Chanderprabhu Jain College Mercantile Law Notes

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: THIRD Semester
Name of the Subject:
MERCANTILE LAW
PAPER CODE-203
CLASS-BBA(CAM)

UNIT 1 CONTRACT
INDIAN CONTRACT ACT 1872
 What is ‘Contract‘?
The term ‘Contract‘ is defined in Section 2(h) of the Indian
Contract Act, which reads as under
“An agreement enforceable by law is a contract.”
 The analysis of this definition shows that a contract must have
the following two elements:
1. An agreement, and
2. The agreement must be enforceable by law.

In other words:
Contract = An Agreement + Enforceability by law
 Agreement (Section 2(e)0
Every promise and every set of promises forming the consideration for each
other is an agreement.
 Promise (Section 2(b))
A proposal when accepted becomes a promise.
Every agreement is not a contract. When an agreement creates some legal
obligations and is enforceable by law, it is regarded as a contract.
“All contracts are agreements but all agreements are not contract”

OFFER
According to Sec.2(a), when a person made a proposal, when he
signifies to another his willingness to do or to abstain from doing
something.
 Implied offer
 Specific offer
 General offer
 Cross offer
 Counter offer
 Standing offer
 Express offer

According to sec.2(b), when a person made a proposal to another to whom
proposal is made, if proposal is assented there to, it is called acceptance.
Acceptance must be given as per the mode prescribed by the offerer.
 Acceptance must be given before the lapse of time or within reasonable time.
 Acceptance must be unconditional.
 Acceptance may be given by any person in case of general offer.
ACCEPTANCE

ESSENTIAL ELEMENTS OF CONTRACT
 Agreement
 Intention to create legal relationship
 Free and genuine consent.
 Parties competent to contract
 Lawful consideration.
 Lawful object.
 Must be in writing. (Generally, oral contract is not enforceable)
 Agreement not declared void or illegal.
 Certainty of meaning.
 Possibility of performance.
 Necessary legal formalities.

FREE CONSENT
According to Sec 10 of the Indian Contract Act one of the essentials of a valid
contract is “Free Consent”
Sec 13 defines “consent” as “Two or more persons are said to consent
when they agree upon the same thing in the same sense”. According to Sec 14,
consent is said to be free when it is not caused by:
 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake

CONSIDERATION
According to sec 2(d) consideration is defined as “when at the desire of
the promisor , or promisee or any other person has done or abstained
from doing or does or abstains from doing ,or promises to do or to
abstain from doing , something , such an act or absinence or promise is
called a consideration for the promise .

CAPACITY TO CONTRACT
Following are the condition for a person to enter into contract
 He must be major
 He must be sound mind
 He must not be disqualified by any other law.

MINOR
According to Indian majority act sec(3) minor is defined as any person
under the age of 18 years . In the following cases a person is said to be
minor if he does not complete the age of 21 years
 any person under the guardian & wards act ,1890
 any person which comes under superintendence of law/legal
representative

DISQUALIFIED PERSONS TO ENTER INTO A
CONTRACT
 Minor
 unsound person
 others
i.e alien enemy,
insolvent,
convict,
company/corporation against MOA / AOA .

VALID CONTRACTS
Absolute contract
Contingent contract(Sec. 31-36)
Express contract
Implied/Quasi contract(Sec.68- 72)
TYPES OF CONTRACTS
INVALID CONTRACTS
 Void contract
 Is void(Void - ab - initio) Becomes void
 Voidable contract
 Illegal contract
 Unenforceable contract

DISCHARGE OF A CONTRACT
 Discharge by performance
 Discharge by agreement or consent
 Discharge by impossibility of performance
 Discharge by lapse of time
 Discharge by operation of law
 Disharge by breach of contract

REMEDIES OF INJURED PARTY
A remedy is a means given by law for the enforcement of a right
Following are the remedies:
 Rescission of damages.
 Suit upon quantum meruit.
 Suit for specific performance.
 Suit for injunction.

CONTRACTS OF INDEMNITY
A contract of indemnity is a contract whereby one party promises to save the
other from loss caused to him by the conduct of the promisor himself or by
the conduct of any other party.
UNIT-2 CONTRACT ACT
WHAT IS CONTRACT OF GUARANTEE
A contract of guarantee is defined as a contract to perform the promise or
discharge the liability or a third person in case of his default.
The person who gives the guarantee is called the “Surety”, the person from
whom the guarantee is given is called the “Principal Debtor” and the person to
whom the guarantee I given is called the “Creditor”.

