SPBA 106

POSTGRADUATE COURSE
MBA

FIRST YEAR
SECOND SEMESTER

CORE PAPER - VI

LEGAL SYSTEM IN BUSINESS

INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
MBA CORE PAPER - VI
FIRST YEAR - SECOND SEMESTER LEGAL SYSTEM IN BUSINESS

WELCOME
Warm Greetings.

It is with a great pleasure to welcome you as a student of Institute of Distance

Education, University of Madras. It is a proud moment for the Institute of Distance education
as you are entering into a cafeteria system of learning process as envisaged by the University
Grants Commission. Yes, we have framed and introduced Choice Based Credit
System(CBCS) in Semester pattern from the academic year 2018-19. You are free to
choose courses, as per the Regulations, to attain the target of total number of credits set
for each course and also each degree programme. What is a credit? To earn one credit in
a semester you have to spend 30 hours of learning process. Each course has a weightage
in terms of credits. Credits are assigned by taking into account of its level of subject content.
For instance, if one particular course or paper has 4 credits then you have to spend 120
hours of self-learning in a semester. You are advised to plan the strategy to devote hours of
self-study in the learning process. You will be assessed periodically by means of tests,
assignments and quizzes either in class room or laboratory or field work. In the case of PG
(UG), Continuous Internal Assessment for 20(25) percentage and End Semester University
Examination for 80 (75) percentage of the maximum score for a course / paper. The theory
paper in the end semester examination will bring out your various skills: namely basic
knowledge about subject, memory recall, application, analysis, comprehension and
descriptive writing. We will always have in mind while training you in conducting experiments,
analyzing the performance during laboratory work, and observing the outcomes to bring
out the truth from the experiment, and we measure these skills in the end semester
examination. You will be guided by well experienced faculty.

I invite you to join the CBCS in Semester System to gain rich knowledge leisurely at
your will and wish. Choose the right courses at right times so as to erect your flag of
success. We always encourage and enlighten to excel and empower. We are the cross
bearers to make you a torch bearer to have a bright future.

With best wishes from mind and heart,

DIRECTOR

(i)
MBA CORE PAPER - VI
FIRST YEAR - SECOND SEMESTER LEGAL SYSTEM IN BUSINESS

COURSE WRITER

Dr. S. Thameemul Ansari

Assistant Professor
PG & Research Department of Commerce
Islamiah College (Autonomous)
Vaniyambadi - 635 752

COORDINATION AND EDITING

Dr. B. Devamaindhan
Associate Professor in Management Studies
Institute of Distance Education
University of Madras
Chennai - 600 005.

Dr. S. Thenmozhi
Associate Professor
Department of Psychology
Institute of Distance Education
University of Madras
Chepauk Chennnai - 600 005.

© UNIVERSITY OF MADRAS, CHENNAI 600 005.

(ii)
 MBA DEGREE COURSE

FIRST YEAR

SECOND SEMESTER

Core Paper - VI

LEGAL SYSTEM IN BUSINESS

SYLLABUS

UNIT – I
The Law of Contracts: Definition of Contact Offer and Acceptance – Essential Elements
of a Valid Contract: Free Consent – Competency of Parties – Lawful Consideration – Legality
of Object. Void, Voidable, Unenforceable and Illegal Contracts – Performance of Contracts
– Privity of Contracts – Assignment of Contracts – By Whom Contract must be Performed
– Time and Place of Performance – Performance of Reciprocal Promises – Contracts
which need not be performed, Discharge of Contracts: By Performance, By Agreement,
By Impossibility, By Lapse of Time, By Operation of Law and By Breach of Contracts –
Remedies for Breach of Contracts.

UNIT – II
Sale of Goods Act: Definition of a Sale and a Contract of Sale – Difference between (1)
Sale and an Agreement to Sell (2) Sale and a Contract Form (3) Sale and Balient (4) Sale
and Mortgage of Goods (5) Sale and Time Purchase Conditions and Warranties – Passing
of Property of Goods – Rights of an Unpaid Seller.
Negotiable Instruments Act: Negotiable Instruments in General: Cheques, Bills of
Exchange and Promissory Notes – Definition and Characteristics

UNIT – III
Partnership Act: Evolution – Definition of Partnership – Difference between Partnership
and Joint Family Business – Kinds of Partnerships – Registration – Rights and Liabilities
of Partners – Dissolution.
Company Law: Evolution of Company Form of Organisation – Companies Separate Legal
Entity – Comparison of Company with Partnership and Joint Hindu Family Business –

(iii)
Kinds of Companies – Comparison of Private and Public Companies – Formation of
Companies – General Idea About Memorandum and Articles of Association, Prospectus,
Statement in lieu of Prospectus – Management of Companies – General Idea of
Management of Companies – Officers, Meetings – Resolutions – Account and Audit –
Winding up of Companies – General Idea of the Different Modes of Winding Up.

UNIT -IV
Labour Law: Factories Act, Minimum Wages Act, Industrial Disputes Act, Workmen’s
Compensation Act, and Payment of Bonus Act. Payment of Gratuity Act 1972. ESI Act,
CPF ACT 1952, Employees Family Pension Scheme, 1971. Maternity Benefits Act, Contract
Labour Act.

UNIT – V
Consumer Protection Act, Competition Act 2002, Cyber Crimes, IT Act 2002. Intellectual
Property Rights: Types of Intellectual Property – Trademarks Act 1999 – The Copyright
Act 1957 – International Copyright Order, 1999 – Design Act, 2000.

Reference Books
1. Intellectual Property Laws, Universal Law Publishing, 2012.
2. Majumdar, A. K. and Kapoor, G.K., Company Law, 15th Edition,Taxmann Publications
Pvt. Ltd., 2012.
3. Majumdar, A. K. and Kapoor,G.K., Company Law and Practice, 17th Edition, Taxmann
Publications Pvt. Ltd., 2012.
4. Mishra, S., Banking Law and Practice, [Link] Publishers, 2012.
5. Rao, P.M., Mercantile Law, PHI Learning, 2011.
6. Wadehra, Laws Relating to Intellectual Property, 5th Edition, Universal Law Publishing,
2012.
 MBA DEGREE COURSE

FIRST YEAR

SECOND SEMESTER

Core Paper - VI

LEGAL SYSTEM IN BUSINESS

SCHEME OF LESSONS

[Link]. Title Page

1 Contract - An Introduction 001

2 Competency of Parties or Capacity of Parties to Contract 017

3 Performance of Contract 029

4 Discharge of Contract 039

5 Sale of Goods Act 048

6 Negotiable Instrument Act, 1881 066

7 Partnership Act 077

8 Kinds of Partnership Firm and Dissolution 090

9 Evolution of Company Form of Organization 101

10 Kinds of Companies 111

11 Memorandum and Articles of Association 133

12 Prospectus and Management of Companies 143

13 Winding Up of Companies 168

14 Labour Law 181

15 Consumer Protection Act, 1986 234

16 Intellectual Property Rights 257

(iv)
 1

LESSON – 1
CONTRACT - AN INTRODUCTION
Learning Objectives
After reading this lesson, you will be able to:

 List out the various Types of Contract

 Outline the elements of contract

 Differentiate the Valid Contract and Void Contract.

Structure
1.1 Introduction

1.2 Definition of Contract

1.3 Types of Contract

1.4 Differences between Void Contract and Voidable Contract

1.5 Differences between Void Contract and Illegal Contract

1.6 Differences between Void Contract and Void Agreement

1.7 Essential Elements of Valid Contract.

1.8 Summary

1.9 Key Words

1.10 Review Questions

1.1 Introduction

A contract arises when the parties concur that there is an agreement. Formation of a
contract generally requires an offer, acceptance, consideration, and a mutual intent to be bound.
Each party to a contract must have capacity to enter the agreement. Minors, intoxicated persons,
and those under a mental affliction may have insufficient capacity to enter a contract.

A contract may be oral or written, and the lack of writing does not automatically make the
contract void. English law and later U.S. law, however, recognized that oral contracts were
subject to fraudulent claims by unscrupulous parties, and so developed the “Statute of Frauds”
requiring that certain types of contracts be put into writing in order to be enforceable.
2

1.2 Definition of Contract

A contract has been defined in Section 2(h) as “an agreement enforceable by law.” To be
enforceable by law, an agreement must possess the essential elements of a valid contract as
contained in Sections 10, 29 and 56.

According to Section 10, all agreements are contracts if they are made by the free consent
of the parties, competent to contract, for a lawful consideration, with a lawful object, are not
expressly declared by the Act to be void, and, where necessary, satisfy the requirements of any
law as to writing or attestation or registration.

1.3 Types of Contract

In connection with contracts, there are four types of classifications. Types of contracts in
contract law are as follows;

A. On the basis of Formation,

B. On the basis of Nature of Consideration,

C. On the basis of Execution and

D. On the basis of Validity.

A. On the basis of Formation

On this base Contracts can be classified into three groups, namely Express, Implied,
Quasi Contracts.

1. Express Contracts: The Contracts where there is expression or conversation are called
Express Contracts. For example: A has offered to sell his house and B has given
acceptance. It is Express Contract.

2. Implied Contract: The Contracts where there is no expression are called implied contracts.
Sitting in a Bus can be taken as example to implied contract between passenger and
owner of the bus.

3. Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so,
actually there will be no Contractual relations between the partners. Such a Contract
which is created by Virtue of law is called Quasi Contract. Sections 68 to 72 of Contract
Act read about the situations where court can create Quasi Contract.
 3

· Sec. 68: When necessaries are supplied

· Sec. 69: When expenses of one person are paid by another person.

· Sec. 70: When one party is benefited by the activity of another party.

· Sec. 71: In case of finder of lost tools.

· Sec. 72: When payment is made by mistake or goods are delivered by mistake.

Example: A case on this occasion is ChowalVs Cooper. In this case A‘s husband becomes
no more. She is very poor and therefore not capable of meeting even cost of cremation. B, one
of her relatives, understands her position and spends his own money for cremation. It is done
so without A‘s request. Afterwards B claims his amount from A where A refuses to pay. Here
court applies Sec. 68 and creates a Quasi Contract between them.

B. On the basis of Nature of Consideration

On this base, Contracts are of two types namely Bilateral Contracts and Unilateral
Contracts.

1. Bilateral Contracts: If considerations in both directions are to be moved after the contract,
it is called Bilateral Contract. Example: A Contract has got formed between X and Y on
1st Jan, According to which X has to deliver goods to Y on 3rd Jan and Y has to pay
amount on 3rd Jan. It is bilateral contract.

2. Unilateral Contract: If considerations are to be moved in one direction only after the
Contract, it is called Unilateral Contract. Example: A has lost his purse and B is its finder.
There after B searches for A and hands it over to A. Then A offers to pay Rs. 1000/- to B
to which B gives his acceptance. Here, after the Contract consideration moves from A to
B only. It is Unilateral Contract.

C. On the basis of Execution

On this base Contracts can be classified into two groups namely, Executed and Executory
Contracts. If performance is completed, it is called executed contract. In case where contractual
obligations are to be performed in future, it is called executor contract.
4

D. On the basis of Validity

On this base Contracts can be classified into 5 groups namely Valid, Void, Voidable,
Illegal and Unenforceable Contracts.

1. Valid: The Contracts which are enforceable in a court of law are called Valid Contracts.
To attain Validity the Contract should have certain features like consensus ad idem,
Certainty, free consent, two directional consideration, fulfillment of legal formalities, legal
obligations, lawful object, capacity of parties, possibility of performance, etc. Example: there
is a Contract between X and Y and let us assume that their contract has all those above
said features. It is Valid Contract.

2. Void: A Contract which is not enforceable in a court of law is called Void Contract. If a
Contract is deficient in any one or more of the above features (Except free consent and
legal formalities). It is called Void Contract. Example: there is a Contract between X and
Y where Y is a minor who has no capacity to contract. It is Void Contract.

3. Voidable: A Contract which is deficient in only free consent, is called Voidable Contract.
That means it is a Contract which is made under certain pressure either physical or
mental. At the option of suffering party, a voidable contract may become either Valid or
Void in future. For example: there is a Contract between A and B where B has forcibly
made A involved in the Contract. It is voidable at the option of A.

4. Illegal: If the contract has unlawful object it is called Illegal Contract. Example: There is a
contract between X and Z according to which Z has to murder Y for a consideration of Rs.
10000/- from X. It is illegal contract.

5. Unenforceable: A contract which has not properly fulfilled legal formalities is called
unenforceable contract. That means unenforceable contract suffers from some technical
defect like insufficient stamp etc. After rectification of that technical defect, it becomes
enforceable or valid contract. Example: A and B have drafted their agreement on Rs. 10/
- stamp where it is to be written actually on Rs. 100/- stamp. It is unenforceable contract.

1.4 Differences between Void Contractand Voidable Contract

When an agreement is enforceable at law, it becomes a contract. Based on validity, there

are several types of contract, i.e. valid contract, void contract, illegal contract, etc. Void contract
and voiadable contract are quite commonly misconstrued, but they are different. Void Contract,
implies a contract which lacks enforceability by law, whereas Voidable Contract, alludes to a
 5

contract wherein one party has the right to enforce or rescind the contract, i.e. the party has to
right to put the contract to end.

Before entering into a contract, the parties must be aware of the types of contract, which
may be helpful in understanding their rights and duties. So, take a read of this article, in which
we have provided the fundamental differences between void contract and voidable contract.

Table 1.1 Differences between Void and Voidable Contract

Basis for Void Contract Voidable

Comparison Contract

Meaning The type of contract which The contract in which one

cannot be enforceable is of the two parties has the
known as void contract. option to enforce or rescind
it, is known as voidable
contract.

Defined in Section 2 (j) of the Indian Section 2 (i) of the Indian

Contract Act, 1872. Contract Act, 1872.

Nature The contract is valid, but The contract is valid, until

subsequently becomes invalid the party whose consent is
due to some reasons. not free, does not revokes
it.

Reasons Subsequent illegality or If the consent of the

impossibility of any act parties is not independent.
which is to be performed
in the future.

Rights to party No Yes, but only to the

aggrieved party.

Suit for damages Not given by any party Damages can be

to another party for the claimed by the aggrieved
non-performance, but any party.
benefit received by any
party must be restored back.
6

1.5 Differences between Void Contract and Ilegal Contract

The Indian Contract Act, 1872 has made it clear that there is a thin line of difference
between void and illegal agreement. A void agreement is one which may not be prohibited
under law, while an illegal agreement is strictly prohibited by law and the parties to the agreement
can be penalized for entering into such an agreement.

A void agreement has no legal consequences, because it is null from the very beginning.
Conversely, illegal agreement is devoid of any legal effect, since it is started. All illegal agreement
are void, but the reverse is not true. If an agreement is illegal, other agreements related to it are
said to be void.

By learning the distinction between the two types of agreement, you will be able to
understand that which one is void and which is unlawful i.e. illegal. So, take a read of the given
article carefully.

Table 1.2: Differences between Void and Illegal Agreement

Basis for Void Agreement Illegal Agreement

Comparison

Meaning An agreement, which An agreement whose

lacks legal enforceability creation is forbidden by
is void agreement. the court of law is an
illegal agreement.

Consequence An agreement becomes void An illegal agreement is

when it loses its enforceability void ab initio i.e. void
by law. from the very beginning.

Prohibition by IPC No Yes

Scope Wide Narrow

Penalty Parties to void agreement are Parties to illegal

not liable for any penalty agreement are
under law. penalized.

Connected agreements May not necessarily be All connected

void, they may be valid also. agreements are void.
 7

1.6 Differences between Void Contract and Void Agreements

A void agreement is void ab-initio, in essence, it is null since it is formed. But on the
other hand, a void contract is one that is valid at the time of creation but eventually becomes
void, due to certain circumstances, which are beyond the control of parties concerned.

In finer terms, it can be said that a void agreement, is always invalid, but if we talk about
the void contract, is one that is enforceable in the beginning, but subsequently lacks it due to
changes in government policy or some other reason. So, here we are going to havein-
depthdiscussion on the difference between void agreement and void contract, so, let’s get
started.

Table 1.3: Differences between Void Agreement and Void Contract

Basis for Void Agreement Void Contract

Comparison

Meaning Void agreement refers to Void contract implies a

an agreement which as valid contract, that
per law, is unenforceable ceases to be
and has no legal consequences. enforceable by law,
becomes a void contract,
when it lacks
enforceability.

Void ab-initio It is void from the very It is valid at the beginning

beginning. but later on becomes
void.

Period of validity It is never valid. It is valid, till it does not

cease to be enforceable.

Causes Due to absence of one Due to impossibility of

of more essentials. performance.

Prerequisite of contract When the agreement is When the contract is

created, all the prerequisite entered into, all the
of the contract are not prerequisite of the
8

satisfied, thus making it void. contract are satisfied,

which due to certain
circumstances,
subsequently becomes
void.

Restitution In general, restitution is Restitution is allowed

not allowed, however, when the contract is
the court may grant restitution discovered as void.
on equitable grounds.

1.7 Essential Elements of Valid Contract

1. Offer and acceptance: There must be a ‘lawful offer’ and a ‘lawful acceptance’ of the
contract, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer and
acceptance must satisfy the requirements of the Contract Act in relation thereto.

Offer: An offer is an expression of willingness to contract on specific terms, made with

the intention that it is to become binding as soon as it is accepted by the person to whom it is
addressed.

Essential Elements of Valid Offer

1. It may be express or implied:An offer may be made either by words or by conduct. An

offer, which is made by words spoken or written, is called an express offer. The offer, which is
made by the conduct of a person, is called an implied offer.

Example:
a. M says to N that he will sell his motorcycle to him for Rs.40,000. It is an express
offer.

b. A railway coolie carries the luggage of B without being asked to do so B allows him
to do so. It is an implied offer.

c. The new Khan Transport Company runs buses on different routes to carry
passengers at the scheduled fares. This is an implied offer by the company.
 9

2. It must create legal relation:The offer must be made in order to create legal relations
otherwise, there will be no agreement. If an offer does into give rise to legal obligations between
the parties it is not a valid offer in the eye of law.

Example:

a. A invites B to dinner B accept the invitation. It does not create any legal relations, so
there is no agreement.

b. A offers to sell his watch to B for Rs.200 and B agrees. There is an agreement
because here the parties intend to create legal relations.

c. Three friends joined to enter a newspaper competition and agreed to share any
winnings. It was held the intended to create legal relations and their agreement was
therefore a contract.

3. It must be definite and clear: An offer must be definite and clear, if the terms of an
offer are not definite and clear, it cannot be called a valid offer. If such offer is accepted it cannot
create a binding contract.

Example: A has two motorcycles. He offers B to sell one motorcycle for Rs.27,000. It is
not a valid offer because it is not clear that which motor cycle A wanted to sell.

4. It is different from invitation to offer: An offer is different from an invitation to offer. It

is also called invitation to treat or invitation to receive offer. An invitation to offer looks like offer
but legally it is not offer.

In the case of an invitation to offer, the person sending out the invitation does not make an
offer but only invites the other party to make an offer. His object is to inform that he is willing to
deal with anybody who after getting such information is willing to open negotiations with him.
Such invitations for offers are not offers according to law and so cannot become agreement by
acceptance.

Example

a. Quotations, Catalogues of prices, display of goods with prices issue of prospectus

by companies are examples of invitation to offer.

b. Display of goods in an auction sale is not an offer rather it is an invitation to offer.

The offer will come from the buyer in the form of bids.
10

5. It may be specific or general:When an offer is made to a specified person or group of

persons, it is called specific offer. Such an offer can be accepted only by the person or persons
to whom it is made. A general offer, on the other hand, is one, which is made to public in general
and it may be accepted by any person who fulfils the conditions mentioned in it. Both specified
and general offers are valid.

Example

a. M makes an offer to N to sell his bicycle for Rs.800, it is a specific offer. In this case,
only N can accept it.

b. A announces in a newspaper a reward of Rs.1,000 for any one who will return his
lost radio. It is general offer.

6. It must be communicated to the offeree:An offer is effective only when it is

communicated to the offeree. If an offer is not communicated to the offeree it cannot be accepted.
Thus an offer, which is not communicated, is not a valid offer. It applies to both specific and
general offers.

Example: A without knowing that a reward has been offered for the arrest of a particular
criminal, catches the criminal and informs the police. A cannot recover the reward as he was not
aware of it.

7. It should not contain negative condition: An offer should not contain a condition the
non-compliance of which may be assumed as acceptance. An offeror cannot say that if
acceptance is not communicated up to a certain date, the offer would be presumed to have
been accepted. If the offeree does not reply, there is no contract, because no obligation to reply
can be imposed on him, on the ground of justice no agreement because such condition cannot
be imposed on the offeree. It is only a one sided offer.

Example: A wrote to B offering to sell his book for Rs.500 adding that if he didn’t reply
within 5 days, the offeree would be presumed to have been accepted. There is no agreement b/
c such condition can’t be imposed on the offeree. It is only a one sided offer.

8. It may be subject to any terms & conditions: An offeror may attach any terms and
andconditions to the offer he makes. He may even prescribe the mode of acceptance. There is
no contract, unless all the terms of the offer are accepted in the mode prescribed by the offeror.
It must be noted that if the offeror asks for sending the acceptance by telegram and the offeree
sends the acceptance by letter, and the offeror may reject such acceptance.
 11

Example: A asks B to send the reply of his offer by telegram but B sends reply by letter,
A may reject such acceptance because it is opposed to the prescribed mode of communication.

9. It must not contain cross offers: When two parties make similar offers to each other,
in ignorance of each other’s such offers are called cross-offers. The acceptance of cross-offers
does not result in complete agreement.

Example: On 23rd December 2007, A wrote B to sell him 100 ton of iron at Rs.10,000 per
ton. On the same day, B wrote to A to buy 100 tons of iron at Rs.10,000 per ton. There is no
contract between A & B because the offers wee similar and made in ignorance of the other and
so there is no acceptance of each other’s offer.

Acceptance: A valid contract can arise only when the acceptance is made before the
offer has lapsed or been withdrawn. An acceptance which is made after the withdrawal of the
offer is invalid, and does not create any legal relationship.

Elements of Acceptance

1. It must be given by the Offeree:An offer can be accepted only by the person to whom
it is made. It cannot be accepted by another person without the consent of offeror. If anyone
attempted to accept it no contract with that person arises.

Example: A sold his business to B without disclosing the fact to his customers. J sent an
order for the supply of goods to A by name. B received the order and executed the same. It was
held that there was no contract between B and J because J never made any offer to B.

2. It must be Absolute &Unconditonal:In order to convert the offer into an agreement

the acceptance must be absolute and unconditional. If the offeree imposes any condition in his
acceptance it is not a valid acceptance but a counter offer.

Example: A offers to sell his watch to B for Rs.500 and B replies that he can buy it only for
Rs.300 thee is a material variation in the acceptance. Therefore, there is no agreement as the
acceptance is not absolute and unconditional.

3. It must be in a Prescribed Manner:If the offeror in his offer has prescribed any
particular manner of acceptance it must be given according to that entire particular manner. If
no particular manner is prescribed in the offer then acceptance should be made in a reasonable
manner.
12

Example: A makes an offer to B and writes “if you accept the offer send your acceptance
by telegram.” B sends his acceptance by registered post. It is not a valid acceptance. But a
should inform B that it is rejected because it not in the prescribed manner.

4. It must be Communicated to the Offeror: In order to form a contract, the acceptance

must be communicated to the offeror in a clear manner by the offeree or his authorized agent.
Mere expression of intention to accept an offer is not a valid acceptance.

Example:A proposes by letter to purchase B’s house. B expresses his intention to sell it
to A but does not send a reply to him. The house is sold to C despite B’s intention. A has no legal
remedy against B.

5. It may be Express or Implied:When an acceptance is given by words spoken or

written, it is called express acceptance. When it is given by conduct, it is called implied
acceptance. Sometimes the proposal instead of being made to a definite person is made to the
public.

Example: A wrote a letter to B to sell his cycle for Rs.2,000. B accepted his offer and sent
a letter of acceptance to A. It is an express acceptance.

2. Intention to create legal relations: There must be an intention among the parties that
the agreement should be attached by legal consequences and create legal obligations.
Agreements of a social or domestic nature do not contemplate legal relations, and as
such they do not give rise to a contract.

An agreement to dine at a friend’s house is not an agreement intended to create legal

relations and therefore is not a contract. Agreements between husband and wife also lack the
intention to create legal relationship and thus do not result in contracts.

Illustrations

(a) M promises his wife N to get her a saree if she will sing a song. N sang the song but
M did not bring the saree for her. N cannot bring an action in a Court to enforce the agreement
as it lacked the intention to create legal relations.

(b) The defendant was a civil servant stationed in Ceylon. He and his wife were enjoying
leave in England. When the defendant was due to return to Ceylon, his wife could not accompany
him because of her health.
 13

The defendant agreed to send her £ 30 a month as maintenance expenses during the
time they were thus forced to live apart.

She sued for breach of this agreement. Her action was dismissed on the ground that no
legal relations had been contemplated and therefore there as no contract. (Balfour vs Balfour)

3. Lawful consideration: The third essential element of a valid contract is the presence of
‘consideration’. Consideration has been defined as the price paid by one party for the
promise of the other. An agreement is legally enforceable only when each of the parties to
it gives something and gets something.

Something given or obtained is the price for the promise and is called ‘consideration’.
Subject to certain exceptions, gratuitous promises are not enforceable at law.

The ‘consideration’ may be an act (doing something) or forbearance (not doing something)
or a promise to do or not to do something. It may be past, present or future. But only those
considerations are valid which are ‘lawful’.

(i) Consideration must move at the desire of the promisor: It is the essential that
consideration must move at the Desire of the promisor, but not at the instance of a third
party. An act done at the Desire of a third person will not constitute a good consideration
within the meaning of section 2 (d) of the Indian Contract Act 1872.

(ii) Consideration may move from the promisee or any other person: A party who wishes
to enforce a contract must be able to show that he himself has furnished consideration for
the promise of the other party. In English law, consideration must move from promise
only. But in Indian law it may move from promisee to any other person.

(iii) Consideration must be real not illusory: Consideration must be real and possible. It
must not be illusory or unsubstantial.

(iv) Consideration may be paste, present or future: The words used in the definition under
section 2(d) of the Indian contract Act, clearly state that, consideration may be past,
present or future.

(v) It must be Lawful:Consideration must not be illegal it must be Lawful.

(vi) It must not be immoral or opposed to public policy: Consideration must not be immoral
for opposed to public policy.
14

4. Capacity of parties: The parties to an agreement must be competent to contract; otherwise

it cannot be enforced by a court of law. In order to be competent to contract the parties
must be of the age of majority and of sound mind and must not be disqualified from
contracting by any law to which they are subject (Sec. 11).

If any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness,
etc., the agreement is not enforceable at [Link] topics will be discussed in the next chapter.

5. Free consent: Free consent of all the parties to an agreement is another essential element
of a valid contract. ‘Consent’ means that the parties must have agreed upon the same
thing in the same sense (Sec. 13).

There is absence of free consent’ if the agreement is induced by (i) coercion, (ii) undue
influence, (iii) fraud, (iv) misrepresentation, or (v) mistake (Sec. 14). If the agreement is vitiated
by any of the first four factors, the contract would be voidable and cannot be enforced by the
party guilty of coercion, undue influence [Link] other party (i. e., the aggrieved party) can
either reject the contract or accept it, subject to the rules laid down in the Act. If the agreement
is induced by mutual mistake which is material to the agreement, it would be void (Sec. 20).

6. Lawful object: For the formation of a valid contract it is also necessary that the parties
to an agreement must agree for a lawful object. The object for which the agreement has
been entered into must not be fraudulent or illegal or immoral or opposed to public policy
or must not imply injury to the person or property of another (Sec. 23).If the object is
unlawful for one or the other of the reasons mentioned above the agreement is void.
Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he
cannot recover the rent through a court of law.

7. Writing and registration: According to the Indian Contract Act, a contract may be oral or
in writing. But in certain special cases it lays down that the agreement, to be valid, must
be in writing or/and registered. For example, it requires that an agreement to pay a time
barred debt must be in writing and an agreement to make a gift for natural love and
affection must be in writing and registered (Sec. 25).Similarly, certain other Acts also
require writing or and registration to make the agreement enforceable by law which must
be [Link], (i) an arbitration agreement must be in writing as per the Arbitration
and Conciliation Act, 1996; (ii) an agreement for a sale of immovable property must be in
writing and registered under the Transfer of Property Act, 1882 before they can be legally
enforced.
 15

8. Certainty: Section 29 of the Contract Act provides that “Agreements, the meaning of
which is not certain or capable of being made certain, are void.” In order to give rise to a
valid contract the terms of the agreement must not be vague or uncertain. It must be
possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced.

Illustration: A agrees to sell B “a hundred tons of oil.” There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.

9. Possibility of performance: Yet another essential feature of a valid contract is that it

must be capable of performance. Section 56 lays down that “An agreement to do an act
impossible in itself is void”. If the act is impossible in itself, physically or legally, the
agreement cannot be enforced at law.

Illustration: A, agrees with B to discover treasure by magic. The agreement is not

enforceable.

10. Not expressly declared void: The agreement must not have been expressly declared to
be void under the Act. Sections 24-30 specify certain types of agreements which have
been expressly declared to be void.

For example, an agreement in restraint of marriage, an agreement in restraint of trade,

and an agreement by way of wager have been expressly declared void under Sections 26, 27
and 30 [Link] dealing with the various essentials of a valid contract one by one in
detail, it will be appropriate to discuss the ‘kinds of contracts’, first, because we shall be using
the terms like ‘voidable contract’, ‘void contract’, ‘void agreement’, etc., very often in the course
of our discussion.

1.8 Summary

A contract arises when the parties concur that there is an agreement. Formation of a
contract generally requires an offer, acceptance, consideration, and a mutual intent to be bound.
Each party to a contract must have capacity to enter the agreement. Minors, intoxicated persons,
and those under a mental affliction may have insufficient capacity to enter a contract.
16

1.11 Key Words

Contract

Express Contract

Implied Contract

Quasi Contract

Void Contract

Voidable Contract

1.10 Review Questions

1. Define Contract.

2. Describe in detail about various types of Contract.

3. What are the differences between Void Contract and Voidable Contract?

4. Mention the differences between Void Agreement and Illegal Agreement.

5. State the essential elements of Valid Offer.

6. Give out the essential elements of Acceptance.

 17

LESSON – 2
CAPACITY OF PARTIES TO CONTRACT
Learning Objectives

After reading this lesson, you will be able to:

 List out the importance of Status of the party to enter into the Contract.

 Discuss the ways of escaping from ill practices such as Fraud, Coercion, Undue
Influence and Misrepresentation.

Structure
2.1 Introduction

2.2 Competency of Parties

2.3 Persons not Competent to Contract

2.4 Consent

2.5 Free Consent

2.6 Coercion

2.7 Fraud

2.8 Misrepresentation

2.9 Mistake

2.10 Summary

2.11 Key Words

2.12 Review Questions

2.1 Introduction

In the last lesson, the types of contract are explained. In this lesson, let us brief the
capacity of parties to contract. To constitute a valid and binding contract one of the essential is
that the parties to the contract must be competent to contract. A person is competent to contract
when he is not minor, or he is not of unsound mind or is not in any way disqualified by any law
to which he is subject.
18

2.2 Competency of Parties

According to Section 11, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.”

 The contracting party must be major,

 The contracting party must be of sound mind,

 Party must not be disqualified from contracting by law to which he is a subject.

2.3 Persons not Competent to Contract

As per the statement of Section 11 of the Indian Contract Act, the following persons are
not competent to contract, i.e., they are incapable of entering into a valid contract.

(i) Minors;

(ii) Persons of unsound mind; and

(iii) Persons disqualified for contracting by any other law.

Minors

According to Section 3 of the Indian Majority Act, 1875, a person who has not completed
his age of 18 years (majority), is considered to be a minor. In the following two cases, a person
becomes major on completing the age of 21 years:

a) Where a guardian of a minor’s person or property has been appointed under the
Guardians and Wards Act, 1890; and

b) Where the superintendence of minor’s property is assumed by a Court of Wards.

Rules Regarding Minor’s Agreements

The law protects minor’s rights because they are not mature and may not possess the
capacity to judge what is good and what is bad for them. The position of a minor as regards his
agreements may be stated as under:

o An agreement with or by a minor is void ab initio: An agreement with a minor has

been held to be void ab initio. It is not only void, but is absolutely void.
 19

o A minor can be a promisee or a beneficiary: A promissory note executed in favour of

the minor can be enforced. He can draw, negotiate or endorse a negotiable instrument so
as not to incur any liability upon himself.

o No ratification: Since a contract with or by a minor is altogether void, he cannot ratify

contracts entered into by him during his minority, even after attaining the majority. There
can be no ratification of a contract void abintio.

o No restitution: Sometimes, the minor receives some property or money by falsely

representing his age. In such cases, the minor can be asked to restore such property or
money so long as the same is traceable in his possession.

o The liability of Minor’s parents or guardian: A contract made by the minor’s parents or
guardian or manager of his estate can be specifically enforced by or against the minor
provided: (a) the contract is within the scope of authority of the parent, etc., and (b) it is for
the benefit of the minor.

o No Estoppel: Where a minor represents fraudulently or otherwise that he is of age and

thereby induces another to enter into contract with him, he in an action founded on the
contract, is not estopped from setting up infancy.

o Minor’s property liable for necessaries: Sometimes, a person supplies necessaries to

a minor. In such cases, the supplier of necessaries can claim reimbursement from the
property of minor.

o Minor’s liability for tort: A minor is liable for negligently causing any injury or damage,
or for converting property that does not belong to him. But, he is not liable for a tort
directly connected with a contract which as an infant he would be entitled to avoid. In
other words, a person cannot convert a contract into a tort to enable him to sue an infant.

o Minor as an agent: Minor can act as an agent and bind his principal by his acts without
incurring any personal liability.

o Minor as a partner: A minor cannot be a partner in a firm. But under Section 30 of the
Partnership Act, he can be admitted to the benefits of partnership with the consent of all
the members.

o Minor as an insolvent: A minor cannot be declared insolvent because he is not competent

to contract.
20

Persons of Unsound Mind

According to Section 12 of the Indian Contract Act, defines the term ‘Sound Mind’ as
follows: “A person is said to be sound mind for the purpose of making a contract if at the time
when he makes it, he is capable of understanding it, and of forming a rational judgement as to
its effects upon his interests”. Thus, if a person is not capable of both, he is said to have
suffered from unsoundness of mind.

Section 11 of the Act also specifically declares that persons of unsound mind are
incompetent to enter into an agreement. The following persons are also considered to be the
persons of unsound mind.

a) Idiot: An idiot is a person who has completely lost his mental faculties of thinking for
rational judgement. All agreements, other than those for necessities of life, with idiots are
absolutely void.

b) Lunatics: A lunatic is a person who is mentally deranged (disordered) due to some mental
strain or other personal experience but who has some lucid intervals of sound mind.

c) Drunken or intoxicated person: A drunken or intoxicated person is a sane person who

is delirious from fever or who is so drunk that he cannot understand the terms of a contract
or form a rational judgement as to its effect on his interest.

Persons Disqualified by Any Law

a) Alien enemy: “Alien” means a person who is not a citizen of India. During the continuance
of war with the country to which an alien belongs, he becomes an alien enemy. In that
situation, he can neither contract with an Indian subject nor can he file a suit in an Indian
court. He can do so only after obtaining the permission of the Central Government.
Contracts made before war may either be suspended or dissolved. They are dissolved if
found to be against public policy or of benefit to the enemy.

b) Insolvent: When a person is declared as an insolvent, his property vests in the Official
Receiver or Assignee. And the insolvent is deprived of his power to deal with the property,
and sue and be sued on his behalf.

c) Foreign Sovereigns, their Diplomatic Staff and Accredited representatives of Foreign

States: Such persons can enter into valid contracts and can enforce them in Indian courts.
However, a suit cannot be filed again them, in the Indian courts, without the prior sanction
of the central government.
 21

d) Joint Stock Company and Corporations incorporated under Special Acts: A

corporation or company, being an artificial person, and having a separate legal entity, can
hold property; can purchase or sell property; and can sue or be sued in the Courts of Law.
But it cannot enter into contracts which are strictly of personal nature.

e) Felons or Convicts: A convict cannot enter into a contract while he is undergoing

imprisonment. This inability comes to an end on the expiration of the period of imprisonment
or if he has been pardoned.

2.4 Consent

According to Section 13 of the Act has defined consent as “two or more persons are said
to consent when they agree upon the same thing in the same sense”. According to this section
which has laid down the basic principle of consensus ad idem on which the law of contract is
based, the parties to an agreement should have identity of minds regarding the subject matter
of the agreement.

2.5 Free Consent

If the consent is there but it is not free or real, then the contract will be voidable at the
option of the contracting parties whose consent is not free. The word “free consent” is defined
in Section 14 of the Contract Act as follows – “Consent is said to be free when it is not caused
by

o Coercion, as defined in Section 15; or

o Undue influence as defined in Section 16; or

o Fraud, as defined in Section 17; or

o Misrepresentation, as defined in Section 18; or

o Mistake,subject to the provisions of Sections 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence
of such coercion, undue influence, fraud, misrepresentation or mistake”.

2.6 Coercion

Coercion means compelling or forcing a person to enter into a contract under a pressure
or threat. Section 15 of the Indian Contract Act defines coercion as “the committing or threatening
22

to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening
to detain, any property, to the prejudice of any person whatsoever, with the intention of causing
any person to enter into an agreement”.

Example: X beats Y and compels him to sell his car for Rs. 50,000. Here, Y’s consent has
been obtained by coercion because beating someone is an offence under the Indian Penal
Code.

Essentials Characteristics of Coercion

o The committing of any act forbidden by Indian Penal Code: When the consent of a
person is obtained by committing any act which is forbidden by the Indian Penal Code,
the consent is said to be obtained by coercion.

o The threatening to commit any act forbidden by Indian Penal Code: If a person
attempts to commit an act which is punishable under the Indian Penal Code, it leads to
coercion, e.g., consent obtained at the pistol point, or by threatening to cause death or by
intimidation.

o The unlawful detaining of any property: If a person unlawfully detains the property of
another person and forces him to enter into a contract, the consent is said to be induced
by coercion.

o The threatening to detain any property unlawfully: If a threat is given to detain any
property of another person, this amount to coercion.

o The act of coercion: It must be done with the object of inducing or compelling any
person to enter into an agreement.

Undue Influence

When a party enters into a contract under any kind of mental pressure, unfair influence or
persuasion by the superior party, the undue influence is said to be employed. According to
Section 16 (1) of the Act, a contract is said to be induced by undue influence, “where the
relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other, and uses that position to obtain an unfair advantage over the
other”.
 23

Presumption of Undue Influence

Section 16 (2), a person is deemed to be in a position to dominate the will of the other is
the following cases:

o Real or apparent authority: Where he holds a real or apparent authority over the other,
e.g., master and the servant, parent and child, Income Tax officer and assessee, etc.

o Fiduciary relationship: Fiduciary relation means a relation of mutual trust and confidence,
e.g., guardian and the ward, solicitor and client, doctor and patient, guru and disciple,
trustees and beneficiaries, etc.

o Mental distress: Where he contracts with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness, or mental or bodily distress.

2.7 Fraud

The term ‘fraud’ may be defined as an intentional, deliberate or wilful misstatement of

facts, which are material for the formation of a contract. According to Section 17, “fraud means
and includes any of the following acts committed by a party to a contract or with his connivance
or by his agent, with intent to deceive another party thereto or his agent, or to induce him to
enter into the contract:

o The suggestion, as to a fact, of that which is not true, by one who does not believe
it to be true;

o The active concealment of a fact by one having knowledge or belief of the fact;

o A promise made without any intention of performing it;

o Any other act fitted to deceive;

o Any such act or omission as the law specially declares to be fraudulent”.

Elements of Fraud

On the basis of aforesaid definition of fraud, the essential elements of fraud are as follows:

1. The act must have been committed by a party to the contract: The fraud must be
committed by a party to a contract or by anyone with his connivance or by his agent. Thus, the
fraud by a stranger to the contract does not affect the validity of the contract.
24

2. Acts committed may be of the following nature:

a) Suggestion of an untrue fact: If a person knowingly states an untrue fact or fact which
he does not believe to be true, it will be taken as a fraud on his part.

b) Active concealment of a fact: An active concealment is considered as a fraud when

o There is a concealment of fact, and

o The concealment is active (i.e., all efforts are made to conceal fact), and

o The concealment is made by a party who has the knowledge of it.

c) A promise made without any intention of performing it: If a party while entering
into a contract has no intention to perform his promise, it will be taken as a fraud on his part.

d) Any other act fitted to deceive: The expression ‘act fitted to deceive’ means any act
which is done with the obvious intention of committing fraud. Thus, this clause covers all tricks
and unfair ways which are used by cunning and clever people to cheat others.

e) Any such act or omission which the law specially declares to be fraudulent:
Under the Transfer of Property Act, any transfer of immovable property with the intention of
defrauding the creditors, is taken as a fraud.

3. The act must have been committed with the intention of inducing the deceived
party to act upon it: It implies that the assertion should be such that it would necessarily
influence and induce the other party to act.

4. The act must have in fact deceived the other party: If a person has committed a
fraudulent act to deceive the other party, but the other party has not been actually deceived by
his act, it will not be taken as a fraud on his part.

5. Plaintiff must have suffered: There is no fraud without damages, and therefore, to
constitute fraud it is necessary that the plaintiff must have suffered some loss of money or
money’s worth or some other tangible detriment capable of assessment.

Effect of Fraud

1. Right to rescind the contract: The party whose consent was caused by fraud can
rescind (cancel) the contract but he cannot do so in the following cases:
 25

o where silence amounts to fraud, the aggrieved party cannot rescind the contract if
he had the means of discovering the truth with ordinary diligence;

o where the party gave the consent in ignorance of fraud;

o where the party after becoming aware of the fraud takes a benefit under the contract;

o where an innocent third party before the contract is rescinded acquires for
consideration some interest in the property passing under the contract;

o where the parties cannot be restored to their original position.

2. Right to insist upon performance: The party whose consent was caused by fraud
may, if he thinks fit, insist that the contract shall be performed and that he shall be put in the
position in which he would have been if the representation made had been true.

3. Right to claim damages: The party whose consent was caused by fraud, can claim
damage if he suffers some loss.

2.8 Misrepresentation

The term ‘Misrepresentation’ means a false representation of fact made innocently or

non- disclosure of a material fact without any intention to deceive the other party. A false
representation made by a person may be either:

1. Innocent or unintentional, i.e., without any intention of deceiving the party.

2. Intentional or wilful or deliberate, i.e., with the intention of deceiving the party.
According to Section 18 defines the term ‘misrepresentation’ as follows:

“Misrepresentation” means and includes –

o the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
o any breach of duty which, without any intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him, by misleading another to his
prejudice, or to the prejudice of any one claiming under him;
o Causing, however innocently, a party to an agreement, to make a mistake as to the
substance of the thing which is the subject of the agreement.
26

Essentials of Misrepresentation
o There must be a representation or breach of duty.
o The representation must be of facts material to the contract.
o The representation must be untrue.
o The representation must be made with a view to inducing the other party to enter
into contract.
o The other party must have acted on the faith of the representation.
o The person making the representation honestly believes it to be true.

2.9 Mistake

A mistake is said to have occurred where the parties intending to do one thing by error do
something else. Mistake is an erroneous belief concerning something.

Example: X engages Y as a teacher for his son appearing for IAS Preliminary. Y agrees
to come daily 7. X think 7 a.m. but Y means 7 p.m. This is a bilateral mistake of fact but not
essential and can be rectified. Therefore the agreement is valid.

Kinds of Mistake
Mistake may be of two kinds:
a) Mistake of Law; and
b) Mistake of Fact.

a) Mistake of Law: It may be of the following types as below

(i) Mistake of law of the country: It does not render the agreement void. This is
based on the well established rule of law namely, ignorantiajuris non excusat (i.e.,
ignorance of law is no excuse). Section 21 lays down that “a contract is not voidable
because it was caused by a mistake as to any law in force in India”.

(ii) Mistake of foreign law: The mistake of the foreign law has the same effect as a
mistake of fact. Therefore, it renders the agreement void. Section 21 lays down that
“a mistake as to a law not in force in India has the same effect as a mistake of fact”.

b) Mistake of Fact: Mistake of fact may be of two types –

(i) Bilateral mistake; and

(ii) Unilateral mistake.

 27

(i) Bilateral mistake: Where both the parties to an agreement are under a mistake as
to matter of fact essential to the agreement, the agreement is void. An agreement
shall be void if the following conditions are satisfied:

a) Both the parties must be under a mistake: This means the mistake must be mutual
or common.

b) Mistake must relate to an essential fact: It is necessary that the mistake must relate
to a matter of fact which is essential to the agreement.

Types of Bilateral Mistake

The following types of bilateral mistake, which render the agreement void, are important
from the subject point of view:

Ø Mistake regarding existence of the subject matter: Where both the parties are
under a mistake regarding the existence of the subject matter, the contract is void.

Ø Mistake regarding identity of the subject matter: If both, the parties are mistaken
about the identity of subject matter, the contract shall be void.

Ø Regarding the title to the subject matter: If a person buys some property which
neither party knew that it already belonged to the buyer, the contract will be void.

Ø Regarding the quantity of the subject matter: Where the quantity purchased is
fundamentally, different from the quantity intended to be sold, there occurs mutual
mistake which prevents the formation of an enforceable contract.

Ø Regarding the quality of the subject matter: It occurs, where the subject matter
is entirely different from that contemplated by the parties.

Ø Regarding the price of the subject matter: Where a seller while writing the price
of the goods intending to write Rs. 2,250 by mistake writes Rs. 1250, the agreement
is void.

Ø Mistake as to the possibility of performance: Where the parties to an agreement

believe that the agreement is capable of performance, while in fact it is not so, the
agreement is treated as void. The impossibility may either be physical or legal.

(ii) Unilateral mistake: The term unilateral mistake means where only one party to the
agreement is under a mistake. A contract is not voidable merely because it was
caused by one of the parties to it being under a mistake as to matter of fact.
28

Types of Unilateral Mistake

Ø Mistake about the identity of the parties to an agreement: If there is a mistake
regarding the identity of the person contracted with, even if the mistake is caused
by fraud or misrepresentation of another party, the contract will be void.

Ø Mistake about the nature of the agreement: If a party does not disclose the true
nature of the document but fraudulently induces the other party to sign it who believes
that he is signing some other document, in such a case there is no real agreement.

2.10 Summary

According to Section 11, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.”
 The contracting party must be major,
 The contracting party must be of sound mind,
 Party must not be disqualified from contracting by law to which he is a subject.
 The way of escaping from its practices are also discussed in this lesson.

2.11 Key Words

Coersion

Consent

Fraud

Mistake

2.12 Review Questions

1. Who are known as Competency of Parties?
2. Who are said to be not competent to Contract?
3. Who is Minor? State the rules regarding Minor’s Agreement.
4. What is Free Consent?
5. Explain the essential elements of Fraud.
6. What are the Characteristics of Coercion?
 29

LESSON - 3
PERFORMANCE OF CONTRACT
Learning Objectives

After reading this lesson, you will be able to:

 List out the essence of Performance of Contract

 Discuss the Privity of Contracts and Exceptions to the rule of it.

 Explain the persons by whom contract must be performed and not performed.

STRUCTURE
3.1 Introduction

3.2 Performance of Contract

3.3 Privity of Contracts

3.4 Exceptions to the Rule of Stranger to Contract

3.5 Assignment of Contract

3.6 By whom the Contract must be performed

3.7 Time and Place of Performance of Contract

3.8 Performance of Reciprocal Promises

3.9 Contract need not be performed

3.10 Summary

3.11 Key Words

3.12 Review Questions

3.1 Introduction

A contract places a legal obligation upon the contracting parties to perform their mutual
promises, and it carries on until the discharge or termination of the contract. The most natural
and usual mode of discharging a contract is to perform it. A person who performs a contract in
accordance with its terms is discharged from any further obligations. As a rule, such performance
entitles him to receive the other party’s performance.
30

Exact and complete performance by both the parties puts an end to the contract. In
expecting exact performance, the courts mean that, performance must match contractual
obligations. In requiring a contract to be complete, the law is merely saying that any work
undertaken must be carried out to the end of the obligations.

A contract should be performed at the time specified and at the place agreed upon.
When this has been accomplished, the parties are discharged automatically and the contract is
discharged eventually. There are, however, many other ways in which a discharge may be
brought about. For example, it may result from an excuse for non-performance. In certain
cases attempted performance may also operate as a substitute for actual performance, and
can result in complete discharge of the contract.

3.2 Performance of Contract

The term ‘Performance of contract’ means that both, the promisor, and the promisee
have fulfilled their respective obligations, which the contract placed upon them. For
instance, A visits a stationery shop to buy a calculator. The shopkeeper delivers the calculator
and A pays the price. The contract is said to have been discharged by mutual performance.

