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North Maharashtra University, Jalgaon

(NAAC Reaccredited ‘A’ Grade University)


FACULTY OF COMMERCE and MANAGEMENT
MBA (Integrated) Second Year w. e. f. 2018 – 19
SEMESTER: III
Paper: MI 3.4 Business Law
60 + 40 Pattern: External Marks 60 +Internal Marks 40 = Maximum Total Marks: 100
Required Lectures: 60 hours
1. Indian Contract Act 1872
1.1. Meaning and Definitions (Offer, Acceptance, Consideration, Contract)
1.2. kinds Of Contract
1.3. Essential of Contract
1.4. Performance and Discharge of Contract
1.5. Breach of Contract

2. Sale of Goods Act, 1930


2.1. Introduction and Definition
2.2. Sale and Agreement to Sell
2.3. Conditions and Warranties
2.4. Unpaid Seller and His Rights
2.5. Performance of Contract of Sale
2.6. Sale by Auction

3. Negotiable Instruments Act, 1881


3.1. Definition and Characteristics of Promissory Note, Bill Of Exchange And Cheque.
3.2. Holder and Holder in, Due Course, Privileges of Holder In Due Course
3.3. Crossing and Endorsement of Negotiable Instrument
3.4. Dishonour Of N.I., Notice Of Dishonour, Dishonour Of Cheque And Its Effects.

4. Limited Liability Partnership Act 2008


4.1. Meaning and Silent Features of LLP
4.2. Partnership deed
4.3. Incorporation of LLP
4.4. Extent and Limitations of Liability, Benefit or Advantages of LLP
4.5. Difference between LLP and Partnership Firm
4.6. Prima facie steps of conversion to LLP
4.6.1. Partnership firm to LLP
4.6.2. Private Limited Company to LLP
4.7. Winding up and Dissolution
4.7.1. Ways of winding up
4.7.2. Circumstances in which LLP may be wound up by Tribunal

5. The Patent and Copyright Act


5.1. “The Patents Act, 2002” –
i) Application for Patent
ii) Grant of Patent
iii) Rights of Patentee
iv) What inventions are not patentable?
v) Revocation of Patents

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5.2. “Copyright Act, 1957 –
i) Introduction
ii) Duration of Copyright protection
iii) Registration of
Copyright
iv) Infringement of Copyright – Exceptions

6. “The Trade Marks Act, 1999”


i) Introduction
ii) Classification of Goods and Services
iii) Procedure for registration of Trade Marks
iv)Grounds for refusal of registration

REFERENCE BOOKS
1. Legal Aspects in Business 2e by Albuquerque – Oxford University Press
2. Legal Aspects of Business by Akhileshwar Pathak – Tata McGraw Hill
3. Mercantile and Commercial Law by Rohini Aggrawal – Taxman Publication
4. Legal Aspects of Business by R.R.Ramtirthkar – Himalaya Publishing House
5. Mercantile Law by N.D.Kapoor – Sultan Chand and Sons
6. Business Law andMgt. By Bulchandani, Himalaya Publication
7. Business Regulatory Framework By S.N. andS.K. Maheshwari, Himalaya Publication
8. Business Law –By Kuchal M.C.- Vikas Publishing House
9. Business Law –By Kapoor .N.D. -Sultan Chand And Sons

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Indian Contract Act 1872

1. Short title
This Act may be called be the Indian Contract Act, 1872.

Extent, commencement - It extends to the whole of except the State of Jammu and Kashmir;
and it shall come into force on the first day of September, 1872.

Enactment repealed - Nothing herein contained shall affect the provisions of any Statute,
Act or Regulation not hereby expressly repealed, nor any usage or customs of trade, nor any
incident of any contract, not inconsistent with the provisions of this Act.

2. Meaning

The Indian Contract Act, 1872[1] prescribes the law relating to contracts in India. The Act is
based on the principles of English Common Law. It is applicable to all the states of India. It
determines the circumstances in which promises made by the parties to a contract shall be
legally binding. Under Section 2(h), the Indian Contract Act defines a contract as an
agreement which is enforceable by law.

The Act as enacted originally had 266 Sections, it had wide scope and included.

 General Principles of Law of Contract – Sections 01 to 75


 Contract relating to Sale of Goods – Sections 76 to 123
 Special Contracts- Indemnity, Guarantee, Bailment & Pledge and Agency – Sections 124
to 238
 Contracts relating to Partnership – Sections 239 to 266
At present the Indian Contract Act may be divided into two parts:

 Part 1: deals with the General Principles of Law of Contract Sections 1 to 75


 Part 2: deals with Special kinds of Contracts such as

1. Contract of Indemnity and Guarantee


2. Contract of Bailment and Pledge
3. Contract of Agency.

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3. Definitions

1. Offer(i.e. Proposal) [section 2(a)]:-When one person signifies to another his willingness
to do or to abstain from doing anything, with a view to obtaining the assent of that
other person either to such act or abstinence, he is said to make a proposal.

2. Acceptance 2(b):- When the person to whom the proposal is made, signifies his assent
there to , the proposal is said to be accepted.

3. Promise 2(b) :- A Proposal when accepted becomes a promise. In simple words, when an
offer is accepted it becomes promise.

4.Promisor and promisee 2(c) :- When the proposal is accepted, the person making the
proposal is called as promisor and the person accepting the proposal is called as promisee.

5. Consideration 2(d):- When at the desire of the promisor, the promisee or any other
person has done or abstained from doing something or does or abstains from doing
something or promises to do or abstain from doing something, such act or abstinence or
promise is called a consideration for the promise.

6. Agreement 2(e) :- Every promise and set of promises forming the consideration for each
other. In short, agreement = offer + acceptance.

7.Contract 2(h) :- An agreement enforceable by Law is a contract.

8.Void agreement 2(g):- An agreement not enforceable by law is void.

9.Voidable contract 2(i):- An agreement is a voidable contract if it is enforceable by Law at


the option of one or more of the parties there to (i.e. the aggrieved party), and it is not
enforceable by Law at the option of the other or others.

10. Void contract :- A contract which ceases to be enforceable by Law becomes void when it
ceases to be enforceable.

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4. Kinds of Contract

1 On the basis of creation

(a) Express contract :- A contract made by word spoken or written. According to sec 9 in so
for as the proposal or acceptance of any promise is made in words, the promise is
said to be express.
Example : A says to B ‘will you purchase my bike for Rs.20,000?” B says to A “Yes”.

(b) Implied contract:- A contract inferred by


 The conduct of person or
 The circumstances of the case.
By implies contract means implied by law (i.e.) the law implied a contract through parties
never intended. According to sec 9 in so for as such proposed or acceptance is made
otherwise than in words, the promise is said to be implied.
Example:
A stops a taxi by waving his hand and takes his seat. There is an implied contract that
A will pay the prescribed fare.

(c) Tacit contract: - A contract is said to be tacit when it has to be inferred from the conduct
of the parties.
Example obtaining cash through automatic teller machine, sale by fall hammer of an
auction sale.

(d). Quasi Contracts are contracts which are created -


 Neither by word spoken
 Nor written
 Nor by the conduct of the parties.
 But these are created by the law.
Example:
If Mr. A leaves his goods at Mr. B’s shop by mistake, then it is for Mr. B to return the
goods or to compensate the price. In fact, these contracts depend on the principle
that nobody will be allowed to become rich at the expenses of the other.
(e). e – Contract: An e – contract is one, which is entered into between two parties via the
internet.

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2 On the basis of validity

(a) Valid contract:- An agreement which satisfies all the requirements prescribed by law On
the basis of creation

(b) Void contract (2(j)):- a contract which ceases to be enforceable by law because void
when of ceased to be enforceable
When both parties to an agreement are:-
 Under a mistake of facts [20]
 Consideration or object of an agreement is unlawful [23]
 Agreement made without consideration [25]
 Agreement in restrain of marriage [26]
 Restraint of trade [27]
 Restrain legal proceeding [28].
 Agreement by wage of wager [30]

(c) Voidable contract 2(i) :- an agreement which is enforceable by law at the option of one
or more the parties but not at the option of the other or others is a voidable
contract.
Result of coercion, undue influence, fraud and misrepresentation.

(d) Unenforceable contract: - where a contract is good in substance but because of some
technical defect i.e. absence in writing barred by imitation etc one or both the
parties cannot sue upon but is described as unenforceable contract.
Example: Writing registration or stamping.
Example: An agreement which is required to be stamped will be unenforceable if the same
is not stamped at all or is under stamped.

(e) Illegal contract:- It is a contract which the law forbids to be made. All illegal agreements
are void but all void agreements or contracts are not necessary illegal.
Contract that is immoral or opposed to public policy are illegal in nature.
 Unlike illegal agreements there is no punishment to the parties to a void agreement.
 Illegal agreements are void from the very beginning agreements are void from the
very beginning but sometimes valid contracts may subsequently becomes void.

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3 On the basis of execution

(a) Executed contract :- A contract in which both the parties have fulfilled their obligations
under the contract.
Example: A contracts to buy a car from B by paying cash, B instantly delivers his car.

(b) Executory contract:- A contract in which both the parties have still to fulfilled their
obligations.
Example : D agrees to buy V’s cycle by promising to pay cash on 15th July. V agrees
to deliver the cycle on 20th July.

(c) Partly executed and partly executory:- A contract in which one of the parties has fulfilled
his obligation but the other party is yet to fulfill his obligation.
Example : A sells his car to B and A has delivered the car but B is yet to pay the price. For A,
it is excuted contract whereas it is executory contract on the part of B since the price is yet to be
paid.

4 On the basis of liability

(a) Bilateral contract:- A contract in which both the parties commit to perform their
respective promises is called a bilateral contract.
Example : A offers to sell his fiat car to B for Rs.1,00,000 on acceptance of A’s offer
by B, there is a promise by A to Sell the car and there is a promise by B to purchase
the car there are two promise.

(b) Unilateral contract:- A unilateral contract is a one sided contract in which only one party
has to perform his promise or obligation party has to perform his promise or
obligation to do or forbear.
Example :- A wants to get his room painted. He offers Rs.500 to B for this purpose B says to
A “ if I have spare time on next Sunday I will paint your room”. There is a promise by A to
pay Rs 500 to B. If B is able to spare time to paint A’s room. However there is no promise by
B to Paint the house. There is only one promise.