INDEMNITY
A contract by which one party promises to save the other from loss caused to
him by the conduct of the promisor himself, or by the conduct of any other
person, is called a ‘contract of indemnity. [section 124].
For Example - A contracts to indemnify B against the consequences of any
proceedings which C may take against B in respect of a certain sum of 200
rupees. This is a contract of indemnity.
PARTIES TO CONTRACT OF INDEMNITY:
INDEMNIFIER: The person who promises to indemnify.
INDEMNITY HOLDER: The person whose loss is to be indemnified.
Examples:
Motor insurance
Marine insurance
Fire insurance
Life insurance is not the contract of indemnity

RIGHTS OF INDEMNITY-HOLDER WHEN SUED
The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor-
 all damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
 all costs which he may be compelled to pay in any such suit, if in bringing of
defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorized him to bring or defend the suit;
 all sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contract to the orders of the promisor, and
was one which it would have been prudent for the promise to make in the
absence of any contract of indemnity, or if the promisor authorized him to
compromise the suit.
RIGHTS OF INDEMNIFIER:
The contract act is silent about the rights of indemnifier

CONTRACT OF GUARANTEE
A “contract of guarantee” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default. A guarantee may be either oral or
written. [section 126].
PARTIES TO CONTRACT OF GUARANTEE
SURETY: The person who gives the guarantee is called the “surety”. Person
giving guarantee is also called as ‘guarantor’. ;
PRINCIPAL DEBTOR: the person in respect of whose default the guarantee is
given is called the “principal debtor”, and
CREDITOR: the person to whom the guarantee is given is called the
“creditor”.
Three parties are involved in contract of guarantee. Contract between any two of
them is not a ‘contract of guarantee’. It may be contract of indemnity.
Primary liability is of the principal debtor. Liability of surety is secondary and
arises when Principal Debtor fails to fulfill his commitments. However, this is so
when surety gives guarantee at the request of principal debtor.

ESSENTIALS OF CONTRACT OF GUARANTEE:
Existence of a principal debt.
Consideration for a contract of guarantee.
There should be no misrepresentation or concealment.
Contract of guarantee must contain all the essential elements of valid contract.
Contract of guarantee is a complete and separate contract by itself.

KINDS OF GUARANTEE
ABSOLUTE GUARANTEE (unconditional guarantee by surety)
CONDITIONAL GUARANTEE (enforceable when contingency along with
default happens)
 RETROSPECTIVE GUARANTEE (given for existing debt)
 PROSPECTIVE GUARANTEE (given for future debt)
 LIMITED GUARANTEE (for a single transaction)
 UNLIMITED GUARANTEE (unlimited as to time or amount)
 GENERAL GUARANTEE (for acceptance by the public generally)
 SPECIAL GUARANTEE (for acceptance by the particular person)
 CONTINUING GUARANTEE (extends to series of transactions)

RIGHTS OF SURETY
AGAINST THE PRINCIPAL DEBTOR
Right of subrogation
Right to indemnity
AGAINST THE CREDITOR
Surety's right to benefit of creditor's securities and, (if the creditor loses, or,
without the consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security).
Surety can rely upon any set off or counter claim which the debtor must
possess against the creditor.
AGAINST THE CO-SURETIES
When several co-sureties have given guarantee for the same debt with their
maximum limits, they are liable to pay equally but subject to the limits they
have fixed

DISCHARGE OF SURETY
Revocation by notice.
Revocation by death.
Discharge of surety by variance in terms of contract.
Discharge of surety by release or discharge of principal debtor.
Discharge of surety when creditor compounds with, gives time to, or agrees not
to sue, principal debtor.
Creditor's forbearance to sue does not discharge surety.
Release of one co-surety does not discharge other.
Discharge of surety by creditor's act or omission impairing surety's eventual
remedy.
By the creditor losing his security.

BAILMENT
Bailment is another type of special contract. Since it is a ‘contract’, naturally all
basic requirements of contract are applicable.
 A “bailment” is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person
delivering them. The person delivering the goods is called the “bailor”. The
person to whom they are delivered is called the “bailee” [section 148].
Bailment means act of delivering goods for a specified purpose on trust. The
goods are to be returned after the purpose is over.
In bailment, possession of goods is transferred, but property i.e. ownership is
not transferred.