Section 27 of Indian contract Act says thatPromises bind the representatives of the
promisor in case of the death of the latter before performance, unless a contrary intention
appears in the contract.

Thus, it is the primary duty of each contracting party to either perform or offer to perform
its promise. For performance to be effective, the courts expect it to be exact and complete,
i.e., the same must match the contractual obligations. However, where under the provisions of
the Contract Act or any other law, the performance can be dispensed with or excused, a party
is absolved from such a responsibility.

Example: A promises to deliver goods to B on a certain day on payment of Rs

1,000. Aexpires before the contracted date. A‘s representatives are bound to deliver the goods
to B, and B is bound to pay Rs 1,000 to A‘s representatives.

Types of Performance
Ø Actual Performance: When a promisor to a contract has fulfilled his obligation in
accordance with the terms of the contract, the promise is said to have been actually
performed. Actual performance gives a discharge to the contract and the liability of the
 31

promisor ceases to exist. For example, A agrees to deliver10 bags of cement at B’s
factory and B promises to pay the price on delivery. A delivers the cement on the due date
and B makes the payment. This is actual performance. Actual performance can further
be subdivided into substantial performance, and partial Performance.

Ø Partial Performance: This is where one of the parties has performed the contract, but
not completely, and the other side has shown willingness to accept the part performed.
Partial performance may occur where there is shortfall on delivery of goods or where a
service is not fully carried out. There is a thin line of difference between substantial and
partial performance. The two following points would help in distinguishing the two types of
performance.

Ø Substantial Performance: This is where the work agreed upon is almost finished. The
court then orders that the money must be paid, but deducts the amount needed to correct
minor existing defect. Substantial performance is applicable only if the contract is not an
entire contract and is severable. The rationale behind creating the doctrine of substantial
performance is to avoid the possibility of one party evading his liabilities by claiming that
the contract has not been completely performed. However, what is deemed to be substantial
performance is a question of fact to be decided in both the case. It will largely depend on
what remains undone and its value in comparison to the contract as a whole.

Ø Partial performance must be accepted by the other party: In other words, the party
who is at the receiving end of the partial performance has a genuine choice whether to
accept or reject. Substantial performance, on the other hand, is legally enforceable against
the other party.

Ø Payment is made on a different basis from that for substantial performance: It is

made on quantum merit, which literally means as much as is deserved. So, for example,
if half of the work has been completed, half of the negotiated money would be payable. In
case of substantial performance, the party that has performed can recover the amount
appropriate to what has been done under the contract, provided that the contract is not an
entire contract. The price is thus, often payable in such circumstances, and the sum
deducted represents the cost of repairing defective workmanship.

Ø Attempted Performance: When the performance has become due, it is sometimes

sufficient if the promisor offers to perform his obligation under the contract. This offer is
known as attempted performance or more commonly as tender. Thus, tender is an offer
of performance, which of course, complies with the terms of the contract. If goods are
32

tendered by the seller but refused by the buyer, the seller is discharged from further
liability, given that the goods are in accordance with the contract as to quantity and quality,
and he may sue the buyer for breach of contract if he so desires.’

3.3 Privity of Contracts

The term ‘privity of consideration’ means stranger to the consideration, or consideration

given by any other person other than the promisee. A promise is enforceable so long as there
is some consideration for it, and it is immaterial whether it is furnished by the promisee or other
person even a stranger.

The term ‘privity of contract’ means stranger to a contract. As per the doctrine of privity of
contract, a person, who is not a party to the contract, cannot sue for carrying out the promise
made by the parties to the contract.

Example: In Dunlop Pneumatic Tyre Co. Ltd. vs. Selfridge & Co. (1915), AC. 847, S
bought tyres from the Dunlop Rubber Co. and sold them to D, a sub-dealer who agreed with S
not to sell below Dunlop’s list price and to pay to Dunlop £5 as damages on every tyre undersold.
D sold two tyres at less than the list price and thereupon Dunlop sued him for breach. Held,
Dunlop cannot maintain the suit as it was a stranger to the contract.

3.4 Exceptions to the Rule of Stranger to Contract

a. In case of Trusts: When a trust is created, the beneficiary can enforce his rights given to
him under the trust, even though he was not a party to the contract between the settler
and the trustees.

b. In case of marriage settlement, partition or other family arrangements: Where a

provision is made in a partition or family arrangement for the benefit of any member of the
family, such a member may sue to enforce the agreement even though he is not a party
to the agreement.

c. Acknowledgement of payment: Where the promisor acknowledges payment to a third

party, either by conduct or otherwise, the latter can sue.

d. In case of agency: A contract entered into by an agent acting within the scope of his
authority, can be enforced by the principal.
 33

e. In case of assignment of rights under a contract: The assignee can enforce the benefits
of the contract.

f. Agreements relating to the land: When any person purchases such land with the notice
of rights and obligations of the owner, then he shall be bound by those rights and obligations
although he was not a party to the agreement.

3.5 Assignment of Contract

An assignment of contract occurs when one party to an existing contract (the “assignor”)
hands off the contract’s obligations and benefits to another party (the “assignee”). Ideally, the
assignor wants the assignee to step into his shoes and assume all of his contractual obligations
and rights. In order to do that, the other party to the contract must be properly notified. Read on
to learn how assignments work, including how to keep an assignment option out of your
[Link] are three steps to follow if you want to assign a contract.

a) Step 1: Examine the contract for any limitations or prohibitions. Check for anti-
assignment clauses. Sometimes the prohibition is not a separate clause but is included in
another provision. Look for language that states, “This agreement may not be assigned.”
If you find such language, you may not be able to assign the agreement unless the other
party consents.

b) Step 2: Execute an assignment. If you are not prohibited from assigning the contract,
prepare and enter into an assignment of contract: an agreement that transfers the parties’
rights and obligations.

c) Step 3: Provide notice to the obligor. After you have assigned your contract rights to
the assignee, you should provide notice to the other original contracting party (referred to
as the obligor). This notice will effectively relieve you of any liability under the contract,
unless the contract says differently (for instance, if the contracts says that the assignor
guarantees the performance of the assigned contract or the contract prohibits an
assignment) or the assignment is prohibited by law.

3.6 By whom the Contract must be performed

1) By the promisor himself: In the case of a contract involving personal skill, taste or
credit, e.g., a contract to paint a picture, a contract of agency or service; the promisor
must himself fulfill the contract. Section 40 states thus, “if it appears from the nature of
34

the case that it was the intention of the parties to any contract that any promise contained
in it should be fulfill by the promisor himself, such promise must be performed by the
promisor.”

Illustration: A promises to paint a picture for B. A must fulfill this promise personally
[Illustration (b) to Section 40].

2) By the promisor or his agent: In the case of a contract of impersonal nature; e.g., a
contract of sale of goods or a contract to lend a sum of money; the promisor himself or his
agent mat fulfill the contract [Section 40 Clause (2)].

Illustration: A promises to pay B a sum of money. A may fulfill this promise, either by
personally paying the money to B or by causing it to be paid to B by another [illustration (a) to
Section 401.

3) By the legal representatives: In case of the death of the promisor before performance,
the liability of performance falls on his legal representatives, unless a contrary intention
appears from the contract [Section 37]. Thus, in the case of contracts involving personal
skill, the heir or legal representatives of a deceased promisor are not bound to perform
the contract. Such contracts come to an end on the death of the [Link] rule of law
is: “a personal cause of action comes to an end with the death of the person concerned.”
In the case of contracts not involving personal considerations, the legal representatives
are bound to fulfil the contract. But their liability is limited to the estate of the deceased
which has come to their hands, in case of breach of contract. They are not personally
liable.

Illustrations

(a) A promises to paint a picture for B by a certain day at a certain price. A dies before the
[Link] contract cannot be enforced either by A’s representatives or by B.

(b) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies
before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay
the Rs. 1,000 to A’s representatives.

4) Performance by a third person: Section 41 lays down that if a promisee accepts

perfor-mance of the promise from a third person, he cannot afterwards enforce it against
the promisor. Thus, where a promisee accepted lesser amount from a third party in full
 35

satisfaction of his claim, it was held that he cannot enforce the promisee against the
promisor (LalaKapurchandvs Mir NawabAzamjah). Notice that under this Section
performance of the promise by a stranger, once accepted by the promisee, discharges
the promisor, although the latter has neither authorized nor ratified the act of the third
party.

3.7 Time and place of performance of Contract

So far as the time and place of performance of a contract is concerned, it must be agreed
upon by the parties to the contract themselves. Sections 46 to 50 lay down rules in this regard.

Rules required for Time and Place of Performance of Contract

1. Performance within a reasonable time (Sec. 46): Sec. 46 states that “Whereby the
contract, a promisor is to perform his promise without application by the promisee and no
time for performance is specified, the engagement must be performed within a reasonable
time.” What is a “reasonable time?” is a question of fact. It depends upon the circumstances
of the case, the usage of trade or the intention of the parties at the time of entering into
the contract.

Example: Supply of order for books by a bookseller to the publisher given in July should
be performed within 4-5 days, it being the time for the demand of books. If such order is given
in May, it may take 20-30 days or so, as the season for books will start in July.

2. Specified time and place for performance (Sec. 47): When a promise is to be performed
on a certain day, the promisor may undertake to perform it without application by the
promisee. Under Sec 47, it has been provided that “In such a case the promisor may
perform the promise at any time during the usual hours of business on such day and at
the place at which the promise ought to be performed.”

Example: X promises to deliver 10 scooters at Y’s go down on April 1. On that day X

brings the scooters but after 8.00 p.m. The delivery is not taken as the go down was closed.
Here it was held that X has not performed his promise.

3. Performance on a certain day (Sec. 48): When a promise is to be performed on a

certain day, the promisor may undertake to perform it after the application by the promisee
to that effect. In such a case, it is the duty of the promisee to apply for performance at a
proper place and within usual hours of business. (Sec. 48)
36

4. Promise when no place is fixed and without application (Sec. 49): When a promise
is to be performed without application by the promisee, and no place is fixed for the
performance of it, it is the duty of the promisor to apply to the promisee to appoint a
reasonable place for the performance of the promise and to perform it at such place.
(Sec. 49).

Example: A cycle company X undertakes to deliver 100 cycles to Y on a fixed day X

should ask Y to appoint a reasonable place for the delivery of cycles and must deliver the cycles
to Y at that place.

5. Performance as prescribed by the promisee (Sec. 50): As per Section 50, “The
performance of any promisee may be made in any manner or at any time, which the
promisee prescribes.”

Example:X owes Y Rs. 10,000. Y accepts X’s car valuing Rs. 6,000 in reduction of the
debt. The delivery of car will amount to a part- payment of the debt.

3.8 Performance of Reciprocal Promises

In a contract, the promisor and the promisee both undertake certain obligations towards
each other. These obligations can also be in the form of a reciprocal promise or a promise in
exchange of a promise. The Indian Contract Act, 1872, provides for the law on reciprocal promises
in Sections 51-58. We will look at the provisions of each of these sections in detail.

Ø Sec. 51 states, when a contract consists of reciprocal promises to be performed

simultaneously, no promisor need to perform his promise unless the promise is ready and
willing to perform his reciprocal promise.

Ø According-to Sec. 52, where the order in which reciprocal promises are to be performed,
is expressly fixed by the contract, they must be performed in that order, and where the
order is not expressly fixed by the contract, they must be fixed in the order which the
nature of the transaction requires.

Ø When a party to the contract prevents the other from performing the promises the contract
becomes voidable on the option of the party so prevented and he is entitled to compensation
from the other party for any loss which he may sustain in consequence of the non-
performance of the contract. (Sec. 53)
 37

Ø According to Sec. 54, when a contract consists of such reciprocal promises that one of
them cannot be performed till the other has been performed and the promisor of the
promise last mentioned, fails to perform it, he cannot claim the performance of the reciprocal
promise.

Ø In such a case, he must make compensation to the other party for any loss which such
other party may sustain by the non-performance of the contract.

Ø If time is the essence in a mutual contract and the promise is not performed at the time
prescribed by the promisee, the other party may assume that the contract is terminated.
(Sec. 55)

Ø Any reciprocal agreement to do an act, performance of which is impossible since beginning,

is void under Sec. 56.

Ø Sec. 57 says, when a contract consists of two parts-one part is legal and the other illegal
and the legal part is separate from the illegal one, the first act of promise is a contract,
and therefore, enforceable, but the second is void agreement being illegal.

Ø In the case of alternate promise, one branch of it being legal and the other illegal, the
legal branch alone can be enforced. (Sec. 58)

3.9 Contract need not be performed

The circumstances under which contracts need not be performed are as follows:

i. If parties to a contract agree to ‘Novation,’ ‘Rescission’ or ‘Alteration’; the original contract

need out be performed (Section 62). In such cases the original contract disappears and is
substituted by a new contract.

ii. If parties to a contract agree to dispense with or remit performance of promise either
wholly or in part, the original contract stands discharged (Sec. 63). This is technically
called as ‘Remission.’

iii. When a person, at whose option a contract is voidable, rescinds it, the other party there
to need not perform his promise. (Sec. 64).

iv. If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused for the non-performance of the
contract (Sec.67). For instance, A contracts with B to repair B’s house. B neglects or
38

refuses to point out to A the places at which his house requires repair. A is excused for the
non-performance of the contract, if it is caused by such neglect or refusal.

3.10 Summary

A contract places a legal obligation upon the contracting parties to perform their mutual
promises, and it carries on until the discharge or termination of the contract. The most natural
and usual mode of discharging a contract is to perform it. A person who performs a contract in
accordance with its terms is discharged from any further obligations. As a rule, such performance
entitles him to receive the other party’s performance.

Exact and complete performance by both the parties puts an end to the contract. In
expecting exact performance, the courts mean that, performance must match contractual
obligations. In requiring a contract to be complete, the law is merely saying that any work
undertaken must be carried out to the end of the obligations.

3.11 Key Words

Assignments

Performance

Privity

3.12 Review Questions

1. What do you understand about Performance of Contract?

2. Bring out the different types of Performance of Contract.

3. Write a note on Privity of Contracts.

4. Point out the Exceptions to the rule of Stranger to Contract.

5. Give a brief account on Assignment of Contract.

6. Under what circumstances, does a contract need not be performed?

 39

LESSON – 4
DISCHARGE OF CONTRACT
Learning Objectives

After reading this Lesson, you will be able to:

 Discuss modes of breach of contract

 Outlne the remedial measures to be taken into account for the breach of contract.

Structure
4.1 Introduction
4.2 Modes of Discharge of Contract
4.3 Remedies for Breach of Contract
4.4 Summary
4.5 Key Words
4.6 Review Questions

4.1 Introduction
The discharge of a contract means that the obligations of the contract come to an end.
When discharge occurs, all duties which arose under the contract are terminated. This chapter
discusses the various methods of discharging a contract and the consequences of each. It
considers how a contract can be discharged through agreement between the parties; the
elements necessary for a contract to be discharged by performance including the rules relating
to partial performance of a contract, and the meaning and effect of the frustration of a contract.

In other words, Discharge of a contract implies termination of contractual obligations.

This is because when the parties originally entered into the contract, the rights and duties in
terms of contractual obligations were set up. Consequently when those rights and duties are
put out then the contract is said to have been discharged. Once a contract stands discharged,
parties to it are no more liable even though the obligations under the contract remain incomplete.

Definition of Discharge of Contract

Discharge of contract defines termination of the contractual relations between the parties
to a contract. A contract is said to be discharged when the rights and obligations of the contracting
parties are extinguished and their relationship comes to an end.
40

4.2 Modes of Discharge of Contract

A contract may be discharged in the following ways:

1) By performance of contract.

2) By agreement.

3) By lapse of time.

4) By operation of law.

5) By impossibility of performance.

6) By committing breach of contract.

i. Discharge by Performance of Contract: Performance of a contract is one of the most

usual ways of discharge of a contract when the parties to the contract fulfill their obligations
under a contract, the contract is said to have been performed and the contract comes to
an end. Performance of contract may be classified as:

 Actual Performance: A contract is said to be discharged by actual performance when

the parties to the contract perform their promise in accordance with the terms of the
contract.

 Attempted Performance or Tender: A contract is said to be discharged by attempted

performance when the promisor has made an offer of performance (i.e., a valid tender) to
the promisee but it has not been accepted by the promisee.

ii. Discharge by Agreement: As contract emerges from an agreement of both parties, it

may also be terminated by another agreement or consent of both parties. A contract can
be discharged by mutual agreement in any of the following ways:

 By novation (Substitution of a new contract): Novation means substituting a new

contract for the existing one, either between the same parties or between different parties,
the consideration mutually being the discharge of the old contract. The novation may be
of the following two types

 i.e., (i) novation involving change of parties, but the contract remaining the same (ii)
novation involving substitution of a new contract, but parties remaining the same.

 By alteration: Alteration means change in one or more of the terms of a contract with
theconsent of all the parties. If any material alterations are made in the contract, the
 41

original contract will come to an end and in its place a new contract in an altered form
comes into existence.

 By rescission: Rescission means cancellation of the contract. A contract may be rescinded

by agreement between the parties at any time before it is discharged by performance or
in some other way.

 By remission: The term ‘remission’ may be defined as the acceptance of lesser fulfillment
of the terms of the promise, e.g., acceptance of a less sum of money where more is due.

 By waiver: When both the parties, by mutual consent, agree of abandon their respective
rights, the contract need not be performed and the same is discharged. It is called waiver.
To constitute a waiver, neither an agreement nor consideration is necessary.

 By merger: It takes place when an inferior right accruing to a party under a contract
merges into a superior right accruing to the same party under the same or some other
contract, e.g., a tenant buying the house in which he is a tenant.

iii. Discharge by Lapse of Time: The Limitations Act, 1963 provides that a contract must be
performed within the period of limitation. If the contract is not performed and the promisee
fails to take any action within the period of limitation, then the contract is terminated or
discharged by lapse of time.

iv. Discharge by Operation of Law: A contract may be discharged by operation of law in

the following cases:

 Death: A contract involving the personal skill or ability of the promisor is discharged
automatically on the death of the promisor.

 Insolvency: When a person is declared insolvent, he is discharged from his liability up to

the date of his insolvency.

 Unauthorized Material Alteration: If any party makes any material alteration in the terms
of the contract without the approval of the other party, the contract comes to an end.

 Merger: Where an inferior right accruing to a party in a contract merges into the superior
rights accruing to the same party, the earlier contract is discharged.

v. Discharge by Impossibility of Performance: A contract will be discharged when the

performance of contract becomes impossible. The effects of impossibility of performance
may be of the two types, namely,
42

 Destruction of subject matter: If the subject-matter of a contract is destroyed after

making the contract, without the default of either party, the contract is discharged.

 Death or personal incapacity: The contract is discharged on the death or incapacity or

illness of a person if the performance of a contract depends on his personal skill or ability.

 Change of law: The contract is discharged if the performance of the contract becomes
impossible or unlawful due to change in law after the formation of the contract.

 Non-occurrence or non-existence of particular state of thing: Where a contract is

made on the basis of continued existence or occurrence of a particular state of things, the
contract comes to an end if the state of things ceases to exist or changes.

 Outbreak of war: The pending contracts at the time of declaration of war are either
suspended or declared as void.

vi. Discharge by Breach of Contract:A contract is said to be discharged by breach of

contract if any party to the contract refuses or fails to perform his part of the contract or by
his act makes it impossible to perform his obligation under the contract. Breach of contract
is of two kinds, namely,

 Anticipatory breach of contract: When a party to a contract refuses to perform his part
of the contract, before the due date of performance, it is known as anticipatory or
constructive breach of contract.

 Actual breach of contract: Actual breach of contract occurs in the following two ways:

 On due date of performance: If a party to a contract fails to perform his obligation at the
specified time, he is liable for its breach.

 During the course of performance: If during performance of a contract, a party to it

either fails or refuses to perform his obligation, there is said to be actual breach during
performance of the contract.

4.3 Remedies for Breach of Contract

A breach of contract occurs if any party refuses or fails to perform his part of the contract
or by his act makes it impossible to perform his obligation under the contract. A breach of
contract may arise in two ways, (a) anticipatory breach and (b) actual breach. A remedy is the
course of action available to an aggrieved party (i.e., the party not at default) for the enforcement
 43

of a right under a contract. The various remedies available to an aggrieved party are as follows:
Suit for rescission of the contract.

1) Suit for damages.

2) Suit for specific performance

3) Suit for injunction

4) Suit upon quantum meruit.

5) Restitution.

1) Rescission of the Contract: Recession of a contract means annulment of it. When all or
some of the terms of the contract are cancelled, rescission of a contract takes place.
When there is a breach of contract by one party, the aggrieved party may rescind the
contract and need not perform his part of the contract. The aggrieved party has to file a
suit for rescission. When rescission is granted, the aggrieved party is absolved form all
his obligations under the contract.

The court grants rescission in the following cases:

 Where the contract is voidable at the option of the plaintiff.

 Where the contract, is unlawful for causes not apparent on its face and the defendant
is more to blame than the plaintiff.

 The court, may, however, refuse to grant rescission, in the following cases:

 Where the plaintiff has expressly or impliedly ratified the contract; or

 Where owing to change in the circumstances of the contract, the parties cannot be
restored to their original position; or

 Where the third parties have, during the subsistence of the contract, acquired right’s
in thecontract in good faith and for value; or

 Where only a part of the contract is sought to be rescinded and such part is not
severable from the rest of the contract.

2) Suit for Damages: “Damages” are monetary compensation allowed for loss suffered by
the aggrieved party due to breach of contract. The object of awarding damages is not to
punish the party at fault but to make good the financial loss suffered by the aggrieved
party due to the breach of contract.
44

Types of Damages
 General or ordinary damages: These are the damages which are payable for the loss
arising naturally and directly, in the usual course, from the breach of contract. In a contract
for the sale of goods, the measure of ordinary damages is the difference between the
contract price and the market price of such goods on the date of breach.

 Special damages: These are the damages which are payable for the loss arising due to
some special or unusual circumstances.

 Exemplary or punitive or vindictive damages: These are the damages which are in
the nature of punishment. The court may award these damages in case of:

 Breach of contract to marry. ii) Wrongful dishonour of cheque by a banker in violation of

Section 31 of the Negotiable Instruments Act. The damages are estimated on the basis of
loss of prestige and goodwill of the customer. The rule applied in this case is that smaller
the amount of cheque, the higher shall be the damages.

 Nominal damages: These are the damages which are very small in amount. Such
damages are awarded simply to establish the right of the party to claim damages for the
breach of contract even though the party has suffered no loss.

 Liquidated damages and penalty: When the amount of compensation fixed by an

agreement between the parties to be paid in case of breach of contract is in the nature of
a fair and honest pre-estimation of probable damages. It is called liquidated [Link]
the amount named in the contract at the time of its formation is disproportionate to the
damages likely to accrue in the event of breach, it will be known as penalty.

Rules Regarding Determination of Damages

Section 73 of the Contract Act provides that when a contract has been broken the party
who suffers by such breach, is entitled to receive, from the party who has broken the contract.

 The ordinary damages are recoverable: The aggrieved party is entitled to receive such
damages:

 as may fairly and reasonably be considered to arise naturally from the breach; or

 as may reasonably be supposed to have been in the contemplation of both the parties at
the time of making of contract as the probable result of breach.
 45

 Remoteness of damage: Compensation shall not be granted for any remote or indirect
damage. Damages are considered to be remote if they are not the necessary or probable
consequence of breach or if they were not in the contemplation of the parties at the time
when contract wasmade. Loss of profit is not to be taken in account in estimating damages
unless otherwise agreedupon.

 Primary aim of damages: The primary aim of the law of damages for breach of contract
is to place the aggrieved party in the position which he would have occupied if the breach
had not occurred.

 Special damages, i.e., damages in the contemplation of the parties: Special damages
which do not arise naturally from the breach cannot be recovered unless these were in
the contemplation of the parties.

 Only compensation, no penalties: Damages are allowed by way of compensation for

the loss suffered and not by way of punishment except in the case of (a) breach of promise
to marry, and (b) wrongful dishonour of a cheque by a bank.

 Nominal damages: What the aggrieved party has not suffered any loss, the court may
allow him nominal damages, in its discretion.

 Mental pain and suffering: Damages are not allowed for injured feeling or mental pain
except where (i) the breach was reckless, (ii) it caused bodily harm, and (iii) the defaulting
party wasaware that breach would cause mental suffering.

 Duty to mitigate the loss: It is the duty of the injured party to take all reasonable steps to
mitigate the loss caused by the breach. He cannot seek damages for loss which are not
due to breach but due to his own neglect to mitigate the loss.

 Difficulty of assessment: Any difficulty in assessing damages shall not prevent the
injured party from recovering them. The court must do its best to determine the amount of
damages.

 Cost of decree: The aggrieved party can recover the cost of getting the decree along
with the damages.

3) Suit For Specific Performance: This means demanding the court’s direction to the
defaulting party to carry out the promise according to the terms of the contract. Specific
performance of the contract may be directed by the court in the following circumstances:

 Where actual damages arising from breach are not measurable.

46

 Where monetary compensation is not an adequate remedy.

 Where the damages are considered as an adequate remedy;

 Where the contract is of personal nature, e.g. contract to marry;

 Where the contract is made by a company beyond its powers as laid down in
itsMemorandum of Association;

 Where the court cannot supervise the performance of the contract;

 Where one of the parties is a minor;

 Where the contract is inequitable to either party.

4) Suit for Injunction: An injunction is an order of the court requiring a person to refrain
from doing some act which has been the subject matter of contract. The power to grant
injunction is discretionary and it may be granted temporarily or for an indefinite period.

5) Suit Upon Quantum Meruit:The word ‘quantum meruit’ literally means “as much as is
earned” or “according to the quantity of work done”. When a person has begun the work
and before he could complete it, if the other party terminates the contract or does something
which makes it impossible for the other party to complete the contract, he can claim for
the work done under the contract.

6) Restitution:Restitution means ‘an act of restoration’. If a person has been unjustly enriched
at the expense of the other party, he should restore the benefit received or compensate
the other party.

4.4 Summary

The discharge of a contract means that the obligations of the contract come to an end.
When discharge occurs, all duties which arose under the contract are terminated. This chapter
discusses the various methods of discharging a contract and the consequences of each. It
considers how a contract can be discharged through agreement between the parties; the
elements necessary for a contract to be discharged by performance including the rules relating
to partial performance of a contract, and the meaning and effect of the frustration of a contract.
 47

4.5 Key Words

Agreement

Breach of Contract

Operation of Law

4.6 Review Questions

1. What is Discharge of Contract?

2. Explain the different of Discharge of Contract. Give suitable examples in each and
every mode.

3. Evaluate the ways in which can a contract be breached by Agreement.

4. Outline elaborately the remedies for Breach of Contract.

48

LESSON – 5
SALE OF GOODS ACT
Learning Objectives

After completing this lesson, you must be able to

 List out the elements of contract of sale

 Differentiate sale and agreement to sell

 Explain the differences between sale and bailment

 Outline the significance of transfer of property

 List out the rights of unpaid seller

Structure
5.1 Introduction

5.2 Definition of Sale

5.3 Contract of Sale

5.4 Differences between sale and agreement to sell

5.5 Differences between sale and a contract form

5.6 Differences between sale and bailment

5.7 Differences between sale and Mortgage of Goods

5.8 Differences between sale and Hire Purchase

5.9 Condition and Warranty

5.10 Passing of Property of Goods

5.11 Rights of Unpaid Seller

5.12 Summary

5.13 Key Words

5.14 Review Questions

 49

5.1 Introduction

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
removed. Now, 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.

5.2 Definition of Sale

An agreement by which one of the contracting parties, called the seller, gives a thing and
passes the title to it, in exchange for a certain price in current money, to the other party, who is
called the buyer or purchaser, who, on his part, agrees to pay such price.

5.3 Contract of Sale

A ‘Contract of Sale’ is a type of contract whereby one party (seller) either transfers the
ownership of goods or agrees to transfer it for money to the other party (buyer). A contract of
sale can be a sale or an agreement to sell. In a contract of sale, when there is an actual sale of
goods, it is known as Sale whereas if there is an intention to sell the goods at a certain time in
future or some conditions are satisfied, it is called an Agreement to sell.

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

 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)].

 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)].
50

 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.

 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.

 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.

5.4 Differences between Sale and Agreement to Sell

Both sale and agreement to sell are types of contract, wherein the former is an executed
contract whereas the latter represents an executory contract. Many law students get confused
amidst these two terms, but these are not one and the same. Here, in the article given below,
we’ve explained the difference between sale and agreement to sell, check it out.

Table 5.1: Differences between Sale and Agreement to Sell

Basis for Sale Agreement to Sell

Comparison

Meaning When in a contract of sale, When in a contract of sale

the exchange of goods for the parties to contract
money consideration takes agree to exchange the
place immediately, it is known goods for a price at a
as Sale. future specified date is
known as an Agreement to
Sell.

Nature Absolute Conditional

Type of Contract Executed Contract Executory Contract

 51

Transfer of risk Yes No

Title In sale, the title of goods In an agreement to sell,

transfers to the buyer with the title of goods remains
the transfer of goods. with the seller as there
is no transfer of goods.

Right to sell Buyer Seller

Consequences of Responsibility of buyer Responsibility of seller

subsequent loss or
damage to the goods

Tax VAT is charged at the

time of sale. No tax is levied.

Suit for breach of The buyer can claim damages Here the buyer has the
contract by the seller from the seller and proprietary right to claim damages
remedy from the party to only.
whom the goods are sold.

Right of unpaid seller Right to sue for the price. Right to sue for
damages.

5.5 Differences between Sale and a Contract Form

Sales and contract form have a number of differences on their own. They are differentiated
in some aspects which are detailed below:

 Sales is an agreement by which, goods are transferred from seller to buyer at some given
price whereas contract form is an application in which, offeror and offeree are asked to fill
up their details before executing the contract.

 In sale, there must be terms and conditions to be fulfilled by both buyer and seller but in
contract form, only details of offeror and offeree will be given which they have to fill up. So
that, the next phase of execution will be possible.

 In sale, price is definite, upon which agreement will be made on the other hand contract
firm will have only details of contractor and contractee.
52

5.6 Differences between Sale and Bailment

Sale and Bailment are two different types of contracts. A contract of sale is a straight
forward contract where a person may buy goods, services or property from a seller in exchange
for remuneration, usually in the form of money. This amount is decided between the buyer and
seller as appropriate for the value of goods, services or property.

Bailment, on the other hand is slightly different than sale. The definition of ‘Bailment’
states that it is “the contractual transfer of possession of assets or property for a specific objective.
In bailment, the deliverer of the asset is the bailor, and the receiver is the bailee. In a bailment
transaction, ownership is never transfered, and the bailor is generally not entitled to use the
property while it’s in possession of the bailee. In these ways, bailment differs from gifting and
leasing.”

“Bailment is a legal relationship between two parties, whereby the owner retains full rights
to the assets or property but the possesses the property. For example, when a bank holds a
borrower’s asset as collateral for a secured loan, this is a form of bailment. In this case, the
bank is the bailee and the borrower is the bailor.”

Essentially, in a bailment contract, the bailor gives the goods, assets or property to the
bailee for a specific amount of time. However, the goods, assets or property still belongs to the
bailor. The bailee just has the possession of the goods for the time being. The bailee may not
however use the asset any way he likes, it must be used as the bailor instructed. The bailor may
also give the assets to the bailee for safekeeping. After the agreed upon time is passed, the
bailee must return the procession of the goods, assets or property back to the bailor.

Table 5.2: Differences between Sale and Bailment

Bases Sale Bailment

Possession Possession of goods Possession of goods is transferred

is transferred to the buyer. to the bailee.

Ownership Ownership is transferred Ownership resides with the bailor.

to the buyer.
 53

Usage The buyer may use the A bailee can use the goods only
goods in any way he likes. according to the directions of the
bailor.

Return There is no return of goods The goods are returned after the
from the buyer to the seller, specified time or accomplishment of
unless there is breach. the purpose.

Consideration The consideration is the The consideration is an

price in terms of money. undertaking to return the goods
after the accomplishment of the
purpose.

Charges The question of any The bailor has to repay the charges
charges to be paid by which the bailee has incurred in
the seller to buyer or vise keeping the goods safe.
versa does not arise.

Duration Final. Once the sale is Temporary. The bailee has to return
transacted, the seller keeps the goods to the bailor once the
the goods until he decides specified time is passed.
to sell them to another.

5.7 Differences between Sale and Time Purchase (or) Mortgage of

Goods

When one is looking in to buy property, there are two main ways that they can pay for it.
One is direct sale, where the buyer would pay the seller the whole amount of the property
outright and take possession of the property. Another is a mortgage, where essentially the
mortgage lender will pay the seller, and the buyer would come to a sort of agreement to pay
back the lender over a number of years.

It also defines mortgage as “A debt instrument that is secured by the collateral of specified
real estate property and that the borrower is obliged to pay back with a predetermined set of
payments. Mortgages are used by individuals and businesses to make large purchases of real
estate without paying the entire value of the purchase up front.”
54

Or rather in simpler terms as “In a residential mortgage, a home buyer pledges his or her
house to the bank. The bank has a claim on the house should the home buyer default on paying
the mortgage. In the case of a foreclosure, the bank may evict the home’s tenants and sell the
house, using the income from the sale to clear the mortgage debt.”

Essentially, in a mortgage, the lender, which is most cases is the bank, actually owns the
home. The lender purchases property and buyer buys the property from the lender by paying
them monthly installments to cover the principal amount, as well as interest on the principal. In
case, the buyer cannot pay those installments, for any reason, the lender has the right to evict
the buyer from the property and to foreclose the property to cover its losses.

5.8 Differences between Sale and Hire Purchase Agreement

a. In a sale, property in the goods is transferred to the buyer immediately at the time of
contract, whereas in hire-purchase, the property in the goods passes to the hirer upon
payment of the last installment.

b. In a sale, the position of the buyer is that of the owner of the goods but in hire purchase,
the position of the hirer is that of a bailee till he pays the last installment.

c. In the case of a sale, the buyer cannot terminate the contract and is bound to pay the
price of the goods. On the other hand, in the case of hire-purchase, the hirer may, if he so
likes, terminate the contract by returning the goods to its owner without any liability to pay
the remaining installments.

d. In the case of a sale, the seller takes the risk of any loss resulting from the insolvency of
the buyer. In the case of hire purchase, the owner takes no such risk, for if the hirer fails
to pay an installment, the owner has the right to take back the goods.

e. In the case of a sale, the buyer can pass a good title to a bonafide purchaser from him but
in a hire-purchase, the hirer cannot pass any title even to a bonafide purchaser.

f. In a sale, sales tax is levied at the time of the contract whereas in a hire-purchase, sales
tax is not leviable until it eventually ripens into a sale

5.9 Condition and Warranty

It is usual for both seller and buyer to make representations to each other at the time of
entering into a contract of sale. Some of these representations are mere opinions which do not
form a part of contract of sale whereas some of them may become a part of contract of sale.
 55

Representations which become a part of contract of sale are termed as stipulation which may
rank as condition and warranty e.g. a mere commendation of his goods by the seller doesn’t
become a stipulation and gives no right of action to the buyer against the seller as such
representations are mere opinion on the part of the seller.

But where the seller assumes to assert a fact of which the buyer is ignorant, it will amount
to a stipulation forming an essential part of the contract of sale.

Meaning of Conditions [Section 12(2)]

A condition is a stipulation

1. Which is essential to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty [Section 12(3)]

A warranty is a stipulation

1. Which is collateral to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to claim damages but not a
right to reject goods and to terminate the contract.

Table 5.3: Differences between Condition and Warranty

Basis for Condition Warranty

Comparison

Meaning A requirement or event A warranty is an assurance

that should be performed A warranty is an assurance
before the completion xbuyer about the state of the
of another action, is product, that the prescribed
known as Condition. facts are genuine.

Defined in Section 12 (2) of Indian Section 12 (3) of Indian Sale

Sale of Goods Act, 1930. of Goods Act, 1930.
56

What is it? It is directly associated It is a subsidiary provision

with the objective of related to the object of the
the contract. contract.

Result of breach Termination of contract. Claim damages for the

breach.

Violation Violation of condition Violation of warranty does not

can be regarded as a affect the condition.
violation of the warranty.

Remedy available to Repudiate the contract as Claim damages only.

the aggrieved party well as claim damages.
on breach

Conditions to be treated as Warranty[Section 13]

In the following three cases a breach of a condition is treated as a breach of a warranty:

1. Where the buyer waives conditions; once the buyer waives conditions,he cannot insist on
its fulfillment e.g. accepting defective goods or beyond the stipulated time amount to
waiving conditions.

2. Where the buyer elects to treat breach of the condition as a breach of warranty;e.g.
where he claims damages instead of repudiating the contract.

3. Where the contract is not severable and the buyer has accepted the goods or part thereof,
the breach of any condition by the seller can only be treated as breach of warranty.
Itcannot be treated as a ground for rejecting the goods unless otherwise specified in the
contract. Thus, where the buyer after purchasing the goods finds that some condition is
not fulfilled,he cannot reject the [Link] has to retain the goods entitling him to claim
damages.

Express and Implied Conditions and Warranties

In a contract of sale of goods,conditions and warranties may be express or implied.

1. Express Conditions and Warranties:These are expressly provided in the [Link]

example,a buyer desires to buy a Sony TV Model No. [Link],model no. is an express
[Link] an advertisement for Khaitan fans,guatantee for 5 years is an express warranty.
 57

2. Implied Conditions and Warranties: These are implied by law in every contract of sale
of goods unless a contrary intention appears from the terms of the contract. The various
implied conditions and warranties have been shown below:

Implied Conditions

1. Conditions as to title [Section 14 (a)]: There is an implied condition on the part of the
seller that

· In the case of a sale,he has a right to sell the goods,and

· In the case of an agreement to sell,he will have a right to sell the goods at the time when
the property is to pass.

2. Condition in case of sale by description [Section 15]: Where there is a contract of

sale of goods by description, there is an implied condition that the goods shall correspond with
description. The main idea is that the goods supplied must be same as were described by the
seller. Sale of goods by description includes many situations as under:

 Where the buyer has never seen the goods and buys them only on the basis of description
given by the seller.

 Where the buyer has seen the goods but he buys them only on the basis of description
given by the seller.

 Where the method of packing has been described.

3. Condition in case of sale by sample [Section 17]: A contract of sale is a contract for
sale by sample when there is a term in the contract, express or implied,to that [Link] sale
by sample is subject to the following three conditions:

 The goods must correspond with the sample in quality.

 The buyer must have a reasonable opportunity of comparing the bulk with the sample.

 The goods must be free from any defect which renders them unmerchantable and which
would not be apparent on reasonable examination of the [Link] defects are called
latent defects and are discovered when the goods are put to use.

4. Condition in case of sale by description and sample [Section 15]: If the sale is by
sample as well as by description, the goods must correspond with the sample as well as the
description.
58

5. Condition as to quality or fitness [Section 16(1)]: There is no implied condition as to

the quality or fitness for any particular purpose of goods supplied under a contract of [Link]
other words,the buyer must satisfy himself about the quality as well as the suitability of the
goods.

Exception to this rule:There is an implied condition that the goods shall be reasonably
fit for a particular purpose described if the following three conditions are satisfied:

 The particular for which goods are required must have been disclosed (expressly or
impliedly) by the buyer to the seller.

 The buyer must have relied upon the seller’s skill or judgement.

 The seller’s business must be to sell such goods.

6. Condition as to merchantable quality [Section 16(2)]: 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 merchantable [Link] expression ‘merchantable quality’ means
that the quality and condition of the goods must be such that a man of ordinary prudence would
accept them as the goods of that [Link] must be free from any latent or hidden
defects.

7. Condition as to wholesomeness: In case of eatables or provisions or foodstuffs,there

is an implied condition as to [Link] as to wholesomeness means that the
goods shall be fit for human consumption.

8. Conditions implied by custom [Section 16(3)]: Condition as to quality or fitness for

a particular purpose may be annexed by the usage of trade.

Implied warranties

a)Warranty as to quiet possession [Section14(b)]: There is an implied warranty that

the buyer shall have and enjoy quiet possession of the [Link] reach of this warranty gives
buyer a right to claim damages from the seller.

b)Warranty of freedom from encumbrances [Section 14(c)]: There is an implied

warranty that the goods are free from any charge or encumbrance in favour of any third person
if the buyer is not aware of such charge or [Link] breach of this warranty gives
buyer a right to claim damages from the seller.
 59

5.10 Passing of Property of Goods

Passing of property implies transfer of ownership and not the physical possession of
[Link] example,where a principal sends goods to his agent,he merely transfers the physical
possession and not the ownership of [Link],the principal is the owner of the goods but is
not having possession of goods and the agent is having possession of goods but us not the
owner.

Significance of Transfer of Property

The time of transfer of ownership of goods decides various rights and liabilities of the
seller and the [Link],it becomes very important to know the exact time of transfer of
ownership of goods from seller to buyer to answer the following questions:

 It is the owner who has to bear the risk and not the person who merely has the possession.

 It is the owner who can take action and not the person who merely has the possession.

 The seller can sue for the price only if the ownership of goods has been transferred to the
buyer.

 The Official Receiver or Assignee can take the possession of of goods from seller only if
the ownership of goods has been transferred to the buyer.

 The official receiver or assignee can take the possession of goods from buyer onlu if the
ownership of goods has not been transferred to the buyer.

Rules relating to Passing of Property/Transfer of Ownership from seller to buyer

For the purposes of ascertaining the time at which the ownership is transferred from
seller to the buyer, the goods have been classified into the following three categories:

 Specific or ascertained goods

 Specific goods mean goods identified and agreed upon at the time when a contract of
sale is made.[Section 2(14)]

 Unascertained goods

 Goods sent ‘on approval’ or ‘on sale on return’ basis.

60

Reasons for Transfer of Property in Goods

The property in the goods is said, to be transferred from the seller to the buyer when the
latter acquires the proprietary rights over the goods and the obligations linked thereto. ‘Property
in Goods’ which means the ownership of goods, is different from ‘ possession of goods’ which
means the physical custody or control of the goods.

The transfer of property in the goods from the seller to the buyer is the essence of a
contract of sale. Therefore the moment when the property in goods passes from the seller to
the buyer is significant for following reasons:

a. Ownership: The moment the property in goods passes, the seller ceases to be their
owner and the buyer acquires the ownership. The buyer can exercise the proprietary
rights over the goods. For example, the buyer may sue the seller for non-delivery of the
goods or when the seller has resold the goods, etc.

b. Risk follows ownership: The general rule is that the risk follows the ownership,
irrespective of whether the delivery has been made or not. If the goods are damaged or
destroyed, the loss shall be borne by the person who was the owner of the goods at the
time of damage or destruction. Thus the risk of loss prima facie is in the person in whom
the property is.

c. Action Against Third parties: When the goods are in any way damaged or destroyed by
the action of third parties, it is only the owner of the goods who can take action against
them.

d. Suit for Price: The seller can sue the buyer for the price, unless otherwise agreed, only
after the gods have become the property of the buyer.

e. Insolvency:- In the event of insolvency of either the seller or the buyer, the question
whether the goods can be taken over by the Official Receiver or Assignee, will depend on
whether the property in goods is with the party who has become insolvent.
 61

Essentials for Transfer of Property

The two essentials requirements for transfer of property in the goods are:

1. Goods must be ascertained: Unless the goods are ascertained, they (or the property
therein) cannot pass from the seller to the buyer. Thus, where there is a contract for the
sale of unascertained goods, no property in the goods is transferred to the buyer unless
and until the goods are ascertained

2. Intention to PASS Property in Goods must be there: In a sale of specific or ascertained

goods the property in them is transferred to the buyer at such time as the parties to the
contract intend it to be regard shall be had to the terms of the contract, the conduct of the
parties and the circumstances of the case.

5.12 Rights of Unpaid Seller

Meaning of an Unpaid Seller [Sec 45(1)(2)]

The seller of goods is deemed to be an ‘unpaid seller’-

1. When the whole of the price has not been paid or tendered

2. When a bill of exchange or other negotiable instrument (such as cheque) has been
received as conditional payment,and it has been dishonoured [Section 45(1)].

3. The term ‘seller’includes any person who is in the position of a seller(for instance,an
agent of the sellerto whom the bill of lading has been endorsed,or a consignor or
agent who has himself paid,or is directly responsible for the price) [Section 4592)].

The rights of an unpaid seller can broadly be classified under the following two categories:

 Rights against the goods

 Rights against the buyer personally

62

The various rights of an unpaid seller have been shown in Figure given below.

Rights of an Unpaid Seller

Against goods Against the buyer personally

When the Suit for Suit for Suit for

Where the interest
property in goods Price damages
property in goods
has passed in the has not passed to
buyer the buyer

Right of Right of Right of Withholding Lien Stoppage Resale

lien stoppage resale delivery in transit
in transit

I Rights against the goods where the property in the goods has passed to the buyer

a) Right of Lien [Section 47, 48 and 49]: The right of lien means the right to retain the
possession of the goods until the full price is received.

Three circumstance under which right of lien can be exercised [Section 47(1)]

1. Where the goods have been sold without any stipulation to credit;

2. Where the goods have been sold on credit,but the term of credit has expired;

3. Where the buyer becomes insolvent.

Other provisions regarding right of lien [Sections 47(2), 48, 49(2)]

1. The seller may exercise his right of lien,even if he possesses the goods as agent or
bailee for buyer[Section 47(2)]

2. Where an unpaid seller has made part delivery of the goods,he may exercise his right of
lien on the remainder,unless such part delivery has been made under such circumstances
as to show agreement to waive the lien [Section 48].

3. The seller may exercise his right of lien even though he has obtained a decree for the
price of the goods [Section 49(2)].
 63

Circumstances under which right of lien in the following cases:

1. When he delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer without reserving the right of disposal of the goods [Section 49(1)(a)].

2. When the buyer or his agent lawfully obtains possession of the goods [Section 49(1)(b)]

3. When the seller waives his right of lien[Section 49(1)(c)].

4. When the buyer disposes of the goods by sale or in any other manner with the consent of
the seller [Section 53(1)].

5. Where document of title to goods has been issued or lawfully transferres to any person
as buyer or owner of the goods and that person transfers the document by way of sale,to
a person who takes the document in good faith and for consideration.[Proviso to Section
53(1)].

b) Right of Stoppage of Goods in Transit: The right of stoppage of goods means the
right of stopping the goods while they are in transit,to regain possession and to retain them till
the full price is paid. Conditions under which right of stoppage in transit can be exercised
[Section 50]. The unpaid seller can exercise the right of stoppage in transit only if the following
conditions are fulfilled:

1. The seller must have parted with the possession of goods,i.e. the goods must not
be in the possession of seller.

2. The goods must be in the course of transit.

3. The buyer must have become insolvent.

c) Right of Resale[Section 46(1) and 54]: An unpaid seller can resell the goods under
the following three circumstance:

1. Where the goods are of a perishable nature.

2. Where the seller expressly reserves a right of resale if the buyer commits a default in
making payment.

3. Where the unpaid seller who has exercised his right of lien or stoppage in transit gives a
notice to the buyer about his intention to resell andbuyer does not pay or tender within a
reasonable time.
64

II Rights against the goods where the property in the goods has not passed to the
buyer

1. Right of withholding delivery[Section 46(2)]: Where the property in the goods has not
been passed to the buyer, the unpaid seller, cannot exercise right of lien, but get a right of
withholding the delivery of goods, similar to and co-extensive with lien and stoppage in
transit where the property has passed to the buyer.

b) Rights of Unpaid Seller against the Buyer Personally: The unpaid seller, in addition
to his rights against the goods as discussed above, has the following three rights of action
against the buyer personally:

1. Suit for price (Sec. 55): Where property in goods has passed to the buyer; or where
the sale price is payable ‘on a day certain’, although the property in goods has not passed; and
the buyer wrongfully neglects or refuses to pay the price according to the terms of the contract,
the seller is entitled to sue the buyer for price, irrespective of the delivery of goods. Where the
goods have not been delivered, the seller would file a suit for price normally when the goods
have been manufactured to some special order and thus are unsaleable otherwise.

2. Suit for damages for non-acceptance (Sec. 56): Where the buyer wrongfully neglects
or refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance. The seller’s remedy in this case is a suit for damages rather than an action for the
full price of the goods.

3. Suit for Interest [Section 61(2)]:In case of breach of the contract on the part of
seller,the buyer may sue the seller for interest from the date on which the payment was made.

