This document provides an overview of Indian contract law under the Indian Contract Act of 1872. It defines key terms like what constitutes a contract, agreement, and consideration. The essential elements of a valid contract are also outlined, including offer and acceptance, intention to create a legal relationship, lawful consideration, capacity of parties, free consent, lawful object, certainty of meaning, possibility of performance, and compliance with required legal formalities. Contracts are also classified based on their validity, formation, performance obligations, and other attributes as defined by the Act.

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MGT 201 BUSINESS LAW
Unit I
Indian contract act- 1872
GENERAL PRINCIPLES OF CONTRACT ACT (Sec. 1 to 75 )
INTRODUCTION:-
The law relating to contracts in India is contained in Indian Contract Act, 1872.The Act was passed
by British India and is based on the principles of English Common Law. It is applicable to all the states
of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made
by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts
everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting
parties
(WHY) OR (OBJECT) The basic purpose of contract law is to provide a framework within which
individuals can freely contract. The rule of contract is the Remedies that are available in a court of law
against a person who fails to perform his contact.
Example: commerce and industry as bulk of their business transaction are based on contract.
WHAT IS CONTRACT:-
The term Contract is defined in section 2 (h) of the Indian Contract Act.
Contract 2(h):- An agreement enforceable by Law is a contract.
Other Words: -
Contract = an Agreement + Enforceability
Definition shows that a contract must have the following two elements:
1) An Agreement and
2) An Agreement must be enforceable by law.
Agreement 2(e):- Every promise and set of promises is forming the consideration for each other.
In short, agreement = offer + acceptance.
If one party fails to perform as promised the other party can use the court system to enforce the contract
and recover damages or other remedy.
Essential Elements of a Valid Contract:-
1. Offer and Acceptance: - In order to create a valid contract, there must be a 'lawful offer' by one
party and 'lawful acceptance' of the same by the other party. Parties are
Offeror –The party who make an offer to enter into a contract
Offeree-The party to whom an offer to enter into a contract is made
Offer
Acceptance
Offeror makes an offer Offeree has the power
To the offeree to accept the offer and create a contract
2. Intention to Create Legal Relationship: - In case, there is no such intention on the part of
parties, there is no contract. Agreements of social or domestic nature do not contemplate legal
relations.
Example : A husband promised to pay his wife a house hold allowance of rs 10000 per months. Later the
parties separated and the husband failed to pay the amount. The wife sued for the allowance. Held
agreements such as these were outside the realm of contract.
3. Lawful Consideration: - Consideration has been defined in various ways. Consideration means
an advantage or benefit moving from one party to the other. It is the essence of a bargain. In
simple words consideration is known as quid pro-quo or something in return. [section 2(d) 23 and
25 ]
Offeror Offeree

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4. Capacity of parties:-The parties to an agreement must be competent to contract. If either of the
parties does not have the capacity to contract, the contract is not valid. According the following
persons is incompetent to contract. (secs. 11 and 12 )
a) Minority,
b) Persons of unsound mind, lunacy, idiocy, drunkenness and
c) persons disqualified by law to which they are subject.
5. Free Consent:- 'Consent' means the parties must have agreed upon the same thing in the same
sense. According to Section 14, Consent is said to be free when it is not caused by-
a) Coercion, or
b) Undue influence, or
c) Fraud, or
d) Mis-representation, or
e) Mistake.
An agreement should be made by the free consent of the parties.
6. Lawful Object (sec. 23) :- The object of an agreement must be valid. Object has nothing to do
with consideration. It means the purpose or design of the contract. Thus, when one hires a house
for use as a gambling house, the object of the contract is to run a gambling house. The Object is
said to be unlawful if-
a) It is forbidden by law;
b) it is of such nature that if permitted it would defeat the provision of any law;
c) it is fraudulent;
d) it involves an injury to the person or property of any other;
e) the court regards it as immoral or opposed to public policy.
7. Certainity of Meaning:- According to Section 29,"Agreement must be certain and not vague or
indefinite”. If it is vague and it is not possible to ascertain its meaning it cannot be enforced.
Example :
8. Possibility of Performance: - If the act is impossible in itself, physically or legally, if cannot be
enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such
Agreements is not enforceable.
9. Not Declared to be void or Illegal (sec 24 to 30 ):-The agreement though satisfying all the
conditions for a valid contract must not have been expressly declared void by any law in force in
the country. Agreements mentioned in Section 24 to 30 of the Act have been expressly declared
to be void for example agreements in restraint of trade, marriage, legal proceedings etc
10. Legal Formalities (sec . 10):- An oral Contract is a perfectly valid contract, expect in those cases
where writing, registration etc. is required by some statute. In India writing is required in cases of
sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum and
articles of association of a company, etc. Registration is required in cases of documents coming
within the scope of section 17 of the Registration Act.

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Types of Contracts :-
Classification of contracts
Classification according to validity or enforceability:-
a) Valid contract: A contract which satisfies all the conditions prescribed by law is a valid contract.
E.g. X offers to marry y. y accepts X offer. This is a valid contract. Section 10 of indian
Contact Act like :-Lawful offer and acceptance ,free consent,etc
For Example :- A ask B if he wants to buy his bike for Rs.10,000.B agrees to buy bike. It is agreement
which is enforceable by law. Hence, it is contract
b) Void Contract: The term void contract is described as under section 2(j) of I.CA, 1872, A
contract which cases to be enforceable by law becomes void when it ceases to be enforceable. In
other words, a void contract is a contract which is valid when entered into but which subsequently
became void due to impossibility of performance, change of law or some other reason. E.g. X
offers to marryY,Y accepts X offer. Later onY dies this contract was valid at the time of its
formation but became void at the death ofY. 
c) Void Agreement: According to Section 2(g), an agreement not enforceable by law is said to be
void. Such agreements are void- ab- initio which means that they are unenforceable right from the
time they are made.
E.g. in agreement with a minor or a person of unsound mind is void –ab-initio because a mino or
a person of unsound mind is incompetent to contract.
For Example X supplies Luxury goods to Y a minor for a consideration of Rs.10,000.Y refused to
make payment .X cannot enforce the agreement in the court of law since the agreement is void
because Y is minor
d) Voidable contract to section 2(i) : According of the Indian contract act, 1872, A voidable contract
is one which can be set aside or avoided at the option of the aggrieved party. Until the contract is
set aside by the aggrieved party, it remains a valid contract. For e.g. a contract is treated as
voidable at the option of the party whose consent has been obtained under influence or fraud or
misinterpretation.
E.g. X threatens to kill Y, if the does not sell his house for Rs. 1 lakh to X.Y sells his house to X
and receives payment. Here, Y consent has been obtained by coercion and hence this contract is
void able at the option of Y the aggrieved party.
For Example :- X promise to sell his scooter to Y for Rs 500000.however ,the consent X has been
procured by Y at a gun point .X is an aggrieved party and the contract is voidable at his point
e) Illegal Agreement: An illegal agreement is one the object of which is unlawful. Such an
agreement cannot be enforced bylaw.Thus, illegal agreements are always void – ab- initio (i.e.
void from the very beginning) e.g. X agrees to y Rs. 1 lakhY kills Z.Y kill and claims Rs. 1
lakh.Y cannot recover from X because the agreement between X andY is illegal and also its
object is unlawful.
Enforceability
a) Valid contract
b) Void contract
c) Void Agreement
d) Voidable
Contract
e) Illegal
Agreement
f) Unenforceable
contract
Formation
a) Express
b) Implied
/Tactic
c) Quasi/
Constructive
d) E.com
Performance
a) Executed
contract
b) Executory
Contract
Obligation
a) Unilateral
b) Bilateral

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Unenforceable contract: It is contract which is actually valid but cannot be enforced because of some
technical defect (such as not in writing, under stamped). Such contracts can be enforced if the technical
defect involved is removed.
Classification according to Formation :-
a) Express contract: Express contract is one which is made by words spoken or written.
Example No. 1: X says toY, will you buy a car for Rs. 100000? Y says to X, I am ready to buy you car for
Rs. 100000. It is an express contract made rally.
Example No. 2: X writes a letter to Y, I offer to sell my car for Rs. 100000 to you. Y send a letter to x, I
am ready to buy you car for Rs. 100000. It is an express contract made in writing.
An implied / tactic contract :- is a contract which is made otherwise than by the words spoken or
written. It came into existence on account of an act or conduct of the parties.
Example: - A stops a taxi by waving his hand and boards it. There is an implied contract that A will pay
the prescribed fare on reaching his destination. Withdrawal of cash from the ATM of a bank.
Quasi or constructive contract: It is a contract in which there is no intention either side to make a
contract, but the law imposes contract. In such a contract eights and obligations arise not by any
agreement between the practice but by operation of law.
E- Contract :- An e-contract is a contract made through the electronic mode.
Classification according to Performance / Obligation :- Executed Contract :- In an executed contract
both the parties have performed their promises under a contract. It is a contract where, under the terms of
contract, nothing remains to be done by the parties. Example A sells his car to B for 1 lakh. A delivered
the car and B paid the price.This is an executed contract.
Executory Contract :- In an executory contract both the parties are yet to perform their promises. In
other words, it is a contract where parties have to still perform their obligation in the future. Example A
sells his car to B for 1 lakh. If A is still to deliver the car and B is yet to pay the price, it is an executory
contract
Bilateral Contract :- In a bilateral contract both the parties have to perform their respective promises. It
is also known as a two-sided contract. Here, the obligation is outstanding on the part of both the parties.
example :- X promises y to pay rs 1000 for his cycle. Neither of them has performed his obligation.
Unilateral Contract :- A unilateral contract is also known as a one-sided contract. It is a contract where
only one party has to perform his promise. In such a contract, the promise on one side is exchanged for an
act on the other side.After the formation of a unilateral contract, only one party remains liable to perform
his obligation because the other party has already performed his obligation. Example Alap promises to
pay 1000 to anyone who finds his lost cellphone. Bansi finds and returns it to Alap. From the time Bansi
found the cell phone, the contract came into existence. Now Alap has to perform his promise, i.e., the
payment of 1000.
The Indian Contract Act, 1872
Nature of Contract The fabric of modern industrial society is woven around economic
relationships. The relational integration and determination of mutual rights and obligations are dependent,
to a great extent, on ex contractum terms. Contracts arising out of economic and social relationships. Such
relations are either contractual or akin to a contract. The market functions on the very premise of effective
functioning of contractual relationship.
What is a contract A written or spoken agreement intended to be enforceable by law. An agreement
enforceable by law is a contract. [Section 2(h) ] A contract is an agreement made between two or more
parties, which the law will enforce. Contract is a method through which individuals make law for
themselves by creating rights and obligation ex contractas.
Every agreement and promise enforceable at law is a contract. Pollock.
A legally binding agreement between two or more persons by which rights are acquired by
one or more to acts or forbearances on the part of the others. Sir William Anson. An agreement creating
and defining obligations between the parties. Salmond

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Proposal, Acceptance, Promise & Agreement
When a person signifies to another his willingness to do, or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or abstinence, he is said to make a proposal. [Sec 2(a)] A
proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto.
A proposal when accepted becomes promise. [Sec 2(b)] Every promise and every set of promises forming
consideration for each other is a an agreement. [(Sec 2(e)]
Section 10 All agreements are contracts if –
They are made by the free consent of the parties, competent to contract, for a lawful consideration and,
with a lawful object, and are not expressly declared to be void.
Classification of Contracts
a) On basis of Formation
b) Express Contract
c) Implied contract –
d) Quasi Contract
e) On basis of Performance
f) Executed Contract
g) Executory Contract
On basis of Validity Voidable Contracts Void agreement Void Contract Valid Contract Illegal Agreements
Unenforceable contract (technical defects)
Essential Elements of Contract
Offer Acceptance Consensus ad idem Legal enforceability Lawful consideration Capacity of parties Free
consent Lawful object Agreement not declared void Certainty and possibility of performance Legal
formalities
Elements of Offer It must be made by one person to another person.
It must be an expression of readiness or willingness to do or to abstain from doing something. It must be
made with a view to obtain the consent of that other person. Terms of offer must be definite,
unambiguous and certain. Offer must be communicated. Offer not to contain a term the non-compliance
of which may amount to acceptance. A statement of price is not an offer.
Types of Offer Express Offer – by words written or spoken.
Implied Offer – By conduct or circumstances. Specific Offer- Made to a specified or definite person.
General Offer- Made to public at large
An offer must be distinguished from
A declaration of intention and an announcement. An invitation to make an offer or do business. A
statement of price. [Harvey v. Facey, (1893)]
Tenders A Definite Offer
When tenders are invited for the supply of specified goods or services, each tender submitted is an offer.
The party inviting tender may accept any tender he chooses thereby bringing about a contractual
relationship with the person (tender) so chosen.
Tenders A Standing Offer
Where goods or services are required continuously over a certain period, a trader may invite tenders as a
standing offer which is a continuing offer. The effect is that as and when goods or services are required,

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an order is placed with the person whose tender has been accepted. However, at each such time a distinct
contract is made.
Special terms in the contract
A term limiting or excluding the liability of offeror. The special terms should be presented in such a
manner that a reasonable man can become aware of it before a contract is entered into. The fact that he
did not or could not read does not alter the legal position. If the conditions are contained in a voucher or
receipt for payment of money, they do not bind the person receiving the voucher or receipt.
Legal Rules as to Acceptance
Must be absolute and unqualified. Must be communicated to the offeror. Must be according to the mode
prescribed or usual and reasonable mode. Must be given within a reasonable time. Cannot precede an
offer. Must be given by the party to whom the offer is made. Must be given before the offer lapse or is
withdrawn. It cannot be implied from silence.
Revocation or lapse of Offer (Sec. 6)
By communication of notice of revocation. By lapse of time. By non-fulfillment by the offeree of a
condition precedent to acceptance. By death or insanity of the offeror. If a counter offer is made. If an
offer is not accepted according to the prescribed or usual mode. If the law is changed.
Consideration Consideration is some kind of an exchange between the parties to an agreement.
Consideration is the price for which the promise of the other is bought and the promise thus given for
value is enforceable. Pollock A valuable consideration in the sense of the law may consist either – in
some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other.
Definition When at the desire of the promise, the promise 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 act
or abstinence or promise is called a consideration.” [Section 2(d)]
Legal Rules as to Consideration
It must move at the desire of the promisor. It may move from promisee or any other person. It may be an
act, abstinence or forbearance. It may be past, present or future. It need not be adequate. It must be real
and not illusory. It must be something which the promisor is not already bound to do. It must not be
illegal, immoral or opposed to public policy.
Capacity to contract Every person is competent to contract who-
Is of the age of majority according to the law to which he is subject. Is of sound mind. Is not disqualified
from contracting by any law to which he is subject. (Sec 11)
The position of Minor’s Agreements
An agreement with or by minor is void ab initio No Estoppel Limited application of Restitution Contracts
for the benefit of Minor No ratification of agreement on attaining majority No specific performance
Cannot be adjudged insolvent He can be an agent Liability of Minor’s parents and guardians Minor’s
liability in Tort Minor as a Partner Minor as a Shareholder Liability of minor for necessities supplied to
him
Other Persons Disqualified by Law
Alien Enemy Foreign Sovereigns and Ambassadors A Company and a Corporations Convicts Insolvents
Free Consent Consent means an act of approval or assenting to an offer. Two or more persons are said to
consent when they agree upon the same thing in the same sense. Consent involves ad idem i.e. identity of
mind about the subject matter of contract. A mere consent is not enough, it should be free and voluntary.
Not to be caused by any vitiating factors given u/s 14.