CLASSIFICATION OF BAILMENT
ON THE BASIS OF BENEFIT
Bailment exclusive for Bailor’s benefit.
Bailment exclusive for Bailee’s benefit
Bailment for mutual benefit.
ON THE BASIS OF WILLINGNESS
Voluntary Bailment : Express contract between the parties.
Involuntary bailment: Arises as per the operation of law.
ON THE BASIS OF REWARDS
Gratituous Bailment : Where neither the bailor nor the bailee get any
remuneration, then, it gratuitous.
Non- Gratituous Bailment : When either the bailor or bailee get remuneration,
then it is known as non-gratuitous bailment.

RIGHTS OF BAILOR
Right of Termination: bailor has right to terminate the contract of bailment, if
the bailee does any inconsistent act with regards to goods.
Right to Demand Return of Goods: Any time in case of gratuitous bailment.
The bailor can demand back goods bailed at any time even if he had lend it for a
specific goods.
Right to file a suit against a wrong doer.
Enforcement of Rights: The duties of bailee are the rights of bailor & bailor
can enforce those rights by filing a suit against bailee.
DUTIES OF BAILOR
Duty to disclose known defects: A bailor is bound to disclose all the defects
relating to goods of which he is known.
Duty to Bear Extraordinary expenses: Where the bailment is gratuitous & the
bailee is not to receive any remuneration, the bailor shall pay bailee all the
necessary expenses.
Bear Risk for Loss: bailor is to bear risk of loss or destruction of the thing
bailed if the bailee had taken prudent care of the goods.
Duty to indemnify bailee: bailor has to indemnify bailee for any loss due to
imperfect title in the goods bailed.
Duty to receive back the goods: on the expiry of the term of bailment.

RIGHTS OF BAILEE
Right to Interplead: If the person other than bailor claims the goods, bailee may
apply to court to stop the delivery.
Right Against third Party: If a third person wrongfully deprive bailee to use the
goods or cause any injury, then bailee is entitled to such remedies which are
available to real owner.
Right of Particular Lien: When the bailee has rendered some services or skills on
the good he had right of particular lien unless he is paid.
Right of General Lien: Banker, factors, attorney of High Court, policy broker
will be entitled to retain as a security for a general balance of account any goods
bailed to then.
Right to Claim Compensation in Case of faulty Goods.
Right to claim necessary expenses.
Right to return the goods to any of the joint bailor.

DUTIES OF BAILEE:
Duty of Reasonable care.
Duty not to make unauthorized use of goods.
Duty not to mix bailor’s goods with his own.
Duty to return any profit out.
PARTICULAR LIEN: It is available to the bailee against such goods in respect
of which he has rendered some servicing involving the excerise of labour or
skills.
GENERAL LIEN: It entitles a person to retain the position of goods
belonging to another for general balance of account. Bankers, factor, attorneys
of a High Court and policy brokers may, in the absence of a contract to the
contrary, retain as a security for a general balance of account, any goods bailed to
them; but no other person have a right retain, as a security for which balance,
goods, bailed to them, unless is an express contract to that effect

PLEDGE
Bailment of goods as a security for payment of debts or performance of
promise is called pledge. The bailor is called pledgor or pawnor and the bailee is
called Pawnee.
ESSENTIALS OF PLEDGE
Delivery of Goods: The delivery of goods to pledgee is necessary to constitute a
pledge.
Delivery of goods should be by way of security. The security being for the
payment of debt or the performance of a promise.
Goods must be movable. An implied condition to return the goods.
RIGHTS AND DUTIES OF PAWNEE
Right of retainer
Right of particular lien
Right to extraordinary expenses
Right in case of default of the pawnor
RIGHTS AND DUTIES OF PAWNOR
Right of redemption
Right to take back the goods.

