UNIT-1

Contract vs. Agreement

A contract is a formal, legally enforceable agreement between two or more
parties, creating rights and obligations enforceable by law. It must meet
certain legal criteria, such as offer, acceptance, consideration, and mutual
intent to be bound. Examples include employment contracts and sales
agreements.
An agreement, however, is a broader term that refers to any understanding
between parties, whether enforceable by law or not. For example, a promise
to meet a friend is an agreement but not a contract because it lacks legal
enforceability.
The key distinction lies in enforceability: all contracts are agreements, but not
all agreements are contracts. For an agreement to become a contract, it must
satisfy the legal essentials, such as lawful object, capacity of parties, and
consideration. Agreements lacking these elements (e.g., social arrangements)
are not legally binding.

Offer
A contract is initiated by an offer or proposal. For this purpose, when a
contract is formed between two or more parties, the person making the offer
is known as the promisor and the person accepting the same is known as an
acceptor. An offer so tabled for the acceptance of the recipient must be valid.
In this article, we look at the elements of a valid offer in detail.
When a person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the ascent of that other to such act
or abstinence he is said to make a proposal. – Section 2 (a) of Indian Contract
act.
Express or Implied
An offer can be tabled through words or conduct. An offer made through
words (which could be written or spoken), is known as an express contract,
whereas the ones addressed through the conduct and actions of the offeror
is known as an implied contract.
Legal Relations
An offer is made for the execution of a contract between two or more parties.
In this respect, it prompts for the creation of legal relations and legal
consequences (in case of non-performance). It is pertinent to note that a
social contract without the establishment of legal relations will not constitute
a valid offer.
Clarity Matters
An offer must be definite and clear, without which a binding contract isn’t
created. A contract of such kind is considered to be void. To state as provided
in the respective legal provision, “Agreements, the meaning of which is not
certain or capable of being certain are void.”
It is Not an Invitation to Offer
An invitation to offer merely invites the other party for an offer but doesn’t
make it. To reiterate, the sender of the invitation intimates the receiver that
he/she/it intends to deal with anybody who is willing to negotiate, after duly
considering the information furnished in the invite. Communications falling
under this category doesn’t constitute an offer.
Specific or General
Offers may be specific or general, and both of these are construed as valid. It
may be noted though that if an offer is made to a specific person or for that
matter a group of persons, it is termed as specific and can only be accepted
by the person to whom it is made. On the other hand, an offer made to the
public is termed as general, and such an offer can be accepted by any person
who fulfils the specified conditions.
Communication of Offer
An offer stated by the offeror must be clear in its communication so as to
facilitate acceptance. Lack of clarity will result in the voidance of the offer
made.
Conditional Offer
An offer has scope to be conditional, though an acceptance hasn’t. The
person making the offer may include any compliance requirements if deemed
necessary. However, an offer shouldn’t have a condition which demands the
recipient to accept a one-sided offer. For instance, an offeror cannot state in
an offer that a proposal is deemed to be accepted if no response is filed
within a given timeline.
No Scope for Cross Offers
Cross-offers take place when two parties make similar offers to each other by
ignoring the offer from the other end. The acceptance of cross offers doesn’t
make for a complete agreement. This is precisely because if the parties
furnish an offer as acceptance of the other, it will potentially lead to issues in
the performance of the contract.

Essentials of Valid Contract:

1. Offers and Acceptance
2. Legal Relationship
3. Lawful Consideration
4. Capacity of Parties
5. Free Consent
6. Lawful Objects
7. Writting and Registration
8. Certainity
9. Possibility of Performance
 10. Not Expressly Declared Void
Free Consent in Indian Contract Act, 1872
Indian Contract Act, 1872 governs the formation, performance, and
enforcement of contracts in India. One of the fundamental requirements for
a valid contract is “Free consent” of the parties involved. Consent refers to
the agreement of both parties on the same thing in the same sense, which is
known as “consensus ad idem.” Section 13 of the Indian Contract Act defines
consent, while Section 14 specifies when consent is considered free. For a
contract to be legally binding, the consent must be free and voluntary,
without being influenced by any factors that undermine its freedom.
Definition of Free Consent:
According to Section 14 of the Indian Contract Act, consent is considered free
when it is not caused by
1. Coercion (Section 15):
Coercion involves compelling a person to enter into a contract by using force
or threats that are illegal. The section defines coercion as committing or
threatening to commit any act forbidden by the Indian Penal Code, or
unlawfully detaining or threatening to detain property, with the intention of
causing someone to enter into an agreement. For instance, if a person is
threatened with physical harm or false imprisonment unless they sign a
contract, the consent obtained under such circumstances is not free. A
contract entered under coercion is voidable at the option of the party whose
consent was coerced.
2. Undue Influence (Section 16):
Undue influence refers to the improper use of a dominant position by one
party to obtain an unfair advantage over the other. A person is said to be in a
position to dominate the will of another when:
 They hold real or apparent authority over the other party (e.g.,
employer over employee).
  They are in a fiduciary relationship, such as a parent over a child,
guardian over a ward, or trustee over a beneficiary.
3. Fraud (Section 17):
Fraud involves intentional deception to induce another party into a contract.
It includes any act committed by a party or their agent with the intent to
deceive, such as:
 Suggesting a fact that is untrue while knowing it is false.
 Actively concealing a fact that is crucial for the contract.
 Making a promise without the intention of fulfilling it.
 Engaging in any other act designed to deceive.
4. Misrepresentation (Section 18):
Misrepresentation occurs when false statements are made innocently or
without intent to deceive. It includes:
 Positive assertions made without knowledge of their truth.
 Breach of duty leading to misleading another party.
 Causing another party to make a mistake about the subject matter of
the contract.
5. Mistake (Sections 20-22):
 Bilateral Mistake:
When both parties are mistaken about the same fact essential to the
agreement, the contract is void.
 Unilateral Mistake:
When only one party is mistaken, the contract remains valid unless the
mistake relates to the identity of the contracting party or the nature of the
contract.

Discharge and Breach of Contract and Remedies

A contract is discharged when obligations are terminated. Common methods
include:
1. Performance: Both parties fulfill their obligations.
2. Agreement: Parties mutually agree to end the contract.
3. Impossibility: Performance becomes impossible due to unforeseen
circumstances (e.g., natural disasters).
4. Operation of Law: Events like bankruptcy discharge obligations.
A breach of contract occurs when a party fails to fulfill its obligations.
Breaches may be:
 Actual: Failure to perform at the agreed time.
 Anticipatory: Indication that one party will not perform in the future.
Remedies for breach include:
1. Damages: Monetary compensation for loss.
2. Specific Performance: Court orders the defaulting party to fulfill
obligations.
3. Injunction: Prevents a party from performing an act.
4. Rescission: Cancellation of the contract
UNIT-2
Sales and Good Act, 1930 Meaning and Essential Elements of Contract of
Sale
Till 1930, transactions relating to sale and purchase of goods were regulated
by the Indian Contract Act, [Link] 1930,Sections 76 to 123 of the Indian
Contract Act, 1872 were repealed and a separate Act called ‘The Indian Sale
of Goods Act,1930 was passed. It came into force on 1st July,[Link] effect
from 22ndSeptember,1963,the word ‘Indian’was also [Link],the
present Act is called’ The sales of goods act,1930’. This Act extends to the
whole of India except the State of Jammu and Kashmir.
Scope of the Act
The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of
goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price.” ‘Contract of sale’ is a generic term
which includes both a sale as well as an agreement to sell.
Essential elements of Contract of sale
1. Seller and buyer
There must be a seller as well as a buyer.’Buyer’ means a person who buys or
agrees to buy goods[Section 2910].’Seller’ means a person who sells or
agrees to sell goods [Section 29(13)].
2. Goods
There must be some goods.’Goods’ means every kind of movable property
other than actionable claims and money 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[Section 2(7)].
3. Transfer of property
Property means the general property in goods,and not merely a special
property[Section 2(11)]. General property in goods means ownership of the
goods. Special property in goods means possession of [Link],there must
be either a transfer of ownership of goods or an agreement to transfer the
ownership of [Link] ownership may transfer either immediately on
completion of sale or sometime in future in agreement to sell.
4. Price
There must be a [Link] here means the money consideration for a sale of
goods[Section 2(10)].When the consideration is only goods,it amounts to a
‘barter’ and not [Link] there is no consideration ,it amounts to gift and
not sale.
5. Essential elements of a valid contract
In addition to the aforesaid specific essential elements,all the essential
elements of a valid contract as specified under Section 10 of Indian Contract
Act,1872 must also be present since a contract of sale is a special type of a
contract.