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Section 14 Consent is said to be free when it is not caused by –
a) Coercion.
b) Undue influence.
c) Fraud.
d) Misrepresentation.
e) Mistake.
The contract is said to be voidable at the option of the party whose consent was not free. [Sec. 19]
Presumption of Domination
Master and Servant, Parent and Child, ITO and the Assessee, Trustee and Beneficiary, Spiritual Guru and
Disciple, Solicitor and Client, Guardian and Ward, Medical Attendant and Patient.
Agreements Opposed to Public Policy
While a contract serves private interest it should not conflict with any other private or public interests.
Public interest policies invalidate any private agreement. Section 23 provides that the consideration or
object of an agreement is lawful unless – it is forbidden by law, is of such a nature that if permitted, it
would defeat the provision of any law, or is fraudulent, or involves injury to the person or property of
another, or the courts regard it as immoral or opposed to public policy.
Trading with enemy. Agreements interfering with the administration of justice –
a) Interference with justice – using improper influence over judges or officers.
b) Stifling Prosecution – by way of an understanding not to prosecute an offender.
c) Maintenance and Champerty – financial or other assistance to bring or defend a lawsuit when the
person has no legal interest. Trafficking in public offices or titles. Agreement creating interest opposed to
duty.
Agreements restricting personal liberty.
Agreements in restraint of marriage. Agreement to commit a crime. Agreements in restraint of trade.
Agreements in restraint of legal proceedings a) Agreement restricting enforcement of rights b) Agreement
Limiting the Period of Limitation.
Exceptions – Restraint of trade
Sale of Goodwill
i) the restriction must relate to the same business;
ii) the restriction must be within a specified local limit;
iii) the restriction must be for the time so long as the buyer or any person, carries on a like business in the
specified local limits;
iv) the specified local limit must be reasonable having regard to the nature of the business.
Trade Combination Trade combination formed to regulate the business or to fix prices are not void, but
trade combinations to create monopoly or cartel, and which are against the public interest are void.
Employment Contracts A clause to serve the employer for a stipulated period is a valid clause if
reasonable. A clause preventing employee from accepting similar engagement during the employment is
also valid. A clause preventing the employee from accepting a similar engagement after the termination –
a) if the restraint is to protect an employer against making use of trade secret it is valid.
b) if the restraint is intended to serve any other purpose, like to avoid competition, it is not valid.
Performance of Contract
Performance of a contract is a mode of discharge of the contract. Performance of contract takes place
when the parties to the contract fulfill their respective obligations under the contract. The parties to a
contract must either perform or offer to perform their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act, or of any other law.[Sec 37]

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Requisite of a valid tender
It must be unconditional. It must be of the whole obligation. It must be made at a proper time and place. It
must be made to the proper person. It may be made to one of the several joint promisees. In case of tender
of goods it must give a reasonable opportunity to the promisee for inspection of the good. In case of
tender of money the debtor must make a valid tender in the legal tender money.
Performance and Demand of Performance
By promisor himself. (S. 40) Promisor’s Agent. (S. 40) Legal representatives. Third person. (S 41) Joint
promisors. Promisee Legal Representative Third Party Joint promisee
Discharge of Contract A contract is said to be discharged when it ceases to operate. The rights and
obligations created by it comes to an end. A contract may be discharged - By Performance Actual
performance – doing what the parties intended to do when they entered in to the contract. Attempted
performance or tender – It is the legitimate attempt on the part of the promisor to perform his obligations
By Mutual Agreement or Consent
Novation Rescission Alteration Remission Waiver Merger
By operation of Law By death. By merger. By insolvency.
By unauthorized alteration of terms of a written contract. By rights and liabilities becoming vested in the
same person.
By Impossibility of Performance
Impossibility existing at the time of agreement – Known to the parties – the agreement is void ab initio.
Unknown to the parties – the agreement is void on the ground of mutual mistake. Impossibility arising
subsequent to the formation of the contract.
By Supervening Impossibility
Destruction of subject matter of contract Non-existence or non-occurrence of a particular state or things
Death or incapacity for personal services Change of law or stepping in of a person with statutory authority
Out break of war
By breach of contract Actual Breach a) On the due date of performance.
b) During the course of performance of contract. i) Express Repudiation. ii) Implied Repudiation.
Anticipatory Breach a) By express renunciation. b) Making the performance of promise become
impossible by doing some act.
Remedies for Breach of Contract
When the contract is broken, the injured party has one or more of the following remedies: Rescission of
the contract. Suit for damages. Suit upon quantum meruit. Suit for specific performance. Suit for
injunction.
Rescission of the contract
Rescission means a right not to perform an obligation. In case of breach of contract the promisee need not
perform his obligation, he is not only discharged from his liabilities but also he is entitled to claim
compensation for damages which he might have sustained due to non performance of the contract.
[Section 39]
Suit for damages Damages are monetary compensation allowed to the injured party for the loss suffered.
The object of awarding damages is not to punish the party at fault but to make good the financial loss
suffered by the injured party due to breach of contract.

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Quantum Meruit When an agreement is discovered to be void. [Sec 65]
When something is done without any intention to do gratuitously. [Sec 70] When there is an express or
implied contract to render service but no agreement as to remuneration. When the completion of the
contract has been prevented by the act of the other party to the contract. When a contract is divisible.
When an indivisible contract is completely performed but badly.
Specific Performance The remedy of Specific Performance is in the nature of equitable remedies based on
the principles of equities. Among the remedies are specific performance, injunction, rectification and
cancellation of instruments and rescission of contract. In the discretion of the court, specific performance
may be enforced: where there is no standard for ascertaining the actual damage caused by the non-
performance; or where compensation in money for the non-performance would not afford adequate relief.
Suit for Injunction It is a judicial process whereby a party to the contract is ordered to refrain from doing
a particular act or thing, or to do a particular act or thing. It a discretionary remedy and it acts only in
personam. Injunction means a prohibitory order of the court to a person to not to do a particular act he has
promised not to do under a contract, or to do an act which he has promised, under a contract, to do.
Quasi Contracts Sometime a person may receive a benefit which the law regards another person as better
entitled, or for which the law considers he should pay to the other person, even though there is no contract
between the parties. Such relationships are called quasi contracts. Because although there is no contract or
agreement between the parties, they are put on the same pedestal as though there was a contract between
them. This is based on the principles of equity.
Kinds of quasi contracts
Right to recover the price of necessities supplied. [Sec 68] Payment by an interested person. [Sec 69]
Right to recover for non-gratuitous Act. [Sec 70] Responsibility of the finder of Goods. [Sec 71] When
money is paid or things are delivered by mistake or under coercion. [Sec 72]
Contracts of Indemnity
In a contract of indemnity one party promises to compensate the other party against loss suffered by the
latter. Section 125 confines itself to losses occasioned due to an act of promisor or due to act of any other
persons. 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. [Sec 124]
If a person who is interested in the payment of money which another is bound to pay and pays it, he is
entitled to be indemnified. [Sec 69] The surety has a rights to claim indemnity from the principal debtor
for sums he has rightfully paid towards the guarantee. [Sec 145] The principal is liable to indemnify the
agent for all amount paid by him during the exercise of his authority. [Sec 222]
Rights of indemnity holder [Sec 125]
All damages that he may be compelled to pay in a suit in respect of any matter to which the promise to
indemnify applies. All cost that he may be compelled to pay in bringing or defending such suit. All sums
which he may have paid under the terms of any compromise of any such suit.
Contract of Guarantee A contract of guarantee is essentially a contract to perform the promise or
discharge the liability of a third person in case of his default. The basic function of a contract of guarantee
is to enable a person to get a loan, or goods, or an employment. [Sec 126]
Essential features of guarantee
Surety. Principal Debtor. Creditor. Not be vitiated by incapacity, flaw in consent, and unlawful character
of the agreement. May be oral and it may either be expressed or implied. Concurrence of parties.
Existence of Principal debt. Essential of a valid contract like Consideration and Free consent.
Extent of surety's liability
The liability of surety is coextensive with that of the principal debtor. [Sec 128] The Surety may limit his

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liability by an express agreement. The liability of the surety arises immediately when a default is made by
the principal debtor. The creditor can sue the surety without suing the principal debtor. If the guarantee is
conditional upon another person joining it as co-surety, the guarantee is not valid if that person does not
join. [Sec 144]
Kinds of Guarantees Specific guarantee – extends to a specific transaction or a single debt. The liability
of surety comes to an end when the guaranteed debt is duly discharged. Continuing guarantee –extends to
a series of transaction. This kind of guarantee is intended to cover a number of transactions over a period
of time. Whether the guarantee is continuing guarantee or not is a question of intention, subject matter &
circumstance.
Revocation of Continuing Guarantee
By Notice By Death of Surety By Novation. (Sec 62) By variance in the terms of contract. (Sec 133) By
release or discharge of principal debtor. By compounding with the principal debtor. (Sec 135) By
creditor's act or omission imparting surety's eventual remedy. (Sec 139) By loss of security. (Sec 142)
Discharge of Surety By Revocation of Guarantee
Discharge by conduct of creditor Variance in the terms of the contract Release or discharge of principal
debtor Compounding by creditor with principal debtor Creditor compounding with principal debtor
Creditor promising to give time to the principal debtor Creditor agreeing not to sue the debtor.
By impairing surety's remedy
Loss of security by the creditor Discharge of surety by invalidation of contract Guarantee obtained by
misrepresentatio Guarantee obtained by concealment Guarantee on contract that creditor shall not act on it
untill a co-surety joins Failure of consideration
Finder of Goods A person who finds goods belonging to another and takes them into his custody, is
subject to the same responsibilities as a bailee. [Sec 71] He must take reasonable care. He must not use
the goods for his own purpose. He must not mix goods with his own. He must try to find out the owner of
the goods.
Rights of Finder of Goods
Right of lien. Right to sue for rewards. Right of sale.
Contract of Agency An agent is a person employed to do any act for another, or to represent another, in
dealings with third persons. The person for whom such act is done or who is so represented, is called the
principal." Whatever the principal can do himself, he may get the same done through an agent,; and What
the principal does by another, he does it himself. The acts of the agents are the acts of the principal.
Creation of Agency By Agreement – - Express Agreement.
Implied Agreement. Implied agency includes the following – Agency by Estoppel. Agency by holding
out. Agency by necessity – Agent acceding his authority in an emergency. A person entrusted with
another's property. Husband and Wife. Agency by ratification.
Essentials of a valid ratification
The agent must act for an identifiable principal. The principal must be in existence. The principal must
have contractual capacity. Ratification must be with full knowledge of facts. Ratification must be done
within a reasonable time. The act to be ratified must not be void, illegal or ultra vires. The whole
transaction must be ratified. Ratification can be of the acts the principal had power to do. Ratification
should not put a third party to damages. Ratification relates back to the date of the act.
Duties of Agents To carry out the work according to the directions of principal. To carry out the work
with reasonable care, skill and diligence. To render proper accounts. To communicate with the principal
in case of difficulty. Not to deal on his own account. To pay sums received for the principal.

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To protect the interest of the principal in case of his death or insolvency.
Not to use information obtained in the course of agency against the principal. Not to make secret profit.
Not to set up an adverse title. Not to put himself in a position where his interest and duty conflict. Not to
delegate authority.
Rights of Agents Right of retainer. Right to receive remuneration.
Right of lien. Right of indemnification. Right of compensation. Right of stoppage in transit.
Delegation of Authority
Delegatus non potest delegar A Sub-agent is a person employed by and acting under the control of the
original agent and the business of the agency. [Section 191] A agent may appoint a sub-agent if - There is
a custom of trade. The nature of work is such that sub-agent is necessary. Where the principal is aware of
the intention of the agent to appoint a sub-agent. Where unforeseen emergencies arise rendering. Where
the act to be done is purely ministerial. Where the principal permits appointment of sub-agent.
Effect of appointment of sub-agent [Section 192 and 193]
Where a sub-agent is properly appointed, the following effect follows : the principal is bound by the acts
of the sub-agent; the agent is responsible to the principal for the acts of the sub-agent; the sub-agent is
responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong.
Where the sub-agent is not properly appointed, the effect will be :
the principal is not bound by the acts of sub-agent; the original agent is responsible for the acts of the sub-
agent both to the principal and to he third party; the sub-agent is responsible for his acts to the original
agent but not to the principal even in case of fraud or willful wrong.
Position of Principal and Agent in relation to third parties
Named principal – Acts of the agent are the acts of the principal. When the agent exceed his authority
Notice given to agent as notice to principal. Principal inducing belief that agent's unauthorised acts were
authorised. Misrepresentation or fraud of agent. Unnamed principal
Undisclosed principal –
The position of Principal – contracting party may sue either the principal or the agent or both. The
principal may also require the performance of contract. The position of agent – as between the principal
and agent, the agent has all the rights of an agent as against the principal; but as regards the third party, he
is personally liable on the contract.
The position of third parties –
the third party may elect to sue either the principal or the agent or both. If the principal discloses himself
before the contract is completed, the other party may refuse to fulfill the contract on the ground of
mistake of identity of party. The third party can also claim a right of set-off against the agent.
Personal Liability of an Agent - Exceptions [Sec 230]
When the contract expressly provides. When the agent acts for a foreign principal. When he acts for an
undisclosed principal. When he acts for a principal who cannot be sued. Where he signs a contract in his
own name. Where he acts for a principal not in existence. Where he is liable for breach of warranty of
authority. Where he receives or pays money by mistake or fraud. Where his authority is coupled with
interest. Where trade usage or customs makes him personally liable.

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Termination of agency [Sec 201]
Termination of agency by act of parties a) Agreement. b) Revocation by the principal. c) Revocation by
agent. Termination of agency by operation of law a) Performance of contract. b) Expiry of time. c) Death
or Insanity. d) Insolvency. e) Destruction of subject matter. f) Principal becoming an alien enemy. g)
Dissolution of a company.
Law of contracts in India defines Contract as an agreement enforceable by
law which offers personal rights, and imposes personal obligations, which the law protects and enforces
against the parties to the agreement. The general law of contract is based on the conception, which the
parties have, by an agreement, created legal rights and obligations, which are purely personal in their
nature and are only enforceable by action against the party in default.
Section 2(h) of the Indian Contract Act, 1872[2] defines a contract as "An agreement enforceable by law".
The word 'agreement' has been defined in Section 2(e) of the Act as ‘every promise and every set of
promises, forming consideration for each other’
Law of Contract and Contribution of Lord Denning:
Lord Denning was perhaps the
greatest law-making judge of the century and the most controversial. His achievement was to shape the
common law according to his own highly individual vision of society. Lord Denning was one of the most
celebrated judges of his time. He is popular as a dissenting judge.
Lord Alfred Thompson Denning (1899-1999) was a Populist English judge whose career
spanned 37 years. He was known as a fighter for the underdog and a protector of the little man's rights
against big business. He served for 20 years as the head of the Court of Appeals, one of the most
influential positions in the English legal system. Denning was a controversial judge who was often the
dissenting voice on the bench. His decisions were based more on his religious and moral beliefs than the
letter of the law and he was often criticized for his subjectivity. Denning retired from the bench in 1982
under a cloud of controversy regarding some racially insensitive views that he published. Denning
continued to publish books during his retirement and died at the age of 100....
Validity & formation of a Contract:
According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining
the obligations between two or more parties" For the formation of a contract the process of proposal or
offer by one party and the acceptance thereof by the other is necessary. This generally involves the
process of negotiation where the parties apply their minds make offer and acceptance and create a
contract.
Standard Form Contracts:
The law of contract has in recent time to face a problem, which is assuming new dimensions. The
problem has arisen out of the modern large scale and widespread practice of concluding contracts in
standardized form. People upon whom such exemption clauses or standard form contracts are imposed
hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company
to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of
exempting the company from all liability under contract. It is necessary and proper that their interests
should be protected. The courts have therefore devised some rules to protect the interest of such persons

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Post-Termination non-compete clauses in employment contracts:
Indian courts have consistently refused to enforce post-termination non-compete clauses in employment
contracts, viewing them as “restraint of trade” impermissible under Section 27 of the Indian Contract Act,
1872 (the Act), and as void and against public policy because of their potential to deprive an individual of
his or her fundamental right to earn a livelihood
Contract- II: Bailment:
Contracts of Bailment are a special class of contract. These are dealt within Chap. IX from S.148 to 181
of the Indian Contract Act, 1872. Bailment implies a sort of one person temporarily goes into the
possession of another. The circumstance in which this happens are numerous. Delivering a cycle, watch
or any other article for repair, delivering gold to a goldsmith for making ornaments, delivering garments
to a drycleaner, delivering goods for carriage, etc. are all familiar situations which create the relationship
of ‘Bailment’.
A Study of Contract Labour (Regulation and Abolition) Act, 1970:
Contract labourers also suffer from inferior labour status, casual nature of employment, lack of job
security and poor economic conditions. It was also observed that in some cases the contract labourers did
the same work as the workers directly employed by the industrialist but were no paid the same wages and
the same working conditions. This practice of contract labour has also lead to the exploitation of these
labourers as they are not employed directly under the employer. This practice of exploitation was and still
is very much prevalent in India, therefore to encounter such problem and also to regulate the conditions of
these labourers the Govt. passed an Act called the Contract Labour (Regulation and Abolition) Act, 1970..
Contract Labour:
Basic instinct. Hearing the concept of labour, what strikes the minds of the layman is the name sakingly
clad men and women who work at construction sites, factories and alongside the roads, working in the
scorching sun and pitiful conditions. Does it ever come to the minds of the general public that these
labourers have a huge set of laws governing and safeguarding their rights ? yes. Probably some of us do
know about labour laws. Ever given a second thought about the implementation of these laws and
regulations which are painstakingly formulated? Not that they are not followed at all but come on! We’re
aware of the scene here in our country
E-Contracts:
It’s an undisputed fact that E-Commerce has become a part of our daily life. One such justification for the
popularization of E-Commerce would be immoderate technological advancement. E-Commerce, as the
name suggests, is the practice of buying and selling goods and services through online consumer services
on the internet. The ‘e’ used before the word ‘commerce’ is a shortened form of ‘electronic’. The
effectiveness of E-Commerce is based on electronically made contracts known as E-Contracts. Although
E-Contracts are legalized by Information Technology Act but still majority feels insecure while dealing
online. The reason being lack of transparency in the terms & conditions attached to the contract and the
jurisdiction in case of a dispute that may arise during the pendency of a transaction with an offshore site
Specific performance of Contracts:
Specific performance is equitable relief, given by the court to enforce against a defendant, the duty of
doing what he agreed by contract to do. Thus, the remedy of specific performance is in contrast with the
remedy by way of damages for breach of contract, which gives pecuniary compensation for failure to