PLEDGE BY NON OWNERS
 Pledge by mercantile agent
Where a mercantile agent is, with the consent of the owner, in possession
of goods or the documents of title to goods, any pledge made by him, when acting
in the ordinary course of business of a mercantile agent, shall be as valid as if he
were expressly authorized by the owner of the goods to make the same
 Pledge by person in possession under voidable contract
When the pawnor has obtained possession of the other goods pledged by
him under a contract voidable under section 19 of section 19A, but the contract
has not been rescinded at the time of the pledge, the pawnee acquired a goods title
to the goods, provided he acts in good faith and without notice of the pawnor's
defect of title.
 Pledge where pawnor has only a limited interest
Where person pledges goods in which he has only a limited interest, the
pledge is valid to the extent of that interest..
 Pledge by seller or buyer in possession after sale
Pledge by seller or buyer in possession after sale is valid pledge provided it
is in good faith.

DEFINITION OF AGENT AND PRINCIPAL
AGENT
An ‘AGENT’ is a person employed to do any act for another or to represent
another in dealings with third persons. The function of an agent is to bring
his principal Into contractual relations with third persons.
PRINCIPAL
A person for whom the above act is done or who is so represented is called
the ‘PRINCIPAL

ESSENTIALS OF RELATIONSHIP OF AGENCY
Aggrement b/w principal and agent-:
Agency depends on agreement but not necessarily on contract. Any
person can become an agent b/w a principal and the third person.
Intention of an agent to act on behalf of the principal.
CREATION OF AGENCY
1. By express agreement
2. By implied agreement
 Agency by ESTOPPLE.
 Agency by Holding out.
 Agency by necessity.
3. By ratification

DUTIES OF AGENT
 To carry out the work undertaken according to the directions given by the
principal.
 To carry out the work with reasonable care, skill and diligence.
 To communicate with the principal in the case of difficulty.
 To pay sums received for the principal.
 To protect and preserve the interests of the principal in the case of his death or
insolvency.
 Not to make secret profit from agency .
 Not to set up an adverse title.
 Not to use information obtained in the course of the agency against the
principal.

RIGHTS OF AGENT
 Right of retainer.
 Right to receive remuneration.
 Right of lien.
 Right of indemnification.
 Right of compensation.

DUTIES OF PRINCIPAL
 To indemnify the agent against the consequences of all lawful acts
 To indemnify the agent against the consequences of acts done in good faith
 To indemnify the agent for injury caused by principal’s neglect.
 To pay the agent the commission other remuneration agreed.
RIGHTS OF PRINCIPAL
 To recover damages.
 To obtain an account of secret profits and recover them and resist a
 Claim for remuneration.
 To resist agent’s claim for indemnity against liability incurred

TERMINATION OF AGENCY
1. BY ACT OF THE PARIES
 Agreement
 Revocation by the principal
Revocation by the agent
2. BY OPERATION OF LAW
 Performance of the contract
Expiry of the time
 Death of either party
Insanity of either party
Insolvency of either party
Destruction of the subject matter
 Principal becoming an alien enemy
 Dissolution of a company

UNIT-3
SALES OF GOODS ACT, 1930
Transactions in the nature of sale of goods form the subject matter of the
Sale of Goods Act, 1930
The Act came into force on 1 July, 1930
It extends to the whole of India, except Jammu & Kashmir
This chapter deals with the specific types of contract, i.e., sale of good
DEFINITION OF A CONTRACT OF SALE
Section 4 defines a contract of sale as “a contract whereby a seller transfers or
agrees to transfer the property in goods to the buyer for a price”

ESSENTIALS OF A CONTRACT OF SALE
From the definition, the following essentials of the contract emerge:
 There must be at least two parties: a sale has to be bilateral because the
property in goods has to pass from one person to another. The seller and
the buyer must be different persons
 Transfer or agreement to transfer the ownership of goods: In a contract of
sale, it is the ownership that is transferred (in the case of sale), or agreed to
be transferred (in the case of agreement to sell), as against transfer of mere
possession
 If for instance, goods are offered as the consideration for goods, it will not
amount to sale. It will be called a barter. Where goods are sold for a
definite sum and the price is paid partly in terms of valued up of goods and
partly in cash, that is sale
 All other essentials of a valid contract as per the Indian Contract Act, 1872
must be present

SALE AND AGREEMENT TO SELL
SALE
Where under a contract of sale, the property (ownership) in the goods is
transferred from the seller to the buyer, it is called a sale.
Thus, sale takes place when there is a transfer of ownership in goods from the
seller to the buyer.
A sale is an executed contract
AGREEMENT TO SELL
Agreement to sell means a contract of sale under which the transfer of property
in goods is to take place at a future date or subject to some conditions
thereafter to be fulfill.

