CA Foundation January 2025 Suggested Answers Paper 2 Business Laws

FOR CA FOUNDATION EXAM PREPARATION

CA Foundation 2025
Suggested Answers ·
Paper 2 Business Laws
EXAM YEAR TYPE SUBJECT

CA Foundation 2025 Suggested Answers Paper 2 Business Laws
DATE

January 2025

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 2: BUSINESS LAWS
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. any four questions from the remaining five questions. em
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aQuestion 1
(a) Examine the validity of the following agreements under the provisions of the
Indian Contract Act, 1872 and justify your answer:
(i) Mrs. Priya pays a sum of ` 10,000 to a marriage bureau to provide
information about the prospective grooms for her daughter's marriage.
(ii) Bharat agrees with John to sell his white bull. Unknown to both the

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parties, the bull was dead at the time of agreement.

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(iii) Rishabh sells the goodwill of his shop to Omkar for ` 10,00,000 and

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promises not to carry on such similar business within the local limits so

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long as Omkar carries on like business.
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(iv) A property worth ` 2,00,000 was agreed to be sold for just ` 25,000 by a
person of unsound mind. (7 Marks)
(b) (i) "Harmony Foundation" is a newly incorporated company focused on
promoting education and healthcare services in rural areas. The
company is registered as a section 8 company with a clear plan to
reinvest all profits into its activities, and a license has been accorded by
the Central Government. For the financial year ending on 31st March,
2024, the company earned a substantial profit and transferred some
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amount to M/s LMP Associates (a Partnership firm and one of the

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member of the Harmony Foundation). Subsequently, on the complaint of
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one of the members, the Central Government, after giving an

s em opportunity of being heard, directed the company to be wound up on the
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ground that a partnership firm cannot be a member of the section 8

ag company and it cannot transfer any part of profit to the firm. Explain, in
the light of the provisions of the Companies Act, 2013, whether the
ground taken for winding up is sufficient. (4 Marks)

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

(ii) Justice Private Limited has 9 directors on its Board of Directors. The
company's Articles of Association currently state that the quorum for
board meetings shall be 1/3rd of the total strength or 2 directors,
whichever is higher. The company now intends to amend this article to
specify that the quorum for board meetings shall be 1/3rd of the total
strength or 4 directors, whichever is higher. Advise the company on the
procedure for including this entrenchment provision in its Articles, in
accordance with the provisions of the Companies Act, 2013. Would your
advice differ if the company were a public company? (3 Marks)
(c) A minor admitted to the benefits of a partnership firm is entitled to certain
rights and may also have liabilities to third parties for the acts of the firm.
Discuss the rights and liabilities (before attaining majority only) of the minor
under the Indian Partnership Act, 1932. (6 Marks)
Answer
(a) (i) Under Section 10 of the Indian Contract Act, 1872, a valid contract
requires free consent, lawful consideration, and a lawful object.
In the instant case, the agreement to pay ` 10,000 in exchange for a
service (providing information about prospective grooms) is lawful.
Hence, the agreement is valid.
(ii) According to section 20, where both the parties to an agreement are
under a mistake as to a matter of fact essential to the agreement, there
is a bilateral mistake. In such a case, the agreement is void.
In the instant case, the bull's death (unknown to both parties)
constitutes a bilateral mistake regarding the subject matter of the
contract.
Hence, the agreement is void.
(iii) Under Section 27, agreements in restraint of trade are void. However,
an exception is provided for contracts involving the sale of goodwill.
The local limits within which the seller of the goodwill agrees not to
carry on similar business must be reasonable.
In the instant case, the restriction is limited to the local area and does
not extend indefinitely.
Hence, the agreement is valid.

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(iv) According to section 12, a contract by a person who is not of sound
mind is void.

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In the instant case, a property worth ` 2,00,000 was agreed to be sold
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for just ` 25,000 by a person of unsound mind.

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Hence, the agreement is void.
(b) (i) seFormation of companies with charitable objects etc. (Section 8 l a s
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ag • Section 8 of the Companies Act, 2013 deals with the formation of
company):

companies which are formed to
o promote the charitable objects of commerce, art, science,
sports, education, research, social welfare, religion, charity,
protection of environment etc.
o Such company intends to apply its profit in

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o promoting its objects and

emoperates under a special licence from
o prohibiting the payment of any dividend to its members.

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• The Section 8 company

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Central Government

• On revocation, Central Government may direct it to
o Converts its status and change its name
o Wind–up
o Amalgamate with another company having similar object.

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• A partnership firm can be a member of Section 8 company.

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In the instant case, “Harmony Foundation” a section 8 company
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transferred some amount to M/S LMP Associates (a Partnership firm

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and one of the members of the Harmony Foundation).

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ag directed the company to be wound up on the ground that a
partnership firm cannot be a member of the Section 8 company and it
cannot transfer any part of profit to the firm.

