CA Foundation May 2026 Suggested Answers Paper 2 Business Laws

FOR CA FOUNDATION EXAM PREPARATION

CA Foundation 2026
Suggested Answers ·
Paper 2 Business Laws
EXAM YEAR TYPE SUBJECT

CA Foundation 2026 Suggested Answers Paper 2 Business Laws
DATE
May 2026

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. e m
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Attempt

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aQuestion 1
Working notes should form part of the answers.

(a) Rakesh intending to sell his used car, approached his friend to suggest the
name of a reliable used car broker who can help to sell his car. His friend
recommended the name of Vikash, a renowned and reliable broker. Vikash
inspected the vehicle and there on the spot Rakesh informed Vikash that he
has decided to sell the car for `12 Lakhs. He also informed Vikash that

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anyone who will be interested must give a token advance amount of ` 5

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Lakhs at the time of the deal and to pay the balance amount of ` 7 Lakhs

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at the time of delivery of the vehicle. Vikash brought a potential customer

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Ravi for inspection of the vehicle, who inspected the same along with a
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mechanic brought by him. He was satisfied with the condition of the car.
When Ravi informed Vikash about his interest, he came to know about the
price of the car offered by Rakesh. Ravi told Vikash that he was prepared to
purchase the car only for a total consideration of ` 10 Lakhs and
immediately transferred an amount of ` 5 lakhs to Vikash's Bank Account
through NEFT as advance, which was immediately transferred by Vikash to
Rakesh. After a week when the parties met to conclude the sale, Ravi issued
another cheque for only ` 5 lakhs as the final payment, which Rakesh
rejected. Vikash tried to convince Rakesh that the condition of the car is
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such that it would not fetch more than ` 10 Lakhs. But Rakesh did not
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agree with Vikash.

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Analysing the applicable provisions of the Indian Contract

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answer the following questions as per the information given
a in this case.
ag (i) Whether there is a legally valid and enforceable contract
(ii) Briefly discuss the remedies available to Rakesh in this situation.

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FOUNDATION EXAMINATION: MAY 2026

(iii) What if Vikash (the broker) never actually (though unintentionally) told
Ravi about the price of ` 12 Lakhs, however received ` 5 Lakhs
anyway? (7 Marks)
(b) Hitarth Foundation was incorporated under Section 8 of the Companies Act,
2013 in May 2020 with the object to promote a healthier lifestyle of the
human beings while caring for the planet. Hitarth was one among the
founder members of the Company. Mission of the Company was to inspire
healthier living by providing pure, organic, and sustainably sourced
products that nurture both people and the planet.
Hitarth Foundation was running successfully in terms of its objectives. Being
well aware of the success of Hitarth Foundation, Ram & Sons a partnership
firm, (in which Hitarth's father Ram was having 80% stake) invested 25% in
the equity of Hitarth Foundation in April 2024.
A few days later, Mr. Ram started interfering in the business of Hitarth
Foundation by supplying poor quality raw materials which defeated the
main purpose of Hitarth Foundation of providing pure and organic products
to nurture people and the planet.
Besides, Ram & Sons pressurized the directors of the Company and Hitarth
Foundation succumbed by the pressure was forced to declare dividend of
10%. Ram & Sons withdrew its share of dividends whereas the other
shareholders did not withdraw their share of dividend on the ground that
Hitarth Foundation was incorporated for other purposes.
Some farmers, who were earlier supplying organic vegetables to Hitarth
Foundation and were denied to supply their products after the interference
of Ram & Sons, filed a complaint before the Central Government to revoke
the license of Hitarth Foundation. The Central Government after hearing all
the stakeholders gave a notice for revocation of license of Hitarth
Foundation after issuing a show cause notice to the company. After
revocation of license, the Central Government ordered for winding-up of
Hitarth Foundation in public interest. Some directors of Hitarth Foundation
approached you for your advice in the following matters:
(i) Whether Ram & Sons can invest 25% in the total equity of Hitarth
Foundation.

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(ii) Ram & Sons has withdrawn its share of dividends since it has 25%
stake in Hitarth Foundation. Whether Hitarth Foundation should have
denied for declaration of any dividend.
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(iii) Hitarth Foundation contended that the Central Government cannot

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give order for winding up of the Company. Maximum the Central

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Government can do is that it can revoke the license and thereafter
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l a s Hitarth Foundation can run its business. Whether this contention was
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justified.

directors. (7 Marks)
(c) ABC & Co. a partnership firm is going to be dissolved. The partners seek
your advice on the following points referring to the relevant provisions of
the Indian Partnership Act, 1932 in this regard.
(i) Right of partners to have business wound up after dissolution.

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(ii) Continuing authority of partners for purposes of winding up.

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(iii) Mode of Settlement of partnership accounts. (6 Marks)
Answer
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(a) (i) Whether there is a legally
When a person to whom the proposal is made signifies his assent
thereto, proposal is said to be accepted. The proposal when accepted,
becomes a promise [Section 2(b) of the Indian Contract Act, 1872].
For a contract to be valid, acceptance must be absolute and
unqualified. If the offeree accepts the offer but modifies, alters, or
adds new conditions, it is not an acceptance, but a counter-offer

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(Section 7).

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A counter-offer has the effect of rejecting and extinguishing the
original offer (Hyde Vs. Wrench).
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Two or more persons are said to consent when theya agree upon the
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same thing in the same sense (Section 13).

a In the present case, Rakesh offered to sell the car for ` 12 lakhs.
However, Ravi informed Vikash (the broker) that he was willing to
purchase the car only for `10 lakhs before remitting the advance

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FOUNDATION EXAMINATION: MAY 2026

amount. Ravi’s response was not an acceptance of Rakesh’s offer;
rather, it was a counter-offer. Consequently, Rakesh’s original offer to
sell the car for ` 12 lakhs came to an end the moment Ravi proposed
to buy it for ` 10 lakhs. Thus, a counter-offer results in rejection of
the original offer.
The parties never agreed on the same price and there was no
meeting of minds on the essential term of price as required under
Section 13 of the Act.
Therefore, since there was no valid acceptance of any offer, no legally
binding contract was formed. The transaction is void for want of
agreement on essential terms.
(ii) Remedies available to Rakesh: Even though no valid contract is
formed, Rakesh has the following remedies:
1. Right to Refuse Delivery: As no valid contract exists, Rakesh is
not bound to deliver the car for ` 10 Lakhs.
2. Refund of Advance Amount: Since the contract was not valid,
Rakesh should refund the advance amount of ` 5 Lakhs to Ravi.
3. Remedy Against Vikash (Broker): An agent is bound to conduct
the business of his principal according to the direction given by
the principal (Section 211). Also, where, an agent does more than
he is authorized to do, and what he does beyond the scope of his
authority cannot be separated from what is within it, the principal
is not bound to recognize the transaction (Section 228).
Here, Vikash has exceeded his authority, Rakesh may hold him
liable for negligence or breach of duty.
4. Right to Sell to Another Buyer: As ownership never transferred
to Ravi, Rakesh continues to remain the lawful owner and may
sell the car to another buyer.
5. Sue for Specific Performance or Damages: Since no contract
existed, specific performance is not applicable. However, if Ravi's
counter-offer had been accepted and he then breached it,
Rakesh could have sued for damages under Section 73 of the
Indian Contract Act. 1872.

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(iii) If Vikash unintentionally failed to inform Ravi about the actual
price fixed by Rakesh, then Ravi believed the car price was `10
Lakhs, whereas Rakesh intended to sell only for ` 12 Lakhs.
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Being an agent/broker, Vikash had a duty to correctly communicate

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the principal’s terms. Failure to do so, even unintentionally,

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constitutes misrepresentation under Section 18 of the Act. His
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l a snegligence may make him liable to Rakesh, but Rakesh still cannot be
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compelled to sell the car for ` 10 Lakhs.
Ravi can rescind the contract on the ground of misrepresentation,
since he was induced to pay ` 5 Lakhs without full knowledge of the
asking price.
Ravi is entitled to recover the ` 5 Lakhs paid since the transaction was
based on incomplete information. He is not bound by any contract he
entered into without knowing the true selling price.