5.12 Summary

Till 1930, transactions relating to sale and purchase of goods were regulated by the
Indian Contract Act, 1872. In 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
removed. Now, 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.
 65

5.13 Key Words

Conditions

Contract of Sale

Unpaid seller

Transfer of Property

5.14 Review Questions

1. Explain the essential elements of Contract of Sale.

2. State the differences between Sale and Agreement to Sell.

3. Differences between Sale and Bailment.

4. How do you differentiate the Condition from Warranty?

5. What is Implied Conditions?

6. Explain the Significance of Transfer of Property

7. What are the reasons for Transfer of Property in Goods?

8. Describe the rights of Unpaid Seller.

66

LESSON – 6
NEGOTIABLE INSTRUMENT ACT, 1881
Learning Objectives

After reading this lesson, you will be able to:

 Explain the various types of Negotiable Instruments and their elements.

 Outline various types of Cheques

 Discuss various types of Promissory Notes

Structure
6.1 Introduction

6.2 Characteristics of Negotiable Instrument

6.3 Promissory Notes

6.4 Bill of Exchange

6.5 Cheque

6.6 The Negotiable Instruments (Amendment) Bill, 2017

6.7 Summary

6.8 Key Words

6.9 Review Questions

6.1 Introduction

Negotiable Instruments are written contracts whose benefit could be passed on from its
original holder to a new holder. In other words, negotiable instruments are documents which
promise payment to the assignee (the person whom it is assigned to/given to) or a specified
person. These instruments are transferable signed documents which promise to pay the bearer/
holder the sum of money when demanded or at any time in the [Link] mentioned above,
these instruments are transferable. The final holder takes the funds and can use them as per
his requirements. That means, once an instrument is transferred, holder of such instrument
obtains a full legal title to such instrument.
 67

In other words, Negotiable instruments are written orders or unconditional promises to

pay a fixed sum of money on demand or at a certain time. Negotiable instruments may be
transferred from one person to another, who is known as a holder in due course. Upon transfer,
also called negotiation of the instrument, the holder obtains full legal title to the instrument. At
last, Negotiable Instrument is understood in terms money or cash equivalents. These can be
converted into liquid cash subject to certain conditions.

Definition of Negotiable Instruments

According to sec 13 Negotiable instruments act of 1881, Negotiable instruments means

promissory note, bills of exchange or cheque payable either to order or to bearer.

6.2 Characteristics of Negotiable Instruments

 Free transfer: the negotiable instruments are easily and freely transferable from one
person to another.

 Transfer free from defects: this is the most important characteristic of negotiable
instruments. That is it confers a good title on the transferee, who has taken it in good
faith, for value and without notice of the fact that the transferor had defective title .

 Rights to sue: the holder has the right to sue in his own name when needed.

 No notice to transfer

 Credit of the party: These instruments will never be dishonoured as credit of the party
who sings the instruments is pledged to the instruments.

Presumption of Negotiable Instruments

 Consideration: It shall be presumed that every NI was made drawn, accepted or endorsed
for consideration.

 Date: where a negotiable instrument is dated.

 Time of acceptance: every accepted bill of exchange is presumed to have been accepted
within a reasonable time aft er its issue and before its maturity

 Time to transfer: It shall be presumed that every transfer of a negotiable instrument was
made before its maturity.
68

 Stamp: the instrument was duly signed and stamped.

 Holder in due course: every holder of the negotiable instrument is a holder in due course.
Order of endorsement: The endorsement is made in the same order in which they
appear.

6.3 Promissory notes

A promissory note refers to a written promise to its holder by an entity or an individual to

pay a certain sum of money by a pre-decided date. In other words, Promissory notes show the
amount which someone owes to you or you owe to someone together with the interest rate and
also the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay
for the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s
promise to pay B either on a specified date or on demand. In another possibility, A might have
a promissory note which is issued by C. He could endorse this note and give it to B and clear of
his dues this way.

However, the seller isn’t bound to accept the promissory note. The reputation of a buyer
is of great importance to a seller in deciding whether to accept the promissory note or not.

Definition of Promissory Notes

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a
bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money to or to the order of a certain person, or to the bearer of the
instruments.” The person who makes the promissory note and promises to pay is called the
maker. The person to whom the payment is to be made is called the payee.

Characteristics of Promissory Notes

 It is an Instrument in Writing

 It is a Promise to Pay

 Signed by the Maker

 Other Formalities

 Definite and Unconditional Promise

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 Promise to Pay Money Only

 Maker must be a Certain Person

 Payee must be Certain

 Sum Payable must be Certain

 It may be Payable on Demand or After a Definite Period of Time

 It cannot be Made Payable to Bearer on Demand

Parties to Promissory Notes

 Maker: Maker is the person who promises to pay the amount stated in the note.

 Payee: Payee is the person to whom the amount of the note is payable.

 Holder: He is either the payee or the person to whom the note may have been
endorsed.

Figure 6.1: Specimen of Promissory Note

6.4 Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to
pay a predetermined sum of money to the second(another) party. Some of the bills might state
that money is due on a specified date in the future, or they might state that the payment is due
on demand.A bill of exchange is used in transactions pertaining to goods as well as services. It
is signed by a party who owes money (called the payer) and given to a party entitled to receive
70

money (called the payee or seller), and thus, this could be used for fulfilling the contract for
payment. However, a seller could also endorse a bill of exchange and give it to someone else,
thus passing such payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s
usually referred to as a bank draft. And if it is issued by an individual, it is usually referred to as
a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter
or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party,
usually the banks, is a party to several bills of exchange acting as a guarantee for these payments.
It helps in reducing any risk which is part and parcel of any transaction.

Definition of Bill of Exchange

According to Section 5 of the act, A bill of exchange is “an instrument in writing containing
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”. It is also
called a Draft.

Special Benefits of Bill of Exchange

 A bill of exchange is a double secured instrument.

 In case of immediate requirement, a Bill may be discounted with a bank.

Essential Elements of Bill of Exchange

 It must be in Writing.

 Order to pay

 Drawee

 Signature of the Drawer

 Unconditional Order

 Parties

 Certainty of Amount

 Stamping

 Cannot be made Payable to Bearer on Demand

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Parties of a Bill of Exchange

 Drawer: The maker of a bill of exchange is called the drawer.

 Drawee: The person directed to pay the money by the drawer is called the drawee.

 Payee: The person named in the instrument, to whom or to whose order the money
are directed to be paid by the instruments are called the payee.

Classification of Bill of Exchange

Inland and Foreign Bills [Section 11 and 12]

Inland Bill

 It is drawn in India on a person residing in India whether payable in or outside India;

or

 It is drawn in India on a person residing outside India but payable in India.

Foreign Bill
 A bill drawn in India on a person residing outside India and made payable outside
India.

 Drawn upon a person who is the resident of a foreign country.

Time and Demand Bills

 Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable
“after date” is a time bill.

 Demand Bill: A bill payable at sight or on demand is termed as a demand bill.

Trade and Accommodation Bills

 Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as
“trade bill”.

 Accommodation Bill: A bill drawn and accepted not for a genuine trade transaction
but only to provide financial help to some party is termed as an “accommodation
bill”.
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Figure 6.2: Specimen of Bill of Exchange

6.5 Cheque

A cheque refers to an instrument in writing which contains an unconditional order, addressed

to a banker and is signed by a person who has deposited his money with the banker. This order,
requires the banker to pay a certain sum of money on demand only to to the bearer of cheque
(person holding the cheque) or to any other person who is specifically to be paid as per instructions
given.

Cheques could be a good way of paying different kinds of bills. Although the usage of
cheques is declining over the years due to online banking, individuals still use cheques for
paying for loans, college fees, car EMIs, etc. Cheques are also a good way of keeping track of
all the transactions on paper. On the other side, cheques are comparatively a slow method of
payment and might take some time to be processed.
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Definition of Cheque

According to Section 6 of the act, A cheque is “a bill of exchange drawn on a specified

banker and not expressed to be payable otherwise than on demand”. Cheque is an instrument
in writing containing an unconditional order, addressed to a banker, sign by the person who has
deposited money with the banker, requiring him to pay on demand a certain sum of money only
to or to the order of certain person or to the bearer of instrument.

“A cheque is also, therefore, a bill of exchange with two additional qualifications:

 It is always drawn on a specified banker.

 It is always payable on demand.

Elements of a Cheque
 In writing/ use of printed form

 Definite and Unconditional Order

 Signed by the Drawer

 Order to Pay Certain Sum

 Order to Pay Money Only

 Payees name

 Drawn upon a Specified Banker

 Payable on Demand

 Date of the cheque

Parties to a Cheque
 Drawer: Drawer is the person who draws the cheque.

 Drawee: Drawee is the drawer’s banker on whom the cheque has been drawn.

 Payee: Payee is the person who is entitled to receive the payment of a cheque.

Types of Cheque

1) Bearer Cheque: Bearer cheques are the cheques which withdrawn to the cheque’s
[Link] types of cheques normally used for a cash transaction.
74

Figure 6.3: Specimen of Bearer Cheque

2) Order Cheque:Order cheques are the cheques which are withdrawn for the payee(the
cheque withdrawn for whose person).Before withdrawn to that payee, banks cross check the
identity of the payee.

Figure 6.4: Specimen of Order Cheque

3) Crossed Cheque:On that type of cheques two parallel line made on the upper part of
the cheques, then that cheques formed to crossed cheques. This type of cheques payment
does not formed in cash while the payment of that type pf cheques transferred to the payee
account and the normal person’s account who recommend by the holder on the cheque.

Figure 6.5: Specimen of Crossed Cheque

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4) Account Payee Cheque :When two parallel lines along with a crossed made on the
cheque and the word ‘ACCOUNT PAYEE’ written between these lines, then that types of cheques
are called account payee [Link] payment of the account payee cheque taken place on
the person, firm or company on which name the cheque issue.

Figure 6.6: Specimen of Payee Cheque

5) Company Crossed Cheque: When two parallel lines along with a cross made on the
cheque and the word ‘COMPANY’ written between these lines, then that types of cheques are
called company crossed cheques. Then the type of withdrawn does not take in cash while the
person on which the cheque issue, transferred on its account. Normally crossed cheque and
company crossed cheque are same.

Figure 6.7: Specimen of Crossed Cheque

6) Stale Cheque:If any cheque issued by a holder does not get withdrawn from the bank
till three months, then that type of cheques are called stale cheque.
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Figure 6.8: Specimen of Stale Cheque

7) Post Dated Cheque:If any cheque issued by a holder to the payee for the upcoming
withdrawn date, then that type of cheques are called post-dated cheque.

Figure 6.9: Specimen of Post Dated Cheque

8) Anti Dated Cheque: If any cheque issue for the upcoming withdrawn date but it withdraw
before the date printed on the cheque, then that type of cheques are called anti dated cheques.

Figure 6.10: Specimen of Ante Dated Cheque

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6.6 The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the LokSabha
earlier this year on Jan 2nd, 2018. The bill seeks for amending the existing Act. The bill defines
the promissory note, bill of exchange, and cheques. The bill also specifies the penalties for
dishonor of cheques and various other violations related to negotiable instruments.

As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would
have to be paid by an individual for cheques being [Link] Bill also inserts a provision
for allowing the court to order for an interim compensation to people whose cheques have
bounced due to a dishonouring party (individuals/entities at fault). Such interim compensation
won’t exceed 20 percent of the total cheque value.

6.7 Summary
Negotiable Instruments are written contracts whose benefit could be passed on from its
original holder to a new holder. In other words, negotiable instruments are documents which
promise payment to the assignee (the person whom it is assigned to/given to) or a specified
person. These instruments are transferable signed documents which promise to pay the bearer/
holder the sum of money when demanded or at any time in the [Link] mentioned above,
these instruments are transferable. The final holder takes the funds and can use them as per
his requirements. That means, once an instrument is transferred, holder of such instrument
obtains a full legal title to such instrument.

6.8 Key Words

Bill of Exchange
Cheque
Promissory Notes
Negotiable Instruments

6.9 Review Questions

1. Define Negotiable Instrument. Explain its Features.
2. List out the Characteristics of Promissory Notes.
3. What is bill of exchange? List out its essential elements.
4. State the different Classification of Bill of Exchange.
5. Define Cheque. Give out its Elements.
6. What are the different Types of Cheque.
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LESSON – 7
PARTNERSHIP ACT
Learning Objectives

After reading this Lesson, you will be able to:

 Go through the existence of Partnership firm and their significance in each and
every sphere of life.

 Evaluate the various types of partners and their role in the partnership firm.

 Explore the decision making authority in the partnership firm.

Structure
7.1 Introduction

7.2 Meaning of Partnership

7.3 Definition of Partnership

7.4 Features of Partnership

7.5 Characteristics of Partnership Firm

7.6 Advantages of Partnership

7.7 Limitations of Partnership

7.8 Types of Partners

7.9 Rights, Duties and Liabilities of Partners

7.10 Summary

7.11 Key Words

7.12 Review Questions

7.1 Introduction

It is basically a relation between two or more persons who join hands to form a business
organisation with the objective of earning profit. The persons who join hands are individually
known as ‘Partner’ and collectively a ‘Firm’. The name under which the business is carried on is
called ‘firm name’. Sultan Chand & Co, Ram Lal& Co, Gupta & Co are the names of some
 79

partnership firms. The partners provide the necessary capital, run the business jointly and
share the responsibilities. You must be thinking how much capital each partner contributes? Do
all the partners jointly manage the business or can any of them manage the business on behalf
of others? Who will take the profits? If there is any loss then who will suffer the loss? Yes, these
are the few questions that might be coming to your mind.

Actually, when you invite your friends to start such a business, it should be the duty of all
of you to decide

(ii) the amount of capital to be contributed by each one of you;

(iii) who will manage;

(iv) how will the profits and losses be shared. Thus, there must be some agreement between
the partners before they actually start the business. This agreement is termed as
‘Partnership Deed’, which lays down certain terms and conditions for starting and running
the partnership firm. This agreement may be oral or written. Actually, it is always better to
insist on a written agreement among partners in order to avoid future controversies.

7.2 Meaning of Partnership

A partnership is an arrangement where parties, known as partners, agree to cooperate to

advance their mutual interests. The partners in a partnership may be individuals, businesses,
interest based organisation, schools, government or [Link] may partner
to increase the likelihood of each achieving their mission and to amplify their reach. A partnership
may result in issuing and holding equity or may be only governed by a contract.

7.3 Definition of Partnership

A partnership firm is governed by the provisions of the Indian Partnership Act, 1932.
Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all”.

According to L.H Haney, ”Partnership is the relation existing between persons competent
to make a contract, who agree to carry on a lawful business in common with a view to private
gain.”
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According to J.L Hansen, “A partnership is a form of business organization in which two

or more persons join together to undertake some type of business activity.”

7.4 Features of Partnership

After having a brief idea about partnership, let us identify the various features of this form
of business organisation.

i. Two or more Members: You know that the members of the partnership firm are called
partners. But do you know how many persons are required to form a partnership firm? At
least two members are required to start a partnership business. But the number of members
should not exceed 10 in case of banking business and 20 in case of other business. If the
number of members exceeds this maximum limit then that business cannot be termed as
partnership business. A new form of business will be formed, the details of which you will
learn in your next lesson.

ii. Agreement: Whenever you think of joining hands with others to start a partnership
business, first of all, there must be an agreement between all of you. This agreement
containso the amount of capital contributed by each partner; o profit or loss sharing ratio;
o salary or commission payable to the partner, if any; o duration of business, if any ; o
name and address of the partners and the firm; o duties and powers of each partner; o
nature and place of business; and o any other terms and conditions to run the business.

iii. Lawful Business: The partners should always join hands to carry on any kind of lawful
business. To indulge in smuggling, black marketing, etc., cannot be called partnership
business in the eye of the law. Again, doing social or philanthropic work is not termed as
partnership business.

iv. Competence of Partners: Since individuals join hands to become the partners, it is
necessary that they must be competent to enter into a partnership contract. Thus, minors,
lunatics and insolvent persons are not eligible to become the partners. However, a minor
can be admitted to the benefits of partnership i.e., he can have a share in the profits only

v. Sharing of Profit: The main objective of every partnership firm is sharing of profits of the
business amongst the partners in the agreed proportion. In the absence of any agreement
for the profit sharing, it should be shared equally among the partners. Suppose, there are
two partners in the business and they earn a profit of Rs. 20,000. They may share the
 81

profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and
three fourth i.e. Rs 5,000/- and Rs. 15000/-.

vi. Unlimited Liability: Just like the sole proprietor the liability of partners is also unlimited.
That means, if the assets of the firm are insufficient to meet the liabilities, the personal
properties of the partners, if any, can also be utilised to meet the business liabilities.
Suppose, the firm has to make payment of Rs. 25,000/- to the suppliers of goods. The
partners are able to arrange only Rs. 19,000/- from the business. The balance amount of
Rs. 6,000/- will have to be arranged from the personal properties of the partners.

vii. Voluntary Registration: It is not compulsory that you register your partnership firm.
However, if you don’t get your firm registered, you will be deprived of certain benefits,
therefore it is desirable. The effects of non-registration are: i)Your firm cannot take any
action in a court of law against any other parties for settlement of claims. ii) In case there
is any dispute among partners, it is not possible to settle the disputes through a court of
law. iii) Your firm cannot claim adjustments for amount payable to or receivable from any
other parties.

viii. No Separate Legal Existence: Just like sole proprietorship, partnership firm also has no
separate legal existence from that of it owners. Partnership firm is just a name for the
business as a whole. The firm means the partners and the partners collectively mean the
firm.

ix. Principal Agent Relationship: All the partners of the firm are the joint owners of the
business. They all have an equal right to actively participate in its management. Every
partner has a right to act on behalf of the firm. When a partner deals with other parties in
business transactions, he/she acts as an agent of the others and at the same time the
others become the principal. So there always exists a principal agent relationship in every
partnership firm.

x. Restriction on Transfer of Interest: No partner can sell or transfer his interest to any
one without the constent of other partners. For example - A, B, and C are three partners.
A wants to sell his share to D as his health does not permit him to work any more. He can
not do so until B and C both agree. xi. Continuity of Business - A partnership firm comes
to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it
can discontinue its business at the will of the partners. At any time, they may take a
decision to end their relationship.
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7.5 Characteristics of Partnership Firm

1. Formation: A partnership form can be established by minimum two people by jointly
investing capital. A partnership form can start its business by registering in concern
department of Nepal government. According to partnership act 2020, to form a partnership
business minimum two men are required and the maximum is not defined.

2. Mutual Agreement: A partnership form is established after making the mutual agreement
between the partners. The agreement can be in written or oral as well as in both forms.
The agreement between partners in written form is called partnership deed.

3. Transfer of shares: The shares of partnership form cannot be transferred from one
name to another name without consent (agreement of other partners). All the partners of
the business must agree to transfer the share of one to another. Therefore, transfer of the
share in partnership is difficult.

4. Sharing of profit/Loss: The profit or loss of partnership business is shared among the
partners on the basis of the ratio of their investment. All the partners in business are able
to bear the loss of business as well as has a right to claim over a profit of a business.

5. Unlimited liability: The partnership business has unlimited liability. It means all the partners
are required to pay a debt of business by selling their personal property as well. In this
business, liability is not limited to the property of the business.

6. No Separate legal entity: Partnership Firm does not have its separate legal existence. In
partnership forms, its partners are taken as one share. Partnership form cannot make
agreement contract or perform business in its name independently.

7. Management: The management of partnership form may be handled by all the partners.
The work and responsibility of this business are to share among the partners equally. All
the partners will give the experience and skills.

8. Mutual Agency: In partnership business, partners can play the role of both agents principle.
Active partners work in a business for benefits of all other partners. At this time, he/she is
playing the role of the agency. On the other hand, when partner represents outside, they
are playing as principal.

9. Utmost good faith: In partnership business, there is utmost good faith among partners.
Active partner work for the betterment of the organization and other partners invest money
in the good faith of partners.
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10. Individually of partners:Partners in partnership form have their own personal identity
and respect in their society. Their identity will not be affected while being outside the
business. Partners have to provide all their skills in social responsibility for the betterment
of the organization.

7.6 Advantages of Partnership

Partnership form of business organisation has certain advantages, which are as follows –

a) Easy to form: Like sole proprietorship, the partnership business can be formed easily
without any legal formalities. It is not necessary to get the firm registered. A simple agreement,
either oral or in writing, is sufficient to create a partnership firm.

b) Availability of large resources: Since two or more partners join hand to start partnership
business it may be possible to pool more resources as compared to sole proprietorship. The
partners can contribute more capital, more effort and also more time for the business.

c) Better decisions: The partners are the owners of the business. Each of them has
equal right to participate in the management of the business. In case of any conflict they can sit
together to solve the problems. Since all partners participate in decision-making, there is less
scope for reckless and hasty decisions.

d) Flexibility in operations: The partnership firm is a flexible organisation. At any time

the partners can decide to change the size or nature of business or area of its operation. There
is no need to follow any legal procedure. Only the consent of all the partners is required.

e) Sharing risks: In a partnership firm all the partners share the business risks. For
example, if there are three partners and the firm suffers a loss of Rs. 12,000 in a particular
period, then all partners may share it and the individual burden will be Rs. 4,000 only.

f) Protection of interest of each partner: In a partnership firm every partner has an

equal say in decision making. If any decision goes against the interest of any partner he can
prevent the decision from being taken. In extreme cases a dissenting partner may withdraw
himself from the business and can dissolve it.

g) Benefits of specialization: Since all the partners are owners of the business they can
actively participate in every aspect of business as per their specialisation and knowledge. If you
want to start a firm to provide legal consultancy to people, then one partner may deal with civil
84

cases, one in criminal cases, another in labour cases and so on as per their specialization.
Similarly two or more doctors of different specialization may start a clinic in partnership.

7.7 Limitations of Partnership

Inspite of all these advantages as discussed above, a partnership firm also suffers from
certain limitations. Let us discuss all these limitations.

a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt
of the firm to an unlimited extent. Thus, they can share the liability among themselves or any
one can be asked to pay all the debts even from his personal properties.

b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It
comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further,
any dissenting member can also give notice at any time for dissolution of partnership.

c) Lack of Harmony: You know that in partnership firm every partner has an equal right
to participate in the management. Also every partner can place his or her opinion or viewpoint
before the management regarding any matter at any time. Because of this sometimes there is
a possibility of friction and quarrel among the partners. Difference of opinion may lead to closure
of the business on many occasions.

d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to
be raised is always limited. It may not be possible to start a very large business in partnership
form.

e) No transferability of share: If you are a partner in any firm you cannot transfer your
share of interest to outsiders without the consent of other partners. This creates inconvenience
for the partner who wants to leave the firm or sell part of his share to others.

7.8 Types of Partners

In a partnership firm you can find different types of partners. Some may actively participate
in the business while others prefer not to keep themselves engaged actively in the business
activities after contributing the required capital. Also there are certain kinds of partners who
neither contribute capital nor actively participate in the day-to-day business operations. Let us
learn more about them.
 85

a) Active partners: The partners who actively participate in the day-to-day operations of
the business are known as active or working partners. They contribute capital and are also
entitled to share the profits of the business. They are also liable for the debts of the firm.

b) Dormant partners: Those partners who do not participate in the day-to-day activities
of the partnership firm are known as dormant or sleeping partners. They only contribute capital
and share the profits or bear the losses, if any.

c) Nominal partners: These partners only allow the firm to use their name as a partner.
They do not have any real interest in the business of the firm. They do not invest any capital, or
share profits and also do not take part in the conduct of the business of the firm. However, they
remain liable to third parties for the acts of the firm.

d) Minor as a partner: You learnt that a minor i.e., a person under 18 years of age is not
eligible to become a partner. However in special cases a minor can be admitted as partner with
certain conditions. A minor can only share the profit of the business. In case of loss his liability
is limited to the extent of his capital contribution for the business.

e) Partner by estoppel: If a person falsely represents himself as a partner of any firm or

behaves in a way that somebody can have an impression that such person is a partner and on
the basis of this impression transacts with that firm then that person is held liable to the third
party. The person who falsely represents himself as a partner is known as partner by estoppel.
Take an example. Suppose in Ram Hari& Co firm there are two partners. One is Ram, the other
is Hari. If Giri- an outsider represents himself as a partner of Ram Hari& Co and transacts with
Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel.

f) Partner by holding out: In the above example, if either Ram or Hari declares that
Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will
be liable to those parties who suffer losses by transacting with Ram Hari& Co with a belief that
Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal
will be known as partner by holding out.

7.9 Rights, Duties and Liabilities of Partners

The Partnership Deed contains the mutual rights, duties and obligations of the partners,
in certain cases, the Partnership Act also makes a mandatory provision as regards to the rights
86

and obligations of partners. When there is no Deed or the Deed is silent on any point, :ne rights
and obligations as provided in the Partnership Act shall apply.

Rights of a Partner

The rights of a partner are as follows:

§ Right of the partner to take part in the day-to-day management of the firm.

§ Right to be consulted and heard while taking any decision regarding the business.

§ Right of access to books of accounts and call for the copy of the same.

§ Right to share the profits equally or as agreed upon by the partners.

§ Right to get interest on capital contributed by the partners to the firm.

§ Right to avail interest on advances paid by the partners for business purpose.

§ Right to be indemnified in respect of payment made or liabilities incurred or for protecting

the firm from losses.

§ Right to the use of partnership property exclusively for partnership business only not
himself.

§ Right as agent of the firm and implied authority to bind the firm for any act done in carrying
the business.

§ Right to prevent admission of new partners/expulsion of existing partners.

§ Right to continue unless and otherwise he himself cease to become partner.

§ Right to retire with the consent of other partners and according to the terms-and conditions
of deed.

§ Right of outgoing partner/legal heirs of deceased partner.

Duties of a Partner
§ To carry on the business to the greatest common advantage: Every partner is bound
to carry on the business of the firm to the greatest common advantage. In other words,
the partner must use his knowledge and skill in the conduct of business to secure maximum
benefits for the firm.

§ To be just and faithful to each other: Every partner must be just and faithful to other
partners of the firm. Every partner must observe utmost good faith and fairness towards
other partners in business activity.
 87

§ To render true accounts:Every partner must render true and proper accounts I his co-
partners. Each and every entry in the books must be supported by vouchers and di
explanations if demanded by other partners.

§ To provide full information:Every partner must provide full information of £ activities

affecting the firm to the other co-partners. No information should be concealed, kept
secret.

§ To attend diligently to his duties:Every partner is bound to attend diligently to duties in

the conduct of the business of the firm.

§ To work without remuneration:A partner is not entitled to receive any kind remuneration
for taking part in the conduct of the business. But in practice, the working partners are
generally paid remuneration as per agreement, so also commission in some case.

§ To indemnify for loss caused by fraud or willful neglect:If any loss is caused to the
firm because of a partner’s willful neglect in the conduct of the business or fraud commit
by him against a third party then such partner must indemnify the firm for the loss.

§ To hold and use partnership property exclusively for the firm: The partners must
hold and use the partnership property exclusively for the purpose of business of the firm
not for their personal benefit.

§ To account for personal profits: If a partner derives any personal profit from partnership
transactions or from the use of the property of the firm or business connection the firm or
the firm’s name, he must account for such profit and pay it to the firm.

§ Not to carry on any competing business: A partner must not carry on competing business
to that of the firm. If he carries on and earns any profit then he must account for the profit
made and pay it to the firm.

§ To share losses: It is the duty of the partners to bear the losses of the firm. ‘ partners
share the losses equally when there is no agreement or as per their profit share ratio.

§ To act within authority: Every partner is bound to act within the scope of authority. If he
exceeds his authority and the firm suffers from any loss, he shall have compensate the
firm for such loss.

§ Duty to be liable jointly and severally: Every partner is jointly and individual liable to the
third parties for all acts of the firm done while he is a partner.
88

§ Duty not to assign his interest: A partner cannot assign or transfer his partner interest
to an outsider so as to make him the partner of the firm without the consent of other
partners. However, he can assign his share of the profit and his share in the assets the
firm where the assignee shall not be entitled to interfere in the conduct of the business

Liabilities of a Partner

§ Liability of a partner for acts of the firm: Every partner is jointly and severally liable for
all acts of the firm done while he is a partner. Because of this liability, the creditor of the
firm can sue all the partners jointly or individually.

§ Liability of the firm for wrongful act of a partner: If any loss or injury is caused to any
third party or any penalty is imposed because of wrongful act or omission of a partner, the
firm is liable to the same extent as the partner. However, the partner must act in the
ordinary course of business of the firm or with authority of his partners.

§ Liability of the firm for misutilisation by partners: Where a partner acting within his
apparent authority receives money or property from a third party and misutilises it or a
firm receives money or property from a third party in the course of its business and any of
the partners misutilises such money or property, then the firm is liable to make good the
loss.

§ Liability of an incoming partner: An incoming partner is liable for the debts and acts of
the firm from the date of his admission into the firm. However, the incoming partner may
agree to be liable for debts prior to his admission. Such agreeing will not empower the
prior creditor to sue the incoming partner. He will be liable only to the other co-partners.

§ Liability of a retiring partner: A retiring partner is liable for the acts of the firm done
before his retirement. But a retiring partner may not be liable for the debts incurred before
his retirement if an agreement is reached between the third parties and the remaining
partners of the firm discharging the retiring partner from all liabilities. After retirement the
retiring partner shall be liable unless a public notice of his retirement is given. No such
notice is required in case of retirement of a sleeping or dormant partner.

7.10 Summary

A partnership is an arrangement where parties, known as partners, agree to cooperate to

advance their mutual interests. The partners in a partnership may be individuals, businesses,
interest based organisation, schools, government or [Link] may partner
 89

to increase the likelihood of each achieving their mission and to amplify their reach. A partnership
may result in issuing and holding equity or may be only governed by a contract.

7.11 Keywords
Agreement
Competence
Profit
Partner
Liability

7.12 Review Questions

1. Define Partnership.

2. Bring out the features of Partnership.

3. Evaluate the Characteristics of Partnership Firm.

4. Write in detail about the Merits and Demerits of Partnership.

5. Critically examine various types of Partners.

6. Narrate the various duties, rights and liabilities of a partner.

90

LESSON – 8
KINDS OF PARTNERSHIP FIRM &DISSOLUTION
Learning Objectives

After reading this lesson, you will be able to:

 Examine the various types of partnership firm and their impact on the smooth running
of business.

 Identify the mode of dissolution of partnership firm and discuss the reasons for it.

Structure
8.1 Introduction

8.2 Kinds of Partnership Firm

8.3 Dissolution of Partnership

8.4 Modes of Dissolution of Partnership Firm

8.5 Premium to be returned on Premature Dissolution

8.6 Summary

8.7 Key Words

8.8 Review Questions

8.1 Introduction

A partnership arises whenever two or more people co-own a business and share in the
profits and losses of the business. Other business legal structures include sole proprietorships;
limited liability companies (LLCs), corporations, and non-profit [Link] a partnership,
each person contributes something to the business such as ideas, money, property, or some
combination of these. Management rights, profit share, and personal liability will vary depending
on which of the three modern partnership forms the business takes: general partnership, limited
partnership, or limited liability partnership (LLP). Below are basic summaries of the main types
of business partnerships.
 91

8.2 Kinds of Partnership Firm

1. General Partnerships: A general partnership involves two or more owners carrying out a
business purpose. General partners share equal rights and responsibilities in connection
with management of the business, and any individual partner can bind the entire group to
a legal obligation. Each individual partner assumes full responsibility for all of the business’s
debts and obligations. Although such personal liability is daunting, it comes with a tax
advantage: partnership profits are not taxed to the business, but pass through to the
partners, who include the gains on their individual tax returns at a lower rate.

Merits of General Partnership

 Easy to start and dissolve: A partnership firm can be setup easily and quickly. There is
not much legal formalities and expenditures are involved in the establishment of a
partnership. Similarly, a partnership firm can be closed down very easily and quickly.

 Higher capital: Many partners invest capitals and there is higher flexibility in capital
because new partner can be agreed to be associated and investing can be increased.

 Higher innovation: Many partners use their own ideas and innovation capacity. So there
is unlimited managerial ability

 Reduction of work load: Partners mustn’t work more to earn more profit. Higher profit
generation is important. So, there is no dull and monotonous work. In case of monotony,
health problem to any partner then other partners can help and reduce absenteeism.

 Better decision: There is specialization in decision taking. So there can be less chances
of taking wrong decisions

 Harmonization of different ability: There are many partners in this firm and many partners
have different skills, knowledge and capacity

 Credit facility: In this liability of partners becomes unlimited. It will help to arrange more
capital. And that’s why it has more credit. It improves more financial function

 Close supervision: There is effective management and effective supervision. They look
the business themselves.

 Flexible: There can be change in management, capital and production. This change can
be made by mutual agreement of partners

 Reduced risk: Partners have right to take part in management. They have the duty to
bear risk with proportion too.
92

Demerits of General Partnership

 No Business secrets: The partner can keep the secrets to himself but these secrets can
be known to competitors or others when there is conflict among the partners

 Uncertain existence: Death of any partner can sometime cause death of entire firm.
Dishonesty, conflict and lack of resource also can collapse the firm

 No Personal contact: A partner can’t be in a position to maintain intimate contacts with

his customers and employees. He cannot be able enter to the requirements of each and
every customer. Then there is no close personal touch which decreases the competitive
strength of the business.

 Unlimited lilbusiness.

 Danger of conflict: Many persons are the owners of partnership firm. There can be
misunderstanding and jealousy among them and these cause problems in operation of
business and profit making

 Difficulty in transfer of shares: Partners cannot transfer their share without the consent
of other partners. There may be conflict when done otherwise.

 Limited resources: There is low investment, may be higher than in sole trading but not
sufficient for large scale production resulting in limited areas of operation.

2. Limited Partnerships: A limited partnership allows each partner to restrict his or her
personal liability to the amount of his or her business investment. Not every partner can
benefit from this limitation — at least one participant must accept general partnership
status, exposing himself or herself to full personal liability for the business’s debts and
obligations. The general partner retains the right to control the business, while the limited
partner(s) do(es) not participate in management decisions. Both general and limited
partners benefit from business profits.

Advantages of Limited Partnership

 Tax benefits: As with a general partnership, the profits and losses in a limited partnership
flow through the business to the partners, all of whom are taxed on their personal income
tax returns. The difference is that the limited partners in the relationship get to share in
the profits and losses, but they do not have to participate in the business itself.

 Liability limits: A limited partner’s liability for the partnership’s debt is limited to the amount
of money or property that individual partner contributed to the partnership. This is not true
 93

of the general partnership, where any money or property contributed becomes an asset
of all the partners.

 The general partners take charge: In a limited partnership, the general partners deal
with the daily operations and responsibilities and don’t need to consult the limited partners
for most business decisions.

 No turnover issues: Limited partners can be replaced or leave without dissolving the
limited partnership.

 Less paperwork: Creating a limited partnership, like a general partnership, requires less
paperwork than forming a corporation. However, it’s important to create and file a
partnership agreement in the county where your company does business.

 Investment opportunities: A limited partnership is a great way to offer investors the

opportunity to benefit from the profits and losses of your business without getting them
actually involved in the business.

Disadvantages of Limited Partnership

 Risks to the general partners: In a limited partnership, the general partners must carry
the burden of all the business’s debts and obligations. If the company is sued or enters
into bankruptcy, all debts and liabilities are the responsibility of the general partners. Also,
each general partner has the ability to make decisions on behalf of the company, and
those decisions become the responsibility of all the general partners.

 Compliance challenges: A general partnership does require less paperwork than a

corporation, but because in essence you have investors (the limited partners), you must
still hold annual meetings and create a detailed partnership agreement.

3. Limited Liability Partnerships (LLP): Limited liability partnerships (LLP) retain the tax
advantages of the general partnership form, but offer some personal liability protection to
the participants. Individual partners in a limited liability partnership are not personally
responsible for the wrongful acts of other partners, or for the debts or obligations of the
business. Because the LLP form changes some of the fundamental aspects of the
traditional partnership, some state tax authorities may subject a limited liability partnership
to non-partnership tax rules. The Internal Revenue Service views these businesses as
partnerships, however, and allows partners to use the pass through technique.
94

Existing partnerships that wish to take advantage of LLP status do not need to modify
their existing partnership agreement, though they may choose to do so. In order to change
status, a partnership simply files an application for registration as a limited liability partnership
with the appropriate state agency. All states require disclosure of the partnership’s name and
principle place of business. Some states also require, among other things, identification of the
number of partners, a brief description of the business, a statement that the partnership will
maintain insurance, and written acknowledgment that the limited liability status may expire.

Advantages of Limited Liability Partnership

 Separate legal entity: An LLP is a separate legal entity. This means that it has assets in
its own name and can sue and be sued. Furthermore, one partner is not responsible or
liable for another partner’s misconduct or negligence.

 No owner/manager distinction: An LLP has partners, who own and manage the business.
This is different from a private limited company, whose directors may be different from
shareholders. For this reason, VCs do not invest in the LLP structure.

 Flexible agreement: The partners are free to draft the agreement as they please, with
regard to their rights and duties.

 Limited liability: The liability of the partners is limited to the extent of his/her contribution
to the LLP. Unless fraud has been detected, the personal assets of the partner are protected
from any liability of the LLP.

 Fewer compliance requirements: An LLP is much easier and cheaper to run than a
private limited company as there are just three compliances per year. On the other hand,
a private limited company has a lot of compliances to fulfil and conduct an audit of its
books.

 Easy to wind-up: Not only is it easy to start, it’s also easier to wind-up an LLP, as compared
to a private limited company. While it still takes two to three months to complete this
process, it can take over a year to close a private limited company.

Disadvantages of Limited Liability Partnership

 Inability to raise VC funding: VCs would be unwilling to invest in an LLP structure. This
is because all ‘shareholders’ in an LLP must be partners, which have certain responsibilities
toward the entity. No VC wants any of these responsibilities, and would, therefore, only
invest in a private limited company.
 95

 Rights of partners: An LLP can be structured in such a way that one partner has more
rights than another. So it isn’t a one vote per share system. So, some lesser partners may
feel compromised if higher shareholders choose to move the business in a direction that
affects their interests.

 Greater penalties: An LLP’s compliances are minimal, but if you don’t complete them,
you could end up paying more in fines than you would with a private limited company.
These fines can escalate to Rs. 5 lakh for a single year.

Table 8.1 : Differences between sole trading concern and Partnership Firm

Basis of difference Sole trading concern Partnership firm

[Link] members A sole trading concern A partnership f irm is

established is established and and managed by two or more
managed by a single person. person.

Investment A single person invests Two or more partners invest

capital for the operation capital for the operation of the
of the business. business.

Agreement Due to only one sole trader, An agreement among the

sole trading concern doesn’t partners is compulsory for
need any agreement. the operation of the business.

Decision Making Decision of business is Decision making is delayed

taken quickly by a single but decisions become
person. There is a high chance matured and rational.
of making a wrong decision.

Secrecy The sole trader can maintain Tight business secrecy

the full secrecy of the cannot be maintained.
business matter. Chances of leaking business
secrecy are comparatively
higher in partnership.

Management The business is managed The business is managed

and control by a single person. and controlled by two or more
than two persons.
96

Risk Bearing The sole trader himself bears All partners share the risk
all risk and responsibilities and responsibility.
of the business.

Registration The sole trading concern The partnership should be

should be registered under registered under the
the Private Firm Registration Partnership Act, 2020.
Act 2014.

Table 8.2: Differences between Partnership and Joint Family Business

[Link] Basis of Partnership Firm Joint Hindu Family Firm

Difference

1. Meaning Two or More JHF conducts business

persons come together inherited as per Hindu law, is
for some business called Hindu Joint family firm.
activity & agree to share
profit & loss is called
partnership firm

2. Creation Partnership firm emerge JHF, firm created by the

out of contact between Operation of Hindu law
two person

3. Membership Partnership firm owned There is no limit. Since

by two or more and membership keep changing
maximum 10 in banking depend upon the birth and
and 20 in other firms death

4. Management All partners have Karta is main key manager

equal managerial right

5. Minor Member A minor member A male minor becomes a

can be admitted to member by his birth
the benefits of partner
with the consent of
all the partner
 97

6. Regulating law Governed by the Its governed by Hindu law

Indian Partnership
Act, 1932.

7. Liability of Members Liability of all the Only karta liability is unlimited,

partners is unlimited co-percener’s liability is
limited.

8.3 Dissolution of Partnership

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.

8.4 Modes of Dissolution of 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-

1. When partners are mutually agreed

2. Compulsory dissolution

3. Dissolution depending on certain contingent events

4. Dissolution by notice

5. Dissolution by notice

6. Transfer of interest or equity to the third party

7. Partners still liable to third parties

8. How are accounts settled

1. 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.
98

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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 [Link] 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.
 99

8. 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–

 Third party debts will be paid first

 Next, loan amount taken by firm from any partner will be repaid to that partner

 Capital contributed by each partner will be repaid to him in the capital contribution
ratio

 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.

8.5 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.

8.6 Summary

A partnership arises whenever two or more people co-own a business and share in the
profits and losses of the business. Other business legal structures include sole proprietorships;
limited liability companies (LLCs), corporations, and non-profit corporations. In a partnership,
each person contributes something to the business such as ideas, money, property, or some
combination of these. Management rights, profit share, and personal liability will vary depending
100

on which of the three modern partnership forms the business takes: general partnership, limited
partnership, or limited liability partnership (LLP). Below are basic summaries of the main types
of business partnerships.

8.7 Key Words

Joint Hindu Family Firm

General Partnership

Limited Partnership

Sole Trading Concern

8.8 Review Questions

1. Define Partnership. Explain the various types of Partnership Firm.

2. State the differences between Sole Trading Concern and Partnership Firm.

3. What are the differences between Partnership Firm and Joint Hindu Family Firm?

4. What is Dissolution of Firm? Explain the various modes of Dissolution of Partnership

Firm.

5. Write a note on Premature Dissolution

 101

LESSON – 9
EVOLUTION OF COMPANY FORM
OF ORGANISATION
Learning Objectives

After reading this lesson, you will be able to:

 Highlight the Evolution of Company besides outlining various definitions associated

with the company.

 Examine various merits of the company

Structure
9.1 Introduction

9.2 Evolution of the Company

9.3 Meaning of Company

9.4 Definition of Company

9.5 Characteristics of Company

9.6 Advantages of Company

9.7 Disadvantages of Company

9.8 Summary

9.9 Key Words

9.10 Review Questions

9.1 Introduction

There are many different forms of businesses like Sole Proprietorship, Partnership firm,
Hindu Undivided Family Business, Limited Liability Partnership etc. But Company form of
business has certain advantages over another form of business like limited liability, perpetual
succession, Separate legal identity, etc.A company, abbreviated as co., is a legal entity made
up of an association of people, be they natural, legal, or a mixture of both, for carrying on
a commercial or industrial enterprise. Company members share a common purpose, and
102

unite to focus their various talents and organize their collectively available skills or resources to
achieve specific, declared goals. Companies take various forms, such as:

 Voluntary associations, which may include non-profit organizations

 Business entities with an aim of gaining a profit

 Financial entities and banks

A company or association of persons can be created at law as a legal person so that the
company in itself can accept limited liability for civil responsibility and taxation incurred as
members perform (or fail to discharge) their duty within the publicly declared ”birth
certificate”or published policy.

Companies as legal persons may associate and register themselves collectively as other
companies – often known as a corporate group. When a company closes, it may need a ”death
certificate” to avoid further legal obligations.

9.2 Evolution of Company

A Joint Stock Company or simply a company is a voluntary association of persons generally

formed for undertaking some big business activity. It is established by law and can be dissolved
by law. The company has a separate legal existence so that even if its members die, the company
remains in existence. Its members contribute money for some common purpose. The money
so contributed constitutes the capital of the company. The capital of the company is divided into
small units called shares. Since members invest their money by purchasing the shares of the
company, they are known as shareholders and the capital of the company is known as share
capital.

In India, the joint stock companies are governed by the Companies Act, 1956. According
to the Act, a company means ‘a company formed and registered under this Act or an existing
company’. An existing company means a company formed and registered under any of the
previous Companies Acts. This definition is not exhaustive enough to reveal the basic features
of the company. However, based on the definition given in the previous Companies Act and
various judicial decisions, it can be defined as ‘an artificial person created by law, having a
separate legal entity, with a perpetual succession’. In the recent past, the Companies Act 1956
was replaced by the Companies Act 2013. The elaborate discussion pertaining to it is seen
below.
 103

The Companies Act 2013 is an Act of the Parliament of India on Indian company law which
regulates incorporation of a company, responsibilities of a company, directors, dissolution of a
company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658
Sections in the Companies Act, 1956 and has 7 schedules. The Act has replaced The Companies
Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August
2013. The Act came into force on 12 September 2013 with few changes like earlier private
companies maximum number of members were 50 and now it will be 200. A new term of “one-
person company” is included in this act that will be a private company and with only 98 provisions
of the Act notified. A total of another 184 sections came into force from 1 April 2014.

The Ministry of Corporate Affairs thereafter published a notification for exempting private
companies from the ambit of various sections under the Companies Act.

9.3 Meaning of Company

The word ‘Company’ has been derived from the Latin word made from two words i.e.
Com and panies. The word ‘com’ in Latin means ‘with or together’ and the word ‘panies’ in Latin
means ‘bread’. Hence, a company meant an association of persons who took their meal together.

In common parlance, the meaning of company form of business can be understood as an

association of persons formed for the purpose of carrying on some business or undertaking. A
company is a body corporate having separate legal identity having status separate from members
constituting it.

9.4 Definition of Company

As per Section 2(20) of the Companies Act, 2013, company is defined as A registered
association which is an artificial legal person, having an independent legal, entity with a perpetual
succession, a common seal for its signatures, a common capital comprised of transferable
shares and carrying limited liability.

According to Justice James, “A company is an association of persons united for a common

object.”

According to Lord Lindley, “By a ‘company’ is meant an association of many persons who
contribute money or money’s worth to a common stock and employ it for some common purpose.
The common stock so contributed is denoted in money and is the capital of the company. The
104

persons who contribute it or to whom it belongs are members. The proportion of capital to which
each partner is entitled is his share.”

According to Kimball and Kimball, “A corporation is by nature an artificial person created

or authorised by the legal stature for some specific purpose.”

According to Prof. Haney, “A company is an artificial person created by law having a

separate entity with a perpetual succession and a common seal.”

According to James Stephenson, “A company is an association of any persons who

contribute money or money’s worth to a common stock and employs it in some trade or business,
and who share the profit and loss (as the case may be) arising there from.”

The persons who form the company and contribute money or money’s worth for the
business of the company are called ‘Members’. They get ‘shares’ in the company in the proportion
of their contribution in the company. The contribution made by members of the company is the
‘Capital’ of the company.

9.5 CHARACTERISTICS OF COMPANY

On the basis of definitions studied above, the following are the characteristics of a company:

 An Artificial Person Created by Law:A company is a creation of law, and is, sometimes
called an artificial person. It does not take birth like natural person but comes into existence
through law. But a company enjoys all the rights of a natural person. It has right to enter
into contracts and own property. It can sue other and can be sued. But it is an artificial
person, so it cannot take oath, cannot be presented in court and it cannot be divorced or
married.

 Separate Legal Entity:A company is an artificial person and has a legal entity quite
distinct from its members. Being separate legal entity, it bears its own name and acts
under a corporate name; it has a seal of its own; its assets are separate and distinct from
those of its [Link] members are its owners but they can be its creditors simultaneously
as it has separate legal entity. A shareholder cannot be held liable for the acts of the
company even if he holds virtually the entire share capital. The shareholders are not
agents of the company and so they cannot bind it by their acts.
 105

 Perpetual Succession:The life of company is not related with the life of members. Law
creates the company and dissolve it. The death, insolvency or transfer of shares of
members does not, in any way, affect the existence of a company.

According to Tennyson-

“For men may come, men may go,

But I go on forever.”

In the case of company it may be said that members may come and members may go but
the company goes on. It is a legal person having come into being by law and only law can bring
its end and none else.

 Common Seal:On incorporation a company becomes legal entity with perpetual

succession and a common seal. The common seal of the company is of great importance.
It acts as the official signature of the company. As the company has no physical form, it
cannot sign its name on a contract. The name of the company must be engraved on the
common seal. A document not bearing the common seal of the company is not authentic
and has no legal importance.

 Limited Liability:The limited liability is another important feature of the company. If

anything goes wrong with the company his risk is only to the extent of the amount of his
shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it
and not beyond [Link] creditors of a company cannot get their claims satisfied beyond
the assets of the company. The liability of members of a company ‘limited by guarantee’
is limited to the amount of guarantee.

 Transferability of Shares:A shareholder can transfer his shares to any person without
the consent of other members. Under Articles of Association, a company can put certain
restriction on the transfer of shares but it cannot altogether stop it. Private company can
put more restrictions on the transferability of shares.

 Limitation of Work:The field of work of a company is fixed by its charter. A company

cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In
order to do the work beyond the memorandum of association, there is a need for its
alteration.

 Voluntary Association for Profits:A company is a voluntary association of persons to

earn profits. It is formed for the accomplishment of some public good and whatsoever
106

profit is divided among its shareholders. A company cannot be formed to carry on an

activity against the public policy and having no profit motive.