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

Hence, the ground for winding up taken on the basis of transfer of any
part of profit by Harmony Foundation to the M/S LMP Associates is
correct and sufficient.
However, M/S LMP Associates can become a member of Section 8
company. Therefore, this ground is not correct hence not sufficient.
(ii) Section 5(4) and (5) of the Companies Act, 2013 contains the following
provisions:
Manner of inclusion of the entrenchment provision: The provisions
for entrenchment shall only be made either on formation of a company,
or by an amendment in the articles agreed to by all the members of
the company in the case of a private company and by a special
resolution in the case of a public company.
Notice to the registrar of the entrenchment provision: Where the
articles contain provisions for entrenchment, whether made on
formation or by amendment, the company shall give notice to the
Registrar of such provisions in such form and manner as may be
prescribed.
In the instant case, Justice Private Limited can follow the above
procedure i.e. with the consent of all the members and notice to the
registrar to include the entrenchment provision in its Articles.
Yes, the advice will differ, if the company is public company, since it
has to pass Special Resolution and also inform to the registrar.
(c) Though a minor cannot be a partner in a firm, he can nonetheless be
admitted to the benefits of partnership under Section 30 of the Indian
Partnership Act, 1932. The following are the Rights and Liabilities (before
attaining majority):
(1) Rights:
(i) A minor partner has a right to his agreed share of the profits and
of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share
but only when severing his connection with the firm, and not
otherwise.

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(iv) On attaining majority, he may within 6 months elect to become a
partner or not to become a partner. If he elects to become a
partner, then he is entitled to the share to which he was entitled
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as a minor. If he does not, then his share is not liable for any acts
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of the firm after the date of the public notice served to that effect.
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(2) Liabilities:
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attaining majority:

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in the profits and the property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred
during his minority.
(c) Minor cannot be declared insolvent, but if the firm is declared
insolvent his share in the firm vests in the Official
Receiver/Assignee (which means minor can recover his share in the
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firm on proportionate basis from official receiver/assignee).

emelectronic components, entered into a
Question 2
(a) (i) MNO Limited, a supplier of
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contract on August 1, 2023,
a contract specifically identified the microchips by
units of microchips. The
serial numbers and confirmed that they were in a deliverable state,
stored in MNO Limited's warehouse. The contract stipulated that the
goods would be delivered on September 1, 2023.
On August 10, 2023, a flood occurred, damaged the warehouse and
destroyed the entire stock of microchips, including the 1000 units
intended for PQR Enterprises. Examine, with reference to the provisions

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of the Sale of Goods Act, 1930 who shall suffer the loss? What will be

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your answer if the microchips are not specifically identified and marked

c. o for PQR Enterprises at the time of the contract?
s emIt turns out
(4 Marks)

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(ii) A purchases a motorcycle from B and uses it for some time.
that the motorcycle sold by B to A was a stolengone
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returned to a rightful owner. A brings action against
the price. Will he succeed? Examine this with reference to the provisions
of the Sale of Goods Act, 1930. (3 Marks)

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

(b) Write in brief the content and model of the Articles of Association (AOA),
according to which the director and other officers are required to perform
their functions as regards the management of the company, its accounts and
audit. (7 Marks)
(c) Dyana and Bharti, newly qualified chartered accountants, wish to form a
Limited Liability Partnership (LLP) to provide their professional services. They
seek information about the provisions of the Limited Liability Partnership Act,
2008, specifically regarding the incorporation document. Additionally, they
want to know whether the statement filed along with the incorporation
document serves as sufficient evidence that all legal requirements for the
incorporation of the LLP have been fulfilled. Explain these aspects to them.
(6 Marks)
Answer
(a) (i) According to Section 18 of the Sale of Goods Act, 1930, where there is a
contract of sale for unascertained goods, the property in goods cannot
pass to the buyer unless and until the goods are ascertained. The buyer
can get the ownership right on the goods only when the goods are
specific and ascertained.
According to section 20 of the Sale of Goods Act, 1930, where there is
an unconditional contract for sale of specific goods in deliverable state,
the property in the goods passes to the buyer when the contract is
made, and it is immaterial whether the time of payment of price or the
time of delivery of the goods, or both, is postponed. Here, the
condition is goods must be ready for delivery.
In the instant case, since the microchips were specifically identified and
were in a deliverable state when the contract was formed on August 1,
2023, ownership (and risk) likely passed to PQR Enterprises on August
1, 2023.
Therefore, PQR Enterprises will suffer the loss.
Goods are not specifically identified and ascertained:
If the microchips were not specifically identified and marked for PQR
Enterprises at the time of the contract, MNO Limited will suffer the loss,
as the risk would not have transferred to PQR Enterprises.