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5. Essentials of valid contract ( sec 10)
Offer + acceptance = Promise
+
consideration
=
Agreement
+
enforceability By Law = Contract

1. Proper offer and proper acceptance with intention to create legal relationship.
Cases;- A and B agree to go to a movie on coming Sunday. A does not turn in
resulting in loss of B’s time B cannot claim any damages from B since the agreement
to watch a movie is a domestic agreement which does not result in a contract.
In case of social agreement there is no intention to create legal relationship and
there the is no contract (Balfour v. Balfour)

In case of commercial agreements, the law presume that the parties had the
intention to create legal relations.
[an agreement of a purely domestic or social nature is not a contract ]

2. Lawful consideration :- consideration must not be unlawful, immoral or opposed to the


public policy.

3. Capacity:- The parties to a contract must have capacity (legal ability) to make valid
contract.
Section 11:- of the Indian contract Act specify that every person is competent to
contract provided.
(i) Is of the age of majority according to the Law which he is subject, and
(ii) Who is of sound mind and
(iii) Is not disqualified from contracting by any law to which he is subject.

 Person of unsound mind can enter into a contract during his lucid interval.
 An alien enemy, foreign sovereigns and accredited representative of a foreign state.
Insolvents and convicts are not competent to contract.

4. Free consent :- consent of the parties must be genuine consent means agreed upon
samething in the same sense i.e. there should be consensus – ad – idem. A consent
is said to be free when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake.

5. Lawful object
 The object of agreement should be lawful and legal.
 Two persons cannot enter into an agreement to do a criminal act.
 Consideration or object of an agreement is unlawful if it
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(a) is forbidden by law; or
(b) is of such nature that, if permitted, would defeat the provisions of any law;
or
(c) is fraudulent; or
(d) Involves or implies, injury to person or property of another; or
(e) Court regards it as immoral, or opposed to public policy.

6. Possibility of performance:
 The terms of the agreement should be capable of performance.
 An agreements to do act, impossible in itself cannot be enforced.

Example : A agrees to B to discover treasure by magic. The agreement is void


because the act in itself is impossible to be performed from the very beginning.

7. The terms of the agreements are certain or are capable of being made certain [29]
Example : A agreed to pay Rs.5 lakh to B for ultra-modern decoration of his drawing
room. The agreement is void because the meaning of the term “ ultra – modern” is
not certain.

8. Not declared Void


 The agreement should be such that it should be capable or being enforced by law.
 Certain agreements have been expressly declared illegal or void by the law.

9. Necessary legal formalities


 A contract may be oral or in writing.
 Where a particular type of contract is required by law to be in writing and registered,
it must comply with necessary formalities as to writing, registration and attestation.
 If legal formalities are not carried out then the contract is not enforceable by law.

Example : A promise to pay a time. Barred debt must be in writing.


1.
2. Agreement is a wider term than contract where as all contracts are agreements. All
agreements are not contracts.

“All Contracts are Agreements, but all Agreements are not Contracts”

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6. Performance of contract

Sec 37:- That the parties to a contract must either perform or offer to perform, their
respective promises unless such performance is dispensed with or excused under the
provisions of contract Act, or of any other law.

 Performance: - Two types

1. Actual performance – when one party does what it undertook to do under


the contract within the time and in the manner prescribed , it is called actual
performance of the contract.
2. Attempted performance or tender of performance refusal to accept offer of
performance by promise [38] – Promisor offers to perform his obligation
under the contract but the promise refuses to accept the performance. It is
called as attempted performance or tender of performance

 Promisor is not responsible for non performance and they can sue the promisee for
breach of contract – nor he (promisor) thereby lose his rights under the contract.

 Who can demand performance?

1. Promisee – stranger can’t demand performance of the contract.

2. Legal Representative – legal representative can demand Exception performance.


contrary intention appears from the contract
contract is of a personal nature.

3. Third party – Exception to “stranger to a contract”

 Person by whom promise is to be performed Sec 40.


1. Promisor himself :- include personal skill, taste or art work.
Ex:- ‘A’ promises to paint a picture for ‘B’ as this promise involves personal skill of
‘A’. If must be performed by ‘A’.
2. Promisor or agent :- [does not involves personal skill]
3. Legal Representative [does not involve personal skill and taste]
4. Third person [Sec 41] :- Acceptance of promise from the third party:-

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If the promisor accepts performance of a contract by a third party, he can’t after
wards enforce the performance against the promisor although the promisor had
neither authorized not ratified the act of the third party.
[In other meaning once the promise accepts the performe from a third person, he
cannot compel the promisor the perform the contract again]

7. Discharge of contract
Discharge of a contract means termination of contractual relation between the parties to a
contract in other words a contract is discharged when the rights and obligations created by
it are extinguished (i.e. comes to an end).

 Mode of discharge of contract

I. Discharge by performance

fulfillment of obligations by a party to the contract within the time and in the manner
prescribed in the contract.
(a) Actual performance – no party remains liable under the contract. Both the
parties performed.
(b) Attempted performance or tender.:- Promisor offers to perform his obligation
under the contract but the promise refuses to accept the performance. It is
called as attempted performance or tender of performance
But the contract is not discharged.

II. Discharge by mutual agreement

(a) Novation [Sec 62] – Novation means substitution of a new contract in the place
of the original contract new contract entered into in consideration of
discharge of the old contract. The new contract may be.
Between the same parties (by change in the terms and condition)
Between different parties (the term and condition remains same or changed)

Following conditions are satisfied :-


(1) All the parties must consent to novation
(2) The novation must take place before the breach of original contract.
(3) The new contract must be valid and enforceable.

Example:
A owes B Rs.50,000. A enters into an agreements with B and gives B a mortgage of his estate
for Rs.40,000 in place of the debt of Rs.50,000. (Between same parties)

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A owes money Rs.50,000 to B under a contract. It is agreed between A, B & C that B shall
henceforth accept C as his Debtor instead of A for the same amount. Old debt of A is
discharged, and a new debt from C to B is contracted. (Among different parties)

(b) Rescission [62]:- Rescission means cancellation of the contract by any party or all the
parties to a contract. X promises Y to sell and deliver 100 bales of cotton on 1st oct his go
down and Y promises to par for goods on 1st Nov. X does not supply the goods. Y may
rescind the contract.

(c) Alteration [62] :- Alteration means a change in one or more of the terms of a contracts
with mutual consent of parties the parties of new contracts remains the same.

Ex:- X Promises to sell and delivers 100 bales of cotton on 1st oct. and Y promises to pay for
goods on 1st Nov. Afterwards X and Y mutually decide that the goods shall be delivered in
five equal installments at is godown . Here original contract has been discharged and a new
contract has come into effect.

(d) Remission [63]:- Remission means accepting a lesser consideration than agreed in the
contract. No consideration is necessary for remission. Remission takes place when a
Promisee-
(a) dispense with (wholly or part) the performance of a promise made to him.
(b) Extends the time for performance due by the promisors
(c) Accept a lesser sum instead of sum due under the contract
(d) Accept any other consideration that agreed in the contract

(e) Merger :- conversion of an inferior right into a superior right is called as merger.

III. Discharge by operation of law

(a) Death :- involving the personal skill or ability, knowledge of the deceased party one
discharged automatically. In other contract the rights and liability passed to legal represent.
Example : A promises to perform a dance in B’s theatre. A dies. The contract comes to
an end.

(b) Insolvency:- when a person is declared insolvent. He is discharged from his liability up to
the date of insolvency.

Example: A contracts to sell 100 bags of sugar to B. Due to heavy loss by a major fire
which leaves nothing to sell, A applies for insolvency and is adjudged insolvent.
Contract is discharged.
(c) By unauthorized material alteration – without the approval of other party – comes to an
end – nature of contract substance or legal effect.

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Example : A agrees upon a Promissory Note to pay Rs.5,000 to B. B the amount as
Rs.50,000. A is liable to pay only Rs.5,000.

IV. Discharge by Lapse of time

Parties conclude contracts when one party makes a clear and definite offer to the other,
who accepts within the prescribed or a reasonable amount of time. Lapse of time arises
when one of the parties does not fulfill their promises under the contractwithin the
expected time limit

V. Discharge by Breach of contract

Failure of a party to perform his part of contract


(a) Anticipatory Breach of contract :- Anticipatory breach of contract occurs when
the party declares his intention of not performing the contract before the
performance is due .
(i) Express repudiation: - 5 agrees to supply B 100 tunes of specified category of iron
on 15.01.2006 on 31.12.2005. 5 express his unwillingness to supply the iron to B.
(ii) Party disables himself: - Implied by conduct.
Ex.:- 5 agrees to sell his fiat car to B on 15.01.2006 on 31.12.05 5 sells his fiat car to
T.

(b) Actual Breach of contract :- If party fails or neglects or refuses to perform his
obligation on the due date of performance or during performance. It is called as
actual breach.

During performance – party has performed a part of the contact.


Consequences of Breach of contract:- The aggrieved party (i.e. the party not at face it
) is discharged from his obligation and get rights to proceed against the party at
fault. The various remedial available to an aggrieved party.

VI. Discharge by Impossibility performance

a) Initial Impossibility – at the time of making contract


 Both parties know – put life into deed body – void .
 Both don’t know – void.
 One know – compensate to other party

(b) Effect of super vanity Impossibility:-


 Where an act becomes impossible after the contract is made – void
 Becomes unlawful, beyond the control of promisor – void
 Promisor alone knows about the Impossibility – compensate loss.
 When an agreement is discovered to be void or where a contract becomes void

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8. Breach of Contract
A contract is breached or broken when any of the parties fails or refuses to perform its
promise under the contract.Breach of contract is a legal cause of action in which a binding
agreement is not honored by one or more parties by non-performance of its promise by him
renders impossible.

Types of breach of contract: (refer point 5th above)

REMEDIES FOR THE BREACH OF CONTRACT

1. RESCISSION OF CONTRACT – SEC 39

 It means right to party to cancel contract.


 In case of breach of contract, other party may rescind contract.

Effect of Rescission of Contract


 Aggrieved party is not required to perform his part of obligation under contract.
 Aggrieved party claims compensation for any loss.
 Party is liable to restore benefit, if any.

When can Court Grant Rescind Contract?


Court can rescind the contract in the following situation:
 Contract is voidable.
 Contract is unlawful

2. SUIT FOR DAMAGES

 It means monetary compensation allowed for loss.