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Vikash would be liable to both Rakesh (for breach of agency duty)

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and Ravi (for misrepresentation). Ravi can demand back the ` 5 Lakhs,

(b) (i) A Section 8 Company canse
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and Rakesh can seek compensation from Vikash for any loss.

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issue shares to persons/entities including
partnership firms.
Hence, Ram & Sons
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a can invest 25% in the total equity of Hitarth
Foundation.
(ii) Section 8 of the Companies Act, 2013 deals with the formation of
companies which are formed to promote the charitable objects of
commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment etc., Such company
intends to apply its profit in promoting its objects and prohibiting the
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payment of any dividend to its members. The declaration of dividend
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under pressure from Ram & Sons was a clear violation of the

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conditions of the licence granted under Section 8.

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Even though Ram & Sons has a 25% stake, no member of a Section 8

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company has the right to receive dividends. The right of Ram & Sons a
a to withdraw dividend is therefore legally invalid.

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FOUNDATION EXAMINATION: MAY 2026

In the instant case, Hitarth Foundation should deny Ram & Sons for
declaration of dividend @ 10% and withdrawal of the same as it is
prohibited under Section 8 company.
(iii) Revocation of license: Section 8(6) of the Companies Act, 2013 (the
Act) empowers the Central Government after giving reasonable notice
and opportunity to be heard, may by order, revoke the licence of the
company where the company contravenes any of the requirements or
the conditions of this sections subject to which a licence is issued or
where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public
interest.
Section 8(7) of the Act further provides that upon revocation of the
licence, the Central Government may, by order, direct the company to
convert its status and change its name, wind up or amalgamate with
another Section 8 company having similar objects.
On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’
against the company’s name in the register. But before such
revocation, the Central Government must give it a written notice of its
intention to revoke the licence and opportunity to be heard in the
matter.
Order of the Central Government: Where a licence is revoked then
the Central Government may, in the public interest order direct the
company to convert its status and change its name, wind up or
amalgamate with another company registered under this section
having similar objects, to form a single company with such
constitution, properties, powers, rights, interest, authorities and
privileges and with such liabilities, duties and obligations as may be
specified in the order, or the company be wound up.
Therefore, the Central Government has the power to both revoke the
licence and direct winding up in public interest.
Hence, the contention of the Hitarth Foundation is not justified as the
Central Government can give order for winding up of the section 8
company in public interest.

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(c) (i) Right of partners to have business wound up after dissolution
(Section 46 of the Indian Partnership Act, 1932):

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On the dissolution of a firm, every partner or his representative is

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entitled, as against all the other partners or their representative, to

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have the property of the firm applied in payment of the debts and

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liabilities of the firm, and to have the surplus distributed among the
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l a spartners or their representatives according to their rights.
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are paid first from firm assets and only then, the remaining surplus is
distributed. This right is enforceable against co-partners.
(ii) Continuing authority of partners for purposes of winding up
(Section 47): After the dissolution of a firm, the authority of each
partner to bind the firm and the other mutual rights and obligations
of the partners, continue notwithstanding the dissolution, so far as

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may be necessary to wind up the affairs of the firm and to complete

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transactions begun but unfinished at the time of the dissolution, but

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not otherwise.
Provided that the firm is s ineno case bound by the acts of a partner

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a who has after the adjudication represented
who has been adjudicated
the liability of any person
himself or knowingly permitted himself to be represented as a
partner of the insolvent.
(iii) Mode of Settlement of partnership accounts (Section 48): In
settling the accounts of a firm after dissolution, the following rules
shall, subject to agreement by the partners, be observed: -
(A) Losses, including deficiencies of capital, shall be paid first out of
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profits, next out of capital, and lastly, if necessary, by the partners
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individually in the proportions in which they were entitled to

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share profits;

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(B) The assets of the firm, including any sums contributed by the

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partners to make up deficiencies of capital, must be applied in a
a the following manner and order:
(a) in paying the debts of the firm to third parties;

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FOUNDATION EXAMINATION: MAY 2026

(b) in paying to each partner rateably what is due to him from
the firm for advances as distinguished from capital;
(c) in paying to each partner rateably what is due to him on
account of capital; and
(d) the residue, if any, shall be divided among the partners in the
proportions in which they were entitled to share profits. If
firm assets are insufficient to pay debts, the partners must
contribute in proportion to their loss-sharing ratios (Section
49) to meet the deficiency.
Question 2
(a) Romi went to a renowned furniture showroom named 'TRENDS IN DELHI' in
Kirti Nagar, for the purpose of customizing and fixing a sofa in her office
cabin. Within 30 minutes, she finalized one design which suited her office
cabin colors scheme and space. Mr. Parth (owner of TRENDS IN DELHI)
assured her that he will deliver the sofa within a month. Mr. Parth told her
that the sofa will cost ` 45,000 and he will charge extra ` 4,500 towards
cartage and corporate packing. The amount of ` 4,500 towards cartage and
corporate packing must be paid by Romi at the time of delivery of the sofa
and the remaining amount may be paid within the period fixed for approval
of the transaction. He also assured Romi that he will be responsible for
assembly and installation of the same without causing any harm to her
office cabin, situated in the 9th floor of the building at no extra cost. Romi
agreed with the terms and conditions of Mr. Parth but with the condition
that she will not approve the sofa and return the same if it will not be
perfect according to the size and color described. Mr. Parth agreed to this
condition but fixed the maximum time by which Romi can reject the sale,
i.e. 20 days after delivery and installation is over, for which Romi also
agreed with.
As per the schedule, Mr. Parth sent the sofa to Romi's office. D (Employee of
Parth) denied delivering the sofa at 9th floor by stairs as it was not
accommodating in the service lift. Romi paid D `1,500 to deliver the sofa at
9th floor by stairs. After assembly and installation, she paid ` 4,500 for
cartage and corporate packing as mutually agreed upon.
One month later, when Mr. Parth asked for payment of ` 45,000, Romi said
that she wants to return the sofa contending that it was not according to

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size and description of her office as she had mentioned at the time of
buying the sofa. Alternatively, she was ready to pay only ` 25,000 towards
the cost of the Sofa in place of ` 45,000 as the sofa was not according to
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her choice and exact requirements.
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Analyzing the applicable provisions of the Sale of Goods Act, 1930, advise
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eWhether Romi can refuse to make the payment of ` 45,000 by gla
on the following with reasons:

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(i)
mentioning that the sofa was not according to size and description
which she described at the time of placing the order.
(ii) In your opinion whether Romi has signified her approval to Mr. Parth in
any manner before the specified day of approval?
(iii) Whether Mr. Parth should file a suit against Romi for non-payment or
he should accept ` 25,000 towards the full and final payment of sofa as
there was remote chance of having a positive outcome of the suit and

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the sofa was customized and already delivered to Romi. (7 Marks)
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. between the Equity Shares with
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(b) (i) Differentiate (any three points)

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differential rights and Preference Shares under the Companies Act,

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2013. (3 Marks)
(ii) Discuss the Doctrineaof Constructive Notice. (4 Marks)
(c) (i) Referring to the provisions of the Limited Liability Partnership Act, 2008
discuss the powers of the Central Government for issuing directions for
taking corrective steps against an LLP being registered with a similar
name of an existing LLP, company or a registered trademark of a
proprietor under the Trade Marks Act, 1999 as is likely to be mistaken
for it. Also discuss the power of the Central Government to suo-moto
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take steps towards redressal of the above issue on persisting non-
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compliance of such directions.