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(ii) As per Section 27 of the Sale of Goods Act, 1930, “no one can transfer
a better title than they themselves have.” This means that a person who
is not the owner of goods cannot convey ownership unless authorized
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by the true owner.
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Also, Section 14(a) imposes an implied condition in every contract of
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sale that the seller has the right to sell the goods means he should be

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the real owner. If the seller’s title turns out to be defective, the buyer

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must return the goods to the true owner and recover the price from
the seller.
In the instant case, A will succeed in his action against B for the return
of the price, as B had no title to sell the stolen motorcycle, and the sale
was in breach of the implied condition.
(b) The Articles of Association are in fact the Bye-Laws of the company
according to which director and other officers are required to perform their

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functions as regards the management of the company, its accounts and

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audit. It is important therefore that the auditor should study them and,

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while doing so he should note the provisions therein in respect of relevant
matters.
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Section 5 of the Companies Act, 2013 seeks to provide the contents
and model of articles of association. The section lays the following
law-
(1) Contains regulations: The articles of a company shall contain the
regulations for management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as
are prescribed under the rules. However, a company may also include
such additional matters in its articles as may be considered necessary
for its management.
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(3) Contain provisions for entrenchment: The articles may
provisions for entrenchment (to protect something) to e
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the effect that

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specified provisions of the articles may be altered only
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if conditions or

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procedures as that are more restrictive than those in the
a case of a special resolution, are met or complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions
for entrenchment shall only be made either on formation of a company,

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

or by an amendment in the articles agreed to by all the members of
the company in the case of a private company and by a special
resolution in the case of a public company.
(5) Notice to the registrar of the entrenchment provision: Where the
articles contain provisions for entrenchment, whether made on
formation or by amendment, the company shall give notice to the
Registrar of such provisions in such form and manner as may be
prescribed.
(6) Forms of articles: The articles of a company shall be in respective
forms specified in Tables, F, G, H, I and J in Schedule I as may be
applicable to such company.
(7) Model articles: A company may adopt all or any of the regulations
contained in the model articles applicable to such company.
(8) Company registered after the commencement of this Act: In case
of any company, which is registered after the commencement of this
Act, in so far as the registered articles of such company do not exclude
or modify the regulations contained in the model articles applicable to
such company, those regulations shall, so far as applicable, be the
regulations of that company in the same manner and to the extent as
if they were contained in the duly registered articles of the company.
(c) Incorporation document (Section 11 of the Limited Liability
Partnership Act, 2008): The most important document needed for
registration is the incorporation document.
(1) For a LLP 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 LLP is to be situated; and
(c) Statement to be filed:
 there shall be filed along with the incorporation document, a
statement in the prescribed form,

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 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 LLP and
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by any one who subscribed his name to the incorporation
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document,
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se that all the requirements of this Act and the rules made
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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 LLP;
(c) state the proposed business of the LLP;

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(d) state the address of the registered office of the LLP;
(e) state the name and address.of each of the persons who are to be

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partners of the LLP on incorporation;

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a of the LLP on incorporation;
(f) state the name and
designated partners
(g) contain such other information concerning the proposed LLP as
may be prescribed.
(3) If a person makes a statement as discussed above which he—
(a) knows to be false; or
(b) does not believe to be true, shall be punishable

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with imprisonment for a term which may extend to 2 years and
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 with fine which shall not be less than ` 10,000 but which
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extend to ` 5 Lakhs.
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Incorporation by registration (Section 12- Sufficient As per

ag section 12, 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 the sub-section has been complied
with.

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

In view of above, the statement filed along with the incorporation
document serves as sufficient evidence that all legal requirements for the
incorporation of the LLP have been fulfilled.
Question 3
(a) P, Q and R, are partners in a construction firm, PQR Associates. P buys
cement on behalf of the firm from D. The cement is used in the ordinary
course of the firm's business. P uses the cement for his personal purposes.
The supplier D, who is unaware of the private use of cement by P, claims the
price from the firm. The firm refuses to pay for the price, on the ground that
the cement was never received by it. Referring to the provisions of the Indian
Partnership Act, 1932, answer the followings:
(i) Whether the Firm's contention is tenable?
(ii) What would be your answer if a part of the cement so purchased by P
was delivered to the firm by him, and the rest of the cement was used by
him for his private use, about which neither the firm nor the supplier
were aware? (7 Marks)
(b) (i) The extract of the major shareholders holding paid-up share capital in
Rural Development Fin. Corp. Ltd., are as follows:
Central Government 26%
State of Maharashtra 18%
State of Tamilnadu 24% and
Public 32%

Whether the company would be considered as a Public Financial
Institution (PFI) under the provisions of the Companies Act, 2013?
Explain in brief about various institutions regarded as 'Public Financial
Institutions' under the Companies Act, 2013. (5 Marks)
(ii) Whether it is mandatory to have common seal for the company? If not,
then what are the other options available as per the Companies Act,
2013? (2 Marks)
(c) What are the agreements which are held to be opposed to public policy under
the Indian Contract Act, 1872. Explain any 6 such agreements. (6 Marks)

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Answer
(a) The given question is based on the Section 18 read with sections 25 & 26
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of the Indian Partnership Act, 1932. Section 18 deals with the Partner to be
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an agent of the firm. This means that a partner is the agent of the firm for

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the purpose of the business of the firm.
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agent.

a far as he acts for his partners, he may properly be deemed as an agent.
concern of the partnership, he may properly be deemed a principal and so