 Purpose is to compensate aggrieved party and not to punish party as fault.

 In India, rules relating to damages are based on English judgment of Hadley vs


Baxendale.

The facts of case were – H’s mill was stopped due to the breakdown of the shaft. He
delivered the shaft to common carrier to repair it and agree to pay certain sum of
repair it and agree to pay certain sum of money for doing this work. H has informed
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to B that delay would result into loss of profit. B delivered the shaft after reasonable
time after repair. H filed suit for loss of profit. It was held that B is not liable for loss
of profit. The court laid down rule that damage can be recovered if party has breach
of contract.

 KINDS OF DAMAGES

The following are the different kinds of damages:


 Ordinary damages
These are the damages which are payable for the loss arising naturally and directly
as result of breach of contract. It is also known as proximate damage or natural
damage.

 Special damages

These are damages which are payable for loss arising due to some special
circumstances. It can be recovered only if special circumstances which result in
special loss in case of breach of contract and party have notice of such damage.
Example: A sends sample of his products for exhibition to an agent of a railway
company for carriage to “New Delhi” for an exhibition. The consignment note stated:
“Must be at New Delhi, Monday Certain.” Due to negligence of the company, the
goods reached only after the exhibition was over. Held, the company was liable for
the loss caused by late arrival of the products because the company’s agent was
aware of the special circumstances.

Exemplary or punitive or vindictive damages


 These damages are allowed not to compensate party but as mean of punishment to
defaulting party. The court may award these damages in the case of:
Breach of contract to marry – loss based on mental injury.
Wrongful dishonor of cheque – smaller amount, larger the damage.

 Nominal damages
Where party suffers no loss, the court may allow nominal damages simply to
establish that party has proved his case and won. Nominal damage is very small in
amount.

3. Suit for Specific Performance


It means, demanding an order from court that promise agreed in contract shall be carried
out.
⇒ When is specific performance allowed?
Where actual damages arising from breach is not measurable.
Where monetary compensation is not adequate remedy.

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⇒ When specific performance is not allowed?
When damages are an adequate remedy.
Where performance of contract requires numbers of minute details and therefore
not possible for court to supervise.
Where contract is of personal in nature.
Where contract made by company beyond its power. (ultra – vires)
Where one party to contract is minor
Where contract is inequitable to either party.
Example : A agree to sell B, an artist painting for Rs.30,000. Later on, he refused to
sell it. Here B can file suit against A for specific performance of the contract.

4. Suit for Injunction

It means stay order granted by court. This order prohibits a person to do particular act.
⇒ Where there is breach of contract by one party and order, of specific performance is not
granted by court, injunction may be granted.
Example: Film actress agreed to act exclusively for W for a year and for no one else.
During the year she contracted to act for Z.

Chapter ends !

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2. Sale of Goods Act, 1930
1. Short title, extent and commencement.-
(1) This Act may be called the Sale of Goods Act, 1930.
2) It extends to the whole of India
(3) It shall come into force on the 1st day of July, 1930

2. Definitions .-
1. Buyer And Seller
As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy goods. Since
a sale constitutes a contract between two parties, a buyer is one of the parties to the contract.

The Act defines seller in sec 2(13). A seller is someone who sells or has agreed to sell goods. For
a sales contract to come into existence, both the buyers and seller must be defined by the Act.
These two terms represent the two parties of a sales contract.

2. Goods

The Act defines the term “Goods” in its sec 2(7) as all types of movable property. The sec 2(7)
of the Act goes as follows:
“Every kind of movable property other than actionable claims and money; and includes stock
and shares, growing crops, grass, and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale will be considered goods”

Goods may be further understood in the following subtypes:

a. Existing Goods

The goods that are referred to in the contract of sale are termed as existing goods if they are
present (in existence) at the time of the contract. In sec 6 of the Act, the existing goods are
those goods which are in the legal possession or are owned by the seller at the time of the
formulation of the contract of sale. The existing goods are further of the following types:

A) Specific Goods

According to the sec 2(14) of the Act, these are those goods that are “identified and agreed
upon” when the contract of sale is formed. For example, you want to sell your mobile phone
online. You put an advertisement with its picture and information. A buyer agrees to the sale
and a contract is formed. The mobile, in this case, is specific good.

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B) Ascertained Goods:

This is a type not defined by the law but by the judicial interpretation. This term is used for
specific goods which have been selected from a larger set of goods. For example, you have 500
apples. Out of these 500 apples, you decide to sell 200 apples. To sell these 200 apples, you will
need to separate them from the 500 (larger set). Thus you specify 200 apples from a larger
group of unspecified apples. These 200 apples are now the ascertained goods.

C) Unascertained Goods:

These are the goods that have not been specifically identified but have rather been left to be
selected from a larger group. For example, from your 500 apples, you decide to sell 200 apples
but you don’t specify which ones you want to sell. A seller will have the liberty to choose any
200 apples from the lot. These are thus the unascertained goods.

b. Future Goods

In sec 2(6) of the Act, future goods have been defined as the goods that will either be
manufactured or produced or acquired by the seller at the time the contract of sale is made.
The contract for the sale of future goods will never have the actual sale in it, it will always be an
agreement to sell.

For example, you have an apple orchard with apples in it. You agree to sell 1000 apples to a
buyer after the apples ripe. This is a sale that has to occur in the future but the goods have
been identified already and the agreement made. Such goods are known as future goods.

c. Contingent Goods

Contingent goods are actually a subtype of future goods in the sense that in contingent goods
the actual sale is to be done in the future. These goods are part of a sale contract that has
some contingency clause in it. For example, if you sell your apples from your orchard when the
trees are yet to produce apples, the apples are a contingent good. This sale is dependent on
the condition that the trees are able to produce apples, which may not happen.

3. Delivery

The delivery of goods signifies the voluntary transfer of possession from one person to
another. The objective or the end result of any such process which results in the goods coming
into the possession of the buyer is a delivery process. The delivery could occur even when the
goods are transferred to a person other than the buyer but who is authorized to hold the
goods on behalf of the buyer.

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There are various forms of delivery as follows:

 Actual Delivery: If the goods are physically given into the possession of the buyer, the
delivery is an actual delivery.

 Constructive delivery: The transfer of goods can be done even when the transfer is
effected without a change in the possession or custody of the goods. For example, a
case of the delivery by attornment or acknowledgment will be a constructive delivery. If
you pick up a parcel on behalf of your friend and agree to hold on to it for him, it is a
constructive delivery.

 Symbolic delivery: This kind of delivery involves the delivery of a thing in token of a
transfer of some other thing. For example, the key of the godowns with the goods in it,
when handed over to the buyer will constitute a symbolic delivery.

4 .The Document of Title to Goods

From the Sec 2(4) of the act, we can say that this “includes the bill of lading, dock-warrant,
warehouse keeper’s certificate, railway receipt, multimodal transport document, warrant or
order for the delivery of goods and any other document used in the ordinary course of
business as proof of the possession or control of goods or authorizing or purporting to
authorize, either by endorsement or by delivery, the possessor of the document to transfer or
receive goods thereby represented.

3. Sale and Agreement to Sale:(section 4)


A contract is a formal or verbal agreement that is enforceable by law. Every contract must have
an agreement but every agreement is not a contract. The section 4(1) of the Sale of Goods Act,
1930 states that – ‘A contract of sale of goods is a contract whereby the seller either transfers
or agrees to transfer the property in goods to the buyer for a decided price.’

In Section 4(4) of the Act, it is maintained that for an agreement of sale to become a sale, the
time has to elapse or the conditions have to be fulfilled subject to which the property in the
goods is to be is to be transferred.

The point that is to be understood from the above discussion is that a contract for the sale of
goods can either be a sale or an agreement of sale. Let us see both the cases in the light of the
Act.

 Sale

Here the property in goods is transferred at once to the buyer from the seller. The Section 4(3)
of the Act says that “where under a contract of sale the property in the goods is transferred
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from the seller to the buyer, the contract is then known as a sale.” A sale is carried out on
deliverable goods. Goods are said to be in a deliverable state when they are in such a condition
that the buyer would, under the contract, be bound to take delivery of them [Section 2(3)].

The transfer of goods may be affected directly, after the fulfillment of a contingency or to a
party authorized by the seller.

 Agreement To Sell

We saw that in a sale the property in the goods is transferred from the seller to the buyer.
However, in an agreement to sell, the ownership of the property in goods is not transferred
immediately. The objective of the agreement is to transfer the goods at a future date, once
some contingent clauses in the agreement or certain conditions are satisfied.

The Act in Section 4(3), defines what an agreement to sell is. The section 4(3) of the sale of
Goods Act defines it as, “where the transfer of the property in the goods is to take place at a
future time or subject to some condition thereafter to be fulfilled, the contract is called an
agreement to sell.”

Thus we see that a contract for the sale of goods may be either sale or agreement to sell. This
depends on the condition whether it postulates an immediate transfer of property from the
seller to the buyer or whether it postulates the transfer to take place at some future date.

Now the question is that how does this transition from agreement to sell to sale occur? The
agreement to sell will become a sale if and only when the time elapses or the conditions are
fulfilled subject to which the contract of sale is to be fulfilled.

4.Elements of A Contract Of Sale


From the Sale of Goods Act, 1930, we see that certain elements must co-exist for a contract of
sale to be constituted. they are as follows:

1. The presence of two parties is a must. As is the case with a contract, there must be at
least two parties in the contract of sale. One shall become the seller and the other a
buyer.

2. The clauses therein present in the contract of sale must limit their scope to only the
movable property. This “movable property” may constitute existing goods, goods in the
possession or the ownership of the seller or future goods.

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3. One of the important elements is the consideration of price. A price in value (currency
and not in kind) has to be paid or promised. The price consideration or the actual
payment could be partly in kind and partly in money but never in kind alone.

4. The ownership of the property of goods must change from the seller to the buyer. In the
contract of sale, like we saw in the elements of a contract, an offer has to be made and
then accepted. The offer is made by a seller and then accepted by the buyer.

5. The contract of sale may be absolute or conditional.

6. The other essential elements of a contract, that we have already seen must also be
present here. The crucial elements of a contract like competency of parties, the legality
of object and consideration etc. have to be present like in any other contract.