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India". Elaborate upon the provision relating to designated
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laid down, further defining a resident partner
a Limited Liability Partnership Act, 2008. (6 Marks)

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FOUNDATION EXAMINATION: MAY 2026

Answer
(a) (i) Sale by description [Section 15 of the Sale of Goods Act, 1930]:
Where there is a contract of sale of goods by description (including
size, colour, specifications), there is an implied condition that the
goods shall correspond with the description. The buyer is not bound
to accept and pay for the goods which are not in accordance with the
description of goods.
Romi had placed a customised order specifying size and colour that
suited her office cabin. If the sofa delivered does not correspond to
the agreed description (size and colour), Romi has the right to reject
it.
Implied condition of fitness for purpose [Section 16(1)]: Where
the buyer makes known to the seller the particular purpose for which
the goods are required and relies on the seller's skill or judgment,
there is an implied condition that the goods shall be reasonably fit
for that purpose. Since Romi described her exact requirements (size,
colour scheme matching her office cabin) and relied on Parth's
showroom expertise, this implied condition is also triggered.
In the instant case, Romi had specifically reserved the right to reject
the sofa if it was not according to the agreed size and color
description. Mr. Parth accepted this condition and fixed a maximum
approval period of 20 days after delivery and installation. This was a
sale on approval with a fixed return period under Section 24.
Even if the sofa did not correspond with the description or was not fit
for the intended purpose, Romi's remedy was to give notice of
rejection within the 20-day period. She failed to do so, therefore the
property in the sofa passed to Romi automatically on expiry of the
20-days period and her right to reject on grounds of description or
fitness was available only within the approval period — having
retained the sofa without rejection, she is now bound to pay.
Romi cannot refuse payment of ` 45,000 after the expiry of the
20-days approval period. The property in the sofa was passed to her
and her right to reject on grounds of description or fitness was
available only within the approval period.

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(ii) Rule related to Acceptance of Delivery of Goods (Section 42):
Acceptance is deemed to take place when the buyer-

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(a) intimates to the seller that he had accepted the goods; or
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(b) does any act to the goods, which is inconsistent with the

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ag In the instant case, Romi’s conduct clearly indicates acceptance
because she allowed installation and assembly of the sofa, she paid
` 4,500 towards cartage and packing, she additionally paid ` 1,500 for
carrying the sofa to the 9th floor by stairs and she retained and used
the sofa beyond the agreed approval period of 20 days. These acts
are inconsistent with rejection of goods.
Therefore, Romi had signified her approval before the specified day
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through her conduct. Hence, the sofa is deemed to have been
accepted by her.
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Alternate Answer to (ii)
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(ii) Section 24 of the Sale of Goods Act, 1930, which deals with 'Sale
on Approval' (Sale or Return): When goods are delivered to the
buyer on approval or “on sale or return” or other similar terms, the
property therein passes to the buyer-
(a) when he signifies his approval or acceptance to the seller or does
any other act adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but
retains the goods without giving notice of rejection, then, if a
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time has been fixed for the return of the goods, on the expiration
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of such time, and, if no time has been fixed, on the expiration of

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a reasonable time; or

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(c) he does something to the good which is equivalent to accepting

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the goods e.g. he pledges or sells the goods. a
a In the instant case, Romi’s conduct clearly indicates that the goods
pass to her because she allowed installation and assembly of the sofa,
she paid ` 4,500 towards cartage and packing, she additionally paid

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FOUNDATION EXAMINATION: MAY 2026

` 1,500 for carrying the sofa to the 9th floor by stairs and she
retained and used the sofa beyond the agreed approval period of 20
days.
Therefore, Romi had signified her approval before the specified day
through her conduct. This implies that she has accepted the Sofa.
(iii) Suit for Price (Section 55): According to Section 55 of the Sale of
Goods Act, 1930, where under a contract of sale, the property in the
goods has passed to the buyer and the buyer wrongfully neglects or
refuses to pay for the goods according to the terms of the contract,
the seller may sue him for the price of the goods.
Damages for Non-Acceptance (Section 56): Where the buyer
wrongfully neglects or refuses to accept and pay for the goods, the
seller may sue the buyer for damages for non-acceptance.
Interest and Special Damages (Section 61): Allows the Court to
award interest on the price from the date of tender or from the date
of the suit, as the court deems fit.
In the instant case, Mr. Parth is not bound to accept
` 25,000 as full and final settlement because the rejection by Rumi
was delayed and acceptance had already deemed to be taken place
and the sofa was customized and not easily resalable.
(b) (i) Difference between Equity Shares with differential rights and
preference shares
Basis of Equity Shares with Preference shares
difference differential rights
Meaning Equity shares Shares carrying
carrying differential preferential rights
rights as to dividend, regarding dividend
voting or otherwise. and repayment of
capital.
Nature of Capital Part of equity share Separate category of
capital. share capital.
(Section 43(a)(ii)). (Section 43(b)).

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Preference in No preference over Dividend is paid
Dividend other equity before equity

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shareholders. shareholders.

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Repayment of No preferential Preferential
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capital repayment during repayment during
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winding up. winding up

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Dividend may differ Fixed preferential
according to terms dividend is generally
of issue. paid.
DVR holders receive
dividend like equity
shareholders
(variable, declared
out of profits) but at
a differential rate as

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specified.
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Nature of Rights DVR shares are Preference shares get

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equity shares but preferential dividend

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with
a voting rights (more repayment of capital
or less voting power) but typically limited/
and/or differential no voting rights.
dividend rights. Generally, no voting
May carry superior, rights, except in
inferior or no voting matters affecting
rights as per terms their rights (Section
of issue. 47).
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document kept by the Registrar, or make a record of the same, or get

las a copy or extracts of any document, including certificate of
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ag incorporation of any company on payment of prescribed fees.
The Memorandum and Articles of Association of a company when
registered with Registrar of Companies, become public documents,
and they are available for inspection to any person, on the payment

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FOUNDATION EXAMINATION: MAY 2026

of a nominal fee. In other words, Section 399 confers the right of
inspection to all. It is, therefore, the duty of every person dealing
with a company to inspect its documents and make sure that his
contract is in conformity with their provisions but whether a person
reads them or not, it will be presumed that he knows the contents of
the documents. This kind of presumed/implied notice is called
constructive notice.
(c) (i) Powers of Central Government for corrective steps against LLP
with similar names [LLP Act, 2008]

Change of name of LLP (Section 17 of the LLP Act, 2008):
Notwithstanding anything contained in Sections 15 and 16 of the LLP
Act, 2008, if through inadvertence or otherwise, a LLP, on its first
registration or on its registration by a new body corporate, its
registered name, is registered by a name which is identical with or
too nearly resembles to —
(a) that of any other LLP or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks
Act, 1999, as is likely to be mistaken for it, then on an application
of such LLP or proprietor referred to in clauses (a) and (b)
respectively or a company, the Central Government may direct
that such LLP to change its name or new name within a period of
3 months from the date of issue of such direction.
Suo-motu Powers on Non-Compliance: If an LLP fails to comply
with a direction given under sub-section (1), the Central Government
shall have the power to allot a new name to such LLP and the
Registrar shall enter the new name in the register of LLPs in place of
the old name and issue a fresh certificate of incorporation with the
new name, and the LLP shall carry on its business under the new
name so allotted from the date of such certificate and the Registrar
shall enter the new name in the Register of LLPs in place of the old
name and issue a fresh certificate of incorporation. The old name
shall be deemed to be altered to the new name assigned by the
Central Government.

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(ii) Designated Partner [Section 2(j)]: “Designated partner” means any
partner designated as such pursuant to Section 7 of the LLP Act,

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2008.

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Every LLP shall have at least two designated partners who are

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eA resident in India means a person who stayed in India for a period of gla
individuals, and at least one of them shall be a resident of India.

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not less than 120 days during the financial year.
All partners of an LLP may be designated partners if they consent to
act as such. Their details and changes must be intimated to the
Registrar.
Further, if in an LLP, 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 LLP or nominees of such

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bodies corporate shall act as designated partners.
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Question 3
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e in CHJ and Associates (a partnership
s
a seat due to his ailing health. He observed
firm) has lately taken alback
(a) (i) Mr. Chand once an active partner
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that the accounts ofathe firm were not being maintained properly and
feared embezzlement by the other two partners. Keeping this in mind
he assigned his interest in the firm to Mr. Niman, his nephew who is a
qualified finance professional and has expertise in this field.
After some days of his nomination, Mr. Niman raised objection as to
the transparency of the accounts and demanded an inspection of the
books, which was refused by the other partners. A year later, CHJ and
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Associates decided to dissolve the partnership firm as the business was
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no longer profitable. Mr. Niman asked for the accounts of past 3 years

se
to ascertain the share of profits been offered by the firm to him for

s em which he was refused yet again.
g l a
gla Analysing the relevant provisions of the Indian a
Partnership Act, 1932,
a decide whether the firm was correct in refusing the inspection of
accounts by Mr. Niman during its (Firm's) continuance.