 Representative Management:The shareholders of company are widely scattered. It is

not possible for all the shareholders to take part in the management. They leave their task
to the representatives the Board of Directors and the company is managed by Board of
Directors.

 Termination of Existence:A company is created by law, carries on its affairs according

to law and ultimately is affected by law. Generally, the existence of a company is terminated
by means of winding up.

9.6 Advantage of Company

The company form of organisation has been successful in almost all countries of the
world. This form is suitable where large resources are required and the production has to be
carried out on a large scale. The number of joint stock companies has shown a phenomenal
increase in the twentieth century.

 Accumulation of Large Resources:The main drawback of the sole trade and partnership
concerns has been the scarcity of resources. The resources of a sole trader and of partners
being limited, these enterprises have always suffered for want of funds. A company can
collect large sum of money from large number of shareholders. There is no limit on the
number of shareholders in a public company. If need for more funds arises, the number of
shareholders can be increased. Joint stock companies are suitable for those businesses
where large resources are required.

 Limited Liability:The liability of members in a company form of organisation is limited to

the nominal value of the shares they have acquired. If a person has purchased a share of
Rs. 100, his liability is limited to Rs. 100 only. If the share is partly paid, then he can be
required to pay only the unpaid value of the share. In no case the total payment will
exceed Rs. 100. The limited liability encourages many persons to invest in shares of joint
stock companies. Many persons will be reluctant to invest in those enterprises where
liability is unlimited.

 Continuity of Existence:When a company is incorporated, it becomes a separate legal

entity. It is an entity with perpetual succession. The members of a company may go on
changing from time to time but that does not affect the continuity of a company. The death
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or insolvency of members does not in any way affect the corporate existence of the
company. The continuity of a company is not only in the interests of the members but is
also beneficial for the society. The discontinuation of a company may cause wastage of
resources and inconvenience to the consumers.

 Efficient Management:In company form of organisation, ownership is separate from

management. It enables the company to appoint expert and qualified persons for managing
various business functions. The availability of large-scale resources enables the company
to attract talented persons by offering them higher salaries and better career opportunities.
The efficient management will help the company to expand and diversify its activities.

 Economies of Large Scale Production:With the availability of large resources, the

company can organise production on a big scale. The increase in scale and size of the
business will result in economies in production, purchase, marketing and management,
etc. These economies will enable the company to produce goods at a lower cost, thus
resulting in more profits. The company will help consumers by providing them with cheaper
goods and will also be able to accumulate more resources for further expansion.

 Transferability of Shares:The shares of a public company are freely transferable. A

shareholder can dispose of his shares at any time when the market conditions are
favourable or he is in need of money. The company does not return share-money before
its winding up but shareholders can easily sell their shares through stock exchange
[Link] Exchange provides a ready market for the purchase and sale of shares.
The facility of transferring shares encourages many persons to invest. This provides
liquidity to the investor and stability to the company. On the other hand, partnership form
of organisation does.

 Ability to Cope with Changing Business Environments:The present business

enterprises operate under uncertain economic and technological environments.
Technological changes are taking place every day. The needs of consumers are varied
and changing, to cope with the changing economic environment every business is required
to invest money on research and developmental programmes. Sole trade concern or
partnership firms cannot afford to spend money on research work. Joint stock companies
can afford to invest money on research projects. It will enable them to cope with changing
business conditions.

 Diffused Risk: In sole trade and in partnership business, the risk is shared by a small
number of persons. Further uncertainties discourage them from taking up new ventures
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for fear of risk. In company form of organisation, the number of contributories is large; so
risk is shared by a large number of persons. The burden to be shared by different individuals
becomes insignificant. It enables companies to take up new ventures.

 Democratic Set-up:The values of shares are generally small. It enables persons with
low incomes to purchase the shares of companies. Shareholders come from all walks of
life. Every individual has an opportunity to become a shareholder. Secondly, the Board of
Directors is elected by the members. So members have a say in deciding the policies of
the company. The company form of organisation is democratic both from ownership and
management side.

 Social Benefits:The company form of organisation mobilises scattered savings of the

community. These savings can be better used for productive purposes. The companies
also enable financial institutions to invest their money by providing them avenues. It also
enables the utilisation of natural resources for better productive uses. Large-scale
production enjoys a number of economies enabling low cost of production. The society is
supplied with enough quantity of goods.

9.7 Disadvantages of Company

 Difficulty of Formation:Promotion of a company is not an easy task. A number of stages
are involved in company promotion. The suitability of a particular type of business is to be
decided first. A number of persons should be ready to associate for getting a company
incorporated. A lot of legal formalities are required to be performed at the time of registration.
The shares will have to be sold during the particular time. Promotion of a company is both
expensive and riskly.

 Separation of Ownership and Management:The ownership and management of public

company is in different hands. The owners i.e., shareholders play an insignificant role in
the working of the company. On the other hand, control is in the hands of those who have
no stakes in the company. The management may indulge in speculative business activities.
There is no direct relationship between efforts and rewards. The profits of the company
belong to shareholders and the Board of Directors are paid only a commission. The
management does not take personal interest in the working of the company as is the
case in partnership and sole-trade business.

 Evils of Factory System:The company form of organisation leads to large-scale

production. The evils of factory system like insanitation, air pollution, congestion of cities
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are attributed to joint stock companies. Joint stock companies facilitate formation of
business combinations which ultimately leads to the monopolistic control and exploitation
of consumers.

 Speculation in Shares:The joint stock companies facilitate speculation in the shares at

stock exchanges. The prices of shares depend upon both economic and non-economic
factors. The speculators try to fluctuate the prices of shares according to their suitability.
The stock exchanges will not help the growth of healthy investment when speculative
activities are being carried on. The management of joint stock companies also sometimes
encourage speculation in shares for their personal gains.

 Fraudulent Management:The promoters and directors may indulge in fraudulent practices.

The management is in the hands of those persons who have not invested much in the
company. The Company Law has devised methods to check fraudulent practices but they
have not proved enough to check them completely.

 Lack of Secrecy:The management of companies remains in the hands of many persons.

Everything is discussed in the meetings of Board of Directors. The trade secrets cannot
be maintained. In case of sole trade and partnership concerns such secrecy is possible
because a few persons are involved in management.

 Delay in Decision-making:In company form of organization no single individual can

make a policy decision. All important decisions are taken either by the Board of Directors
or are referred to general house. Decision-taking process is time consuming. If some
business opportunity arises and a quick decision is needed, it will not be possible to
arrange meetings all of a sudden. So many opportunities may be lost because of a delay
in decision-making.

 Concentration of Economic Power:The company form of organization has helped

concentration of economic power in a few hands. Some persons become directors in a
number of companies and try to formulate policies which promote their own interests. The
shares of a number of companies are purchased to create subsidiary companies.
Interlocking of direction-ship and establishment of subsidiary companies have facilitated
concentration of economic power in the hands of a few business houses.

 Excessive State Regulations:A large number of rules and regulations are framed for
the working of the companies. The companies will have to follow rules even for their
internal working. The government tries to regulate the working of the companies because
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large public money is involved. The formalities are many and the penalties for their non-
compliance are heavy. This often detracts companies from their main objectives for which
they have been formed.

9.8 Summary

A company or association of persons can be created at law as a legal person so that the
company in itself can accept limited liability for civil responsibility and taxation incurred as
members perform (or fail to discharge) their duty within the publicly declared ”birth
certificate”or published policy.

Companies as legal persons may associate and register themselves collectively as other
companies – often known as a corporate group. When a company closes, it may need a ”death
certificate” to avoid further legal obligations.

9.9 Keywords
Economics

Liability

Legal Entity

SharesTransferability

9.10 Review Questions

1. Define Company.

2. Explain the evolution of the Company.

3. State the Characteristics of a Company.

4. Outline the Merits of Company.

5. Bring out the Demerits of Company.

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LESSON – 10
KINDS OF COMPANIES
Learning Objectives

After reading this lesson, you will be able to:

 Discuss the classification of Company and explain the role played by different types
of company.

 Differentiate all the companies on various parameters and highlight the merits and
demerits of such companies.

Structure
10.1 Introduction

10.2 Kinds of Companies

10.3 Chartered, Statutory and Registered company

10.4 Companies limited by shares, Guarantee and Unlimited companies

10.5 Private and Public Company

10.6 Foreign and Indian Companies

10.7 Miscallaneous Category

10.8 Formation of Company

10.9 Summary

10.10 Key Words

10.11 Review Questions

10.1 Introduction

The word ‘Company’ has been derived from the Latin word made from two words i.e.
Com and panies. The word ‘com’ in Latin means ‘with or together’ and the word ‘panies’ in Latin
means ‘bread’. Hence, a company meant an association of persons who took their meal together.

In common parlance, the meaning of company form of business can be understood as an

association of persons formed for the purpose of carrying on some business or undertaking. A
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company is a body corporate having separate legal identity having status separate from members
constituting it.

10.2 Kinds of Companies

It must be noted that the Company can be classified into five categories namely (A)
Companies on the basis of Incorporation; (B) Companies on the basis of Liability and (C)
Companies on the basis of number of members (D) Companies on the basis of Domicile and
(E) Other types of Companies.

10.3 Chartered, Statutiry and Registered Company

On the basis of incorporation, companies can be classified as:

1) Chartered companies

2) Statutory companies

3) Registered companies

1) Chartered companies:The crown in exercise of the royal prerogative has power to create
a corporation by the grant of a charter to persons assenting to be incorporated. Such
companies or corporations are known as chartered companies. Examples of this type of
companies are Bank of England (1694), East India Company (1600). The powers and the
nature of business of a chartered company are defined by the charter which incorporates
it. After the country attained independence, these types of companies do not exist in
India.

2) Statutory companies: A company may be incorporated by means of a special Act of the

Parliament or any state legislature. Such companies are called statutory companies,
Instances of statutory companies in India are Reserve Bank of India, the Life Insurance
Corporation of India, the Food Corporation of India etc. The provisions of the Companies
Act 1956 apply to statutory companies except where the said provisions are inconsistent
with the provisions of the Act creating them. Statutory companies are mostly invested with
compulsory powers.
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Features of Statutory Corporations

The main characteristics of the statutory corporation are:

 It is a Corporate Body: It is an artificial person created by law & is a legal entity. Such
corporations are managed by the board of directors constituted by the government. A
corporation has a right to enter into contracts & can undertake any kind of business under
its own name.

 Owned by State: State provides help to such corporations by subscribing to the capital
fully or wholly. It is fully owned by the state.

 Answerable to the Legislature: A statutory corporation is answerable either to parliament

legislature or state assembly whosever creates it. Parliament has no right to interfere in
the working of statutory corporations. It can only discuss policy matters & overall
performance of corporations.

 Own Staffing System: Employees are not government servants, even though the
government owns & manages a corporation. Employees of various corporations receive
balanced or uniform pay & benefits by the government. They are recruited, remunerated
& governed as per the rules laid down by the corporation.

 Financial Independence: A statutory corporation enjoys financial autonomy or

independence. It is not subject to the budget, accounting & audit controls. After getting
the prior permission from the government, it can even borrow money within & outside the
country.

Merits of Statutory Corporations

The main advantages of the statutory corporation are:

 Initiative & flexibility: Operations & management of a statutory corporation is done

independently, without any government’s interference, with its own initiative & flexibility.

 Administrative autonomy: A public corporation is able to manage its affairs with

independence & flexibility.

 Quick decisions: A public corporation is relatively free from red-tapism, as there is less
file work & less formality to be completed before taking decisions.

 Service motive: The activities of the public corporation are discussed in parliament. This
ensures the protection of public interest.
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 Efficient staff: The public corporations can have their own rules & regulations regarding
remuneration & recruitment of employees. It can provide better facilities & attractive terms
of service to staff to secure efficient working from its staff.

 Professional management: Board of directors of statutory corporation consists of

business experts & the representatives of various groups such as labor, consumers
nominated by the government.

 Easy to raise capital: As such corporations are fully owned by the government, they can
easily raise required capital by floating bonds at a low rate of interest. Since these bonds
are safe, the public also feels comfortable in subscribing such bonds.

Demerits of Statutory Corporations

 Autonomy on paper only: The autonomy & flexibility of public corporation is only for
name’s sake. Practically ministers, government officials & political parties often interfere
with the working of these operations.

 Lack of initiative: Public corporations do not have to face any competition & are not
guided by a profit motive. So the employees do not take initiative to increase the profit &
reduce loss. The losses of the public corporation are made good by the government.

 Rigid structure: The objects & powers of public corporations are defined by the act &
these can be amended only by amending the statute or the act. Amending the act is a
time-consuming & complicated task.

 Clash amongst divergent interests: The government appoints the board of directors &
their work is to manage & operate corporations. As there are many members, it is quite
possible that their interests may clash. Because of this reason, the smooth functioning of
the corporation may be hampered.

 Unfair practices: The governing board of a public corporation may indulge in unfair
Practices. It may charge an unduly high price to cover up inefficiency.

 Suitability: The public corporation is suitable where the undertakings require:

o Monopoly powers.

o Special powers, defined by the act or statute.

o Regular grants from the government.

o An appropriate combination of public accountability & operational

autonomy.
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3) Registered companies: Companies registered under the Companies Act 1956, or earlier
Companies Acts are called registered companies. Such companies come into existence
when they are registered under the Companies Act and a certificate of incorporation is
granted to them by the Registrar.

10.4 Companies limited by Shares, Generator and Unlimited

Companies

On the basis of liability the company can be classified into:

1) Companies limited by shares

2) Companies limited by guarantee

3) Unlimited companies.

1) Companies limited by shares: When the liability of the members of a company is

limited to the amount if any unpaid on the shares, such a company is known as a company
limited by shares. In a company limited by shares the liability of the members is limited to
the amount if any unpaid on the shares respectively held by them. The liability can be
enforced during existence of the company as well as during the winding up. Where the
shares are fully paid up, no further liability rests on them.

2) Companies limited by guarantee: It is a registered company in which the liability of

members is limited to such amounts as they may respectively undertake by the
memorandum to contribute to the assets of the company in the event of its being wound
up. In the case of such companies the liability of its members is limited to the amount of
guarantee undertaken by them. Clubs, trade associations, research associations and
societies for promoting various objects are various examples of guarantee companies.

3) Unlimited companies: A company not having a limit on the liability of its members is
termed as unlimited company. In case of such a company every member is liable for the
debts of the company as in an ordinary partnership in proportion to his interest in the
company. Such companies are not popular in India.

10.5 Private and Public Companies

The Following Companies are classified on the basis of Number of Members

1) Private Company

2) Public Company
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1) Private company: A private company means a company which by its articles of

association

 Restricts the right to transfer its shares

 Limits the number of its members to fifty (excluding members who are or were in the
employment of the company) and

 Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.

 Where two or more persons hold one or more shares in a company jointly, they are
treated as a single member. There should be at least two persons to form a private
company and the maximum number of members in a private company cannot exceed 50.
A private limited company is required to add the words “Private Ltd” at the end of its
name.

Characteristics of Private Limited Company

 It can be formed by two members but the number of member limit shall not exceed 50.

 There are restrictions on filling the prospectus of statement in lieu of prospectus with the
register.

 It can begin business after registration without requiring any certificate.

 Statutory meeting is not required as well as not to submit statuary report.

 The number of director at least should be two in numbers. However the maximum numbers
of directors are mentioned in the Articles of Association.

 Without any prior approval of the government, directors of a company can easily receive
loan.

 It is necessary that there should be at least two members in a meeting to make a quorum.

 The payments are made to the directors and the management staff are required no
restrictions.

 The financial report i.e. balance sheet and profit and loss were not require to send the
copies account to the registrar.

 The word (Private) limited is compulsory to use as the last word of the name.

 It cannot be listed on stock exchange of the country.

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Advantages of Private Limited Company

The major advantages of a private limited company are as under:-

 One of the advantages of private limited company is that members are well known to
each other; however control is in the hands of owners of capital.

 In the management of affairs and conduct of business is greater flexibility.

 Statuary meeting is not required as well as submitting of a statuary report.

 The number of directors in a private limited company is at least two.

 One of the advantages of private limited company is that its limited liability, due to which
every members enjoy this facility. It has the advantage of a public company and
a partnership firm.

 A private company after receiving certificate of incorporation start business immediately.

Disadvantages of Private Limited Company

 One of the disadvantages of private limited company is that it restricts transferability of
shares by its articles.

 In a private limited company the number of members in any case cannot exceed 50.

 Another disadvantage of private limited company is that it cannot issue prospectus to

general public.

 In stock exchange shares cannot be quoted.

2) Public company: A public company means a company which is not a private company.
There must be at least seven persons to form a public company. It is of the essence of a public
company that its articles do not contain provisions restricting the number of its members or
excluding generally the transfer of its shares to the public or prohibiting any invitation to the
public to subscribe for its shares or debentures. Only the shares of a public company are
capable of being dealt in on a stock exchange.

Advantages of Public Limited Company

 Able to raise capital for expansion by selling additional shares

 Higher status than a public limited company so will benefit from more publicity.
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 Share prices listed on the stock exchange so shareholders cawork out the value of their
shares. They can buy or sell shares.

 Limited liability for shareholders.

Disadvantages of Public Limited Company

 Original owners lose control and ownership of the business.

 Professional directors and manager appointed to run the business may have different
aims to those of the shareholders.

 Must disclose all main accounts to the public. These are often greatly publicised by the
media.

 Company can be taken over if a majority of shareholders agree to bid.

Table 10.1 : Differences between Public Company and Private Company

Public Company Private Company

A Private company has “[Link]” A Public company has “Ltd” at the end of its
at the end of its name. name.

Minimum number of members

The minimum number of members The minimum number of members needed to

needed to form a private form a Public Company is at least 7 members.
company is at least 2 members.

Maximum number of members

The Maximum number of The Public Company have no restriction on a

members in a Private Company maximum number of members.
is restricted to 200.

Minimum Paid-up Capital

Private Company should Public Company should have a minimum paid

have a minimum paid up up capital of 5 lakh rupees.
capital of 1 lakh rupees.
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Commencement of Business

Commencement of business A Public Company can only Commence its

of a Private Company takes business after receiving a certificate of
place immediately after getting incorporation and Certificate to
the certificate of incorporation. commencement.

Number of Directors

A Private Company must have at A Public Company must have at least 3

least 2 directors to head and directors to manage and lead the affairs of the
supervise the affairs of the company. company.

Issue of Prospectus

A Private Company cannot issue a Public Company can issue a Prospectus.

Prospectus. Private Company is Public Company is free to invite public for
not allowed for inviting the public subscription of its shares.
for subscription of its shares.

Minimum Subscription

A Private Company can allot A Public Company cannot be able to allot

shares without waiting for the shares before the minimum subscription of
completion of minimum shares is completed.
subscription limit.

Transferability of shares

The Articles of Association of The Public Company is free to transfer the

a Private Company lays restriction The Public Company is free to transfer the
on transfer of the shares from xanother.
one person to another person.

Quorum

A Private Company is obligated A Public Company is obligated to have at least

to have at least 2 members 5 members personally present to constitute the
personally present for holding meeting.
the company meeting.
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Statutory meeting

A Private Company is not A Public Company is required to conduct a

required to conduct a Statutory statutory Meeting and file the Report to the
Meeting of the members or filing Register of Companies.
of Report to the Register of
Companies.

Managerial remuneration

There are no restrictions on There are some restrictions on payments and

payments and remunerations remunerations offered to the directors or
offered to the directors or remunerations offered to the directors or
managers of a Private Company. xexceed 11% of the net profits.

10.6 Foreign and Indian Companies

1) Foreign Company

2) Indian Companies

1) Foreign company:It means a company incorporated outside India and having a place
of business in India.

According to Section 591 a foreign company is one incorporated outside India:

(a) Which established a place of business within India after the commencement of this
Act or (b) Which had a place of business within India before the commencement of this Act and
continues to have the same at the commencement of this Act.

2) Indian Companies: A company formed and registered in India is known as an Indian

Company.

10.7 Miscellaneous Category

The following companies fall under miscellaneous category

1) Government Company

2) Holding and Subsidiary Companies

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1) Government Company: It means any company in which not less than 51 percent of
the paid up share capital is held by the Central Govt, and/or by any State Government or
Governments or partly by the Central Government and partly by one or more State Governments.
The subsidiary of a Government company is also a Government company.

Characteristics of a Government Company

 A government company is formed and registered under the Companies Act, 1956 as a
public company or a private company. Provisions of company law are applicable to
government companies also.

 It has a separate legal entity, perpetual succession and a common seal.

 It can sue and be sued, enter into contracts and acquire property in its own name.

 A government company may be owned wholly by the government or partly by the

government and partly by the private investors. When these companies are owned by
both the government and private investors, not less than 51 per cent of the paid-up share
capital of government company is held by the Government.

 The government company is managed by Board of Directors. The directors are appointed
by the government and other shareholders.

 The auditor of a government company is appointed by the Central Government on the

advice of the Comptroller and Auditor-General of India.

 The annual report of the working of the government company is required to be presented
every year to the Parliament or State Legislature as the case may be.

Advantages of a Government Company

 A government company is formed easily as no statute is required to be enacted.

 It has a separate legal entity and so can manage its affairs on its own.

 These companies are run on sound business lines. They earn surpluses to finance their
own expansion plans.

 This form of management has greater flexibility than the department management. The
Memorandum of Association’ and ‘Articles of Association’ of government company can
be altered according to the provisions of the Indian Companies Act, 1956 as and when
required.
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 It is the only form of management by which the government can make use of managerial
skill and technical know-how of the private sector.

 Tie directors of a government company are free to take decisions. They can take prompt
decisions. They will not let an opportunity slip away.

Limitations of a Government Company

Notwithstanding the above mentioned points of merit there are certain limitations of this
form of organisation.

 The relatively independent character of the Government company has proved to be farce.
Government being the sole or the bulk shareholder dictates its terms and the management
is conducted by the Board of Directors according to the will of the Government.

 Ministerial interference in the working of the Government company is found to be frequent

and far-reaching. Undefined and unrestricted authority is exercised by the Government
department to influence or twist the operational policies of the Government companies
according to the whims and fancies of the Ministers and Secretariat officers.

 The apparently independent Government companies tend to be either the extension of

departmental bureaucracy or the tool of the pet political ideas or policies of the ruling
party divorced from the tangible criteria of commercial feasibility, administrative efficiency
and integrity.

 The powers of the Board of Directors are subject to the approval of the concerned Ministry.
This is particularly so in regard to the borrowing power, increase in the capital, appointment
of top officials, entering into contracts for large orders and restrictions on capital
expenditure. Thus the Government company can rarely function with flexibility and
independence.

 The control exercised by the Government over these companies is so vast or all-pervading
that they “are reduced to mere adjuncts to the ministries and subjected to the same
treatment as given to the subordinate organisation or offices of the Government.”

 The autonomy of the Government companies is vitiated by the executive orders of the
Government issued without reference to the Parliament.

 The Boards of Management of the Government companies are dominated by officials

from the ministerial departments in their ex-officio capacity. These officials do not develop
any sense of attachment and do not show any initiative and drive (as they have no direct
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financial stake in the working of the concerns) essential for increasing productive activity
and increasing efficiency.

 The departmental officers appointed to top posts in the executive control of these
companies. They are liable to be transferred back to their original departments. Hence
their divided loyalty dilutes their interest in carrying out the responsible tasks assigned to
them as managers of the Government companies.

 It evades the constitutional responsibility to the Government and the Parliament.

 Parliament has no effective control over State undertakings constituted in the form of
Government company.

2) Holding and subsidiary companies:A company is known as the holding company of

another company if it has control over another company. A company is known as subsidiary of
another company when control is exercised by the latter over the former called a subsidiary
company. A company is to be deemed to be subsidiary company of anotherIf the other:

 Controls the composition of its Board of directors or

 Exercises or controls more than half of its total voting power where it is an existing company
in respect where of the holders of preference shares issued before the commencement
of the Act have the same voting rights as the holders of equity shares or

 In the case of any other company holds more than half in nominal value of its equity share
capital or

(b) If it is a subsidiary of a third company which is subsidiary of the controlling company.

Differences between Holding Company and Subsidiary Company

A company which controls another company is known as Holding company, and the
company so controlled is termed as Subsidiary [Link] per section 4, a company shall be
deemed to control another company in each of the following cases:

1) If it controls the majority composition of the board of directors of another company. The
composition of other company’s board of directors shall be deemed to be controlled if it can, at
its direction without the consent or concurrence of any other person, appoint or remove the
holders of all or a majority of the directorships. A company shall be deemed to have power to
appoint the director in each of the following three cases:
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a. If a person cannot be appointed as a director without the exercise in his favour of the
power of appointment held by the company.

b. If a person’s appointment to directorship follows necessarily from his appointment as a

director, or manager or to any other office or employment in that company, or

c. If the directorship is held by an individual nominated by that company or a subsidiary

thereof.

2) If it holds majority of the shares of another company. For the purpose of control the
company should hold more than half in nominal value of the equity shares of another [Link]
where another company is an existing company and its preference shares issued before the
commencement of the Companies Act, have the same voting rights in all respects as equity
shares, a company is termed as holding company if it exercises or controls more than half the
total voting power of another company.

Holding of shares or power to appoint majority of directors of the following nature shall
not be taken into consideration while determination of the relationship of holding and subsidiary
companies:

a. Where the shares are held or the power is exercised by the company in a fiduciary capacity;
or

b. Where the shares are held or the power is exercisable by any person by virtue of the
provisions of any debentures or a trust deed for securing any issue of such debentures;

c. Where the shares are held or power is exercisable by a lending company by way of
security and only for the purpose of a transaction entered into the ordinary course of
business.

3) A company shall be deemed to be the holding company of another company if another

company is a subsidiary of the first mentioned company’s subsidiary (i.e. subsidiary of the
subsidiary).

4) In the case of a company incorporated outside India, a subsidiary or holding company

of the company under the law of such country will also be treated as a subsidiary or holding
company within the meaning and for the purposes of this Act also, whether the requirements of
this section are met or not.
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5) A private company, being a subsidiary of a company incorporated outside India, which,

if incorporated in India, would be a public company within the meaning of this Act, shall be
deemed for the purposes of this Act to be a subsidiary of a public company. But this is when the
entire share capital in that private company is not held by that company whether alone or
together with one or more other bodies corporate incorporated outside India.

As mentioned earlier, a private company which is subsidiary of a public company is regarded

as the public company.A subsidiary company cannot be a member of its holding company and
any allotment or transfer of shares in the holding company to its subsidiary will be void. This
prohibition also extends to the nominees of the subsidiary company.

This prohibition, however, will not apply to the subsidiary company which was holding
shares in its holding company at the commencement of the Act or before becoming a subsidiary
of the holding company. The subsidiary shall have no right to vote at the meetings of the holding
company or of any class of members thereof. (Sec. 42)

The provisions of section 42 do not apply to the following cases:

a. Where the subsidiary is concerned as the legal representative of a deceased members of

the holding company, or

b. Where the subsidiary is concerned as trustee, unless the holding company or a subsidiary
thereof is beneficially interested under the trust and is not interested only by way of security
for the purpose of a transaction entered into by it in ordinary course of the business which
includes the lending of money.

c. Every holding company is required to attach to its annual accounts, copies of the Balance
Sheet and Profit and Loss Account, etc., of the subsidiary companies as per the
requirements of sections 212 to 214.

(iii) One man Company:This is a company in which one man holds practically the whole
of the share capital of the company and in order to meet the statutory requirement of minimum
number of members, some dummy members hold one or two shares each. The dummy members
are usually nominees of principal shareholder. The principal shareholder is in a position to enjoy
the profits of the business with limited liability. Such type of companies are perfectly valid and
not illegal.
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10.8 Formation of Companies

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. It presupposes the technical processing of a commercial proposition
with reference to its potential profitability. The meaning of promotion and the steps to be taken
in promoting a business are discussed in brief here. Promotion of a company refers to the sum
total of the activities of all those who participate in the building of the enterprise upto the
organisation of the company and completion of the plan to exploit the idea. It begins with the
serious consideration given to the ideas on which the business is to be based.

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.

Procedure to the Registration of this Company

In order to get a company registered or incorporated, the following procedure is to be

adopted:

(A) Preliminary Activities:Before a company is incorporated, the promoter has to take

decision regarding the following;

1. To decide the name of the company

2. Licence under Industries Development and Regulation Act, 1951

(B) Filing of Document with the Registrar:

1. Memorandum of Association

2. Articles of Association

3. List of directors

4. Written consent of directors

5. Statutory declaration

(C) Certificate of Incorporation: On the registration of memorandum and other

documents, the Registrar will issue a certificate known as the Certificate of Incorporation certifying
 127

under his hand that the company is incorporated and, in the case of a limited company that the
company is limited.

The specimen of certificate of incorporation is given below:

Effects of Incorporation:The certificate of incorporation is conclusive evidence of

the fact that:

 The company is properly incorporated and duly registered;

 The terms of the Memorandum and Articles are within the law;

 All requirements of the Act in respect of registration have been complied with;

 A private company can start its business after getting the certificate of incorporation;
and

 With the issue of certificate, the company takes birth with a separate legal entity.

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
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public company having a share capital. Such a company has to pass through these additional
two stages before it can commence [Link] the capital subscription stage comes the
task of obtaining the necessary capital for the company.

a. Appointment of the Secretary. In most cases the appointment of pre-tem secretary

(who is appointed at the promotion stage) is confirmed.

b. Appointment of bankers, auditors, solicitors and brokers etc.

c. Adoption of draft ‘prospectus’ or ‘statement in lieu of prospectus’.

d. Adoption of underwriting contract, if any.

Besides the above mentioned business, the Board also decides as to whether:

a) a public offer for capital subscription is to be made, and

b) Listing of shares at a stock exchange is to be secured.

The company will now proceed to obtain the permission of the Controller of Capital Issue,
New Delhi, under the Capital Issue Control Act, 1947 if a public offer for sale of shares and
debentures exceeding Rs. one crore is to be made during a period of 12 months, unless the
issue fulfils the conditions of exemption as laid down in the Capital Issue (Exemption) Order,
1969.

The Capital Issue Control Act, 1947 however, does not apply to a private company, a
banking company, an insurance company, and a government company provided it does not
make an issue of securities to the general public.

After the above formalities have been completed, the directors of the company file a copy
of the ‘prospectus’ with the Registrar and invite public to subscribe to the shares of the company
by putting the ‘prospectus’ in circulation.

Application for shares are received from the public through the company’s bankers and if
the subscribed capital is at least equal to the minimum subscription amount as disclosed in the
prospectus, and other conditions of a valid allotment are fulfilled, the directors of the company
pass a formal resolution of allotment.
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Allotment letters are then posted, return of allotment is filed with the Registrar and share
certificates are issued to the allottees in exchange of the allotment letters. If the subscribed
capital is less than the minimum subscription or the company could not obtain the minimum
subscription within 120 days of the issue of prospectus, all money will be refunded and no
allotment can be made.

It may be noted that a public company having a share capital, but not issuing a ‘prospectus’
has to file with the Registrar ‘a Statement in lieu of Prospectus’ at least three days before the
directors proceed to pass the first allotment resolution.

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.

After making the sale of the required number of shares a certificate is sent to the Registrar
stating this fact, along-with a letter from the banks, that it has received application money for
such shares.

The Registrar scrutinizes the documents. If he is satisfied, then issues a certificate known
as Certificate of Commencement of Business. This is the conclusive evidence of the
commencement of the business.
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The specimen of certificate of commencement of business is given below:

Restrictions on the Commencement of Business: Section 149 of the Companies Act,

has imposed some restrictions on the commencement of business by public companies, which
are as follows:

1. Companies which issue a prospectus: A company having share capital issues

prospectus to the general public for subscription of their shares or debentures.

But this company cannot commence business or exercise borrowing powers unless
the following formalities are complied with [Sec. 149 (1)]:

a. The shares payable in cash have been allotted equal to an amount not less than the
minimum subscription.

b. The directors have taken up and paid for the qualification shares in cash an amount equal
to the amount payable by other subscribers on application and allotment.
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c. No money is liable to become refundable to applicants, because of company’s failure to

apply for, or to get permission for the share or debentures to be dealt in on any recognised
stock exchange.

d. A statutory declaration duly verified by any one of the company should be filed with the
Registrar stating that all conditions given above in (i), (ii) and (iii) have been complied
with.

2. Companies which do not issue a prospectus:A company which has not issued a
prospectus must file the following documents with the Registrar or in other words, cannot
commence the business unless the following formalities are complied with [Sec. 149 (2)].

a. A statement in lieu of prospectus has been filed with the Registrar.

b. The directors have taken up and paid for the qualification shares in cash an amount equal
to the amount payable by other subscribers on application and allotment.

c. A statutory declaration duly verified by any one of the directors or secretary of the company
that the directors have taken up and paid for the qualification shares in cash an amount
equal to the amount payable by other subscribers on application and allotment.

If the above requirements have been complied with, the Registrar issues a certificate that
the company is entitled to commence business. This certificate of commencement of business,
like the certificate of incorporation, is a conclusive evidence that the company is so entitled
[Sec. 149 (3)].

10.9 Summary

It must be noted that the Company can be classified into five categories namely (A)
Companies on the basis of Incorporation; (B) Companies on the basis of Liability and (C)
Companies on the basis of number of members (D) Companies on the basis of Domicile and
(E) Other types of Companies.

10.10 Key Words

Chartered Company

Company limited by Gurantee

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Company Limited by Shares

Private Company

Public Company

Foreign Company

10.11 Review Questions

1. Explain the different kinds of Companies.

2. What are the features of Statutory Corporation?

3. List out the differences between Public Company and Private Company.

4. Explain the advantages and disadvantages of Private Limited Company.

5. What is Government Company? Explain the Characteristics of Government

Company.

6. State the differences between Holding and Subsidiary Company.

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LESSON – 11
MEMORANDUM AND ARTICLES OF ASSOCIATION
Learning Objectives

After reading this lesson, you will be able to:

 Discuss the memorandum of Association and list out the various clauses and contents
of Memorandum of Association.

 Present the Articles of Association apart from discussing its contents and clauses.

Structure
11.1 Introduction

11.2 Memorandum of Association

11.3 Definition of Memorandum of Association

11.4 Features of Memorandum of Association

11.5 Importance of Memorandum of Association

11.6 Framing Memorandum

11.7 Clauses of Memorandum of Association

11.8 Articles of Association

11.9 Definition of Articles of Association

11.10 Contents of Articles of Association

11.11 Alteration of Articles of Association

11.12 Differences between Memorandum of Association and Articles of

Association.

11.13 Summary

11.14 Key Words

11.15 Review Questions

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11.1 Introduction

The memorandum and articles of association are two constitutional documents that all
limited companies are required to have when they incorporate at Companies House. The
memorandum states the names of each subscriber (the very first shareholders or guarantors
who become members during the company formation process) and their intention to form and
join the business. The articles of association is a governing document that outlines the purpose
of a company, the rights and responsibilities of its members and directors, and the way in which
the company must operate as a whole.

11.2 Memorandum of Association

Memorandum of Association is the most important document of a company. It states the

objects for which the company is formed. It contains the rights, privileges and powers of the
company. Hence it is called a charter of the company. It is treated as the constitution of the
company. It determines the relationship between the company and the outsiders.

The whole business of the company is built up according to Memorandum of Association.

A company cannot undertake any business or activity not stated in the Memorandum. It can
exercise only those powers which are clearly stated in the Memorandum.

11.3 Definition of Memorandum of Association

Lord Cairns:Thus, a Memorandum of Association is a document which sets out the

constitution of the company. It clearly displays the company’s relationship with outside world. It
also defines the scope of its activities. MOA enables the shareholders, creditors and people
who have dealing with the company in one form or another to know the range of activities.

11.4 Features of Memorandum of Association

 It is a fundamental document of a company.

 It is essential to every company to prepare its own memorandum.

 It should be in written form.

 It contains Name, signature and other particulars of persons.

 On registration of memorandum, the company is deemed to have been registered.

 It contains information regarding company information.

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 Memorandum is a public document after registration and inspected by any person.

 It is a binding of company and its members.

11.5 Importance of Memorandum of Association

The Memorandum of association is important document of an organisation, and it is very

significant and vital document of every company. It is not only important for company also
important for shareholders,creditors and every person who deals with company. Theimportance
of memorandum isdiscussedbelow:-

1. Basis for the company: Memorandum of association is the basic document of company
and company can’t get registered without it.

2. Determines company scope: It lay down the scope of company activities which they
perform and company cannot go beyond that.

3. Source of company’s Power: Memorandum of association also defines the the company
powers and help company members in workings.

4. Guide to directors: It serves as a guide to the directors of the company. It guides them
to work for achieving the objectives of company and restrains them from doing anything
beyond memorandum.

5. Protect Investors: Memorandum protects the interest of investors because there is a

risk when person invest money on a company.

11.6 Framing Memorandum

Following factors must be considers while framing memorandum of association of a

company are :-

1. Must be in proper form.

2. Memorandum shall be printed.

3. It shall be divided in paragraphs numbered consecutively.

4. Their should be information regarding subscribers.

5. Signed by all the subscribers.

6. It must be stamped as per stamp act.

7. Date must be written on it.

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11.7 Clauses of Memorandum of Association

According to the Companies Act, the Memorandum of Association of a company must

contain the following clauses:

1. Name Clause of Memorandum of Association: The name of the company should be

stated in this clause. A company is free to select any name it likes. But the name should not be
identical or similar to that of a company already registered. It should not also use words like
King, Queen, Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O.,
World Bank etc. If it is a Public Limited Company, the name of the company should end with the
word ‘Limited’ and if it is a Private Limited Company, the name should end with the words
‘Private Limited’.

2. Situation Clause of Memorandum of Association: In this clause, the name of the

State where the Company’s registered office is located should be mentioned. Registered office
means a place where the common seal, statutory books etc., of the company are [Link]
company should intimate the location of registered office to the registrar within thirty days from
the date of incorporation or commencement of business.

The registered office of a company can be shifted from one place to another within the
town with a simple intimation to the Registrar. But in some situation, the company may want to
shift its registered office to another town within the state. Under such circumstance, a special
resolution should be passed. Whereas, to shift the registered office to other state, Memorandum
should be altered accordingly.

3. Objects Clause of Memorandum of Association: This clause specifies the objects

for which the company is formed. It is difficult to alter the objects clause later on. Hence, it is
necessary that the promoters should draft this clause carefully. This clause mentions all possible
types of business in which a company may engage in future.

The objects clause must contain the important objectives of the company and the other
objectives not included above.

4. Liability Clause of Memorandum of Association: This clause states the liability of

the members of the company. The liability may be limited by shares or by guarantee. This
clause may be omitted in case of unlimited liability.
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5. Capital Clause of Memorandum of Association: This clause mentions the maximum

amount of capital that can be raised by the company. The division of capital into shares is also
mentioned in this clause. The company cannot secure more capital than mentioned in this
clause. If some special rights and privileges are conferred on any type of shareholders mention
may also be made in this clause.

6. Subscription Clause of Memorandum of Association: It contains the names and

addresses of the first subscribers. The subscribers to the Memorandum must take at least one
share. The minimum number of members is two in case of a private company and seven in
case of a public [Link] the Memorandum of Association of the company is the most
important document. It is the foundation of the company.

11.8 Articles of Association

An article of Association is an important document of a Joint Stock Company. It contains

the rules and regulations or bye-laws of the company. They are related to the internal working
or management of the company. It plays a very important role in the affairs of a company. It
deals with the rights of the members of the company between themselves.

The contents of articles of association should not contradict with the Companies Act and
the MOA. If the document contains anything contrary to the Companies Act or the Memorandum
of Association, it will be inoperative. The privateconcern that is limited by shares and those
limited by guarantee and unlimited companies must have their articles of association. Public
companies may not have their articles but may adopt Model articles given in Table A of Schedule
I of Companies Act,. If a public company has only some articles of its own, for the rest, articles
of Table A will be applicable.

Articles that are profound to be registered should be printed, segmented well and
sequenced consecutively. Each subscriber to Memorandum of Association must sign the articles
in the presence of at least one witness.

11.9 Definition of Articles of Association

The Articles of Association or AOA are the legal document that along with the
memorandum of association serves as the constitution of the company. It is comprised of rules
and regulations that govern the company’s internal affairs.
138

The articles of association are concerned with the internal management of the company
and aims at carrying out the objectives as mentioned in the memorandum. These define the
company’s purpose and lay out the guidelines of how the task is to be carried out within the
organization. The articles of association cover the information related to the board of directors,
general meetings, voting rights, board proceedings, etc.

The articles of association are the contracts between the shareholders and the organization
and among the shareholder themselves. This document often defines the manner in which the
shares are to be issued, dividend to be paid, the financial records to be audited and the power
to be given to the shareholders with the voting rights.

The articles of association can be considered as the user manual for the organization that
comprises of the methodology that can be used to accomplish the company’s day to day
operations. This document is a binding on the shareholders and the organization and has
nothing to do with the outsiders. Thus, the company is not accountable for any claims made by
any external party.

The articles of association are comprised of following provisions:

§ Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of
shares, share warrant, surrender of shares, etc.

§ Directors, their qualifications, appointment, remuneration, powers, and proceedings of

the board of directors meetings.

§ Voting rights of shareholders, by poll or proxies and proceeding of shareholders general

meetings.

§ Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:

1. Unlimited Companies: The article must state the number of members with which the
company is to be registered along with the amount of share capital, if any.

2. Companies Limited by Guarantee: The article must define the number of members
with which the company is to be registered.

3. Private Companies Limited by Shares: The private company having the share capital,
then the article must contain the provision that, restricts the right to transfer shares, limit
the number of members to 50, prohibits the invitation to the public for the further subscription
of shares in the form of shares or debentures.
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11.10 Contents of Articles of Association

The articles generally deal with the following

a. Classes of shares, their values and the rights attached to each of them.

b. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of

capital.

c. Directors, their appointment, powers, duties etc.

d. Meetings and minutes, notices etc.

e. Accounts and Audit

f. Appointment of and remuneration to Auditors.

g. Voting, poll, proxy etc.

h. Dividends and Reserves

i. Procedure for winding up.

j. Borrowing powers of Board of Directors and managers etc.

k. Minimum subscription.

l. Rules regarding use and custody of common seal.

m. Rules and regulations regarding conversion of fully paid shares into stock.

n. Lien on shares.

11.11 Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the
benefit of the company. They should not lead to breach of contract with the third parties. The
following are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should
be given to ensure that the alteration of AoA does not conflict with the provisions of the
Memorandum of Association or the Companies Act. A copy of every special resolution altering
the Articles must be filed with the Registrar within 30 days of its passing.

a. The proposed alteration should not contravene the provisions of the Companies
Act.
140

b. The proposed alteration should not contravene the provisions of the Memorandum
of Association.
c. The alteration should not propose anything that is illegal.
d. The alteration should be bonafide for the benefit of the company.
e. The proposed alteration should in no way increase the liability of existing members.
f. Alteration can be made only by a special resolution.
g. Alteration can be done with retrospective effect.
h. The Court does not have any power to order alteration of the Articles of Association.

11.12 Differences between Memorandum of Association and

Articles of Association

The memorandum of association and articles of association are the two charter documents,
for setting up of the company and its operations thereon. ‘Memorandum of Association’
abbreviated as MOA, is the root document of the company, which contains all the basic details
about the company. On the other hand, ‘Articles of Association’ shortly known as AOA, is a
document containing all the rules and regulations designed by the company.

While the MOA sets out the company’s constitution, and so it is the cornerstone on which
the company is built. Conversely, AOA comprises of bye-laws that govern the company’s internal
affairs, management, and conduct. Both, MOA and AOA, requires registration, with the Registrar
of companies (ROC), when the company goes for incorporation.

To further comprehend the difference between memorandum of association and articles

of association, take a read of the given article.

Table 11.1 Differences between Memorandum of Association and Articles of Association

Basis for Memorandum of Articles of Association

Comparison Association

Meaning Memorandum of Association Articles of Association are a

is a document that contains document containing all the
all the fundamental rules and regulations that
information which is required governs the company.
for the incorporation of
the company.
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Defined in Section 2 (56) Section 2 (5)

Type of Information Powers and objects of Rules of the company.

contained the company.

Status It is subordinate to the It is subordinate to the

Companies Act. memorandum.

Retrospective The memorandum of association The articles of association can

Effect of the company cannot be be amended retrospectively.
amended retrospectively.

Major contents A memorandum must The articles can be drafted as

contain six clauses. per the choice of the company.

Obligatory Yes, for all companies. A public company limited by

shares can adopt Table A in
place of articles.

Compulsory filing Required Not required at all.

at the time of
Registration

Alteration Alteration can be done, after Alteration can be done in the

passing Special Resolution (SR) Articles by passing Special
in Annual General Meeting Resolution (SR) at Annual
(AGM) and previous approval of General Meeting (AGM)
Central Government (CG)
or Company Law Board
(CLB) is required.

Relation Defines the relation between Regulates the relationship

company and outsider. between company and its
members and also between the
members inter se.

Acts done Absolutely void Can be ratified by shareholders.

beyond the scope
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11.13 Summary

The memorandum and articles of association are two constitutional documents that all
limited companies are required to have when they incorporate at Companies House. The
memorandum states the names of each subscriber (the very first shareholders or guarantors
who become members during the company formation process) and their intention to form and
join the business. The articles of association is a governing document that outlines the purpose
of a company, the rights and responsibilities of its members and directors, and the way in which
the company must operate as a whole.

11.14 Key Words

Articles of Association

Memorandum of Association

11.15 Review Questions

1. Define Memorandum of Association. Explain its Contents.

2. Explain the Clauses of Memorandum of Association.

3. Narrate the characteristics and features of Memorandum of Association.

4. What do you understand by Articles of Association? Name the contents of Articles

of Association.

5. What do you understand by the Alteration of Articles of Association?

6. Explain the differences between Memorandum of Association and Articles of

Association.
 143

LESSON – 12
PROSPECTUS AND MANAGEMENT OF COMPANIES
Learning Objectives

After reading this lesson, you will be able to:

 List out the ways of issuing Prospectus and enumerate the Contents of Prospectus.

 Explore the various types of Prospectus

 Differentiate prospectus and statement lieu of Prospectus.

Structure
12.1 Introduction

12.2 Definition of Prospectus

12.3 Characteristics of Prospectus

12.4 Contents of Prospectus

12.5 Types of Prospectus

12.6 Legal Requirements regarding issue of Prospectus

12.7 Mis-Statement in Prospectus

12.8 Differences between Prospectus and Statement in lieu of Prospectus

12.9 Management of Companies

12.10 Accounts and Audit of Company

12.11 Summary

12.12 Key Words

12.13 Review Questions

12.1 Introduction

After getting the Certificate of Incorporation or Registration a public limited company

invites the public to subscribe to its shares. This is done by issuing a document called Prospectus.
Under the Companies Act, a prospectus has been defined as “any document described or
issued as a prospectus and includes any notice, circular, advertisement or other document,
144

inviting deposits from the public or inviting offers from the public for the subscription or purchase
of shares or debentures of a company or body corporate”.

The main objectives of issue of a prospectus are:

a. To inform the public about the company;

b. To induce people to invest in the shares or debentures of the company; and

c. To provide an authentic information about the company and the terms and conditions of
issue of shares and debentures.

The prospectus usually contains the following information which is considered important
for the prospective investors of shares and debentures of the company.

a. General information regarding the name, office of the company, stock exchange where
shares are to be listed, date of opening and closing of the issue, credit rating information,
name of underwriters, brokers and bankers.

b. Capital structure of the company.

c. Terms of payment and application procedure.

d. Company management and details of the project and project report.

e. Other listed companies under the same management.

f. Outstanding litigations and defaults.

g. Management perception of risk factors.

The prospectus must be prepared with great care because on the basis of its details the
public subscribes to the capital of the company. No facts should be withheld in this. It must not
contain even an idea of falsehood. It should contain only truth, complete truth and nothing but
truth. The future schemes and bright futures of the company are presented through this.
Companies which do not want to issue a prospectus may submit a statement in lieu of prospectus
to the Registrar of Companies. It is a copy of the prospectus but is not issued to the public.

12.2 Definition of Prospectus

Section 2(70) of the Companies Act, 2013 defines a prospectus as “”A prospectus means
Any documents described or issued as a prospectus and includes any notices, circular,
advertisement, or other documents inviting deposit fro the public or documents inviting offer
 145

from the public for the subscription of shares or debentures in a company.” A prospectus also
includes shelf prospectus and red herring prospectus. A prospectus is not merely an
advertisement.

A document shall be called a prospectus if it satisfies two things:

1. It invites subscription to shares or debentures or invites deposits.

2. The aforesaid invitation is made to the public.

In another definition, prospectus is also defined as a legal document, wherein the offer
their securities for the public for purchase. It must be in written format, i.e. an oral invitation to
offer, for the purchase of shares will not be regarded as a prospectus. It includes the red-
herring prospectus, shelf prospectus, abridged prospectus or any other circular or notice, that
invites the public to subscribe for its shares.