5. Concept of Condition and Warranty

All of us who have bought electronic items or similar devices, ask about the warranty periods.
In some cases, you may have seen that even the warranty is sold separately as a commodity.
But does the law say about it? Here in this section on the concepts of condition and warranty,
we will see the manner in which we can define these terms and also the manner in which they
derive their legality in the light of The Sale Of Goods Act, 1930.

 Warranty And Conditions

In a contract of sale, parties may make certain statements about the stipulation or the course
of trade. These stipulations in the contract of sale are made with reference to the subject
matter of the sale. These stipulations may either be a condition or in the form of a warranty.

The provisions of the conditions and warranty are provided in the sections 11 to 17 of the Act.
The stipulations are the essence of the contract of sale and a breach of these stipulations
provides a remedy to the grieved party.

 Conditions

A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives the right to repudiate the contract and to claim damages. (Sec 12 (2)). We can
understand this with the help of the following example:

Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’ pointing at a
particular vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on that
this car only has a top mileage of 15 km/ liter. This amounts to a breach of condition because
the seller made the stipulation which forms the essence of the contract. In this case, the

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mileage was a stipulation that was essential to the main purpose of the contract and hence its
breach is a breach of condition.

 Warranty

A warranty is a stipulation collateral to the main purpose of the said contract. The breach of
warranty which gives rise to a claim for damages. However, it does give a right to reject the
goods or treat the contract as repudiated. (Sec 12(3)). Let us understand this with the help of
an example below.

A man buys a particular car, which is warranted to be quite to drive and very comfortable. It
turns out that after some days the car starts to make a very unpleasant noise everytime it is
operated. Also sitting inside it is also not very comfortable.

Thus the buyer’s only remedy is to claim damages. This is not a breach of condition but rather a
breach of warranty, because the stipulation made by the seller was only a collateral one.

 Identification of a Stipulation as a Condition or Warranty

Whether a stipulation is a condition or a warranty is a very important aspect to have the


knowledge about. A stipulation in a contract of sale is either a condition or is a warranty
depending in either case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.

6. Unpaid Seller and His Rights


 Unpaid Seller:
A seller of goods is an unpaid seller within the meaning of the Sale of Goods Act , when the
whole price has not been paid or tendered or when a bill of exchange or other negotiable
instrument has been received as conditional payment and the condition on which it was
received as conditional payment and the condition on which it was received has not been
fulfilled by reason of the dishonour of instrument or otherwise.

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seller of goods is an unpaid seller within the meaning of the Sale of Goods Act , when
the
whole price has not been paid or tendered or when a bill of exchange or other negotia
ble instrument has been received as
conditional payment and the condition on which it was received has not been fulfilled
by reason of the dishonour of theinstrument or otherwise.

 Rights of Unpaid Seller Against Goods

An unpaid seller has certain rights against the goods and the buyer. In this article, we will refer
to the sections of the Sale of Goods Act, 1930 and look at the rights of an unpaid seller against
goods namely rights of lien, rights of stoppage in transit etc.

 Rights of Lien

 Seller’s Lien (Section 47)

According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid seller, who
is in possession of the goods can retain their possession until payment. This is possible in the
following cases:

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.

3. The buyer becomes insolvent.

 Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means that an
unpaid seller has the right to stop the goods while they are in transit, regain possession, and
retain them till he receives the full price.

If an unpaid seller has parted with the possession of the goods and the buyer becomes
insolvent, then the seller can ask the carrier to return the goods back. This is subject to the
provisions of the Act.

 Effect of Stoppage

Even if the unpaid seller exercises his right of stoppage in transit, the contract stays valid. The
buyer can ask for delivery of the goods after making the payment.

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 Right of Lien vs. Rights of Stoppage in Transit

Rights of Stoppage in
Right of Lien
Transit

Essence Retain possession Regain possession

The carrier or other


Who has the possession bailee. The buyer should
The seller.
of the goods? not have received the
goods.

The right can be


Not a mandatory
Buyer insolvent exercised only when the
requirement
buyer becomes insolvent.

In simple words, the right of stoppage in transit begins when the right of lien ends.

 Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this right, then
the right of lien and stoppage won’t make sense. An unpaid seller can exercise his right of
resale under the following conditions:

 Goods are perishable in nature: In such cases, the seller does not have to inform the
buyer of his intention of resale.

 Seller gives a notice to the buyer of his intention of resale: The buyer needs to pay the
price of the goods and ask for delivery within the time mentioned in the notice. If he
fails to do so, then the seller can resell the goods. He can also recover the difference
between the contract price and resale price if the latter is lower. However, if the resale
price is higher, then the seller keeps the profits.
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 Unpaid seller resells the goods post exercising his right of lien or stoppage:The
subsequent buyer acquires a good title to the goods even if the seller has not given a
notice of resale to the original buyer.

 Resale where the right of resale is reserved in the contract of sale: If the contract of
sale specifies that the seller can resell the goods if the buyer defaults, then the seller
reserves his right of sale. He can claim damages from the original buyer even if he does
not give a notice of resale to him.

 Property in the goods has not passed to the buyer: The unpaid seller can exercise his
right of withholding delivery of goods. This is similar to the right of lien and is called
quasi-lien.

2.5. Performance of Contract of Sale


There are many rules and definitions governing the law on sales in sections 31 to 40 of the Sale
of Goods Act, 1930. In this article, we will be looking at various definitions and duties of buyers,
sellers, and third parties (wherever applicable).

Definition of Delivery

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary transfer of
possession of goods from one person to another. Hence, if a person takes possession of goods
by unfair means, then there is no delivery of goods. Having understood delivery, let’s look at
the law on sales

 Law on Sales

1] The Duty of the Buyer and Seller (Section 31)

It is the duty of the seller to deliver the goods and the buyer to pay for them and accept them,
as per the terms of the contract and the law on sales.

2] Concurrency of Payment and Delivery (Section 32)

The delivery of goods and payment of the price are concurrent conditions as per the law on
sales unless the parties agree otherwise. So, the seller has to be willing to give possession of
the goods to the buyer in exchange for the price. On the other hand, the buyer has to be ready
to pay the price in exchange for possession of the goods.

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 Rules Pertaining to the Delivery of Goods

The Sale of Goods Act, 1930 prescribes the following rules regarding delivery of goods:

a. Delivery (Section 33)

The delivery of goods can be made either by putting the goods in the possession of the buyer
or any person authorized by him to hold them on his behalf or by doing anything else that the
parties agree to.

b. Effect of part-delivery (Section 34)

If a part-delivery of the goods is made in progress of the delivery of the whole, then it has the
same effect for the purpose of passing the property in such goods as the delivery of the whole.

c. Buyer to apply for delivery (Section 35)

A seller is not bound to deliver the goods until the buyer applies for delivery unless the parties
have agreed to other terms in the contract.

d. Place of delivery [Section 36 (1)]

When a sale contract is made, the parties might agree to certain terms for delivery, express or
implied. Depending on the agreement, the buyer might take possession of the goods from the
seller or the seller might send them to the buyer.

If no such terms are specified in the contract, then as per law on sales

 The goods sold are delivered at the place at which they are at the time of the sale

 The goods to be sold are delivered at the place at which they are at the time of the
agreement to sell. However, if the goods are not in existence at such time, then they are
delivered to the place where they are manufactured or produced.

e. Time of Delivery [Section 36 (2)]

Consider a contract of sale where the seller agrees to send the goods to the buyer, but not
time of delivery is specified. In such cases, the seller is expected to deliver the goods within a
reasonable time.

f. Expenses for delivery [Section 36 (5)]

The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the
parties agree to some other terms in the contract.
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g. Delivery of wrong quantity (Section 37)

 Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the


contracted quantity, then the buyer may reject the delivery. If he accepts it, then he
shall pay for them at the contracted rate.

 Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the


contracted quantity, then the buyer may accept the quantity included in the contract
and reject the rest. The buyer can also reject the entire delivery. If he wants to accept
the increased quantity, then he needs to pay at the contract rate.

 Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are
mentioned in the contract and some are not, then the buyer may accept the goods
which are in accordance with the contract and reject the rest. He may also reject the
entire delivery.

 Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.

h. Instalment deliveries (Section 38)

The buyer does not have to accept delivery in instalments unless he has agreed to do so in the
contract. If such an agreement exists, then the parties are required to determine the rights and
liabilities and payments themselves.

i. Delivery to carrier [Section 36 (1)]

The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be
‘delivery to the buyer’ unless contrary terms exist in the contract.

 Acceptance of Delivery of Goods (Section 42)

A buyer is deemed to have accepted the delivery of goods when:

 He informs the seller that he has accepted the goods; or

 Does something to the goods which is inconsistent with the ownership of the seller; or

 Retains the goods beyond a reasonable time, without informing the seller that he has
rejected them.

 Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer
fails to do so within a reasonable time after receiving the request, then he is liable to the seller

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for any loss occasioned by his refusal to take delivery. He is also liable to pay a reasonable
charge for the care and custody of goods.

 Solved Example on law on sales

Q: Peter agrees to sell 100 kilograms of tomatoes to John at Rs. 20 per kilo. However, he
delivers 120 kilograms instead. Can John reject the delivery? What other option does John have
according to the law on sales?

Answer: Since the contract was for 100 kilograms but Peter delivers 120 kilograms, John has
the following options:

 He can reject the entire lot

 Accept 100 kilograms and reject the additional 20 kilograms

 He can accept the entire 120 kilograms and pay at the contract rate.

2.6. Sale by Auction


An auction sale is a public sale. The goods are sold to all members of the public at large who
are assembled in one place for the auction. Such interested buyers are the bidders.

The price they are offering for the goods is the bid. And the goods will be sold to the bidder
with the highest bid.

The person carrying out the auction sale is the auctioneer. He is the agent of the seller. So all
the rules of the Law of Agency apply to him.

But if an auctioneer wishes to sell his own property as the principal he can do so. And he need
not disclose this fact , it is not a requirement under the law.

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 Rules of an Auction Sale

As we saw previously, the rules regarding an auction sale are found in the Sale of Goods Act.
Section 64 of the Act specifically deals with the rules governing an auction sale. Let us take a
brief look.

1] Goods Sold in Lots

In an auction sale, there can be many goods up for sale of many kinds. If some particular goods
are put up for sale in a lot, then each such lot will be considered a separate subject of a
separate contract of sale. So each lot ill prima facie be the subject of its own contract of sale.