Transfer of ownership in goods including sale by non-owners

A sale by non-owner in business law occurs when goods are sold by a person
who is not the owner without the owner’s permission.
A sale by non-owner in business law occurs when goods are sold by a person
who is not the owner without the owner’s permission. Only the person who
owns the title to a piece of property, whether that is personal property or
real estate, can transfer the title to someone else.

Nemo dat quod non habet is a legal term that’s often abbreviated to nemo
dat. It simply means no one can transfer what they don’t have. As such, a
seller can only transfer ownership to a buyer if he possesses the right to do
so. Nemo dat may apply if a seller sells stolen goods without the rights to
them or a buyer purchases stolen goods.
Nemo Dat Exceptions
Nemo dat protects the rightful owner of a piece of property, precluding the
innocent purchaser from maintaining ownership of the title. However, there
are several exceptions to the rule. Each exception is contained in one of the
following acts:
 The Sale of Goods Act 1979 (SGA)
 The Factors Act 1889 (FA)
 The Hire Purchase Act 1964 (HPA)
When any of these exceptions are enacted, the rightful owner of the property
loses ownership of the title in favor of the purchaser. In essence, these
exceptions protect the innocent purchaser.
Here’s an example of a scenario where the transfer of ownership to a non-
owner may arise:
 Mr. Smith steals a piece of property and sells it to Mr. Jones.
 Then, Mr. Smith sells another piece of property to Mr. Murphy but
retains possession of it while wrongfully selling it again to Mr. Napoli.
 Mr. Smith then passes the property to Mr. Jones in search of an offer for
sale. Meanwhile, Mr. Jones goes on to sell the property without Mr.
Smith’s authority and maintains the proceeds from the sale.
 Mr. Smith buys the piece of property on credit and resells it to Mr. Jones,
with no intention of paying for the property.
Limited Liability partnership Act 2008
The LLP Act, 2008, was enacted to provide a new form of business entity that
offers the benefits of limited liability to its partners while allowing them the
flexibility of organizing their internal structure as a partnership. This Act came
into force on 31st March 2009 and has been instrumental in providing an
alternative to traditional partnerships and private limited companies.

