Unit 9 Legal Aspects of Business PYQ’s 9 Sep 2026 Shift 2

The correct answer is: A-III, B-I, C-IV, D-II.

Key Points

Additional Information

• Chinnaya Vs Ramaya (1882):
  • This case is a landmark in Indian Law regarding Consideration. It established that consideration for a promise need not necessarily move from the promisee; it may move from any other person (a stranger to consideration).
• Mohoribibi Vs Dharmodas Ghose (1903):
  • This is the leading case on Minor’s agreements. The Privy Council held that a contract with a minor is void-ab-initio (void from the very beginning), meaning it has no legal validity whatsoever.
• Hadley Vs Baxendale (1854):
  • This English contract law case set the rule for Damages. It distinguished between Ordinary Damages (arising naturally from the breach) and Special Damages (arising from special circumstances communicated at the time of the contract).
• Dunlop Pneumatic Tyre Co Ltd Vs Selfridge & Co Ltd (1915):
  • This case confirmed the Doctrine of Privity of Contract. It established that only a person who is a party to a contract can sue on it, and a stranger to a contract cannot enforce it, even if the contract was made for their benefit.

The correct answer is: C, E, A, B, D.

Key Points

The formation of a Limited Liability Partnership (LLP) in India is governed by the Limited Liability Partnership Act, 2008. The process follows a specific legal sequence to ensure compliance with the Ministry of Corporate Affairs (MCA). The correct chronological order of the steps is as follows:

• Step 1: Deciding the Partners and Designated Partners (C):
  • The first step involves identifying at least two partners to form the LLP.
  • Among them, at least two individuals must be appointed as Designated Partners, and at least one of them must be a resident of India.
• Step 2: Obtaining DIN and Digital Signature (E):
  • All designated partners must obtain a Digital Signature Certificate (DSC) to sign electronic documents.
  • They must also apply for a Designated Partner Identification Number (DPIN/DIN) through the MCA portal.
• Step 3: Choosing a Name for the LLP (A):
  • Partners must apply for the reservation of the proposed name of the LLP through the RUN-LLP (Reserve Unique Name) service.
  • The name must be unique and not resemble any existing company or trademark.
• Step 4: Drafting of LLP Agreement (B):
  • The LLP Agreement is a crucial document that defines the rights, duties, and obligations of the partners.
  • While it is drafted during the process, it must be formally executed and filed within 30 days of incorporation.
• Step 5: Filing of Incorporation Documents (D):
  • The final step in the creation phase is filing Form FiLLiP (Form for incorporation of Limited Liability Partnership) with the Registrar of Companies (RoC).
  • Once the RoC is satisfied with the documents, a Certificate of Incorporation is issued.

Additional Information

• Nature of LLP: An LLP is a separate legal entity, meaning the entity is liable to the full extent of its assets, but the liability of the partners is limited to their agreed contribution.
• Perpetual Succession: Unlike a traditional partnership firm, an LLP has perpetual succession; the entry or exit of partners does not affect its existence.
• Compliance: After incorporation, the LLP must file the LLP Agreement in Form 3 on the MCA portal within 30 days of the date of incorporation.

The correct answer is: A-III, B-IV, C-II, D-I.

Key Points

Additional Information

• Digital Signature Certificates (DSC): These are the digital equivalent of physical or paper certificates. They serve as proof of identity of an individual for a certain purpose online.
• Class 0: These are the lowest level of certificates. They are not meant for actual transactions but are used to showcase how the digital signature process works.
• Class 1: These are issued to individuals/private subscribers. These certificates confirm that the user’s name and email address in the CA’s database are unique and valid. They provide a basic level of assurance.
• Class 2: These were widely used for filing documents with the Registrar of Companies (ROC), Income Tax returns, and GST. The verification is done against a pre-verified database. Note: The Controller of Certifying Authorities (CCA) has discontinued Class 2 certificates from January 2021, moving users toward Class 3.
• Class 3: This is the highest level of security. It is used for high-value transactions like E-Tendering and E-Auctions. It requires the applicant to prove their identity in person (or via video verification) before the Certifying Authority.

The Correct answer is: B, C, and D

Key Points

• Rounding off Fractions (Statement A):
  • This statement is incorrect.
  • According to the Companies Act, 2013, while calculating the quorum for a meeting, any fraction of a number shall be rounded off as one. For example, if the required quorum is 1/3rd of 7 directors (2.33), it is rounded off to 3.
• Total Strength and Vacancies (Statement B):
  • This statement is correct.
  • The term ‘Total Strength’ refers to the total number of directors on the Board at a given time. It does not include directors whose places are vacant due to resignation, death, or any other reason.
• Automatic Adjournment (Statement C):
  • This statement is correct.
  • Under Section 174 of the Companies Act, 2013, if a meeting of the Board cannot be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week.
• Adjourned Day and National Holidays (Statement D):
  • This statement is correct.
  • If the day to which the meeting is adjourned falls on a national holiday, the meeting shall be held on the next succeeding day which is not a national holiday, at the same time and place.