GOODS & THEIR CLASSIFICATION
Goods’ means every kind of movable property, other than actionable claims and money; and
includes stocks 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
Trademarks, patents, copyright, goodwill, water, gas, electricity are all goods
In general, it is only the movables that form good
 The term goods excludes money
 Money means legal tender and not the rare coins which can be sold and purchased as
goods
 Money itself cannot be subject of a sale
 The actionable claims are things which a person cannot make use of, but which can be
claimed by him by means of a legal action

DOCUMENTS OF TITLE TO GOODS
Any written instrument, such as a bill of lading, a warehouse receipt, or an order for the
delivery of goods, that in the usual course of business or financing is considered
sufficient proof that the person who possesses it is entitled to receive, hold, and dispose
of the instrument and the goods that it covers.
A document of title is usually either issued or addressed by a bailee—an individual who
has custody of the goods of another—to a bailor—the person who has entrusted the
goods to him or her. Its terms must describe the goods covered by it so that they are
identifiable as well as set forth the conditions of the contractual agreement. Possession
of a document of title is symbolic of ownership of the goods that are described within
it.

CLASSIFICATION OF GOODS
Existing goods are those which are owned or possessed by the seller at the time of
the contract
 Instances of goods possessed but not owned by the seller are sales by agents
and pledge. Existing goods may be either:
a) Specific or ascertained
b) Generic and unascertained
 Future goods means goods to be manufactured or produced or acquired by the
seller after making the contract of sale
 Contingent goods are the goods the acquisition of which by the seller depends
upon a contingency which may or may not happen. Contingent goods is a part
of future goods

CONDITIONS & WARRANTIES (SEC. 11-17)
In a contract of sale, parties make certain stipulations, i.e., agree to certain terms
regarding the quality of the goods, the price and the mode of its payment, the
delivery of goods and its time and place
All stipulations cannot be treated on the same footing
Some may be intended by the parties to be of a fundamental nature, eg. Quality
of the goods to be supplied, the breach of which therefore will be regarded as a
breach of the contract
Some may be intended by the parties to be binding, but of a subsidiary or inferior
character, eg., time of payment, so that a breach of these terms will not put an
end to the contract but will make the party committing the breach liable to
damages
The former stipulations are called ‘conditions’ and the latter ‘warranties’

CONDITION & WARRANTY DISTINGUISHED
 AS TO VALUE
A condition is a stipulation which is essential to the main purpose of the
contract, whereas a warranty is a stipulation which is collateral to the main
purpose of the contract.
 AS TO BREACH
The breach of a condition gives the aggrieved party the right to repudiate
the contract and also to claim damages.
 AS TO TREATMENT
A breach of condition may be treated as a breach of warranty. But a breach
of warranty cannot be treated as a breach of condition.

EXPRESS & IMPLIED CONDITIONS & WARRANTIES
EXPRESS CONDITION OR WARRANT
These may be of any kind that the parties may choose to agree upon, eg, it
may be agreed that delivery of goods shall be made or taken on or before a
certain date. Similarly, in a contract of sale of a car, express warranty as to
its soundness may be incorporated
IMPLIED CONDITIONS AND WARRANTIES
They are deemed to be incorporated by law in every contract of sale of
goods unless the terms of the contract show a contrary intention

TRANSFER OF OWNERSHIP
A contract of sale is performed in two inter-related stages
 Transfer of possession of goods
 Transfer of ownership of goods
Followings reason-
 Risk of Losses
 Only owner can sue-if third party destroyed or damaged
 Insolvency of buyer & Seller-when seller or buyer become insolvent then
liquidator can take over property
 Suit for price-only seller can sue

CONCEPT OF NEGOTIABLE INSTRUMENT
Negotiable means ‘transferable by delivery,’ and the word instrument means ‘a
written document by which a right is created in favour of some person.’
The term “negotiable instrument” literally means ‘a written document which
creates a right in favour of somebody and is freely transferable by delivery.’
A negotiable instrument is a piece of paper which entitles a person to a certain
sum of money and which is transferable from one to another person by a
delivery or by endorsement and delivery.
NEGOTIABLE
INSTRUMENT ACT 1881

TYPES OF NEGOTIABLE INSTRUMENTS
Negotiable instruments are of two types which are as follows:
 Negotiable Instruments recognized by status:
e.g. Bills of Exchange, Cheque and Promissory Notes.
 Negotiable instruments recognized by usage or customs of trade:
e.g. Bank notes, exchequer bills, share warrants, bearer debentures,
dividend warrants, share certificate.

