price are mentioned) Lead Merchant Banker prepares a
research report on the company. Presentations are made before QIB’s (Qualified
Institutional Bankers) called Road shows. QIB’s indicate their interest in the issue. Bids
are invited. Cut off price is decided
• The prospectus is filed with ROC
• Basis of allotment prepared by registrar to issue
• Return of allotment to be filed with ROC

Self Prospectus:- Only for Banks & Financial Institution

• Filing of issue of prospectus which will be issued for 1 year
• Details of shares subscribed & allotted are filed with ROC

Authorized Capital:- Maximum amount the company is authorized to raise as per capital
clause of MOA

Issued Capital:- Number & amount of share capital issued to the public

Subscribed Capital (90%) & Paid Up Share Capital:- Shares subscribed by the investors
(which may not be less than 98% of issue amount)
Paid Up = Subscribed Capital less calls in arrears

Shares
Equity (3) Preference (1)
Those shares which are not preference shares Which can enjoy preferential rights
(risk capital) • Dividend
• No assurance as to return of investment • Redemption
• No certainty as to return on investment

Equity
Voting Rights Without Voting Rights (not more than 25% of
paid up share capital)
Equity shares with differential voting rights

Preferential Rights:-

1. Cumulative / Non Cumulative – Preference shares where the right to dividend is

allowed to be accumulated even if company has not declared dividend & the dividend
will be payable in the year when the company has adequate profit are called cumulative
preference shares & preference shares where dividend is not allowed to be accumulated
are called non cumulative preference shares.
2. Participative / Non Participative – Participative Preference shares are those which are
allowed to participate in share of profit after payment of dividend on equity from out of
surplus profit left. Non Participative Preference shares are not entitled to any
participation in surplus profit. They are entitled to agreed dividend
3. Convertible / Non Convertible – Convertible Preference shares are those which are
converted into equity. Non Convertible Preference Shares are those which are not
converted into equity
4. Redeemable / Irredeemable – Redeemable Preference shares are those which will be
redeemed / repaid within max period of 10 years. Irredeemable Preference shares cannot
be issued
5. Cumulative Convertible Preference shares – Right to dividend is accumulated.
Preference shares are converted into equity

Shares issued at Premium Shares issued at
Discount
- shares issued at value - Rs. 10 shares issued
higher than the face at Rs .9 per share
value - company when
- share premium can be issues shares at a
utilized for price less than the
• writing off face value
Shares issued at Buy Back Shares
Par
Shares issued at Market price is related
face value price multiples of EPS
(Earnings / No. of
shares)
- company can buy
back 25% of its
 preliminary • Not more than paid up capital
expenses 10% unless - buy back from
• Bonus issue of approved by • accumulated
shares central govt. profits
• Expansion • Approved by • reserves
- Rs. 10 share issued at Rs. members by • proceeds of
120 (Share Capital – special previous issues
Rs.10 & Share Premium resolution of shares
Rs. 110) • Shares - there must be
forfeited are provision in AOA
issued at - buy back can be by
discount • purchase of odd
lots
• open market
purchases
• reverse book
building
• shares tendered
under buy back
must be
cancelled within
7 days

Meetings of Members:-

Statutory Meeting AGM EOGM

- held once under the act
hence statutory
- To be held only by Public
Ltd Company. Pvt. Ltd
Company not to hold this
meeting
- held once in life time
- it is held between 1 – 6
months from the date of
obtaining certificate of
commencement of business
- Can be held by Public / Pvt. - Can be held by Public / Pvt.
Ltd company Ltd company
- Held every year - Can be held any time when
- With 6 months from end of the matter is urgent
accounting year - It cannot wait till next AGM
- One meeting per calendar - Any meetings of members
year other than AGM are EOGM
- 1st meeting to be held within
18 months from the date of
incorporation
- between 2 AGM’s gap not
more than 15 months
- Obtain approval of ROC if
gap exceeds 15 months

Agenda

Statutory Meeting AGM EOGM

Consideration of Statutory Consideration of Statutory Consideration of Statutory
Report Report Report
- Report explaining the - P&L a/c
progress made since - Balance sheet
incorporation of the - Auditors report
company - Directors reports
- Receipts & payment a/c - Corporate governance
- Shares issued & allotted report
- Important contracts signed
by management
- To be filed with ROC