Additional Information

• Quorum for Board Meetings:
  • The quorum for a meeting of the Board of Directors of a company shall be one-third of its total strength or two directors, whichever is higher.
  • Participation of directors by video conferencing or other audio-visual means is also counted for the purposes of quorum.
• Interested Directors:
  • If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength, the number of directors who are not interested and present at the meeting, being not less than two, shall be the quorum.

The correct answer is ‘Filling up an inchoate instrument’

Key Points

• Inchoate Instrument: According to Section 20 of the Negotiable Instruments Act, 1881, an inchoate instrument is a document that is signed and delivered but is either wholly blank or incomplete in some material particular.
• Non-Material Alteration: Filling up the blanks in an inchoate instrument is not considered a material alteration. The law provides an implied authority to the holder to complete the instrument for any amount specified therein, provided it does not exceed the amount covered by the stamp duty paid.
• Legal Validity: Since the person signing the instrument gives prima facie authority to the holder to make or complete the negotiable instrument, the act of filling it up is legally sanctioned and does not void the instrument.

Additional Information

• Material Alteration: A material alteration is one which varies the rights, liabilities, or legal character of the instrument as originally executed. Under Section 87, any material alteration renders the instrument void against anyone who was a party at the time of making such alteration and did not consent to it.
• Alteration in Time of Payment: Changing the date of payment or the period of credit is a material alteration because it affects the maturity date and the liability of the parties.
• Adding a New Party: Adding a new maker or a new payee to an instrument without the consent of the existing parties is a material alteration as it changes the contractual relationship.
• Alteration of Amount Payable: Any change in the sum certain (whether increasing or decreasing the amount) is a material alteration as it directly alters the financial obligation of the parties.
• Other Non-Material Alterations: Examples include correcting a clerical error, completing an incomplete name, or adding words that the law would otherwise imply (like ‘on demand’ where no time is specified).

The correct answer is: D, C, A, E, B.

Key Points

Under the Insolvency and Bankruptcy Code (IBC), 2016, Section 53 specifies the ‘Waterfall Mechanism’, which dictates the order of priority in which the proceeds from the sale of the liquidation assets are distributed. The priority is arranged as follows:

• Insolvency Resolution Process and Liquidation Costs (D):
  • This is the highest priority claim. It includes the costs incurred during the Corporate Insolvency Resolution Process (CIRP) and the liquidation process itself, such as the fees of the resolution professional and liquidator.
• Secured Creditors and Workman Dues (C):
  • The second rank is shared equally (pari passu) between secured creditors (who have relinquished their security interest) and workmen’s dues for the period of 24 months preceding the liquidation commencement date.
• Other Employees Dues (A):
  • The third rank is assigned to wages and unpaid dues owed to employees (other than workmen) for a period of 12 months preceding the liquidation commencement date.
• Financial Debts of Unsecured Creditors (E):
  • The fourth rank belongs to unsecured financial creditors. These are creditors who provided financial debt but do not hold a charge or security over the assets of the corporate debtor.
• Government Dues and Unpaid Secured Creditors (B):
  • The fifth rank includes Central and State Government dues (for up to 2 years) and any remaining unpaid amounts owed to secured creditors following the enforcement of their security interest.

Additional Information

• Waterfall Mechanism: This legal hierarchy ensures that the most critical operational costs and the most vulnerable stakeholders (workmen) are protected before other creditors or the government.
• Residual Claims: After the above five categories, the remaining proceeds are distributed to any remaining debts and dues, followed by preference shareholders, and finally equity shareholders or partners.
• Pari Passu: This Latin term means ‘on equal footing’. In the IBC context, it means if the assets are insufficient to pay everyone in a specific rank, the available funds are distributed proportionately among them.

The Correct answer is: B, C, E only

Key Points

• Statement A: A contract with a minor is voidable at his option:
  • This statement is incorrect.
  • According to the landmark case Mohori Bibee v. Dharmodas Ghose (1903), a contract with a minor is void-ab-initio (void from the very beginning), not voidable. A voidable contract is valid until rescinded, but a minor’s agreement has no legal standing at all.
• Statement B: A minor can be an agent and is empowered to bind the principal:
  • This statement is correct.
  • Under Section 184 of the Indian Contract Act, any person may become an agent. While a minor cannot be a principal, they can act as an agent and bind the principal to third parties, although the minor themselves will not be personally liable to the principal.
• Statement C: A person of unsound mind cannot enter into a valid contract:
  • This statement is correct.
  • Section 11 and Section 12 specify that for a valid contract, the parties must be of sound mind. A person is of sound mind if they can understand the contract and form a rational judgment as to its effect upon their interests.
• Statement D: An alcoholic person can never enter into a valid contract:
  • This statement is incorrect.
  • The law does not permanently bar an alcoholic. Under Section 12, a person who is usually of sound mind, but occasionally of unsound mind (e.g., due to drunkenness), may not make a contract when they are in that state. However, they can enter into a valid contract during a lucid interval when they are sober and capable of understanding the terms.
• Statement E: A contract for the benefit of a minor can be enforced:
  • This statement is correct.
  • While a minor cannot incur liability, the law does not prevent a minor from acquiring benefits. A contract where the minor is a beneficiary (such as a promissory note executed in favor of a minor) is valid and enforceable by the minor.