Formation of LLP:
 Minimum Requirements:
An LLP must have at least two partners, and there is no upper limit on the
number of partners. At least two designated partners must be individuals,
and at least one designated partner must be a resident of India.
 Incorporation Document:
The LLP is formed by filing an incorporation document with the Registrar of
Companies (ROC), along with prescribed fees. The incorporation document
must include the name, address of the registered office, and details of
partners and designated partners.
 LLP Agreement:
The partners must enter into an LLP agreement, which details the mutual
rights and duties of partners and the LLP.
Legal Status and Liability:
 Separate Legal Entity:
An LLP is a body corporate and a legal entity separate from its partners. It has
perpetual succession and can own property, sue, and be sued in its name.
 Limited Liability:
The liability of the partners is limited to the extent of their agreed
contribution in the LLP. Personal assets of the partners are protected from
the liabilities of the LLP, except in cases of fraud or wrongful acts.
Partners and Designated Partners:
 Partners:
Any individual or body corporate can become a partner of an LLP. Partners
share profits and losses in the ratio specified in the LLP agreement.
  Designated Partners:
Designated partners are responsible for compliance with the provisions of
the LLP Act. They must file annual returns, maintain proper books of
accounts, and ensure timely audits.
Capital Contribution:
The LLP Act does not prescribe any minimum capital requirement. Partners
can contribute in the form of tangible, movable, or immovable property, or
intangible property, including money, promissory notes, and contracts for
services performed.
Audit and Compliance:
Every LLP must maintain proper books of accounts and file an annual return
with the ROC. An LLP is required to get its accounts audited if its turnover
exceeds ₹40 lakhs or its contribution exceeds ₹25 lakhs in any financial year.
Taxation:
LLPs are treated as partnerships for tax purposes and are taxed accordingly.
The income of the LLP is taxed at the LLP level, and profits distributed to
partners are exempt from tax.
Winding Up and Dissolution:
An LLP can be wound up either voluntarily by partners or compulsorily by the
Tribunal. The process involves settling the debts, distributing the remaining
assets among partners, and filing the necessary documents with the ROC.
Advantages of LLP:
 Limited Liability:
Partners enjoy limited liability, protecting their personal assets from business
liabilities.
 Separate Legal Entity:
The LLP has a distinct legal identity, allowing it to own property and enter
into contracts in its name.
  Perpetual Succession:
The LLP’s existence is not affected by changes in partnership, such as the
death or departure of partners.
 Flexibility in Management:
Partners have the flexibility to organize their internal structure and
management without the need for extensive statutory requirements.
 No Minimum Capital Requirement:
There is no mandatory minimum capital requirement for forming an LLP.
 Tax Benefits:
LLPs are taxed as partnerships, avoiding the double taxation applicable to
companies.
Compliance Requirements:
 Annual Return:
LLPs must file an annual return in Form 11 with the ROC within 60 days from
the end of the financial year.
 Statement of Accounts and Solvency:
LLPs must file a statement of accounts and solvency in Form 8 with the ROC
within 30 days from the end of six months of the financial year.
 Income Tax Return:
LLPs must file their income tax returns annually by 31st July, or by 30th
September if an audit is required.
 Audit Requirements:
LLPs with a turnover exceeding ₹40 lakhs or contribution exceeding ₹25 lakhs
must have their accounts audited.
Implications for Businesses:
The LLP structure is particularly beneficial for:
  Professional Firms:
Law firms, accounting firms, and consulting firms prefer LLPs due to the
limited liability protection and flexible management structure.
 Small and Medium Enterprises (SMEs):
SMEs benefit from the ease of formation, limited compliance requirements,
and tax advantages of LLPs.
 Joint Ventures:
LLPs are an attractive option for joint ventures as they provide a clear
separation between ownership and management while limiting liability.
Registration of Partnership, Dissolution of Partnership firm
Registration of Partnership
A Partnership is one of the most important forms of a business organization,
where two or more people come together to form a business and divide the
profits thereof in an agreed ratio. A Partnership is easy to form, and the
compliance is minimal as compared to companies.
Name given to the Partnership firm
Any name can be given to a partnership firm as long as you fulfill the below-
mentioned conditions:
 The name shouldn’t be too similar or identical to an existing firm doing
the same business,
 The name shouldn’t contain words like emperor, crown, empress,
empire or any other words which show sanction or approval of the
government.
How should be the agreement between partners formed?
Partnership deed is an agreement between the partners in which rights,
duties, profits shares and other obligations of each partner is mentioned.
Partnership deed can be written or oral, although it is always advisable to
write a partnership deed to avoid any conflicts in the future.
Following details are required in a partnership deed:
1. General Details:
2. Name and address of the firm and all the partners
3. Nature of business
4. Date of starting of business Capital to be contributed by each partner
5. Capital to be contributed by each partner
6. Profit/loss sharing ratio among the partners

Is it necessary to register a partnership firm?