Procedure to Conduct meetings of members

• Authority to convene a meeting – Board of Directors – Every general body meeting
must be presided by Board meeting
• Notice – Specify time (working time), Day (Working Day – not a Sunday or public
holiday – Negotiable Instrument Act), Date & place of meeting (registered office or
other place in the town in which registered office is located, 21 day clear notice – date
of posting & date of receipt to be excluded under certificate of posting)
• Agenda for Meeting – For AGM agenda is divided in 2 parts
1. Ordinary Business
• Approval of P&L, B/s Passed by ordinary resolution
• Declaration of dividend
• Appointment of auditor
• Appointment of Directors
2. Special Business
• anything other than ordinary business
• explanatory statement should be given in the notice
• reason why business is taken up
• disclosure of interest of any director
• At EOGM – all business matters are special business requiring explanatory stand

Procedure to conduct meetings of members on the date of meeting

1. Chairman – the designated chairman to preside over the meeting. If there is no

designated chairman, the members to choose one of them as chairman of the meeting
2. Quorum – Minimum no. of members required to be present at the meeting
a. As per provisions in the article
b. If articles are silent, in case of Public ltd company 5 persons, in case of Pvt ltd
company 2 persons shall form quorum
c. Quorum must be present within half an hour from the scheduled time of
commencement of meeting
 d. If quorum is not present within half an hour, meeting is adjourned to next week,
same time, same place
e. If at the adjourned meeting quorum is not present, persons present shall form the
quorum
3. Proxy – a member is entitled to attend the meeting or depute a person to attend on his
behalf by executing instrument of proxy
a. Proxy need not be a member
b. Proxy form should be lodged with the company 48 hours before the scheduled
time of commencement of meeting
c. Proxy may be open or with specific direction to vote or against the resolution
d. Proxy is cancelled if member attends the meeting
e. Proxy cannot speak, but vote at the meeting
4. Movement of Resolution
a. Resolution is proposed by 1 of the members
b. It is seconded by another member
c. Decision on the resolution – members can raise questions – chairman to answer
d. Report of auditor is read at the meeting
5. Chairman to ascertain the sense of the meeting (whether the resolution has been passed
or not)
a. Voice vote - Ordinary resolution requires simple majority
b. By show of hands - Special resolution requires 3/4th majority
c. By division
d. By ballot
e. By poll
6. Minutes – record of resolution passed is written in minute book to be signed by
chairman of the meeting
7. Special resolution are passed to be filed with ROC

Resolutions
Ordinary Special Resolution requiring special
notice
- Simple majority - Requires 3/4th majority - Removal of a Director
- Ordinary business of rule is - Amendment in MOA - Removal of an Auditor
passed by simple majority - Amendment in AOA
- Appointment of MD
- Remuneration of MD
- Appointment of sole selling
agent
- Can be done by postal
ballot for listed companies
 Appoint Auditors to check
Power to manage the & control performance of
company given to Board company which is
of Directors – who are managed by directors
responsible for day to day
management
Report to members
Members – Contribute to
the capital of the company
& control the company by
executing voting rights at
meeting

Q. Discuss the provisions relating to qualifications, appointment, powers & removal of

directors of the company under companies act?

Director – Director means a person who holds position of a Director by whatever name called
1. Agent of the Company – Director functions as an agent of the company acting on behalf
of the company
2. Trustees
a. of the members for the property owned by the company
b. must observe at most good faith (trust & confidence)
c. act in the benefit of the company & not for personal profit
3. Managing Organ – Through which the company operates / functions
4. Professional Employees – Director has to be an individual & not an incorporated body

Appointment of Directors No. of Directors – minimum in case of Public ltd company – 3 &
Pvt. Ltd Company – 2. Maximum no. as may be permissible in AOA
1. First Directors – Names in AOA. In case articles are silent all the subscribers to MOA /
AOA shall be deemed to be the first director. These directors shall held office till AGM
2. Subsequent Directors – by the members at AGM. 1/3 rd of the directors can be non
repairable & 2/3rd of the directors will be liable to retirement. Of this 2/3rd ,1/3rd will
retire every year. Retiring directors can offer themselves for re-appointment.
Reappointment by members at AGM
3. Directors appointed by Board of Directors
a. Appointment of additional director
i. BOD can appoint additional director (not exceeding the max. no.
provision in AOA) to take benefit of expertise as well as experience of
any individual
ii. Such director will hold position till next AGM. At next AGM he may be
re-appointed
b. To fill up casual vacancies
 i. On account if vacancy arises, BOD can appoint a director to fill up the
vacancies
ii. Death, resignation or Disqualification
iii. Such director to hold office till next AGM
c. Alternate directors - When the director leaves the state in which registered office
of a company is located
i. For a period more than 3 months
ii. Board may appoint alternate director to attend the Board meeting in
absence of original director
iii. The alternate director attends Board meetings in absence of original
director
4. Appointment of directors by outsiders – There can be an agreement by the company
with
a. Its lenders or
b. Creditors
Whereby its nominee of lenders / creditors may be appointed in the Board
c. Such directors are not liable to retirement
5. Power of Government / NCLT (National Company Law Tribunal) to appoint director on
the Board of the Company
a. Where there are complaints about mismanagement of the company &
b. Investigation have been carried out
c. Or complaints before NCLT about the affair of the company being conducted
against the interest of the members. NCLT / Government can appoint Director
on the Board of the Company
d. These directors are not liable to retirement