Additional Information

• Capacity to Contract (Section 11):
  • Every person is competent to contract who is of the age of majority according to the law to which he is subject, who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
• Necessaries supplied to a Minor (Section 68):
  • If a person incapable of entering into a contract (like a minor) is supplied by another person with necessaries suited to their condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.

The correct answer is ‘A tells B in the presence and with hearing distance of Q that he is Q’s agent. Q doesn’t contradict the statement. Later on B enters into a contract with A, honestly presuming that A is Q’s Agent. Q will be bound by this contract.’

Key Points

• Agency by Estoppel:
  • This arises when a person, by their words or conduct, induces a third party to believe that a certain person is their agent.
  • If the third party acts on this belief and enters into a contract, the person who made the representation (the Principal) is stopped (prevented) from later denying the existence of the agency relationship.
  • In the correct scenario, Q remains silent while A claims to be Q’s agent in front of B. This silence or lack of contradiction creates a reasonable belief in B’s mind. Therefore, Q is bound by the contract under the doctrine of Estoppel.
• Legal Basis:
  • Under the Indian Contract Act, 1872 (Section 237), when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.

Additional Information

• Agency by Holding Out:
  • The scenario where Q allows his servant to purchase goods on credit repeatedly (Option 2) is a specific form of estoppel known as Agency by Holding Out. It is based on a prior course of conduct that leads a third party to assume the authority continues.
• Agency by Necessity:
  • The example of a Ship Captain borrowing money to fuel a ship (Option 3) represents Agency by Necessity. This occurs in emergencies where it is impossible to communicate with the principal and action is required to protect the principal’s interests.
• Agency by Ratification:
  • The case where A accepts rent for a house lent by B without authority (Option 4) is Agency by Ratification. Here, the principal approves an act that was originally unauthorized after it has already been performed.

The correct answer is ‘The amount of loan can be recovered from minor’s property since it is a loan for necessaries.’

Key Points

• Section 68 of the Indian Contract Act, 1872:
  • This section deals with the claim for necessaries supplied to a person incapable of entering into a contract, such as a minor or a person of unsound mind.
  • It states that if a person incapable of entering into a contract is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.
• Definition of ‘Necessaries’:
  • The term ‘necessaries’ is not restricted to basic food, clothing, and shelter. It includes items or services required to maintain the person according to their status and specific needs.
  • Legal expenses incurred to defend a minor in a criminal prosecution or to protect their liberty/property are considered necessaries under the law.
• Nature of Liability:
  • A minor is never personally liable for the payment of necessaries. The liability is quasi-contractual in nature.
  • The creditor (Mr. Rahul) can only recover the amount from the minor’s estate or property. If the minor has no property, the creditor cannot recover the money.

Additional Information

• Mohori Bibee v. Dharmodas Ghose (1903):
  • This landmark case established that an agreement with a minor is void ab initio (void from the very beginning).
  • While the general rule is that a minor’s agreement is void, Section 68 acts as an exception where the law allows recovery for necessaries to ensure that people are not discouraged from helping minors in need.
• Analysis of Other Options:
  • Void ab initio: While generally true for contracts, it does not prevent recovery under Section 68 for necessaries.
  • Ratification: A minor cannot ratify an agreement after attaining majority because a void agreement cannot be made valid later.
  • Guardian’s Liability: A guardian is not personally liable for the debts of a minor unless the guardian entered into the contract on the minor’s behalf for a purpose that binds the estate.

The correct answer is: C, A, E, B, D.

Key Points

• C. Board Meeting:
  • The process begins with a Board Meeting where the directors of the company meet to make a Declaration of Solvency.
  • They verify that the company has no debts or that it will be able to pay its debts in full from the proceeds of assets sold in the voluntary winding up.
• A. General Meeting:
  • Within four weeks of the declaration of solvency, a General Meeting of the shareholders is convened.
  • A special resolution is passed by the members to wind up the company voluntarily and to appoint a Company Liquidator.
• E. Approval of Creditors:
  • If the company owes money to creditors, a meeting of creditors must be held.
  • The voluntary winding up resolution passed in the general meeting must be approved by a majority of creditors in value for the process to proceed.
• B. Public announcement by liquidator:
  • Once appointed and the resolution is approved, the Liquidator must make a public announcement within five days of their appointment.
  • This notice is published in the Official Gazette and newspapers to invite claims from stakeholders and inform the general public.
• D. Submission of report with NCLT:
  • After the affairs of the company are fully wound up and the assets are liquidated, the liquidator prepares a final report.
  • This final report and the application for dissolution are then submitted to the National Company Law Tribunal (NCLT) for the final order of dissolution.

Additional Information

• Insolvency and Bankruptcy Code (IBC), 2016:
  • In India, the voluntary liquidation of corporate persons is governed by Section 59 of the IBC, 2016.
  • The process is designed for companies that are solvent and can meet their liabilities in full.
• Role of the Liquidator:
  • The liquidator takes over the powers of the board, realizes the assets, settles the claims of the creditors, and distributes the remaining proceeds among the shareholders.