PROMISSIORY NOTE
According to Section 4,
 “A promissory note is an instrument in writing (not being a bank-note or a
currency-note) containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to, or to the order of, a certain person, or
to the bearer of the instrument.” An instrument is a promissory note if there
are present the following elements:-
 Writing
 Promise to pay :
Case: Mange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court
Unconditional
Case: Roberts Vs Peake
 Money only and a certain sum of money
 Certainties of parties
 Signed by the maker

BILL OF EXCHANGE
According to Section 5,
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.
 A banker’s draft
 A demand draft even if it drawn upon another office of the same bank
 An order issued by a District Board Engineer on Government Treasury for
payment to or order of a certain person

DISHONOUR OF CHEQUES
According to Sec. 138 Dishonour of cheque for insufficiency, etc. of funds in the
account – where any cheque drawn by a person on an account maintained by him
with a banker for payment of any amount of money to another person from out of
that account for the discharge, in whole or in part, of any debt, either because of
the amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from that
account by an agreement made with that bank, such person shall be deemed to
have committed that offence and shall, without prejudice to any other provision of
this Act.

NATURE & MEANING
 An association of like-minded persons formed for the purpose of carrying on
some business or undertaking.
 A company owes its existence either to a special Act of Parliament or to
Company Legislation.
“An association of many persons who contribute money or money’s worth to a
common stock and employ it in some trade or business and who share profit and
loss arising there from.” Lord Justice James
UNIT 4
COMPANIES ACT 1956

CHARACTERISTICS
 Corporate Personality
 Limited Liability
 Perpetual Succession
 Separate Property
 Transferability of Shares
 Common Seal
 Contractual Rights
 Capacity to sue and be sued
 Limitation of Action
 Separate Management
 Termination of its Existence

TYPES OF BUSINESS ORGANISATIONS
NON CORPORATE
 Proprietorship
 Collective Ownership
 HUF
 Partnership
 Partnership at Will
 Joint Ventures
CORPORATE
 Reg. Companies
 Unlimited Companies
 Pvt. Ltd. Companies
 Pub. Ltd. Companies
 Govt. Companies
 Corporation Statutory
 Trust Society

CLASSIFICATION OF COMPANIES
On the Basis of Incorporation
 Chartered Companies
 Statutory Companies
 Registered Companies
On the Basis of Liability
 Unlimited Companies
 Companies limited by Guarantee
 Companies limited by shares
 Companies limited by shares and Guarantee
On the Basis of Membership
 Private Company
 Public Company
 Holding Company
 Subsidiary Company

MEMORANDUM OF ASSOCIATION
 It contains the fundamental rules regarding the constitution of the
company.
 It lays down how the company is going to be constituted and what work it
shall undertake.
 It sets out the constitution of the company.
 It is a foundation on which the structure of the company stands.
 Its purpose is to enable the shareholders, creditors, and those who deal
with the company to know what is the permitted range of its enterprise.
 It defines as well as confines the power of the company

CONTENTS OF THE MEMORANDUM
 Name Clause
 Registered Office / Situation Clause
 Object Clause- main objects and other objects
 Liability Clause- limited by share or guarantee
 Capital Clause.
 Association Clause
DOCTRINE OF ULTRA VIRES
 An act or transaction, which may not be illegal, is beyond company's power
by not being within the object of the Memorandum.
 An act ultra vires the company is incapable of ratification.
 Act which is intra vires the company but outside the authority of directors
may be ratified by the company in proper form.
 The shareholders can ratify an act ultra vires the directors.

ARTICLES OF ASSOCIATION
 Articles are by-laws or rules and regulations for the govern the management
of its internal affairs and conduct of business.
 It also includes regulation contained in Table A of Schedule I.
 Deals with the rights of the members inter se.
 Articles are subordinate to and controlled by Memorandum.
 Unlimited companies, companies limited by guarantee and private companies
must have their own Articles of Associations.
 Must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to Memorandum and duly witnessed.