Qualifications – Qualifications if provided in AOA the director will have to take up

qualification shares within 2 months of appointment. For shares upto face value of Rs. 5000/-
Disqualifications – Person is disqualified
1. if he is of unsound mind
2. undischarged insolvent
3. he applies for declaring himself insolvent
4. he has been sentenced to imprisonment for a period not excluding 6 months, for offence
involving moral turpitude & a period of 5 years has not expired
5. he is director in a company
a. company has defaulted to file annual return & balance sheet for a consecutive
period of 3 years with ROC
b. Company defaults in payout of interest / principal of deposits from public
Max. no. of companies - a person can be director in max. 15 companies excluding
Pvt, ltd Companies

Vacation of office of Directors

1. on attracting disqualification
2. if a director fails to attend 3 consecutive Board meetings without leave of absence
3. if director fails to take qualification shares within 2 months
 4. if he fails to pay call money on shares within 6 months

Removal of a Director
1. Removal by the member at AGM
a. By not reappointing retired Director
b. By appointing someone else in place of retiring director
c. By passing a resolution removing a director
2. Removal of Director by NCLT

Powers of a Director
1. General Power – General Powers to be exercised keeping in view
a. Provisions of companies act
b. AOA
c. Contract with the company
i. Directors have general power to do all those things which a company is
empowered to do
2. Powers which can be exercised at Board Meeting – there has to be board meetings (min.
4 meetings in a year, 1 every quarter)
a. Power to make calls on shares
b. Power to issue debentures
c. Power to borrow
d. Power to make investment
e. Power to make political donations – total Rs. 50000/- or 5% of net profit
whichever is higher
3. Powers which can be exercised with consent of members
a. To sell any undertaking (division) of the company
b. To borrow in excess of paid up capital & reserves
c. To amalgamate / merge other company / with other company
d. To appoint sole selling agent
e. To amend MOA / AOA
f. To fix remuneration of MD

Account & Audit – Books of a/c / registers to be maintained by the company

• Assets of the company
• Liabilities of the company
• Register of sales
• Register of purchases for manufacturing operations
• Registers for
o Raw material
o Labor
o Utilities
o Other expenditure

P&L & B/S as per schedule VI

Dividend to be paid – to be paid only out of current profits
1. provided for depreciation
2. rules relating to transfer of profits to reserve
Profit Transfer to Reserve
10% - 12.5% 2.5%
12.5% - 15% 5%
15% - 17.5% 7.5%
Above 17.5% 10%
3. a/c’s to be audited by the auditors

Q. Discuss provisions relating to appointment, qualification & powers of auditors of the

company under the companies act 1956?

Audit under the companies act is statutory audit. Every company under the companies act is
required to have its accounts audited by the auditor

Auditor
• CA – member of ICAI having certificate of practice &
• He is not in the full time employment
• Not indebted to the company for amount exceeding Rs. 1000/-
• Should not be related to Directors

Powers of Auditor
1. Power to have access to all documents – agreements / contracts / minutes
2. Power to visit / verify / check – properties / assets of the company at all locations (plant,
branch. HR)
3. Power to obtain information / explanation from the employees of the company
4. To report to the members
a. Whether the company has maintained the required books of a/c or registers
b. Whether the company has been complying with accounting standards
c. In case of variation point out the impact on P&L of the company

Certify That
1. P&L a/c gives true & fair view of profit & loss for the year
2. Balance sheet gives true & fair view of financial position of the company as on a
particular date
a. Auditors to qualify the report where there are irregularities
b. Directors to reply to qualifying remarks of auditors
 NEGOTIABLE INSTRUMENTS ACT 1881

Transferable documents which are used for transfer of movable property. Negotiable instrument
means Promissory Note, bill of exchange & Cheque