2] Completion of Sale

The sale is complete when the auctioneer says it is complete. This can be done by actions also –
like the falling of the hammer, or any such customary action. Till the auctioneer does not
announce the completion of the sale the prospective buyers can keep bidding.

3] Seller may Reserve Right to Bid

The seller may reserve his right to bid. To do so he must expressly reserve such right to bid. In
this case, the seller on any person on his behalf can bid at the auction.

4] Sale Not Notified

If the seller has not notified of his right to bid he may not do so under any circumstances. Then
neither the seller nor any person on his behalf can bid at the auction. If done then it will be
unlawful.

The auctioneer also cannot accept such bids from the seller or any other person on his behalf.
And any sale that contravenes this rule is to be treated as fraudulent by the buyer.

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5] Reserve Price

An auction sale may be subject to a reserve price or an upset price. This means the auctioneer
will not sell the goods for any price below the said reserve price.

6] Pretend Bidding

But if the seller or any other person appointed by him employs pretend bidding to raise the
price of the goods, the sale is voidable at the option of the buyer. That means the buyer can
choose to honor the contract or he can choose to void it.

7] No Credit

The auctioneer cannot sell the goods on credit as per his wishes. He cannot accept a bill of
exchange either unless the seller is expressly fine with it.

 Solved Question on Auction Sale

Q: A was the auctioneer at an auction sale. He had accepted the bid of B and slammed down
his hammer. C then comes up with a higher bid and A refuses to accept the bid. Can the seller
enforce the sale to C?

Ans: No the goods have already been sold to B. Once the hammer comes down the sale is
complete and there are no more bids. Also, the seller cannot sell to C because he wishes so.
The auctioneer is his agent and acts on his behalf. The seller is bound by the actions of A.

Chapter Ends!

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3. Negotiable Instruments Act, 1881
INTRODUCTION
The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its
enactment, the provision of the English Negotiable Instrument Act were
applicable in India, and the present Act is also based on the English Act with
certain modifications. It extends to the whole of India. The Act operates subject
to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.

MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Ac t, “Negotiable instrument means a


promissory note, bill of exchange or cheque payable either to order or to
bearer, whether the word “order” or “ bearer” appear on the instrument or
not.” In the words of Justice, Willis, “A negotiable instrument is one, th e
property in which is acquired by anyone who takes it bonafide and for value
notwithstanding any defects of the title in the person from whom he took it”.
Thus, the term, negotiable instrument means a written document which creates
a right in favour of some person and which is freely transferable.

Although the Act mentions only these three instruments (such as a promissory
note, a bill of exchange and cheque), it does not exclude the possibility of
adding any other instrument which satisfies the following two conditions of
negotiability:

1. the instrument should be freely transferable (by delivery or by endorsement.


and delivery) by the custom of the trade; and

2. the person who obtains it in good faith and for value should get it free from
all defects, and be entitled to recover the money of the instrument in his own
name.

As such, documents like share warrants payable to bearer, debentures payable


to bearer and dividend warrants are negotiable instruments. But the money
orders and postal orders, deposit receipts, share certificates, bill of lading, dock
warrant, etc. are not negotiable instruments. Although they are transferable by
delivery and endorsements, yet they are not able to give better title to the
bonafide transferee for value than what the transferor has.

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3.1. Definition and Characteristics of Promissory Not e, Bill Of Exchange And
Cheque.

 PROMISSORY NOTE : SEC.4

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 only to the person mentioned therein, or to the order of a certain person or to
the bearer of the instrument. The words ‘or to the bearer of the instrument” is inoperative
in View of Sec on 31 of the Reserve Bank of India Act, 1934, which provides that no person
in India other than Reserve Bank of India or Central Government can make or issue
promissory note payable to bearer of the instrument.

 Characteristics of Promissory Note

a. In writing
It must be in writing. An oral promise does not result in an instrument.
Example: A promises to pay 70,000/- to “B”, over telephone. This promise is not a
promissory note as it is not in writing.

b. Promise to pay
A mere acknowledgement of debt is not a promissory note.
a) A receipt of ` 50,000/- Not a Promissory Note.
b) A receipt of ` 50,000/- with a promise to pay in 5 monthly instalments beginning 1st
April 2004 - It is a Promissory Note.

c. Unconditional
It is to be noted that a promise to pay will be unconditional where it depends upon an
event which is certain to happen but theme of its occurrence may be uncertain.
“I promise to pay to ‘A’ ` 1,000/- 10 days after the death of ‘B’.” — This is not conditional
as it is certain that ‘B’ will die though the exact time of his death is uncertain.
The promissory note does not lose its character as such merely because it contains a
promise to pay at a certain place.
"I promise to pay to 'A' ` 1 Lac after the death of 'B' provided 'B' leaves enough money
to pay."

d. Certain sum of money only


Amount promised must be certain and should be in terms of money. The instrument must
be payable in money and money only. If the instrument contains a promise to pay
something other than money or something in addition to money, it will not be a promissory
note.
‘I promise to pay ` 350 and all other sums which shall be due’ — It is not a valid
promissory note.
'I promise to pay ` 1 Lac and 500 bags of rice is not a valid promissory note.'
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In the event of rate of interest not being specified, the amount which would be due on
the due date would not be certain.

e. Signed by the Maker


The maker must sign the instrument and it is incomplete ll it is so signed. The signature
may be made on any part of the document.

f. Certainty of Parties
The person by whose order and to whom the payment is to be made must be definite. The
payee must
be a certain person and where the name of the payee is not mentioned as a party,
the instrument becomes invalid.

g. Not payable to maker himself


A promissory note cannot be made payable to the maker himself. However, it would
become valid when it is endorsed to the maker. This is so because it becomes payable to
bearer, if endorsed in blank or it becomes payable to endorsee or his order, if endorsed
specifically.

 BILL OF EXCHANGE : SEC.5

A Bill of Exchange is an instrument in writing containing an unconditional order, signed by


the maker, directing a certain person to pay a certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument. The words or to the bearer of the
instrument is inoperative in view of
Sec on 31 of the Reserve Bank of India Act, 1934, which provides that no person in India
other than Reserve Bank of India or Central Government make or issue promissory note
payable to bearer of the instrument.

 Characteristics of Bill of Exchange

1. In writing
It must be in writing.
2. Order
It must contain an order to pay. Order to be made by drawer to drawee to pay money.
3. Unconditional Order
The order must be unconditional, I.e., the order must not make the payment of the bill
dependent on a contingent event.
Where a bill of exchange is in this form: ‘Three months after date pay to my order the
sum of ` 8001- for value received’. This is not conditional.
4. Money only —
Certain sum The Order must be to pay money and money only. The instrument must
be payable in money and money only. The sum of money payable must also be certain.

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In the absence of the rate of interest, the amount which would be due on the due date
would not be certain or definite.
5. Acceptance
The drawee must sign the instrument, without which the document is ineffective.
6. Three Parties
The three parties to a bill viz., drawer, drawee and payee are to be specified in the
instrument with reasonable certainty. All three persons need not specifically be different
persons. One can play the role of two persons, ie., a drawer can be a payee.
7. Stamping
It must be stamped.

 CHEQUE : SEC.6
A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes “the electronic image of truncated cheque”
and a ‘cheque in the electronic form”.
• A Cheque, prima facie, is a bill of exchange and hence must satisfy the essential
conditions of bill of exchange under Sec on 5.
• A Cheque is an except on to the general rule that a bill of exchange cannot be drawn
payable to bearer on demand - Sec.31 of Reserve Bank of India Act, ie., payable only on
demand.

3.2. Holder and Holder in, Due Course, Privileges of Holder In Due Course

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3.3. Crossing and Endorsement of Negotiable Instrument

 CROSSED CHEQUE
When a cheque bears across its face two parallel transverse lines, (usually on the top
left corner of cheque) the cheque is said to be crossed.
1. Crossing affects mode of payment of cheque. Cheque is not payable to payee or holder
at Bank. Payment is to be obtained only through Bank. Crossed Cheque can be negotiated.
2. The objective of crossing is to help tracing the recipient of money, if an
unauthorized person receives it.

1. General Crossing : Sec. 123


Where a cheque bears across its face an addition of —
• the words ‘and company’ or any abbreviations thereof between two parallel transverse
lines, or
• two parallel transverse lines simply.

2. Special Crossing : Sec. 124


Where a cheque bears across its face an addition of the name of a banker, either with or
without the words ‘not negotiable’, that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially.
Where a cheque is crossed specially, the banker on whom it is crossed shall not pay it,
otherwise than to
the banker to whom it is crossed or his agent for collection.
Difference: In general crossing the Name of the Bank is not mentioned whereas in special
crossing the Name of the Bank is mentioned.

3. ‘Not Negotiable’ Crossing : Sec.130


A person taking a cheque crossed generally or specially, bearing in either case the words
‘not negotiable’, shall not have, and shall not be capable of giving a better title to the
cheque other than that which the
person from whom he took it had. The title of transferee of the cheque cannot be better
than title of transferor of the cheque. It means that even if transferee has acquired in good
faith still his title cannot be defect free if transferor’s title is defective.
It may be noted that though it is mentioned ‘Not Negotiable’, the cheque can be
transferred. The only restriction is with regard to the title passed.
In other words, the principle of nemo dat quod non habet (nobody can pass on a title
better than what he himself has) will be applicable to a cheque with a ‘not negotiable’
crossing, even though the cheque is in the hands of a holder in due course.

4.‘Account Payee’ Crossing / Restrictive Crossing


The purpose of this crossing bearing the words “A/c Payee” is to obviate the risk of a wrong
person obtaining payment on a cheque.
It is a direction to banker to credit the proceeds only to the account of the payee.
The cheque remains legally negotiable but “A/c payee” crossing hinders the negotiability of
the cheque in practice’. Such cheque cannot be transferred further to any person.
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3.4. Dishonour Of N.I., Notice Of Dishonour, Dishonour Of Cheque And Its
Effects.

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to
all the previous parties in order to make them liable. A negotiable instrument can be
dishonoured either by non – acceptance or by non-payment. A cheque and a promissory
note can only be dishonoured by non-payment but a bill of exchange can be dishonoured
either by non-acceptance or by non-payment.