Prospectus is the key document of the body corporate, on which the investment decisions
of the prospective investors relies. So, it is mandatory for the companies to make disclosure of
all the material facts and also prohibits variations in the terms and conditions of the contracts,
as any misstatement or concealment of facts can cause heavy loss to the investing public.

12.3 Characteristics of Prospectus

 It is a document issued as a prospectus;

 It is an invitation to the member of the public;

 The public is invited to subscribe to the shares or debentures of the company;

 It includes any notice, circular, advertisement inviting deposits from the public;

 It is a document by which the company procures its share capital needed to carry on its
activities.

12.4 Contents of a Prospectus

1. Address of the registered office of the company.

2. Name and address of company secretary, auditors, bankers, underwriters etc.

3. Dates of the opening and closing of the issue.

4. Declaration about the issue of allotment letters and refunds within the prescribed
time.
146

5. A statement by the board of directors about the separate bank account where all
monies received out of shares issued are to be transferred.

6. Details about underwriting of the issue.

7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.

8. The authority for the issue and the details of the resolution passed therefore.

9. Procedure and time schedule for allotment and issue of securities.

10. Capital structure of the company.

11. Main objects and present business of the company and its location.

12. Main object of public offer and terms of the present issue.

13. Minimum subscription, amount payable by way of premium, issue of shares otherwise
than on cash.

14. Details of directors including their appointment and remuneration.

15. Disclosure about sources of promoter’s contribution.

16. Particulars relation to management perception of risk factors specific to the project,
gestation period of the project, extent of progress made in the project and deadlines
for completion of the project.

12.5 Types of Prospectus

1. Statement in lieu of Prospectus: A public company, which does not raise its capital
by public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus
must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It
should be dated and signed by each director or proposed director and should contain the same
particulars as are required in case of prospectus proper.

The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies
(ROC) when the company has not issued prospectus to the public for inviting them to subscribe
for shares. The statement must contain the signatures of all the directors or their agents
authorised in writing. It is similar to a prospectus but contains brief [Link] Statement
in Lieu of Prospectus needs to be filed with the registrar if the company does not issues prospectus
or the company issued prospectus but because minimum subscription has not been received
the company has not proceeded for the allotment of shares.
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2. Deemed Prospectus: Section 25 of the companies Act, 2013 provides that all
documents containing offer of shares or debentures for sale shall be included within the definition
of the term prospectus and shall be deemed as prospectus by implication of law.

Unless the contrary is proved an allotment of or an agreement to allot shares or debentures

shall be deemed to have been made with a view to the shares or debentures being offered for
sale to the public if it is shown

1. That the offer of the shares or debentures of or any of them for sale to the public
was made within 6 month after the allotment or agreement to allot; or

2. That at the date when the offer was made the whole consideration to be received by
the company in respect of the shares or debentures had not been received by it.

All enactments and rules of law as to the contents of prospectus shall apply to deemed
prospectus.

3. Abridged Prospectus [Sec. 2(1)]: Abridged prospectus means a memorandum

containing such salient features of a prospectus as may be specified by the SEBI by making
regulations in this behalf. No form of application for the purchase of any of the securities of a
company shall be issued unless such form is accompanied by an abridged prospectus. A copy
of the prospectus shall, on a request being made by any person before the closing of the
subscription list and the offer, be furnished to him.

12.6 Legal requirement regarding issue of Prospectus (Sec. 26 of

the Companies Act, 2013)

The Companies Act has defined some legal requirements about the issue and registration
of a prospectus. The issue of the prospectus would be deemed to be legal only if the requirements
are met.

1. Issue after the incorporation: As a rule, the prospectus of a company can only be
issued after its incorporation. A prospectus issued by, or on behalf of a company, or in relation
to an intended company, shall be dated, and that date shall be taken as the date of publication
of the prospectus.

2. Registration of prospectus: it is mandatory to get the prospectus registered with the

Registrar of Companies before it is issued to the public. The procedure of getting the prospectus
registered is as under:
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A. A copy of the prospectus, duly signed by every person who is named therein as a
director or a proposed director of the company must be filed with Registrar of Companies
before the prospectus is issued to the public.

B. The following document must be attached thereto:

a) Consent to the issue of the prospectus required under any person as an expert
confirming his written consent to the issue thereof, and that he has not withdrawn
his consent as aforesaid appears in the prospectus.

b) Copies of all contracts entered into with respect to the appointment of the managing
director, directors and other officers of the company must also be filed with Registrar.

c) If the auditor or accountant of the company has made any adjustments in the
company’s account, the said adjustments and the reasons thereof must be filed
with the documents.

d) There must be a copy of the application which is to be filled for the issue of the
company’s shares and debentures attached with the prospectus.

e) The prospectus must have the written consent of all the persons who have been
named as auditors, solicitors, bankers, brokers, etc.

C. Every prospectus must have, on the face of it, a statement that:

a) A copy of the prospectus has been delivered to the Registrar for registration.

b) Specifies that any documents required to be endorsed by this section have been
delivered to the Registrar.

D. A copy of the prospectus must be filed with the Registrar of Companies.

E. According to the Section 26, no prospectus shall be issued more than ninety days after
the date on which a copy thereof is delivered for [Link] a prospectus issued in
contravention of the above –stated provisions, then the company and every person who knows
a party to the issue of the prospectus shall be punishable with a fine.
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12.7 Mis-Statement in Prospectus

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement

is misleading in the form and context in which it is included.

2. Omission from prospectus of any matter to mislead the investors.

Criminal Liability for Mis-Statement in prospectus (Section 24)

Where a prospectus, issued, circulated or distributed:

1. Includes any statement which is untrue or misleading in form or context in which it

is included; or

2. Where any inclusion or omission of any matter is likely to mislead;

Every person who authorises the issue of such prospectus shall be liable under section
447 i.e. fraud.

Defences available in this section are:

1. Person proves that statement or omission was immaterial;

2. Person has reasonable ground to believe and did believe that statement was true;
or

3. Person has reasonable ground to believe and did believe that the inclusion or
omission was necessary.

Civil Liability for Mis-Statement in Prospectus (Section 35)

Where a person has subscribed for securities of a company acting upon any misleading
statement, inclusion or omission and has sustained any loss or damage as its consequence,
the company and every person who:

1. is a director at the time of the issue of prospectus;

2. has named as director or as proposed director with his consent;

3. is a promoter of the company;

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4. has authorised the issue of the prospectus; and

5. is an expert;shall be liable to pay compensation to effected person. This civil liability

shall be in addition to the criminal liability under section 36.

Where it is proved that a prospectus has been issued with intent to defraud the applicants
for the securities of a company or any other person or for any fraudulent purpose, every person
shall be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by any person who subscribed to the securities on the
basis of such prospectus.

Defences under this section are

1. He has withdrawn his consent or never gives his consent;

2. The prospectus was issued without his knowledge or consent and when he become
aware, gave a reasonable public notice that prospectus was issued without his
knowledge or consent.

12.8 Differences between Prospectus and Statement in Lieu of

Prospectus

The prospectus is often contrasted with the statement in lieu of prospectus, but they
are not same, in essence, the statement in lieu of prospectus is issued when the company does
not invite public subscription.

Nevertheless, both the documents compile similar details, there is a difference between
prospectus and statement in lieu of prospectus.

Table 12.1 Differences between Prospectus and Statement in lieu of Prospectus

Basis for Prospectus Statement in Lieu of

Comparison Prospectus

Meaning Prospectus refers to a Statement in lieu of prospectus is a

legal-document published document issued by the company
by the company to invite when it does not offer its securities
general public for for public subscription.
subscribing its shares
and debentures.
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Objective To encourage public To be filed with the registrar.

subscription.

Used when Capital is raised from Capital is raised from known

general public. sources.

Content It contains details It contains information similar to a

prescribed by the
Indian Companies Act. prospectus but in brief.

Minimum
subscription Required to be stated Not required to be stated

12.9 Management of Companies

The management of a company is carried out by its officers, who include a director,
manager and/or company secretary. A director is appointed to carry out and control the day-to-
day affairs of the company. The structure, procedures and work of the board of directors, which
as a body govern the company, are determined by the company’s articles of association. A
manager is delegated supervisory control of the affairs of the company. A manager’s duties to
the company are generally more burdensome than those of the employees, who basically owe
a duty of confidentiality to the company. Every company must have a company secretary, who
cannot also be the sole director of the company. This requirement is not applicable if there is
more than one director. A company’s auditors are appointed at general meetings. The auditors
do not owe a duty to the company as a legal entity, but, rather, to the shareholders, to whom the
auditor’s report is addressed.

Meetings and Resolution

1. Board meetings: Company directors collectively form a board. A board meeting is,
therefore, any official meeting of the directors of a limited company. There is no legal
requirement to hold any board meetings in a private limited company, but it is common
practice to hold such meetings at regular intervals if a company has more than one director.
Furthermore, it is beneficial to hold a meeting of the directors within one month of company
formation. This enables the directors to clarify the objectives of the new business and
determine their individual duties and responsibilities.
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Board meeting agenda: Directors will usually convene at a board meeting to discuss
business matters that need to be addressed. During the first board meeting, such matters may
include:

 Appointing a chairman

 Confirmation of company formation details

 Consulting the articles of association

 Issuing share certificates to shareholders

 Determining the rights and powers of the directors

 Assigning various duties and responsibilities to directors

 Verifying the company’s accounting reference date (ARD)

 Confirming the statutory filing deadline for the first annual return and annual accounts

 HMRC registration for Corporation Tax, VAT and PAYE.

 Company insurance and licence requirements

 Appointing a company secretary

 Record-keeping and accounting requirements

 Appointing an accountant

 Opening a business bank account

 Raising capital

 Recruitment

 Marketing and advertising

 Suppliers and service providers

 Suggestions and recommendation for the business

2. Decision-making: Directors normally have an equal say in matters pertaining to company

business and policy. When a decision is put to a vote at a board meeting, each director is
usually entitled to one vote, unless the articles states otherwise. When a consensus - a
majority agreement for or against a proposed resolution - is obtained, a decision has
been reached. If no consensus is reached, the chairman of the board is usually given a
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second or casting vote in order to reach a decision. Many companies adopt a manual
outlining the rules and procedures of board meetings.

3. Calling a board meeting: Board meetings can be called at any time by the chairman of
the board or an individual director. Reasonable notice of the meeting must be provided to
all directors, but there is no provision in the Companies Act regarding a minimum notice
period for board meetings. This is one of the points that can be set out in the board
meeting manual. One week is usually sufficient.

The notice should state the following details:

 Time, date and location of the meeting

 Purpose of the meeting

 Any proposed resolutions

 Schedule of proceedings

4. Minutes of board meetings: It is a legal requirement that minutes be taken of all board
meetings. This is usually the responsibility of the company secretary. Minutes are simply
a record of the proceedings of the meeting, and they will usually include:

 Company name

 Names of those present

 Chairman of the meeting

 Apologies for any absences

 Time, date and location of meeting

 Details of proposed resolutions

 Result of any votes

 Objections raised

 Record of those for and against any proposed resolution

 Summary of other items of business discussed

 Chairman’s signature

Board meeting minutes are usually kept at the back of the company registers (a bound
book or loose-leaf binder) at the company’s registered office or principal place of business, but
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they may also be kept in electronic form. They can be inspected at any time by directors and
auditors; however, members, creditors and the general public are not permitted to inspect the
minutes of directors’ meetings.

5. General meetings: A general meeting is a meeting of the members of a limited company.

This type of meeting is more formal than a board meeting of directors, because the
calling and conduct of general meetings is regulated by the Companies Act 2006. Private
limited companies are no longer legally required to hold Annual General Meetings (AGM)
unless a provision to the contrary is included in the articles. Most private companies will
only call general meetings when extraordinary decisions have to be made by the members,
though it is good practice to hold an AGM to review the company’s performance, annual
accounts and plan ahead for the forthcoming year.

Purpose of a general meeting

Shareholders will convene at a general meeting in exceptional circumstances when they

need to address an issue or pass a resolution on any matter that extends beyond the directors’
powers. It is possible to pass resolutions in writing, but it is often more beneficial to formally and
collectively discuss a proposed resolution at a general meeting - particularly if a company has
multiple shareholders who do not interact on a daily basis. If you are a sole director and
shareholder of your own company, you will not need to hold any general meetings, because you
are the sole decision-maker.

The types of matters discussed at a general meeting may include:

 Appointing or removing a director

 Altering the articles of association

 Changing the shareholders’ agreement

 Changing the company’s share structure by issuing more shares or creating different
classes of shares

 Approving directors’ loans

 Approving directors’ service contracts

 Adding or removing directors’ powers

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 Appointing or removing an auditor

 Changing the company structure

 Approving the transfer of shares as proposed by a director

Under the Companies Act 2013, all members’ decisions can be made by written resolution,
with the exception of dismissing a director or removing an auditor before the end of their
contractual period. It is possible to include provisions in the articles to further restrict decision-
making by written resolution, if required.

6. Notice period: A general meeting can be called by the company directors or shareholders.
A minimum notice period of 14 days is required for calling a general meeting in a private
limited company. The notice must be sent to every member and director, and any persons
entitled to a share on the death or bankruptcy of a shareholder. Notice can be given in
hard copy form, electronic form or by posting it on the company website. The following
information should be disclosed on the notice:

 Time, date and location of the general meeting

 Purpose of the meeting

 Proposed resolutions to be agreed

 Statement that every shareholder may appoint a proxy if they are unable to attend

 Notice date

 Name(s) of director(s) or shareholder(s) calling the meeting

7. Minutes of meetings: The company secretary (or director) must arrange for minutes to
be taken to record the names of those present at the meeting, a summary of the
proceedings and the outcome of any proposed resolution. A copy of the minutes should
be kept in the company’s statutory register held at the registered office or principal place
of business for a minimum of 10 years. Copies should also be issued to the company
members.

8. Resolutions: A resolution is a legally binding agreement or decision made by company

members or directors. The outcome of a resolution is determined by the votes cast for
and against the decision. If the required majority is reached, the resolution is ‘passed’. If
the necessary majority is not reached, the proposed resolution fails.
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Different types of resolutions:Any decision made by the directors of a company is

called a resolution, but there are two types of members’ resolutions: ordinary and special.

1. An ordinary resolution: It is passed when a simple majority vote is reached (above

50%). This type of resolution can be used for all decisions unless the Companies
Act or articles of association specifies the need for a special resolution for any other
matter.

2. A special resolution: It is passed when a 75% majority vote is [Link] types

of resolutions can be passed at a general meeting or in writing (a written resolution),
apart from a resolution to dismiss a director or remove an auditor before the expiration
of his or her contract. If a member is unable to attend a general meeting, he or she
can appoint a proxy.

9. Passing a resolution: Voting at general meetings is normally taken by a show of hands

or a poll. If the vote is taken as a show of hands, the percentage is worked out as one vote
per shareholder. If a poll is taken, the votes are worked out in proportion to the number of
shares held by each shareholder - most shares carry one vote; therefore, shareholders
with multiple shares can cast more [Link] conditions of members’ voting rights are
usually stated in the articles of association and shareholders’ agreement. Generally,
however, a member will have the same number of votes whether passing a resolution at
a general meeting or on a written resolution.

Resolutions must be proposed in the notice that is circulated prior to a board meeting or
general meeting. Proposed members’ resolutions must be also be issued to the auditors, if a
company has any. If the proposed resolution is for the removal of a director, the director in
question must receive a copy.

Copies of all special resolutions should be filed with Companies House within 15 days
and issued to all shareholders and the company auditor, if applicable. Copies should also be
kept in the company’s statutory register at the registered office address or principal place of
business for a minimum of 10 years.

12.10 Accounts and Audit of Company

Accounts of the Company
1. Books of Account to be kept by a Company: Every company must maintain proper
books of accounts of its affairs. The following transactions must be entered in the books
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of accounts of the company which must be kept at its registered office all sums of money
received and expended by the company and the matters in respect of which the respect
of which the receipt and expenditure took place;

 All sales and purchases of goods by the company; and

 The assets and liabilities of the company.

 In the case of a company engaged in production, processing, manufacturing or

mining activities, such particulars relating to utilisation of material or other items of
cost as may be prescribed relating to certain class of companies as the Central
Government may require.

The books of accounts must comply with the following conditions:

 The books must give a true and fair view of the state of affairs of the company or the
branch office, if any, and explain its transaction.

 The books must be kept on accrual basis and according to double entry system of
accounting.

 Every company must keep its books of account at its registered office. However, some of
the books of account may be kept at such other place in India as the Board of Directors
may decide, provided a notice in writing giving full address of that other place alongwith
requisite filing fee is filed with the Registrar of Companies within seven of such decision.

 If the company has a branch office, the books of account relating to transactions at the
branch office may be kept at that branch office, but proper summarised reports and
statements must be sent to the registered office or such other place where the books are
kept, at intervals of not more than three months. The books of account of the branch must
give a true and fair view of the affairs of the branch and clearly explain its transactions.

 They must not conceal any transaction and also not disclose any transaction which is
fictitious. The books of accounts and other documents and records are open to inspection
by any director during business hours. Similarly, they are open to inspection by the Registrar
of Companies or an officer authorised by the Central Government.

 These books and papers together with the vouchers pertaining to entries made must be
maintained for at least 8 years. It has been clarified by the Department of Company
Affairs in their Circular No. 2/83 dated 2/3/1983 that the books of account should be
prepared and maintained in indelible ink (and not in pencil).
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The following persons are responsible for maintaining the books of accounts of a company:-

 The managing director or manager;

 If the company has neither a managing director nor manager, then every director of the
company;

 Every officer and other employee who has been authorised and to whom responsibility to
maintain the books has been alloted by the Board of Directors.

 If any of the persons referred to above fails to take all reasonable steps to maintain
proper books of accounts or has by his own willful act been the cause of any default by
the company in this respect, he is punishable with imprisonment up to six months or with
fine which may extend to Rs. 1,000 or with both. However, no person can be sentenced to
imprisonment unless it is proved that the contravention was committed by him wilfully.

2. Preparation of Balance Sheet and Profit and Loss Account: The company has to
prepare its balance sheet and profit & loss account from the books of account maintained
by it. Every Balance Sheet of a company must give a true and fair view of the state of
affairs of the company as at the end of the financial year and must be in the prescribed
format.

If the responsible for maintaining proper books of account fails to take all reasonable
steps to secure compliance by the company with the requirement of law relating to the form and
contents of the balance sheet, he is liable for each offence to imprisonment for a term extending
up to six months or to fine up to Rs.1,000/- or to both.

Form of Balance Sheet,

Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance
sheet is to be prepared. The schedule specifies 2 types of formats, the horizontal format and
the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the
horizontal format, the liabilities including the share capital are placed on the left side and assets
of all types on the right. The main heads in this form are arranged as under:
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(a) Share Capital (a) Fixed assets

(b) Reserves and surplus (b) Investments

(c) Loans (c) Current assets,

loans and advances

(d) Current liabilities and (d) Miscellaneous

expenditure to the provisions
extent not written off or adjusted

(e) Profit & Loss Account

Total

In the vertical format, the various heads of liabilities and assets are arranged vertically
and current liabilities are shown as deduction, from current assets. Whatever information which
is required to be given in the horizontal format must also be given in the vertical format.
Summarised prescribed vertical form of balance sheet is given below:

I. Sources of Funds

(1) Shareholders’ funds

(2) Loan funds

Total

II Application of Funds

(1) Fixed assets

(2) Investments

(3) Current assets, loans and advances

Less: Current liabilities & provisions

(4) (a) Miscellaneous expenditure to the

extent not written off or adjusted

(b) Profit & Loss Account

Total
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The Central Government may, on the application or with the consent of the Board of
Directors of the company, by order, modify in relation to that company, any of the requirements
as to matters to be stated in the company’s balance sheet or profit and loss account for adapting
them to the circumstances of the company.

Contents of Profit and Loss Account

Though no format has been prescribed for the profit and loss account, Part II to Schedule
VI of the Companies Act, 1956 gives a list of items which must be disclosed in every profit &
loss account. Every profit and loss account of a company must give a true and fair view of the
company’s profit or loss for the financial year for which it is drawn up.

1. Adoption of Balance Sheet and Profit & Loss Account: The Board of directors must
present to the shareholders of the company, the balance sheet and a profit and loss
account for the financial year at every annual general meeting. In the case of companies
which are not commercial organisations such as Section 25 companies, instead if the
profit & loss account, an income & expenditure account may be prepared. Theprofit and
loss account to be placed in the FIRST annual general meeting should relate to a period
beginning with the incorporation of the company and ending with a day, the interval between
which and the date of the meeting does not exceed nine months.

In case of subsequent annual general meetings, the profit and loss account should relate
to a period beginning with a day immediately after the period for which the preceding profit &
loss account was made and ending with a day, the interval between which and the date of the
meeting should not exceed six months. The financial year may be more or less than a calendar
year, but it must not exceed 15 months or with the special permission of the Registrar, 18
months.

If any director fails to take all reasonable steps to comply with the aforesaid requirements
he is, in respect of each offence liable to be punished with imprisonment up to six months or
with fine up to Rs.1,000/- or with both.

2. Authentication of Balance Sheet and Profit & Loss Account: The balance sheet and
profit & loss account of a company must be signed on behalf of the Board of directors by
two directors out of whom one must be the managing director, where there is one and the
manager, or secretary, if any. The balance sheet and profit and loss account must be
approved by the Board of directors before they are submitted to the auditors for the
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purpose of audit. The report of the auditors must be attached to the balance sheet and
profit & loss account.

The company and every officer of the company who is in default with the above provisions
shall be punishable with the fine which may extend to Rs.500/-, if:

 Any copy of balance sheet and profit and loss account is issued, circulated or
published, without being signed as required ; or

 Any copy of balance sheet is issued, circulated or published, without there being
annexed or attached thereto, a copy each of the following :-

 The profit and loss account;

 Any accounts, reports or statements pertaining to subsidiary companies which are

required to be attached to the balance sheet,

 The auditors’ report; and

 The Report of the Board of Directors

3. Circulation of Balance Sheet and Auditors’ Report: A copy of every balance sheet,
profit and loss account, auditors’ report and every other document required to be annexed
or attached to the balance sheet must be sent not less than twenty-one days before the
general meeting to every member, to every trustee for debenture holders, and to all other
persons who are entitled to have a notice of general meetings. In the case of a company
not having a share capital, the above documents need not be sent to a member, or
debenture holder who is not entitled to have notice of general meetings.

In case of listed companies, the company may keep the aforesaid documents available
for inspection at its registered office during working hours for a period of twenty-one days
before the meeting and send to every member and trustee for debentureholders only a
summarised statement containing the salient features of these documents in the prescribed
format.

4. Filing of Annual Accounts with the Registrar: Every company must file with the Registrar
within 30 days from the day on which the annual accounts, auditor’s report and the director’s
report were presented at the annual general meeting, three certified copies of these
documents signed by the managing director, manager or secretary of the company or if
there be none of these by a director of the company.
162

These accounts may be inspected and copies thereof may be obtained by any member of
the public at the Registrar of Companies on payment of the requisite fee. However, no person
other than a member of the company is entitled to inspect, or obtain copies, of the profit and
loss account in the case of the following types of companies:-

 A private company which is not a subsidiary of public company;

 A private company whose entire paid-up capital is held only by one or more bodies
corporate incorporated outside India; or

 A private company which is deemed to be a public company by virtue of Section

43A, if the Central Government directs that it is not in the public interest that any
person other than a member of the company should be entitled to inspect or obtain
copies of the profit and loss account of the company.

In case the annual general meeting of a company for any year has not been held, 3
copies of the balance sheet and profit and loss account, duly signed, within thiry days from the
latest day on or before which that meeting should have been held in accordance with the
provisions of the Act must be filed with the Registrar of Companies. If for any reason, the
annual general meeting before which a balance sheet is laid does not adopt it, or is adjourned
without adopting the balance sheet or if the annual general meeting of a company for any year
has not been held, a statement of the fact and reasons thereof must also be annexed to the
balance sheet and to the copies thereof to be filed with the Registrar.

If default is made in complying with the above provisions, then the company and every
officer of the company who is in default shall be punishable with fine which may extend to Rs.50
for every day during the period the default continues

5. Directors’ Report: The report of the Board of Directors must be attached to every balance
sheet prsented at the annual general meeting. The report must contain information
regarding the following matters:-

1. The state of affairs of the company

2. The amount, if any, which it proposes to carry to any reserves in such balance
sheet

3. The amount of dividend recommended

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4. Details of any material changes and commitments, if any, affecting the financial
position of the company which have occurred between the end of the financial year
of the company to which the balance sheet relates and the date of the report

5. Conservation of energy, technology absorption, foreign exchange earnings and

outgo.

6. Names, designations and other particulars of all employees drawing more than Rs.
50000/- p.m. in the company

7. Details necessary for a proper understanding of the state of the company’s affairs
and which are not, in the Board’s opinion, harmful to the business of the company
or of any of its subsidiaries, in respect of changes which have occurred during the
financial year :-

 in the nature of company’s business;

 in the company’s subsidiaries or in the nature of the business carried on by them;

and

 generally in the classes of business in which the company has an interest

Auditors of Company

The auditor of a Government company is appointed or re-appointed by the Central

Government on the advice of the Comptroller and Auditor-General of India provided that the
audit would be within the number of acceptable audits available to each auditor.

Power of Comptroller & Auditor General of India

 To direct the manner in which the company’s accounts are to be be audited by the auditor
so appointed and to give such auditor instructions in regard to any matter relating to the
performance of his functions as such

 To conduct supplementary or test audit of the company’s accounts by such person or

persons or persons as he may authorise in this behalf; and for the purpose of such audit,
to require additional information to be furnished to any person or persons so authorised,
on such matters, by such person or persons, and in such form, as the Comptroller and
Auditor-General may, by general or special order, direct.
164

 The auditor must submit a copy of his audit report to the Comptroller and Auditor-General
of India who shall have the right to comment upon or supplement, the audit report in such
manner as he may think fit.

 Any such comments upon, or supplement to, the audit report must be placed before the
annual general meeting of the company at the same time and in the same manner as the
auditors’ report.

Auditors of Other Companies: It is the duty of the auditor conduct the audit of the books
of accounts of the company and to make his report to the members of the company on the
accounts examined by him, and on every balance sheet, every profit and loss account and on
every other document declared by the Act to be part of or annexed to the balance-sheet or profit
and loss account and laid before the company in general meeting during his tenure of office.
The auditor’s report, besides other things necessary in any particular case, must expressly
state:-

 Whether, in his opinion and to the best of his information and according to explanation
given to him, the accounts give the information required by the Act and in the manner as
required;

 Whether the balance-sheet gives a true and fair view of the company’s affairs as at the
end of the financial year and the profit and loss account gives a true and fair view of the
profit or loss for the financial year;

 Whether he has obtained all the information and explanations required by him for the
purposes of his audit;

 Whether in his opinion, the profit & loss account and balance sheet refered to in his report
comply with the accounting standards recommended by the Institute of Chartered
Accountants of India;

 Whether, in his opinion, proper books of account as required by law have been kept by
the company, and proper returns for the purposes of his audit have been received from
the branches not visited by him;

 Whether the company’s balance sheet and profit and loss account dealt with by the report
are in agreement with the books of account and returns.

 In case any of the above matters is answered in the negative or with a qualification, the
auditor’s report must state the reason for the same. Where the auditor is unable to express
 165

any opinion in answer to a particular question, his report shall indicate such fact together
with the reasons why it is not possible for him to give an answer to such question.

The Central Government is empowered to issue orders requiring the auditor to include in
his report a statement on such matters as may be specified. In exercise of this power the
Central Government has issued an order called “The Manufacturing and other Companies
(Auditor’s Report) Order, 1975. It is the duty of the auditor to comply with this order when
making his report to the shareholders.

Only the person appointed as auditor of the company or where a firm of auditors is so
appointed, only a partner of that the firm practising in India, can sign the auditor’s report or sign
or authenticate any other document of the company required by law to be signed or authenticated
by the [Link] Corporate Loans and Investments

A company cannot:-

1. Make any loan to any other body corporate

2. Give guarantee or security in connection with any loan made by any person to another
body corporate

3. Acquire, by subscription, purchase or in any other manner, securities in any other body
corporate

4. Exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves,
whichever is more, unless approved by a special resolution passed at a general meeting
of members.

5. The Board of the company may give a guarantee without being previously authorised by
a special resolution of members if all the following conditions are satisfied:-

 A Board resolution is passed to this effect

 There exist exceptional circumstances which prevent the company from obtaining
previous authorisation by special resolution

 The Board resolution is confirmed within 12 months in a general meeting or its next
Annual general meeting, whichever is earlier.

 Notice of such resolution must clearly indicate the specific limits, the particulars of
the body corporate in which the investment / loan / guarantee / security is proposed,
the purpose of the investment / loan / guarantee / security, sources of funding, etc.
166

6. No investment / loan / guarantee / security may be made or given unless the Board
resolution sanctioning it is with the consent of all directors present at the meeting and
prior approval of the public financial institution ( if any term loan is outstanding) is obtained.

7. Approval of the public financial institution is not required if the investment / loan / guarantee
/ security is with the 60 % limit as mentioned above and there has been no default in
repaying the term loan and / or interest thereon.

8. No loan can be made at a rate of interest lower than the bank rate prescribed by the
Reserve Bank of India.

9. A company which has defaulted in repaying public fixed deposits cannot make or give any
investment / loan / guarantee / security unless the fixed deposit is fully repaid along with
interest due as per the terms and conditions of the fixed deposit.

10. A register of such inter-corporate loans and investments must be maintained giving the
relevant details.

The above provisions do not apply to:-

Any loan / guarantee / security made or given by:-

1. a banking company or an insurance company or a housing finance company in the ordinary

course of its business or a company established with the object of financing industrial
enterprises or providing infrastructural facilities

2. a company whose principal business is the acquisition of shares, stocks, debentures or

other securities

3. a private company unless it is a subsidiary of a public company

4. Investment made under Rights issue of securities

5. Loan made by holding company to its wholly subsidiary company

6. Guarantee or security given by a holding company for loan to its wholly owned subsidiary

7. Acquisition of securities by a holding company in its wholly owned subsidiary

12.11 Summary

Section 2(70) of the Companies Act, 2013 defines a prospectus as “”A prospectus means
Any documents described or issued as a prospectus and includes any notices, circular,
 167

advertisement, or other documents inviting deposit fro the public or documents inviting offer
from the public for the subscription of shares or debentures in a company.” A prospectus also
includes shelf prospectus and red herring prospectus. A prospectus is not merely an
advertisement.

A document shall be called a prospectus if it satisfies two things:

1. It invites subscription to shares or debentures or invites deposits.

2. The aforesaid invitation is made to the public.

The types, contents and characteristics of prospectus as discussed in this lesson.

12.12 Key Words

Accounts

Audit

Content

Prospectus

12.13 Review Questions

1. Define Prospectus.

2. What are the features and Characteristics of Prospectus?

3. Explain the Contents of Prospectus.

4. State the types of Prospectus.

5. Present the legal requirements for the issuance of Prospectus.

6. What is Misleading of Prospectus? Explain the Civil Liability and Criminal Liability
for Mis-statement in Prospectus.

7. What are the differences between Prospectus and Statement in lieu of Prospectus?

8. Explain the Procedures as to the Management of Companies.

9. How are Accounts and Audit maintained in the company?

168

LESSON – 13
WINDING UP OF COMPANIES
Learning Objectives

After reading this lesson, you will be able to:

 Outline the circumstances of winding up of companies

 Explain the procedures for winding up.

 Discuss the various consequences of winding up of company and differentiate the

winding up of company and dissolution of company

Structure
13.1 Introduction

13.2 Definition

13.3 Causes for Winding up

13.4 Consequences of Winding up

13.5 Modes of Winding up

13.6 Duties of Liquidator

13.7 Meaning of Dissolution of Company

13.8 Modes of Dissolution

13.9 Summary

13.10 Key Words

13.11 Review Questions

13.1 Introduction

“Winding up is a means by which the dissolution of a company is brought about and its
assets are realised and applied in the payment of its debts. After satisfaction of the debts, the
remaining balance, if any, is paid back to the members in proportion to the contribution made by
them to the capital of the company.”
 169

The winding up or liquidation of a company is the process by which a company’s assets

are collected and sold in order to pay its debts. Any monies remaining after all debts, expenses
and costs have been paid off are distributed amongst the shareholders of the company. When
the winding up has been completed, the company is formally dissolved and it ceases to exist.

Broadly speaking, a company can be wound up in one of two ways. First, the Court can
compulsorily wind up a company. Secondly, the shareholders or the creditors of the company
can themselves apply to wind up the company in proceedings known as “voluntary winding up”.

13.2 Definition

Winding up of a company is defined as a process by which the life of a company is

brought to an end and its property administered for the benefit of its members and creditors. In
words of Professor Gower, “Winding up of a company is the process whereby its life is ended
and its Property is administered for the benefit of its members & creditors. An Administrator,
called a liquidator is appointed and he takes control of the company, collects its assets, pays its
debts and finally distributes any surplus among the members in accordance with their rights.”

According to Halsburry’s Laws of England, “Winding up is a proceeding by means of

which the dissolution of a company is brought about & in the course of which its assets are
collected and realised; and applied in payment of its debts; and when these are satisfied, the
remaining amount is applied for returning to its members the sums which they have contributed
to the company in accordance with Articles of the Company.” Winding up is a legal process.

“The liquidation or winding up of a company is the process whereby its life is ended and
its property is administered for the benefit of its creditors and members. An Administrator, called
a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts
and finally distributes any surplus among the members in accordance with their rights.”

13.3 Causes for Winding up

As per Section 433, court may order for the winding up of a company on a petition submitted
to it on any of the following grounds:

1. Passing of special resolution for the winding up: When a company has by passing
a special resolution resolved to be wound up by the court, winding up order may be made by the
court. The resolution may be passed for any cause what so ever. Court, however may not order
170

for the winding up if it finds winding up to be opposed to public interest or the interest of the
company as a whole.

2. Default in holding statutory meeting: When default has been committed by a company
in the filing of the statutory report or in the holding of the statutory meeting in the manner and
within the time prescribed by the Act, court may make a winding up order. Instead of ordering
for the winding up, court may direct the company to call the statutory meeting or to deliver the
statutory [Link] on this ground can be presented either by the Registrar or by a
contributory and it should not be filed before the expiration of fourteen days after the last day on
which the statutory meeting ought to have been held [Sec. 439 (7)].

3. Failure to commence business: When a company fails to commence business within

a year from its incorporation or suspends business for a year, it may be ordered to be wound
up. The power of the court to pass an order for the winding up of the company on this ground is
discretionary and will not be exercised unless there are indications that the company has no
intention of continuing it business.

If the company’s trade has been suspended temporarily owing to the trade depression
with bona fide intention to continue its operations when conditions improve, a prayer made to
the court for the winding up of the company will not be granted as the intention to continue
business after the improvement of conditions is clear. But in case chances of resuming business
are gloomy, the court may order for the winding up of the company.

4. Reduction in membership: When the number of members has fallen below seven in
the case of a public company and two in the case of a private company, the company may be
ordered to be wound up.

5. Inability to pay debts: As per section 434, a company shall be deemed to be unable
to pay its debts under the following circumstances:

(a) Notice for payment: When a creditor to whom the company owes a sum exceeding
T 500 [the Companies (Second Amendment) Act, 2002 has increased this amount to Rs. 1
lakh, but that has not yet become operative] has served on the company a demand for payment
and the company has for three weeks thereafter neglected to pay the sum or otherwise satisfy
the creditor, it shall be deemed that the company has become unable to pay its debt. It is
essential that the debt is payable presently.
 171

Mere omission by itself will not amount to negligence. Further, where a debt is bonafide
disputed, there is no negligence to pay. Failure to pay public deposits on their due dates amount
to inability to pay debts. A dividend when declared becomes a debt due by the company and the
shareholder can also apply for company’s liquidation if the company is unable to pay his dividend.

(b) Decree: If a decree or order issued by a court in favour of a creditor of the company
remains unsatisfied on its execution.

(c) Commercial insolvency: It is proved to the satisfaction of the court that the company
cannot pay its debts. This implies commercial insolvency of the company as is disclosed by its
balance sheet. The mere fact that the company is incurring losses does not mean that it is
unable to pay its debts, for its assets may be more than its liabilities.

Liabilities for this purpose will include all contingent and prospective liabilities and even if
the debt relied upon in the petition is disputed bona fide, the company may be wound up if the
applicant can prove the insolvency of the company. However, non-payment of a bona fide
disputed claim is no proof of insolvency.

Merely because the liabilities of a company have exceeded the assets, an order for
‘compulsory winding up’ cannot be passed unless it is proved that the company has failed to
pay its liabilities when payment was demanded.

Similarly, courts may pass an order for the winding up of the company when default in the
payment of the debt after demand within three weeks has been committed by the company
even though the assets of the company were much than the liabilities. The debts in all cases
must be real, immediately payable and without any bonafide and reasonable dispute with regard
to it.

6. Just and equitable: The court may order for the winding up of a company if it thinks
that there are just and equitable grounds for doing so. The court has very large discretionary
power in this [Link] term ‘just and equitable’ grounds may include any of the grounds for the
winding up of the company. This power has been given to the court to safeguard the interests of
the minority and the weaker group of members.

Court, before passing such an order, will take into account the interest of the shareholders,
creditors, employees and also the general public. Court may also refuse to grant an order for
the compulsory winding up of the company if it is of the opinion that some other remedy is
172

available to the petitioner to redress his grievances and that the demand for the winding up of
the company is unreasonable. A few examples of ‘just and equitable’ grounds on the basis of
which the court may order for the winding up of the company are given as follows:

(i) Oppression of minority: In cases where those who control the company, abuse their
power to such an extent that it seriously prejudices the interests of minority shareholders, the
court may order for the winding up of the company.

The court will issue such an order only when it is impossible for the business of the
company to be carried on for the benefit of the company as a whole owing to the way in which
voting power is held and used.

(ii) Deadlock in management: Where there is a complete deadlock in the management

of the company, the company may be ordered to be wound up. But mere incompatibility of good
relations between the rival factions of the directorate i.e., the majority group and minority group
will not be sufficient for ordering winding up.

Re. Yenidje Tobacco Ltd. W and R were the only two shareholders as well as the directors
of a private company. Subsequently some serious differences developed and they became
hostile to each other.

They stopped even talking to each other. It was held that there was complete deadlock in
the management of the company and, therefore, it would be just and equitable to order for its
winding up.

(iii) Loss of substratum: Where the objects for which a company was constituted have
either failed or become substantially impossible to be carried out, i.e., ‘substratum of the company’
is lost; the company may be ordered to be wound up on just and equitable grounds.

However, a temporary difficulty which does not knock out the company’ objects and
purposes may not be permitted to become a ground for liquidation. Loss of substratum is a
question of fact depending on the circumstances of the case.

(iv) Losses: When the business of a company cannot be carried on except at a loss, the
company may be wound up by an order of the court on just and equitable grounds. But mere
 173

apprehension on the part of some shareholders that the company will not be able to earn profits
cannot be just and equitable ground for the winding up order.

(a) Fraudulent object: If the business or the objects of the company are fraudulent or
illegal, or have become illegal with the changes in the law, the court may order the company to
be wound up on just and equitable grounds. It will not be a valid defence in such a case that the
profits earned will be used for philanthropic purposes.

However, the mere fact of having been a fraud in the promotion or fraudulent
misrepresentation in the prospectus will not be sufficient ground for a winding up order, for the
majority of shareholders may waive the fraud.

(vi) Bubble company: When a company is a bubble company i.e. it does not carry on
any business in reality or does not own any property.

(vii) Private companies in the nature of partnership: Where a private company

consisting of one or more families or relatives or friends is in the nature of partnership business
and circumstances justify dissolution of partnership under the Partnership Act, such as loss of
mutual confidence on account of mis- conduct of one or more partner or a state of complete
dead-lock, such a company may be ordered to be wound up on just and equitable grounds.
This is because in such a case it is impossible to carry on business of Die Company (Re. Dais
collates).

Besides these grounds the Companies (Second Amendment) Act, 2002, which has not
yet been notified to be effective, has added three more grounds of compulsory winding up of a
company. These are:

 Default in filing Annual Accounts or Annual Returns with the Registrar for any 5
consecutive financial years.

 Company working against the interests of State — sovereignty, integrity and security;
or public order, decency or morality.

 Winding up of a Sick Industrial Company when its revival is unlikely within a

reasonable time.
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13.5 Consequences of Winding Up

The most important consequences of the winding up of a company are as follows “

1. As Regards the Company Itself

 Winding up doesn’t take away the existence of the company completely.

 The company continues to exist as a corporate entity till its dissolution.

 All the ongoing business of the company is administered by the liquidator during
the phase of liquidation.

2. As Regards the Shareholders

Contributors “ a new statutory liability comes into existence.

 Every transaction of share during the liquefaction done without the approval of the
liquidator is termed void.

3. As Regards the Creditors

 The creditors cannot file a case against the company except with the consent of the
court.

 If the creditors already have decrees, they cannot proceed with the execution.

 They must explain their claims and justify their claims to the liquidator.

4. As Regards the Management

 With the appointment of the liquidator, all the powers of the directors, chief executives
and other officers tend to cease.

 Only the powers to give notice of resolution and the power of appointment of the
liquidator upon winding up of the company are given to the members.

5. As Regards the Disposition of the Company’s Property: All the dispositions of the
company’s properties are void if the dispositions are not approved by the court
or the liquidator.

13.6 Modes of Winding Up

As per section 270 of the Companies Act 2013, the procedure for winding up of a company
can be initiated either:
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1) By the tribunal or,

2) Voluntary.

1) Winding up by the tribunal: As per new Companies Act 2013, a company can be
wound up by a tribunal in the below mentioned circumstances:

a. When the company is unable to pay its debts

b. If the company has by special resolution resolved that the company be wound up by the
tribunal.
c. If the company has acted against the interest of the integrity or morality of India, security
of the state, or has spoiled any kind of friendly relations with foreign or neighboring
countries.
d. If the company has not filled its financial statements or annual returns for preceding 5
consecutive financial years.
e. If the tribunal by any means finds that it is just & equitable that the company should be
wound up.
f. If the company in any way is indulged in fraudulent activities or any other unlawful business,
or any person or management connected with the formation of company is found guilty of
fraud, or any kind of misconduct.

Filling up winding up petition: Section 272 provides that a winding up petition is to be

filed in the prescribed form no 1, 2 or 3 whichever is applicable and it is to be submitted in 3
sets. The petition for compulsory winding up can be presented by the following persons:

a) The company

b) The creditors ; or

c) Any contributory or contributories

d) By the central or state govt.

e) By the registrar of any person authorized by central govt. for that purpose

Final Order and its Contents: The tribunal after hearing the petition has the power to
dismiss it or to make an interim order as it think appropriate or it can appoint the provisional
liquidator of the company till the passing of winding up order. An order for winding up is given in
form 11.
176

2) Voluntary winding up of a company: The company can be wound up voluntarily by

the mutual decision of members of the company, if:

a) The company passes a Special Resolution stating about the winding up of the company.

b) The company in its general meeting passes a resolution for winding up as a result of
expiry of the period of its duration as fixed by its Articles of Association or at the occurrence
of any such event where the articles provide for dissolution of company.

Procedure for Voluntary Winding Up

a. Conduct a board meeting with 2 Directors and thereby pass a resolution with a declaration
given by directors that they are of the opinion that company has no debt or it will be able
to pay its debt after utilizing all the proceeds from sale of its assets.

b. Issues notices in writing for calling of a General Meeting proposing the resolution along
with the explanatory statement.

c. In General Meeting pass the ordinary resolution for the purpose of winding up by ordinary
majority or special resolution by 3/4th majority. The winding up shall be started from the
date of passing the resolution.

d. Conduct a meeting of creditors after passing the resolution, if majority creditors are of the
opinion that winding up of the company is beneficial for all parties then company can be
wound up voluntarily.

e. Within 10 days of passing the resolution, file a notice with the registrar for appointment of
liquidator.

f. Within 14 days of passing such resolution, give a notice of the resolution in the official
gazette and also advertise in a newspaper.

g. Within 30 days of General meeting, file certified copies of ordinary or special resolution
passed in general meeting.

h. Wind up the affairs of the company and prepare the liquidators account and get the same
audited.

i. Conduct a General Meeting of the company.

j. In that General Meeting pass a special resolution for disposal of books and all necessary
documents of the company, when the affairs of the company are totally wound up and it is
about to dissolve.

k. Within 15 days of final General Meeting of the company, submit a copy of accounts and
file an application to the tribunal for passing an order for dissolution.
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l. If the tribunal is of the opinion that the accounts are in order and all the necessary
compliances have been fulfilled, the tribunal shall pass an order for dissolving the company
within 60 days of receiving such application.

m. The appointed liquidator would then file a copy of order with the registrar.

n. After receiving the order passed by tribunal, the registrar then publish a notice in the
official Gazette declaring that the company is dissolved.

Effect of Winding up by tribunal (Sec. 279): According to this section, the order for
winding up of a company shall operate in favour of all the creditors and all contributories of the
company as if it had been made out or the joint petition of creditors and contributories.

Effect of voluntary winding up (Sec. 309): In the case of a voluntary winding up, the
company shall from the commencement of the winding up cease to carry on its business except
as far as required for the beneficial winding up of its business. The corporate state and corporate
powers of the company shall continue until it is dissolved.

13.6 Duties of Liquidator

1. To conduct proceedings in winding up: The liquidator shall conduct the proceedings
in winding up the company and perform such duties in reference thereto as the court may
impose. The acts of the liquidator shall be valid, notwithstanding any defect that may afterwards
be discovered in his appointment or qualifications (Sec. 457).

2. To submit preliminary report: Immediately on the receipt of the Statement of Affairs

from the directors and within six months after the date of the winding up order, liquidator shall
submit to the court a preliminary report with regard to capital issued, subscribed and paid, the
estimated amount of assets and liabilities, causes of the failure of the company and whether in
his opinion, fraud and punishable offence have been committed by directors and other officers
of the company (Sec. 455).

3. Collection and distribution of company’s property: Immediately after the winding

up order is made by the court, all the property and assets of the company shall vest in the
liquidator. He shall have the rights to enjoy control on all the properties of the company.

He shall collect all the assets of the company, prepare schedules of creditors and
contributories and distribute proportionately the total realisations made by him amongst the
creditors (Sec. 456).
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4. To obey the order of the court: Throughout the performance of his duties, Official
Liquidator shall not only obey the orders and carry out the advice and directions of the court but
shall also care to see that his actions do not come out to be ultra vires the provisions of the
company law. He shall carry out his duties most honestly and faithfully. He shall also take into
account the directions given to him by the resolutions of the creditors or contributories.

5. Meetings of creditors and contributories: The liquidator may call the meetings of
creditors and contributories whenever he may deem fit for the purposes of ascertaining their
wishes. But he shall have to summon such meetings at such times as the creditors or
contributories may by resolution direct or whenever requested in writing to do so [Sec. 460 (3)].

6. To maintain proper books: The liquidator shall keep, in the manner prescribed, proper
books in which he shall cause entries or minutes to be made of the proceedings at meetings
and of such other matters as may be prescribed. Any creditor or contributory may, subject to the
control of the court, inspect any books personally or by his agent (Sec. 461).

7. To account for money received by him: Official Liquidator shall pay all cash collections
made by him into the public account of India in the Reserve Bank of India. He shall present to
the court twice a year an account of his receipts and payments as liquidator.

The account shall be in prescribed form and shall also be verified by a declaration in the
prescribed form. The court shall cause the account to be audited in a manner as it thinks fit.

8. Appointment of committee of inspection: The liquidator will have to appoint a

Committee of Inspection to assist him if the court so directs. He should convene a meeting of
the creditors within two months from the date of the court’s direction for the purpose of determining
who are to be the members of the committee.

He should also within fourteen days of the creditors’ meeting, convene a meeting of the
contributories to consider the decision of the creditors’ meeting with respect to the membership
of the committee. In case the contributories do not accept die decision of the creditors’ meeting
in its entirety, the liquidator should apply to the court for directions regarding the composition of
the committee (Sec. 464).

9. Information as to pending liquidation: If the winding up of a company is not completed

within one year after its commencement, the liquidator shall within two months of the expiry of
such year and thereafter until the winding up is concluded at intervals of not more than one
 179

year, file a statement in the prescribed form and containing the prescribed particulars regarding
proceedings in and position of liquidation. The statement should be duly audited by a person
qualified to act as an auditor of the company.

13.7 Meaning of Dissolution of a Company

A company is said to be dissolved when it ceases to exist as a corporate entity. On

dissolution, the company’s name shall be struck off by the Registrar from the Register of
Companies and he shall also get this fact published in the Official Gazette. The dissolution,
thus puts an end to the existence of the company.