Q. Define promissory note & differentiate it from bill of exchange & a cheque

Promissory Note
• Instrument in writing
• Not being a bank note or currency note
 • Signed by the maker
• Containing an unconditional undertaking
• Ta pay certain sum of money only
• To a certain person on his order

25/11/2005
On demand I promise to pay Rupesh Pandey sum of Rs. 50000/- for
value received
To Rupesh Pandey Signed by maker / promissor

Bill of exchange
• Instrument in writing
• Signed by the maker
• Containing an unconditional order
• Directing a certain
• To pay a certain sum of money only
• To certain person or his order
25/11/2005
On demand pay Rupesh Pandey sum of Rs. 50000/- for value received

To Drawee (who has been directed to pay) Signed by maker / promissor

Cheque
Bill of exchange drawn on a specified banker

Bank of Baroda 25/11/2005

Pay Rupesh Pandey
In Words Figures_________
Signed by maker / promissor

Promissory Note Bill of Exchange Cheque

1. Parties Involved 2 parties – maker who 3 parties 3 parties
promises to pay & • Drawer / maker • Drawer –
payee (promise) who – who draws maker of a
collects payment the bill cheque
• Drawee – on • Drawee – Bank
whom the bill
 is drawn or to • Payee - Who
whom direction collects the
to pay is given payment
• Payee - Who
collects the
payment
2. Nature of Maker – Debtor Drawer – Creditor vis-
Drawer – Creditor vis-
relationship Payee - Creditor à-vis Drawee but
à-vis Bank but Debtor
Debtor vis-à-vis Payee
vis-à-vis Payee
Drawee – Debtor Drawee – Bank -
Payee – Creditor Debtor
Payee – Creditor
3. Nature of liability Maker of promissory Drawee – Primary Bank – Primary Liable
note is primararily Liable Drawer – Secondary
liable Drawer – Secondary Liable
Liable
4. Acceptance Not Required Acceptance by drawee Not Required
required
5. Crossing N.A. N.A. Only cheque are
required to be crossed
6. Stamp Duty Attracted Attracted Not Required
7. Notice of dishonor Not Required Required Bank issues non
Payment memo
8. Special Provisions
a. Drawee in case of N.A. N.A.
need
b. Acceptance for N.A. N.A.
Honor

Q. What do you mean by crossing of cheques? Discuss various types of crossings & their
significance?

Meaning – When a cheque bears across in face two parallel transverse lines with or without the
word
• And company
• & company
• not negotiable
Cheque is said to be crossed

Significance – crossing is an instruction to the bank not to pay cash across the counter

Types of Crossing
General Crossing Special Crossing Restrictive Crossing
 When the cheque bears across
its face two parallel lines with
the name of a particular banker
then the cheque is said to have
been specially crossed to that
bank
Significance – Banker to whom
the cheque is specially crossed
Is the only authorized banker to
collect the payment
When the cheque bears across
its face two parallel lines with
the words “a/c payee only” or
“payees a/c only” cheque is said
to be restrictively crossed
Significance – Cheque cannot
be deposited in any other a/c of
payee

Significance of cheques crossed with the words not negotiable – words not negotiable do not
prohibit the transferability of the amount of a cheque but it is a warning that the title of the
person receiving the cheque will not get better than that of the person from whom he gets it

Negotiations – Process whereby the amount mentioned in Negotiable Instrument is transferred

to another person
By mere delivery Endorsement & delivery
If negotiable instrument is drawn payable to Negotiable instrument drawn payable to order
bearer

Q. What do you understand by endorsement? Discuss various types of endorsements &

effect thereby by giving suitable examples?

Endorsement – Instruction to transfer the amount of negotiable instrument to another person

Person who gives the instrument – Endorser
Person in whose favor endorsement is given – Endorsee