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FOUNDATION EXAMINATION: MAY 2026

Also decide whether Niman is legally eligible to ask for the accounts of
the firm for past 3 years on dissolution. (4 Marks)
(ii) Mr. Pramod a senior partner in PKL and Associates (a dairy product
manufacturing firm having two partners) has been approached by Mr.
Sanjay a raw material supplier of the Firm, to withdraw a long pending
suit and settle through mediation and out of court settlement. The long
pending matter relates to a dispute regarding supply of poor-quality
raw materials by Mr. Sanjay to the Firm which has brought disrepute to
PKL and Associates and had resulted in lowering of demand for the
Firm's product in the market.
Mr. Sanjay as a part of out of court settlement has offered the Firm one
of his properties at a price much below the market price.
Mr. Pramod is considering to accept the offer as not only it would settle
a long pending dispute, but also result in acquisition of a property to
the firm at a price which is much below the market price. Mr. Pramod
has communicated the above offer to the other partner Mr. Kumar
whose view is not available at this moment as he is out of the state for
some personal work.
Analysing the applicable provisions of the Indian Partnership Act, 1932
decide whether at this juncture Mr. Pramod as an active partner is
authorized to withdraw the suit and acquire the property as offered by
Mr. Sanjay when one of the partners has not offered his view.
(3 Marks)
(b) State Power Corp Private Limited was incorporated under the Companies
Act, 2013 with 51% shares held by the Central Government to promote
infrastructure for a future Information Technology project. The Board of the
Company had the appropriate representation of the nominees of the
Central Government. The Company performed extremely well in the initial
years after incorporation. However, use of Artificial Intelligence in the field
of Information Technology broke the backbone of the Company and its
scale of performance nosedived during the last three years. State Power
Corp Private Limited has neither conducted any business nor filed the
required returns with the Registrar for the last two financial years. The
Board now wishes to apply for 'Dormant' status. Some directors of the
Company opined that having 51% stake of the Central Government, the

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Company should be considered as a Public Financial Institution in terms of
the provisions of the Companies. Act, 2013. In the contrary, some other
directors also opposed that being a Private Company State Power Corp
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Private Limited even cannot be considered as a Government Company. The
c. o
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directors decided to procure your advice regarding the following matters:
e m
m 51% stake of the Central Government whether State Power las
eCorp
s
(i) Having
Private Limited could be considered as a Government Company g
g l a a
a (ii) Whether State Power Corp Private Limited could be considered as a
since it was incorporated as a private company.

Public Financial Institution in terms of the provisions of the Companies
Act, 2013.
(iii) Whether the Company is eligible to apply for availing the status of a
Dormant Company.
Analyzing the applicable provisions of the Companies Act, 2013 advise the

o m
c
directors supported by justification. (7 Marks)

m . of the Indian Contract Act, 1872,
e
(c) Referring to the applicable provisions
answer the following:
s
la Vindictive or Exemplary damage is awarded
(with justification). a
g
(i) State the situations where

(ii) Penalty and liquidated damages have one thing in common that both
are payable on the occurrence of a breach of contract. However, it is
very difficult to draw a clear line of distinction between the two. State
any three principles which may be helpful to differentiate between
Penalty and liquidated damages. (6 Marks)
Answer
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(a) (i) Whether the firm was correct in refusing the inspection of

se
accounts by Mr. Niman during the firm’s continuance?

s em g la
la
As per Section 29(1) of the Indian Partnership Act, 1932 (the Act), a

g a
transfer by a partner of his interest in the firm, either absolute or by
a mortgage, or by the creation by him of a charge on such interest,
does not entitle the transferee, during the continuance of the firm, to
interfere in the conduct of business, or to require accounts, or to

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FOUNDATION EXAMINATION: MAY 2026

inspect the books of the firm, but entitles the transferee only to
receive the share of profits of the transferring partner, and the
transferee shall accept the account of profits agreed to by the
partners.
In the given case during the continuance of partnership, such
transferee Mr. Niman is not entitled:
- to interfere with the conduct of the business.
- to require accounts.
- to inspect books of the firm.
However, Mr. Niman is only entitled to receive the share of the profits
of the transferring partner and he is bound to accept the profits as
agreed to by the partners, i.e. he cannot challenge the accounts.
Therefore, CHJ & Associates was correct in refusing Niman the right
to inspect accounts during the firm's continuance. Niman's demand
was legally unenforceable.
Whether Niman is legally eligible to ask for the accounts of the
firm for past 3 years on dissolution?
As per Section 29(2) of the Act, if the firm is dissolved or if the
transferring partner ceases to be a partner, the transferee is entitled
as against the remaining partners to receive the share of the assets of
the firm to which the transferring partner is entitled, and, for the
purpose of ascertaining that share, to an account as from the date of
the dissolution. Also, there is no provision entitling Niman to demand
accounts for the past 3 years (prior to dissolution).
In the instant case, as the CHJ and Associates decided to dissolve the
partnership firm, Mr. Niman is not eligible to ask for the accounts of
the firm for past 3 years on dissolution. He is entitled to an account
of the firm from the date of the dissolution only.
(ii) Implied authority of partner as agent of the firm (Section 19 of
the Indian Partnership Act, 1932): Subject to the provisions of
Section 22 of the Act, the act of a partner which is done to carry on,
in the usual way, business of the kind carried on by the firm, binds
the firm.

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The authority of a partner to bind the firm conferred by this section is
called his “implied authority”.

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In the absence of any usage or custom of trade to the contrary, the
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implied authority of a partner does not empower him to-

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(a) Submit a dispute relating to the business of the firm to
e la s
a s arbitration;
l (b) withdraw a suit or proceedings filed on behalf of the firm; a g
ag (c) acquire immovable property on behalf of the firm;
In the instant case, Mr. Promod cannot submit the suit against Mr.
Sanjay, a raw material supplier of the firm for poor quality raw
materials to Mediation as it is beyond the Implied authority of a
partner.
As he cannot, on his own, withdraw the existing suit against Mr.

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Sanjay to enable out-of-court settlement (mediation), as Section

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19(2)(d) restricts a partner's implied authority to withdraw a suit on

em the immovable property offered by
behalf of the firm.

s
a firm.
Mr. Sanjay on behalf oflthe
Furthermore, he cannot acquire

a g
Mr. Pramod cannot unilaterally withdraw the suit or acquire the
property on behalf of the firm without the consent of Mr. Kumar. He
must wait for Mr. Kumar to return or seek his consent before
proceeding. Acting without consent would make Pramod personally
liable for any adverse consequences.
(b) (i) Government Company [Section 2(45) of the Companies Act,

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2013]: Government Company means any company in which not less

co
than 51% of the paid-up share capital is held by the Central
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Government, or by any State Government or Governments, or partly

em
by the Central Government and partly by one or more State

la se
s g
Governments, and the section includes a company which is a

gla subsidiary company of such a Government company.
a
a In the instant case, 51% of the shares of State Power Corp Limited is
held by the Central Government. Therefore, the company shall be
treated as a Government Company. The fact that it is incorporated as

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FOUNDATION EXAMINATION: MAY 2026

a private company does not affect its status as a Government
Company. Therefore, the contention of some directors that a private
company cannot be a Government Company is incorrect.
In view of the above, State Power Corp Private Limited is a
Government Company under Section 2(45) despite being
incorporated as a private company.
(ii) Public Financial Institutions (PFI) [Section 2(72)]: A “PFI” includes
institutions specified in Schedule I of the Act (like IDBI, LIC, UTI, IFCI,
ICICI, etc.) and such other institution as may be notified by the
Central Government. A Government Company does not automatically
become a PFI merely because 51% shares are held by the Central
Government. Since State Power Corp Pvt Ltd was incorporated for
infrastructure/IT purposes, there is no indication that State Power
Corp Private Limited has been specifically established as a PFI under
the Act or notified by the Central Government for this purpose, it
cannot be regarded as a PFI. Hence, the view of the directors claiming
it to be a PFI is not correct.
In view of the above, State Power Corp Private Limited cannot be
considered a Public Financial Institution.
(iii) Dormant Company (Section 455): Where a company is formed and
registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction,
such a company or an inactive company may make an application to
the Registrar in such manner as may be prescribed for obtaining the
status of a dormant company.
“Inactive Company” means a company which has not been carrying
on any business or operation, or has not made any significant
accounting transaction during the last two financial years, or has not
filed financial statements and annual returns during the last two
financial years.
Since State Power Corp Private Limited has neither conducted
business nor filed the required returns during the last two financial
years, it qualifies as an inactive company and is eligible to apply for
the status of a Dormant Company.