13.8 Modes of Dissolution

Dissolution of a company may be brought about in any of the following ways:

1) Through transfer of a company’s undertaking to another under a scheme of

reconstruction or amalgamation. In such a case, the transferor company will be
dissolved by an order of the Tribunal without being wound up.

2) Through the winding up of the company, wherein assets of the company are realized
and applied towards the payment of its liabilities. The surplus, if any is distributed to
the members of the company, in accordance with their rights.

Table 13.1 Differences between Dissolution & Winding Up of a Company

S. No. Winding Up Dissolution

1. Winding up is one of the methods Dissolution is the end result of

by which dissolution of a winding up.
company is brought about.

2. Legal entity of the company Dissolution brings about an end to

continues at the commencement the legal entity of the company
of the winding up.

3. A company may be allowed to Company ceases to exist on its

continue its business as far it dissolution.
is necessary for the beneficial
winding up of the company
180

13.9 Summary

The winding up or liquidation of a company is the process by which a company’s assets

are collected and sold in order to pay its debts. Any monies remaining after all debts, expenses
and costs have been paid off are distributed amongst the shareholders of the company. When
the winding up has been completed, the company is formally dissolved and it ceases to exist.

Broadly speaking, a company can be wound up in one of two ways. First, the Court can
compulsorily wind up a company. Secondly, the shareholders or the creditors of the company
can themselves apply to wind up the company in proceedings known as “voluntary winding up”.

13.10 Keywords
Dissolution

Liquidator

Winding Up

13.11 Review Questions

1. Define Winding up of Company.

2. Bring out the Causes and Consequences of Winding up of Company.

3. Explain the different modes of Winding up of Company.

4. Outline the Procedures for the Winding up of Company.

5. On liquidation of the company, Liquidator plays an Importance Role – Justify.

6. What are the differences between Winding up of Company and Dissolution of

Company?
 181

LESSON – 14
LABOUR LAW
Learning Objectives

After reading this lesson, you will be able to:

 Learn the Labour Laws in General and Certain aspects in the law in particular.

 Explain the sections of various Labour Laws.

Structure
14.1 Introduction

14.2 Definition

14.3 Origin and Importance

14.4 Factories Act, 1948

14.5 Minimum Wages Act, 1948

14.6 Industrial Dispute Act, 1947

14.7 Workmen’s Compensation Act, 1923

14.8 Payment of Bonus Act, 1965

14.9 Payment of Gratuity Act, 1972

14.10 Employee’s State Insurance Act, 1948

14.11 Employee’s Family Pension Scheme Act, 1971

14.12 Maternity Benefit Act, 1961

14.13 Contract Labour Act, 1970

14.14 Summary

14.15 Key Words

14.16 Review Questions

182

14.1 Introduction

Labour law (also known as labor law or employment law) mediates the relationship between
workers, employing entities, trade unionsand the government. Collective labour law relates to
the tripartite relationship between employee, employer and union. Individual labour law concerns
employees’ rights at work and through the contract for work. Employment standards are social
norms (in some cases also technical standards) for the minimum socially acceptable conditions
under which employees or contractors are allowed to work. Government agencies (such as the
former US Employment Standards Administration) enforce labour law (legislative, regulatory,
or judicial).

Labour law, the varied body of law applied to such matters as employment, remuneration,
conditions of work, trade unions, and industrial relations. In its most comprehensive sense, the
term includes social security and disability insurance as well. Unlike the laws of contract, tort,
or property, the elements of labour law are somewhat less homogeneous than the rules governing
a particular legal relationship. In addition to the individual contractual relationships growing out
of the traditional employment situation, labour law deals with the statutory requirements
and collective relationships that are increasingly important in mass-production societies, the
legal relationships between organized economic interests and the state, and the various rights
and obligations related to some types of social services.

Labour law has won recognition as a distinctive branch of the law within the academic
legal community, but the extent to which it is recognized as a separate branch of legal practice
varies widely depending partly on the extent to which there is a labour code or other distinctive
body of labour legislation in the country concerned, partly on the extent to which there are
separate labour courts or tribunals, and partly on the extent to which an influential group within
the legal profession practice specifically as labour lawyers.

In the early phases of development the scope of labour law is often limited to the most
developed and important industries, to undertakings above a certain size, and to wage earners;
as a general rule, these limitations are gradually eliminated and the scope of the law extended
to include handicrafts, rural industries and agriculture, small undertakings, office workers, and,
in some countries, public employees. Thus, a body of law originally intended for the protection
of manual workers in industrial enterprises is gradually transformed into a broader body of legal
principles and standards, which have basically two functions: the protection of the worker as
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the weaker party in the employment relationship, and the regulation of the relations between
organized interest groups (industrial relations).

14.2 Definition

Labour Laws are the laws enacted by the Government to provide economic and social
justice to the workers in industries. Generally these laws provide guidelines to the employers/
industrialists in dealing with the matters of wages, wage incentives, facilitates for workers and
the working conditions of labour.

According to Mr. V.V. Giri, industrial legislation is “a provision for equitable distribution of
profits and benefits emerging from industry, between industrialists and workers and affording
protection to the workers against harmful effects to their health safety and morality.”

14.3 Origin and Importance

Labour law arose in parallel with the Industrial Revolution as the relationship between
worker and employer changed from small-scale production studios to large-scale factories.
Workers sought better conditions and the right to join (or avoid joining) a labour union, while
employers sought a more predictable, flexible and less costly workforce. The state of labour law
at any one time is therefore both the product of, and a component of struggles between various
social forces.

As England was the first country to industrialise, it was also the first to face the often
appalling consequences of industrial revolution in a less regulated economic framework. Over
the course of the late 18th and early to mid-19th century the foundation for modern labour law
was slowly laid, as some of the more egregious aspects of working conditions were steadily
ameliorated through legislation.

Importance of Labour Law

(1) Improves industrial relation i.e. employee-employer relations and minimizes industrial
disputes.

(2) Prospects workers form exploitation by the employers or management

(3) Helps workers in getting fair wages

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(4) Minimizes labour unrest

(4) International Uniformity

(1) Social justice: The first step in establishing social justice is to protect those who can’t
protect themselves. Industrial laws provide social justice to the workers by ensuring suitable
distribution of profits and benefits among the employer and employees. It also provides better
working conditions in industry.

(2) Social equality/welfare: Another objective of labour law is to ensure social welfare of
workers. These laws help the employees to improve their social status i.e. material and morale
of the workers by providing adequate wages and safety measures, ensuring appropriate working
hours and health facilities.

(3) National economy: National economy is another guiding principle of labour legislation.
It ensures normal growth of industry for the development of nation. It increases the efficiency of
workers and satisfies their needs. Thus efficient industry finally contributes a lot to improve
national economy.

(4) International uniformity: In attaining international uniformity International Labour

Organization (I.L.O.) has played an important part. It aims at securing minimum standard on
uniform basis in respect of all labour matters. Uniformity of standards can be maintained only
by enforcing various industrial laws.

14.4 Factories Act, 1958

The Factories Act,1948 (Act No. 63 of 1948), as amended by the Factories (Amendment)
Act, 1987 (Act 20 of 1987)), serves to assist in formulating national policies in India with respect
to occupational safety and health in factories and docks in India. It deals with various problems
concerning safety, health, efficiency and well-being of the persons at work places.

The Act is administered by the Ministry of Labour and Employment in India through its
Directorate General Factory Advice Service & Labour Institutes (DGFASLI) and by the State
Governments through their factory inspectorates. DGFASLI advises the Central and State
Governments on administration of the Factories Act and coordinating the factory inspection
services in the States.
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The Act is applicable to any factory using power & employing 10 or more workers and if
not using power, employing 20 or more workers on any day of the preceding twelve months,
and in any part of which a manufacturing process is being carried on with the aid of power, or is
ordinarily so carried on, or whereon twenty or more workers are working, or were working on
any day of the preceding twelve months, and in any part of which a manufacturing process is
being carried on without the aid of power, or is ordinarily so carried on; but this does not include
a mine, or a mobile unit belonging to the armed forces of the union, a railway running shed or a
hotel, restaurant or eating place.

14.4.1 Scope of the Act

The scope of the Factories Act, 1948 is to ensure adequate safety measures and to
promote the health and welfare of the workers employed in factories. The Act also makes
provisions regarding employment of women and young persons (including children and
adolescents), annual leave with wages etc.

The Act extends to whole of India including Jammu & Kashmir and covers all manufacturing
processes and establishments falling within the definition of ‘factory’ as defined under Section
2(m) of the Act. Unless otherwise provided it is also applicable to factories belonging to Central/
State Governments. (Section 116)

14.4.2 Objectives of Factories Act, 1948

The main objectives of the Indian Factories Act, 1948 are to regulate the working conditions
in factories, to regulate health, safety welfare, and annual leave and enact special provision in
respect of young persons, women and children who work in the factories.

1. Working Hours: According to the provision of working hours of adults, no adult worker
shall be required or allowed to work in a factory for more than 48 hours in a week. There should
be Compensa-tory holidays should be given to employees who work on holidays, i.e.,
compensatory holidays of equal number to the holidays so lost should be given to the workers.

 No adult worker shall be required or allowed to work in a factory for more than nine hours
in any day. According to this Act, the working hours each day shall be so fixed that no
period shall exceed five hours.

 He should be given half an hour rest after every five hours of work.

 There should be a weekly holiday.

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 Extra wages for the overtime done by the worker should be paid. A worker who completes
work for a period of 240 days or more during a year will be granted annual leave with
wages.

 A child worker should not be allowed to work for more than 41/2 hours a day. Women and
child workers should not be asked to work or allowed to work between 7 P.M. and 6 A.M.
and in no case between 10 P.M. and 5 A.M.

 The manager of every factory is required to maintain a separate register for child workers
(i.e., workers below the age of 18). No child below the age of 14 will be employed.

2. Health: For protecting the health of workers, the Act lays down that every factory shall
be kept clean and all necessary precautions shall be taken in this regard. The factories should
have proper drainage system, adequate lighting, ventilation, temperature etc.

Adequate arrangements for drinking water should be made. Sufficient latrine and urinals
should be provided at convenient places. These should be easily accessible to workers and
must be kept cleaned.

3. Safety:In order to provide safety to the workers, the Act provides that the machinery
should be fenced, no young person shall work at any dangerous machine, in confined spaces,
there should be provision for man-holes of adequate size so that in case of emergency the
workers can escape. Wherever there are chances of fire, fire-fighting equipments should be
available at convenient places. Efforts should be made to give training to the workers to save
themselves in case of fire.

Such factories should have arrangements for conveying warning to the workers in the
event of fire or any other dangerous situations. Under this Act, the State Government may
appoint inspector for under-taking checking of factories to ensure that safety measures are
taken by them.

4. Welfare: For the welfare of the workers, the Act provides that in every factory adequate
and suitable facilities for washing should be provided and maintained for the use of workers.

Facilities for storing and drying clothing, facilities for sitting, first-aid appliances, shelters,
rest rooms’ and lunch rooms, crèches, should be there.
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5. Penalties: If the provisions of The Factories Act, 1948, or any rules made under the
Act, or any order given in writing under the Act is violated, it is treated as an offence. The
following penalties can be imposed:

(a) Imprisonment for a term which may extend to three months;

(b) Fine which may extend to one lace rupees; or

(c) Both fine and imprisonment.

If a worker misuses an appliance related to welfare, safety and health of workers, or in

relation to discharge of his duties, he can be imposed a penalty of Rs. 500/-.

14.4.3 Administration of Factories Act

The State Governments carry out the administration of the Act through:

1. Inspecting Staff

2. Certifying Surgeons

3. Welfare Officers

4. Safety Officers.

1. The Inspecting Staff

Section 8 empowers the State Government to appoint Inspectors, Additional Inspectors

and Chief Inspectors, such persons who possess prescribed qualifications.

 Section 8(2) empowers the State Government to appoint any person to be a Chief Inspector.
To assist him, the government may appoint Additional, Joint or Deputy Chief Inspectors
and such other officers as it thinks fit [Section 8(2A)].

 Every District Magistrate shall be an Inspector for his district. The State Government may
appoint certain public officers, to be the Additional Inspectors for certain areas assigned
to them [Section 8(5)].

 The appointment of Inspectors, Additional Inspectors and Chief Inspector can be made
only by issuing a notification in the Official Gazette.
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 When in any area, there are more inspectors than one, the State Government may by
notification in the Official Gazette, declare the powers which such Inspectors shall
respectively exercise and the Inspector to whom the prescribed notices are to be sent.

 Inspector appointed under the Act is an Inspector for all purposes of this Act. Assignment
of local area to an inspector is within the discretion of the State Government.

 A Chief Inspector is appointed for the whole State. He shall in addition to the powers
conferred on a Chief Inspector under this Act, exercise the powers of an Inspector
throughout the State. Therefore, if a Chief Inspector files a complaint, the court can legally
take congnizance of an offence. Even assignment of areas under Section 8(6) does not
militate in any way against the view that the Chief Inspector can file a complaint enabling
the court to take congnizance. The Additional, Joint or Deputy Chief Inspectors or any
other officer so appointed shall in addition to the powers of a Chief Inspector, exercise the
powers of an Inspector throughout the State.

Powers of Inspectors

Section 9 describes the powers of the Inspectors subject to any rules made in this behalf
for the purpose of the Act. An Inspector may exercise any of the following powers within the
local limits for which he is appointed:

1. He can enter any place which is used or which, he has reasons to believe, is used
as a factory.

2. He can make examination of the premises, plant, machinery, article or substance.

Inquire into any accident or dangerous occurrence whether resulting in bodily injury,
disability or not, and take on the spot or otherwise statements of any person which
he may consider necessary for such inquiry.

3. Require the production of any prescribed register or any other document relating to
the factory. Seize, or take copies of any register, record of other document or any
portion thereof.

4. Take measurement and photographs and make such recordings as he considers

necessary for the purpose of any examination.

5. In case of any article or substance found in any premises, being an article or

substance which appears to him as having caused or is likely to cause danger to
the health or safety of the workers, direct it to be dismantled or subject it to any
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process or test (but not so as to damage or destroy it unless the same is in the
circumstances necessary, for carrying out the purposes of this Act) and take
possession of any such article or substance or a part thereof, and detain it for so
long as is necessary for such examination.

Production of documents

The Factories Act requires the maintenance of certain registers and records. Inspectors
have been empowered to ask for the production of any such documents maintained under law,
and the non-compliance of this has been made an offence.

2. Certifying Surgeons: Section 10 provides for the appointment of the Certifying Surgeons
by the State Government for the purpose of this Act to perform such duties as given below
within such local limits or for such factory or class or description of factories as may be assigned
to Certifying Surgeon:

a. The examination and certification of young persons under this Act;

b. The examination of persons engaged in factories in such dangerous occupations or

processes as may be prescribed;

c. The exercising of such medical supervision as may be prescribed for any factory or class
or description of factories.

3. Welfare Officer: Section 49 of the Act imposes statutory obligation upon the occupier
of the factory of the appointment of Welfare Officer/s wherein 500 or more workers are ordinarily
employed. Duties, qualifications and conditions of service may be prescribed by the State
Government.

4. Safety Officer: Section 40-B empowers the State Government for directing a occupier
of factory to employ such number of Safety Officers as specified by it where more than 1,000
workers are employed or where manufacturing process involves risk of bodily injury, poisoning
or disease or any other hazard to health of the persons employed therein. The duties,
qualifications and working conditions may be prescribed by the State Government.

Section 6 empowers the State Government to make rules with regard to licensing and
registration of factories under the Act on following matters:

a) Submission of plans of any class or description of factories to the Chief Inspector or the
StateGovernment;
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b) Obtaining previous permission of the State Government or the Chief Inspector, for the
site on which factory is to be situated and for construction or extension of any factory or
class or description of factories. However, replacement or addition of any plant or machinery
within prescribed limits, shall not amount to extension of the factory, if it does not reduce
the minimum safe working space or adversely affect the environmental conditions which
is injurious to health;

c) Considering applications for permission for the submission of plans and specifications;

d) Nature of plans and specifications and the authority certifying them;

e) Registration and licensing of factories;

f) Fees payable for registration and licensing and for the renewal of licences;

g) Licence not to be granted or renewed unless notice specified under Section 7 has been
given.

14.4.4 Measures To Be Taken By Factories for Health, Safety And Welfare

Of Workers

(i) Cleanliness:Section 11 ensures the cleanliness in the factory. It must be seen that a
factory is kept clean and it is free from effluvia arising from any drain, privy or other nuisance.
The Act has laid down following provisions in this respect :

1. All the accumulated dirt and refuse on floors, staircases and passages in the factory shall
be removed daily by sweeping or by any other effective method. Suitable arrangements
should also be made for the disposal of such dirt or refuse.

2. Once in every week, the floor should be thoroughly cleaned by washing with disinfectant
or by some other effective method [Section 11(1)(b)].

3. Effective method of drainage shall be made and maintained for removing water, to the
extent possible, which may collect on the floor due to some manufacturing process.

4. To ensure that interior walls and roofs, etc. are kept clean, it is laid down that:

a. white wash or colour wash should be carried at least once in every period of 14
months;

b. where surface has been painted or varnished, repair or revarnish should be

carried out once in every five years, if washable then once in every period of six
months;
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c. where they are painted or varnished or where they have smooth impervious
surface, it should be cleaned once in every period of 14 months by such method
as may be prescribed.

5. All doors, windows and other framework which are of wooden or metallic shall be kept
painted or varnished at least once in every period of five years.

6. The dates on which such processes are carried out shall be entered in the prescribed
register.

(ii) Disposal of waste and effluents: Every occupier of a factory shall make effective
arrangements for the treatment of wastes and effluents due to the manufacturing process carried
on in the factory so as to render them innocuous and for their disposal. Such arrangements
should be in accordance with the rules, if any, laid down by the State Government. If the State
Government has not laid down any rules in this respect, arrangements made by the occupier
should be approved by the prescribed authority if required by the State Government. (Section
12)

(iii) Ventilation and temperature:Section 13 provides that every factory should make
suitable and effective provisions for securing and maintaining (1) adequate ventilation by the
circulation of fresh air; and (2) such a temperature as will secure to the workers reasonable
conditions of comfort and prevent injury to health. What is reasonable temperature depends
upon the circumstances of each case. The State Government has been empowered to lay
down the standard of adequate ventilation and reasonable temperature for any factory or class
or description of factories or parts thereof. It may direct that proper measuring instruments at
such places and in such position as may be specified shall be provided and prescribed records
shall be maintained.

Measures to reduce excessively high temperature: To prevent excessive heating of

any workroom following measures shall be adopted:

1. Walls and roofs shall be of such materials and so designed that reasonable temperature
does not exceed but kept as low as possible.

2. Where the nature of work carried on in the factory generates excessively high temperature,
following measures should be adopted to protect the workers:
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a. By separating such process from the workroom; or

b. Insulating the hot parts; or

c. Adopting any other effective method which will protect the workers.

(iv) Dust and fume:There are certain manufacturing processes like chemical, textile or
jute, etc., which generates lot of dust, fume or other impurities. It is injurious to the health of
workers employed in such manufacturing process.

14.5 Minimum Wages Act, 1948

The Minimum Wages Act was passed in 1948 and it came into force on 15th March,
1948. The National Commission on Labour has described the passing of the Act as landmark in
the history of labour legislation in the country. The philosophy of the Minimum Wages Act and
its significance in the context of conditions in India, has been explained by the Supreme Court
in Unichoyi v. State of Kerala (A.I.R. 1962 SC 12), as follows:

“What the Minimum Wages Act purports to achieve is to prevent exploitation of labour
and for that purpose empowers the appropriate Government to take steps to prescribe minimum
rates of wages in the scheduled industries. In an underdeveloped country which faces the
problem of unemployment on a very large scale, it is not unlikely that labour may offer to work
even on starvation wages. The policy of the Act is to prevent the employment of such sweated
labour in the interest of general public and so in prescribing the minimum rates, the capacity of
the employer need not to be considered. What is being prescribed is minimum wage rates
which a welfare State assumes every employer must pay before he employs labour”.

Some of the salient features of minimum wages act 1948 are as follows:-

1. The Act applied to certain employments (listed in the Schedule). Both the governments
(Central and State) have to declare minimum wages for their sphere. The appropriate
government may add any employment to the list if there are 1000 workers are working in
that state.

2. Minimum wage means all remuneration in cash includes HRA (declared minimum wage +
special allowance).

3. Kinds of fixing of Minimum wages: (a) a minimum time rate, (b) a minimum piece rate, (c)
a guaranteed time rate, (d) a time rate or a piece rate applicable to overtime rate.
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4. Classes of fixing minimum rates of wages: different scheduled employments; different

classes of work in the same scheduled employment; adults, adolescents, children and
apprentices; and different localities (zone wise).

5. Norms to be considered for fixing minimum wage: Standard family of four members –
three consumption units (2 adults + 2 children) for one earner. Minimum food requirement
should be calculated on the basis of a net intake of calories. Clothing a total of 72 yards;

The rent corresponding to the minimum area (one room) Other routine expenditure 20%
of the total minimum wage. Social expenditure – further constitute 25% of the total minimum
wage.

6. Period to revise minimum wages by the appropriate government is five years.

7. The appropriate Government shall declare special allowance after every six months (i.e.
1st April and 1st October of every year).

8. In case of not paying minimum wage, a claim can be made under section 20 before the
labor authority who can make or order of payment of 10 times of difference amount.

9. Not paying Minimum wages is an offence punishable up to six months’ imprisonment or

with fine up to Rs. 500 or with both.

10. Contracting out: Any contract or agreement whereby an employee either relinquishes or
reduces his right to a minimum rate of wages or any privilege or concession accruing to
him under this Act shall be null and void.

11. Regional Labour Commissioner (C) is the authority declared by Central Government to
decide claims (less than minimum wages) made under section 20 of the Act. Assistant
Commissioner of Labour is an authority in Gujarat.

14.5.1 The Constitutional Validity of the Minimum Wages Act, 1948

India introduced the Minimum Wages Act in 1948, giving both the Central government
and State government jurisdiction in fixing wages. The act is legally non-binding but statutory.
Payment of wages below the minimum wage rate amounts to forced labour. Wage Boards are
set up to review the industry’s capacity to pay and fix minimum wages such that they at least
cover a family of four’s requirements of calories, shelter, clothing, education, medical assistance,
and entertainment. Under the law, wage rates in scheduled employments differ across states,
sectors, skills, regions and occupations owing to the difference in costs of living, regional
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industries’ capacity to pay, consumption patterns, etc. Hence, there is no single uniform minimum
wage rate across the country and the structure has become overly complex.

(A) The act is not unreasonable: It can scarcely be disputed that securing of living
wages to labourers which ensure not only bare physical subsistence but also the maintenance
of health and decency is conducive to the general interest of the public. This is one of the
directive principles of the state policy embodied in Article 43 of the constitution.

Individual employers might find it difficult to carry on the business on the basis of minimum
wages fixed under the Act but this must not be the entire premise and reason to strike down the
law itself as unreasonable.

(B) The Act doesn’t violate Article 14 of the Indian Constitution: “On a careful
examination of the various Acts and the machinery set up by this Act, Section 3(3)(iv) neither
contravene Article 19(1) of the constitution nor does it infringe the equal protection clause of the
constitution. the Courts have also held that the constitution of the committees and the Advisory
Board did not contravene the statutory provisions in that behalf prescribed by the legislature”,-
this was held in the case of ‘BhikusaYamasa Kshatriya v. Sangamner Akola BidiKamgar
Union”(4). Further, as decided in the case “C.B. Boarding & Lodging, Re(1970) II LLJ 403: AIR
1970: SC 2042: 38 FIR I(5) .” , it added to the above-mentioned case that, “… nor the reason
that two different procedures are provided for collecting information.”

(C) Notification fixing different rates of minimum wages for different localities is
not [Link] the fixation of rates of wages and their revision was manifestly
preceded by a detailed survey and enquiry and the rates were brought into force after a full
consideration of the representations which were made by a section of the employers concerned,
it would be difficult in the circumstances to hold that notification which fixed different rates of
minimum wages for different localities was not based on intelligent differentia having a rational
nexus with the object of the Act, and thereby violated article 14. when the Government issued
notification improving the existing minimum wages as revised minimum wages disregarding
the contrary report of the committee appointed under

(D) Sanctity of The Minimum Wage Act:Supreme Court in three separate rulings, has
held that non-payment of minimum wages is tantamount to ‘forced labour’ prohibited under
Article 23 of the Constitution. The Supreme Court holds that ‘forced labour’ may arise in several
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ways, including “compulsion is arising from hunger and poverty, want and destitution”. In Sanjit
Roy v. State of Rajasthan (1983) (7), the Supreme Court held that the Exemption Act in so far
as it excluded the applicability of the Minimum Wages Act 1948 to the workmen employed in
famine relief work is “clearly violative” of Article 23. Thus even public works ostensibly initiated
by the government for the sole purpose of providing employment are subject to the Minimum
Wage Act.

14.5.2 Fixation of Minimum Rate of Wages

(1) The appropriate government shall in the manner hereinafter provided:
 Fix the minimum rates of wages payable to employees employed in an employment
specified in Part I or Part II of the Schedule and in an employment added to either Party
by notification under section 27 :

 Conducive to the general interest of the public.

 Provided that the appropriate government may in respect of employees employed in an

employment specified in Part II of the Schedule instead of fixing minimum rates of wages
under this clause for the whole State fix such rates for a part of the State or for any
specified class or classes of such employment in the whole State or part thereof;review at
such intervals as it may think fit such intervals not exceeding five years the minimum
rates of wages so fixed and revise the minimum rates if necessary.

 Provided that where for any reason the appropriate government has not reviewed the
minimum rates of wages fixed by it in respect of any scheduled employment within any
interval of five years nothing contained in this clause shall be deemed to prevent it from
reviewing the minimum rates after the expiry of the said period of five years and revising
them if necessary and until they are so revised the minimum rates in force immediately
before the expiry of the said period of five years shall continue in force.

 (1A) Notwithstanding anything contained in sub-section (1) the appropriate government

may refrain from fixing minimum rates of wages in respect of any scheduled employment
in which there are in the whole State less than one thousand employees engaged in such
employment but if at any time the appropriate government comes to a finding after such
inquiry as it may make or cause to be made in this behalf that the number of employees
in any scheduled employment in respect of which it has refrained from fixing minimum
rates of wages has risen to one thousand or more it shall fix minimum rates of wages
payable to employees in such employment as soon as may be after such finding.
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(2) The appropriate government may fix:

 a minimum rate of wages for time work (hereinafter referred to as “a minimum time rate”);

 a minimum rates of wages for piece work (hereinafter referred to as “a minimum piece
rate”);

 a minimum rate of remuneration to apply in the case of employees employed on piece

work for the purpose of securing to such employees a minimum rate of wages on a time
work basis (hereinafter referred to as “a guaranteed time rate”);

 a minimum rate (whether a time rate or a piece rate) to apply in substitution for the
minimum rate which would otherwise be applicable in respect of overtime work done by
employees (hereinafter referred to as “overtime rate”).

 (2A) Where in respect of an industrial dispute relating to the rates of wages payable to
any of the employees employed in a scheduled employment any proceeding is pending
before a Tribunal or National Tribunal under the Industrial Disputes Act 1947 (14 of 1947)
or before any like authority under any other law for the time being in force or an award
made by any Tribunal National Tribunal or such authority is in operation and a notification
fixing or revising the minimum rates of wages in respect of the scheduled employment is
issued during the pendency of such proceeding or the operation of the award then
notwithstanding anything contained in this Act the minimum rates of wages so fixed or so
revised shall not apply to those employees during the period in which the proceeding is
pending and the award made therein is in operation or as the case may be where the
notification is issued during the period of operation of an award during that period; and
where such proceeding or award relates to the rates of wages payable to all the employees
in the scheduled employment no minimum rates of wages shall be fixed or revised in
respect of that employment during the said period.

(3) In fixing or revising minimum rates of wages under this section

(a) Different minimum rates of wagesmay be fixed for:

 different scheduled employments;

 different classes of work in the same scheduled employment;

 adults adolescents children and apprentices;

 different localities;
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(b) Minimum rates of wages may be fixed by any one or more of the following wage
periods; namely:

 by the hour

 by the day

 by the month or

 by such other larger wage-period as may be prescribed;

 and where such rates are fixed by the day or by the month the manner of calculating
wages for a month or for a day as the case may be may be indicated :

 Provided that where any wage-periods have been fixed under section 4 of the Payment of
Wages Act 1936 (4 of 1936) minimum wages shall be fixed in accordance therewith.

4. Minimum rate of wages

(1) Any minimum rate of wages fixed or revised by the appropriate government in respect
of scheduled employments under section 3 may consist of –

 a basic rate of wages and a special allowance at a rate to be adjusted at such intervals
and in such manner as the appropriate government may direct to accord as nearly as
practicable with the variation in the cost of living index number applicable to such workers
(hereinafter referred to as the “cost of living allowance”); or

 a basic rate of wages with or without the cost of living allowance and the cash value of the
concessions in respect of suppliers of essential commodities at concession rates where
so authorised; or

 an all-inclusive rate allowing for the basic rate the cost of living allowance and the cash
value of the concessions if any.

(2) The cost of living allowance and the cash value of the concessions in respect of
supplied of essential commodities at concession rate shall be computed by the competent
authority at such intervals and in accordance with such directions as may be specified or given
by the appropriate government.
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5. Procedure for fixing and revising minimum wages

(1) In fixing minimum rates of wages in respect of any scheduled employment for the first
time under this Act or in revising minimum rates of wages so fixed the appropriate government
shall either –

 appoint as many committees and sub-committees as it considers necessary to hold

enquiries and advise it in respect of such fixation or revision as the case may be or

 by notification in the Official Gazette publish its proposals for the information of persons
likely to be affected thereby and specify a date not less than two months from the date of
the notification on which the proposals will be taken into consideration.

(2) After considering the advice of the committee or committee appointed under clause
(a) of sub-section (1) or as the case may be all representations received by it before the date
specified in the notification under clause (b) of that sub-section the appropriate government
shall by notification in the Official Gazette fix or as the case may be revise the minimum rates of
wages in respect of each scheduled employment and unless such notification otherwise provides
it shall come into force on the expiry of three months from the date of its issue :

Provided that where the appropriate government proposes to revise the minimum rates
of wages by the mode specified in clause (b) of sub-section (1) the appropriate government
shall consult the Advisory Board also.

6. Advisory committees and sub-committees

Repealed by the Minimum Wages (Amendment) Act 1957.

7. Advisory Board

For the purpose of co-ordinating work of committees and sub-committees appointed under
section 5 and advising the appropriate government generally in the matter of fixing and revising
minimum rates of wages the appropriate government shall appoint an Advisory Board.

Central Advisory Board

a) For the purpose of advising the Central and State Governments in the matters of the
fixation and revision of minimum rates of wages and other matters under this Act and for
co-ordinating the work of the Advisory Boards the Central Government shall appoint a
Central Advisory Board.
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b) The Central Advisory Board shall consist of persons to be nominated by the Central
Government representing employers and employees in the scheduled employments who
shall be equal in number and independent persons not exceeding one-third of its total
number of members; one of such independent persons shall be appointed the Chairman
of the Board by the Central Government.

9. Composition of committees etc.

Each of the committee’s sub-committees and the Advisory Board shall consist of persons
to be nominated by the appropriate government representing employers and employees in the
scheduled employments who shall be equal in number and independent persons not exceeding
one-third of its total number of members; one of such independent persons shall be appointed
the Chairman by the appropriate government.

10. Correction of errors

a) The appropriate government may at any time by notification in the Official Gazette correct
clerical or arithmetical mistakes in any order fixing or revising minimum rates of wages
under this Act or errors arising therein from any accidental slip or omission.

b) Every such notification shall as soon as may be after it is issued be placed before the
Advisory Board for information.

11. Wages in kind

a) Minimum wages payable under this Act shall be paid in cash.

b) Where it has been the custom to pay wages wholly or partly in kind the appropriate
government being of the opinion that it is necessary in the circumstances of the case may
by notification in the Official Gazette authorise the payment of minimum wages either
wholly or partly in kind.

c) If appropriate government is of the opinion that provision should be made for the supply
of essential commodities at concession rates the appropriate government may by
notification in the Official Gazette authorise the provision of such supplies at concessional
rates.

d) The cash value of wages in kind and of concessions in respect of supplies of essential
commodities at concession rates authorised under sub-sections (2) and (3) shall be
estimated in the prescribed manner.
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12. Payment of minimum rate of wages

a) Where in respect of any scheduled employment a notification under section 5 is in force
the employer shall pay to every employee engaged in a scheduled employment under
him wages at a rate not less than the minimum rate of wages fixed by such notification for
that class of employees in that employment without any deductions except as may be
authorised within such time and subject to such conditions as may be prescribed.

b) Nothing contained in this section shall affect the provisions of the Payment of Wages Act
1936 (4 of 1936).

13. Fixing hours for normal working day etc.

(1) In regard to any scheduled employment minimum rates of wages in respect of which
have been fixed under this Act the appropriate government may –

a) Fix the number of hours of work which shall constitute a normal working day inclusive
of one or more specified intervals;

b) Provide for a day of rest in every period of seven days which shall be allowed to all
employees or to any specified class of employees and for the payment of
remuneration in respect of such days of rest;

c) Provide for payment for work on a day of rest at a rate not less than the overtime
rate.

(2) The provisions of sub-section (1) shall in relation to the following classes of employees
apply only to such extent and subject to such conditions as may be prescribed :-

a) Employees engaged on urgent work or in any emergency which could not have
been foreseen or prevented;

b) Employees engaged in work in the nature of preparatory or complementary work

which must necessarily be carried on outside the limits laid down for the general
working in the employment concerned;

c) Employees whose employment is essentially intermittent;

d) employees engaged in any work which for technical reasons has to be completed
before the duty is over;

e) Employees engaged in a work which could not be carried on except at times

dependent on the irregular action of natural forces.
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(3) For the purposes of clause (c) of sub-section (2) employment of an employee is essentially
intermittent when it is declared to be so by the appropriate government on the ground that
the daily hours of duty of the employee or if there be no daily hours of duty as such for the
employee the hours of duty normally include periods of inaction during which the employee
may be on duty but is not called upon to display either physical activity or sustained
attention.

14. Overtime
a) Where an employee whose minimum rate of wages is fixed under this Act by the hour by
the day or by such a longer wage-period as may be prescribed works on any day in
excess of the number of hours constituting a normal working day the employer shall pay
him for every hour or for part of an hour so worked in excess at the overtime rate fixed
under this Act or under any law of the appropriate government for the time being in force
whichever is higher.

b) Nothing in this Act shall prejudice the operation of the provisions of section 59 of the
Factories Act 1948 (63 of 1948) in any case where those provisions are applicable.

15. Wages of worker who works for less than normal working day

If an employee whose minimum rate of wages has been fixed under this Act by the day
works on any day on which he was employed for a period less than the requisite number of
hours constituting a normal working day he shall save as otherwise hereinafter provided be
entitled to receive wages in respect of work done by him on that day as if he had worked for a
full normal working day :

Provided however that he shall not be entitled to receive wages for a full normal working
day

a) in any case where his failure to work is caused by his unwillingness to work and not by the
omission of the employer to provide him with work and

b) in such other cases and circumstances as may be prescribed.

16. Wages for two or more classes of work

Where an employee does two or more classes of work to each of which a different minimum
rate of wages is applicable the employer shall pay to such employee in respect of the time
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respectively occupied in each such class of work wages at not less than the minimum rate in
force in respect of each such class.

17. Minimum time rate wages for piece work

Where an employee is employed on piece work for which minimum time rate and not a
minimum piece rate has been fixed under this Act the employer shall pay to such employee
wages at not less than the minimum time rate.

18. Maintenance of registers and records

a) Every employer shall maintain such registers and records giving such particulars of
employees employed by him the work performed by them the wages paid to them the
receipts given by them and such other particulars and in such form as may be prescribed.

b) Every employer shall keep exhibited in such manner as may be prescribed in the factory
workshop or place where the employees in the scheduled employment may be employed
or in the case of out-workers in such factory workshop or place as may be used for giving
out work to them notices in the prescribed form containing prescribed particulars.

c) The appropriate government may by rules made under this Act provide for the issue of
wage books or wage slips to employees employed in any scheduled employment in respect
of which minimum rates of wages have been fixed and prescribed to manner in which
entries shall be made and authenticated in such wage books or wage slips by the employer
or his agent.

19. Inspectors

(1) The appropriate government may by notification in the Official Gazette appoint such
persons as it thinks fit to be Inspectors for the purposes of this Act and define the local limits
within which they shall exercise their functions.

(2) Subject to any rules made in this behalf an Inspector may within the local limits for
which he is appointed –

a) Enter at all reasonable hours with such assistants (if any) being persons in the service of
the government or any local or other public authority as he thinks fit any premises or
place where employees are employed or work is given out to out-workers in any scheduled
employment in respect of which minimum rates of wages have been fixed under this Act
for the purpose of examining any register record of wages or notices required to be kept
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or exhibited by or under this Act or rules made thereunder and require the production
thereof for inspection;

b) Examine any person whom he finds in any such premises or place and who he has
reasonable cause to believe is an employee employed therein or an employee to whom
work is given out therein;

c) Require any person giving out-work and any out-workers to give any information which is
in his power to give with respect to the names and addresses of the persons to for and
from whom the work is given out or received and with respect to the payments to be made
for the work;

d) Seize or take copies of such register record or wages or notices or portions thereof as he
may consider relevant in respect of an offence under this Act which he has reason to
believe has been committed by an employer; and

e) Exercise such other powers as may be prescribed.

(3) Every Inspector shall be deemed to be a public servant within the meaning of the
Indian Penal Code (45 of 1860).

(4) Any person required to produce any document or thing or to give any information by
an Inspector under sub-section (2) shall be deemed to be legally bound to do so within the
meaning of section 175 and section 176 of the Indian Penal Code (45 of 1860).

20. Claim

(1) The appropriate government may by notification in the Official Gazette appoint any
Commissioner for Workmen’s Compensation or any officer of the Central Government exercising
functions as a Labour Commissioner for any region or any officer of the State Government not
below the rank of Labour Commissioner or any other officer with experience as a judge for a
civil court or as a Stipendiary Magistrate to be the authority to hear and decide for any specified
area all claims arising out of payment of less than the minimum rates of wages or in respect of
the payment of remuneration for days of rest or for work done on such days under clause (b) or
clause (c) of sub-section (1) of section 13 or of wages at the overtime rate under section 14 to
employees employed or paid in that area.

(2) Where an employee has any claim of the nature referred to in sub-section (1) the
employee himself or any legal practitioner or any official of a registered trade union authorised
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in writing to act on his behalf or any Inspector or any person acting with the permission of the
authority appointed under sub-section (1) may apply to such authority for a direction under sub-
section (3) :

Provided that every such application shall be presented within six months from the date
on which the minimum wages or other amount became payable :

Provided Further that any application may be admitted after the said period of six months
when the applicant satisfies the authority that he had sufficient cause for not making the
application within such period.

(3) When any application under sub-section (2) is entertained the authority shall hear the
applicant and the employer or give them an opportunity of being heard and after such further
inquiry if any as it may consider necessary may without prejudice to any other penalty to which
the employer may be liable under this Act direct –

a) in the case of a claim arising out of payment of less than the minimum rates of wages the
payment to the employee of the amount by which the minimum wages payable to him
exceed the amount actually paid together with the payment of such compensation as the
authority may think fit not exceeding ten times the amount of such excess;

b) in any other case the payment of the amount due to the employee together with the
payment of such compensation as the authority may think fit not exceeding ten rupees;

c) and the authority may direct payment of such compensation in cases where the excess or
the amount due is paid by the employer to the employee before the disposal of the
application.

(4) If the authority hearing any application under this section is satisfied that it was either
malicious or vexatious it may direct that a penalty not exceeding fifty rupees be paid to be
employer by the person presenting the application.

(5) Any amount directed to be paid under this section may be recovered –

a) if the authority is a Magistrate by the authority as if it were a fine imposed by the authority
as a Magistrate or

b) if the authority is not a Magistrate by any Magistrate to whom the authority makes application
in this behalf as if it were a fine imposed by such Magistrate.
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(6) Every direction of the authority under this section shall be final.

(7) Every authority appointed under sub-section (1) shall have all the powers of a civil
court under the Code of Civil Procedure 1908 (5 of 1908) for the purpose of taking evidence
and of enforcing the attendance of witnesses and compelling the production of documents and
every such authority shall be deemed to be a civil court for all the purposes of section 195 and
Chapter XXXV of the Code of Criminal Procedure 1898 (5 of 1898).

21. Single application in respect of a number of employees

1) Subject to such rules as may be prescribed a single application may be presented

under section 20 on behalf or in respect of any number of employees employed in the scheduled
employment in respect of which minimum rates of wages have been fixed and in such cases
the maximum compensation which may be awarded under sub-section (3) of section 20 shall
not exceed ten times the aggregate amount of such excess or ten rupees per head as the case
may be.

(2) The authority may deal with any number of separate pending applications presented
under section 20 in respect of employees in the scheduled employments in respect of which
minimum rates of wages have been fixed as a single application presented under sub-section
(1) of this section and the provisions of that sub-section shall apply accordingly.

22. Penalties for certain offences any employer who

a) pays to any employee less than the minimum rates of wages fixed for that employee’s
class of work or less than the amount due to him under the provisions of this Act or

b) contravenes any rule or order made under section 13;shall be punishable with imprisonment
for a term which may extend to six months or with fine which may extend to five hundred
rupees or with both :

c) Provided that in imposing any fine for an offence under this section the court shall take
into consideration the amount of any compensation already awarded against the accused
in any proceedings taken under section 20.

22A. General provision for punishment of other offences

Any employer who contravenes any provision of this Act or of any rule or order made
thereunder shall if no other penalty is provided for such contravention by this Act be punishable
with fine which may extend to five hundred rupees.
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22B. Cognizance of offences

(1) No court shall take cognizance00 of a complaint against any person for an offence –

a) under clause (a) of section 22 unless an application in respect of the facts constituting
such offence has been presented under section 20 and has been granted wholly or in part
and the appropriate government or an officer authorised by it is this behalf has sanctioned
the making of the complaint;

b) under clause (b) of section 22 or under section 22A except on a complaint made by or
with the sanction of an Inspector.

(2) No court shall take cognizance of an offence –

a) under clause (a) or clause (b) of section 22 unless complaint thereof is made within one
month of the grant of sanction under this section;

b) under section 22A unless complaint thereof is made within six months of the date on
which the offence is alleged to have been committed.

22C. Offences by companies

(1) If the person committing any offence under this Act is a company every person who at
the time the offence was committed was in charge of and was responsible to the company for
the conduct of the business of the company as well as the company shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to
any punishment provided in this Act if he proves that the offence was committed without his
knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1) where any offence under this
Act has been committed by a company and it is proved that the offence has been committed
with the consent or connivance of or is attributable to any neglect on the part of any director
manager secretary or other officer of the company such director manager secretary or other
officer of the company shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
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Explanation: For the purposes of this section –

a) “Company” means anybody corporate and includes a firm or other association of

individuals and

b) “Director” in relation to a firm means a partner in the firm.

22D. Payment of undisbursed amounts due to employees

All amounts payable by an employer to an employee as the amount of minimum wages of

the employee under this Act or otherwise due to the employee under this Act or any rule or order
made thereunder shall if such amounts could not or cannot be paid to the employee on account
of his death before payment or on account of his whereabouts not being known be deposited
with the prescribed authority who shall deal with the money so deposited in such manner as
may be prescribed.

22E. Protection against attachment of assets of employer with

government

Any amount deposited with the appropriate government by an employer to secure the
due performance of a contract with that government and any other amount due to such employer
from that government in respect of such contract shall not be liable to attachment under any
decree or order of any court in respect of any debt or liability incurred by the employer other
than any debt or liability incurred by the employer towards any employee employed in connection
with the contract aforesaid.

22F. Application of Payment of Wages Act 1936 to scheduled

employments

(1) Notwithstanding anything contained in the Payment of Wages Act 1936 (4 of 1936)
the appropriate government may by notification in the Official Gazette direct that subject to the
provisions of sub-section (2) all or any of the provisions of the said Act shall with such modifications
if any as may be specified in the notification apply to wages payable to employees in such
scheduled employments as may be specified in the notification.

(2) Where all or any of the provisions of the said Act are applied to wages payable to
employees in any scheduled employment under sub-section (1) the Inspector appointed under
this Act shall be deemed to be the Inspector for the purpose of enforcement of the provisions so
applied within the local limits of his jurisdiction.
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23. Exemption of employer from liability in certain cases

Where an employer is charged with an offence against this Act he shall be entitled upon
complaint duly made by him to have any other person whom he charges as the actual offender
brought before the court at the time appointed for hearing the charge; and if after the commission
of the offence has been proved the employer proves to the satisfaction of the court-

a) That he has used due diligence to enforce the execution of this Act and

b) That the said other person committed the offence in question without his knowledge
consent or connivance.

c) That other person shall be convicted of the offence and shall be liable to the like punishment
as if he were the employer and the employer shall be discharged :

Provided that in seeking to prove as aforesaid the employer may be examined on oath
and the evidence of the employer or his witness if any shall be subject to cross-examination by
or on behalf of the person whom the employer charges as the actual offender and by the
prosecution.

24. Bar of suits

No court shall entertain any suit for the recovery of wages in so far as the sum so
claimed

a) Forms the subject of an application under section 20 which has been presented by or on
behalf of the plaintiff or

b) Has formed the subject of a direction under that section in favour of the plaintiff or

c) Has been adjudged in any proceeding under that section not to be due to the plaintiff or

d) Could have been recovered by an application under that section.

25. Contracting out

Any contract or agreement whether made before or after the commencement of this Act
whereby an employee either relinquishes or reduces his right to a minimum rate of wages or
any privilege or concession accruing to him under this Act shall be null and void in so far as it
purports to reduce the minimum rate of wages fixed under this Act.
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26. Exemption and exceptions

(1) The appropriate government may subject to such conditions if any as it may think fit to
impose direct that the provisions of this Act shall not apply in relation to the wages payable to
disabled employees.

(2) The appropriate government if for special reasons it thinks so fit by notification in the
Official Gazette direct that subject to such conditions and for such period as it may specify the
provisions of this Act or any of them shall not apply to all or any class of employees employed
in any scheduled employment or to any locality where there is carried on a scheduled employment.

(2A) The appropriate government may if it is of opinion that having regard to the terms
and conditions of service applicable to any class of employees in a scheduled employment
generally or in a scheduled employment in a local area or to any establishment or a part of any
establishment in a scheduled employment it is not necessary to fix minimum wages in respect
of such employees of that class or in respect of employees in such establishment or such part
of any establishment as are in receipt of wages exceeding such limit as may be prescribed in
this behalf direct by notification in the Official Gazette and subject to such conditions if any as
it may think fit to impose that the provisions of this Act or any of them shall not apply in relation
to such employees.

(3) Nothing in this Act shall apply to the wages payable by an employer to a member of his
family who is living with him and is dependent on him.

Explanation: In this sub-section a member of the employer’s family shall be deemed to

include his or her spouse or child or parent or brother or sister.

27. Power of State Government to add to Schedule

The appropriate government after giving by notification in the Official Gazette not less
than three months’ notice of its intention so to do may by like notification add to either Part of
the Schedule any employment in respect of which it is of opinion that minimum rates of wages
should be fixed under this Act and thereupon the Schedule shall in its application to the State be
deemed to be amended accordingly.
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28. Power of Central Government to give directions

The Central Government may give directions to a State Government as to the carrying
into execution of this Act in the State.

29. Power of Central Government to make rules

The Central Government may subject to the condition of previous publication by notification
in the Official Gazette make rules prescribing the term of office of the members the procedure
to be followed in the conduct of business the method of voting the manner of filling up casual
vacancies in membership and the quorum necessary for the transaction of business of the
Central Advisory Board.

30. Power of appropriate government to make rules

(1) The appropriate government may subject to the condition of previous publication by
notification in the Official Gazette make rules for carrying out the purposes of this Act.