14. 14
carry out the terms of the contract. Damages and specific performance are both, remedies available upon
breach of obligations by a party to the contract; the former is a ‘substitutional’ remedy, and the latter a
‘specific’ remedy. The remedy of specific performance is granted by way of exception.
The Contract Labour (Regulation And Abolition) Act, 1970:
The Object of the Contract Labour Regulation and Abolition) Act, 1970 is to prevent exploitation of
contract labour and also to introduce better conditions of work. A workman is deemed to be employed as
Contract Labour when he is hired in connection with the work of an establishment by or through a
Contractor. Contract workmen are indirect employees. Contract Labour differs from Direct Labour in
terms of employment relationship with the establishment and method of wage payment.
Regulation of Contract Labour:
Contract Labour is one of the acute form of unorganized labour. Under the system of contract labour
workers may be employed through contractor on the contract basis. Workmen shall be deemed to be
employed as contract labour 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. In this class of labour the contractors hire men (contract labour) who do the work on the
premises of the employer, known as the principal employer but are not deemed to be the employees of the
principal employer. The range of tasks performed by such contract workers varies from security to
sweeping and catering and is steadily increasing. It has been felt, and rightly too, that the execution of a
work on contract through a contractor who deployed the contract labour was to deprive the labour of its
due wages and privileges of labour class.
Doctrine of Frustration & Force-Majeure Clause:
The requirements of Force-Majeure are:
(a) It must proceed from a cause not brought about by the defaulting party’s default.
(b) The cause must be inevitable and unforeseeable.
(c) The cause must make execution of the contract wholly impossible.
The Calculation of Damages in EPC Contracts in India:
The engineering & construction industry, especially that in India, is dynamic and highly volatile, making
it susceptible to tremendous amounts of litigation and other forms of alternative dispute resolution. The
rapid and substantial growth in the magnitude of this industry has resulted in the increased need for
information about the rights and obligations of the various players involved in the execution of a
particular work of construction. It has become essential that proper attention is given to assert one’s rights
and discharge one’s obligations as laid down by the law and also by a correct understanding of the
meaning and interpretation of the terms of the contract governing such relationships, as otherwise the
basis of estimates and calculations made will become infructuous
Liquidated Damages:
The Indian Contract Act, 1872, provides a basic structure of the law of contract in India, its enforcement,
various provisions regarding non-performance and the breach of contract. This report is aimed to
highlight provisions regarding liquidated damages in case of the breach of the contract and to bring about
a comparative study between India and England regarding it. Thus, before knowing what exactly
liquidated damages are, it is important to understand the consequences of breach of contract and the
damages awarded in case of breach. A party who is injured by the breach of a contract may bring an
action for damages and Damages means compensation in terms of money for the loss suffered by the

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injured party. Thus, in contract when these damages are awarded it is known as liquidated damages
Privity of contract and third party beneficiary in a contract:
The doctrine of privity of contract means that only those involved in striking a bargain would have
standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a
contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries
have been allowed to recover damages for breaches of contracts they were not party to. There are two
times where third party beneficiaries are allowed to fall under the contract. The duty owed test looks to
see if the third party was agreeing to pay a debt for the original party. The intent to benefit test looks to
see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised
performance. Any defense allowed to parties of the original contract extend to third party beneficiaries[1].
A recent example is in England, where the Contract (Rights of Third Parties) Act 1999 was introduced
Contract Ratification:
Ratification is in law equivalent to previous authority it may be expressed or it may be affected impliedly
by conduct.[1] Section 196 and 197 of the act show that an act done by person who is not authorized to do
it, but who purports to act as an agent for another person, can retrospectively ratified by such other
person. From this it follows logically, that such an act on the part of the person purporting to act as agent
is not void but voidable. If it is not ratified it becomes void but if it is ratified it will be validated.
Relevance of Quasi-Contracts:
There are certain situations wherein certain persons are required to perform an obligation despite the fact
that he hasn’t broken any contract nor committed any tort. For instance, a person is obligated to restore
the goods left at his home, by mistake, and keep it in good condition. Such obligations are called quasi-
contracts
Choice of law by the parties to the contract:
In this era of globalization where a contract contains one or more foreign elements, the difficult and
complicated question in proceeding that arises is that of ascertaining its applicable law. Such difficulty
stems from the multiplicity and diversity of connecting factors and each of them may arise in a different
jurisdiction for instance the place where the contract was made; the place of performance; the place of
business of the parties; the place of payment; the currency of payment; domicile or nationality o the
parties and so on. So to avoid this situation parties are granted with the freedom to select the law to
govern their contract under the provisions of Rome convention. The inclusion of a choice of law clause is
such an everyday matter in international contracts that its absence would be to ignore commercial realities
E-contracts & issues involved in its formation:
With the advancements in computer technology, telecommunication and information technology the use
of computer networks has gained considerable popularity in the recent past, computer networks serve as
channels between for electronic trading across the globe. By electronic trading we don’t just mean the use
of computer networks to enter into transaction between two human trading partners by facilitating a
communication but electronic trading or electronic commerce also means those contracts which are
entered between two legal persons along with the aid of a computer program which acts as an agent even
when it has no conscious of its own but also by initiating it

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Standard Form Contract:
The Law of Standard Form Contracts rests on intuitions of the common mass. This research paper
explores these intuitions and examines intended consumer behavior on common contracting contexts.
Firstly, the research paper focuses on the need of Standard Form Contracts and its justification. After the
clear explanation of the term and its use in the practical world, the focus shifts to the legal issue, as to
what are the problems with the issuance of Standard Form Contracts on a large scale, and how it can
prove to be of exploitative nature. Further, the paper discusses the basic tendency of the consumers
towards the acceptance of the Standard Form Contracts, the reasons for such acceptance and how the
party issuing the Standard Form Contract can take advantage of the consumer’s ignorant behaviour
Section 65 of the Indian Contract Act, 1872 with special reference to Discharge of a Contract by
Frustration:
The effects of frustration with special reference to the restitution of advantages or benefits received by a
party, not entitled to such advantage or benefit. On account of an agreement being deemed void,
subsequent to certain obligations being fulfilled by either party, there would continue to subsist, rights to
make good the loss caused. Section 65 of the Indian Contract Act, 1872, states
Evidentiary Value Of E-Contracts:
It’s an undisputed fact that E-Commerce has become a part of our daily life. One such justification for the
popularization of E-Commerce would be immoderate technological advancement. E-Commerce, as the
name suggests, is the practice of buying and selling goods and services through online consumer services
on the internet. The ‘e’ used before the word ‘commerce’ is a shortened form of ‘electronic’. The
effectiveness of E-Commerce is based on electronically made contracts known as E-Contracts. Although
E-Contracts are legalized by Information Technology Act but still majority feels insecure while dealing
online. The reason being lack of transparency in the terms & conditions attached to the contract and the
jurisdiction in case of a dispute that may arise during the pendency of a transaction with an offshore site
Arbitration clause v. Contingent Contract:
Section 32 and 33 provide for when are such contracts enforceable. Section 32 says when a contingent
contract to do or not to do anything depends on the happening of an uncertain future event cannot be
enforced by law unless and until that event has happened and in case the event becomes impossible, then
the contract becomes void. Section 33 provides that if a contingent contract to do or not to do anything
depends on an uncertain future event not happening, it can be enforced only when the happening of that
event becomes impossible and not before
E-Contracts & Its Legality:
E-contract is a contract modeled, specified, executed and deployed by a software system. E-contracts are
conceptually very similar to traditional (paper based) commercial contracts. Vendors present their
products, prices and terms to prospective buyers. Buyers consider their options, negotiate prices and terms
(where possible), place orders and make payments. Then, the vendors deliver the purchased products.
Nevertheless, because of the ways in which it differs from traditional commerce, electronic commerce
raises some new and interesting technical and legal challenges. For recognition of e-contracts following
questions are needed to be considered
Electronic Contract:
In the traditional notion of contract formation, negotiating parties must come to a "meeting of the minds"
on the terms of an agreement. In the course of negotiation, there may be invitations to make offers (e.g.,
price lists are generally not offers, but invitations) and counter-offers, but the general rule is that
formation requires an offer and acceptance to be communicated between the parties

17. 17
Contract Law Jurisdiction: Panama:
Under Panama Civil Law the general rule is that all contracts are consensual, which is to mean that they
are perfected by the mere consent of the parties. Consequently, and except if expressly established by law
that a contract is formal or real, it must be understood to be consensual, without prejudice to the liberty
granted by law to the parties to give a consensual contract the character of formal
Nature and Classification of contracts
Nature of contract
Corporate & Business Law THE INDIAN CONTRACT ACT, 1872
WHAT IS LAW?
Law consists of rules that regulate the conduct of individuals, businesses, and other organizations within
society. Law means any rule of conduct, standard or pattern , to which actions are required to conform.
OBJECT OF LAW
a) Object of law is the creation and protection of legal rights to maintain order in the society.
b) Keeping the peace.
c) Shaping moral standards.
d) Promoting social justice
e) Maintaining the status quo
f) Facilitating orderly change
g) Maximizing individual freedom
IGNORTIA JURIS NOT EXCUSANT
Ignorance of law is - NO EXCUSE
Every member of the society is expected that his actions conform to a set pattern or standard as reflected
in legal rules. For this purpose he is presumed to know the legal rules. He cannot take the plea that he did
not know them.
Business Laws
Business law is also termed as commercial Law and mercantile law. Business law is generally used to
denote that portion of law which deals with rights and obligations arising out of transactions between
mercantile persons. The term appears to be a convenient way of grouping together the laws that should be
regarded important for men in business.
It includes following laws:
a) Law of contracts
b) Sales of goods act
c) Partnership act
d) Company law
e) Negotiable instrument act
f) Insurance act
THE INDIAN CONTRACT ACT, 1872
The Law of Contract
It is that branch of law which determines the circumstances in which promises made by the parties to a
contract shall be legally binding on them.
It defines:
a) Remedies available
b) Conditions under which remedies are available

18. 18
Nature of the Law of Contract
It does not lay down the duties and responsibilities which the law will enforce
BUT,
It consists a number of limiting principles, subject to which; the parties may create rights & duties for
themselves which the law will upload.
Law of contract
a) creates
b) jus in personam,
c) jus in rem
DEFINITION OF CONTRACT
Sec.2(h) “An agreement enforceable by law.”
Contract =Agreement + enforceability by law.
Agreement must create a legal obligation or duty.
AGREEMENT
Sec. 2(e), “Every promise and every set of promises, forming consideration for each other” An agreement
takes place when an offer is made by one person is accepted by the other. All agreements are not contracts
but all contracts are agreements. (Balfour v/s Balfour)
Agreement = Offer + Acceptance
Agreement is a wide term
All agreements are not contracts BUT All contracts are agreements (Social v/s Legal) Consensus ad idem
Obligation
ESSENTIAL ELEMENTS OF VALID CONTRACT
Offer and acceptance – Two parties, offer & acceptance .Intention to create legal relationship –(Balfour
vs. Balfour- domestic, social agreements ) Lawful consideration- cash, kind,act of abstinence .Capacity of
parties – Competency .Free consent – without pressure (physical or mental)
Lawful object – The object of contract is unlawful, if :
1. Immoral
2. Illegal
3. Opposed to public policy
Agreement not expressly declared void – agreements must not be declared void by law in force in the
country .Certainty and possibility of performance ,Legal formalities – In writing, properly stamped
CLASSIFICATION OF CONTRACTS
Valid Contracts Formation Performance
1. Valid Contracts
2. Voidable Contracts
3. Void Agreement
4. Void Contracts
5. Unenforceable
Contracts
6. Illegal contract
1. Express Contracts
2. Implied Contracts
3. Quasi contracts
1. Executed Contracts
2. Executory Contracts
3. Bilateral Contracts
4. Unilateral Contracts

19. 19
Classification of Contracts Validity or Enforceability
CLASSIFICATION OF CONTRACTS…
According to validity
1. Valid contract – Agreement satisfying all the essentials.
2. Voidable contract – Consent of one party is not free. ( Aggrieved party, avoid in reasonable
time). & Void at option of that party only
3. Void contract – A valid contract when it was made but subsequently it becomes void.
Illegal contract – An agreement which is forbidden by law or against the policy of law is known as
unlawful or illegal agreement. (smuggling, murder )
Void agreements - Void ab - initio …. From the very beginning ( lack of one of the essentials)
Unenforceable contract – one which cannot be enforced in a Court of law due to some technical defects
According to formation
1. Express contract – orally or in writing
2. Implied contract – by conduct or acts
3. Quasi contract – no intention of the parties to create legal relationship. It is created by law.
According to time of performance:
Executed contract – Both the parties have performed.
Executory contract – Both the parties are yet to perform. It can be partly as well.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
ESSENTIAL ELEMENTS OF A VALID CONTRACT
All Contracts are agreements but all agreements are not contracts. Only that agreement which is
enforceable by law is a contract. An agreement, to be enforceable by law, must possess the essential
elements of a valid contract as contained in section 10 of the Indian Contract Act. According to Section
10, "All agreements are contract if they are made by the free consent of the parties, competent to contract,
for a lawful consideration and with a lawful object and are not expressly declared to be void.
The essential elements of a valid contract are:
1. Proper Offer and Proper Acceptance. In order to create a valid contract, there must be a 'lawful offer'
by one party and 'lawful acceptance' of the same by the other party. Section 2 (a) of the Contract Act
defines Offer as – ‘when one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make an
offer'. Section 2 (b) of the Contract Act states that, ‘when the person to whom the offer is made signifies
his assent there to, the offer is said to be accepted.
2. Intention to Create Legal Relationship. In case, there is no such intention on the part of parties, there
is no contract. Agreements of social or domestic nature do not contemplate legal relations.
Case :- Balfour vs. Balfour(1919) Mr. Balfour and his wife went to England for a vacation, and his wife
became ill and needed medical attention. They made an agreement that Mrs. Balfour was to remain
behind in England when the husband returned to Ceylon (Sri Lanka) and that Mr. Balfour would pay her
£30 a month until she returned. This understanding was made while their relationship was fine; however
the relationship later soured. The lower court found that there was sufficient consideration in the consent
of Mrs. Balfour and thus found the contract binding, which Mr. Balfour appealed. Arrangements made
between husbands and wives are not generally contracts as the parties do not intend to be legally bound
by the agreements.
3.Lawful Consideration. At the desire of promise, promisee or any other person has done or abstain
from doing or does abstain from doing such act or promises is known as consideration. According to
Blackstone "Consideration is recompense given by the party contracting to another." In other words of
Pollock, "Consideration is the price for which the promise of the another is brought." Consideration is
known as quid pro-quo or something in return. It may be cash, kind, act or abstinence and may be in past,
present or future. It should be unlawful, immoral and against the public policy.
4. Competent of parties. The parties to an agreement must be competent. If either of the parties does not
have the ability to contract, the contract is not valid. According to the following persons are incompetent
to contract. (a) Minor: A person less than age of 18 is minor. (b) Unsound mind person: Any person who

20. 20
is unable to understand the term and condition of contract at the time of its formation is unsound mind. (c)
persons disqualified by law to which they are subject.
5. Free Consent. 'Consent' means the parties must have agreed upon the same thing in the same sense.
According to Section 14, Consent is said to be free when it is not caused by-
(1) Coercion
(2) Undue influence
(3) Fraud
(4) Mis-representation
(5) Mistake.
An agreement should be made by the free consent of the parties.
6. Lawful Object. The object of an agreement must be valid. Object has nothing to do with consideration.
It means the purpose or design of the contract. Thus, when one hires a house for use as a gambling house,
the object of the contract is to run a gambling house. The Object is said to be unlawful if-
(a) it is forbidden by law;
(b) it is of such nature that if permitted it would defeat the provision of any law;
(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it as immoral or opposed to public policy.
7. Certainty of Meaning. According to Section 29,"Agreement the meaning of which is not Certain or
capable of being made certain are void.“ For e.g. : A agree to sell to B a 100 tonne of oil, there is nothing
to show what kind of oil intended, the agreement is void due to the absence of certainty. But if A is dealer
of coconut oil only agree to sell B,100 tonne of oil, the nature of A’s trade is sufficient to show the kind
of oil, and this will be a valid contract.
8. Possibility of Performance. Condition for a contract should be capable for performance .If the act is
impossible in itself, physically or legally, if cannot be enforced at law. For example: If A and B makes an
agreement that if B encloses a space with the help of two straight lines then A will pay him Rs. 1000
otherwise B will be liable for paying Rs. 500 to A. RESULT: This is an impossible work. Two straight
lines can not enclose a space , hence contract is not valid.
9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions for a valid
contract must not have been expressly declared void by any law in force in the country. Agreements
mentioned in Section 24 to 30 of the Act have been expressly declared to be void. For example
agreements in restraint of trade, marriage, legal proceedings etc. That is : If A is not willing to marry with
B, law can not enforce him/her.
10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases where writing,
registration etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease
and gift of immovable property, negotiable instruments; memorandum and articles of association of a
company, etc. Registration is required in cases of documents coming within the scope of section 17 of the
Registration Act. All the elements mentioned above must be in order to make a valid contract. If any one
of them is absent the agreement does not become a contract.
Offer and Acceptance
Offer and Acceptance: Everything You Need to Know
Offer and acceptance are the essential elements of a contract. In either case, it
should be done out of one's free will and with an intention to enter into a legally binding agreement.3 min
read
Offer and acceptance are the essential elements of a contract. In either case, it
should be done out of one's free will and with an intention to enter into a legally binding agreement.
What Is an Offer?
When someone expresses his or her willingness to enter into a contract on certain
terms and intends to form a binding contract if the other party accepts it, such expression of willingness is
called an offer.