First Endorser – Payee

Allonge – Additional slip attached to check for endorsement

Types of Endorsements
1. Endorsement in Blank – where payee or endorser merely signs the instruments at the
back for the purpose of transfer amount of Negotiable Instrument. Effect – order
instrument becomes bearer instrument & amount can be paid by mere delivery
2. Endorsement in Full – when payee or endorser gives full instructions as to whom the
amount of Negotiable Instrument is to be transferred. Effect - The person in whose
favor endorsement is made is entitled to collect the amount of Negotiable Instrument or
further endorse
3. Restrictive Endorsement – when payee or endorser restricts further endorsements are
restricted. Effect – Endorsee will have collect the amount by depositing the Negotiable
Instrument in his a/c
4. Conditional Endorsement – when payee or endorser attaches conditions to transfer of
amount of Negotiable Instrument. Effect – Endorsee will have to comply with terms of
endorsement
 5. Partial Endorsement – when payee or endorser transfers part of the amount of
Negotiable Instrument. Partial Endorsement is invalid. Exception – Incase where Bill of
Exchange contains a note that part amount is already paid Negotiable Instrument will
stand reduced to that amount
6. Facultative Endorsement – when payee or endorser forgoes his right or increases his
responsibility. Effect – Endorser continues to be held responsible even if notice of
dishonor was not served on him
Bill of Exchange drawn by Ramesh Sinha
Drawee – Amit
Payee – Angad
1st Endorsee – Abbas
2nd Endorsee – Shardul
3rd Endorsee - Asif
7. Endorsement Sans-resource – when payee or endorser makes further endorsement
without having any reference to himself. Effect – The endorser is not available for any
reference / remedy
8. Endorsement sans frais – when payee or endorser transfers without his availability to
contribute towards expenses. Effect – Endorsee cannot depend on contribution on
endorser

Q. Define Holder in due course & discuss privileges of holder in due course

Holder in Due Course

A B C D E F
Drawer Drawee Payee Endorsee1 Endorsee2 Endorsee3

Holder – A person in possession of Negotiable Instrument in his own name. entitles to receive
the amount

Holder in due course – A person who became

• Possessor of Negotiable Instrument payable to bearer
• Payee or endorsee of Negotiable Instrument payable to order
• For consideration
• Before maturity
• Without having sufficient cause to believe that
• Defect existed in the of the person from whom he derived it

Privileges of the Holder in due course

1. All the previous parties are liable to HIDC
2. HIDC can file suit for recovery in his own name against all the previous persons
3. Drawee cannot refuse payment to HIDC on the grounds that the bill was
accommodation bill – Bill drawn without consideration
 4. Drawee cannot refuse payment on the ground that bill is fictitious – where either drawer
or payee are not existing
5. Drawee cannot refuse payment on the ground that bill is inchoate – Bill which is
stamped & signed but incomplete / blank in respect of other details
6. Holder in due course is entitled / authorized to fill up / complete inchoate stamped
instrument
7. Drawee cannot refuse payment on the ground that bill is unconditional / escrow – where
bill has been drawn & accepted subject to certain conditions
8. Once the Negotiable Instrument passes through the hands of HIDC it gets cleansed of
all its defects
9. Capacities of previous parties cannot be questioned
10. Every holder is pressured to be holder in due course

A cheque is ordinarily paid by the drawee bank if it is in perfect order. But sometimes a cheque
is not paid. When a cheque is paid by the drawee bank, it is said to be honored. When it is not
paid it is said to be dishonored. In the following cases the bank may dishonor a cheque:

• When the customer has died and the bank has notice of his death.
• Where the customer has become insolvent or an order of adjudication has been passed
against him.
• When the bank has received an order from the court prohibiting payment out of the
funds belonging to the customer.
• When a customer becomes a lunatic and the banker has got notice of his insanity.
• Where the drawer countermands payment.
• When the customer has not got sufficient funds with the bank and there is no overdraft
arrangement.
• Where there are material alterations or signatures of the drawer or endorses are
irregular.
• When the drawer has closed his account prior to the presentation of cheque.
• When a cheque is mutilated.

Insurance is a contract, a risk transfer mechanism whereby a company (Underwriter) promised

to compensate or indemnify another party (Policyholder) upon the payment of reasonable
premium to the insurance company to cover the subject-matter of insurance. If you are well
conversant with these principles, you will be in a better position in negotiating you insurance
needs.

1. Insurable interest. This is the financial or monetary interest that the owner or possessor of
property has in the subject-matter of insurance. The mere fact that it might be detrimental to
him should a loss occurred because of his financial stake in that assets gives him the ability to
insure the property. Castellin Vs Preston 1886.

2. Umberima fadei. It means utmost good faith, this principle stated that the parties to insurance
contract must disclose accurately and fully all the facts material to the risk being proposed. That
is to say that the insured must make known to the insurer all facts regarding the risk to be
insured (Looker Vs Law Union and Rock 1928). Likewise, the underwriter must highlight and
explain the terms, conditions and exceptions of the insurance policy. And the policy must be
void of 'small prints'.

3. Indemnity. It stated that following a loss, the insurer should ensure that they placed the
insured in the exact financial position he enjoyed prior to the loss (Leppard Vs Excess 1930).