Indian Partnership Act, 1932 governs the partnerships. Registration of
partnership firm is optional and at the discretion of the partners.
Registration of partnership firm may be done at any time – before starting a
business or anytime during the continuation of partnership.
It is always advisable to register the firm since a registered firms enjoy special
rights which aren’t available to the unregistered firms.
How to register the partnership firm?
An application form along with fees is to be submitted to Registrar of Firms of
the State in which firm is situated. The application has to be signed by all
partners or their agents.
Documents to be submitted to Registrar are
 Application for registration of partnership (Form 1)
 Specimen of Affidavit
 Certified original copy of Partnership Deed
 Proof of principal place of business (ownership documents or
rental/lease agreement)
If the registrar is satisfied with the documents, he will register the firm in
Register of Firms and issue Certificate of Registration.
Register of Firms contains up-to-date information on all firms and can be
viewed by anybody upon payment of certain fees.
Dissolution of Partnership firm
Dissolving a partnership firm means discontinuing the business under the
name of said partnership firm. In this case, all liabilities are finally settled by
selling off assets or transferring them to a particular partner, settling all
accounts existed with the partnership firm.
Any profit/ loss is transferred to partners in their profit sharing ratio as
agreed by them in the partnership deed.
Dissolving a partnership firm is different from dissolving a partnership. In the
former case, the firm ends its name and hence cannot do business in the
future. But in case of dissolving a partnership, the existing partnership is
dissolved– by consent or on happening of a certain event, but the firm can
retain its existence if remaining partners enter into a new partnership
agreement. There are different ways in which a partnership firm may get
dissolved-
When partners are mutually agreed
It is the easiest way to dissolve a partnership firm since all partners have
mutually agreed upon closing the partnership firm. Partners can give a
mutual consent or may enter into an agreement for the dissolve.
Compulsory Dissolution
A firm may need to be dissolved compulsorily if:
 All partners or all partners except one partner are declared insolvent
 The firm is carrying unlawful activities like dealing in drugs or other
illegal products or doing business with alien countries or other countries
that may harm the interest of India or doing other such activities.
Dissolution depending on certain contingent events
Upon happening of certain events, a firm may be required to get dissolved:
 Expiry of fixed-term– Partnership formed for a fixed term will get
dissolved once the term gets over.
 Completion of task– Sometimes, a partnership is formed for a certain
task or objective. Once the task is completed, the partnership will
automatically get dissolved.
 Death of the partner– If there are only two partners, and one of the
partner dies, the partnership firm will automatically dissolve. If there are
more than two partners, other partners may continue to run the firm. In
such case, only the partnership will get dissolved, and other partners
will enter into a new agreement.
Dissolution by notice
If a partnership business is at will, any partner can dissolve the partnership by
giving an advanced notice. Notice will contain a date from which dissolution
will be effective.
Dissolution by Court
If any of the partners becomes mentally unstable or misbehaves with the
other partner(s) or doesn’t abide by the clauses of the agreement, the other
partner(s) may file a case in the court to dissolve the firm. But a court can
dissolve the firm only if it is registered with the registrar of firms. Hence an
unregistered partnership firm can’t be dissolved by the court.
Transfer of interest or equity to the third party
If any partner transfers control in the form of interest or equity to a third
party without consulting other partners, the partner(s) may dissolve the firm.
Partners still liable to third parties
Until a public notice of dissolution is given, partners remain liable for any act
done by any of the partners which would have been an act of the firm, if such
act was done before resolution.
If a partner has been declared insolvent or has retired from the firm, he will
not liable for any acts done after his insolvency or retirement. The legal heirs
of any deceased partner are also not liable for any acts done by other
partners after the partner has died.
How are accounts settled
Accounts of the firm are settled in the following order–
 Losses of the firm will be paid out of the profits, next out of the capital
of the partners, and even then, losses aren’t paid off, losses will be
divided among the partners in profit sharing ratios,
 Assets of the firm and the capital contributed by the partners to set-off
losses of the firm will be applied in the following order–
1. Third party debts will be paid first
2. Next, loan amount taken by firm from any partner will be repaid to that
partner
3. Capital contributed by each partner will be repaid to him in the capital
contribution ratio
4. Balance amount will be shared among the partners in their profit
sharing ratios.
 Upon realization, all assets will be sold off in the market, and the cash
realizing out of such a sale will be used for paying the liabilities. Assets
or liabilities may also be taken over by the partner(s) for which the
respective partner capital accounts will be adjusted by such amount.
Premium to be returned on premature dissolution
If a partner paid a certain premium for entering into a partnership for a fixed
term, and the firm is dissolved before the end of fixed term, the firm is liable
to repay the partner his premium amount. But few conditions are attached
with this –
 Firm isn’t dissolving due to death of a partner
  Dissolution shouldn’t be happening due to his misconduct
 Dissolution is happening on the basis of an agreement that contains no
provision for repayment of full or a part of the premium