PROSPECTUS
"Any document described or issued as a prospectus and includes
any notice,
circular,
advertisement, or
other document
inviting deposits from the public or
for the subscription or purchase of any shares in, or debenture of a body
corporate." [(Section 2(36)]

STATEMENT IN LIEU OF PROSPECTUS of
 Promoters are required to prepare a draft prospectus known as statement in
Lieu of Prospectus.
 A copy of it must be filled with the RoC at least three days before any
allotment of shares is made.
 It contains similar particulars as are required for a prospectus.
 No minimum subscription is required to be stated.
 The process of issuing securities through a statement in lieu of prospectus is a
kind of private placement.

SHARE CAPITAL
In relation to a company limited by share it means share capital - in terms of
rupees divided into specified number of shares of a fixed amount each.
The memorandum must state the amount of capital and its various division.
 Nominal, Authorised or Registered Capital
 Issued Capital
 Subscribed Capital
 Called-up Capital
 Un-called Capital
 Paid-up Capital

KINDS OF SHARES
Two classes of Shares [Sec 86 as amended in 2002] -
 Equity Share [Sec 85(2)]
"Equity Share Capital means all share capital which is not preference share capital."
The equity shareholders receive dividend out of profits declared in AGMs.
Dividend declared only after depreciation allowance and payment of preference
shareholders.
Voting right is in proportion to paid-up equity capital.
 Preference Shares [Sec 85(1)]
Preference shares capital is that part of share capital which fulfills following two
conditions-carries preferential right with respect to dividend- fixed amount or at fixed
rate; and carries preferential right with respect to repayment of capital on winding up.

BOARD OF DIRECTORS
"A director includes any person occupying the position of director by whatever name
called." [Section 2(13)].Only individual, and not a body corporate, association or firm,
shall be appointed as director. [Section 253]"An individual who direct, control, manage,
superintend the affairs of the company in the form of the board of directors.“
Professional Directors
 Specialist in different fields of management.
 Income derives principally from sitting fees.
Nominee Directors
 Appointed by FIs, or Banks
 Powerful tool of project supervision, monitoring and control.
Executive Directors
 Is a full time employee of the company.
 May not be members of the board, as such not a director in strict sense.

TYPES OF DIRECTORS
Independent Directors
 Do not have any material pecuniary relationship or transaction with the company.
 Entitle to receive director's remuneration.
Government Directors (Section 408)
 Appointed by the Central Government on the recommendation of the CLB.
 To safeguard the interest of the company or its shareholder or in public interest.
 When the operations of the company are conducted in such a manner as to oppress any
member of the company or in a manner prejudicial to the company.
Whole-time Directors [Section 269(1)]
 Includes a director in the whole time employment of the company.
 Technical director, legal director, works director sales director if appointed on full time
basis.
Executive directors have employment stake in the company. They wield substantial power,
enjoy maximum remuneration, perquisites, fees, commission and allowances.
Part-time directors get only sitting fees for the board meetings attended by them and wield
little or no powers.

QUALIFICATION OF DIRECTORS
According to Sec 274 a person shall not be capable of being appointed as director
if:
found to be of unsound mind;
an un-discharged insolvent;
applied to be adjudicated as an insolvent;
convicted of any offence involving moral turpitude and sentenced for not less
than six months and a period of 5 years has not elapse.
has failed to repay the deposits or interest thereon or redeemed its debentures.
Only individuals can be a director. [Sec 253]

COMPANY MEETINGS
 A company being an artificial person expresses its will or takes its decision
through resolutions passed at regularly convened meeting of the general body
of the shareholders, and the directors.
 The companies Act provide the shareholders a forum of self-protection,
which is general meeting of shareholders.
 The shareholders can use the forum to appoint directors as well as auditors of
their own choice who may safeguard them from the possible manipulation.
 The business of the meeting is conducted in the form of resolutions proposed
and passed.

TYPES OF COMPANY MEETINGS
Shareholders Meetings
 Statutory Meeting under Section 165;
 Annual General Meetings under Section 166;
 Extraordinary General Meetings:
Convened by directors between two AGMs
 Meetings of the Board of Directors.
 Meetings of the Board Committee.
 Class Meetings of Shareholders.
 Meetings of the Debenture holders.
 Meetings of the Creditors.
 Meetings of the Contributories in winding u

THANK YOU

Chanderprabhu Jain College Mercantile Law Notes

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Chanderprabhu Jain College Mercantile Law Notes