21. 21
The expression of willingness can be in various forms like a letter, email, fax, or even
conduct. However, it is important that the person communicates the terms on which he is willing to enter
into a contract.
Whether or not the person making an offer has the intention of entering into a contract is
judged objectively. It doesn't matter whether the person has real intentions. It's enough if, based upon the
circumstances of the case, it can be reasonably made out that he intended to form a binding contract.
A party can either expressly make an offer, or it can even be implied by its conduct. An offer can be made
to a specific person, a group of persons, or even the world at large (for example, announcement to offer a
reward).
An offer is different from an invitation to treat, where a party merely invites offers, which
can be accepted or rejected by it. For example, an advertisement is not an offer; it's only an invitation to
treat. If it were an offer, then the advertiser would have to supply the product to everyone accepting the
“offer”, irrespective of the stock he holds. Similarly, an auction is also an invitation to treat, where each
bid received by the auctioneer is an offer.
What Is an Acceptance?
If a person agrees to all the conditions of an offer made to him without placing any counter-
condition, the communication of such assent to the offerer is called an acceptance, provided it's done with
the intention of accepting the offer.
Sometimes, the conduct of the offeree may constitute expression of acceptance. In such
cases, it would be no defense to say that the party did not intend to enter into a legally binding agreement.
Courts often refer to the correspondence between the parties while deciding whether an acceptance has
occurred.
It's important that the offeree accepts the offer unconditionally. If he makes a counteroffer,
the original offer becomes irrelevant.
For example, when you list an item on eBay with a “buy now” price, with an option to sell it for the best
offer, every bid placed on your item constitutes a counteroffer. If you accept a counteroffer, this becomes
the basis of the contract of sale.
A contract does not become effective unless the offerer receives a communication of
acceptance from the offeree. The communication may be instant or at a later point in time, say for
instance, through email or post.
Although signing a contract is a common way of accepting an offer, there are various other
ways of acceptance. For example, if you offer a contractor to paint your home for a certain sum of money
and make some advance payment to him, the receiving of advance payment itself amounts to an
acceptance by the contractor.
Rules of Acceptance
There must be communication of acceptance from the offeree's side.
You can withdraw an offer any time before it's accepted.
Only the person to whom the offer is made can accept it. You are not bound by an acceptance made by
someone else on behalf of the offeree without his authorization.
You may do away with the requirement of communicating the acceptance; sometimes this may be
obvious from the construction of the contract.
If an offer requires a specific method of acceptance, it cannot be accepted through a less effective method
than what's specified.
Silence does not constitute an acceptance.
According to the “mirror image rule”, you must accept an offer in its entirety, without any changes.
Modifying the offer in any manner constitutes a counter-offer and nullifies the original offer.
The offeree can, however, request for information; such request does not amount to making a counter-
offer. You can draft an inquiry in a way that it adds to the original offer without nullifying it.
Usually, companies use a standard form contract in business.
In all cases where the contracting parties have contemplated acceptance via post, the contract is created at
the moment you post the acceptance.

22. 22
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Offer And Acceptance
Offer
Definition of offer •
Section 2(a) of Indian contract act
when one person signifies to another person his willingness to do or abstain from doing with a view to
obtain of assent of that other person.
Offeror
1. Shows intent to enter into a
contract
2. Makes a definite offer
3. Communicates the offer to the
offeree
“I’ll pay you Rs 50 an hour to edit
my book on Mesoamerican sewing
techniques”.
Offeree
1. Shows intent to accept the offer
2. Communicates intent to accept
by proper means
3. States acceptance that “Mirrors
“the terms of the offer
“I’ll take the editing job.”
Offer
Acceptance
Definition Offer must be certain Types of offer
Revocation of an
offer and
communication of
revocation
Communication of an
offer
To whom offer can be
made?
Promise
Offer/Proposal Acceptanc
e

23. 23
I will sell my car for10K.would u purchase it?? Yes I will purchase it.
Essential for making a valid contract
1. Offer must be communicated to the other party
2. The offer must be made with a view to obtain consent of the offree
3. The offer must have its terms and definite and clear
4. The offer must be capable of creating legal relationship
Types Of Offer
a) General Offer
b) Specific Offer
c) Counter Offer
d) Cross Offer
General and specific offer
General offer made to the whole world at large Specific offer made to some specific person
General offer can be accepted by any person
Having notice of the offer
by doing what is required under the offer
Specific offer can be accepted only by person to
whom it was made
COUNTER OFFER
A counteroffer is a type of offer made in response to another offer, which was seen as unacceptable. A
counteroffer revises the initial offer, making it more appealing for the person making the new offer.
Responding with a counteroffer allows a person to decline on a previous offer, while allowing
negotiations to continue.
COUNTER OFFER DOES NOT MAKE ANY CONTRACT

24. 24
Cross Offer •
When two persons make identical offers (EX. Similar in terms, conditions) to each other, without having
knowledge of each other’s offer are known as CROSS OFFER
A makes a offer to B B makes a offer to A
Invitation to offer •
When one or many party/persons are invited to one or more offer is called as invitation to offer, it
is not require for them to get into contract. Display of goods by a shopkeeper in his window , with prices
marked on them is not an offer, But merely an invitation to the public to make an offer to buy the goods at
the marked price.
Communication of an offer •
Section 4(a) – When the offeree understand and have a knowledge about the offer.
Revocation Of Offer And Communication
SEC.6(a)-The communication of notice
SEC.6(b)-Lapse of time Revocation of an offer and communication-SEC.5)(1)-
SEC.6(c) –Fails to fulfill the condition
SEC.6(d)-The offeror is dead
To whom an Offer can be made?
One person
A group
The whole world

25. 25
Acceptance
Definition •
According To Sec 2(a) •
“When the person to whom the proposal is made signifies his assent there to, The proposal is said to be
Accepted. A proposal when accepted becomes a promise.”
Teams of acceptance
1. Absolute and unqualified by section 7(a)
2. By expressed in some usual and reasonable manner by section 7(b)
3. Silence cannot be treated as acceptance to an offer
Types of acceptance
1. Express
a) Writing
b) Verbal
2. Implied
a) Action
b) Behavior
Communication of acceptance
1. Section 5( c) Communication of an acceptance completes when it comes to the knowledge of
offeror
2. The use of telecommunication apparatus: telephone, facsimile, video
3. Other types are letter and telegram (Use a the postal rules)
E.g:Sec.4(2)(a) and sec.4(2)(b)
Revocation Of Acceptance •
According to [sec.5 para-2]
Dismissed
An acceptance may be revoked at any time before the communication of acceptance is complete as
against the ACCEPTOR, But not afterwards
Consideration
Consideration meaning in law
In the legal system, the term consideration in contract law refers to something of value
given to someone in return for goods, services, or some other promise. A valid contract must include
consideration for every party involved. In simple terms, consideration is the basic reason a party enters
into a legal contract. To explore this concept, consider the following consideration definition.
Definition of Consideration
Noun
Something of value given in exchange for something else of value, usually in the context of a contract.
Definition Term of acceptance Type of acceptance
Revocation of an
acceptance and
communication of
recoveron
Communication of
an acceptance

26. 26
Origin
What is Consideration
Consideration is the benefit that each party receives, or expects to receive, when entering
into a contract. Consideration is often monetary, but it can be a promise to perform a specific act, or a
promise to refrain from doing something. In order for a contract or agreement to be legally binding, every
party to the contract must receive some type of consideration. In other words, a contract is a two-way
street, so each party must receive something of value from the other party or parties. Illegal or immoral
acts are not legally considered to serve as consideration.
Example 1
John backed into Allen’s car, damaging it. John is liable to pay for the damages, but does
not have the money right now. While Allen could sue John for the damages to his car, he enters into an
agreement with John to give him 90 days to pay the full amount of $1,500, plus an additional $250 for the
inconvenience. The agreement states that Allen will not file a lawsuit before the 90 days is up, but is free
to do so after that time. This agreement, or “contract,” provides consideration for both parties:
John’s benefit: Allen gives up the right to sue for a period of 90 days
Allen’s benefit: John will pay for the damages, plus an additional amount of $250
Example 2
Brittney agrees to sell her car to Bill for $1,000. Bill’s payment serves as consideration for
Brittney’s promise to sell the car to him. Brittney’s consideration is her promise to sell him the car.
Example 3
A landlord and a prospective tenant meet to discuss the rental of a condo. At the meeting,
they go over the terms of the lease, and agree to enter into the lease, which is signed by both the landlord
and the tenant. In this type of contract, the landlord agrees to provide tenant with housing, and the tenant
promises to pay rent in return.
Elements of Consideration
In order for a contract to be considered valid and enforceable by the courts, three elements
of consideration must be met. If one or more of these elements are missing, the contract lacks the
necessary requirements, it could potentially be deemed invalid by the court. The required elements of
consideration include:
1. The contract must include a bargain for the terms of the exchange. This means there must be
something that is worth bargaining over to both the parties.
2. There must be a mutual exchange between the parties. In simple terms, all parties involved must
benefit from the contract.
3. The exchange in the contract must be something of value.
In addition to the elements of consideration, a contract must contain certain other elements to be
enforceable. While these requirements vary by state, generally these requirements include:
1. An intent by both parties to enter into the agreement
2. The subject matter must be legal
3. One party must make an offer
4. The other party must accept an offer
5. Types of Consideration
Consideration in a contract is the exchange of anything of value by each party. Most often, services or
goods are exchanged or promised in a contract, though consideration may be whatever the parties agree
to. Examples include:
1. Money
2. Services
3. Personal property
4. Real property
5. Promise to act
6. Promise to refrain from acting
7. Lack of Consideration

27. 27
A contract may be deemed invalid by a court if it lacks recognizable consideration. Although
the exchange of certain items or terms may seem like something valid on which to create a contract, not
just anything meets the definition of consideration. Some of the scenarios where a contract lacks
consideration includes:
1. The agreement is more of a promise of a gift, rather than a contract
2. One of the parties involved was already legally obligated to perform as specified by the contract
3. The bargained for promise cannot be illusory. This means there cannot be a contract if the parties
are not mutually agreed, or where only one party is required to perform.
Example of a Gift
Naomi’s mother promises to buy her a car when she graduates in two years, if she keeps
her grades up, making an official-looking document, which she signed. After graduation, Naomi is
disappointed that her mother has decided not to buy the car, as Naomi got into trouble with drugs and
delinquent behavior over the past couple of years.
Naomi files a civil lawsuit, claiming that she had a contract with her mother, and that
her mother must buy her a car. However, because there was no mutual benefit, no consideration given by
both parties, the court is likely to determine that the document was simply a promise of a future gift,
which is not an enforceable contract.
Example of an Illusory Promise
ChocoTime candy company enters into a contract with Cocoa Merchants in which
ChocoTime will purchase all of the cocoa it needs for its candy from Cocoa Merchants, and Cocoa
Merchants will sell as much cocoa as it wants to ChocoTime. Because this contract binds ChocoTime to
purchasing all of the cocoa it needs only from Cocoa Merchants, ChocoTime is not bound to do anything.
In fact, Cocoa Merchants could choose not to sell any cocoa to ChocoTime if it desired. This is one type
of illusory promise, and it therefore makes this contract invalid and unenforceable.
Related Legal Terms and Issues
1. Binding – Having power to bind or oblige; imposing an obligation.
2. Contract – An agreement between two or more parties in which a promise is made to do or
provide something in return for a valuable benefit.
3. Damages – A monetary award in compensation for a financial loss, loss of or damage to personal
or real property, or an injury.
4. Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means
to a specific end.
5. Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself,
as in a contract.
6. Personal Property – Any item that is moveable and not fixed to real property.
7. Real Property – Land and property attached or fixed directly to the land, including buildings and
structures.

28. 28
Capacity to Contract
One of the most essential elements of a valid contract is the competence of the parties to make a contract.
Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a person to be dependent
on three aspects; attaining the age of majority, being of sound mind, and not disqualified from entering
into a contract by any law that he is subject to. In this article, we will look at all aspects in a detailed
manner.
Capacity to Contract
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.”
So, we have three main aspects:
Attaining the age of majority
Being of sound mind
Not disqualified from entering into a contract by any law that he is subject to
1] Attaining the Age of Majority
According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. For the
purpose of entering into a contract, even a day less than this age disqualifies the person from being a party
to the contract. Any person, domiciled in India, who has not attained the age of 18 years is termed as a
minor.
Let’s look at certain laws governing a minor’s agreement:
A Contract made with a Minor is Void
Since any person less than 18 years of age does not have the capacity to contract, any agreement made
with a minor is void ab-initio (from the beginning).
Peter is 17 years and 6 months old. He needs some money to go for a vacation with his friends. He
approached a moneylender and borrows Rs 25,000. As security, he signs some papers mortgaging his
laptop and motorcycle. Six months later, when he attains the age of majority, he files a suit declaring that
the mortgage executed by him when he was a minor is void and should be canceled. The Court agrees
and relieves Peter of all liability to repay the loan.
Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the
contract is void ab-initio. And, a void agreement cannot be ratified.
A Minor can be a Beneficiary of a Contract
While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian
Partnership Act, 1932, also specifies that while a minor cannot become a partner in the partnership firm,
the benefits of the firm can be extended to him.
Peter lends some money to his neighbor, John and asks him to mortgage his house as security. John
agrees and the mortgage deed is made favoring Peter’s 10-year-old son – Oliver. John fails to repay the
loan and Peter, as the natural guardian of Oliver, files a suit against John to recover his money. The
Court holds the case since a minor an be a beneficiary of a contract.
A Minor is always given the Benefit of being a Minor
Even if a minor falsely represents himself as a major and takes a loan or enters into a contract, he can
plead minority. The rule of estoppel cannot be applied against a minor. He can plea his minority in
defense.
Contract by Guardian
Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the minor.
Such a contract, which the guardian enters into, for the benefit of the minor, can also be enforced by the
minor.
However, guardians cannot bind a minor by a contract for buying immovable property. But, a contract
entered into by a certified guardian of a minor, appointed by the Court, with an approval from the Court
for the sale of a minor’s property can be enforced.

29. 29
Insolvency
A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending from the
properties of the minor and he is not personally liable for the same.
Joint contract by a Minor and an Adult
In case of a joint contract between an adult and a minor, executed by the guardian on behalf of the minor,
the liability of the contract falls on the adult.
2] Person of Sound Mind
According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a
person is said to be of sound mind if he is capable of understanding the contract and being able to assess
its effects upon his interests.
It is important to note that a person who is usually of an unsound mind, but occasionally of a sound mind,
can enter a contract when he is of sound mind. No person can enter a contract when he is of unsound
mind, even if he is so temporarily. A contract made by a person of an unsound mind is void.
3] Disqualified Persons
Apart from minors and people with unsound minds, there are other people who cannot enter into a
contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political
status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy,
convicts, insolvents, etc.
"Capacity of Parties" Business Law
Section 11
Competent to contract
Capacity to Contract Capacity means legal Competency of parties to enter into a contract.
1. Age of majority,
2. Sound Mind,
3. Not ‘disqualified by Law’. Business Law
Minors
Any person who has not attained the age of Majority is known as ‘Minor’. • An agreement with a
Minor is Void-ab-initio.
Unsound Mind •
Idiot – Any person whose Mental condition is not stable since birth, who cannot understand the Contract
or its Terms.
Lunatic – A person who behaves in a silly or dangerous way, a person suddenly acts/attacks violently.
These people are not allowed to make contract especially during the intervals of insanity. Rest of the time
they are perfectly fine to make a contract.
a) Drunken/Intoxicated
b) Hypnotised
Disqualified by Law •
Alien Enemy – he cannot enter into a contract with any indian national so long as the declaration is in
force.
Insolvents - Inability to pay one's debts/lack of means to pay one's debts.
a) Convicted
b) Artificial person (corporation/companies)
c) Married Women – she is an agent of her husband by necessity.
Rules by Judiciary as to Minors.
1. The law must protect the interest of minors.
2. The law should not cause Unnecessary hardship to the other party.
3. Enforcement is possible if minor is a Beneficiary/Promisee.
Provisions
1. Void-ab-initio: an agreement with minors is absolutely void.

30. 30
2. Minors can be promisee: if minor promises to someone and not perform then he has no such
obligation but if somebody promises to minor and not perform then a minor can enforce such agreement
in which he is beneficiary.
3. Insolvency: Minors neither can create agreement nor has personal liability so minor just can’t be
declared as insolvent.
4. Minor as a Joint Promisor: minor can be a Joint Promisor but not liable to perform his promise.
5. No ratification/approval: minor
6. Minor can plead minority: Minor enters into an agreement presenting himself major he is still not
bound to perform.
7. As a Partner: minor may not be a partner but he can be a partner of the firms only for benefits with
consent of all the partners.
8. As an agent: a minor himself cant appoint an agent because he is not competent. But yes minor is
appointed as an agent. Here he is personally not liable for any damage then his principal is liable.
9. As a shareholder/member: minor can be a shareholder with conditions:-
a) shares fully paid up
b) When AOA does not prohibits a minor
10. Contract by parents: yes possible on these conditions:-
a) On behalf of minor
b) Benefit of minor
c) Within the authority
d) Within the scope Business Law PPT: Sandeep Sharma
11. As a Guarantor: minor can’t be a surety in a contract of guarantee.
12. Restitution/Compensation possible: according to “specific relief act 1963” court may order a minor
to restore the benefits which he has.
13. No liability of Parents: Minor’s parents are not liable for agreements made by minor.
14. No specific performance: the court doesn’t order for specific performance to a minor.
Provisions relating to free consent
What is free consent in business law?
Free Consent. According to Section 13, " two or more persons are said to be in
consent when they agree upon the same thing in the same sense (Consensus-ad-idem).
According to Section 14, Consent is said to be free when it is not caused by coercion or undue
influence or fraud or misrepresentation or mistake
What is consent and free consent?
In the Indian Contract Act, the definition of Consent is given in Section 13, which
states that “it is when two or more persons agree upon the same thing and in the same sense”. ...
The section says that consent is considered free consent when it is not caused or effected by the
following, Coercion. Undue Influence. Fraud.
There have to be two parties to a contract, who willingly and knowingly enter into an
agreement. But how does the law determine if the parties are both these things? This is where the concept
of free consent comes in. Let us learn more about free consent and the elements vitiating free consent.
Free Consent
In the Indian Contract Act, the definition of Consent is given in Section 13, which
states that “it is when two or more persons agree upon the same thing and in the same sense”. So the two
people must agree to something in the same sense as well. Let’s say for example A agrees to sell his car
to B. A owns three cars and wants to sell the Maruti. B thinks he is buying his Honda. Here A and B have
not agreed upon the same thing in the same sense. Hence there is no consent and subsequently no
contract.