(2) Without prejudice to the generality of the foregoing power such rules may –

a) Prescribe the term of office of the members the procedure to be followed in the conduct
of business the method of voting the manner of filling up casual vacancies in membership
and the quorum necessary for the transaction of business of the committees sub-
committees and the Advisory Board;

b) Prescribe the method of summoning witnesses production of documents relevant to the

subject-matter of the enquiry before the committees sub-committees and the Advisory
Board;

c) Prescribe the mode of computation of the cash value of wages in kind and of concessions
in respect of supplies of essential commodities at concession rates;

d) Prescribe the time and conditions of payment of and the deductions permissible from
wages;

e) Provide for giving adequate publicity to the minimum rates of wages fixed under this Act;

f) Provide for a day of rest in every period of seven days and for the particulars to be
entered in such registers and records;

g) Prescribe the number of hours of work which shall constitute a normal working day;
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h) Prescribe the cases and circumstance in which an employee employed for a period of
less than the requisite number of hours constituting a normal working day shall not be
entitled to receive wages for a full normal working day;

i) Prescribe the form of registers and records to be maintained and the particulars to be
entered in such registers and records;

j) Provide for the issue of wage book and wage slips and prescribe the manner of making
and authenticating entries in wage books and wage slips;

k) Prescribe the powers of Inspectors for purposes of this Act;

l) Regulate the scale of costs that may be allowed in proceedings under section 20 and

m) Prescribe the amount of court-fees payable in respect of proceedings under section 20;
and

n) Provide for any other matter which is to be or may be prescribed.

30A. Rules made by Central Government to be laid before Parliament –

Every rule made by the Central Government under this Act shall be laid as soon as may
be after it is made before each House of Parliament while it is in session for a total period of
thirty days which may be comprised in one session or two successive sessions and if before the
expiry of the session in which it is so laid or the session immediately following both Houses
agree in making any modification in the rule or both Houses agree that the rule should not be
made the rule shall thereafter have effect only in such modified form or be of no effect as the
case may be so however that any such modification or annulment shall be without prejudice to
the validity of anything previously done under that rule.

31. Validation of fixation of certain minimum rates of wages

Where during the period –

a) commencing on the 1st day of April 1952 and ending with the date of the commencement
of the Minimum Wages (Amendment) Act 1954 (26 of 1954); or

b) commencing on the 31st day of December 1954 and ending with the date of the
commencement of the Minimum Wages (Amendment) Act 1957 (30 of 1957); or

c) commencing on the 31st day of December 1959 and ending with the date of the
commencement of the Minimum Wages (Amendment) Act 1961 (31 of 1961) minimum
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rate of wages have been fixed by an appropriate government as being payable to

employees employed in any employment specified in the Schedule in the belief or purported
belief that such rates were being fixed under clause (a) of sub-section (1) of section 3 as
in force immediately before the commencement of the Minimum Wages (Amendment)
Act 1954 (26 of 1954) or the Minimum Wages (Amendment) Act 1957 (30 of 1957) or the
Minimum Wages(Amendment) Act 1961 (31 of 1961) as the case may be such rates shall
be deemed to have been fixed in accordance with law and shall not be called in question
in any court on the ground merely that the relevant date specified for the purpose in that
clause had expired at the time the rates were fixed :

Provided that nothing contained in this section shall extend or be construed to extend to
affect any person with any punishment or penalty whatsoever by reason of the payment by him
by way of wages to any of his employees during any period specified in this section of an
amount which is less than the minimum rates of wages referred to in this section or by reason
of non-compliance during the period aforesaid with any order or the rule issued under section
13.

14.6 Industrial Disputes Act, 1947

According to Section 2A: Where any employer discharges, dismisses, retrenches or

otherwise terminates the services of an individual workman, any dispute or difference between
that workman and his employer connected with, or arising out of, such discharge, dismissal,
retrenchment or termination shall be deemed to be an industrial dispute notwithstanding that no
other workman nor any union of workmen is a party to the dispute.

Industrial Disputes have adverse effects on industrial production, efficiency, costs, quality,
human satisfaction, discipline, technological and economic progress and finally on the welfare
of the society. A discontent labour force, nursing in its heart mute grievances and resentments,
cannot be efficient and will not possess a high degree of industrial morale. Hence, the Industrial
Dispute Act of 1947 was passed as a preventive and curative measure.

The Industrial Disputes Act 1947 extends to the whole of India and regulates Indian labour
law so far as that concerns trade unions as well as Individual workman employed in any Industry
within the territory of Indian mainland. It came into force 1 April 1947.
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14.6.1 Objectives of Industrial Dispute Act

The objective of the Industrial Disputes Act is to secure industrial peace and harmony by
providing machinery and procedure for the investigation and settlement of industrial disputes by
conciliation, arbitration and adjudication machinery which is provided under the statute. The
main and ultimate objective of this act is “Maintenance of Peaceful work culture in the Industry
in India” which is clearly provided under the Statement of Objects & Reasons of the statute.

The laws apply only to the organised sector. Chapter V talks about the most important
and often in news topic of ‘Strikes and Lockouts’. It talks about the Regulation of strikes and
lockouts and the proper procedure which is to be followed to make it a Legal instrument of
‘Economic Coercion’ either by the Employer or by the Workmen. Chapter V-B, introduced by an
amendment in 1976, requires firms employing 300 or more workers to obtain government
permission for layoffs, retrenchments and closures. A further amendment in 1982 (which took
effect in 1984) expanded its ambit by reducing the threshold to 100 workers.

The Act also lays down:

1. The provision for payment of compensation to the workman on account of closure

or lay off or retrenchment.

2. The procedure for prior permission of appropriate Government for laying off or
retrenching the workers or closing down industrial establishments

3. Unfair labour practices on part of an employer or a trade union or workers.

14.6.2 Aspects of Industrial Dispute Act

The main aspects of this act are as follows:

 Any industrial dispute can be sorted out at an industrial tribunal by the mutual consent of
both the parties or by the state government.

 An award shall bind on both the parties creating the dispute within one year.

 Any kind of strikes and lockouts are restricted during the period when the conciliation and
the adjunction is pending, when the settlements reached in the course of conciliation are
pending and when the awards of industrial tribunal declared by the government are pending.

 In case of public interest or in the time of emergency, the government has the power to
declare the transport, coal, cotton textiles, food stuffs and iron and steel industries to be
public commodity services for a maximum of six months.
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 The employer is requested to pay compensation in case of lay-off or retrenchment of

workmen.

 For industrial disputes, a number of authorities are provided irrespective of the roles they
play in the industry.\

14.6.3 Important Terms in Industrial Disputes Act

1. Arbitrator: An arbitrator is an umpire who presides over the tribunal in case of an industrial
dispute.

2. Average pay: The average payment of the workmen is termed as average pay.

3. Award: An interim of the final determination of an industrial dispute is termed as award.

4. Banking Company: Banking Company refers to a banking company as defined in the

Banking Companies Act, 1949.

5. Board: A board of conciliation constituted under this act is termed as board.

6. Closure: The permanent closing down of a place of employment is termed as closure.

7. Conciliation officer: A conciliation officer appointed under the act is termed as a

conciliation officer.

8. Conciliation proceedings: Any proceedings held by the conciliation officer are called
conciliation proceedings

9. Court: The court of enquiry constituted under this act is termed as court.

10. Industrial dispute: It is a dispute between the employees and the employers or between
the employers and the workmen.

14.7 Workmen's Compensation Act, 1923

The Workmen’s Compensation Act, 1923 provides for payment of compensation to

workmen and their dependants in case of injury and accident (including certain occupational
disease) arising out of and in the course of employment and resulting in disablement or death.
The Act applies to railway servants and persons employed in any such capacity as is specified
in Schedule II of the Act. The schedule II includes persons employed in factories, mines,
plantations, mechanically propelled vehicles, construction works and certain other hazardous
occupations.
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The amount of compensation to be paid depends on the nature of the injury and the
average monthly wages and age of [Link] minimum and maximum rates of compensation
payable for death (in such cases it is paid to the dependents of workmen) and for disability have
been fixed and is subject to revision from time to time.

A Social Security Division has been set up under the Ministry of Labour and Employment,
which deals with framing of social security policy for the workers and implementation of the
various social security schemes. It is also responsible for enforcing this Act. The Act is
administered by the State Governments through Commissioners for Workmen’s Compensation.

14.7.1 Provision of Industrial Dispute Act

1. An employer is liable to pay compensation:- (i) if personal injury is caused to a workman
by accident arising out of and in the course of his employment; (ii) if a workman employed
in any employment contracts any disease, specified in the Act as an occupational disease
peculiar to that employment.

2. However, the employer is not liable to pay compensation in the following cases:-

a) If the injury does not result in the total or partial disablement of the workman for
a period exceeding three days.

b) If the injury, not resulting in death or permanent total disablement, is caused by

an accident which is directly attributable to:- (i) the workman having been at the
time of the accident under the influence of drink or drugs; or (ii) the willful
disobedience of the workman to an order expressly given, or to a rule expressly
framed, for the purpose of securing the safety of workmen; or (iii) the willful
removal or disregard by the workman of any safety guard or other device which
has been provided for the purpose of securing safety of workmen.

3. The State Government may, by notification in the Official Gazette, appoint any person to
be a Commissioner for Workmen’s Compensation for such area as may be specified in
the notification. Any Commissioner may, for the purpose of deciding any matter referred
to him for decision under this Act, choose one or more persons possessing special
knowledge of any matter relevant to the matter under inquiry to assist him in holding the
inquiry.

4. Compensation shall be paid as soon as it falls due. In cases where the employer does not
accept the liability for compensation to the extent claimed, he shall be bound to make
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provisional payment based on the extent of liability which he accepts, and, such payment
shall be deposited with the Commissioner or made to the workman, as the case may be.

5. If any question arises in any proceedings under this Act as to the liability of any person to
pay compensation (including any question as to whether a person injured is or is not a
workman) or as to the amount or duration of compensation (including any question as to
the nature or extent of disablement), the question shall, in default of agreement, be settled
by a Commissioner. No Civil Court shall have jurisdiction to settle, decide or deal with any
question which is by or under this Act required to be settled, decided or dealt with by a
Commissioner or to enforce any liability incurred under this Act.

6. The State Government may, by notification in the Official Gazette, direct that every person
employing workmen, or that any specified class of such persons, shall send at such time
and in such form and to such authority, as may be specified in the notification, a correct
return specifying the number of injuries in respect of which compensation has been paid
by the employer during the previous year and the amount of such compensation together
with such other particulars as to the compensation as the State Government may direct.

7. Whoever, fails to maintain a notice-book which he is required to maintain; or fails to send

to the Commissioner a statement which he is required to send; or fails to send a report
which he is required to send; or fails to make a return which he is required to make, shall
be punishable with fine.

14.8 Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 is the principal act for the payment of bonus to the
employees which was formed with an objective for rewarding employees for their good work for
the organization. It is a step forward to share the prosperity of the establishment reflected by
the profits earned by the contributions made by capital, management and labour with the
employees.

The payment of Bonus Act provides for payment of bonus to persons employed in certain
establishments of the basis of profits or on the basis of production or productivity and for matters
connected therewith.

It extends to the whole of India and is applicable to every factory and to every other
establishment where 20 or more workmen are employed on any day during an accounting year.
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14.8.1 Objectives of Payment of Bonus Act

1. To improve statutory liability to pay bonus [reward for good work] in case of profits
or losses.

2. To prescribe formula for calculating bonus

3. To prescribe Minimum & Maximum percentage bonus

4. To provide of set off/set on mechanism

5. To provide redressal mechanism

14.8.2 Eligibility for Bonus

Every employee receiving salary or wages upto RS. 3,500 p.m. and engaged in any kind
of work whether skilled, unskilled, managerial, supervisory etc. is entitled to bonus for every
accounting year if he has worked for at least 30 working days in that year.

However employees of L.I.C., Universities and Educational institutions, Hospitals, Chamber

of Commerce, R.B.I., IFCI, U.T.I. Social Welfare institutions are not entitled to bonus under this
Act.

14.8.3 Disqualification for Bonus

Notwithstanding anything contained in the act, an employee shall be disqualified from

receiving bonus, if he is dismissed from service for fraud or riotous or violent behaviour while in
the premises of the establishment or theft, misappropriation or sabotage of any property of the
establishment.

14.8.4 Minimum/Maximum Bonus Payable

Minimum Bonus

a) The minimum bonus which an employer is required to pay even if he suffers losses during
the accounting year or there is no allocable surplus is 8.33 % of the salary or wages
during the accounting year, or

b) Rs. 100 in case of employees above 15 years and Rs 60 in case of employees below 15
years, at the beginning of the accounting year,whichever is higher
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Maximum Bonus

If in an accounting year, the allocable surplus, calculated after taking into account the
amount ‘set on’ or the amount ‘set of’ exceeds the minimum bonus, the employer should pay
bonus in proportion to the salary or wages earned by the employee in that accounting year
subject to a maximum of 20% of such salary or wages.

14.8.5 Time Limit for Payment

The bonus should be paid in cash within 8 months from the close of the accounting year
or within one month from the date of enforcement of the award or coming into operation of a
settlement following an industrial dispute regarding payment of bonus. However if there is
sufficient cause extension may be applied for.

14.8.6 Calculation of Bonus

The method for calculation of annual bonus is as follow:

1. Calculate the gross profit in the manner specified in-

a) First Schedule, in case of a banking company, or

b) Second Schedule, in any other case

2. Calculate the Available Surplus.

Available Surplus = A+B, where A = Gross Profit – Depreciation admissible u/s 32 of the
Income tax Act - Development allowance - Direct taxes payable for the accounting year (calculated
as per Sec.7) – Sums specified in the Third Schedule.

B = Direct Taxes (calculated as per Sec. 7) in respect of gross profits for the immediately
preceding accounting year – Direct Taxes in respect of such gross profits as reduced by the
amount of bonus, for the immediately preceding accounting year.

3. Calculate Allocable Surplus: Allocable Surplus = 60% of Available Surplus, 67% in

case of foreign companies.

4. Make adjustment for ‘Set-on’ and ‘Set-off’. For calculating the amount of bonus in
respect of an accounting year, allocable surplus is computed after considering the
amount of set on and set offf from the previous years, as illustrated in Fourth
Schedule.
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5. The allocable surplus so computed is distributed amongst the employees in

proportion to salary or wages received by them during the relevant accounting year.

In case of an employee receiving salary or wages above Rs. 2,500 the bonus payable is
to be calculated as if the salary or wages were Rs. 2,500 p.m. only.

14.8.6 Duties/Rights of Employer

Duties
1. To calculate and pay the annual bonus as required under the Act

2. To submit an annul return of bonus paid to employees during the year, in Form D, to the
Inspector, within 30 days of the expiry of the time limit specified for payment of bonus.

3. To co-operate with the Inspector, produce before him the registers/records maintained,
and such other information as may be required by them.

4. To get his account audited as per the directions of a Labour Court/Tribunal or of any such
other authority.

Rights

An employer has the following rights:

1. Right to forfeit bonus of an employee, who has been dismissed from service for fraud,
riotous or violent behaviour, or theft, misappropriation or sabotage of any property of the
establishment.

2. Right to make permissible deductions from the bonus payable to an employee, such as,
festival/interim bonus paid and financial loss caused by misconduct of the employee.

3. Right to refer any disputes relating to application or interpretation of any provision of the
Act, to the Labour Court or Labour Tribunal.

Rights of Employees
1. Right to claim bonus payable under the Act and to make an application to the Government,
for the recovery of bonus due and unpaid, within one year of its becoming due.

2. Right to refer any dispute to the Labour Court/Tribunal Employees, to whom the Payment
of Bonus Act does not apply, cannot raise a dispute regarding bonus under the Industrial
Disputes Act.
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3. Right to seek clarification and obtain information, on any item in the accounts of the
establishment.

14.8.8 Recovery of Bonus Due

1. Where any bonus is due to an employee by way of bonus, employee or any other person
authorised by him can make an application to the appropriate government for recovery of
the money due.

2. If the government is satisfied that money is due to an employee by way of bonus, it shall
issue a certificate for that amount to the collector who then recovers the money.

3. Such application shall be made within one year from the date on which the money became
due to the employee.

4. However the application may be entertained after a year if the applicant shows that there
was sufficient cause for not making the application within time.

14.8.9 Offences and Penalties

1. For contravention of the provisions of the Act or rules the penalty is imprisonment upto 6
months,or fine up to Rs.1000, or both.

2. For failure to comply with the directions or requisitions made the penalty is imprisonment
upto 6 months,or fine up to Rs.1000, or both.

3. In case of offences by companies, firms, body corporate or association of individuals, its

director, partner or a principal officer responsible for the conduct of its business, as the
case may be, shall be deemed to be guilty of that offence and punished accordingly,
unless the person concerned proves that the offence was committed without his knowledge
or that he exercised all due diligence

14.9 Payment of Gratuity Act, 1972

In India gratuity is a type of retirement benefit. It is a payment made with the intention of
helping an employee monetarily after his retirement. It was held by the Supreme Court of
India in Indian Hume Pipe Co Ltd v Its Workmen, that the general principal underlying gratuity
scheme is that by service over a long period the employee is entitled to claim a certain amount
as retirement benefit. The Payment of Gratuity Act was passed by Indian Parliament in 21
August 1972. The act came in force on 16 September 1972.
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14.9.1 Application and extent

The act applies to the whole of India. But according to section 1(2), in so far it relates to
plantation or ports, it shall not be extended to State of Jammu and Kashmir. The act applies to
all factories, mines, oilfield, plantation, port and railway company. But in case of shops or
establishments other than those stated before, it applies to those organisations with 10 or more
persons are employed on any day of the preceding 12 months.

Under Section 1(3-A), if in case of any shop and establishment to which the act applies
the number of employee reduces below 10, it shall continue to be governed by the act irrespective
of the number of employee’s. Thus no employer can escape liability under this act by reducing
the number of employee’s. Under Section 2(e), Nothing in this act applies to Apprentices and
Persons who hold civil posts.

14.9.2 Payment of gratuity: eligibility and calculation

Under Section 4, payment of gratuity is mandatory. Gratuity shall be payable to an employee

on termination of employment after he has rendered continuous service for not less than 5
years in a single organisation. The termination can be due to:

1. Superannuation.

2. Retirement or Resignation.

3. On Death or Disablement due to accident or disease.

As per Section 4(1), the completion of continuous service of 5 years is not required where
termination of employment is due to death or disablement. In such case mandatory gratuity is
payable.

Gratuity is paid at a rate of 15 days wages for every completed year of service or part
thereof in excess of Six months. The wages here means wages last drawn by the employee.
The “15 Days Wages” will be calculated by dividing the last drawn wages by 26 and multiplying
the result with 15. But under section 4(3), the maximum gratuity that is payable is fixed at
Rupees 20,00,000.

Formula for Gratuity Calculation = [((Basic Pay + D.A) x 15 days) / 26] x No. of years of
service (example of Gratuity Calculation).
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Under the Central Government or State Government and are subjected to any other act
or rule other than this act.

14.10 Employee's State Insurance Act, 1948

Employee’s State Insurance (abbreviated as ESI) is a self-financing social security

and health insurance scheme for Indian workers. This fund is managed by the Employees’
State Insurance Corporation (ESIC) according to rules and regulations stipulated there in the
ESI Act 1948. ESIC is an autonomous corporation by a statutory creation under Ministry of
Labour and Employment, Government of India.

The Government of India through notification in the Official Gazette has amended the
Employees’ State Insurance (Central) Rules, 1950. Accordingly, as per rule 50, the wage limit
for coverage of an employee under Employees State Insurance Act has been enhanced from
Rs. 10,000 to Rs. 15,000 with effect from 1 May 2010.

14.10.1 Applicability

The ESI Act, 1948 in the first instance, applies to:

 Factories using power in the manufacturing process and employing 10 or more

persons

 Non-power using factories or establishments employing 20 or more persons for

wages.

The Act contains an enabling provision under which Appropriate Government is empowered
to extend the provision of the ESI Act, 1948 to other classes of establishments.

 Industrial

 Commercial

 Agricultural or otherwise

Under these provisions the State Governments have extended the provisions of the ESI
Act to the following classes of establishments.

 Shops

 Hotels & Restaurants

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 Cinemas including preview Theaters

 Road Motor Transport Undertaking

 News Paper Establishments

Employees of covered units and estab-lishments drawing wages upto Rs. 15,000 per
month come under the purview of the ESI Act, 1948 for multi-dimensional social security benefits.

14.10.2 Contribution

ESI scheme is financed by contribution raised from employees covered under this scheme
and their employers as a fixed percentage of wages. Rates of contribution are as follows:

· Employees contribution 1.75% of wages ( Employees earning up to Rs. 50 per day are
exempted from payment of their contribution)

· Employer’s contribution 4.75% of wages.

14.10.3 Social Security Benefits

Various benefits that the insured employees and their dependents are entitled to are as
follows

 Medical Benefits

 Sickness Benefits

 Maternity Benefits

 Disablement Benefits

 Dependent Benefits

 Other Benefits (like funeral expenses, vocational rehabilitations, free supply of

physical aids etc).

14.10.4 Safeguard for Insured Employees

 Right to receive payment of any benefit under the Act are not transferable.

 Employer shall not dismiss, discharge or reduce the wages or otherwise punish a
covered employee during the period he/she is in receipt of Sickness Benefit or
Maternity Benefit etc.
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 By reason of his liability to pay his share of contribution under the ESI Act, no employer
shall directly or indirectly reduce the wages of a covered employee.

 Right to register their grievances / complaints at any level for immediate redressel.

 Right to approach ESI Court against any action/decision of the Medical Board etc

 Cash Benefits payable under the Act are not liable to attachment or sale in execution of
any decree or order of any court

14.10.5 Duties of Employer

 An employer shall apply in Form-01 for coverage under the ESI Act, within 15 days after
the Act becomes applicable to a fac-tory or establishment.

 The employer shall submit Declaration Form in respect of all coverable employees in the
unit.

 The employer shall deposit both employees’ and employers’ contribution as per specified
rates within 21 days of the following month.

 The Employer shall maintain all such records and registers as are required under the Act
and produce them for verification / inspection before the authorised officers of the
Corporation.

 The employer shall submit half-yearly Return of Contributions (RC) by 12 th May/

11th November every year with all columns properly filled.

 The employer will report any change in business activity, address, ownership or the
management to ESIC authorities forthwith.

 An employer will also ascertain the liability towards ESI dues, while taking over the
ownership of a factory/establishment through purchase, gift, lease, licence or otherwise
as the new owner is liable to discharge past liabilities.

 An employer will also ascertain the liability towards ESI dues, while taking over the
ownership of a factory / establishment through purchase, gift, lease, licence or otherwise
as the new owner is liable to discharge past liabilities.

14.11.6 Central Provident Fund (CPF)

The Central Provident Fund (CPF) is a compulsory comprehensive savings plan for
working Singaporeans and permanent residents primarily to fund their retirement, healthcare,
 225

and housing needs. The CPF is an employment based savings scheme with employers and
employees contributing a mandated amount to the Fund.

It is administered by the Central Provident Fund Board, a statutory board operating under
the Ministry of Manpower which is responsible for investing contributions.

14.10.7 Accounts and interest rates

Employees and employers are required to make monthly contributions to the following
CPF accounts:

 Ordinary Account (OA) – for housing, pay for CPF insurance, investment and education.

 Special Account (SA) – for old age and investment in retirement-related financial products.

 Medisave Account (MA) – for hospitalisation and approved medical insurance.

The OA and SA is combined to form the Retirement Account (RA) when one turns 55. The
RA is used to meet basic needs during old age.

Central government constitute a Central Board to diagnose where all the act applies and
all appointments by the central government. The Central Board shall constitute of

(i) Chairman, Vice Chairman

(ii) Central provident fund (CPF) commissioner who shall be an ex-office member of the
board

(iii) Not more than 15 persons appointed by central government

(iv) Not more than 15 persons representing the government of state

(v) 10 person representing employees of the establishments to which the scheme applies.

The board’s duties are administering the funds vested in it by means of contributions and
maintain proper accounts of its income and expenditure in central government’s prescribed
way. It also performs other functions under any provisions of Employees Provident Fund scheme
and Insurance scheme.

Central government constitute Executive Committee to assist the central board in the
performance of its function
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(i) Chairman, he is appointed from amongst members of central board

(ii) 2 persons from central amongst central board

(iii) 3 persons representing employers and 3 persons representing employees

Government CPF commissioner is to serve as CEO of Central Board, a Financial advisor

and Chief Accounts Officer to assist central provident fund commissioner in the discharge of
his duties. The Central government also constitutes Employee Provident Fund Appellate tribunal
and it consists of only one person who is Presiding officer. Eligibility for the presiding officer is
that a person must be the judge of high court or district court.

Contribution: The provident fund contributions consist of contribution both by Employee

and by Employer.

14.10.8 Employee’s Contribution

An employee is eligible for membership of Employee Provident Fund from the very 1st
date of joining in any establishment getting salary up to Rs6500 Provident fund contribution is
recovered at 12% of wages from employee salary. The pension is that which represents a
person has retired. To avail pension a person should have 10years of continues service and
with age of 50years or more will receive pension amount on monthly basis after the age of 58.
A member is eligible to apply for withdrawing his provident and pension fund only after 2 months
from the date of registration, provident that he/she is not employed during those 2months.

Employer’s Contribution: Employer is also required to contribute towards provident

fund; the deduction rate is same as employee’s contribution i.e. 12% of the wages. Of this 12%,
3.67% goes to Provident Fund and the balance of 8.33% goes to Pension Fund.

Advance PF: A person is eligible to withdraw money in advance from their PF Account for
purposes like marriage, education, medical treatment etc, subject to the prescribed conditions.
Note that the said advance is totally tax-free and interest-free.

14.11 Employmee Family Pension Scheme Act, 1971

Employees’ Pension Scheme is a social security scheme run by the Employees’ Provident
Fund Organisation (EPFO) for the employees of the organised sector.
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14.11.1 Eligibility of Employee Family Pension Scheme Act

1. Be a member of the Employees’ Provident Fund Scheme (EPFS), 1952 - Are a member
of the ceased Family Pension Scheme 1971 or employed in Factories engaged in Industries
specified in Schedule I of the Employees’ Provident Fund and Miscellaneous Provisions
Act 1952 or employed in establishments notified and engaging 20 or more employees
with a salary/wage less than Rs. 15,000 per month at the date of appointment.

2. Rendered eligible service of 10 years or more where contribution to EPFS has been
made.

3. Pension to be received by the member on attaining 58 years of age. Provision of withdrawal

benefit also exists.

4. A member, who is permanently and totally disabled during the employment is also eligible
for pension.

5. The Family of the member is eligible to receive the pension Pension following the date of
death of the member.

14.11.2 Features Employee Family Pension Scheme Act

1. Members: It is compulsory for members of family pension scheme, 1971 and for those
who become subscribers of PF Scheme from 16th November 1995.

2. Contribution: Up to 15th November 1995, employer’s contribution to PF shall remain in

PF. Thereafter 8.33% of the wages out of employer’s share shall move to Pension Fund and
remaining 1.67% to Provident Fund.

3. Administration:The Central Board of Trustee shall administer the Pension Scheme.

4. Qualifying Condition:

(i) Service duration – 10 years,

(ii) Age – 58 years.

(iii) Service required for voluntary retirement – 20 years.

5. Benefits
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(i) Minimum Pension:For age between 48 + 53 years – Rs. 600 p.m. (for 24 years of
service). For age 53 and above – Rs. 500 p.m. which shall be reduced to a maximum of Rs. 325
and Rs. 265 p.m. if past service is less than 24 years. For service beyond 16.11.95 pension
shall be calculated according to formula.

(ii) On super annuation:If the service tenure is 33 years – 50% of average salary. If the
service tenure is more than 33 years between 50% to 60% of average salary.

(iii) Reduced Pension:If age is less than 50 years – No pension.

(iv) Communication of Pension:From 16.11.1998, up to 1/3rd of the pension may be

commuted.

14.12 Maternity Benefit Act, 1961

A maternity benefit is one that every woman shall be entitled to, and her employer shall be
liable for, the payment of maternity benefit, which is the amount payable to her at the rate of the
average daily wage for the period of her actual absence. Maternity Benefits should aim to
regulate employment of women employees in certain establishments for certain periods before
and after childbirth and provides for maternity and certain other benefits.

Post Maternity, women work participation rate is negatively affected in labour market. It is
important to recognize that women participation in labour market has significantly increased in
recent years, particularly in urban areas. Further, most of the increase in women participation in
labour market is contributed by young women in urban areas. Since India is committed to
creating a gender friendly labour market environment, there is increasing realization to provide
a conducive working environment. Looking at the large number of women employment in broad
occupational categories, it was but natural to protect and safeguard their health in relation to
Maternity and the children.

The fundamental purpose for providing maternity benefits is to preserve the self-respect
for motherliness, protect the health of women, complete safety of the child etc. Due to the
increasing number of women employees in the government and private sector, it became
necessary to grant maternity leave and other maternity allowances to working women.

The objective of maternity benefits is to protect the dignity of “Motherhood” by providing

the complete & health care to the women & her child when she is not able to perform her duty
 229

due to her health condition. There is need for maternity benefits so that a woman is to be able
to give quality time to her child without having to worry about whether she will lose her job and
her source of income.

Women at the reproductive stage are exposed to special risks during pregnancy and
child bearing, and mortality and maternal morbidity are factors which require special
consideration. The Maternity benefit Act was passed to regulate the employment of women for
certain period before and after the child birth and to provide certain maternity and other benefits.

14.12.1 Benefits under the Act

1. Cash Benefits

a) Leave with average pay for six weeks before the delivery

b) Leave with average pay for six weeks after the delivery

c) A medical bonus if the employer does not provide free medical care to the woman

d) An additional leave with pay up to one month if the woman shows proof of illness
due to the pregnancy, delivery, miscarriage or premature birth

e) In case of miscarriage, six weeks leave with average pay from the date of miscarriage.

14.12.2 Non Cash Benefits/Privilege

a) Light work for ten weeks (six weeks plus one month) before the date of her expected
delivery, if she asks for it

b) Two nursing breaks in the course of her daily work until the child is 15 months old

c) No discharge or dismissal while she is on maternity leave

d) No change to her disadvantage in any of the conditions of her employment while on

maternity leave

e) Pregnant women discharged or dismissed may still claim maternity benefit from the
employer.

Under the Maternity Benefits Act, 1961 the condition levied is that the female employee
should have served the institution for a minimum period of 80 days in 12 months preceding the
date of expected delivery. Also, the Act has undergone regular amendments with the recent one
being in 2008. Here, the minimum medical bonus in case of inability of employer to provide free
230

medical care to pregnant women employee was raised from Rs 25 to Rs.1000 extending to
Rs. 20000.

The Act provides for 12 weeks of paid leave as maternity leave and 6 weeks in case of
miscarriage or termination of pregnancy. In addition to the provisions for leave and cash benefits,
the Act also makes provisions for matters like light work for pregnant women 10 weeks prior to
her delivery, nursing breaks during daily work till the child attends age of 15 months, etc.

The Act serves as a protective umbrella as it restricts termination of service of a pregnant

woman employee except on grounds of misconduct. Moreover, it imposes punishment for a
period of minimum three months or fine extending to Rs. 5000 on the employer, in the event of
any failure to provide maternity benefits to female employees.

14.13 Contract Labout Act, 1970

Contract labour has its root from time immemorial. The size of contract labour in India has
significantly expanded in the post-independence period with the expansion of construction
activities. Contract workmen are hired, supervised and remunerated by the contractor who, in
turn, remunerated by the establishment hiring the services of the Contractor. Contract labourers
were considered exploited section of the working class mainly due to lack of organisation on
their part. The Contract Labour (Regulation and Abolition) Act, 1970 was enacted to regulate
the employment of contract labour in certain establishments and to provide for its abolition in
certain circumstances.

14.13.1 Definition of contract labour

Section 2(1)(b) states that a workman shall be deemed to be employed as”contract labour”
in or in connection with the work of an establishment when he is hired in or in connection with
such work by or through a contractor, with or without the knowledge of the principal employer.

14.13.2 Applicability

The act is applicable to:

 every establishment in which twenty or more workmen are employed or were employed
on any day of the preceding twelve months as contract labour;

 every contractor who employs or who employed on any day of the preceding twelve
months twenty or more workmen. Non- applicability:
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 An establishment which performs an intermittent or casual nature of work. - The appropriate

Government shall decide upon the intermittent or casual nature of work after consultation
with the Central Board/ State Board.

14.13.3 Liabilities and responsibilities of Principal Employer

1. The Principal Employer shall provide the essential amenities like Canteen (above 100
contract labours), rest rooms, drinking water facilities and first aid facilities if the same is
not provided by the Contractor (Sec 16 to 19). - The expenses incurred on amenities by
the Principal employer may be recovered from the contractor either by deduction of any
amount payable to the contractor under any contract or as a debt payable by the contractor
(Section 20).

2. The Principal employer must ensure the disbursement of wages through Contractor within
the expiry of prescribed period by nominating a representative. If the Contractor fails to
make payment or makes short payment then, the principal employer shall be liable to
make payment of wages in full or the unpaid balance and recover the amount so paid
from the Contractor (Section 21). Compliances under the Act Principal Employer:

a) Within 15 days of commencement or completion of each contract work under

each contractor, submit a return to the inspector, intimating the actual dates of
commencement and completion of such contract work.

b) Submit annual returns to the registering officer concerned not later than, 15th
February following end of the year to which it relates.

14.14 Summary

Labour law, the varied body of law applied to such matters as employment, remuneration,
conditions of work, trade unions, and industrial relations. In its most comprehensive sense, the
term includes social security and disability insurance as well. Unlike the laws of contract, tort,
or property, the elements of labour law are somewhat less homogeneous than the rules governing
a particular legal relationship. In addition to the individual contractual relationships growing out
of the traditional employment situation, labour law deals with the statutory requirements
and collective relationships that are increasingly important in mass-production societies, the
legal relationships between organized economic interests and the state, and the various rights
and obligations related to some types of social services.
232

Labour law has won recognition as a distinctive branch of the law within the academic
legal community, but the extent to which it is recognized as a separate branch of legal practice
varies widely depending partly on the extent to which there is a labour code or other distinctive
body of labour legislation in the country concerned, partly on the extent to which there are
separate labour courts or tribunals, and partly on the extent to which an influential group within
the legal profession practice specifically as labour lawyers.

14.15 Key Words

Bonus

Factory

Employer

Gratuity

Maternity Benefit

Industrial Disputes

14.16 Review Questions

1. Explain the Origin of Labour Law.

2. Narrate the importance of Labour Law.

3. Write an essay about Factories Act.

4. Write a note on Administration of Factories Act.

5. Explain in detail about Minimum Wages Act.

6. How are Minimum and Maximum rate of wages fixed?

7. Give an account on Industrial Disputes Act.

8. State the provision of Industrial Dispute Act.

9. What do you mean by Payment of Bonus Act? state the objectives of Payment of
Bonus Act.

10. How is Bonus Calculated?

11. What are the duties of Employer?

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12. Write a brief note on Payment of Gratuity Act.

13. Explain the State Insurance Act. Also mention the situations where is it applied.

14. What do you understand by Central Provident Fund?

15. Critically examine the Employee Family Pension Scheme Act.

16. What are the benefits of Maternity Benefit Act?

17. What is Contract Labour Act? Explain the liabilities and responsibilities of Employer.
234

LESSON – 15
CONSUMER PROTECTION ACT
Learning Objectives

After reading this lesson, you will be able to:

 Discuss the meaning, duties and responsibilities of Consumers

 Explain the features of the Competition Act

 Outline the importance and salient features of Cyber Crime and Information
Technology Act.

Structure
15.1 Introduction

15.2 Meaning of Consumer

15.3 Concept of Consumer Protection

15.4 Need for Consumer Protection

15.5 Rights of Consumer

15.6 Responsibilities of Consumer

15.7 Ways for Protecting Consumers

15.8 Consumer Protection Act

15.9 Consumer Protection Bill, 2018

15.10 Competition Act, 2002

15.11 Cyber Crimes Act

15.12 Information Technology Act 2000

15.13 Summary

15.14 Key Words

15.15 Review Questions

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15.1 Introduction

With changing times the economic and business environment of India also went through
a change. In the 1980s and 1990s, we opened our economy and truly became a global trading
partner with the world. This exposed customers to new products but also new problems. To
protect consumer from unscrupulous trade practices, Consumer Protection Act was brought in
to effect in the year 1986 by an Act of the Parliament of India enacted to protect the interests of
consumers in India. It makes provision for the establishment of consumer councils and other
authorities for the settlement of consumers’ disputes and for matters connected therewith also.
The act was passed in Assembly in October 1986.

Consumer Protection Act has been implemented (1986) or we can bring into existence to
protect the rights of a consumer. It protects the consumer from exploitation that business practice
to make profits which in turn harm the well-being of the consumer and society.

15.2 Meaning of Customer

A consumer is a person who consumes or uses any goods or services. Goods may be
consumables like wheat flour, salt, sugar, fruit etc. or durable items like television, refrigerator,
toaster, mixer, bicycle etc. Services refer to items like electricity, cooking gas, telephone,
transportation, film show etc. Normally, it is the consumption or use of goods and services that
makes the person to be called as ‘consumer’. But in the eyes of law, both the person who buys
any goods or hires any service for consideration (price) and the one who uses such goods and
services with the approval of the buyer are termed as consumers.

For example, when your father buys apple for you and you consume them, your father as
well as yourself are treated as consumers. The same thing applies to hiring a taxi to go to your
school. In other words, even the buyer of goods and services whether he uses them himself or
purchases them for consumption or use by some other person(s) is treated as consumer in the
eyes of law. However, a person who buys goods for resale (like wholesaler, retailer, etc.) or for
any commercial purpose is not treated as consumer.

15.3 Concept of Consumer protection

Consumer protection means safeguarding the interest and rights of consumers. In other
words, it refers to the measures adopted for the protection of consumers from unscrupulous
and unethical malpractices by the business and to provide them speedy redressal of their
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grievances. The most common business malpractices leading to consumer exploitation are
given below.

 Sale of adulterated goods i.e., adding something inferior to the product being sold.

 Sale of spurious goods i.e., selling something of little value instead of the real product.

 Sale of sub-standard goods i.e., sale of goods which do not confirm to prescribed quality
standards.

 Sale of duplicate goods.

 Use of false weights and measures leading to underweight.

 Hoarding and black-marketing leading to scarcity and rise in price.

 Charging more than the Maximum Retail Price (MRP) fixed for the product.

 Supply of defective goods.

 Misleading advertisements i.e., advertisements falsely claiming a product or service to be

of superior quality, grade or standard.

 Supply of inferior services i.e., quality of service lower than the quality agreed upon

15.4 Need for Consumer Protection

The necessity of adopting measures to protect the interest of consumers arises mainly
due to the helpless position of the consumers. There is no denying fact that the consumers
have the basic right to be protected from the loss or injury caused on account of defective
goods and deficiency of services. But they hardly use their rights due to lack of awareness,
ignorance or lethargic attitude.

However in view of the prevailing malpractices and their vulnerability there to, it is necessary
to provide them physical safety, protection of economic interests, access to information,
satisfactory product standard, and statutory measures for redressal of their grievances. The
other main arguments in favour of consumer protection are as follows:

(a) Social Responsibility: The business must be guided by certain social and ethical
norms. It is the moral responsibility of the business to serve the interest of consumers. Keeping
in line with this principle, it is the duty of producers and traders to provide right quality and
quantity of goods at fair prices to the consumers.
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(b) Increasing Awareness: The consumers are becoming more mature and conscious
of their rights against the malpractices by the business. There are many consumer organisations
and associations who are making efforts to build consumer awareness, taking up their cases at
various levels and helping them to enforce their rights.

(c) Consumer Satisfaction: Father of the Nation Mahatma Gandhi had once given a call
to manufactures and traders to “treat your consumers as god”. Consumers’ satisfaction is the
key to success of business. Hence, the businessmen should take every step to serve the
interests of consumers by providing them quality goods and services at reasonable price.

(d) Principle of Social Justice: Exploitation of consumers is against the directive principles
of state policy as laid down in the Constitution of India. Keeping in line with this principle, it is
expected from the manufacturers, traders and service providers to refrain from malpractices
and take care of consumers’ interest.

(e) Principle of Trusteeship: According to Gandhian philosophy, manufactures and

producers are not the real owners of the business. Resources are supplied by the society. They
are merely the trustees of the resources and, therefore, they should use such resources effectively
for the benefit of the society, which includes the consumers.

(f) Survival and Growth of Business: The business has to serve consumer interests for
their own survival and growth. On account of globalisation and increased competition, any
business organisation which indulges in malpractices or fails to provide improved services to
their ultimate consumer shall find it difficult to continue. Hence, they must in their own long run
interest, become consumer oriented.

15.5 Rights of Consumer

John F, Kennedy, the former USA President, in his message to consumer had given six
rights to consumers. These rights are (i) right to safety, (ii) right to be informed, (iii) right to
choose, (iv) right to be heard, (v) right to redress and (vi) right to represent. These rights had
paved the way for organised consumer movement in the USA and later it spread all over the
world. In India, the Consumer Protection Act, 1986 has also provided for the same rights to
consumers. Let us have a brief idea about these rights of consumers.

a. Right to Safety: It is the right of the consumers to be protected against goods and
services which are hazardous to health or life. For example, defective vehicles could lead
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to serious accidents. The same is true of electrical appliances with sub-standard material.
Only recently, there were mass protests and boycott of soft drinks due to presence of
hazardous pesticides beyond permissible limits. Thus, right to safety is an important right
available to the consumer which ensures that the manufacturers shall not produce and
sell sub-standard and dangerous products.

b. Right to be Informed: The right to be informed is an important component of consumer

protection. The consumer must be provided with adequate and accurate information about
quality, quantity, purity, standard and the price of the goods and services. Now-a-days the
manufacturers provide detailed information about the contents of the product, its quantity,
date of manufacturing, date of expiry, maximum retail price, precautions to be taken, etc.
on the label and package of the product. Such information helps the consumers in their
buying decision and use of the product.

c. Right to Choose: The right to choose provides that the consumer must be assured,
whenever possible, access to a variety of goods and services at competitive prices. If the
market has enough varieties of products at highly competitive prices, the buyers have an
opportunity of wide selection. However, incase of monopolies like railways, postal service
and electricity supply etc. it implies a right to be assured of satisfactory quality of service
at a fair price.

d. Right to be Heard: The rights to safety, information and choice will be frivolous without
the right to be heard. This right has three interpretations. Broadly speaking, this right
means that consumers have a right to be consulted by Government and public bodies
when decisions and policies are made affecting consumer interests. Also, consumers
have a right to be heard by manufactures, dealers and advertisers about their opinion on
production, marketing decisions and any grievances of the consumers. Now-a-days, most
of the top manufacturers and firms have set up consumer service cells to attend to
consumers’ complaints and take appropriate steps for their redressal. Thirdly consumers
have the right to be heard in legal proceedings in law courts dealing with consumer
complaints.

e. Right to Seek Redressal: The consumers have been given the right of redressal of their
grievances relating to the performance, grade, quality etc. of the goods and services. If
required, the product must be repaired / replaced by the seller/ manufacturer. The
Consumer Protection Act has duly provides for a fair settlement of genuine grievances of
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the consumers. It has also set up a proper mechanism for their redressal at district, state
and national levels.

f. Right to Consumer Education: It means the right to receive knowledge and skill to
become informed consumer. In this direction the consumer associations, educational
institutions and the policy makers can play an important part. They are expected to impart
information and knowledge about (i) the relevant laws which are aimed at preventing
unfair trade practices, (ii) the ways and means which dishonest traders and producers
may adopt to deceive the consumers, (iii) insistence on a bill or receipt at the time of
purchase, and (iv) the procedure to be followed by consumers while making complaints.
Effective consumer education leads to an increased level of consumer awareness and
help them to enforce their rights more effectively, and protect themselves against fraudulent,
deceitful and grossly misleading advertisement, labeling, etc.

15.6 Responsibilities of Consumer

You have learnt about the various rights of the consumers. Let us now have an idea about
their duties and responsibilities. These include the following:

a. Be quality conscious: To put a stop to adulteration and corrupt practices of the

manufacturers and traders, it is the duty of every consumer to be conscious of the quality
of product they buy. They should look for the standard quality certification marks like ISI,
Agmark, FPO, Woolmark, Eco-mark, Hallmark etc. while making the purchases.

b. Beware of misleading advertisements: The advertisement often exaggerates the quality

of products. Hence, the consumers should not rely on the advertisement and carefully
check the product or ask the users before making a purchase. Incase there are
discrepancies, the same should be brought to the notice of the sponsors and the appropriate
authority, if need be.

c. Responsibility to inspect a variety of goods before making selection: The consumer

should inspect a variety of goods before buying the goods and service. For this purpose
he/she should compare their quality, price, durability, after sales service etc. This would
enable the consumers to make the best choice within the limit of Collect proof of transaction.
The consumer should insist on a valid documentary evidence (cash memo/invoice) relating
to purchase of goods or availing of any services and preserve it carefully. Such proof of
purchase is required for filing a complaint. In case of durable goods the manufactures
generally provide the warrantee/guarantee card along with the product. It is the duty of
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consumers to obtain these documents and ensure that these are duly signed, stamped
and dated. The consumer must preserve them till the warrantee/ guarantee period is
over.

d. Consumers must be aware of their rights: The consumers must be aware of their
rights as stated above and exercise them while buying goods and services. For example,
it is the responsibility of a consumer to insist on getting all information about the quality of
the product and ensure himself/ herself that it is free from any kind of defects.

e. Complaint for genuine grievances: As a consumer if you are dissatisfied with the product/
services, you can ask for redressal of your grievances. In this regard, you must file a
proper claim with the company first. If the manufacturer/company does not respond, then
you can approach the forums. But your claim must state actual loss and the compensation
claim must be reasonable. At no cost fictitious complaints should be filed otherwise the
forum may penalise you.

f. Proper use of product/services: It is expected from the consumers that they use and
handle the product/services properly. It has been noticed that during guarantee period,
people tend to reckless use of the product, thinking that it will be replaced during the
guarantee period. This practice should be avoided their own resources.

15.7 Ways for Protecting the Consumers

We have enumerated several instances of exploitations and malpractices on the part of

manufacturers, traders, dealers and services providers. Now the question arises as to how can
these be eliminated. Actually it is very difficult to stop such exploitation by any consumer single
handedly. The consumers have to collectively act against such malpractices and take the help
of consumer organisations and the government agencies.

Infact, consumer protection essentially needs consumer awareness, education and

guidance, and it cannot be assured by voluntary business conduct or self-regulation. The following
are the various ways and means of consumer protection followed in India.

1. LokAdalat LokAdalats: They are the effective and economical system for quick redressal
of the public grievances. The aggrieved party can directly approach the adalats with his
grievance, and his issues are discussed on the spot and decisions are taken immediately.
The consumers may take the advantage of this system to solve their problems. Cases of
electricity billing, telephone billings, road accidents etc. can be taken up in LokAdalat for
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spot settlement. Infact, Indian Railways, Mahanagar Telephone Nigam Limited and Delhi
Vidyut Board hold LokAdalat regularly to settle user’s grievances on the spot.

2. Public Interest Litigation:Public Interest Litigation (PIL) is a scheme under which any
person can move to the court of law in the interest of the society. It involves efforts to
provide legal remedy to un-represented groups and interests. Such groups may consist
of consumers, minorities, poor persons, environmentalists and others. Any person or
organisation, though not a party to the grievances, can approach the court for remedial
action in case of any social atrocities.

3. Redressal Forums and Consumer Protection Councils: Under the Consumer Protection
Act 1986, a judicial system has been set up to deal with the consumer grievances and
disputes at district level, state level and national level. These are known as District Forum,
State Consumer Disputes Redressal Commission (State Commission) and National
Consumer Disputes Redressal Commission (National Commission). Any individual
consumer or association of consumers can lodge a complaint with the District, State or
National level forum, depending on the value goods and claim for compensation. The
main objective of these forums is to provide for a simple, speedy and inexpensive redressal
of consumers’ grievances. The Act as amended in 2002 also provides for setting up of
Consumer Protection Council at district, state and national level for promotion and
protection of the rights of the consumers as laid down in Section 6 of the Act. The councils
are required to give wide publicity to the rights of consumers, the procedures for filling
complaints by them and provide inputs to consumer movement in the country.

4. Awareness Programme: To increase the level of awareness among the consumers the
Government of India has initiated various publicity measures. It regularly brings out journals,
brochures, booklets and various posters depicting the rights and responsibilities of
consumers, redressal machineries etc. It observes World Consumer Rights Day on 15
March and National Consumer Day on 24 December. Several video programmes on
consumer awareness are broadcasted through different television channels. Similarly,
audio programmes are also broadcasted through All India Radio and FM channels. The
poster and slogan competition on consumer protection are also organised at various
level. To encourage the participation of public in the field of consumer protection the
Government has also instituted National Awards to the persons who have done outstanding
work in this field.
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5. Consumer Organisations: Consumer organisations have been active all over the world
to promote and protect consumer interests. A number of such organisations have also
been set up in recent years in different parts of India. It is felt that neither it is possible to
discipline all members of the business community through moral sanctions and a code of
fair business practices nor can administrate orders and legislative provisions to ensure
consumer protection without the active involvement of consumer associations. Now with
an increasing number of consumer organisations involved in consumer protection, the
consumer movement is getting a foothold in India and helping individuals to seek quick
and adequate redressal of their grievances. Look at the box for some of such consumer
organisations Consumer Welfare Fund The government has created a consumer welfare
fund for providing financial assistance to strengthen the voluntary consumer movement
in the country particularly in rural areas. This fund is mainly used for setting up facilities
for training and research in consumer education, complaint handling, counseling and
guidance mechanisms, product testing labs, and so on.