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(c) (i) Situations where Vindictive or Exemplary Damages are awarded:
Under the Indian Contract Act, 1872, the general rule under Section
73 is that only ordinary/compensatory damages are awarded for
m
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breach of contract. However, vindictive or exemplary damages
c. o
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(punitive in nature) are awarded in the following exceptional
s e m
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e1. Breach of a contract to Marry: In an action for breach of gla
situations:

s
la promise to marry, exemplary damages may be awardeda
ag considering the mental suffering, injury to feelings, and
humiliation caused to the aggrieved party.
2. Wrongful Dishonour of Cheque: For wrongful dishonour by a
banker of his customer’s cheque (despite availability of sufficient
funds), because in this case the injury due to wrongful dishonour
to the drawer of cheque is so heavy that it causes loss of credit
and reputation to him. A business man whose credit has suffered

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will get exemplary damages even if he has sustained no

.
pecuniary loss. But a non-trader cannot get heavy damages in

em
the like circumstances, unless the damages are alleged and

l a s
proved as special damages. [Gibbons Vs. West Minister Bank].

ag liquidated
(ii) Distinction between
and liquidated damages
damages and penalty: Penalty
have one thing in common that both are
payable on the occurrence of a breach of contract. It is very difficult
to draw a clear line of distinction between the two but certain
principles as laid down below may be helpful.
1. If the sum payable is so large as to be far in excess of the
probable damage on breach, it is certainly a penalty.

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2. Where a sum is expressed to be payable on a certain date and a

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further sum in the event of default being made, the latter sum is
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c. o a penalty because mere delay in payment is unlikely to cause

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damage.

las 3.
a
The expression used by the parties is not final. The court must
g
ag find out whether the sum fixed in the contract is in truth a
penalty or liquidated damages. If the sum fixed is extravagant or
exorbitant, the court will regard it as a penalty even if it is termed
as liquidated damages in the contract.

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FOUNDATION EXAMINATION: MAY 2026

4. The essence of a penalty is payment of money stipulated as a
terrorem of the offending party. The essence of liquidated
damages is a genuine pre-estimate of the damage.
Alternate Answer to (ii)
(ii) Three principles to differentiate Penalty from Liquidated
Damages (Section 74 of the Indian Contract Act, 1872):
Both penalty and liquidated damages are amounts stipulated in the
contract as payable on breach. The distinction as developed by
English law and recognised in India:
Principle 1 – Genuine pre-estimate vs. In terrorem: Liquidated
damages represent a genuine pre-estimate of the loss likely to flow
from the breach, agreed upon at the time of contract. A penalty is a
sum fixed in terrorem (as a threat/deterrent) to secure performance,
exorbitant and unconscionable compared to the greatest loss that
could possibly flow from the breach.
Principle 2 – Proportionality to Breach: If a single sum is made
payable on the occurrence of several events, some serious and some
trivial, it is presumed to be a penalty (as it cannot be a genuine pre-
estimate for all events). Liquidated damages would typically vary with
the nature/extent of breach.
Principle 3 – Impossibility of Exact Estimation: If the nature of the
breach is such that it is difficult to estimate damages precisely, a fixed
sum agreed upon may be held as liquidated damages. Conversely, if
the harm caused by breach is easily assessable and the fixed sum far
exceeds it, the sum is a penalty.
Question 4
(a) Mr. Bhusan is a businessman dealing in retail sale of jewellery made of gold
and precious stones. He had approached RCK Bank Ltd. for a loan of ` 70
Lakhs for the purpose of expansion of his business. For availing the loan,
Mr. Bhusan mortgaged gold bar worth ` 5 Lakhs and has arranged personal
guarantee from Suresh, Suyash, Sumati and Suman, who have agreed to
provide guarantee for ` 30 Lakhs, ` 20 Lakhs, ` 10 Lakhs and ` 10 Lakhs
respectively in event of repayment failure on part of Mr. Bhusan.

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Mr. Bhusan invested the loan amount in the business and increased stock of
jewellery and set up an additional jewellery showroom in the nearby area.

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The gold bars which were mortgaged to the bank by physical transfer were
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lost due to a burglary committed in connivance with a bank's staff who

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could not be traced till today. Earlier Mr. Bhusan had also sold a Ganesha

em la
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Idol made of gold during Diwali to the Bank (on the request of the Bank) to

l a
be kept at the Bank's main counter which was worth ` 5 Lakhs for which
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payment has not been made by the Bank so far. Meanwhile, due to a
business downturn, Mr. Bhusan could not repay the loan and the Bank had
to approach the guarantors for repayment of the unpaid amount. The Bank
has asked the guarantors to contribute the deficit amount equally.
Analysing the relevant provisions of the Indian Contract Act, 1872, decide:
(i) Whether the Bank's contention as to equal contribution by the persons
who have provided guarantee is valid and if not, what amount should
be paid by each of the guarantors.

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(ii) What would be your answer regarding liability of each guarantor
.
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towards contribution in case the Bank makes changes in terms and

s
conditions of the loan with Mr. Bhusan without consent and knowledge

l a
g provisions of the Negotiable Instruments Act,
of any of the guarantors? (7 Marks)

a
(b) Referring to the applicable
1881, answer the following questions.
(i) Negotiable instruments may be negotiated either by delivery or by
indorsement and delivery.
State the situations when negotiable instrument is negotiated by the
following modes: -

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(A) By delivery only

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(B) By delivery & indorsement
.c o
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(ii) Delivery is important in both cases, i.e. either by delivery
emonly or by

s em delivery & indorsement.
g l a
gla a
(A) Explain why delivery is essential for negotiation?

a (B) Whether there is any circumstance where, instruments cannot be
negotiated even by delivery thereof? (7 Marks)

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FOUNDATION EXAMINATION: MAY 2026

(c) Discuss the following terms which you would find while studying the Indian
Regulatory Framework:
(i) Common Law
(ii) Principles of Natural Justice. (6 Marks)
Answer
(a) (i) Co-sureties liable to contribute equally (Section 146 of the
Indian Contract Act, 1872): Unless otherwise agreed, each surety is
liable to contribute equally for discharge of whole debt or part of
the debt remains unpaid by debtor.
Liability of co-sureties bound in different sums (Section 147): The
principal of equal contribution is, however, subject to the maximum
limit fixed by a surety to his liability. Co-sureties who are bound in
different sums are liable to pay equally as far as the limits of their
respective obligations permit.
Surety’s right to benefit of creditor’s securities [Section 141]: A
surety is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the existence
of such security or not; and, if the creditor loses, or, without the
consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security.
Right to set off: If the creditor sues the surety, for payment of
principal debtor’s liability, the surety may have the benefit of the set
off, if any, that the principal debtor had against the creditor.
In the instant case, the RCK Bank granted a loan of ` 70 Lakhs to
Mr. Bhusan. The Bank also possessed following securities:
• Gold bars worth ` 5 Lakhs mortgaged by Mr. Bhusan, were lost due
to negligence/connivance of bank staff discharges the sureties to
the extent of ` 5 Lakhs.
• Ganesha Idol worth ` 5 Lakhs sold to the Bank, for which payment
was not made, that amount is also adjustable against the liability.
Hence, effective unpaid liability = ` 70 Lakhs – ` 10 Lakhs = ` 60 Lakhs.