31. 31
Now Free Consent has been defined in Section 14 of the Act. The section says that consent is considered
free consent when it is not caused or effected by the following,
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake
Elements Vitiating Free Consent
Let us take a look at these elements individually that impair with the free consent of either party.
Coercion (Section 15)
Coercion means using force to compel a person to enter into a contract. So force or threats are
used to obtain the consent of the party under coercion, i.e it is not free consent. Section 15 of the Act
describes coercion as
a) committing or threatening to commit any act forbidden by the law in the IPC
b) unlawfully detaining or threatening to detain any property with the intention of causing any
person to enter into a contract
For example, A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even if B
sells the house to A, it will not be a valid contract since B’s consent was obtained by coercion.
Now the effect of coercion is that it makes the contract voidable. This means the contract is voidable at
the option of the party whose consent was not free. So the aggravated party will decide whether to
perform the contract or to void the contract. So in the above example, if B still wishes, the contract can go
ahead.
Also, if any monies have been paid or goods delivered under coercion must be repaid or returned once the
contract is void. And the burden of proof proving coercion will be on the party who wants to avoid the
contract. So the aggravated party will have to prove the coercion, i.e. prove that his consent was not freely
given.
Undue Influence (Section 16)
Section 16 of the Act contains the definition of undue influence. It states that when the relations
between the two parties are such that one party is in a position to dominate the other party, and uses such
influence to obtain an unfair advantage of the other party it will be undue influence.
The section also further describes how the person can abuse his authority in the following two
ways,
When a person holds real or even apparent authority over the other person. Or if he is in a
fiduciary relationship with the other person
He makes a contract with a person whose mental capacity is affected by age, illness or distress.
The unsoundness of mind can be temporary or permanent
Say for example A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised him
good grades. Here the consent of A (adult) is not freely given, he was under the influence of his teacher.

32. 32
Now undue influence to be evident the dominant party must have the objective to take advantage of the
other party. If influence is wielded to benefit the other party it will not be undue influence. But if consent
is not free due to undue influence, the contract becomes voidable at the option of the aggravated party.
And the burden of proof will be on the dominant party to prove the absence of influence.
Fraud (Section 17)
Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes false
statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly without
checking for the trueness, this is said to be fraudulent. It absolutely impairs free consent.
So according to Section 17, a fraud is when a party convinces another to enter into an agreement by
making statements that are
a) suggesting a fact that is not true, and he does not believe it to be true
b) active concealment of facts
c) a promise made without any intention of performing it
d) any other such act fitted to deceive
Let us take a look at an example. A bought a horse from B. B claims the horse can be used
on the farm. Turns out the horse is lame and A cannot use him on his farm. Here B knowingly deceived A
and this will amount to fraud.
One factor to consider is that the aggravated party should suffer from some actual loss due to
the fraud. There is no fraud without damages. Also, the false statement must be a fact, not an opinion. In
the above example if B had said his horse is better than C’s this would be an opinion, not a fact. And it
would not amount to fraud.
Misrepresentation (Section 18)
Fraudulent misrepresentation means purposely lying about a transaction
Misrepresentation is also when a party makes a representation which is false, inaccurate,
incorrect etc. The difference here is the misrepresentation is innocent, i.e. not intentional. The party
making the statement believes it to be true. Misrepresentation can be of three types
a) A person makes a positive assertion believing it to be true
b) Any breach of duty gives the person committing it an advantage by misleading another. But the
breach of duty is without any intent to deceive
c) when one party causes the other party to make a mistake as to the subject matter of the contract.
But this is done innocently and not intentionally.
VOID AGREEMENT. Void agreements are those agreements which are not enforced by law courts. ...
All agreements are contracts if they are made with free consent of parties competent to contract, for a
lawful, consideration and with a lawful object, and are not hereby expressly declared to be void.

33. 33
VOID AGREEMENTS
Valid Contracts. (Sec. 10)•
Section 10 “ All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void. Nothing herein contained shall affect any law in force in India and not hereby
expressly repealed, by which any contract is required to be made in writing or in the presence of
witnesses, or any law relating to the registration of documents.
VOID AGREEMENTS•
i. Agreements by a Incompetent to Contract (Sec.11).•
ii. Mistake of Fact (Both Parties, Essential Fact) (Sec.20).•
iii. Where Object or Consideration is Unlawful (Sec.23).•
Iv. Where Object or Consideration is Unlawful in Part (Sec.24).•
v. Agreements made without consideration (Sec. 25).
Section 10 “ All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void. Nothing herein contained shall affect any law in force in India and not hereby
expressly repealed, by which any contract is required to be made in writing or in the presence of
witnesses, or any law relating to the registration of documents.
1. Agreements in Restraint of Marriage (Sec.26)•
2. Agreements in Restraint of a Trade (Sec.27)•
3. Agreements in Restraint of Legal Proceedings (Sec.28)•
4. Agreements, Meaning of which is Not Certain (Sec.29)•
5. Agreements By Way Wager (Sec.30)•
6. Agreements Contingent on Impossible Event (Sec.36)•
7. Agreements To Do an Impossible Act (Sec.56(1)).
Agreements in Restraint of Marriage (Sec.26)•
Sec.26 “Every agreement in restraint of the marriage of any person, other than minor, is void.”•
Difference between a positive promise to marry a particular person And but restrictive agreement
containing a promise not to marry anybody else.• Lowe v. Peers, (1768) : Mr. Peers promised Mrs.
Catherine Lowe, that he would not marry anyone other than Mrs. Lowe and promised further to pay, Mrs.
Lowe, 2000 pounds on default.
Agreements in Restraint of a Trade (Sec.27)•
Sec.27 “Every agreement by which anyone is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.”

34. 34
Agreements in Restraint of a Trade (Sec.27)
EXCEPTIONS•
1) Sale of Goodwill: a seller of goodwill may be restrained from carrying on
a) (i)a similar business,
b) within specified local limits
c) so long as the buyer carries on a like business: provided
d) That such, limits appear to the Court reasonable regard being had to the nature of the
business.
Partners Agreement:
1) Amongst the Partners
2) Retiring Partner
3) On dissolution of Partnership
4) Sale of Good Will of Partnership
Trade Combination: An agreement the primary object of which is to regulate business and not to
restrain is valid.
Service Agreement:
Agreements in Restraint of Legal Proceedings (Sec.28)•
“Every agreement, by which any party there to is restricted absolutely from enforcing his rights under or
in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the
time within which he may thus enforce his rights, or which provides for forfeiture of any rights arising
from contract, if suit is not brought within a specified time, is void to the extent.
Baroda Spinning Co. Ltd V/s Satyanarayan Marine & Fire Insurance Co. Ltd.
This Sec. applies to only rights arising from contract. Not to cases of crime or tort.• Does not
affect the law relating to arbitration.• Does not affect an agreement “not to file an appeal”• Select one of
the two courts.

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Uncertain (Sec.29)•
According to Section 29, Agreements, the meaning of which is not certain, or capable of being made
certain, are void.
Wagering Agreements• Sec. 30 “
A wager contract is a contract in which one person promises to another to pay money or
money’s worth by the happening of an uncertain future event in consideration for other person’s promise
to pay if the event does not happen
Agreements by way of wager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to any person to abide the result of any game or other
uncertain event on which may wager is made.”
A wagering agreement is one by which two persons professing to hold opposite views touching
the issue of a future uncertain event mutually agrees that, dependent upon the determination of that event,
one shall win from the other, and the other shall pay or hand over to him, a sum of money or other stake,
neither of the contracting parties have any other interest in that contract.”• Carlill V/s Carbolic Smoke
Ball Co.
Wagering Agreements
Essentials of a wagering agreement•
1) Opposite views about an uncertain event•
2) Chances of gain or loss to the parties•
3) No other interest in the event except the amount of bet.
Wagering Agreements Exceptions:
1. Any horse races.
2. Lottery. {In Shekharchand Jain v. Ramnarayan (1977)} though a StateLottery is not illegal, the same is
nonetheless in the nature of wager, and,therefore, void. Hence, a person declared winner of prize money
on lotterycannot sue for the recovery of the prize money.
3. Crossword competitions (skill/merits).
4. Games of skill, e.g., picture, puzzles or athletic competitions:
5. A contract of insurance.
6. Share market transactions.
Impossible Event/Act•
6. Agreements Contingent on Impossible Event (Sec.36)•
7. Agreements To Do an Impossible Act. Sec.56(1)).

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Provisions Relating to Performance and Discharge of Contracts
Discharge of contract (Business Law)
Discharge/Termination of Contract
Discharge of a contract means termination of contractual relation between the parties to a
contract. In other words, a contract is discharged when it ceases to operate i.e. when the rights and
obligations created by it comes to an end.
A contract may be discharged:
1) By performance
2) By agreement or consent
3) By impossibility of performance
4) By lapse of time
5) By operation of law
6) By breach of contract
1) Discharge by performance
Discharge by performance takes place when the parties to the contract fulfill their obligations
arising under the contract within the time and in the manner prescribed. In such a case, the parties are
discharged and the contract comes to an end. But if only one party performs the promise, he alone is
discharged. Such a party gets a right of action against the another party who is guilty of breach.
Performance of a contract is the most usual mode of its discharge. It may be:
1. Actual performance
2. Attempted performance or tender of performance.
2) Discharge by agreement or consent
As it is the agreement of the parties which binds them, so by their further agreement or consent
the contract may be terminated. The general rule of law is a thing may be destroyed in the same manner in
which it is constituted. This means a contractual obligation may be discharged by a agreement which may
be expressed or implied. The various cases of discharge of a contract by mutual agreement are dealt with
in Section 62 and 63 and are discussed below:
Novation (Sec.62):-
Novation takes places
1. When substitution of a new contract for the original. one between the same parties.
2. The consideration for the new contract is mutually being the discharge of old contract.
3. Novation should take place before the expiry of the time of the performance of the original
contract. Rescission (Sec.62):- Rescession of a contract takes place when all or some of the terms
of the contract are cancelled. It may occur:
4. By mutual consent of the parties (or)
5. Where one party fails in the performance of his obligation. In such a case, the other party may
rescind the contract without claiming compensation for the breach of contract. In case of
recession, only the old contract is cancelled and no new contract comes to exist in its
Alteration (Sec. 62):- Alteration means a change in one or more terms of a contract with mutual consent
of the parties. In such a case the old contract is discharged.
Remission (Section.63): Remission means acceptance of a lesser fulfillment of the promise made or
acceptance of a sum lesser than what was contracted for.
Waiver (Sec. 63):- When a contracting party fails to perform his obligation under the contract, the other
party may rescind the contract and may waive the promisor or release. This is called as Waiver. It takes
place when the parties to a contract agree that they shall no longer be bound by the contract.
Merger: Merger 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.
Ex: "P" holds a property under a lease. He later buys the property. His rights as a lessee merge into his
rights as a owner.

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3) Discharge by impossibility of performance
If an agreement contains an undertaking to perform an impossibility, it is void. This rule is based on the
following:
1. The law does not recognize what is impossible.
2. What is impossible does not create an obligation.
According to Sec. 56, impossibility of performance may fall into either of the following
categories:
Impossibility existing at the time of agreement:- Sec. 56{1} lays down that an agreement to do an act
impossible in itself is void. This is known as pre-contractual or initial impossibility.
Impossibility arising subsequent to the formation of contract:- Impossibility which arises subsequent
to the formation of contract (which could be perform at the time when the contract was entered into) is
called post-contractual or supervening impossibiliy.
4) Discharge by lapse of time
The Limitation Act, 1963 lays down that a contract should be perform within a specified period
called period of limitation. If it is not perform & if no action is taken by the promisee within the period of
limitation, he is deprived of his remedy at law. In other words, we may say that the contract is
terminated.
5) Discharge by operation of law
A contract may be discharged by operation of law which takes place:
1. By Death: If contracts involving personal skill or ability of the promisor, the contract is
discharged/terminated on the death of the promisor.
2. By insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred
prior to his adjudication.
By unauthorized alteration of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the other party, the other
party can avoid the contract.
By rights and liabilities becoming vested in the same person: When the rights and liabilities
under a contract vests in the same person, the other parties are discharged.
6) Discharge by breach of contract
Breach of contract means promisor fails to perform the promise or breaking of the
obligations which a contract imposes. It occurs when a party to the contract without lawful excuse does
not fulfill his contractual obligation or by his own act makes it impossible that he should perform his
obligation under it.
Breach of contract may be of two types:
1. Actual breath of contact.
2. Anticipatory breath of contact
Actual breach of contract:
Actual breach means promisor's failure to perform the promise on due date of performance.
When a promisor fails or refuses to perform the promise upon the due date for performance then it is
called actual breach of contract.
Anticipatory Breach of contract:
It occurs when a party to executory contract declares his intention of not performing the
contract before the performance is due.
It may take place in two ways.
a) Expressly by words
b) Implied by the conduct
Ex: A person contracts to sell a particular horse to another on 1st of June and before the due date he sells
the horse to somebody else.
Remedies for breach of contract
Parties to a lawful contract are bound to perform their respective promises but when one of
the parties terminates the contract by refusing to perform his promise, he is said to have committed a

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breach of contract. Breach of contract is not an unlawful act because the Contract Act accommodates it. It
is quite likely that a person may not keep his promise but the act has made provisions for remedies for the
injured
Remedies available to the aggrieved party
In the case of breach of contract, the following remedies are available to the aggrieved party:
1. Rescission of the contract
2. Damages
3. Quantum meruit
4. Specific performance of the contract
5. Injunction
1) Rescission of the contract
When there is breach of contract by one party, the aggrieved party may rescind the contract
& 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 from all his obligations under the contract.
Ex: A promises to deliver a table to B on 5 Feb & B promises to make the payment on delivery. If A does
not deliver the table on the fixed date, B need not make the payment.
2) Damages
Damages are the monetary compensation allowed to the aggrieved party for the loss or injury
suffered by him by the breach of contract. The fundamental principle underlying damages is not
punishment but compensation for the pecuniary (having to do with money) loss which naturally flows
from the breach. The primary purpose of awarding damages is to put the aggrieved party in the same
position in which he would have been had the contract been perform.
"If actual loss is not proved, no damages will be awarded“.
Types of damages
Ordinary or General damages:- Ordinary damages are generally the difference between contract price
and market price in sale of such damages which arise naturally in usual course of things from the breach
of contract.
Special damages:- These are damages which the aggrieved party may claim besides general damages for
any loss he has suffered owing to special circumstances known to both the parties at the time of
contracting
Vindictive or exemplary damages:-
They are quite heavy in amount and are awarded by way of punishment only in the following two cases:
a) Breach of contract to marry
b) Dishonor of a customer’s cheque by the bank without any proper reason.
Nominal damages:- They are awarded in cases where there is a technical breach but the injured party has
not suffered any loss. In order to establish the rights of the injured party, such damages are awarded. The
amount may be even a rupee.
Damages for inconvenience and discomfort:
Damages can be recovered for physical inconvenience and discomfort. If, however the
inconvenience or discomfort caused by a breach is substantial, the damages can be recovered on the
ground of fairness.
Mitigation of damages:
It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by
the breach. He cannot claim compensation or loss which is really due not to the breach but due to his own
neglect.
3) Quantum Meruit
The word quantum meruit literally means “as much as earned” or “according to the quantity
of work done”. When the person has begun the work & 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.

39. 39
This claim arises in the following two ways:
1. Based on contract
2. Based on quasi contract
a) Based on contract
Where one party leaves the contract midway or refuses to perform it:
In such a case the other party who has made part performance, can claim payment on
quantum meruit.
Where a contract is not divisible & there is part performance:
In such a case the party who has done part performance cannot get payment from
the party who has enjoyed the benefit.
When a indivisible contract is completed but badly:
In such a case the person who has completed the work can claim payment but the
other party can make a deduction as he is not fully satisfied.
Express or implied contract without mentioning remuneration:
Where there is an express or implied contract to render some service but no
remuneration is fixed then some reasonable amount is payable. What is reasonable shall be determined by
the principle of quantum meruit.
When a contract becomes void:
A contract may become void midway with part performance by some party. He is entitled to
receive payment for his part performance.
b) Based on quasi contract
Where a person receive something from another person:
Not gratuitously, then the person receiving such benefit must pay the party from whom he has
receive it.
Where there is a breach of contract:
Where one party breaks the contract, the injured party may claim payment from his part
performance.
4) Specific performance of the contract
In some cases where damages are not an adequate remedy or actual damages cannot be
measured, the court may direct the party who has broken the contract to actually perform his promise.
Specific performance of the contract may be directed by the court in the following circumstances:
Where damages are not an adequate relief. This happens in cases where the subject matter of the
contract is unique or rare & no substitute is available in the market.
Where it is not possible to ascertain the amount of damages, specific performance may be ordered. In
contracts for sale of land & rare articles, court generally order for specific performance of the contract.
Injunction
Where a party is in breach of a negative term of the contract i.e. where he is doing
something which he promise not to do. The court may by issuing an order restrain him from doing what
he promised not to do. Ex: N, a film actor agreed to act exclusively for W for a year & for no one else.
During the year, he contracted to act for Z. It was held that he could be restrain by injunction from doing
so.
Performance of contract
PERFORMANCE OF CONTRACT
ACTUAL PERFORMANCE •
When both the parties to the contract fulfills their obligations as per the contract, the promise is
said to be actually performed. Actual performance gives a discharge to the contract and the liability of the
promisor ceases to exist. •
For example, P agrees to deliver 100 sacks of Mangoes to Q and Q promises to pay the price on delivery.
P delivers the Mangoes on the due date and Q thereby makes the payment. This is called actual
performance of contract.