6. Legislative Measures: A number of laws have been enacted in India to safeguard the
interest of consumers and protect them from unscrupulous and unethical practices of the
businessmen. Some of these Acts are as follows: (i) Drug Control Act, 1950 (ii) Agricultural
Products (Grading and Marketing) Act, 1937 (iii) Industries (Development and Regulation)
Act, 1951 (iv) Prevention of Food Adulteration Act, 1954 (v) Essential Commodities Act,
1955 (vi) The Standards of Weights and Measures Act, 1956 (vii) Monopolies and
Restrictive Trade Practices Act, 1969 (viii) Prevention of Black-marketing and Maintenance
of Essential Supplies Act, 1980 (ix) Bureau of Indian Standards Act, 1986 The object and
interest of almost all these enactments are mainly punitive, though some of these are
also preventive in nature. However, none of these laws provide any direct relief to the
consumers. Hence, amendments have been made in some of these laws by which
individual consumers and consumer organisations have been conferred the right to take
initiative and launch legal proceedings in civil and criminal courts against the violators.
Another legal enactment that made a dent in this situation was the Monopolies and
Restrictive Trade Practices Act, 1969. It gained the status of a specific consumer protection
law with amendments made in 1984. Inspite of the changes made in 1984, a need was
felt to have a more elaborate legislation. So the Consumer Protection Act was passed in
1986 to offer the necessary protection to consumers and provide an elaborate mechanism
to deal with consumer grievances and disputes.
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15.8 Consumer Protection Act

Consumer protection act, 1986 is defined as follows:

1. The Act applies both to goods and services.

2. The provisions of the Act are applicable even when part payment has been made and
rest is promised to be paid later.

3. The Act protects not only buyer but user in the case of goods and any beneficiary in
case of services.

Salient Features of Consumer Protect Act

1. The Act provides speedy redressal to consumer complainants. The Bill provides for setting
up of a Consumer Redressal Forum in every district, a commission at the state level and
the National Commission at the Centre. The Forum in the District will have original
jurisdiction to redress complaints up to claim of Rs. 1 lakh (after amendment up to 10
lakhs).

2. The State Commission will be original jurisdiction to settle claims up to the amount Rs. 10
lakhs (after amendment 20 lakhs). The National Commission can entertain any claim for
damages above Rs. 10 lakhs (after amendment above 20 lakhs). The State Commission
will be vested with appropriate Appellate and Revisional powers.

3. To promote voluntary consumer movement and to ensure involvement of consumers.

The Bill provides for the establishment of Consumer Protection Councils at centre and in
the states. These Councils will have both non-official and official members. The objects of
the Councils will be to promote and protect the rights of the consumers.

4. It shall apply to all goods and classes of goods or all services or classes of services
except those which are specially exempted by notification by the central government.

5. The provisions of the Bill shall be in addition to and not in derogation of any other law for
the time being in force.

6. Necessary penal and punitive provisions have been corporate to ensure that the proposed
legislation is effective in protecting consumers.

7. The complaint can be filed by a consumer or an organization being a society registered

under the Societies Registration Act, or a company registered under the Companies Act,
representing consumers or by the central or state government.
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8. The complaint can be filed on account of any unfair trade practices resulting in loss or
damage, defect in the goods, deficiency in the services, prices charged in excess of the
prices fixed by or under any law or displayed on the goods/packets.

Main authorities under Consumer Protect Act, 1986

1. District forum: This forum has power to solve the problems of consumers up to
Rs. 500000 at district [Link] govt. has power to make suitable numbers of district
forum for protecting the rights of [Link] forum can be made by district judge
and other experienced persons in the field of law and commerce.

2. State commission: Consumer can also appeal to state commission against the decisions
of district forum. State commission has power to solve the problems of consumers from
Rs. 500000 to Rs. 2000000. This commission can be made by state high court judges
and 2 experts in the field of commerce and laws.

3. National Commission: National commission has power to solve all consumers’ disputes
and problems more than 2000000 Rs. The chairperson of this commission will be the
retired Supreme Court judges and other 4 experts in the field of commerce and laws and
industry. Out of four, it is necessary to include one lady member in the four expert team.

15.9 Consumer Protection Bill, 2018

The Consumer Protection Bill, 2017 which was approved by the Union Cabinet last year
(as already discussed in our previous titled “India: The Union Cabinet Approves The Consumer
Protection Bill, 2017”1, dated January 15, 2018) is reportedly2 scheduled to be taken up during
this Budget session, which is to commence tentatively from January 29, 2018, as there is a
need to update the Consumer Protection Act, 1986 (hereinafter referred to as the ‘Act’). The
Consumer Protection Bill, 2018 (hereinafter referred to as the ‘Bill’) is slated to be the next big
thing for the consumers.

The said Bill was originally drafted in 2015 and placed before the LokSabha (Lower House)
in 2016 and subsequently sent to the Standing Committee on Food and Consumer Affairs. The
Bill is important because the new Bill is expected to completely overhaul the current laws stipulated
under the Consumer Protection Act, 1986.
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The Consumer Protection Bill, 2018 proposes the following new amendments:

 The Pecuniary Jurisdiction of the Consumer Disputes Redressal Agencies has been
revised. As per the rules, the jurisdiction of the District Forums has now been extended to
INR 10 Million from the earlier limit of INR 2 Millions. Similarly, the State Forums can now
entertain complaints where the value of dispute exceeds INR 10 Million, but does not
exceed INR 100 Million. Finally, the National Forums can now entertain complaints where
the value of the disputes exceeds INR 100 Million. The three-tier structure for adjudicating
consumer disputes still remains in the form of district forums, state and national
commissions but with enhanced values at each level, considering the current market
realities.

 Any manufacturer or service provider who causes a false or misleading advertisement to

be made which is prejudicial to the interest of consumers shall be punished with
imprisonment for a term which may extend to two years and with fine which may extend
to INR 1 Million, for the first offence; and for every subsequent offence, be punished with
imprisonment for a term which may extend to five years and with fine which may extend
to INR 5 Million. It also provides for prosecution of celebrities endorsing products with
misleading claims, including fines.

 Establishment of a Central Consumer Protection Authority, whose task is to promote,

protect and enforce the rights of consumers; make interventions when necessary to prevent
consumer detriment arising from unfair trade practices and to initiate class
action including enforcing recall, refund and return of products, etc. This fills an institutional
void in the regulatory regime extant.

· Introduction of the concept of product liability action, i.e., of affixing liability on a

manufacturer or producer and even a product seller in certain specified circumstances
for any personal injury, death or property damage caused to a consumer resulting from
defects in manufacture, construction, design, formula, preparation, assembly, testing,
service, warning, instruction, marketing, packaging, or labelling of any product.

 Exclusive provisions have been proposed for reference of a dispute to Mediation as an

Alternate Dispute Resolution Mechanism. The Bill states that if it appears to the
Consumer Forum that there exist elements of a settlement which may be acceptable to
the parties, it may direct the parties to give in writing consent to have their dispute settled
by mediation in accordance with the provisions of the Act. The Bill further provides for the
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establishment of Consumer Mediation Cell and also enumerates the procedure for
mediation.

 The Bill also proposes for a complaint to be filed electronically. Also, the admissibility of
the complaint shall ordinarily be decided within 21 days from the date on which the complaint
was filed. If it is not decided within 21 days, the complaint shall be deemed accepted.

 The Bill further proposes that if the party is found guilty of adulteration and results in
the death of a consumer, the offender is liable with imprisonment for a term which shall
not be less than 7 years, but which may extend to imprisonment for life and with fine
which shall not be less than INR 1 Million.

 Liability on manufacturers and service providers, online and offline, will not be primarily
limited to any consumer who buys goods or avails service but towards all consumers i.e.,
introducing the idea of class action suits to the masses and allowing a majority of
consumers to gain benefit at once. Although, the consumers still have the rights to file a
class action suit under section 12(1) (C) of the Consumer Protection Act, 1986.

 To address emergence of global supply chains, rapid development of e-commerce and to

tackle misleading advertisements, telemarketing, multi-level marketing and direct selling
the Bill also attempts to define e-commerce. At the same time, it endeavors to empower
the Centre to make rules for preventing unfair trade practices in online trade.

 The Bill also proposes classification of six contract clauses as ‘unfair’. These contracts
maybe between a manufacturer or trader or service provider on one hand, and a consumer
on the other. ‘Unfair’ covers terms such as (i) payment of excessive security deposits; (ii)
disproportionate penalty for a breach; (iii) unilateral termination without reasonable cause;
(iv) conditions or charges or obligations which puts the consumer at a disadvantage.

 While majority of the amendments are pro consumer, the bill has also proposed to enhance
the penalty to minimize baseless and false complaints from Rs.10,000 to Rs.50,000.

15.10 Competition Act, 2002

The economic environment in the world has been changed in last decade and continuously
changing. There emerged large players and MNCs in the local market. The liberalization of
Indian economy open door for many large MNCs to cater emerging markets in India. The Indian
companies are also allowed to explore foreign markets for their products and services.
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The Government of Indian to check various types of Restrictive and Unfair Trade Practices
introduces Monopolies and Restrictive Trader Practices Act, 1969, which regulates and prohibits
Restrictive and Unfair Trade practices. But in the course of time and due to changing business
and economic environment in the world the MRTP Act, 1969 loses its significance. The
government is now thinking to check and promote free play of competition instead of prohibiting
it.

The Monopolies and Restrictive Trade Practices Act, 1969 has become obsolete in certain
respects in the light of international economic developments relating more particularly to
competition law and there is a need to shift our focus from curbing monopolies to promoting
competition. The Act seeks to provide for;

1. The establishment of Competition Commission of India;

2. To prevent practices having adverse effect on the competition;

3. To promote and sustain competition in the market;

4. To protect interest of consumers and

5. To ensure free trade in the market.

The Competition Act, 2002 received accent of the president on 13th January, 2003. It
extends to whole of India, except the state of Jammu and Kashmir.

15.10.1 Concept of Competition

The Act does not provide any definition of Competition, it is generally understood that it is
a process whereby the economic enterprises compete with each other to secure customers for
their products and services. In this process the enterprises compete to outsmart their competitors
and eliminate them from the market.

Competition is basically an economic rivalry amongst economic enterprises to control

greater market powers. The Competition is a situation where market is always open to potential
new enterprises and that enterprises operate under pressure of the Competition.

The Competition is necessary in the market to secure welfare of the customers and
[Link] Competition Act, 2002 contains various provisions for regulation of fair competition
in the market and for curbing monopolies and dominant position or any act to eliminate any
enterprise by other in the market.
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15.10.2 Applicability of the Act

The act applies to all goods and services including goods imported into India. It applies to
all enterprises whether they belong to private sector or government. However any act of
government relatable to sovereign functions including the activities carried on by departments
of the Central Government dealing with Security, Atomic Energy, Currency, Defence and Space
are outside the scope of the act.

Any dispute relating to consumers, which has no affected on the Competition will not be
considered under provisions of this act.

15.10.3 Non-Applicability of Competition Act

Competition Act is not applicable in the following cases:
1. Public Financial Institutions.

2. Foreign Institutional Investors (FIIs).

3. Banks.

4. Venture capital Funds (VCFs).

5. Agreements related to intellectual property rights (IPRs) such as trademarks, patents,

copyrights etc.

6. Central Government has the authority to exempt any class of enterprises from the
provisions of Act in the common interest of national security or public interest.

15.10.4 Features of Competition Act, 2002

The focus of the new law is towards the following areas affecting competition namely:

 Prohibition of certain agreements, which are considered to be anticompetitive in nature.

Such agreements [namely tie in arrangements, exclusive dealings (supply and distribution),
refusal to deal and resale price maintenance] shall be presumed as anti- competitive if
they cause or are likely to cause an appreciable adverse effect on competition within
India.

 Prohibition of Abuse of dominant position- If an enterprise by imposing unfair or

discriminatory conditions or limiting and restricting production of goods or services or
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indulging in practices resulting in denial of market access or through in any other mode
are prohibited.

 Regulation of combinations which cause or are likely to cause an appreciable adverse

effect on competition within the relevant market in India is also considered to be void.

 Entrust Competition Commission of India the responsibility of undertaking competition

advocacy, awareness and training about competition issues

15.10.5 Objectives of Competition Act, 2002

 To promote healthy competition in the market.

 To prevent those practices which are having adverse effect on competition.

 To protect the interests of concerns in a suitable manner.

 To ensure freedom of trade in Indian markets.

 To prevent abuses of dominant position in the market actively.

 Regulating the operation and activities of combinations (acquisitions, mergers and

amalgamation).

 Creating awareness and imparting training about the competition Act.

15.11 Cyber Crimes Act

15.11.1 Cyber Crimes

Cyber Crime can be globally considered as the gloomier face of technology. The only
difference between a traditional crime and a cyber-crime is that the cyber-crime involves in a
crime related to computers. Let us see the following example to understand it better.

 Traditional Theft ” A thief breaks into Ram’s house and stealsan object kept in the house.

 Hacking ” A Cyber Criminal/Hacker sitting in his own house, through his computer, hacks
the computer of Ram and steals the data saved in Ram’s computer without physically
touching the computer or entering in Ram’s house.

 To understand the concept of Cyber Crime, you should know these laws. The object of
offence or target in a cyber-crime are either the computer or the data stored in the computer.
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15.11.2 Cyberspace

Cyberspace can be defined as an intricate environment that involves interactions between

people, software, and services. It is maintained by the worldwide distribution of information and
communication technology devices and networks.

With the benefits carried by the technological advancements, the cyberspace today has
become a common pool used by citizens, businesses, critical information infrastructure, military
and governments in a fashion that makes it hard to induce clear boundaries among these
different groups. The cyberspace is anticipated to become even more complex in the upcoming
years, with the increase in networks and devices connected to it.

15.11.3 Cyber security

Cyber security denotes the technologies and procedures intended to safeguard computers,
networks, and data from unlawful admittance, weaknesses, and attacks transported through
the Internet by cyber delinquents.

ISO 27001 (ISO27001) is the international Cyber security Standard that delivers a model
for creating, applying, functioning, monitoring, reviewing, preserving, and improving an
Information Security Management System.

The Ministry of Communication and Information Technology under the government of

India provides a strategy outline called the National Cyber security Policy. The purpose of this
government body is to protect the public and private infrastructure from cyber-attacks.

15.11.4 Cyber security Policy

The cyber security policy is a developing mission that caters to the entire field of Information
and Communication Technology (ICT) users and providers. It includes “

 Home users

 Small, medium, and large Enterprises

 Government and non-government entities

It serves as an authority framework that defines and guides the activities associated with
the security of cyberspace. It allows all sectors and organizations in designing suitable cyber
security policies to meet their requirements. The policy provides an outline to effectively protect
information, information systems and networks.
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It gives an understanding into the Government’s approach and strategy for security of
cyber space in the country. It also sketches some pointers to allow collaborative working across
the public and private sectors to safeguard information and information systems. Therefore,
the aim of this policy is to create a cyber-security framework, which leads to detailed actions
and programs to increase the security carriage of cyberspace.

15.11.5 Nature of Threat

Among the most serious challenges of the 21st century are the prevailing and possible
threats in the sphere of cyber security. Threats originate from all kinds of sources, and mark
themselves in disruptive activities that target individuals, businesses, national infrastructures,
and governments alike. The effects of these threats transmit significant risk for the following “

 public safety

 security of nations

 stability of the globally linked international community

Malicious use of information technology can easily be concealed. It is difficult to determine

the origin or the identity of the criminal. Even the motivation for the disruption is not an easy
task to find out. Criminals of these activities can only be worked out from the target, the effect,
or other circumstantial evidence. Threat actors can operate with considerable freedom from
virtually anywhere. The motives for disruption can be anything such as “

 simply demonstrating technical prowess

 theft of money or information

 extension of state conflict, etc.

Criminals, terrorists, and sometimes the State themselves act as the source of these
threats. Criminals and hackers use different kinds of malicious tools and approaches. With the
criminal activities taking new shapes every day, the possibility for harmful actions propagates.

15.11.6 Enabling People

The lack of information security awareness among users, who could be a simple school
going kid, a system administrator, a developer, or even a CEO of a company, leads to a variety
of cyber vulnerabilities. The awareness policy classifies the following actions and initiatives for
the purpose of user awareness, education, and training “
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 A complete awareness program to be promoted on a national level.

 A comprehensive training program that can cater to the needs of the national
information security (Programs on IT security in schools, colleges, and universities).

 Enhance the effectiveness of the prevailing information security training programs.

Plan domain-specific training programs (e.g., Law Enforcement, Judiciary, E-
Governance, etc.)

 Endorse private-sector support for professional information security certifications.

15.11.7 Mission and Vision Cyber security Program

Mission

The following mission caters to cyber security:

 To safeguard information and information infrastructure in cyberspace.

 To build capabilities to prevent and respond to cyber threats.

 To reduce vulnerabilities and minimize damage from cyber incidents through a

combination of institutional structures, people, processes, technology, and
cooperation.

15.12 Information Technology Act, 2000

The Government of India enacted the Information Technology (I.T.) Act with some major
objectives which are as follows “

 To deliver lawful recognition for transactions through electronic data interchange (EDI)
and other means of electronic communication, commonly referred to as electronic
commerce or E-Commerce. The aim was to use replacements of paper-based methods
of communication and storage of information.

 To facilitate electronic filing of documents with the Government agencies and further to
amend the Indian Penal Code, the Indian Evidence Act, 1872, the Bankers’ Books Evidence
Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith
or incidental thereto.

The Information Technology Act, 2000, was thus passed as the Act No.21 of 2000. The
I.T. Act got the President’s assent on June 9, 2000 and it was made effective from October 17,
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2000. By adopting this Cyber Legislation, India became the 12th nation in the world to adopt a
Cyber Law regime.

15.12.1 Salient Features of I.T Act

The salient features of the I.T Act are as follows “

 Digital signature has been replaced with electronic signature to make it a more technology
neutral act.

 It elaborates on offenses, penalties, and breaches.

 It outlines the Justice Dispensation Systems for cyber-crimes.

 It defines in a new section that cyber café is any facility from where the access to the
internet is offered by any person in the ordinary course of business to the members of the
public.

 It provides for the constitution of the Cyber Regulations Advisory Committee.

 It is based on The Indian Penal Code, 1860, The Indian Evidence Act, 1872, The Bankers’
Books Evidence Act, 1891, The Reserve Bank of India Act, 1934, etc.

 It adds a provision to Section 81, which states that the provisions of the Act shall have
overriding effect. The provision states that nothing contained in the Act shall restrict any
person from exercising any right conferred under the Copyright Act, 1957.

15.12.2 Scheme of I.T Act

The following points define the scheme of the I.T. Act “

 The I.T. Act contains 13 chapters and 90 sections.

 The last four sections namely sections 91 to 94 in the I.T. Act 2000 deals with the
amendments to the Indian Penal Code 1860, The Indian Evidence Act 1872, The Bankers’
Books Evidence Act 1891 and the Reserve Bank of India Act 1934 were deleted.

 It commences with Preliminary aspect in Chapter 1, which deals with the short, title,
extent, commencement and application of the Act in Section 1. Section 2 provides Definition.

 Chapter 2 deals with the authentication of electronic records, digital signatures, electronic
signatures, etc.
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 Chapter 11 deals with offences and penalties. A series of offences have been provided
along with punishment in this part of The Act.

 Thereafter the provisions about due diligence, role of intermediaries and some
miscellaneous provisions are been stated.\

 The Act is embedded with two schedules. The First Schedule deals with Documents or
Transactions to which the Act shall not apply. The Second Schedule deals with electronic
signature or electronic authentication technique and procedure. The Third and Fourth
Schedule are omitted.

15.12.3 Application of the I.T Act

As per the sub clause (4) of Section 1, nothing in this Act shall apply to documents or
transactions specified in First Schedule. Following are the documents or transactions to which
the Act shall not apply “

 Negotiable Instrument (Other than a cheque) as defined in section 13 of the Negotiable

Instruments Act, 1881;

 A power-of-attorney as defined in section 1A of the Powers-of-Attorney Act, 1882;

 A trust as defined in section 3 of the Indian Trusts Act, 1882;

 A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 including
any other testamentary disposition;

 Any contract for the sale or conveyance of immovable property or any interest in such
property;

 Any such class of documents or transactions as may be notified by the Central Government.

15.12.4 Amendments Brought in the I.T Act

The I.T. Act has brought amendment in four statutes vide section 91-94. These changes have
been provided in schedule 1-4.

 The first schedule contains the amendments in the Penal Code. It has widened the scope
of the term “document” to bring within its ambit electronic documents.

 The second schedule deals with amendments to the India Evidence Act. It pertains to the
inclusion of electronic document in the definition of evidence.
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 The third schedule amends the Banker’s Books Evidence Act. This amendment brings
about change in the definition of “Banker’s-book”. It includes printouts of data stored in a
floppy, disc, tape or any other form of electromagnetic data storage device. Similar change
has been brought about in the expression “Certified-copy” to include such printouts within
its purview.

 The fourth schedule amends the Reserve Bank of India Act. It pertains to the regulation
of fund transfer through electronic means between the banks or between the banks and
other financial institution.

15.12.5 Intermediary Liability

Intermediary, dealing with any specific electronic records, is a person who on behalf of
another person accepts, stores or transmits that record or provides any service with respect to
that record.

According to the above mentioned definition, it includes the following “

 Telecom service providers

 Network service providers

 Internet service providers

 Web-hosting service providers

 Search engines

 Online payment sites

 Online auction sites

 Online market places and cyber cafes

15.12.6 Highlights of the Amended Act

The newly amended act came with following highlights:

 It stresses on privacy issues and highlights information security.

 It elaborates Digital Signature.

 It clarifies rational security practices for corporate.

 It focuses on the role of Intermediaries.

 New faces of Cyber Crime were added.

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15.13 Summary

With changing times the economic and business environment of India also went through
a change. In the 1980s and 1990s, we opened our economy and truly became a global trading
partner with the world. This exposed customers to new products but also new problems. To
protect consumer from unscrupulous trade practices, Consumer Protection Act was brought in
to effect in the year 1986 by an Act of the Parliament of India enacted to protect the interests of
consumers in India. It makes provision for the establishment of consumer councils and other
authorities for the settlement of consumers’ disputes and for matters connected therewith also.
The act was passed in Assembly in October 1986.

Consumer Protection Act has been implemented (1986) or we can bring into existence to
protect the rights of a consumer. It protects the consumer from exploitation that business practice
to make profits which in turn harm the well-being of the consumer and society. Cyber Crimes
out and Information Technology act are also discussed in this lesson.

15.14 Key Words

Competition Act

Consumer

Cyber Crime

Information Technology Act

15.15 Review Questions

1. Point out the concept of Consumer Protection.

2. Why is Consumer Protection needed?

3. What are the rights of Consumer?

4. Bring out the different ways for protecting the Consumers.

5. Explain the salient features of Consumer Protection Act.

6. Which are the main authorities under Consumer Protection Act?

7. Enumerate the Features of Competition Act.

8. What are the salient features of Information Technology Act?

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LESSON – 16
INTELLECTUAL PROPERTY RIGHTS
Learning Objectives

After reading this lesson, you will be able to:

 Discuss the Concept and Activities of Intellectual Property Rights apart from
discussing the advantages of Intellectual Property Rights.

 Outline the various types of Intellectual Property Rights and their impact on the
different classes of Business.

Structure
16.1 Introduction

16.2 Definition of Intellectual Property Rights

16.3 Activities covered by Intellectual Property Rights

16.4 Advantages of Intellectual Property Rights

16.5 Intellectual Property Rights in India

16.6 Intellectual Property in Cyber Space

16.7 Types of Intellectual Property Rights

16.7.1 Copy Right Act 1957

16.7.2 Trade Mark Act 1999

16.7.3 Design Act 2000

16.7.4 Patent Act

16.8 Summary

16.9 Key Words

16.10 Review Questions

16.1 Introduction

Intellectual property rights are the rights given to persons over the creations of their minds.
They usually give the creator an exclusive right over the use of his/her creation for a certain
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period of time. In other words Intellectual Property (IP) refers to the protection of creations of
the mind, which have both a moral and a commercial value.

IP law typically grants the author of intellectual creation exclusive rights for exploiting and
benefiting from their creation. However, these rights, also called monopoly right of exploitation,
are limited in scope, duration and geographical [Link] protection is intended to stimulate the
creativity of the human mind for the benefit of all by ensuring that the advantages derived from
exploiting a creation benefit the creator. This will encourage creative activity and allow investors
in research and development a fair return on their investment.

IP confers on individuals, enterprises or other entities the right to exclude others from the
use of their creations. Consequently, intellectual property rights (IPRs) may have a direct and
substantial impact on industry and trade as the owner of an IPR may - through the enforcement
of such a right - prevent the manufacture, use or sale of a product which incorporates the IPR.

For this reason control over the intangible asset (IPR) connotes control of the product and
[Link] protection encourages the publication, distribution and disclosure of the creation to
the public, rather than keeping it secret while at the same time encouraging commercial
enterprises to select creative works for exploitation. Intellectual property legal titles relates to
the acquisition and use of a range of rights covering different type of creations. These may be
industrial or literary and artistic.

16.2 Definition of Intellectual Property Rights

Intellectual property rights are the legal rights that cover the privileges given to individuals
who are the owners and inventors of a work, and have created something with their intellectual
creativity. Individuals related to areas such as literature, music, invention, etc., can be granted
such rights, which can then be used in the business practices by them.

16.3 Activities covered by Intellectual Property Rights

The creator/inventor gets exclusive rights against any misuse or use of work without his/
her prior information. However, the rights are granted for a limited period of time to maintain
equilibrium.
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The following list of activities which are covered by the intellectual property rights are laid
down by the World Intellectual Property Organization (WIPO) “

 Industrial designs

 Scientific discoveries

 Protection against unfair competition

 Literary, artistic, and scientific works

 Inventions in all fields of human endeavor

 Performances of performing artists, phonograms, and broadcasts

 Trademarks, service marks, commercial names, and designations

 All other rights resulting from intellectual activity in the industrial, scientific, literary,
or artistic fields

16.4 Advantages of Intellectual Property Rights

Intellectual property rights are advantageous in the following ways “

 Provides exclusive rights to the creators or inventors.

 Encourages individuals to distribute and share information and data instead of

keeping it confidential.

 Provides legal defense and offers the creators the incentive of their work.

 Helps in social and financial development.

16.5 Intellectual Property Rights in India

To protect the intellectual property rights in the Indian territory, India has defined the
formation of constitutional, administrative and jurisdictive outline whether they imply the copyright,
patent, trademark, industrial designs, or any other parts of the intellectual property rights.

Back in the year 1999, the government passed an important legislation based on
international practices to safeguard the intellectual property rights.
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16.6 Intellectual Property in Cyber Space

Every new invention in the field of technology experiences a variety of threats. Internet is
one such threat, which has captured the physical marketplace and have converted it into a
virtual marketplace.

To safeguard the business interest, it is vital to create an effective property management

and protection mechanism keeping in mind the considerable amount of business and commerce
taking place in the Cyber Space.

Today it is critical for every business to develop an effective and collaborative IP

management mechanism and protection strategy. The ever-looming threats in the cybernetic
world can thus be monitored and confined.

Various approaches and legislations have been designed by the law-makers to up the
ante in delivering a secure configuration against such cyber-threats. However it is the duty of
the intellectual property right (IPR) owner to invalidate and reduce such mala fide acts of criminals
by taking proactive measures.

16.7 Types of Intellectual Property Rights

16.7.1 Copyright Act, 1957

The Copyright Act, 1957, along with the Copyright Rules, 1958, is the governing law for
copyright protection in India. Copyright laws serve to create property rights for certain kinds of
intellectual property, generally called works of authorship. Copyright laws protect the legal rights
of the creator of an ‘original work’ by preventing others from reproducing the work in any other
way.

 Copyright Protection: There are four basic concepts central to the idea of copyright
Protection as discussed here.

 Idea vs. Expression: It is necessary to fix the boundary between the idea and the
expression contained in the original work. It is important to note that copyright applies
only to the expression and not to the idea. But what constitutes the idea and not the
expression can be a source of great legal debate.

 Originality: To get protection under copyright laws, it is important to establish that the
work originates from the author and is not a copied work.
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 Fixation: Copyright can exist only if the work is represented in a material form. It is only
if the book is written, the sound is recorded, or the painting or sculpture is executed, that
the work is eligible for protection under copyright laws.

 Fair Use: Copyright holders are deemed to consent to fair use of their work by others.
Fair use is not defined but can include use in the course of news reporting, commenting,
scientific research, etc.

Copyright Term: In most cases, the term of copyright is the lifetime of the author plus 60
years thereafter. There are some notable exceptions as given below:

1. Broadcasting organization has rights with respect to their broadcasts. The term of this
right is 25 years from the beginning of the calendar year follow-ing the year in which the
broadcast is made.

2. Performers have some special rights in relation to their performance. These rights are for
a period of 50 years from the beginning of the calendar year following the year of the first
performance.

3. In case of posthumous publications, the rights stand for a period of 60 years after the
publication.

Infringement of Copyright

A copyright grants protection to the creator of an original work and prevents such work
from being copied or reproduced without consent. The creator of a work can prohibit anyone
from

a. Reproducing the work in any form, such as print, sound, video, etc.,

b. Recording the work in compact disks, cassettes, etc.,

c. Broadcasting it in any form,

d. Translating it into other languages, and

e. Using the work for a public performance, such as a stage drama or musical
performance.

A copyright is infringed when someone, without the permission of the copyright holder,
does any of the above, which only the copyright holder has the exclusive right to do.
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The Copyright Act provides for both civil and criminal remedies for infringements of
copyrights. On proving an infringement, the copyright owner is entitled to remedy by way of
injunctions and order for seizure and destruction of infringing articles. The offending parties
may also be asked to pay damages.

The Registrar of Copyrights has the power to prevent the import of infringing copies. On
receiving a complaint, the Registrar can enter ships, docks, or warehouses, housing the alleged
infringing material and examine them. In case the infringing material is found, it is handed over
to the copyright holder.

Copyright Protection for Computer Programs

In 1994, the definition of the term literary work in the Copyright Act was amended to
include ‘computer programs, tables and compilations, including computer databases.’Owners
of computer programs get protection under copyright laws. A computer program can be registered
with the Registrar of Copyrights by giving the first 25 and the last 25 lines of the source code.
Here again, it is preferred to establish date of development by submitting logbooks detailing
development work, etc. Making copies of legally obtained computer programs for purposes of
making back-up copies as a temporary protection against damage or destruction is permitted.
Knowingly making use of an infringing copy of a computer program is a punishable offence.

The penalty for such an offence is imprisonment (minimum of seven days and maximum
of three years) and a fine (Rs. 50,000 to Rs. 2, 00,000). If the offender pleads and proves that
he/she used the infringing copy for personal use and not in the course of trade, court is likely to
take a lenient view of the matter and impose the minimum fine of Rs. 50,000.

16.7.2 Trade Mark Act 1999

The Trade Marks Act 1940 introduced for the first time to address the issues relating to
the registration and statutory protection of trade marks in India. This Act was in force until 1958,
when Trade and Merchandise Marks Act was passed. This Act was repealed and the present
law is governed by the Trade Marks Act 1999. The Trade Marks Act 1999 has made substantial
changes in the law. As regards unregistered trademarks, some of the law are codified, while
others are based on common law for which one has to refer the decisions of courts. The statutory
rights conferred by registration of a trade mark are so wide and complex. It has been found
necessary to safeguard the bonafide interest of other traders from litigation and harassment by
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owners of registered trademarks, apart from protecting the purchasing public from imposition
and fraud by infringers of genuine trademarks. The Present Act of 1999, apart from simplifying
the law, has introduced many new provisions, which are in the interest of trade mark owners as
well as the consumers of goods.

Salient Features of Trade Mark Act 1999

The salient features of the Trade Marks Act 1999 are presented below

 The Trade Marks Act, 1999 deals with entire law relating to trademarks and its procedures

 The provisions of this Act are in conformity with the obligations imposed by the Agreement
on TRIPs.

 Provisions for filing a single application for registration of a mark in more than one class.
Class 1 to 34 related with goods and Class 35 to 45 related with services.

 Section 9 of the Act specifically mentions absolute grounds for refusal of registration.

 Section 12 empowers the Registrar to permit registration by more than one proprietor of
trade marks in the case of concurrent use even though marks are identical or similar.

 Widening the definition of trade mark by recognizing the shape of goods, packaging and
combination of colours as marks and trademarks.

 Simplifying the procedure for registration of registered user and enlarging the scope of
permitted use.

 Marks which are not registrable elaborated.

 Abolition of the necessity for disclaimer.

 The Act has abolished the system of maintaining registration of trade marks in Part A and
Part B with different legal rights and provide only a single register with simplified procedure
for registration and with equal rights. Abolition of Part B register.

 Provisions for protection of well-knowntrademarks and test for determination of such

marks.

 Increasing the period of registration and renewal from 7 to 10 years.

 Widening the scope of infringement of registered trade mark.

 Assignment of unregistered trade mark without goodwill of business is permitted.

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 Registered user provisions simplified. Registrar has been given the power to decide.

 Non-registered licensing of registered trade mark is permitted.

 Licensing of unregistered trademark is permitted.

 Creation of Appellate Board to hear and decide appeals from the decisions of Registrar.

 Publication of alphabetical Index of classification of goods and services.

 Transferring the final authority relating to registration of certification trademarks to the

Registrar instead of the Central Government.

16.7.3 Design Act 2000

Designs, more accurately, industrial designs, are protected under the Designs Act of 2000,
which replaced the archaic Designs Act of 1911. Under the 2000 legislation, the Design Rules
of 2001 have also been formulated.

India, as a WTO member is obligated to maintain minimum standards of protection under

the TRIPS (Trade Related Aspects of Intellectual Property Rights) Agreement. Under the TRIPS,
intellectual property protection extends to designs as well as traditional IPRs such as copyright,
trademarks and patents.

Definition of Design under Design Act 2000

It is defined as “features of shape, configuration, pattern, ornament or composition of

lines or colours applied to any article in two or three-dimensional form, or both, by any industrial
process or means – whether manual, mechanical or chemical, separate or combined – which in
the finished article appeal to and are judged solely by the eye.”

This definition excludes any mode of construction, or anything which in its substance is a
mere mechanical [Link] also excludes any trademark or property mark as well as any artistic
work as protected under the Copyright Act.

Essential Requirements for registration

 Novelty and originality: A design can be considered for registration only if they are
unique. A combination of previously registered design can also be considered only if the
combination produces new visuals. In a case Hello Mineral Water PVT. LTD. v. Thermoking
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California Pure, a design of water dispenser having a cylindrical shape was not considered
as new on the grounds that mere shape and form is not sufficient to prove novelty.

 Design must be unique, a Prior publication is not acceptable: The design must not
be a published one. If the design is already published than the design is not eligible for
the publication. There should not be any tangible copy available already in the market if
you are seeking registration of the design that is in digital format. Displaying of the design
in any fashion show by the creator is the publication of that design. Secret and private use
of the design does not amount to the publication and can be used for the experimental
purpose.

 It was held in Kemp and company v. Prima Plastics LTD. that disclosure of design by
the proprietor to any third person cannot be claimed as publication provided that the
disclosure must be in good faith.

 Making application of design to an Article: The applicability of the design should be to

the article itself. It can be informed of a three-dimensional figure. There are two-dimensional
figures also included in this act i.e any painting or any graffiti on the walls or print on the
bedsheets.

 The design must not be contrary to the order and morality: The design must be
registrable under the Design Act, 2000. It must not be prohibited by the Government of
India or any institution so authorized. The design must be capable of registering under
the Section 5 of this act. The design which can cause a breach of peace and may hurt the
sentiments of the people may not be allowed to get register.

Who is entitled to seek Registration?

As per the provisions of Design Act, 2000 any proprietor who is seeking registration of a
design which is original and unpublished previously in any country which does not seems to be
contrary to any law and order of that country can file an application for registration. A proprietor
as per Section 2(j) includes that person who

1. is the author of that design

2. acquired design for a valid consideration and

3. Any person to whom the design has been devolved from the original proprietor.
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In case there is more than one author than the design must be applied by the joint authors
only.

What can be registered under this act?

 It must be new and original.

 It must be capable of being made and sold as an individual item.

 It should not be in publicly domain prior to filing an application. Thus the design
should be private and unpublished.

 It should be explicitly distinguishable from already existing designs.

 It should not have any obscene or inappropriate content.

Rights of the proprietor of the design

When a proprietor applies for the registration of the design he shall automatically get
‘copyrights in design’ for the period of 10 years from the date of registration. This period can be
extended if the proprietor wants to continue with the design. The Design Act should not be
confused with the Copyrights act because there are many products which can be registered
under both the acts but their remedies cannot be sought in both the acts individually.

Salient features of Design Act 2000

1. As India is a member of World trade organization, Paris convention and also signed the
Patent Cooperation Treaty which allows the members of these conventions can claim
priority rights.

2. Under Design Act, 2000 Locarno classification has been adopted where the classification
is totally based on the subject matter so of design. Under previous provisions, classification
is only made on the basis of the material the subject matter is made of.

3. With the introduction of “ absolute novelty”, Novelty can be judged on the basis of the
prior publication of the article not only in India but also in other countries.

4. Restoration of design is possible as per the new law which was omitted in the previous
laws. Now you can restore registration of your design.

5. Under new provisions, power has been given to district court to transfer cases to the high
court where the court is having jurisdiction. This is only possible if the person is challenging
the validity of the design registration.
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6. Incorporates the provisions regarding delegation of powers of the controller to other

controllers and duty of examiner.

7. Under the new provision, the quantum of punishment is also enhanced in case of
infringement.

8. It revokes the secrecy of two years of a registered design.

9. It contains provisions for the avoidance of certain restrictive conditions so as to regulate

anti-competitive practices within contractual licenses.

10. The registration is taken into consideration when it is brought within the domain of public
records that too physically. Anyone can inspect the records and get a certified copy of it.

11. It contains provisions for substitution of the application before registering the design.

16.7.4 Patent Act

The history of Patent law in India starts from 1911 when the Indian Patents and Designs
Act, 1911 was enacted. The present Patents Act, 1970 came into force in the year 1972, amending
and consolidating the existing law relating to Patents in India. The Patents Act, 1970 was again
amended by the Patents (Amendment) Act, 2005, wherein product patent was extended to all
fields of technology including food, drugs, chemicals and microorganisms. After the amendment,
the provisions relating to Exclusive Marketing Rights (EMRs) have been repealed, and a provision
for enabling grant of compulsory license has been introduced. The provisions relating to pre-
grant and post-grant opposition have been also introduced.

An invention relating to a product or a process that is new, involving inventive step and
capable of industrial application can be patented in India. However, it must not fall into the
category of inventions that are non-patentable as provided under Section 3 and 4 of the (Indian)
Patents Act, 1970. In India, a patent application can be filed, either alone or jointly, by true and
first inventor or his assignee.

Procedure for Grant of a Patent in India

After filing the application for the grant of patent, a request for examination is required to
be made for examination of the application by the Indian Patent Office. After the First Examination
Report is issued, the Applicant is given an opportunity to meet the objections raised in the
report. The Applicant has to comply with the requirements within 12 months from the issuance
of the First Examination Report. If the requirements of the first examination report are not
268

complied with within the prescribed period of 12 months, then the application is treated to have
been abandoned by the applicant. After the removal of objections and compliance of
requirements, the patent is granted and notified in the Patent Office Journal. The process of the
grant of patent in India can also be understood from the following flow chart:

Filing of Application for Grant of Patent in India by Foreigners

India being a signatory to the Paris Convention for the Protection of Industrial Property,
1883 and the Patent Cooperation Treaty (PCT), 1970, a foreign entity can adopt any of the
aforesaid routes for filing of application for grant of patent in India.

Where an application for grant of patent in respect of an invention in a Convention Country

has been filed, then similar application can also be filed in India for grant of patent by such
applicant or the legal representative or assignee of such person within twelve months from the
 269

date on which the basic application was made in the Convention Country i.e. the home country.
The priority date in such a case is considered as the date of making of the basic application.

Pre-Grant Opposition

A representation for pre-grant opposition can be filed by any person under Section 11A of
the Patents Act, 1970 within six months from the date of publication of the application, as
amended (the “Patents Act”) or before the grant of patent. The grounds on which the
representation can be filed are provided under Section 25(1) of the Patents Act. There is no fee
for filing representation for pre-grant opposition. Representation for pre-grant opposition can
be filed even though no request for examination has been filed. However, the representation
will be considered only when a request for examination is received within the prescribed period.

Post-Grant Opposition

Any interested person can file post-grant opposition within twelve months from the date
of publication of the grant of patent in the official journal of the patent office.

Grounds for Opposition

Some of the grounds for filing pre-and post-grant opposition are as under:

a. Patent wrongfully obtained;

b. Prior publication;

c. The invention was publicly known or publicly used in India before the priority date of that
claim;

d. The invention is obvious and does not involve any inventive step;

e. That the subject of any claim is not an invention within the meaning of this Act, or is not
patentable under this Act;

f. Insufficient disclosure of the invention or the method by which it is to be performed;

g. That in the case of a patent granted on convention application, the application for patent
was not made within twelve months from the date of the first application for protection for
the invention made in a convention country or in India;

h. That the complete specification does not disclose or wrongly mentions the source and
geographical origin of biological material used for the invention; and
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i. That the invention was anticipated having regard to the knowledge, oral or otherwise,
available within any local or indigenous community in India or elsewhere.

Term of Patent: The term of every patent in India is twenty years from the date of filing
the patent application, irrespective of whether it is filed with provisional or complete specification.
However, in case of applications filed under the Patent Cooperative Treaty (PCT), the term of
twenty years begins from the international filing date.

Payment of Renewal Fee: It is important to note that a patentee has to renew the patent
every year by paying the renewal fee, which can be paid every year or in lump sum.

Restoration of Patent: A request for restoration of patent can be filed within eighteen
months from the date of cessation of patent along with the prescribed fee. After the receipt of
the request, the matter is notified in the official journal for further processing of the request.

Patent of Biological Material: If the invention uses a biological material which is new, it
is essential to deposit the same in the International Depository Authority (“IDA”) prior to the
filing of the application in India in order to supplement the description. If such biological materials
are already known, in such a case it is not essential to deposit the same. The IDA in India
located at Chandigarh is known as Institute of Microbial Technology (IMTECH).

What are the Rights granted by Patent?

If the grant of the patent is for a product, then the patentee has a right to prevent others
from making, using, offering for sale, selling or importing the patented product in India. If the
patent is for a process, then the patentee has the right to prevent others from using the process,
using the product directly obtained by the process, offering for sale, selling or importing the
product in India directly obtained by the process.

Before filing an application for grant of patent in India, it is important to note ”What is not
Patentable in India?” Following i.e. an invention which is (a) frivolous, (b) obvious, (c) contrary
to well established natural laws, (d) contrary to law, (e) morality, (f) injurious to public health, (g)
a mere discovery of a scientific principle, (h) the formulation of an abstract theory, (i) a mere
discovery of any new property or new use for a known substance or process, machine or
apparatus, (j) a substance obtained by a mere admixture resulting only in the aggregation of
the properties of the components thereof or a process for producing such substance, (k) a
mere arrangement or rearrangement or duplication of known devices, (l) a method of agriculture
or horticulture and (m) inventions relating to atomic energy, are not patentable in India.
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Maintainability of Secrecy by the Indian Patent Office (IPO)

All patent applications are kept secret up to eighteen months from the date of filing or
priority date, whichever is earlier, and thereafter they are published in the Official Journal of the
Patent Office published every week. After such publication of the patent application, public can
inspect the documents and may take the photocopy thereof on the payment of the prescribed
fee.

Compulsory Licensing: One of the most important aspects of Indian Patents Act, 1970,
is compulsory licensing of the patent subject to the fulfillment of certain conditions. At any time
after the expiration of three years from the date of the sealing of a patent, any person interested
may make an application to the Controller of Patents for grant of compulsory license of the
patent, subject to the fulfillment of following conditions, i.e.

 the reasonable requirements of the public with respect to the patented invention
have not been satisfied; or

 that the patented invention is not available to the public at a reasonable price; or

 that the patented invention is not worked in the territory of India.

It is further important to note that an application for compulsory licensing may be made by
any person notwithstanding that he is already the holder of a license under the patent.

For the purpose of compulsory licensing, no person can be stopped from alleging that the
reasonable requirements of the public with respect to the patented invention are not satisfied or
that the patented invention is not available to the public at a reasonable price by reason of any
admission made by him, whether in such a licence or by reason of his having accepted such a
licence.

The Controller, if satisfied that the reasonable requirements of the public with respect to
the patented invention have not been satisfied or that the patented invention is not available to
the public at a reasonable price, may order the patentee to grant a licence upon such terms as
he may deem fit. However, before the grant of a compulsory license, the Controller of Patents
shall take into account following factors:

 The nature of invention;

 The time elapsed, since the sealing of the patent;

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 The measures already taken by the patentee or the licensee to make full use of the
invention;

 The ability of the applicant to work the invention to the public advantage;

 The capacity of the applicant to undertake the risk in providing capital and working
the invention, if the application for compulsory license is granted;

 As to the fact whether the applicant has made efforts to obtain a license from the
patentee on reasonable terms and conditions;

 National emergency or other circumstances of extreme urgency;

 Public non-commercial use;

 Establishment of a ground of anti-competitive practices adopted by the patentee.

The grant of compulsory license cannot be claimed as a matter of right, as the same is
subject to the fulfilment of above conditions and discretion of the Controller of Patents. Further
judicial recourse is available against any arbitrary or illegal order of the Controller of Patents for
grant of compulsory license.

Infringement of Patent

Patent infringement proceedings can only be initiated after grant of patent in India but
may include a claim retrospectively from the date of publication of the application for grant of
the patent. Infringement of a patent consists of the unauthorized making, importing, using,
offering for sale or selling any patented invention within the India. Under the (Indian) Patents
Act, 1970 only a civil action can be initiated in a Court of Law. Further, a suit for infringement
can be defended on various grounds including the grounds on which a patent cannot be granted
in India and based on such defence, revocation of Patent can also be claimed.

16.8 Summary

Intellectual property rights are the rights given to persons over the creations of their minds.
They usually give the creator an exclusive right over the use of his/her creation for a certain
period of time. In other words Intellectual Property (IP) refers to the protection of creations of
the mind, which have both a moral and a commercial value.

IP law typically grants the author of intellectual creation exclusive rights for exploiting and
benefiting from their creation. However, these rights, also called monopoly right of exploitation,
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are limited in scope, duration and geographical [Link] protection is intended to stimulate the
creativity of the human mind for the benefit of all by ensuring that the advantages derived from
exploiting a creation benefit the creator. This will encourage creative activity and allow investors
in research and development a fair return on their investment.

16.9 Key Words

Copyright

Design

Trademark

Patent

16.10 Review Questions

1. What is Intellectual Property Rights? Explain the advantages.

2. Give a detail note on Intellectual Property Right in India.

3. Explain in detail the Types of Intellectual Property Rights.

4. What is Trade Mark? What are the Salient Features

5. Explain the essential requirements for registration under Design Act.

6. Write a detailed note on Patent Act.

7. Explain the Infringement of Patent.

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Model Question Paper

MBA Degree Examination
First Year – Second Semester
Paper - VI
LEGAL SYSTEM IN BUSINESS
Time : 3 Hours Maximum : 80 Marks

SECTION - A

Answer any TEN of the following in 50 words each (10 x 2 = 20 Marks)

1. What is a Contract ?

2. What is an agreement to sell ?

3. What do you mean by joint family business ?

4. What is Partnership ?

5. What is a Company ?

6. Who are Consumers ?

7. What is a Prospectus ?

8. What do you mean by Winding up of a company ?

9. What is a Factory ?

10. What do you mean by industrial disputes ?

11. What is a copyright?

12. What do you mean by the term "Bonus"?

SECTION - B

Answer any FIVE of the following in 250 words each ( 5 x 6 = 30 Marks)

13. Differentiate offer and acceptance.

14. What are void and voidable contracts ?

15. What are warranties ? Briefly explain.

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16. Explain the types of companies.

17. Differentiate accounts and audit.

18. What are the features of trademark ?

19. List down the rights of Consumers.

SECTION - C

Answer any THREE questions in about 500 words each (3 x 10 = 30 Marks)

20. Discuss the remedies for breach of contracts.

21. Outline the rights of unpaid seller

22. Describe the rights and liabilities of partners.

23. Compare private and public limited companies.

24. Explain the types of intellectual property.