Unit 9 Legal Aspects of Business PYQ’s 6th Dec 2019 Shift 2

Sale of Goods Act, 1930

The Sale of Goods Act, 1930 herein referred to as the Act, is the law that governs the sale of goods in all parts of India. It doesn’t apply to the state of Jammu & Kashmir.

Key Points

Implied conditions according to the Sale of Goods Act.

(i) Seller’s title to goods is valid

(ii) Goods comply with description & sample

(iii) Quality or fitness of goods for the purpose specified by Buyer

(iv) Wholesomeness of eatables

Therefore, option 4 is the correct answer.

Cheque: Cheque refers to a negotiable instrument that contains an unconditional order to the bank to pay a certain sum mentioned in the instrument, from the drawer’s account, to the person to whom it is issued, or to the order of the specified person or the bearer.

Key Points

Parties to Cheque:

Basically, there are three parties to a cheque:

1. Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the sum.
2. Drawee: The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
3. Payee: The beneficiary, i.e. to whom the amount is to be paid.

Apart from these three, there are two more parties to a cheque:

1. Endorser: When a party transfers his right to take the payment to another party, he/she is called an endorser.
2. Endorsee: The party in whose favor, the right is transferred, is called endorsee.

Important Points

1. Sometimes, the drawer and payee can be the same person, when the drawer writes a self-cheque.
2. If it is a bearer cheque, the person in whose name it is made is a holder. If it is damaged the payee or the last endorsee is the holder.

Therefore, Option 2 is the correct option.

The following are the explanation for the correct match:

Public Limited Company

1. A public limited company is a voluntary association of members that are incorporated and, therefore has a separate legal existence and the liability of whose members is limited.
2. Public limited companies are listed on the stock exchange where it’s share/stocks are traded publicly.

The formation of a company is a lengthy process. For convenience, the whole process of company formation may be divided into the following four stages: 1. Promotion Stage 2. Incorporation or Registration Stage 3. Capital Subscription Stage 4. Commencement of Business Stage.

Stage # 1. Promotion Stage:

• Promotion is the first stage in the formation of a company.
• The term ‘Promotion’ refers to the aggregate of activities designed to bring into being an enterprise to operate a business.
• According to C.W. Grestembeg, “Promotion may be defined as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.”
• In the Promotion stage, the promotor need to undertake preliminary expenditures to set up the business enterprise.

Stage # 2. Incorporation or Registration Stage:

• Incorporation or registration is the second stage in the formation of a company.
• It is the registration that brings a company into existence.
• A company is properly constituted only when it is duly registered under the Act and a Certificate of Incorporation has been obtained from the Registrar of Companies.

Stage # 3. Capital Subscription Stage:

• A private company or a public company not having share capital can commence business immediately on its incorporation.
• As such ‘capital subscription stage’ and ‘commencement of business stage’ are relevant only in the case of a public company having a share capital.
• Such a company has to pass through these additional two stages before it can commence business.

• Under the capital subscription stage comes the task of obtaining the necessary capital for the company.
• At this stage, equity shares are issued to the Promoters of the company to pool funds into the business.

Stage # 4. Commencement of Business Stage:

• After getting the certificate of incorporation, a private company can start its business.
• A public company can start its business only after getting a’ certificate of commencement of business’.

• After getting the certificate of incorporation:
• A public company issues a prospectus of inviting the public to subscribe to its share capital,
• A minimum subscription is fixed, and
• The company is required to sell a minimum number of shares mentioned in the prospectus.

Therefore, from the above explanation, Option 4 is the correct answer.

Void Contract Or Agreement

Section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law void.

Key Points

1. An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract;
2. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

Therefore, A contract which ceases to be enforceable by law is a void contract.

Additional Information

1. Unilateral Contract:

• A unilateral contract is a contract agreement in which an offeror promises to pay after the occurrence of a specified act.
• In general, unilateral contracts are most often used when an offeror has an open request in which they are willing to pay for a specified act.
• An example of a unilateral contract is an insurance policy contract, which is usually partially unilateral. In a unilateral contract, the offeror is the only party with a contractual obligation.

2. Implied contract:

• An implied contract is a legally-binding obligation that derives from actions, conduct, or circumstances of one or more parties in an agreement.
• It has the same legal force as an express contract, which is a contract that is voluntarily entered into and agreed on verbally or in writing by two or more parties.

3. Express Contract:

• An express contract is a contract whose terms the parties have explicitly set out. This is also termed as a special contract.
• In an express contract, all the elements would be specifically stated. In an express contract, the agreement of the parties is expressed in words, either in oral or written form.

Sale of Goods Act, 1930

‘Goods’ is defined as per Section 2 (7) of the Sales Of Goods Act, 1930 as “Every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”

Warranty:

1. According to Section 12(3) of the Sale of Goods Act, 1930, a warranty, is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
2. In other words, warranty is a stipulation which is not essential to the main purpose of the contract i.e., it is of a subsidiary or collateral nature.
3. If there is a breach of warranty, the buyer cannot repudiate the contract, but he can only claim damages from the seller.
4. In the case discussed above if the buyer had asked for a good car and while selling the car the dealer said that it could run for 15 km per litre of petrol. But it was discovered that it could run only 12 km per litre of petrol. Here, the statement made by the seller would amount to a warranty and the buyer could not terminate the contract and he was entitled to claim damages only.