 Dishonour by non-acceptance (Section 91)


A bill of exchange can be dishonoured by non-acceptance in the following ways:

1. If a bill is presented to the drawee for acceptance and he does not accept it within 48
hours from the time of presentment for acceptance. When there are several drawees
even if one of them makes a default in acceptance, the bill is deemed to be dishonoured
unless these several drawees are partners. Ordinarily when there are a number of drawees
all of them must accept the same, but when the drawees are partners acceptance by one of
them means acceptance by all.

2. When the drawee is a fictitious person or if he cannot be traced after reasonable search.

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3. When the drawee is incompetent to contract, the bill is treated as dishonoured.

4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of
exchange having been dishonoured.

5. When the drawee has either become insolvent or is dead.

 Dishonour by non-payment (Section 92)


A bill after being accepted has got to be presented for payment on the date of its maturity.
If the acceptor fails to make payment when it is due, the bill is dishonoured by non-
payment. In the case of a promissory note if the maker fails to make payment on the due
date the note is dishonoured by non-payment. A cheque is dishonoured by non-payment as
soon as a banker refuses to pay.
An instrument is also dishonoured by non-payment when presentment for payment is
excused and the instrument when overdue remains unpaid (Sec 76).

 Effect of dishonour:
When a negotiable instrument is dishonoured either by non acceptance or by non-payment,
the other parties thereto can be charged with liability. For example if the acceptor of a bill
dishonours the bill, the holder may bring an action against the drawer and the indorsers.
There is a duty cast upon the holder towards those whom he wants to make liable to give
notice of dishonour to them.

 Notice of dishonour:
Notice of dishonour means the actual notification of the dishonour of the instrument by
non-acceptance or by non-payment. When a negotiable instrument is refused acceptance or
payment notice of such refusal must immediately be given to parties to whom the holder
wishes to make liable. Failure to give notice of the dishonour by the holder would discharge
all parties other than the maker or the acceptor (Sec. 93).

 Notice by whom:
Where a negotiable instrument is dishonoured either by non- acceptance or by non-
payment, the holder of the instrument or some party to it who is liable thereon must give a
notice of dishonour to all the prior parties whom he wants to make liable on the instrument
(Section 93).
The agent of any such party may also be given notice of dishonour. A notice given by a
stranger is not valid. Each party receiving notice of dishonour must, in order to render any
prior party liable give notice of dishonour to such party within a reasonable time after he
has received it. (Sec. 95)
When an instrument is deposited with an agent for presentment and is dishonoured, he
may either himself give notice to the parties liable on the instrument or he may give notice
to his principal. If he gives notice to his principal, he must do so within the same time as if
he were the holder. The principal, too, in his turn has the same time for giving notice as if
the agent is an independent holder. (Sec. 96)

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Notice to whom?:
Notice of dishonour must be given to all parties to whom the holder seeks to make liable.
No notice need be given to a maker, acceptor or drawee, who are the principal debtors
(Section 93).
Notice of dishonour may be given to an endorser. Notice of dishonour may be given to a
duly authorised agent of the person to whom it is required to be given. In case of the death
of such a person, it may be given to his legal representative. Where he has been declared
insolvent the notice may be given to him or to his official assignee (Section 94).
Where a party entitled to a notice of dishonour is dead, and notice is given to him in
ignorance of his death, it is sufficient (Section 97).

Mode of notice: The notice of dishonour may be oral or written or partly oral and partly
written. It may be sent by post. It may be in any form but it must inform the party to whom
it is given either in express terms or by reasonable intendment that the instrument has been
dishonoured and in what way it has been dishonoured and that the person served with the
notice will be held liable thereon.

Mode of Dishonour of cheques and its effects:

A cheque is a widely used method of payment and post-dated cheques are frequently used
in various transactions in business life. Post-dated cheques are given to provide a certain
accommodation to the drawer of the cheque. Therefore, it becomes necessary to ensure
that the drawer of the cheque does not abuse the accommodation given to him.
The Negotiable Instruments Act, 1881 ("Act") deals with negotiable instruments, such as
promissory notes, bills of exchange, cheques etc. Chapter XVII containing Sections 138 to
142 was introduced with the aim of inculcating confidence in the efficacy of banking
operations and giving credibility to negotiable instruments employed in business
transactions. If a party issues a cheque as a mode of deferred payment and the payee of the
cheque accepts the sameon the faith that he will get his payment on due date, then he
should not suffer on account of non-payment.

The penal provisions contained in Sections 138 to 142 of the Act have been enacted to
ensure that obligations undertaken by issuing cheques as a mode of deferred payment are
honoured. Section 138 of the Act provides for circumstances under which a case for
dishonour of cheques is filed.1 The ingredients required for complying with Section 138 are
as follows:

1. a person must have drawn a cheque for payment of money to another for the
discharge of any debt or other liability;
2. that cheque has been presented to the bank within a period of three months;

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3. that cheque is returned by the bank unpaid, either because insufficient of funds or
that it exceeds the amount arranged to be paid from that account by an agreement
made with the bank;
4. the payee makes a demand for the payment of the money by giving a notice in
writing to the drawer within 15 days of the receipt of information by him from the
bank regarding the return of the cheque as unpaid;
5. The drawer fails to make payment to the payee within 15 days of the receipt of the
notice.

Procedure that is followed in matters with regard to Section 138 of the Act is
as follows:

i. A legal notice is to be issued to the drawer within 15 days of dishonor of cheque by


registered post with all relevant facts. The drawer is given a time of 15 days to make
the payment, if the payment is made then the matter is served and the issue is
settled. On the other hand if the payment is not made then the complainant is to file
a criminal case process under Section 138 of the Act, against the drawer within 30
days from the date of expiry of 15 days specified the notice,with the concerned
magistrate court within the jurisdiction.
ii. The complainant or his authorized agent should appear in the witness box and
provide relevant details for filing the case. If the court is satisfied and finds substance
in the complainant, then summons will be issued to the accused to appear before
the Court.
iii. If after being served with the summons the accused abstains himself from appearing
then the court may issue a bailable warrant. Even after this if the drawer does not
appear a non-bailable warrant may be issued.
iv. On appearance of the drawer/accused, he may furnish a bail bond to ensure his
appearance during trial. After which the plea of accused is recorded.In case he
pleads guilty, the court will post the matter for punishment. If the accused, denies
the charges then he will be served with the copy of complaint.
v. The Complainant may present his evidence by way of affidavit and produce all
documents including the original in support of his complaint. The complainant will be
cross examined by the accused or his counsel.
vi. The accused will be given an opportunity to lead his evidence. The accused will also
be afforded an opportunity to submit his documents in support of his case, as well as
witnesses in his support. Accused and his witnesses will be cross examined by the
complainant.
vii. The last stage of the proceeding is that of the arguments after which the court will
pass a judgment.If the accused is acquitted then the matter ends, but the
complainant can go on further appeal in the High Court, similarly if the accused is
convicted he can file an appeal in the Sessions Court.

Chapter Ends!
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4. Limited Liability Partnership Act
2008
4.1. Meaning and Silent Features of LLP

Meaning of Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a body corporate, with a distinct legal entity separate
from that of its partners. It has perpetual succession and a common seal. A LLP, which is a
separate legal person, will be liable to the third parties independent of the other partners.
Any change in its partners, will not affect the existence, rights or liabilities of the limited
liability partnership. Like a company, a limited liability partnership can do all the things an
individual or company can do. It can make contracts, sue or be sued, hold property in its
name etc.

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle
that provides the benefits of limited liability but allows its members the flexibility of
organizing their internal structure as a partnership based on a mutually arrived agreement.
A LLP combines the advantages of both the Company and Partnership into a single form of
organization.

The Limited Liability Partnership form of business organization was introduced in India by
way of Limited Liability Partnership Act, 2008 (LLP Act 2008) which came into effect by way
of notification dated 31st March 2009.

Need for Limited Liability Partnership

The LLP form of business organization would enable entrepreneurs, professionals and
enterprises providing services of any kind or engaged in scientific and technical disciplines,
to form commercially efficient vehicles suited to their requirements. Owing to flexibility in
its structure and operations, the LLP would also be a suitable vehicle for small enterprises
and for investment by venture capital. Accordingly, the LLP form of Organization is available
to Professionals, Service Providers, Traders and Manufacturers.

The existing organization structures in India, which are most commonly, used - like
proprietary concerns, partnerships and companies are subject to varying regulatory and tax
requirements and are not suitable for some businesses and professions. In India, several
professionals are barred from forming companies with limited liability. In general
Partnerships, the unlimited liability of the partners is an increasing cause of concern in light
of general increase in the incidence of litigation for professional negligence; and the size of
claims and the risk to partners’ personal assets when a claim exceeds the sum of the assets
of the partnership. The unlimited liability of the partners has been the chief reason why
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partnership firms have not grown in size to meet the challenges posed by international
Competition In India, a concept paper on Limited Liability Partnership Law was brought out
by the Ministry of Company Affairs in 2005.

In the year 2006 the Limited Liability Partnership Bill was introduced in the Parliament and
referred to the Parliamentary Standing Committee on Finance. Taking into consideration the
suggestions of the Standing Committee, the revised Bill, namely the Limited Liability
Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008 and was
considered and passed by Rajya Sabha on 24th October, 2008. The Lok Sabha granted its
assent to the Bill on December 12, 2008. The Limited Liability Partnership Act, 2008 received
the assent of the President on 7th January, 2009 and was published in the official Gazette of
India on January 9, 2009. Parliament enacted the Limited Liability Partnership Act 2008 and
notified it on 31.03.2009.

Salient features of LLP

1. Limited liability partnership to be body corporate.—


(1) A limited liability partnership is a body corporate formed and incorporated under this Act
and is a legal entity separate from that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership shall not affect the existence,
rights or liabilities of the limited liability partnership.

2. Non-applicability of the Indian Partnership Act, 1932.—


Same as otherwise provided, the provisions of the Indian Partnership Act, 1932 (9 of 1932)
shall not apply to a limited liability partnership.

3. Partners.—
Any individual or body corporate may be a partner in a limited liability partnership:
Provided that an individual shall not be capable of becoming a partner of a limited liability
partnership, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.