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As per the rule relating to co-sureties bound in different sums,
contribution shall first be equal as far as possible, but not beyond
individual limits.
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Therefore, equal contribution among four sureties towards ` 60 Lakhs

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would be ` 15 Lakhs each. However, Sumati and Suman can each be
m
eHence, the liabilities are la
s
made liable only up to ` 10 Lakhs.

l a a g
ag Sumati = ` 10 Lakhs
Suman = ` 10 Lakhs
Remaining liability = ` 40 Lakhs
This remaining amount will be equally shared between Suresh and
Suyash:
Suresh = ` 20 Lakhs

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Suyash = ` 20 Lakhs

e m
Accordingly, the Bank’s contention that all guarantors should
contribute equally is not sfully valid because liability cannot exceed
the amount guaranteedla
a g by each surety.
(ii) By variance in terms of contract (Section 133):
Where there is any variance in the terms of contract between the
principal debtor and creditor without surety’s consent, it would
discharge the surety in respect of all transactions taking place
subsequent to such variance.
The discharge is absolute: the Guarantors cannot be held liable for
any default occurring after the variation in terms.
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A surety undertakes liability for a specific risk, if the terms of the
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contract are changed, the nature of the risk itself changes, and the

s em surety cannot be held for a risk he did not agree to guarantee.
g la
gla a
Therefore, if the Bank changes the terms and conditions of the loan
a with Mr. Bhusan without the consent and knowledge of the
guarantors, all the guarantors shall be discharged from their liability
in respect of transactions subsequent to such change.

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FOUNDATION EXAMINATION: MAY 2026

(b) (i) (A) Modes of Negotiation: Section 14 of the Negotiable
Instruments Act, 1881 defines Negotiation as the transfer of a
negotiable instrument to another person in such a manner as to
constitute the transferee the holder thereof.
By Delivery Only: A bearer instrument (or one endorsed in
blank) can be negotiated by mere delivery without any
endorsement. The instrument passes from hand to hand by
physical delivery alone.
Applicable when: The instrument is a bearer instrument (payable
to bearer), or
The instrument has been endorsed in blank by the last endorsee,
converting it into a bearer instrument.
(B) By Delivery & Indorsement: An order instrument (payable to a
specified person or order) can only be negotiated by
endorsement and delivery. Both acts are necessary:
Indorsement: The holder must sign on the back of the
instrument (or on a slip affixed to it 'allonge'), and
Delivery: Physical delivery of the instrument to the transferee.
Without delivery, endorsement alone does not constitute valid
negotiation.
Alternative Answer (b)(i)
Negotiation by delivery [Section 47 of the Negotiable
Instruments Act, 1881]: Subject to the provisions of section 58, a
promissory note, bill of exchange or cheque payable to bearer is
negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered
on condition that it is not to take effect except in a certain event is
not negotiable (except in the hands of a holder for value without
notice of the condition) unless such event happens.
Negotiation by delivery and indorsement [Section 48]
Subject to the provisions of section 58, a promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by
indorsement and delivery thereof.

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(ii) (A) Why is delivery essential for negotiation? [Section 46]
Delivery of an instrument is essential whether the instrument is
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payable to bearer or order for effecting the negotiation. The

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delivery must be voluntary, and the object of delivery should be

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s
to pass the property in the instrument to the person to whom it

em is delivered. The delivery can be actual or constructive. Actual
la
l a s delivery takes place when the instrument changes hand
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physically. Constructive delivery takes place when the instrument
is delivered to the agent, clerk or servant of the indorsee on his
behalf or when the indorser, after indorsement, holds the
instrument as an agent of the indorsee.
Section 46 also lays down that when an instrument is
conditionally or for a special purpose only, the property in it does
not pass to the transferee, even though it is indorsed to him,
unless the instrument is negotiated to a holder in due course.

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The contract on a negotiable instrument until delivery remains
.
em
incomplete and revocable. The delivery is essential not only at

s
the time of negotiation but also at the time of making or drawing

l a
of negotiable instrument. The rights in the instrument are not
g
a
transferred to the indorsee unless after the indorsement the
same has been delivered.
(B) Circumstances where instruments cannot be negotiated even
by delivery: If a person makes the indorsement of instrument
but before the same could be delivered to the indorsee, the
indorser dies, the legal representatives of the deceased person
cannot negotiate the same by mere delivery thereof. (Section 57)

m
If the endorsement on an order instrument is forged, delivery of

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such instrument cannot complete a valid negotiation; a forged

c. o (c) (i) Common Law: A judicial precedent or a case law is scommon m
endorsement is no endorsement (Section 58).

m e law. A
s e a
judgment delivered by the Supreme Court will belbinding upon the
g 141 of the Indian
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courts within the territory of India under Article
Constitution. The doctrine of Stare Decisis is the principle supporting
common law. It is a Latin phrase that means “to stand by that which is
decided.” The doctrine of Stare Decisis reinforces the obligation of

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FOUNDATION EXAMINATION: MAY 2026

courts to follow the same principle or judgement established by
previous decisions while ruling a case where the facts are similar or
“on all four legs” with the earlier decision.
(ii) Principles of Natural Justice: Natural justice, often known as Jus
Natural deals with certain fundamental principles of justice going
beyond written law. Nemo judex in causa sua (Literally meaning No
one should be made a judge in his own cause, and it’s a Rule against
Prejudice), audi alteram partem (Literally meaning hear the other
party or give the other party a fair hearing), and reasoned decision
are the rules of Natural Justice. A judgement can override or alter a
common law, but it cannot override or change the statute.
Question 5
(a) Rishi is having a farmhouse in the outskirts of Ambala. The clay of his
farmhouse is very heavy and strong. In order to cultivate some seasonal
vegetables, he approached a multi-brand dealer to buy a tractor and six
automatic seed planter machines. He categorically specified the condition
of the clay of his farmhouse to the dealer and also informed the dealer that
he is relying upon the expertise of the dealer for this purpose. The dealer in
turn suggested the tractor and automatic seed planter machines (which are
independent of each other) of a particular leading brand. Rishi relying upon
the expertise of the dealer purchased the above items through a single bill
with separately itemized pricing that breaks down the individual costs for
the tractor and each of the six seed planter machines with item serial
number. While they were being used for digging the land and sowing seeds,
the tractor broke down just after 16 days of use as it was found to be
unsuitable for the purpose. In contrast, only one out of the six seed planter
machines broke down on the same day as it was also unsuitable for the
particular field. By this time all the other five seed planter machines were
also used in the specified field by Rishi and found to be suitable.
Consequently, Rishi wanted to repudiate the entire contract and return the
tractor and all the seed planting machines.
Analyzing the relevant provisions of the Sale of Goods Act, 1930, advise
Rishi on the following based on the facts given above.
(i) Can Rishi return the tractor of the leading brand?
(ii) Can Rishi return all six seed planting machines? (7 Marks)

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(b) A minor cannot be bound by a contract because a contract with a minor is
void and not merely voidable. Therefore, a minor cannot become a partner
in a firm because partnership is founded on a contract. Though a minor
m
m
cannot be a partner in a firm, he can nonetheless be admitted to the
o c. o
.c
benefits of partnership.
e m
s emand liabilities of a minor partner.
Referring to the provisions of the Indian Partnership Act, 1932,
(7 Marks) gl
discuss the
as
la a
rights
(c)g Briefly discuss the exceptions to the rule "Doctrine of privity of contract" as
a laid down under the provisions of the Indian Contract Act, 1872. (6 Marks)
Answer
(a) (i) Condition as to quality or fitness [Section 16(1) of the Sale of
Goods Act, 1930]:
There is implied condition on the part of the seller that the goods
supplied shall be reasonably fit for the purpose for which the buyer

o m
c
wants them, provided the following conditions are fulfilled:

m . known to the seller the particular
e are required.
(a) The buyer should have made

s
la on the skill and judgement of the seller.
purpose for which goods

g
a be of a description dealt in by the seller,
(b) The buyer should rely
(c) The goods must
whether he be a manufacturer or not.
Similarly, where the goods are bought by description from a seller
who deals in goods of that description, there is an implied condition
that the goods shall be of mercantile quality [Section 16(2)].
In the instant case, Rishi informed the dealer about the heavy and

m
strong clay of his farmhouse and relied upon the dealer’s expertise

m
for selecting the tractor and seed planter machines. Therefore, the
.co
c. o implied condition as to fitness for purpose under Section 16(1)
se
m
em la
applies.

las a
As regards the tractor, it broke down within 16 days because it was
g
ag unsuitable for the intended purpose. This amounts to breach of the
implied condition regarding fitness for purpose.
Breach of a condition gives the buyer the right to treat the contract
as repudiated and reject the goods and claim refund of price.