Q1. Define Holder and Holder in due course. Explain the privileges of Holder
in due course.
A Holder of a negotiable instrument is a person who is in possession of the
instrument and has a right to receive or recover the amount due. A Holder in
Due Course (HDC), however, is a holder who has acquired the instrument in
good faith, for value, and without notice of any defects or claims. An HDC is
protected under the law and has certain privileges:
1. Good Title: An HDC holds the instrument free from defects, such as prior
dishonor or irregularities.
2. Freedom from Defenses: The HDC is not affected by any defenses that
could be raised by previous parties, except for fraud or illegality.
3. Right to Recover: An HDC can claim the full amount from prior parties,
even if the instrument has been transferred multiple times.
These privileges ensure that an HDC’s rights remain intact, encouraging the
transferability of negotiable instruments in commerce.
Q2. Define Crossing of Cheques. Explain its different kinds. Explain a
situation where a banker ‘must refuse’ payment of customer’s cheque.
Crossing of Cheques refers to the process of marking two parallel lines on the
face of a cheque, which restricts its payment to a bank account only. This is
done to enhance security and prevent fraudulent encashment.
There are two types of cheque crossing:
1. General Crossing: Two parallel lines are drawn on the top left corner of
the cheque. The cheque can only be deposited into a bank account.
2. Special Crossing: The cheque is crossed with the name of a specific bank
written between the lines. Payment can only be made to the bank
mentioned.
A banker must refuse payment of a customer’s cheque in the following
situations:
1. Insufficient Funds: If the account has insufficient balance.
2. Post-Dated or Stale Cheque: If the cheque is presented after its validity
period (6 months).
3. Mutilated or Altered Cheques: If the cheque is damaged, altered, or
appears to be tampered with.

Q3. Define various kinds of meetings of a company. Explain the essential

conditions of a valid meeting.
A company conducts several types of meetings, such as:
1. Annual General Meeting (AGM): Held annually to discuss company
performance, declare dividends, and appoint or reappoint directors.
2. Extraordinary General Meeting (EGM): Called for urgent matters that
require shareholder approval outside of the AGM.
3. Board Meeting: Held by the directors to discuss day-to-day management
and company policies.
 4. Class Meeting: Convened for a specific class of shareholders to address
issues affecting their particular interests.
Essential conditions for a valid meeting:
1. Proper Notice: Adequate notice (in writing) must be given to all
members.
2. Quorum: Minimum number of members required to be present to
validate the proceedings.
3. Agenda: The meeting must follow a clear agenda that outlines the items
to be discussed.
4. Valid Resolution: Decisions made during the meeting must be in
accordance with the law and the company's bylaws.

Q4. Explain the following:

i) Kinds of Resolution
 Ordinary Resolution: Requires a simple majority of votes to pass (more
than 50%).
 Special Resolution: Requires a three-fourths majority of votes to pass.
 Resolution by Circulation: Passed without a physical meeting, typically
among directors or shareholders.
ii) Prevention of Oppression and Mismanagement
 Provisions in company law (Section 241-246 of the Companies Act,
2013) allow shareholders to seek relief in cases of oppression or
mismanagement by filing a petition with the National Company Law
Tribunal (NCLT). The tribunal can pass orders to protect the interests of
aggrieved parties.
iii) Qualifications of a Director
  A director must be a natural person, at least 18 years old, and should not
be disqualified under the provisions of the Companies Act (e.g.,
undischarged insolvent or convicted of serious crimes).