4. Minimum number of partners.—


(1) Every limited liability partnership shall have at least two partners.
(2) If at any time the number of partners of a limited liability partnership is reduced below
two and the limited liability partnership carries on business for more than six months while
the number is so reduced, the person, who is the only partner of the limited liability
partnership during the time that it so carries on business after those six months and has the
knowledge of the fact that it is carrying on business with him alone, shall be liable personally
for the obligations of the limited liability partnership incurred during that period.
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5. Designated partners.—
(1) Every limited liability partnership shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India:
Provided that in case of a limited liability partnership in which all the partners are bodies
corporate or in which one or more partners are individuals and bodies corporate, at least
two individuals who are partners of such limited liability partnership or nominees of such
bodies corporate shall act as designated partners.

Explanation.—For the purposes of this section, the term "resident in India" means a person
who has stayed in India for a period of not less than one hundred and eighty-two days
during the immediately preceding one year.

(2) Subject to the provisions of sub-section (1),—


(i) if the incorporation document—
(a) specifies who are to be designated partners, such persons shall be designated partners
on incorporation; or
(b) states that each of the partners from time to time of limited liability partnership is to be
designated partner, every such partner shall be a designated partner;
(ii) any partner may become a designated partner by and in accordance with the limited
liability partnership agreement and a partner may cease to be a designated partner in
accordance with limited liability partnership agreement.

(3) An individual shall not become a designated partner in any limited liability partnership
unless he has given his prior consent to act as such to the limited liability partnership in such
form and manner as may be prescribed.

(4) Every limited liability partnership shall file with the registrar the particulars of every
individual who has given his consent to act as designated partner in such form and manner
as may be prescribed within thirty days of his appointment.

(5) An individual eligible to be a designated partner shall satisfy such conditions and
requirements as may be prescribed.

6. Liabilities of designated partners.—


Unless expressly provided otherwise in this Act, a designated partner shall be—
(a) responsible for the doing of all acts, matters and things as are required to be done by the
limited liability partnership in respect of compliance of the provisions of this Act including
filing of any document, return, statement and the like report pursuant to the provisions of
this Act and as may be specified in the limited liability partnership agreement; and
(b) liable to all penalties imposed on the limited liability partnership for any contravention
of those provisions.

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7. Changes in designated partners.—
A limited liability partnership may appoint a designated partner within thirty days of a vacancy arising
for any reason and provisions of sub-section (4) and sub-section (5) of section 7 shall apply in respect
of such new designated partner:
Provided that if no designated partner is appointed, or if at any time there is only one designated
partner, each partner shall be deemed to be a designated partner.

4.2. Partnership deed

There is no partnership deed for LLP as it is registered under Companies Act and due nto non
applicability of Indian Partnership Act.

4.3. Incorporation of LLP

1. Incorporation document.—
(1) For a limited liability partnership to be incorporated,—
(a) two or more persons associated for carrying on a lawful business with a view to profit
shall subscribe their names to an incorporation document;
(b) the incorporation document shall be filed in such manner and with such fees, as may be
prescribed with the Registrar of the State in which the registered office of the limited
liability partnership is to be situated; and
(c) there shall be filed along with the incorporation document, a statement in the prescribed
form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a
Cost Accountant, who is engaged in the formation of the limited liability partnership and by
any one who subscribed his name to the incorporation document, that all the requirements
of this Act and the rules made thereunder have been complied with, in respect of
incorporation and matters precedent and incidental thereto.

(2) The incorporation document shall—


(a) be in a form as may be prescribed;
(b) state the name of the limited liability partnership;
(c) state the proposed business of the limited liability partnership;
(d) state the address of the registered office of the limited liability partnership;
(e) state the name and address of each of the persons who are to be partners of the limited
liability partnership on incorporation;
f) state the name and address of the persons who are to be designated partners of the
limited liability partnership on incorporation;
(g) contain such other information concerning the proposed limited liability partnership as
may be prescribed.

(3) If a person makes a statement under clause (c) of sub-section (1) which he—
(a) knows to be false; or
(b) does not believe to be true,
shall be punishable with imprisonment for a term which may extend to two years and with
fine which shall not be less than ten thousand rupees but which may extend to five lakh
rupees.
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2. Incorporation by registration.—

(1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11
have been complied with, the Registrar shall retain the incorporation document and, unless
the requirement imposed by clause (a) of that sub-section has not been complied with, he
shall, within a period of fourteen days—
(a) register the incorporation document; and
(b) give a certificate that the limited liability partnership is incorporated by the name
specified therein.

(2) The Registrar may accept the statement delivered under clause (c) of sub-section (1) of
section 11 as sufficient evidence that the requirement imposed by clause (a) of that sub-
section has been complied with.

(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the Registrar
and authenticated by his official seal.

(4) The certificate shall be conclusive evidence that the limited liability partnership is
incorporated by the name specified therein.

3. Registered office of limited liability partnership and change therein.—


(1) Every limited liability partnership shall have a registered office to which all
communications and notices may be addressed and where they shall be received.

(2) A document may be served on a limited liability partnership or a partner or designated


partner thereof by sending it by post under a certificate of posting or by registered post or
by any other manner, as may be prescribed, at the registered office and any other address
specifically declared by the limited liability partnership for the purpose in such form and
manner as may be prescribed.

(3) A limited liability partnership may change the place of its registered office and file the
notice of such change with the Registrar in such form and manner and subject to such
conditions as may be prescribed and any such change shall take effect only upon such filing.

(4) If the limited liability partnership contravenes any provisions of this section, the limited
liability partnership and its every partner shall be punishable with fine which shall not be
less than two thousand rupees but which may extend to twenty-five thousand rupees.

4. Effect of registration.—
On registration, a limited liability partnership shall, by its name, be capable of—
(a) suing and being sued;

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(b) acquiring, owning, holding and developing or disposing of property, whether movable or
immovable, tangible or intangible;
(c) having a common seal, if it decides to have one; and
(d) doing and suffering such other acts and things as bodies corporate may lawfully do and
suffer.

5. Name.—

(1) Every limited liability partnership shall have either the words "limited liability
partnership" or the acronym "LLP" as the last words of its name.

(2) No limited liability partnership shall be registered by a name which, in the opinion of the
Central Government is—
(a) undesirable; or
(b) identical or too nearly resembles to that of any other partnership firm or limited liability
partnership or body corporate or a registered trade mark, or a trade mark which is the
subject matter of an application for registration of any other person under the Trade Marks
Act, 1999 (47 of 1999).

6. Reservation of name.—
(1) A person may apply in such form and manner and accompanied by such fee as may be
prescribed to the Registrar for the reservation of a name set out in the application as—
(a) the name of a proposed limited liability partnership; or
(b) the name to which a limited liability partnership proposes to change its name.

(2) Upon receipt of an application under sub-section (1) and on payment of the prescribed
fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central
Government in the matter, that the name to be reserved is not one which may be rejected
on any ground referred to in sub-section (2) of section 15, reserve the name for a period of
three months from the date of intimation by the Registrar.

7. Change of name of limited liability partnership.—


(1) Notwithstanding anything contained in sections 15 and 16, where the Central
Government is satisfied that a limited liability partnership has been registered (whether
through inadvertence or otherwise and whether originally or by a change of name) under a
name which—
(a) is a name referred to in sub-section (2) of section 15; or
(b) is identical with or too nearly resembles the name of any other limited liability
partnership or body corporate or other name as to be likely to be mistaken for it,
the Central Government may direct such limited liability partnership to change its name,
and the limited liability partnership shall comply with the said direction within three months
after the date of the direction or such longer period as the Central Government may allow.
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(2) Any limited liability partnership which fails to comply with a direction given under sub-
section (1) shall be punishable with fine which shall not be less than ten thousand rupees
but which may extend to five lakh rupees and the designated partner of such limited liability
partnership shall be punishable with fine which shall not be less than ten thousand rupees
but which may extend to one lakh rupees.

8. Application for direction to change name in certain circumstances.—


(1) Any entity which already has a name similar to the name of a limited liability partnership
which has been incorporated subsequently, may apply, in such manner as may be
prescribed, to the Registrar to give a direction to any limited liability partnership, on a
ground referred to in section 17 to change its name.

(2) The Registrar shall not consider any application under sub-section (1) to give a direction
to a limited liability partnership on the ground referred to in clause (b) of sub-section (1) of
section 17 unless the Registrar receives the application within twenty-four months from the
date of registration of the limited liability partnership under that name.

9. Change of registered name.—


Any limited liability partnership may change its name registered with the Registrar by filing
with him a notice of such change in such form and manner and on payment of such fees as
may be prescribed.

10. Penalty for improper use of words "limited liability partnership" or "LLP".—

If any person or persons carry on business under any name or title of which the words
"Limited Liability Partnership" or "LLP" or any contraction or imitation thereof is or are the
last word or words, that person or each of those persons shall, unless duly incorporated as
limited liability partnership, be punishable with fine which shall not be less than fifty
thousand rupees but which may extend to five lakh rupees.

11. Publication of name and limited liability.—


(1) Every limited liability partnership shall ensure that its invoices, official correspondence
and publications bear the following, namely:—
(a) the name, address of its registered office and registration number of the limited liability
partnership; and
(b) a statement that it is registered with limited liability.

(2) Any limited liability partnership which contravenes the provisions of sub-section (1) shall
be punishable with fine which shall not be less than two thousand rupees but which may
extend to twenty-five thousand rupees.

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4.4. Extent and Limitations of Liability, Benefit or Advantages of LLP

Extent and Limitations of Liability


1. Partner as agent.—

Every partner of a limited liability partnership is, for the purpose of the business of the
limited liability partnership, the agent of the limited liability partnership, but not of other
partners.

2. Extent of liability of limited liability partnership.—


1) A limited liability partnership is not bound by anything done by a partner in dealing with a
person if—
(a) the partner in fact has no authority to act for the limited liability partnership in doing a
particular act; and
(b) the person knows that he has no authority or does not know or believe him to be a
partner of the limited liability partnership.

(2) The limited liability partnership is liable if a partner of a limited liability partnership is
liable to any person as a result of a wrongful act or omission on his part in the course of the
business of the limited liability partnership or with its authority.

(3) An obligation of the limited liability partnership whether arising in contract or otherwise,
shall be solely the obligation of the limited liability partnership.

(4) The liabilities of the limited liability partnership shall be met out of the property of the
limited liability partnership.

3. Extent of liability of partner.—


(1) A partner is not personally liable, directly or indirectly for an obligation referred to in
sub-section (3) of section 27 solely by reason of being a partner of the limited liability
partnership.