The rule that a partner is the agent of the firm for the purpose of the
business of the firm cannot be applied to all transactions and dealings
between the partners themselves. It is applicable only to the act done by
partners for the purpose of the business of the firm.
According to section 25, the partners are jointly and severally responsible

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to third parties for all acts which come under the scope of their express or

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implied authority. “Act of firm’ connotes any act or omission by all the

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partners or by any partner or agent of the firm, which gives rise to a right
enforceable by or against the firm.
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As per section 26, the firm is liable to the same extent as the partner for
any loss or injury caused to a third party by the wrongful acts of a partner,
if they are done by the partner while acting:
(a) in the ordinary course of the business of the firm
(b) with the authority of the partners.
According to the facts given in the questions, P, a partner to PQR
Associates, buys cement on behalf of the firm from D in the ordinary course
of the firm’s business. P uses the cement for his personal purposes. D, the
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was never received by it.

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(i) Said Section is applicable only to the act done by partners for the
purpose of the business of the firm. In such case, partner act as the

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

agent of the firm for the purpose of the business of the firm. Since in
the given case, P, buys cement on behalf of the firm from D in the
ordinary course of the firm’s business.
Therefore, in the given case, firms’ contention of refusal to pay the
price on the ground that the cement was never received by it, is not
tenable.
(ii) Further for commission of the wrongful act by the partner, the firm is
liable to the same extent as the partner for any loss or injury caused to
a third party by the wrongful acts of a partner, if they are done by the
partner while acting:
(a) in the ordinary course of the business of the firm
(b) with the authority of the partners.
In the given case, part of the cement so purchased by P was delivered
to the firm by him and the rest of the cement was used by him for his
private use, was not known to the firm and the supplier. Since the act
of the P to purchase the cement was in the ordinary course of business
with the authority of the partner, however wrongful use by the partner
will make the firm liable to the same extent as the partner for loss or
injury caused to D.
However, PQR Associates can take action against P, the partner.
(b) (i) Conditions for an institution to be notified as PFI (Section 2(72) of
the Companies Act, 2013: No institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or
State Act other than this Act or the previous Companies Law; or
(B) not less than fifty-one per cent of the paid-up share capital is held
or controlled by the Central Government or by any State
Government or Governments or partly by the Central Government
and partly by one or more State Governments.
In the instant case, the major shareholders holding paid-up share
capital in Rural Development Fin. Corp. Ltd. by the Central Government
and State Governments is 68% (i.e. Central Government: 26%, State of
Maharashtra: 18% and State of Tamilnadu: 24%), hence it will be

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regarded as ‘Public Financial Institution’ under the Companies Act,
2013.

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By virtue of Section 2(72) of the Companies Act, 2013, the following
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institutions are to be regarded as public financial institutions:

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(i) the Life Insurance Corporation of India, established under the Life
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ag (iii) specified company referred to in the Unit Trust of India (Transfer
(ii) the Infrastructure Development Finance Company Limited,

of Undertaking and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under section
4A(2) of the Companies Act, 1956 so repealed under section 465
of this Act;
(v) such other institution as may be notified by the Central

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Government in consultation with the Reserve Bank of India.

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(ii) No, it is not mandatory to have common seal for the company.
In case a company does notm
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s or by a director and the Company
have a common seal, the authorization

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shall be made by two directors
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Secretary, wherever the company has appointed a Company Secretary.
(c) Some of the agreements which are held to be opposed to public policy
are-
(1) Trading with enemy: Any trade with person owing allegiance to a
Government at war with India without the licence of the Government
of India is void, as the object is opposed to public policy. Here, the
agreement to trade offends against the public policy by tending to

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prejudice the interest of the State in times of war.

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(2) Stifling Prosecution: An agreement to stifle prosecution i.e. “an
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agreement to present proceedings already instituted from running

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their normal course using force” tends to be a perversion or an abuse

las of justice; therefore, such an agreement is void. The principle is that
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ag one should not make a trade of felony. The compromise of any public
offence is generally illegal.
Under the Indian Criminal Procedure Code, there is, however, a
statutory list of compoundable offences and an agreement to drop

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SUGGESTED ANSWER FOUNDATION EXAMINATION: JANUARY 2025

proceeding relating to such offences with or without the permission of
the Court, as the case may be, in consideration the accused promising
to do something for the complainant, is not opposed to public policy.
(3) Maintenance and Champerty: Maintenance is an agreement in which
a person promises to maintain suit in which he has no interest.
Champerty is an agreement in which a person agrees to assist another
in litigation in-exchange of a promise to hand over a portion of the
proceeds of the action.
(a) It is unreasonable so as to be unjust to other party or
(b) It is made by a malicious motive like that of gambling in litigation
or oppressing other party by encouraging unrighteous suits and
not with the bonafide object of assisting a claim believed to be
just.
(4) Trafficking relating to Public Offices and titles: An agreement to
trafficking in public office is opposed to public policy, as it interferes
with the appointment of a person best qualified for the service of the
public. Public policy requires that there should be no money
consideration for the appointment to an office in which the public is
interested. The following are the examples of agreements that are void;
since they are tantamount to sale of public offices.
(1) An agreement to pay money to a public servant in order to induce
him to retire from his office so that another person may secure the
appointment is void.
(2) An agreement to procure a public recognition like Padma
Vibhushan for reward is void.
(5) Agreements tending to create monopolies: Agreements having for
their object the establishment of monopolies are opposed to public
policy and therefore void.
(6) Marriage brokerage agreements: An agreement to negotiate
marriage for reward, which is known as a marriage brokerage contract,
is void, as it is opposed to public policy.