40. 40
2. ATTEMPTED PERFORMANCE/TENDER •
Sometimes it so happens that the promisor offers to perform his obligation under the
contract at the proper time and place but the promisee does not accept the performance. This is known as
“attempted performance” or “tender”. •
If goods are 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. The rationale being that when a person offers to
perform, he is ready, willing and capable to perform. Therefore, a tender of performance is at par to actual
performance, and it gives the promisor freedom from further performance of contract and moreover
authorizes the promisor to bring action against the promisee for the breach.
Offer to perform –Section 38 LAY DOWN:-
Where a promisor has made an offer of performance to the promisee, and the offer has
not been accepted, the promisor is not responsible for non- performance, nor does he thereby lose his
rights under the contract. •
For example, A contracts to deliver to B, 100 tons of basmati rice at his warehouse, on 6 December
2015. A takes the goods to B’s place on the due date during business hours, but B, without assigning any
good reason, refuses to take the delivery. Here, A has performed what he was required to perform under
the contract. It is a case of attempted performance and A is not responsible for non-performance of B, nor
does he thereby lose his rights under the contract.’
Requirements of Valid Tender
1. It must be unconditional
2. It must be made at proper time and place
3. A person to whom the tender is made must be given opportunity of inspection of goods or
articles
4. The tender must be whole and not of the part
5. The tender must be in proper form – tender of money in current coins
6. The tender must be made to proper person
7. Tender for the delivery of goods must be for the quantity and quality as stipulated in the contract
8. A tender made to one of the several joint promisees has the same legal consequences as a tender
to all of them
Effect of refusal of party to perform the promise wholly (Section 39)
When a party to a contract has refused to perform, or disabled himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or
conduct, his acquiescence in its continuance
Illustration:-
(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in
every week during next two months, and B engages to pay her 100 rupees for each night’s performance.
On the sixth night A wilfully absents herself from the theatre. B is at liberty to put an end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in
every week during next two months, and B engages to pay her at the rate of 100 rupees for each night. On
the sixth night A wilfully absents herself. With the assent of B, A sings on the seventh night. B has
signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is
entitled to compensation for the damage sustained by him through A’s failure to sing on the sixth night.
Contracts which need not to be performed
A contract need not be performed –
1. When its performance becomes impossible (Section 56)
2. When the parties to it agree to substitute a new contract for it or to rescind or alter it.(Section 62)
3.When the promisee dispenses with or remits, wholly or in part, the performance of the promise made to
him or extends the time for such performance or accepts any satisfaction for it.(Section 63)
4.When the person at whose option it is voidable, rescinds it(Section 64)

41. 41
5. When the promisee neglects or refuses to afford the promisor reasonable facilities for the performance
of his promise.(Section 67)
6. When it is illegal.
By whom the contract must be performed
1. Promisor Himself :-
In the case of a contract involving personal skill, taste or diligence of the promisor, 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 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.” (Section 40)
Illustration:- A promises to paint a picture for B. A must fulfill this promise personally.
2. Agent:- When the contract is of impersonal nature i.e., personal consideration is not the foundation of a
contract, a competent person can be employed to perform it. [Section 40(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
3. Legal Representative:- 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 ]. But, the contracts involving personal skill comes to an end on the death of the promisor on
the basis of the rule of law : “ actio personalis moritur cum persona, i.e., a personal action dies with
person”.
Illustrations:
(a) A promises to paint a picture for B by a certain day at a certain price. A dies before the day. The
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. Third Person:-
If a promisee accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor.(Section 41).
Illustration:- A wanted to sell his property to B. So, A & B both entered into the contract for sale of
property. A suddenly fall ill and therefore through power of attorney authorized his elder brother ‘E’ to
perform the contract on A’s behalf. ‘B’ thus afterward cannot enforce it against the promisor.
5. Joint Promisors:- When two or more persons makes a joint promise to promisee, all joint promisors
are bound to perform the contract. Illustration:- A, B & C jointly enters into the contract with E for the
sale of their jointly purchased property. Here, A,B & C are equally liable for the performance of contract.
Who can demand performance
1. It is only the promisee who can demand for performance of the contract. This makes no
difference that whether the performance demanded is for the benefit of the promisee or for the
third person.
2. In case of death of the promisee before the performance, his legal representative can move ahead
with the demand.
Illustration:- A promises B to pay C a sum of Rs.10,000/-. A does not pay the amount to C. C
cannot take action against A as it is only B who can enforce the promise against A.
Time and place of performance (Section 46-50)
1. Performance of the promise within a reasonable time:- As per the Section 46 of Contract Act,
where the time for performance is not specified in the contract and the promissory himself has to perform
the promise without being asked for by the promisee, the contract must be performed within a reasonable
time. The question of reasonable time, in each particular case, is a question of fact.
2. Performance of promise where time is specified:- Section 47 says that when a promise is to be
performed on a certain day and the promissory has undertaken to perform it without any demand by the

42. 42
promisee, the promisor may perform it at any time during the usual hours of business on such day and at
the place at which the promise ought to be performed.
3. Performance of promise on an application by the promise:- It may also happen that the day for the
performance of the promise is specified in the contract but the promisor has not undertaken to perform it
without application or demand by the promisee. In such cases, the promisee must apply for performance
at a proper place and within the usual hours of business.
4. Performance of promise where no place is specified and also no application is to be made by
promise:- Section 49 of the contract act says that when 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.
5. Performance of promise in the manner and time or sanctioned by promise:- Sometimes the
promisee himself prescribes the manner and the time of performance. In such cases, the promise must be
performed in the manner and at the time prescribed by the promisee. The promisor shall be discharged
from his liability if he performed the promise in the manner and time prescribed by the promisee.
“Time as the essence of the contract” means the performance of the promise by a party to the contract
shall be within the specified time or within the reasonable time.
Section 55 deals with “Time as the essence of the contract”-
1. When time is of the essence – In a contract where time is as the essence of the contract and if there is
failure in performance of the obligation within the specified time then the contract becomes voidable at
the option of the promisee. If the promisee accepts the performance of contract after the specified time
then in such case promisee is not entitled to claim compensation for any loss suffered due to non-
performance of contract on time.
IN COMMERCIAL OR MERCANTILE CONTRACTS, which provides for performance within the
specified time, here time is ordinarily of the essence of the contract as businessmen wants certainty in
respect of business.
2) When time is not of the essence:- In a contract, where time is not of essence of the contract, it do not
makes the contract voidable rather the promisee is entitled to claim compensation for any loss suffered
due to non- performance of the contract at specified time.
1. Intention to make time as the essence of the contract, if expressed in writing, it must be
unambiguous and without any mistake.
2. In cases other than COMMERCIAL OR MERCANTILE CONTRACTS, the presumption is that
the time is not of the essence of the contract.
Illustration:- In a contract of sale of immovable property time is not of the essence unless it is
shown that the intention of the parties was that the time should be the essence of the contract.
Devolution of joint liabilities (Section 42-44)
“Devolution” means passing over from one person to another. When two or more persons have made a
joint promise, then unless a contrary intention appears by the contract, all such persons, during their lives
and after the death of any of them, their representatives jointly with the survivor or survivors, and after
the death of the last survivor, the representatives of all jointly, must fulfill the promise.
Illustration:- A, B & C jointly took loan from D. If, ‘A’ dies then his representative will perform the
promise jointly with B & C. Further in case of death of all, the legal representatives of all of them jointly
needs to perform the promise.
Devolution of joint rights (Section 45)
When a person has made a promise to two or more persons jointly, the rule is called devolution of joint
rights.
Section 45 lays down:-
1. All the promisees must jointly claim the performance.
2. If, any one of them dies then his representative shall claim performance jointly with the surviving
promisees.
3. Further in case of death of all, the legal representatives of all of them jointly needs to claim the
performance of the promise. Illustration:- A & B jointly gives loan of Rs.5,000/- to C. C promises A &

43. 43
B jointly to repay back the amount. B dies, here, legal representative of B jointly with the survivor A can
claim for the performance of the promise from C.
Reciprocal promises
Promises which form the consideration or part of the consideration for each other, are called
reciprocal promises – Section 2(f).
Rules regarding the performance of the Reciprocal Promises :- (Section 51-54 & 57) :-
1. Section 51- Promisor not bound to perform, unless reciprocal promisee ready and willing to
perform.—When a contract consists of reciprocal promises to be simultaneously performed, no promisor
need perform his promise unless the promisee is ready and willing to perform his reciprocal promise.
Illustrations
(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not deliver
the goods, unless B is ready and willing to pay for the goods on delivery. Moreover, B need not pay for
the goods, unless A is ready and willing to deliver them on payment.
2. Section 52:- Order of performance of reciprocal promises.—Where the order in which reciprocal
promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and
where the order is not expressly fixed by the contract, they shall be performed in that order which the
nature of the transaction requires.
Illustrations:- (a) A and B contract that A shall build a house for B at a fixed price. A’s promise to build
the house must be performed before B’s promise to pay for it.
3) Section 53:- Liability of party preventing event on which the contract is to take effect.—When a
contract contains reciprocal promises, and one party to the contract prevents the other from performing
his promise, the contract becomes voidable at 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.
Illustration:- A and B contract that B shall execute certain work for A for a thousand rupees. B is ready
and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable
at the option of B; and, if he elects to rescind it, he is entitled to recover from A compensation for any loss
which he has incurred by its non-performance.
4) Section 54:- Effect of default as to that promise which should be performed, in contract
consisting of reciprocal promises.—When a contract consists of reciprocal promises, such that one of
them cannot be performed, or that its performance cannot be claimed till the other has been performed,
and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the
performance of the reciprocal promise, and must make compensation to the other party to the contract for
any loss which such other party may sustain by the non-performance of the contract.
Illustrations :- A promises B to sell him one hundred bales of merchandise, to be delivered next day, and
B promises A to pay for them within a month. A does not deliver according to his promise. B’s promise
to pay need not be performed, and A must make compensation.
5) Section 57:- Reciprocal promise to do things legal, and also other things illegal -Where persons
reciprocally promise, firstly to do certain things which are legal, and secondly, under specified
circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the
second is a void agreement.
Illustration:- A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a
gambling house, he shall pay A 50,000 rupees for it. A and B agree that A shall sell B a house for 10,000
rupees, but that, if B uses it as a gambling house, he shall pay A 50,000 rupees for it." The first set of
reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract. The first set of
reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract." The second
set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void
agreement. The second set is for an unlawful object, namely, that B may use the house as a gambling
house, and is a void agreement."

44. 44
Assignment of contract
Assignment of the contract means transfer of contractual rights and liabilities under the contract to a
third party.
It may take place by:-
1. Act of the parties:- This is subject to the following rules:-
(1) Contracts involving personal skill or ability or other personal qualifications cannot be assigned.
(2) A promisor cannot assign his liabilities or obligations under a contract.
(3) The rights and benefits under a contract may be assigned.
(4) An actionable claim can always be assigned but the assignment to be complete and effectual must be
effected by an instrument in writing. Notice of such assignment must also be given to the debtor.
2. Operation of Law:- This takes place in case of death or insolvency of a party to the contract.
Quasi contracts
A quasi contract is a contract that is created by a court order, not by an agreement
made by the parties to the contract. For example, quasi contracts are created by the court when no official
agreement exists between the parties, in disputes over payments for goods or services. The goal in the
court’s creation of these contracts is to prevent unjust enrichment to any party. To explore this concept,
consider the following quasi contract definition.
Definition of Quasi Contract
Noun
A contract created by the court in the absence of an official agreement between the parties.
What is a Quasi Contract
A quasi contract is a contract that is created by the court when no such official contract
exists between the parties, and there is a dispute with regard to payment for goods or services provided.
Courts create quasi contracts to prevent a party from being unjustly enriched, or from benefitting from
the situation when he does not deserve to do so.
Consider the following example of a quasi contract:
Teresa’s brother, Eric, tries to talk her into building a greenhouse in her large back
yard. She declines, but Eric is convinced that, if she were surprised by a lovely greenhouse, she would
love it. Knowing that Teresa makes good money, and could easily afford the greenhouse, Eric contacts
greenhouse builder John, and arranges to have him erect the structure while his sister is at work one day.
Teresa is not happy by her brother’s initiative, but the deed is done. Eric has
directed John to bill his sister for the greenhouse, and that turns out to be the biggest surprise for her. She
declines to pay, and Eric tells John he cannot afford it. John is now out, not only payment for his many
hours of hard work, but cash for the materials he used.
John has no choice but to file a civil lawsuit against Teresa, seeking payment. No
contract exists between Teresa and John, however the court might allow John to recover the costs
involved with building the greenhouse from Teresa, in order to prevent Teresa from being unjustly
enriched. This is because, whether Teresa planned on it or not, she now has a brand new greenhouse.
The court is likely to create a quasi contract, essentially contriving an agreement
between John and Teresa, and holding Teresa responsible for the cost of John’s materials. It is also
possible the court might order her to pay for John’s labor as well. Quasi contracts are always made to fit
their specific situations.
A quasi contract, or an “implied-in-law” contract, may offer less recovery than an
implied-in-fact contract. This is because an implied-in-fact contract lays out the terms of an agreement in
its entirety, as the parties initially intended, even if only in a verbal agreement. As a result of an implied-
in-fact contract, a party may be entitled to recover any and all expected profits, as well as the cost of any
labor and materials he may have laid out to complete the project.

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A quasi contract will only afford as much recovery as necessary to prevent one
party from being unjustly enriched. In the example above, it would be unfair for Teresa to benefit from
the new greenhouse at John’s expense, even though she never intended to enter into a contract with him.
History of Quasi Contract
The history of quasi contract can be followed back to the Middle Ages, under a
practice that was referred to back then as indebitatus assumpsit. In that period, the law dictated that a
plaintiff would receive a sum of money from the defendant, in an amount dictated by the courts, as if the
defendant had always agreed to pay the plaintiff for his goods or services.
Indebitatus assumpsit was a method used by the courts to make one party pay
another as if a contract had been created between the two parties. The defendant’s agreement to be bound
by a contract that required compensation was implied by the law. The early days in the history of quasi
contract saw such contracts being used to enforce obligations related to restitution.
Unjust Enrichment
The term “unjust enrichment” refers to an individual receiving a benefit unfairly, whether it be by chance,
or as the result of another person’s misfortune. When one is unjustly enriched, he has not paid or worked
for the benefit he has received, and it is therefore morally and ethically appropriate for him to return it.
Five elements must be shown in order to prove unjust enrichment:
1. The defendant must have received an enrichment.
2. The claimant must have suffered a disadvantage as a result of the enrichment.
3. The enrichment must be established as unjust.
4. There must be an absence of explanation for the enrichment and related disadvantage.
5. There must be an absence of a remedy provided to the claimant by law.
The remedy available to a claimant in a case involving unjust enrichment is
restitution. Restitution is payment to compensate him for what the claimant was originally promised so as
to correct an injustice. Restitution can either come in the form of an order for the defendant to pay the
cash value of the benefit he received, or he might be ordered to return an item that is the subject of the
enrichment.
Requirements for Quasi Contract
In order for a judge to make a ruling in this type of case, there are certain
requirements for quasi contract. The first of the requirements for quasi contract is that the plaintiff must
have provided a tangible good or service to the defendant, with the impression that the plaintiff would
receive payment for that good or service. The second of the requirements for quasi contract is that the
plaintiff must be able to express why it would be unjust for the defendant to receive the good or service
without paying for it, and would therefore be unjustly enriched.
Consider the above example of the greenhouse. John would have every right to demand payment from
Teresa, who unexpectedly received a new greenhouse on her property. A quasi contract would be handed
down by the court, requiring Teresa to pay restitution, or “quantum meruit,” to John. Quantum meruit is
only awarded to the extent that the defendant was unjustly enriched, and no more.
Quasi Contract Example Involving the Construction of Houses on Two Properties
An early example of a quasi contract can be found in a case involving the
construction of two homes on two lots that ultimately could not be completed. In February of 1981,
Walter Salamon, a homebuilder, and Alfred E. Terra, Jr., a landowner, entered into two written
agreements wherein Terra agreed to sell two properties to Salamon for $9,000 each. From this $9,000
amount, $8,500 was to be paid on delivery of the deeds, which was to take place in August of that same
year. The parties agreed that Salamon would take over ownership of the lots by April 15.
The parties also agreed that Salamon would, upon taking ownership of the lots, be
responsible for paying the expenses related to the construction of houses on these properties, and that he
would then sell the properties to third parties and pay Terra from the proceeds. Salamon was able to
partially complete the construction of both houses, but he was unable to find the financing and purchasers
necessary to complete the construction, due to the state of the economy at that time. The sales agreement
was extended by several months, but Salamon was ultimately unable to pay for the lots.

46. 46
Not only was Salamon unable to pay for the properties in full, he wanted Terra to
reimburse him for the money he spent partially building the homes. Salamon sued Terra in district court,
asking the court to create a quasi contract so that he could recover for the costs associated with the two
partially completed houses.
The court found that no promise had existed on Terra’s part to pay Salamon for the
value of the partially completed houses. However, the court found that Terra had been unjustly enriched,
as he then had partially-built structures on his properties. The court imposed a quasi contract, awarding
Salamon $15,000 – the value of the benefits Terra had received – to compensate Salamon for his labor
and materials.
Terra appealed the decision, and the Appellate Division reversed the lower court,
holding that the lower court’s finding of a quasi contract was erroneous. According to the court, even if
Terra was enriched and Salamon had suffered, there was no evidence to prove that either of these results
was unjust.
The Appellate Division also stated that there was no basis for finding that Salamon
had reasonably expected Terra to pay for partially completed houses if Salamon was unable to perform
the contract. Therefore, the Appellate Division concluded that Salamon bore the risks involved with not
completing or selling the houses, and must therefore also bear the losses suffered for not anticipating the
effect of the economic downswing.
Salamon then appealed to the Commonwealth of Massachusetts, which affirmed the
Appellate Court’s decision. The court held that the evidence did not support the conclusion that either
party should have expected Terra to pay for the value of the partially completed houses, or the expenses
that Salamon had incurred. The court went on to say that the fact that Salamon built two houses on
property Terra owned was merely part of the financing arrangement, and that Terra did not request, or
even want the houses to be built. Terra, per the court, was only interested in receiving the balance of the
purchase price of the lots.
Said the Court, in its decision:
“Where services are rendered by one party and voluntarily accepted by another, the
presumption that there is an expectation of payment therefor, as well as an implied promise of payment
for the reasonable worth of those services, may be rebutted by a showing of strong self-interest in the
outcome of the transaction by the party furnishing those services. Compensation on a quasi contract
theory is not mandated where the services were rendered simply to gain a business advantage or where
the plaintiff did not contemplate a personal fee.”
Related Legal Terms and Issues
Appellate Court – A court having jurisdiction to review decisions of a trial-level or other lower court.
Contract – An agreement between two or more parties in which a promise is made to do or provide
something in return for a valuable benefit.
Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or
charged with, a crime or offense.
Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit,
or criminal proceedings.
Remedy – The enforcement of a right, or imposition of a penalty by a court of law.
Unjust Enrichment – A legal principle that prohibits one person from profiting, or being enriched, at the
expense of another person. In such a case, the unjustly enriched party may be ordered to make restitution
for the reasonable value of the services rendered, property transferred or damaged, or other benefits
received.