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FOUNDATION EXAMINATION: MAY 2026

Hence, Rishi is entitled to reject and return the tractor and repudiate
the contract relating to the tractor.
(ii) In case of the six seed planter machines, only one machine was
defective and unsuitable, whereas the remaining five machines were
suitable and had already been used by Rishi. Further, the bill
contained separately itemized pricing and serial numbers, indicating a
severable contract.
The seed planter that broke down on the same day (16th day) was
also found unsuitable for the specific field/purpose. This is essentially
breach of implied condition of fitness for purpose under Section
16(1). Therefore, Rishi can return this one machine and claim refund.
Also, according to Section 37(3), where the seller delivers to the buyer
the goods he contracted to sell mixed with goods of a different
description not included in the contract, the buyer may accept the
goods which are in accordance with the contract and reject or may
reject the whole.
The remaining 5 seed planters were used and found to be suitable for
the field. Since they performed as expected, there is no breach of any
condition or warranty for these 5 machines.
Therefore, Rishi can reject and return only the defective seed planter
machine (breach of fitness condition), but he cannot return all six
seed planter machines since the remaining five machines were
suitable and already accepted by use.
(b) Minors admitted to the benefits of partnership (Section 30): A minor
cannot be bound by a contract because a minor’s contract is void and not
merely voidable. Therefore, a minor cannot become a partner in a firm
because partnership is founded on a contract. 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 Act. When this has been done with
the consent of all the partners then the rights and liabilities of such a
partner under Section 30 are as follows:
(1) Rights:
(i) A minor partner has a right to his agreed share of the profits and
of the firm.

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(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
m
c. o
but only when severing his connection with the firm, and not

m
co
otherwise.

. e m
m
(iv) On attaining majority, he may within 6 months elect to become a
e la s
s g
partner or not to become a partner. If he elects to become a

l a partner, then he is entitled to the share to which he was entitled
a
ag as a minor. If he does not, then his share is not liable for any acts
of the firm after the date of the public notice served to that
effect.
(2) Liabilities:
(i) Before attaining majority:
(a) The liability of the minor is confined only to the extent of his
share in the profits and the property of the firm.
m
c. o
(b) Minor has no personal liability for the debts of the firm

m insolvent, but if the firm is
incurred during his minority.
(c) Minor cannot be edeclared
s
la (which
a g
declared insolvent
Receiver/Assignee
his share in the firm vests in the Official
means minor can recover his share
in the firm on proportionate basis from official
receiver/assignee)
(ii) After attaining majority: Within 6 months of his attaining
majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later,
the minor partner has to decide whether he shall remain a

m
partner or leave the firm.

m .co
c. o
Where he has elected not to become partner, he may give public
m
se
notice that he has elected not to become partner and such notice

em la
shall determine his position with regard to the firm. If he fails to

las give such notice he shall become a partner in the firm on the
a g
ag expiry of the said six months.
(a) When he becomes partner: If the minor becomes a partner
on his own willingness or by his failure to give the public
notice within specified time, his rights and liabilities as given

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FOUNDATION EXAMINATION: MAY 2026

in Section 30(7) are as follows:
(i) He becomes personally liable to third parties for all acts
of the firm done since he was admitted to the benefits of
partnership.
(ii) His share in the property and the profits of the firm
remains the same to which he was entitled as a minor.
(b) When he elects not to become a partner:
(i) His rights and liabilities continue to be those of a minor
up to the date of giving public notice.
(ii) His share shall not be liable for any acts of the firm done
after the date of the notice.
(iii) He shall be entitled to sue the partners for his share of
the property and profits. It may be noted that such
minor shall give notice to the Registrar that he has or
has not become a partner.
(c) The rule that stranger to a contract cannot sue is known as a “doctrine of
privity of contract”, is subject to certain exceptions. In other words, even a
stranger to a contract may enforce a claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the
trust, though he was not a party to the contract between the settler
and the trustee.
(2) In the case of a family settlement, if the terms of the settlement are
reduced into writing, the members of family who originally had not
been parties to the settlement may enforce the agreement.
(3) In the case of certain marriage contracts/arrangements, a
provision may be made for the benefit of a person, he may file the
suit though he is not a party to the agreement.
(4) In the case of assignment of a contract, when the benefit under a
contract has been assigned, the assignee can enforce the contract but
such assignment should not involve any personal skill.
(5) Acknowledgement or estoppel – where the promisor by his conduct
acknowledges himself as an agent of the third party, it would result
into a binding obligation towards third party.

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Where a party to a contract acknowledges or admits that he holds
money or property for a third party, or where his conduct creates an
estoppel, the third party can enforce the obligation. Example: A
m
m
owes money to B. A receives money from C for B. B can directly
o c. o
.c
claim from A.
e m
m land with notice that the owner of land is bound by certain las
epurchases
(6) In the case of covenant running with the land, the person who

l a s duties affecting land, the covenant affecting the land may bea
g
ag enforced by the successor of the seller.
(7) Contracts entered into through an agent: The principal can enforce
the contracts entered by his agent where the agent has acted within
the scope of his authority and in the name of the principal.
Queston 6
(a) Examine the validity of the following instruments under the Negotiable

m
Instruments Act, 1881, by providing justification in support of your
o
c
. executed by Alok, containing an
conclusions (treating the three situations independent of each other)

e m
s
(i) A promissory note for ` 25,000

a
Anand thereafter found land brought the dog and claimed the reward.
undertaking to pay the unidentified
g
person who brings his lost dog.

a
(ii) A signed bearer cheque was delivered by Alok as a reward to Anand for
the already completed service of finding the lost dog.
(iii) Alok made a self-drawn and self-accepted bill of exchange and delivered
it to Anand (as a reward) after the dog was found. (7 Marks)
(b) Referring to the applicable provisions of the Indian Contract Act, 1872,
answer the following:
(i) Rights of finder of lost goods
o m
m (ii) Rights of Pawnee/Pledgee c
. Marks)
c. o m
(6

em OR
l a of the Indian se
las a g
(b) Answer both of the following with reference to the provisions

ag Contract Act, 1872.
(i) "The party defrauded has several remedies at his disposal". Discuss the
remedies available to the party defrauded.

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FOUNDATION EXAMINATION: MAY 2026

(ii) State the circumstances under which a contract of bailment shall
terminate. (6 Marks)
(c) Referring to the provisions of the Sale of Goods Act, 1930, answer the
following:
(i) State the situations when a seller can restrain the passing of property
to the buyer inspite of the fact that the goods have already been
delivered to the buyer.
Also state the circumstances in which the seller is presumed to have
reserved the right of disposal of the property in goods? (4 Marks)
(ii) Discuss the provisions with regard to determination of price by a third
party. (3 Marks)
Answer
(a) (i) A Promissory Note for `25,000 payable to 'the person who brings
the lost dog: According to Section 4 of the Negotiable Instruments
Act, 1881, “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, or to the order of, a certain person, or to the bearer of the
instrument.” The payee must be certain; either a named person, or
'bearer'. The undertaking to pay must be unconditional.
In the given case, the promissory note was made payable to the
unidentified person who would bring the lost dog. Since the payee
was uncertain at the time of making the instrument, the requirement
of payment to a “certain person” is not fulfilled.
Therefore, the instrument is not a valid promissory note under Section 4
of the Negotiable Instruments Act, 1881.
(ii) A signed bearer cheque delivered by Alok to Anand as reward for
finding the dog: Under Section 6 of the Negotiable Instruments Act,
1881, a cheque is a bill of exchange drawn on a specified banker and
payable on demand.
A signed bearer cheque delivered by Alok to Anand after the dog was
found is a valid cheque. The fact that the service had already been
completed does not affect the validity of the cheque as a negotiable

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instrument. A bearer cheque is payable to the person who presents it
(the bearer).

m
c. o
Therefore, the bearer cheque is a valid negotiable instrument and

m
co
Anand can claim payment on it.