(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not
affect the personal liability of a partner for his own wrongful act or omission, but a partner
shall not be personally liable for the wrongful act or omission of any other partner of the
limited liability partnership.

4. Holding out.—
(1) Any person, who by words spoken or written or by conduct, represents himself, or
knowingly permits himself to be represented to be a partner in a limited liability partnership
is liable to any person who has on the faith of any such representation given credit to the
limited liability partnership, whether the person representing himself or represented to be a
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partner does or does not know that the representation has reached the person so giving
credit:
Provided that where any credit is received by the limited liability partnership as a result of
such representation, the limited liability partnership shall, without prejudice to the liability
of the person so representing himself or represented to be a partner, be liable to the extent
of credit received by it or any financial benefit derived thereon.

(2) Where after a partner's death the business is continued in the same limited liability
partnership name, the continued use of that name or of the deceased partner's name as a
part thereof shall not of itself make his legal representative or his estate liable for any act of
the limited liability partnership done after his death

5. Unlimited liability in case of fraud.—


(1) In the event of an act carried out by a limited liability partnership, or any of its partners,
with intent to defraud creditors of the limited liability partnership or any other person, or
for any fraudulent purpose, the liability of the limited liability partnership and partners who
acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for
all or any of the debts or other liabilities of the limited liability partnership:
Provided that in case any such act is carried out by a partner, the limited liability partnership
is liable to the same extent as the partner unless it is established by the limited liability
partnership that such act was without the knowledge or the authority of the limited liability
partnership.

(2) Where any business is carried on with such intent or for such purpose as mentioned in
sub-section (1), every person who was knowingly a party to the carrying on of the business
in the manner aforesaid shall be punishable with imprisonment for a term which may
extend to two years and with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees.

(3) Where a limited liability partnership or any partner or designated partner or employee of
such limited liability partnership has conducted the affairs of the limited liability partnership
in a fraudulent manner, then without prejudice to any criminal proceedings which may arise
under any law for the time being in force, the limited liability partnership and any such
partner or designated partner or employee shall be liable to pay compensation to any
person who has suffered any loss or damage by reason of such conduct:
Provided that such limited liability partnership shall not be liable if any such partner or
designated partner or employee has acted fraudulently without knowledge of the limited
liability partnership.

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Benefit or Advantages of LLP

There are various benefits of LLP which shall includes:-


• Renowned form of business: Though the concept of Limited Liability Partnership has
been recently introduced in India but it is very known concept in other countries of the
world especially in service sector.
• Easy to Form: It is very easy to form LLP, as the process is very simple as compared to
Companies and does not involve much formality. Moreover, in terms of cost the minimum
fees of incorporation is as low as Rs 800 and maximum is Rs 5600.
• Body Corporate: Just like a Company, LLP is also body corporate , which means it has its
own existence as compared to partnership. LLP and its Partners are distinct entity in the
eyes of law. LLP will know by its own name and not the name of its partners.
• Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and
person, who own it, are separate entities and both functions separately. Liability for
repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Any
business with potential for lawsuits should consider incorporation; it will offer an added
layer of protection.
• Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any
changes in the partners of the LLP, the LLP will be a same entity with the same privileges,
immunities, estates and possessions. The LLP shall continue to exist till its wound up in
accordance with the provisions of the relevant law.
• Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own affairs.
Partner can decide the way they want to run and manage the LLP, in form of LLP
Agreement. The LLP Act does not regulated the LLP to large extent rather than allows
partners the liberty to manage it as per their will and fancies..
• Easy Transferable Ownership: It is easy to become a Partner or leave the LLP or otherwise
it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
• Separate Property: A LLP as legal entity is capable of owning its funds and other
properties. The LLP is the real person in which all the property is vested and by which it is
controlled, managed and disposed off. The property of LLP is not the property of its
partners. Therefore partners cannot make any claim on the property in case of any dispute
among themselves.
Taxation: Another main benefit of incorporation is the taxation of a LLP. LLP are taxed at a
lower rate as compared to Company. Moreover, LLP are also not subject to Dividend
Distribution Tax as compared to company, so there will not be any tax while you distribute
profit to your partners.
• Raising Money: Financing a small business like sole proprietorship or partnership can be
difficult at times. A LLP being a regulated entity like company can attract finance from PE
Investors, financial institutions etc.

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• Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others.
The partners are not liable to be sued for dues against the LLP.
• No Mandatory Audit Requirement: Under LLP, only in case of business, where the annual
turnover/ contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account
audited annually by a chartered accountant. This provides great relief to small businessmen.
• Partners are not agent of other Partners: In LLP, Partners unlike partnership are not
agents of the partners and therefore they are not liable for the individual act of other
partners in LLP, which protects the interest of individual partners.
• Compliances: As compared to a private company, the number of compliances are on
lesser side in case of LLP.
4.5. Difference between LLP and Partnership Firm

BASIS FOR LIMITED LIABILITY PARTNERSHIP


PARTNERSHIP
COMPARISON (LLP)

Meaning Partnership refers to an arrangement Limited Liability Partnership is a


wherein two or more person agree form of business operation which
to carry on a business and share combines the features of a
profits & losses mutually. partnership and a body corporate.

Governed By Indian Partnership Act, 1932 Limited Liability Partnership Act,


2008

Registration Optional Mandatory

Charter Partnership deed LLP Agreement


document

Liability Unlimited Limited to capital contribution,


except in case of fraud.

Contractual It cannot enter into contract in its It can sue and be sued in its name.
capacity name.

Legal Status Partners are collectively known as It has a separate legal status.
firm, so there is no separate legal

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BASIS FOR LIMITED LIABILITY PARTNERSHIP
PARTNERSHIP
COMPARISON (LLP)

entity.

Name of firm Any name Name containing LLP as suffix

Maximum 100 partners No limit


partners

Property Cannot be held in the name of firm. Can be held in the name of the LLP.

Perpetual No Yes
Succession

Audit of Not mandatory Mandatory, only if turnover and


accounts capital contribution overreaches 40
lakhs and 25 lakhs respectively.

Relationship Partners are agents of firm and other Partners are agents of LLP only.
partners as well.

4.6. Prima facie steps of conversion to LLP

4.6.1. Partnership firm to LLP

(1) The Registrar, on satisfying that a partnership firm has complied with the provisions of
the Second Schedule, shall, subject to the provisions of this Act and the rules made
thereunder, register the documents submitted under such Schedule and issue a certificate
of registration in such form as the Registrar may determine stating that the limited liability
partnership is, on and from the date specified in the certificate, registered under this Act:

Provided that the limited liability partnership shall, within fifteen days of the date of
registration, inform the concerned Registrar of Firms or Registrar of Companies, as the case
may be, with which it was registered under the provisions of the Indian Partnership Act,
1932 (9 of 1932) about the conversion and of the particulars of the limited liability
partnership in such form and manner as may be prescribed.

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(2) Upon such conversion, the partners of the firm, the limited liability partnership to which
such firm or such company has converted, and the partners of the limited liability
partnership shall be bound by the provisions of the Second Schedule, applicable to them.

(3) Upon such conversion, on and from the date of certificate of registration, the effects of
the conversion shall be such as specified in the Second Schedule.

(4) Notwithstanding anything contained in any other law for the time being in force, on and
from the date of registration specified in the certificate of registration issued under the
Second Schedule—
(a) there shall be a limited liability partnership by the name specified in the certificate of
registration registered under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm all assets,
interests, rights, privileges, liabilities, obligations relating to the firm, and the whole of the
undertaking of the firm further assurance, act or deed; and
(c) the firm shall be deemed to be dissolved and removed from the records of the Registrar
of Firms.

4.6.2. Private Limited Company to LLP

(1) The Registrar, on satisfying that a private company has complied with the provisions of
the Third Schedule subject to the provisions of this Act and the rules made thereunder,
register the documents submitted under such Schedule and issue a certificate of registration
in such form as the Registrar may determine stating that the limited liability partnership is,
on and from the date specified in the certificate, registered under this Act:

Provided that the limited liability partnership shall, within fifteen days of the date of
registration, inform the concerned Registrar of Companies, as the case may be, with which it
was registered under the provisions of the Companies Act, 1956 (1 of 1956) as the case may
be, about the conversion and of the particulars of the limited liability partnership in such
form and manner as may be prescribed.

(2) Upon such conversion, the shareholders of private company, the limited liability
partnership to which such company has converted, and the partners of the limited liability
partnership shall be bound by the provisions of the the Third Schedule or applicable to
them.

(3) Upon such conversion, on and from the date of certificate of registration, the effects of
the conversion shall be such as specified in the the Third Schedule

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(4) Notwithstanding anything contained in any other law for the time being in force, on and
from the date of registration specified in the certificate of registration issued under the the
Third Schedule—
(a) there shall be a limited liability partnership by the name specified in the certificate of
registration registered under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm or the
company, as the case may be, all assets, interests, rights, privileges, liabilities, obligations
relating to the company and the whole of the undertaking of the company, shall be
transferred to and shall vest in the limited liability partnership without further assurance,
act or deed; and
(c) the company, shall be deemed to be dissolved and removed from the records of the
Registrar of Companies.

4.7. Winding up and Dissolution

Winding up and dissolution.—The winding up of a limited liability partnership


may be either voluntary or by the Tribunal and limited liability partnersh ip, so
wound up may be dissolved.

4.7.1. Ways of winding up

Limited Liability Partnership may be wound up in the following ways:

I. Voluntary Winding up

II. Insolvency and Bankruptcy Code (IBC), 2016: Though this code provides steps for
restructuring and revival of Corporate Debtor (LLP) yet under certain circumstances NCLT
can pass order for liquidation of LLP. Therefore, it is included under the modes of winding
up.

III. Compulsory winding up by the Tribunal.

4.7.2. Circumstances in which LLP may be wound up by Tribunal

A limited liability partnership may be wound up by the Tribunal,—

(a) if the limited liability partnership decides that limited liability partnership be wound up
by the Tribunal;

(b) if, for a period of more than six months, the number of partners of the limited liability
partnership is reduced below two;

(c) if the limited liability partnership is unable to pay its debts;

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(d) if the limited liability partnership has acted against the interests of the sovereignty and
integrity of India, the security of the State or public order;

(e) if the limited liability partnership has made a default in filing with the Registrar the
Statement of Account and Solvency or annual return for any five consecutive financial years;
or
(f) if the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be
wound up.

Chapter Ends!

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