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Breach of Contract and its remedies
Breach of Contract: Remedies. The five basic remedies for breach of contract include
the following: money damages, restitution, rescission, reformation, and specific performance. A money
damage award includes a sum of money that is given as compensation for financial losses caused by a
breach of contract.
Breach of contract and its remedies indian contract act
All parties to a contract are expected to perform their promises. When one party refuses
to perform his promise, then the breach of contract takes place. The other party or parties are called
aggrieved or injured party or parties. There are various types of remedies for the injured parties. Such as –
i) Rescission of the contract.
ii) Claim for specific performance.
iii) Claim for injunction.
iv) Claim for quantum merit and
v) Claim for damages.
Rescind of the contract
If there is breach of contract by one party, then the other parties may rescind the contract
and thereby he is absolved from his all obligations under the contract.
Example: - M promises N to supply him a motor car on 1st January 2007, and N promises to pay for the
motor car on 1st January 2007. N is absolved from paying its price.
Claim for specific performance
In some specific cases if the damages are not adequate remedy, then the court can direct
the party in breach for the specific performance of the contract. In such case, the promise is carried out as
per terms and conditions of the contract. Generally in the following cases, the court grants specific
performance:
i) When the act agreed to be done is such that compensation in money for its non-performance of the act
agreed to be done.
ii) When it is probable that compensation in money cannot be get for the non- performance of the act
agreed to be done.
iii) When there is not any standard for ascertaining the actual damage caused by the non-performance of
the act agreed to be done.
Court does not grant specific performance in the following cases
i) Damages are an adequate remedy.
ii) The contract is not certain.
iii) The contract is inequitable to either party.
iv) The contract is of revocable nature.
v) The contract is made by the trustee in breach of trust.
vi) The contract is of personal nature i.e. contract to marry.
vii) The contract made by a company ultra-vires of its memorandum of association.
viii) The court cannot supervise its carrying out.
Claim for injunction
Injunction is an order passed by a competent court restraining a person from doing some act. Injunction
can be defined as a mode of securing the specific performance of the negative terms of a contract.
Negative terms of contract imply doing something, which a party has promised not to do. Injunction is an
order which is granted by the court restraining the person to do what he had promised not to do.
The court may order injunction in the following cases
i) if the contract is voidable.
ii) if the contract becomes void or
iii) on discovering the contract as void.
Claim for quantum merit
The claim for quantum merit may be arise if a contract performed by one party has
become discharged by breach of the other party. The meaning of the phrase quantum merit is ‘as much as

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earned’. The claim is not for the original contract that has been discharged or void, but on an implied
promise by the other party to pay for what he has done.
Quantum merits are arised in the following circumstances.
a) If a contract is found to be void.
b) If something is done without any intention to do so gratuitously.
c) If one party abandons or refuses to perform the contract.
d) If a contract is divisible.
e) If a contract is performed badly.
Claim for damages
Damages are a monetary compensation awarded by the court to the injured party for the loss
or injury suffered by him. As per contract, one party can claim damages if other party breach the contract.
The main purpose of awarding the damages is to make good the loss suffered by him. It is known as
doctrine of restitution. The Section 73 of the Indian Contract Act, 1872 deals with the compensation for
loss or damages caused by a party for breach of contract.
Type of damages
There are mainly four types of damages, such as-
i) Ordinary damages
ii) Special damages
iii) Vindictive or exemplary damages
iv) Nominal damages.
v) Damages for loss of reputation
vi) Damages for inconvenience
Ordinary damages
When a contract has been broken the injured party can recover from the other party such
damages as naturally and directly arose in the usual course of things from the breach.
Ex: A contracts to sell and deliver 50 quintals of Wheat to B at Rs.775 per quintal and the price to be paid
at the time of delivery. The price of wheat rises to Rs. 800 per quintal and A refuses to sell the wheat.
Now B can claim damages at the rate of Rs.25 per quintal.
Special damages
Special Damages can be claimed only if special circumstances which would result in a
special loss in case of breach of contract are brought to the notice of the party. These damages arise on
account of the special or unnatural circumstances affecting the plaintiff.
The special circumstances which are mentioned above are the circumstances at the time
when the contract is entered into. Subsequent knowledge of special circumstances will not create any
special liability.
Vindictive or exemplary damages
These damages are awarded with a view to punish the guilty party for the breach. The
exemplary damages have no place in the law of contract since the object of the damages are to
compensate the loss suffered by the injured party in case of a breach. However, Exemplary or vindictive
damages are awarded to the following exemptions.
1. Breach of a contract to marry
2. Dishonour of a cheque by a banker when there are sufficient funds to the credit of the customer.
Nominal damages
These damages are awarded when there are no significant loss suffered by the plaintiff. It is
awarded for namesake to establish the right of the injured party.
a) A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A failed to purchase the
Scooter. However, the demand for the Scooter far exceeded the supply and B could sell the Scooter to Z
for Rs. 25, 000, i.e., without any loss of profit. Here if B makes a claim upon A for breach of contract, he
will be entitled to nominal damages only.

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Damage for loss of reputation
1. Generally not recoverable
2. Exception – Banker who wrongly refuses to honour a customer's cheque, if the customer happens
to be a tradesman, he can recover damages in respect of any loss to his trade reputation by the
breach.
3. If the customer is not a trademan he can only claim a nominal damages.
Damages for inconvenience and discomfort
1. Damages can be recovered for physical inconvenience and discomfort.
2. The measure of damages is not affected by the motive or manner of the breach.
3. If the inconvenience caused by a breach is substantial, the damages can be recovered on the
ground of fairness.
Unit -II
Sale of goods Act, 1930
What is sales of goods in business law?
Definition sale of goods. A contract of sale is a legal contract an exchange of
goods, services or property to be exchanged from seller to buyer for an agreed upon value in
money paid or the promise to pay same. It is a specific type of legal contract
SALES OF GOODS ACT, 1930
HISTORY 
1. Sale of goods act was enacted in 1930.
2. Borrowed from the English act.
3. Came into force in July, 1930.
4. Prior to the act, the law of sale of goods was contained in chapter VII of the Indian contract
act,1872.
FORMATION OF CONTRACT OF SALE
DEFINITION
Sec 4(1) of the Indian Sale of Goods Act, 1930 defines the contract of the sale of goods in
the following manner:
“A 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”.
The term “Contract of sale of goods‟ is a generic term and it includes:
a. Sale and
b. An agreement to sell
Where the seller transfers the ownership rights to the buyer immediately on making the
contract, it is the contract of sale, but where the ownership rights are to pass on some future date upon the
fulfillment of certain conditions then it is called an agreement to sell.
ESSENTIALS OF A CONTRACT OF SALE 
a) Two parties- buyer and seller
b) Goods 
c) Price 
d) Transfer of general property
e) Essential elements of a valid contract
f) A contract of sale may be absolute or conditional.

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DIFFERENCE BETWEEN Sale Agreement to sell
Sale Agreement to sell
1 .Ownership passes to the buyer. 1. Ownership remains with the seller
2. It is a executed contract 2. It is a executorycontract
3. Risk of loss falls on buyer. 3.  Risk of loss falls on the seller.
4. Seller cannot resell the goods 4. Seller can sell goods to third party
5. It can be in case of existing and specific goods 5. It can be in case of future and unascertained
goods.
6. In case of breach of a contract, seller can sue for
the price of the goods
6. In case of breach of a contract, seller can sue
only for damages not for the price
7. The seller is only entitled to the ratable dividend
of the price due if the buyer becomes insolvent.
7. The seller may refuse to the sell the goods to the
buyer W/O payments if the buyer becomes
insolvent.
8. The buyer is entitled to recover the specific
property from the assignee if the seller becomes
insolvent.
8. Buyer can claim only ratable dividend for the
money paid.
DISTINCTION BETWEEN
Sale Hire-purchase agreement
1. Property in the goods is transferred to the buyer
immediately at the time of the contract
1. The goods passes to the hirer on the payment of
the last installment
2. The position of the buyer is that of the owner of
the goods .
2. The position of the buyer is that of a bailee till he
pays the last installment.
3. The buyer cannot terminate the contract and is
bound to pay the price of the goods.
3. The hirer may, terminate the contract, by
returning the goods to its owner without any
liability to pay the remaining installment.
BAILMENT
Bailment is the delivery of the goods for some specific purpose under a contract on the
condition that the same goods are to be returned to the bailor or are to be disposed of according to the
directions of the bailor.
For example:- A guard hired to protect the paintings at a museum.
FEATURES OF BAILMENT
1. Subject is personal property
2. Transfer is temporary possession
3. Transfer is temporary control
4. Both parties intend to return the goods
A bailment must be personal property. Real property such as land and buildings, cannot be bailed.
DISTINCTION BETWEEN Sale Bailment
Sale Bailment
1. The property in goods is transferred from the
seller to the buyer.
1. There is only transfer the of possession of goods
from the bailor to the bailee for any of the reasons
like safe custody, carriage etc
2. The return of goods in contract of sale is not
possible
2. The bailee must return goods to the bailor on the
accomplishment of the purpose for which bailment
was made
3.The consideration is the price in terms of money 3. The consideration may be gratuitous or non
gratuitous.

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CONDITIONS AND WARRANTIES [SEC 12]
TERMS
Representation: Statement made by the seller before entering into a contract.
Stipulation: If such representation forms an integral part of the contract and other party relies upon it.
No Representation: CAVEAT EMPTOR
‟i.e., Let the Buyer Beware – is applied
CONDITION AND WARRANTY
“A stipulation in a contract of sale with reference to goods which are subject matter thereof may be a
condition or a warranty.”
These stipulations forms a part of the contract of sale and breach of it provides a remedy to the buyer
against the seller.
CONDITION [SEC12(2)]
“ A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise
to a right to treat the contract as repudiated.”
It goes to the root of the contract.
Its non fulfillment upsets the very basis of the contract.
Example :- [Behn v. Burness,1863]
By charter party( a contract by which a ship is hired for the carriage of goods), it was agreed
that ship m of 420 tons “now in port of Amsterdam” should proceed direct to new port to load a cargo. In
fact at the time of the contract the ship was not in the port of Amsterdam and when the ship reached
Newport, the charterer refused to load. Held, the words “now in the port of Amsterdam” amounted to a
condition, the breach of which entitled the charterer to repudiate the contract.
WARRANTY : SEC.12(3)
A warranty is a stipulation collateral to the main purpose of the contract the breach of which
gives rise to a claim for damages but not right to reject the goods and treat the contract as repudiated.
DISTINCTION BETWEEN Condition warranty
Condition Warranty
1. It is a stipulation which is essential for the main
purpose of the contract
1. It is a stipulation which is collateral to the main
of the purpose of the contract
2. In case. breach of a condition the aggrieved party
can repudiate the contract of sale.
2. I n case of breach of, the warranty, aggrieved
party can claim damages only.
3. A breach of condition may be treated as breach
of warranty
3. The breach of warranty cannot be. treated as a
breach of a condition
TYPES
Express Conditions : Expressely provided in the contract
Implied conditions & warranty(sec 14 to 17) : which the law implies in a contract of sale
IMPLIED CONDITIONS :
a) Conditions as to title [Sec.14(a)]
[Rowland Divall,(1923)]
b) Sale by description [Sec.15]
[Bowes v.shand,(1877)]
c) Conditions as to quality or fitness.[Sec.16(1)]
d) Condition as Merchantability [Sec.16(2)] 
[R.S.Thakur v. H.G.E. corp., A.I.R.(1971)]
e) Conditions implied by custom [Sec.16(3)].
f) Sale by Sample (Sec.17)
g) Condition as to wholesomeness.

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IMPLIED WARRANTIES
1. Warranty of Quiet possession-Sec.14(6)
2. Warranty against encumbrances-Sec.14(c)
3. Warranty to disclose dangerous natures of goods
4. Warranty as to quality or fitness by usage of trade –. Sec.16(4).
CAVEAT EMPTOR
Let the „Buyer Beware‟
The maxim Caveat Emptor does not apply & the contract will be subject to the implied conditions under
the following circumstances :
1. Sale under fitness for buyers purpose
2. Sale under merchantable quality
3. Sale under usage of trade
4. Consent by Fraud
EXCEPTIONS
a) Fitness for buyer‟s purpose.
b) Sale under a patent or trade name. 
c) Consent by fraud
d) Usage of trade
e) Merchantable quality
RIGHTS OF UNPAID SELLER
UNPAID SELLER (SEC.45)
A seller of goods is deemed to be an unpaid seller when:- The whole of the price has not been
paid or tendered;• A bill of exchange or other negotiable instrument has been received as a conditional
payment, and the condition on which it was received has not been fulfilled by reason of the dishonour of
the instrument or otherwise.
CONDITIONS
The term "seller" includes any person who is in the position of a seller, as, for instance, an
agent of the seller to whom the bill of lading has been endorsed, or a consignor or agent who has himself
paid, or is directly responsible for, the price. The seller shall be called an unpaid seller even when only a
small portion of the price remains to be unpaid. It is for the nonpayment of the price and not for other
expenses that a seller is termed as an unpaid seller. Where the full price has been tendered by the buyer
and the seller refused to accept it, the seller cannot be called as unpaid seller. Where the goods have been
sold on credit, the seller cannot be called as an unpaid seller. Unless : If On the expiry ofduring the
credit period seller becomes insolvent, or the credit period, if the price remains unpaid, Then, only the
seller will become an unpaid seller.
1) Right against goods:
Where the property in the goods has passed
a) A right of Re-saleWhere
b) A right of stoppage-in-transit
c) Lien on goods
Where the property in the goods has not passed
a) Withholding delivery
b) Stoppage in transit
Right against the buyer:
c) the property in the goods has not passed
d) Suit for damages
e) Suit for price
f) Suit for interest
g) Repudiation o contract

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RIGHT OF LIEN (SEC.47-49)
a) the goods are not sold on credit:
b) The goods have been sold on credit, but the period of credit has expired
c) the buyer becomes insolvent
RIGHT OF STOPPAGE IN TRANSIT (SEC.50-52)
a) The transit is end in following cases:
b)  If the buyer obtains the possession of the goods before its arrival at the destination
c) If, after the arrival at their destination, the carrier acknowledges to the buyer that he holds on
his behalf
d) If the carrier wrongfully refuses to deliver the goods to the buyer
RIGHT OF RE-SALE (SEC.54)
a) When the buyer does not pay the price
b) Where the goods are of perishable nature
Contract of sale of goods
The law relating to sale of goods is contained in the Sale of Goods Act,1930. This law came
force on 1st July 1930. The Act contains 66 sections and extends to the whole of Pakistan.
Definition of contract of sale:
Sale of Goods Act defines a contract of sale of goods as “A contract whereby the seller transfer
or agrees to transfer the property in goods to the buyer for a price”.
In the other words, a contract to transfer the ownership of goods from the seller to the buyer is
known as contract of sale.
Essentials of contract of sale:
The Following are essentials of a contract of sale of goods:
1: Contract
The word contract means an agreement enforceable by law. All the essential of a valid
contract like capacity of parties, free consent, legality of object, etc. should also be present in a contract of
sale. It may be verbal or in writing. It may be express or implied.
2: Two Parties
There should be two parties to a contract of sale, i.e. a buyer and seller. One person cannot
act as a buyer and seller because a person cannot buy his own goods and similarly a person cannot sell his
goods to himself. However, an owner of a one part can sell his share to the owner of other part. Similarly,
a partner may buy the goods from the firm in which he is a partner and vice-versa. Example: A sells his
computer to B for Rs. 40,000. A is seller and B is buyer.
3: Transfer of Property:
Transfer of property is another essential of contract of sale. Property here means ownership. A
mere transfer of possession of the goods cannot be termed as a sale. To constitute a contract of sale the
seller must either transfer or agree to transfer the property (ownership) in the goods to the buyer.
Example: “A” sells his car to “B” for Rs 8,000,000. The ownership and possession of the car will be
transfer from “A” to “B”.
4: Goods:
Goods means every kind of movable property other than actionable claims and money; and
includes electricity, water, gas, stock and shares, growing crops, car etc. Every movable property is
regarded as goods. The trees, fruits etc. are regarded as goods because they can be separated from land.
An actionable claim means a debt or a claim for money which a person may have against another and
which can be recovered by filing a suit. Money is not regarded as goods. However, old coins are treated
as goods
5: Price:
The consideration in a contract of sale must be the price. When goods are sold or exchanged for
other goods, the transaction is barter, and not a contract of sale of goods. If goods are sold partly for
goods and partly for money, the contract is sale.