4. Contribution. In a situation where two or more insurers is covering a particular risk, if a loss
occurred, the insurers must contribute towards the settlement of the claim in accordance with
their rateable proportion.

5. Subrogation. It has often been said that contribution and subrogation are corollary of
indemnity, which means that these two principles operates so that indemnity does not fail.
Subrogation operates mainly on motor insurance. When an accident occurred involving two or
more vehicles, there must be tortfeasor(s) who is responsible for accident. On this basis, the
insurer covering the policyholder who was not at fault can recover their outlay from the
underwriter of the policyholder who is responsible for the incidence.

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INSURANCE

Human life is exposed to many risks, which may result in heavy financial losses. Insurance is
one of the devices by which risks may be reduced or eliminated in exchange for premium. In
words of Chief Justice Tindal, “Insurance is a contract in which a sum of money is paid by the
assured in consideration of the insurer's incurring the risk of paying larger sum upon a given
contingency”. In its legal aspects it is a contract whereby one person agrees to indemnify
another against a loss which may happen or to pay a sum of money to him on the occurring of a
particular event. All contracts of insurance (except marine insurance) may be verbal or in
writing, but practically contracts of assurance are included in a document.

Basic principles of insurance

The following are the basic essentials 'or requirements of insurance irrespective of the type of
insurance concerned.

1. Utmost good faith

All types of contracts of insurance depend upon the contracts of utmost good faith. Both parties
(insurer and the insured) in the contract must disclose all material facts for the benefit of each
other. False information or non-disclosure of any important fact makes the contract avoidable.
So the conditions to show utmost good faith is very strict on the part of the insured.

2. Insurable Interest

The insured must possess an insurable interest in the object insured. It may be defined as a
financial interest in the subject matter of contract. The presence of insurable interest is a legal
requirement. So an insurance contract without the existence of insurable interest is not legally
valid and cannot be claimed in a Court. The object of this principle is to prevent insurance from
becoming a gambling contract.

3. Principle of indemnity

All types of contracts except life and personal accident insurance are contract of indemnity.
According to them, the insurer undertakes to indemnify the insured against a loss of the subject
matter of insurance due to insured cause. In life assurance the question of loss and, therefore, of
its indemnification does not rise. Because the loss of life cannot be estimated in term of money.
The principles of indemnity is based on the idea that the assured in the case of loss only shall be
compensated against the actual total loss. But if no event happens, the insured has not to receive
any amount, so in this case the premiums paid by him becomes the profit of the Insurer.

4. Doctrine of subrogation

This principle applies to the contract of indemnity only i.e. marine and fire. It lays down a
principle which is quite equitable. According to this doctrine, where a loss occurs and the
insurer pays as for a total loss, he is entitled to all the rights and remedies which the insured has
against a third party in respect of loss so paid for. It prevents the insured being indemnified
from two sources in respect of the same loss. Suppose ‘A’ has damaged ‘B’ is motor car
negligently. If he pays ‘B’ is loss in full. B cannot collect the same from the insurance
company. On the other hand if B applied to his insurance company for indemnity under his
policy, he will not be permitted to collect the damages from A. In the latter case the insurance
company will be entitled to collect that amount.
5. Doctrine of proximate cause

This principle is found very useful when the loss occurred due to series of events. It means that
in deciding whether the loss has arisen through any of the risks insured against, the proximate
or the nearest cause should be considered. To take an illustration in one case where a policy
holder sustains an accident while hunting. He was unable to walk after the accident and as a
result of lying on wet ground before being picked up, he suffered pneumonia. There was an
unbroken change of cause between the accident and the death, and the proximate cause of the
death, therefore, was the accident and not the pneumonia.

6. Cancellation

Both parties have right to cancel the policy before its expiry date. The period of .the policy
comes to an end on the cancellation of policy. So the protection provided by the insurer to the
insured stops from the date of such cancellation. The premium received by the insurance
company is also returnable to the insured.

7. Attachment of risk

Without the attachment of definite risk to the policy, the contract of insurance cannot be in
force. So in this case the consideration fails and the premium received by the insurance
company must be returned.

8. Mitigation of loss

When the event insured against takes place, the policy holder must do every thing to minimize
the loss and to save what is left. This principle makes the insured more careful in respect of this
insured property.

9. Arbitration

Most fire and accident insurance policies contain an arbitration clause which provides for
referring' to differences to an arbitration. The arbitrator is to be appointed in writing by the
parties in difference. The object of this clause is to reduce litigation.