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(7) Interference with the course of justice: An agreement whose object
is to induce any judicial officer of the State to act partially or corruptly
is void, as it is opposed to public policy.
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(8) Interest against obligation: The following are examples of agreement

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that are void as they tend to create an interest against obligation. The
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object of such agreements is opposed to public policy.

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a consent compensation from another for the performance of his
agency is invalid.
(2) A, who is the manager of a firm, agrees to pass a contract to X if X
pays to A ` 200,000 privately; the agreement is void.
(9) Consideration Unlawful in Part: By virtue of Section 24, if any part of
a single consideration for one or more objects, or any one or any part
of any one of several considerations for a single object, is unlawful, the
agreement is void.”
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This section is an obvious consequence of the general principle of

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Section 23. There is no promise for a lawful consideration if there is

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anything illegal in a consideration which must be taken as a whole. The
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general rule is that where the legal part of a contract can be severed
from the illegal part, the bad part may be rejected and the good one
can be retained. But where the illegal part cannot be severed, the
contract is altogether void.
Question 4
(a) A, B and C jointly promised to pay D a sum of ` 6,000. Examine, considering
the provisions of the Indian Contract Act, 1872 -

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(i) Can D compel any of three parties A, Band C to pay him ` 6,000?

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(ii) C is compelled to pay the whole of the amount to D. Can he recover

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anything from A and B, when -

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(1) Both A and B were solvents.

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(2) A is not in a position to pay anything. (7 Marks)
(b) What are the rules governing the compensation payable in the event of
dishonour of a negotiable instrument under the provisions of the Negotiable
Instruments Act, 1881? (7 Marks)

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(c) Ashok and Vimal are pursuing chartered accountancy course and discussing
about the structure of the Indian judicial system. Explain them the functions
of judiciary system of India and the hierarchy of courts and briefly explain
their functioning under the Indian Regulatory Framework. (6 Marks)
Answer
(a) Section 42 of the Indian Contract Act, 1872 requires that when two or more
persons have made a joint promise, then, unless a contrary intention
appears from the contract, all such persons jointly must fulfil the promise.
In the event of the death of any of them, his representative jointly with the
survivors and in case of the death of all promisors, the representatives of
all jointly must fulfil the promise.
Section 43 allows the promisee to seek performance from any of the joint
promisors. The liability of the joint promisors has thus been made not only
joint but “joint and several”. Section 43 provides that in the absence of
express agreement to the contrary, the promisee may compel any one or
more of the joint promisors to perform the whole of the promise.
Section 43 deals with the contribution among joint promisors. The
promisors, may compel every joint promisor to contribute equally to the
performance of the promise (unless a contrary intention appears from the
contract). If any one of the joint promisors makes default in such
contribution the remaining joint promisors must bear the loss arising from
such default in equal shares.
In the instant case,
(i) D can compel any of three parties A, B and C to pay him ` 6,000.
(ii) (1) C can recover the contribution from A and B because A, B and C are
joint promisors.
(2) A is unable to pay anything, C is compelled to pay the whole. C is
entitled to receive ` 3,000 from B.
(b) Rules as to compensation (Section 117 of the Negotiable Instruments
Act, 1881):
The compensation payable in case of dishonour of promissory note, bill of
exchange or cheque, by any party liable to the holder or any endorsee, shall
be determined by the following rules:

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(a) the holder is entitled to the amount due upon the instrument, together
with the expenses properly incurred in presenting, noting and
protesting it;
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(b) when the person charged resides at a place different from that at which

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the instrument was payable, the holder is entitled to receive such sum

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at the current rate of exchange between the two places;

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(c) an endorser who, being liable, has paid the amount due on the same
is entitled to the amount so paid with interest at 18% per annum from
the date of payment until tender or realisation thereof, together with
all expenses caused by the dishonour and payment;
(d) when the person charged and such endorser reside at different places,
the endorser is entitled to receive such sum at the current rate of
exchange between the two places;
(e) the party entitled to compensation may draw a bill upon the party

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liable to compensate him, payable at sight or on demand, for the

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amount due to him, together with all expenses properly incurred by

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him. Such bill must be accompanied by the instrument dishonoured

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and the protest thereof (if any). If such bill is dishonoured, the party