Q5. Discuss the procedure for conversion of private company into One
Person Company.
The conversion of a private company into a One Person Company (OPC)
involves several steps:
1. Board Resolution: The company’s board must approve the conversion
through a board resolution.
2. Shareholder’s Approval: The conversion must be ratified by the
shareholders of the private company in a general meeting.
3. Filing with Registrar: File a special resolution with the Registrar of
Companies (RoC) in e-Form MGT-14, along with necessary documents.
4. Alteration of MOA/AOA: The Memorandum of Association (MOA) and
Articles of Association (AOA) must be amended to reflect the OPC
structure.
5. Certificate of Conversion: Once the RoC approves the application, a
certificate of incorporation is issued, confirming the conversion.

Q6. Who decides about remuneration payable to the Managing Director of

a large public company? Whether there exist any kind of restrictions?
The Board of Directors of a company decides the remuneration of the
Managing Director (MD). However, such decisions must be within the
framework of approval from the Shareholders in the Annual General Meeting
(AGM) and comply with the provisions under the Companies Act, 2013.
There are restrictions:
 1. Section 197 of the Companies Act sets a cap on the total remuneration
of the directors, including the MD, as a percentage of the company’s
profits.
2. The MD’s remuneration must not exceed 5% of the profits of the
company, and in case of more than one managing director or manager,
the limit is 10% of the profits.
3. If the company does not have adequate profits, remuneration is subject
to the approval of the Central Government.

Q7. State the provisions related to bouncing of cheques as given in the

Negotiable Instrument Act. What are the benefits of this provision?
Under Section 138 of the Negotiable Instruments Act, a cheque is considered
dishonored (bounced) if it is returned due to insufficient funds or if the
signature is mismatched. The drawer of the dishonored cheque can be held
criminally liable and fined up to twice the cheque amount or imprisonment
for up to 2 years, or both.
The benefits of this provision include:
1. Deterrent Effect: It discourages people from issuing cheques without
sufficient funds.
2. Legal Recourse: Provides a clear remedy for the payee, ensuring
payment is made or compensation is received.
3. Credibility: Enhances the credibility of cheques as a form of payment in
business transactions.

Q8. Define Negotiable Instrument. What are the essential features of

Negotiable Instrument?
A Negotiable Instrument (NI) is a written document that guarantees the
payment of a specific amount of money either on demand or at a specified
future date. Examples include promissory notes, bills of exchange, and
cheques.
Essential features include:
1. Transferability: The instrument can be transferred from one person to
another, who then holds the right to claim the sum.
2. Payable to Bearer or Order: The instrument can be made payable to the
person holding it (bearer) or to a specified person (order).
3. Unconditional Promise or Order: There must be a promise or order to
pay without any conditions.
4. Certainty of Amount: The amount to be paid must be clear and
unambiguous.

Q9. When a Negotiable Instrument is considered as dishonoured? What are

the duties of a holder upon such dishonour?
A negotiable instrument is considered dishonoured when the issuer (drawer)
or the party responsible for payment refuses or fails to pay when the
instrument is presented for payment.
The duties of the holder upon dishonour include:
1. Notice of Dishonour: The holder must give notice of dishonour to the
drawer and endorsers, typically within 24 hours.
2. Taking Legal Action: The holder may initiate legal proceedings against
the parties responsible for the dishonor.
3. Presentment for Payment: The holder must present the instrument for
payment within the stipulated time frame.

Q10. “The company is a legal entity distinct from its members.” In what
cases do the court disregard this principle?
The principle of corporate personality, which states that a company is a
separate legal entity from its members, may be disregarded in exceptional
circumstances, known as the "lifting of the corporate veil." Courts may
disregard this principle in cases involving:
1. Fraud or Improper Conduct: If the company is used to perpetrate fraud
or evade legal obligations, the court may lift the veil to hold the
individuals behind the company accountable.
2. Agency or Trust: When a company is acting as an agent or trustee of its
members or others, the corporate veil may be pierced.
3. Avoiding Legal Obligations: In cases where a company is used to avoid
liabilities or obligations, the court may disregard the separate legal
entity status and hold the individuals liable.
This ensures that the principle of separate legal identity is not misused.