The Negotiable Instruments Act, 1881 provides for various kinds of presumptions and estoppel (Estoppel is a legal principle that prevents someone from arguing something or asserting a right that contradicts what they previously said or agreed to by law). A presumption is a rule of law that is used by courts or juries from where they obtain a particular inference from a particular fact or evidence, unless and until the truth of such an inference is disproved.

Key Points

Presumptions as to negotiable instruments (sec. 118) :

Until the contrary is proved, the following presumptions shall be made:–

1. of consideration:— that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;
2. as to date:— that every negotiable instrument bearing a date was made or drawn on such date;
3. as to the time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity;
4. as to the time of transfer:— that every transfer of a negotiable instrument was made before its maturity;

5. as to order of indorsements:— that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

6. as to stamp:— that a lost promissory note, bill of exchange or cheque was duly stamped;
7. that holder is a holder in due course:— that the holder of a negotiable instrument is a holder in due course: provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.

Indemnity:

1. The term ‘indemnity’ simply means to make good the loss or to compensate the party who has suffered some loss.
2. The term ‘contract of indemnity‘ is defined in Section 124 of the Indian Contract Act as follows, “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person, is called a contract of indemnity.”
3. The person who promises to compensate for the loss is called the “indemnifier” and the person to whom this promise is made or whose loss is to be made good is known as “indemnity-holder” or “indemnified“.

4. An example of an indemnity would be an insurance contract, where the insurer agrees to compensate for any damages that the entity protected by the insurer’s experiences.

Key Points

RIGHTS OF INDEMNITY HOLDER

In pursuance of Section 125 of the Act the indemnity-holder may recover from the indemnifier (promisor), the following amounts, provided the acts within the scope of his authority :

1. He is entitled to recover all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applied.
2. He is entitled to recover from the indemnifier all costs which he had paid in bringing or defending any suit in respect of contracts of indemnity. In bringing or defending the suit the indemnity-holder must not contravene the orders of the indemnifier and he must act in the same way as a prudent man would have acted under similar circumstances in his own case.
3. He is entitled to recover from the indemnifier, all the amount which he had paid under the terms of the compromise of such suit. However, it is essential that the compromise must not be contrary to the orders of the indemnified, and in compromising the suit, he must act as a prudent man. This right is also available to the indemnity-holder when he paid any amount under any compromise entered by him and authorized by the indemnifier.

The indemnity holder is entitled to the above 3 rights. Thus, The indemnity holder is NOT entitled to damages for liability incurred which is not absolute.

1. Specific Goods:

• These are those goods which are separately identified and agreed upon at the time of sale.
• Example: You decided to purchase a good day biscuit and you went to the shop, paid for it, and took the delivery.
• So, here good day biscuits will be called specific goods as you bought specifically this brand’s biscuits.

2. Unascertained Goods:

• Example: You want to buy any biscuits from the large variety of biscuits available in the shop.
• So, this will be the case of unascertained goods as you are ready to buy any brand from the large variety of brands available and it’s not certain that which brand you will purchase.

3. Future Goods:

• Goods which will come into existence at a future date/time.
• They don’t exist at the time of sale.
• Example: A goes to buy a bike on 11th April 2020 at the showroom and makes a payment, but A was promised the delivery of the bike on 15th May 2020 due to its unavailability at the moment.
• So, here the good will be in existence in the future, so it will be called future good and there will be an agreement to sell.

4. Ascertained Goods:

• These are those goods which are separately identified and agreed upon after-sale transaction.
• Example: You want to buy a good day biscuit and went to the shop, paid for it and later on after paying for it you decided to buy Oreo biscuit so, here this will be the case of ascertained goods because the change is being done after the sale transaction/ after payment is made.

Key Points

Specific Goods, Unascertained Goods, Ascertained Goods are available with the seller and are immediately transferred to the buyer once the agreement is reached. But Future Goods are not available with the seller and are not immediately transferred to the buyer.

Thus, option 3 is the correct answer.

Section 319 of Companies Act, 2013 facilitates amalgamation, absorption, and reconstruction of companies.

Key Points

Section 319 of Companies Act 2013– Power of Company Liquidator to accept shares, etc., as consideration for the sale of property of the company

1. Where a company (the transferor company) is proposed to be or is in the course of being, wound up voluntarily and the whole or any part of its business or property is proposed to be transferred or sold to another company (the transferee company), the Company Liquidator of the transferor company may, with the sanction of a special resolution of the company conferring on him either a general authority or an authority in respect of any particular arrangement,—

• receive, by way of compensation wholly or in part for the transfer or sale of shares, policies, or other like interest in the transferee company, for distribution among the members of the transferor company; or
• enter into any other arrangement whereby the members of the transferor company may, in lieu of receiving cash, shares, policies or other like interest or in addition thereto, participate in the profits of, or receive any other benefit from, the transferee company.

Additional Information

1. Section 320– Distribution of property of the company
2. Section 410– National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the orders of National Company Law Tribunal(s) (NCLT), with effect from 1st June 2016.
3. Section 502– Appointment of liquidator.