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dishonouring the same is liable to make compensation thereof in the
same manner as in the case of the original bill.
(c) The functions of judiciary system of India are:
♦ Regulation of the interpretation of the Acts and Codes,
♦ Dispute Resolution,
♦ Promotion of fairness among the citizens of the land.
In the hierarchy of courts, the Supreme Court is at the top, followed by the
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High Courts and District Courts. Decisions of a High Court are binding in
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c. o the respective state but are only persuasive in other states. Decisions of the
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Supreme Court are binding on all High Courts under Article 141 of the

las Indian Constitution. In fact, a Supreme Court decision is the final word on
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ag the matter.
(i) Supreme Court: The Supreme Court is the apex body of the judiciary.
It was established on 26th January, 1950. The Chief Justice of India is
the highest authority appointed under Article 126. The principal bench

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of the Supreme Court consists of seven members including the Chief
Justice of India. Presently, the number has increased to 34 including
the Chief Justice of India due to the rise in the number of cases and
workload. An individual can seek relief in the Supreme Court by filing
a writ petition under Article 32.
(ii) High Court: The highest court of appeal in each state and union
territory is the High Court. Article 214 of the Indian Constitution states
that there must be a High Court in each state. The High Court has
appellant, original jurisdiction, and Supervisory jurisdiction. However,
Article 227 of the Indian Constitution limits a High Court’s supervisory
power. In India, there are twenty-five High Courts, one for each state
and union territory. Six states share a single High Court. An individual
can seek remedies against violation of fundamental rights in High
Court by filing a writ under Article 226.
(iii) District Court: Below the High Courts are the District Courts. The
Courts of District Judge deal with Civil law matters i.e. contractual
disputes and claims for damages etc., The Courts of Sessions deals with
Criminal matters.
Under pecuniary jurisdiction, a civil judge can try suits valuing not more
than Rupees two crore.
Jurisdiction means the power to control. Courts get territorial
Jurisdiction based on the areas covered by them. Cases are decided
based on the local limits within which the parties reside or the property
under dispute is situated.
(iv) Metropolitan courts: Metropolitan courts are established in
metropolitan cities in consultation with the High Court where the
population is ten lakh or more. Chief Metropolitan Magistrate has
powers as Chief Judicial Magistrate and Metropolitan Magistrate has
powers as the Court of a Magistrate of the first class.
Question 5
(a) (i) The Institute of Science, Pune (the buyer), placed an order for various
chemicals worth ` 1,50,000 from a supplier in Delhi (the seller). The
buyer made full advance payment, and the seller dispatched the
consignment via a courier of his own choice, without reserving any right

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of disposal over the goods. The consignment was lost in transit, and now
the buyer seeks a refund of the purchase price. With reference to the
provisions of the Sale of Goods Act, 1930, assess the validity of the
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buyer's claim for a refund. (4 Marks)
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(ii) Adarsh visited an authorized car showroom and purchased a car of his
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choice without conducting a detailed inspection. After making the
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l a s payment and taking delivery of the car, he discovered a defect in the
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engine that could not have been detected even with a reasonable
inspection. With reference to the provisions of the Sale of Goods Act,
1930, advise, whether Adarsh can invoke the implied condition of
merchantability and repudiate the contract due to the defect in the car.
(3 Marks)
(b) (i) Explain the following terms under the Indian Partnership Act, 1932:
(1) Partner by holding out

moccur by mutual agreement with
(2) Nominal Partner (4 Marks)

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(ii) "Dissolution of a partnership firm mayo
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the consent of the majority of partners, while compulsory dissolution
requires an order from the scourt." Discuss this statement with reference

g laof the Indian Partnership Act, 1932.
a
to the relevant provisions
(3 Marks)
(c) Explain with reference to the Indian Contract Act, 1872:
(i) When a contract is said to be induced by "undue influence".
(ii) When a party is deemed to be in a position to dominate the will of
another. (6 Marks)
Answer

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(a) (i) Delivery of the goods to the carrier [Section 23(2) of the Sale of
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Goods Act, 1930]: Where, in pursuance of the contract, the seller delivers

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the goods to the buyer or to a carrier or other bailee (whether named by

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the buyer or not) for the purpose of transmission to the buyer, and does

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not reserve the right of disposal, he is deemed to have unconditionally

a appropriated the goods to the contract.
In the instant case, the Institute of Science, Pune placed an order for
various chemicals worth ` 1,50,000 from a supplier in Delhi. The seller

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dispatched the consignment via a courier without reserving any right
of disposal over the goods. The consignment was lost in transit.
According to Section 23(2), it is an unconditional appropriation of
goods because of which the Institute of Science, Pune (buyer) has
become the owner of the goods. Therefore, it will bear the risk of loss
of the consignment in the way. Hence, the buyer’s claim is not valid.
(ii) Condition as to Merchantability [Section 16(2) of the Sale of Goods
Act, 1930]: Where goods are bought by description from a seller who
deals in goods of that description (whether he is the manufacturer or
producer or not), there is an implied condition that the goods shall be
of merchantable quality.
There are two requirements for this condition to apply:
(a) Goods should be bought by description.
(b) The seller should be a dealer in goods of that description.
Provided that, if the buyer has examined the goods, there shall be no
implied condition as regards defects which such examination ought to
have revealed.
The expression “merchantable quality”, though not defined,
nevertheless connotes goods of such a quality and in such a condition
a man of ordinary prudence would accept them as goods of that
description. It does not imply any legal right or legal title to sell.
In the instant case, the defect in the engine could not have been
detected even with a reasonable inspection.
Therefore, Adarsh can invoke the implied condition of merchantability
and is entitled to repudiate the contract due to the defect in the car.
(b) (i) (1) Partner by holding out (Section 28 of the Indian Partnership Act,
1932): Where a man holds himself out as a partner, or allows others
to do it, he is then stopped from denying the character he has
assumed and upon the faith of which creditors may be presumed to
have acted.
(2) Nominal Partner: A person who lends his name to the firm,
without having any real interest in it, is called a nominal partner.