. e m
m
(iii) A self-drawn and self-accepted Bill of Exchange by Alok,
e la s
s g
delivered to Anand: Under Section 5 of the Negotiable Instruments

l a Act, 1881, a “bill of exchange” is an instrument in writing containing
a
ag 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.
A 'self-drawn and self-accepted' bill of exchange means Alok is both
the Drawer and the Drawee/Acceptor — i.e., Alok has drawn a bill
upon himself and accepted it.
Under Section 5 of the NI Act, where the drawer and drawee are the

m
same person, the holder has the option of treating it as a Promissory

c. o
Note or a Bill of Exchange. If treated as a Promissory Note, the

embill is a valid instrument. The holder
instrument is valid — it is essentially Alok's promise to pay Anand.

a s
(Anand) may treat it asl a Promissory Note under Section 5, and it is
The self-drawn self-accepted
g
enforceable againstaAlok.
(b) (i) Rights of finder of lost goods [Section 168 of the Indian Contract
Act, 1872]: A person who finds some goods which do not belong to
him, is called the finder of the goods. It is the duty of the finder of
goods to find the true owner and surrender the goods to him.
However, the finder of goods has no right to sue the owner for
compensation for trouble and expense voluntarily incurred by him in
m
co
finding the owner and preserving the goods found. But he has a right
m .
c. o
to retain the goods against the owner until he receives such
m
se
compensation; and, where the owner has offered a specific reward on

s em the lost goods, the finder may sue the owner for such reward, and
g la
la a
may retain the goods until then.

ag When finder of thing commonly on sale may sell it [Section 169].
When a thing which is commonly the subject of sale, if lost, if the
owner cannot with reasonable diligence be found or if he refuses,

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FOUNDATION EXAMINATION: MAY 2026

upon demand, to pay the lawful charges of the finder, the finder may
sell it-
(i) When the thing is in danger of perishing or of losing the greater
part of its value, or
(ii) When the lawful charges of the finder in respect of the thing
found amount to two-thirds of its value.
(ii) Rights of Pawnee/Pledgee: Rights of Pawnee can be classified as under
the following headings:
(a) Right to retain the pledged goods [Section 173 of the Act]:
The pawnee may retain the goods pledged, not only for payment
of the debt or the performance of the promise, but for the
interest, of the debt, and all necessary expenses incurred by him
in respect of the possession or for the preservation of the goods
pledged.
(b) Right to retention of subsequent debts [Section 174 of the
Act]: The Pawnee can retain the goods pledged for any debt or
promise other than the debt or promise for which they are
pledged. But he can exercise this right only when there is a
contract to this effect. i.e. a right to retain goods for subsequent
debts can be exercised only when it has been provided for in a
contract to this effect.
(c) Pawnee’s right to extraordinary expenses incurred [Section
175 of the Act]: The pawnee is entitled to receive from the
pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged. For such expenses, however,
he does not have the right to retain the goods, but he can sue
the pawnor for such expenses.
(d) Pawnee’s right where pawnor makes default [Section 176 of the
Act]: If the pawnor makes default in payment of the debt, or
performance, at the stipulated time of the promise, in respect of
which the goods were pledged, the pawnee has the following rights:
i. the pawnee may bring a suit against the pawnor upon the
debt or promise, and retain the goods pledged as a collateral
security; or

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ii. he may sell the thing pledged on giving the pawnor
reasonable notice of the sale.

m
c. o
If the proceeds of such sale are less than the amount due in

m
co
respect of the debt or promise, the pawnor is still liable to pay

. e m
s
the balance. If the proceeds of the sale are greater than the

em amount so due, the pawnee shall pay over the surplus to the
la
l a s pawnor.
a g
a(b)g [SECOND ALTERNATE]
(i) When the consent to an agreement in caused by the fraud, the
contract is voidable at option of the party defrauded and he has the
following remedies:
(1) He can rescind the contract within a reasonable time.
(2) He can sue for damages.

m
(3) He can insist on the performance of the contract on the

. co
condition that he shall be put in the position in which he would

em
have been had the representation made been true.

l a s
(ii) Termination of Bailment: A contract of bailment shall terminate in
the following circumstances:
a g
1. On expiry of stipulated period: If the goods were given for a
stipulated period, the contract of bailment shall terminate after
the expiry of such period.
2. On fulfilment of the purpose: If the goods were delivered for a
specific purpose, a bailment shall terminate on the fulfilment of
that purpose.

o m
c
3. By Notice:
m . with
c. o m
e terminate
(a) Where the bailee acts in a manner which is inconsistent
s
em a the bailee.
the terms of the bailment, the bailor can always
the contract of bailment by giving a noticelto
las g
a by the bailor at any
ag (b) A gratuitous bailment can be terminated
time by giving a notice to the bailee. However, the
termination should not cause loss to the bailee in excess of
the benefit derived by him. In case the loss exceeds the

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FOUNDATION EXAMINATION: MAY 2026

benefit derived by the bailee, the bailor must compensate
the bailee for such a loss.
4. By Death: A gratuitous bailment terminates upon the death of
either the bailor or the bailee.
5. Destruction of the subject matter: A bailment is terminated if
the subject matter of the bailment is destroyed or there is a
change is in the nature of goods which makes it impossible to be
used for the purpose of bailment.
(c) (i) Under the Sale of Goods Act, 1930, even if goods have been
delivered to the buyer, the seller may restrain passing of
property in the following situations:
1. Right of Stoppage in Transit [Section 50]: When the buyer
becomes insolvent after goods have been dispatched but are still
in transit (not yet received by the buyer), the unpaid seller may
stop the goods in transit and resume possession. This right
operates during the transit period.
2. Reservation of Right of Disposal (Section 25 of the Sale of
Goods Act, 1930): This Section preserves the right of disposal of
goods to secure that the price is paid before the property in
goods passes to the buyer.
Where there is contract of sale of specific goods or where the
goods have been subsequently appropriated to the contract, the
seller may, by the terms of the contract or appropriation, as the
case may be, reserve the right to dispose of the goods, until
certain conditions have been fulfilled. In such a case in spite of
the fact that the goods have already been delivered to the buyer
or to a carrier or other bailee for the purpose of transmitting the
same to the buyer, the property therein will not pass to the buyer
till the condition imposed, if any, by the seller has been fulfilled.
(sub-section 1)
Circumstances where seller is presumed to have reserved the
right of disposal [Section 25(2)]: If the goods are shipped or
delivered to a railway administration for carriage and by the bill
of lading or railway receipt, as the case may be, the goods are

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deliverable to the order of the seller or his agent, then the seller
will be prima facie deemed to have reserved to the right of
disposal. (Sub Section 2)
m
m c. o
co
Where the seller draws a bill on the buyer for the price and sends

. e m
s
to him the bill of exchange together with the bill of lading or (as

em la
s
the case may be) the railway receipt to secure acceptance or

l a payment thereof, the buyer must return the bill of lading, if he
a g
ag
does not accept or pay the bill.
And if he wrongfully retains the bill of lading or the railway
receipt, the property in the goods does not pass to him.
(Sub Section 3).
(ii) Determination of Price by Third Party: Section 10 of the Sale of
Goods Act, 1930 provides for the determination of price by a third
party.

m
co
1. Where there is an agreement to sell goods on the terms that

.
price has to be fixed by the third party and he either does not or

em
cannot make such valuation, the agreement will be void.
2.
l a s
In case the third party is prevented by the default of either party

a g
from fixing the price, the party at fault will be liable to the
damages to the other party who is not at fault. If only part of the
goods has been delivered and the third party fails to value, the
buyer must pay a reasonable price for those goods actually
delivered and accepted.
3. However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.

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s em g la
gla a
a

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