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He is not entitled to share the profits of the firm. Neither he invests
in the firm nor takes part in the conduct of the business. He is,
however liable to third parties for all acts of the firm.
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(ii) Dissolution by Agreement (Section 40 of the Indian Partnership

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Act, 1932):
m 40 gives right to the partners to dissolve the partnership by la
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a a contract already made.
contract between the partners. ‘Contract between the partners’ means

Hence, the statement ‘dissolution of a firm by the consent of the
majority of the partners is not correct unless otherwise provided in a
contract between them.
(iii) Compulsory dissolution (Section 41):
A firm is compulsorily dissolved
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by the happening of any event which makes it unlawful for the

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business of the firm to be carried on or for the partners to carry it
on in partnership.
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Hence, the statementg‘compulsory dissolution requires an order from
a
the court’ is not correct.
(c) (i) Undue influence (Section 16): According to section 16 of the Indian
Contract Act, 1872, “A contract is said to be induced by ‘undue influence’
where the relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other and he uses
that position to obtain an unfair advantage over the other”.

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(ii) Position to dominate the will: Relation between the parties exist in

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such a manner that one of them is in a position to dominate the will of
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c. o the other. A person is deemed to be in such position in the following
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circumstances:

las (a) Real and apparent authority: Where a person holds a real
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ag authority over the other as in the case of master and servant,
doctor and patient and etc.
(b) Fiduciary relationship: Where relation of trust and confidence
exists between the parties to a contract. Such type of relationship

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exists between father and son, solicitor and client, husband and
wife, creditor and debtor, etc.
(c) Mental distress: An undue influence can be used against a person
to get his consent on a contract where the mental capacity of the
person is temporarily or permanently affected by the reason of
mental or bodily distress, illness or of old age.
(d) Unconscionable bargains: Where one of the parties to a contract
is in a position to dominate the will of the other and the contract
is apparently unconscionable i.e., unfair, it is presumed by law that
consent must have been obtained by undue influence.
Unconscionable bargains are witnessed mostly in money-lending
transactions and in gifts.
Question 6
(a) (i) Anjali purchased various cosmetic products worth ` 15,000 during the
last week from Sushil, a shopkeeper, on credit of one month. After a
fortnight, she makes out a blank promissory note, signed it and delivered
to Sushil who further endorsed it to Manish for the payment of his dues.
Manish, who is holder in due course, filled up the due amount of ` 17,000
from Sushil and on maturity presented it to Anjali for payment but she
refused to pay because the amount filled up is more than the agreed
amount of ` 15,000. It is to be noted that the amount of ` 17,000 is
covered by the stamp affixed on it. Referring to the provisions of the
Negotiable Instruments Act, 1881 decide, whether Anjali is liable to
honour the promissory note to Manish for ` 17,000? (4 Marks)
(ii) Priya, a small business owner, receives a bill of exchange from her
customer, Sanjay, which is due for payment on October 15th. On October
12th, Priya presents the bill of exchange for payment at Sanjay's office
during regular business hours, but Sanjay is not present. Priya leaves the
bill with Sanjay's assistant, requesting to be presented to Sanjay for
payment when he returns. However, Sanjay's assistant forgot to give the
bill, and Sanjay does not make the payment by the due date, and the bill
is dishonoured. Based on the provisions of the Negotiable Instruments
Act, 1881, examine whether Priya's presentation of the bill of exchange
to Sanjay's assistant is valid under law. (3 Marks)

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(b) What are the conditions to be satisfied for an "Agent's authority in an
emergency" under the provisions of The Indian Contract Act, 1872?

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(6 Marks)

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OR
(b) Both a .sub-agent and a substituted agent are appointed by the agent, e
em there are some points of distinction between the two. Elaborate any gla s
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l6apoints.
however,
(6 Marks)a
g
a(c) What are the rights of a buyer, when seller commits a breach of contract
under the provisions of the Sale of Goods Act, 1930? (7 Marks)
Answer
(a) (i) Section 20 of the Negotiable Instruments Act, 1881 reads as “Where one
person signs and delivers to another a paper stamped in accordance with
the law relating to negotiable instruments then in force in India, and either

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wholly blank or having written thereon an incomplete negotiable

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instrument, he thereby gives prima facie authority to the holder thereof
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to make or complete, as the case may be, upon it a negotiable instrument,

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for any amount specified therein and not exceeding the amount covered

ag shall be liable upon such instrument, in the
by the stamp.
The person so signing
capacity in which he signed the same, to any holder in due course for
such amount. Provided that no person other than a holder in due
course shall recover from the person delivering the instrument
anything in excess of the amount intended by him to be paid
thereunder”.
In the instant case, Anjali is not liable to honour the promissory note
to Manish for ` 17000. She is liable only for ` 15000.
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(ii) Presentment for payment [Section 64 of the Negotiable

se
Instruments Act, 1881]

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As per section 64 of the Negotiable Instruments Act, 1881, promissory

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notes, bill of exchange and cheques must be presented for payment to
a the maker, acceptor or drawee thereof respectively, by or on behalf of
the holder as hereinafter provided.

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In default of such presentment, the other parties thereto are not liable
thereon to such holder.
So, presentment for payment must be made to the person primarily
liable on the instrument, or in their absence, at the proper place during
the usual business hours.
In this case, Priya presented the bill at Sanjay’s office during regular
business hours, but since Sanjay was not present, she left the bill with
his assistant.
While leaving the bill with the assistant might be considered a practical
step, it does not fulfil the strict legal requirement of presenting the bill
directly to the drawee (Sanjay) or his authorised representative for
payment.
Therefore, the presentation of the bill by Priya to Sanjay’s assistant is
not valid under law.
(b) Agent’s authority in an emergency [Section 189 of the Indian Contract
Act, 1872]: An agent has authority, in an emergency, to do all such acts for
the purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be
satisfied:
(i) Agent should not be in a position or have any opportunity to
communicate with his principal within the time available.
(ii) There should have been actual and definite commercial necessity for
the agent to act promptly.
(iii) the agent should have acted bonafide and for the benefit of the
principal.
(iv) the agent should have adopted the most reasonable and practicable
course under the circumstances, and
(v) the agent must have been in possession of the goods belonging to his
principal and which are the subject of contract.

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OR
(b) Under the Indian Contract Act, 1872, both a sub-agent and a substituted
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agent are appointed by the agent. But, however, the following are the

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points of distinction between the two.

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S.No. Sub Agent
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Substituted Agent
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1.
s A sub-agent does his work A substituted agent works
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under the control and under the instructions of the
directions of agent. principal.
2. The agent not only appoints a The agent does not delegate
sub-agent but also delegates any part of his task to a
to him a part of his own substituted agent.
duties.
3. There is no privity of contract Privity of contract is established
between the principal and the between a principal and a
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sub-agent. substituted agent.

em responsible to the principal and
4. The sub-agent is responsible

s
to the agent alone and is not

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generally responsible to the not to the original agent who

5.
principal.
a appointed him
The agent is responsible to The agent is not responsible to
the principal for the acts of the principal for the acts of the
the sub-agent. substituted agent.
6. The sub-agent has no right of The substituted agent can sue
action against the principal the principal for remuneration
for remuneration due to him. due to him.

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7. Sub-agents may be Substituted agents can never

m improperly appointed. be improperly appointed.

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the acts of the sub-agent as has named thes substituted
The agent remains liable for The agent's duty ends once he

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long as the sub-agency agent.

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(c) If the seller commits a breach of contract, the buyer gets the following
rights against the seller:
1. Damages for non-delivery [Section 57 of the Sale of Goods Act,
1930]: Where the seller wrongfully neglects or refuses to deliver the
goods to the buyer, the buyer may sue the seller for damages for non-
delivery.
2. Suit for specific performance (Section 58): Where the seller commits
of breach of the contract of sale, the buyer can appeal to the court for
specific performance. The court can order for specific performance only
when the goods are ascertained or specific.
This remedy is allowed by the court subject to these conditions:
(a) The contract must be for the sale of specific and ascertained
goods.
(b) The power of the court to order specific performance is subject to
provisions of the Specific Relief Act of 1963.
(c) It empowers the court to order specific performance where
damages would not be an adequate remedy.
(d) It will be granted as remedy if goods are of special nature or are
unique.
3. Suit for breach of warranty (Section 59): Where there is breach of
warranty on the part of the seller, or where the buyer elects to treat
breach of condition as breach of warranty, the buyer is not entitled to
reject the goods only on the basis of such breach of warranty. But he
may –
(i) set up against the seller the breach of warranty in diminution or
extinction of the price; or
(ii) sue the seller for damages for breach of warranty.
4. Repudiation of contract before due date (Section 60): Where either
party to a contract of sale repudiates the contract before the date of
delivery, the other may either treat the contract as subsisting and wait
till the date of delivery, or he may treat the contract as rescinded and
sue for damages for the breach.

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5. Suit for interest:
(1) Nothing in this Act shall affect the right of the seller or the buyer
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to recover interest or special damages, in any case where by law
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interest or special damages may be recoverable, or to recover the

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money paid where the consideration for the payment of it has
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failed.

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a interest at such rate as it thinks fit on the amount of the price to
the buyer in a suit filed by him for the refund of the price (in a case
of a breach of the contract on the part of the seller) from the date
on which the payment was made.

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