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Example: A sell his Car to M for Rs 3 lac. It is a contract of sale because here the subject matter is car
which is moveable thing.
6: Sale and Agreement to sell:
The term contract of sale includes both sale and an agreement to sell. When the property in
the goods is transferred from the seller to the buyer at the time of formation of contract, the contract is
called a sale. Where under a contract of sale the transfer of ownership in the goods is to be transferred
from seller to buyer at some future date, the contract is called an agreement to sell.
Example: “A” buys a book from “S” and pays the entire price on a counter and received the goods, it’s a
sale. “A” agree to buy “B’s” car for Rs 2 lac, but deliver will be take placed after a month, it’s a
agreement to sale.
Kinds of goods:-
The following are the kinds of goods.
1. Existing Goods: The good which are owned or possessed by the seller at the time of contract of sale
are called existing goods. In other words the goods which are physically in existence and in seller’s
possession, at the time of contract are called existing goods.
These goods can be divided into following kinds
a. Specific Goods:
The goods identified and agreed upon at the time of the contract of sale are called specific goods.
In other words these are the goods which can be clearly identified and recognized as separate things at the
time of contract.
b. Unascertained Goods: The goods which are not identified and agreed upon at the time when a
contract of sale is made are called unascertained goods.
Example: A has 100 bags of sugar. A promise to sell 10 bags of sugar out of them, it is a contract of
unascertained goods.
2. Future Goods:
The goods which a seller does not possess at the time of contract but will be manufactured,
produced or acquired by the seller after making the contract of sale are called future goods. The seller can
just make an agreement sell about future goods.
Example: “A” agrees to sell to “B” all the wheat which will be produced in his farm next year, it is a
contract of future goods.
3. Contingent Goods:
Though a type of future goods, these are the goods the acquisition of which by the seller depends
upon a contingency, which may or may not happen
Example: “X agrees to sell to Y 25 bales of Egyptian cotton, provided the ship which is bringing them
reaches the port safely. It is a contract for the sale of contingent goods. If the ship in sunk, the contract
becomes void and the seller is not liable. A agrees to sell specific goods in a particular ship to B to be
delivered on the arrival of the ship. If the ship arrives but with no such goods on board, the seller is not
liable, for the contract is to deliver the goods should they arrive.
Fixation of price:
The money consideration for sale of goods is known as price. Price is an essential element in
every contract of sale of goods, a valid sale cannot take place without a price. The price should be paid or
promised to be paid.
Modes of Fixing Price:
1.Parties: This is most usual mode of fixing the price. The parties are free to fix any price. The price may
be stated in a contract by the parties of the contract. Example: “Y” agrees to sell his car to “Z” for Rs 5
lac, Here the price is fixed in the contract itself.
2. Agreed Manner: The price is fixed in a manner agreed upon in a contract it may be the price
prevailing on any particular date.
Example: “A” agrees to sell 1,000 share of PIAA to “B” at the rate prevailing on the 20th day after the
deal.

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3. Course of Dealings:
Where price is neither expressed in the contract nor any manner of fixing the price is
agreed, the price would be determined by the course of dealings between the parties.
Example: “A” agrees with “B” to buy 100 shares of XYZ company, In general course of dealings the
accepted price of shares is the price prevailing on date of contract, it is the price prevailing in the marker
on date of sale.
Reasonable Price:
If the price is not capable of being fixed in by any of the above modes, the buyer is bound
to pay to the seller a reasonable price, what is the reasonable price depends upon the circumstances of
each case.
Example: “B” orders “C” to supply 1500 kg of Sugar without fixing the price. Price of sugar in the
market on day of order would be considered as reasonable price “C” must supply sugar to “A” at this
market rate.
Conditions and Warranties .
A contract of sale of goods contains various terms or stipulations regarding the quality,
price, mode of payment, delivery of goods, time of performance and place where the goods are to be sent.
The major terms are called conditions and minor terms are called warranties. Conditions and Warranties
Definition of condition
Condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated. Thus, a condition is essential for the main
purpose of the contract. Its non fulfillment causes massive losses to the suffered party. In case of violation
of condition, the suffered party can cancel the contract.
Examples:
“A” contract to deliver 100 fans of GFC fans to “B”, but “A” delivers Millet Fans, it is
breach of condition, B can accept or reject them and claim for damages.
“C” contract to delivery 50 laptops of HP to “D”, but “B” delivers 50 laptops of Dell, its
breach of condition.
Definition of warranty
Warranty is a stipulation to the main purpose of the contract, the breach of which gives rise a
claim for damages but not the right to reject the goods and treat the contract as a repudiated. In other
words , a warranty is not essential for the main purpose of the contract, The breach of warranty gives the
suffered party a right to recover damages only but not to reject the contract.
Warranty
Examples:
“A” promise to deliver to “B” 100 fans at his office, but
“A” delivers them at his home, it is breach of warranty, B can claim damages only but cant
reject the contract.
Difference between condition and warranty
CONDITION WARRANTY
1. Value A condition is a stipulation essential to the
main purpose of the contract.
1. Value A warranty is a stipulation not essential to
the main purpose of the contract.
2. Basis It forms the basis of a contract and goes
direct to the root of the contract.
2. Basis It doesn’t forms the basis of a contract and
doesn’t goes direct to the root of the contract.
3. Breach The breach of a condition gives the
suffered party the right to reject the contract.
3. Breach The breach of a warranty doesn’t gives
the suffered party the right to reject the contract.
4. Treatment The treatment of condition may be
treated as a breach of warranty.
4. Treatment The treatment of warranty cannot be
treated as a breach of condition.
5. Option In the breach of condition, the suffered
party has an option to claim damages instead of
rejecting the contract.
5. Option In the breach of warranty, the suffered
party has no option to reject the contract. He can
only claim for damages

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Express and implied conditions and warranties
The condition and warranty which are included in contract are called express. The conditions
and warranty which are not included in the contract but the law presumes their existence in the contract
are called implied.
Implied conditions
Whether any express condition is made or not law presumes certain standards which are
to be ensured by the seller before selling the any product .These presumptions as to nature, quality, and
rightful ownership of the product are termed as implied conditions.
1. Sales by description:’
“If you contract to sell peas, you cannot oblige a party to take beans.” where there is a
contract for the sale of goods by description, there is an implied condition that the goods shall correspond
with the description. If the goods are not according to the description, the buyer can reject the goods. If
the seller supplies different goods, the buyer is not bound to accept the goods.
Example: “A” advertised a car for sale as Corolla, 2014 model, B after buying the car, found it of an
older model, B could return the car.
2. Sale by sample:
In case of sale by sample, the goods must be supplied according to a sample agreed. Seller
should supply the goods according to sample shown to the buyer.
3. Sale by sample and description:
When the goods are sold by sample as well as by description, there is an implied condition
that the bulk of the goods shall correspond with the sample and the description. If the goods supplied
correspond only with the sample and not with description, so the buyer could reject.
Example: Mr. Ali agreed to sell Mr. Asif imported refined almond oil. The oil supplied corresponded
with the sample but was mixed with grape oil, held, that the oil was not in accordance with the
description, so the buyer could reject the oils.
4. Condition of Fitness and Quality:
Where the buyer inform to the seller about the particular purpose for which goods are
required, there is an implied condition that the goods shall be reasonably fit for such purpose. This
condition applies if the following requirement satisfied.
Example: A enters into an agreement with B to buy 100 oil filters to be used for Suzuki Car, The oil
filters were unfit, A reject them
5. Condition for wholesomeness:
Wholesomeness means beneficial for health. This condition applies only in contract of sale
of eatables. In such cases goods supplied must be in a suitable condition to be sold, its means good must
be fit for consumption.
Example: “F” bought Milk for “E”, a dairy owner, but milk contained germs of typhoid fever, F’s wife
after taking the milk became infected and died, “A” was held liable in damages
Implied Warranties:
Unless otherwise agreed, the law includes following implied warranties into the contract of sale
of goods.
2. Disclosure of dangerous goods:
The implied warranty on the part of the seller is that if the goods are of dangerous nature,
seller should warn the buyer about the product and how it would be dangerous.
Example: C purchased a tin of insect killing powder from A, A knew that if tin is not opened with special
care, it may be dangerous but told nothing to C, C opened the tin in the normal way and as a result the
powder flied into his eyes and caused injury.
2. Quiet Possession:
It is an implied assurance to the buyer that he shall have the possession and enjoyment of the
goods sold to him without disturbance from the seller or any other person. If the buyer is disturbed in the
enjoyment of the goods due to the seller’s defective title, he can claim damages from the seller.

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Example: Mr. Waqar purchased a second hand car from Mr. Javed, Mr. Waqar spent money on its
repair and used it for some months. The Car was found to be stolen and Mr. Waqar had to return it to its
true owner, Held Mr. Waqar could recover damages and the price.
PERFORMANCE OF CONTRACT OF SALE
A contract of sale is said to be performed when each party to it fulfills his promise or does his
duty. It is the duty of the seller to deliver the goods, and of the buyer to accept and pay them in
accordance with the terms of the contract of sale.
Buyer’s Rights ( or seller’s duty):
The most important duty of the seller is to deliver the goods to the buyer according to the
terms of the contract of sale. Delivery simply means transfer of possession from one person to another.
A. Part Delivery:
A delivery of part of goods, in progress of the delivery of the whole, has the same effect for the
purpose of passing the property in such goods as a delivery of the whole.
B. Time of Delivery:
In the absence of any express contract, the seller of goods is not bound to deliver them until
the buyer applies for delivery. Where under the contract of sale the seller is bound to send goods to the
buyer but if no time for sending them is fixed, the seller is bound to send them within reasonable time.
C. Place of Delivery: Goods must be delivered where it is mentioned in the contract by the buyer to the
seller or manufacturer of the goods.
Seller’s Rights ( or Buyer’s Duties ):
The buyer must accept the goods delivered to him at the proper place and at a reasonable
time and must pay to the seller in accordance with the terms of the contract.
A. Delivery of Wrong Quantity:
Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the
buyer may reject the them, but if the buyer accepts the goods so delivered, he shall pay for them at the
contract rate. Again, where the seller delivers to the buyer a quantity of goods larger than he contracted to
sell, the buyer may accept the goods included in the contract and reject the excess quantity to the contract.
If the buyer accepts the entire goods, so delivered, he shall pay for them at the contract rate.
B. Delivery of the Goods of Wrong Description:
Where the seller delivers to the buyers the goods he contracted to sell mixed with goods of
a different description not included in the contract, the buyer may accept the goods which are in
accordance with the contract and reject the rest, if he accepts the goods he must pay the seller according
to contract.
C. Neglect or refusal of delivery:
Where the seller is ready and willing to deliver the goods and request the buyer to take the
delivery and the buyer does not within a reasonable time after the request take delivery of the goods, he is
liable to the seller for any loss occur due to his neglect or refusal to take the delivery.
Breach of contract:
Where under a contract of sale of the property in goods has passed to the buyer and
buyer intentionally refuse to pay for the goods according to the terms of the contract, the seller may sue
him for the goods. If the buyer wrongfully neglects or refuse to accept and pay for the goods, the seller
may claim for damages. Where under a contract of sale the price is payable on a certain day irrespective
of delivery and the buyer wrongfully neglect to refuse to pay such price, the seller may sue him for the
price although the property in goods has not passed or it may be passed to the buyer. If the seller
wrongfully neglect or refuse to deliver the goods to the buyer, the buyer may claims for damages.

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1.3 ESSENTIAL OF A CONTRACT OF SALE OF GOODS
ESSENTIAL OF A CONTRACT OF SALE OF GOODS: (OR ESSENTIAL ELEMENTS OF
A CONTRACT OFSALE OF GOODS)
These are various essential elements which must be present in a contract of sale of goods
these are:
(1) At least two parties:
To make a contract of sale there must be at least two parties. These parties must be distinct,
that is, a buyer and a seller. These parties should be also competent to make a contact. In this context the
word ‘buyer’ means any person who buys or agrees to buy the goods and the word ‘seller”’ means any
person who sells or agrees to sell the goods.
(2) Goods :
the subject-matter of the contract of sale of goods, must be some goods the purpose of this
contract is to transfer the property in these goods from the seller to the buyer. And the googs forming the
subject-matter of contract should be monable. The regulation of transfer of immovable property does not
come within the purview of sale of Goods act.
(3) Price-the consideration :
In a contract of sale the consideration is price. The price must be money when the goods are
sold in exchange for goods, this is not sale but only a barter. But price or consideration may by partly in
money and partly in goods.
(4) General property :
In a contract of sale the object is to transfer general property, from the seller to the buyer,
in the goods. General property in the goods in different from special property in the goods. If a person has
the ownership of the goods, it means, he has the general property in the goods. If the owners of the goods
pledges these goods with a money-lender, the moneylender has special property in the goods.
(5) In a contract of sale all the essential elements of a valid contract must be present, namely, agreement,
intention to create legal relationship, capacity to make contract, free consert, lawful consideration, lawful
object, etc.
Essential Elements of a Valid Contract
All the requirements of a valid contract such as free consent, consideration, competency
of the parties, lawful object and consideration must be fulfilled. If any of the essential elements of a valid
contract is absent, then the contract of sale will not be valid.
For e.g., A agreed to sell an almirah to B without any consideration. Such a contract of sale is not valid
because it is made without consideration.
2. Two Parties
Another essential element of a contract of sale is that there must be two parties to the contract of
sale viz., seller and buyer.
In a contract of sale, the ownership of goods has to pass from one person to another. Hence the
seller and the buyer must be different persons because one person cannot be both the buyer and the seller.
But there are certain exceptions to this – where a person’s goods are sold under an execution of decree he
may purchase his own goods.
For e.g., A and B were partners. After some years, the firm was dissolved. On the dissolution, some
goods were divided among all the partners. Such a distribution of goods among the partners was not a
sale.
3. Goods
There must be some goods as a subject-matter. Goods must be one which is defined as
goods in Sec. 2(7) of the Sale of Goods Act. As per the definition given in Sec. 2(7) of the Act, goods
means every kind of movable property and it includes

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1. stock and share,
2. growing crops, grass,
3. The things attached to or forming a part of the land which can be severed from the land.
For e.g., A agreed to sell to B, wheat crops which is grown in his field. A and B agreed that B may cut the
crop and take it away upon the payment of the price. As the growing crop is included in the term “goods”,
this is a valid contract of sale.
4. Transfer of Ownership
In a contract of sale, ownership over goods has to be transferred to the buyer by the seller
or there should be an agreement to transfer the ownership by the seller to the buyer.
The property in the goods means “all ownership rights” of the goods. In a contract of sale, all the
ownership rights of the goods must be transferred by the seller to the buyer. However, the physical
delivery of the goods is not required.
For e.g., A agreed to buy a new two wheeler from B an agent for Rs.25,000. A paid the price and got the
two wheeler registered in his name and the registration book was delivered by B to A. This is a valid
contract of sale because the ownership of the two wheeler has been transferred to A.
5. Price
Another essential element of a contract of sale is that there must be some price for the
goods. That means, the goods must be sold for some price. According to Sec. 2(10) of the Sale of Goods
Act, the term price means “the money consideration for a sale of goods“.
Thus the price is the consideration for contract of sale which should be in terms of money.
If the ownership of the goods is transferred for any consideration other than the money, that will not be a
sale but an exchange. However, consideration can be paid partly in money and partly in goods.
For e.g., A delivered to B 10 cows valued at Rs.2,000 per cow. B delivered to A 20 bags of rice at Rs.750
per bag and paid the balance of Rs.5,000 in cash in exchange of the cows. This is a valid contract of sale.
Formalities of a Contract of sale
What is the formalities of a contract of sale? A contract of sale is made by an offer to buy
or sell goods for a price and the acceptance of such price. A contract may provide for the immediate
delivery of goods or immediate payment of the price or both, or for the delivery or payment by
installments
Formalities of contract of sale
1) Immediate delivery :or
2) Immediate payment of price ,delivery at future date ; or
3) Immediate delivery and immediate payment of price :or
4) Delivery or payment or both in installments: or
5) Delivery or payment or both at some future date
Contract of sale how made? (Sec 5)
A contract of sale may be made in writing or by word of mouth or partly in writing and partly by word of
mouth or may be implied from the conduct of the parties or from the course of dealings between the
parties. A contract of sale is made in any of the following three ways:
1) Offer and acceptance: An offer to buy or sell goods by one party for a price and acceptance of such an
offer by another party is necessary.
2) Delivery: The contract may provide for immediate delivery of the goods or delivery by installments or
delivery at a future date.
3) Ascertainment of Price: (Sec 9) The contract may provide for immediate payment of the price or
payment by installment or payment may be postponed. Price must be money consideration for a sale of
goods. [Sec 2 (10)]
In the contract of sale, the price may be fixed by the contract or may be left to be fixed in a
manner thereby agreed or maybe determined by the course of dealings between the parties. Where the

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price is not so fixed, the buyer shall pay a reasonable price. Reasonable price is a question of fact
depending on the circumstances of each particular case.
Price to be fixed when agreement is to sell at valuation; (Sec 10):
Where the price is to be fixed by the valuation of a third party and such party fails to
make such valuation, the agreement becomes void. If, however, the buyer has taken delivery, or the goods
are appropriated by the buyer, he shall pay a reasonable price therefore. Where such third party is
prevented from making a valuation, buy the fault of the seller or buyer the party who so prevents is liable
to be sued for damages by the party who is in fault.
4) Goods: he contract of sale of goods may be for existing or future goods
5) Contract: Contract of sale of goods must possess all the essentials of an ordinary contact.
Hire purchase Agreement:
The possession of the goods passes to the buyer who promises to pay the price of the
goods in certain installments. Unless full price of the goods is paid, the ownership of the goods remains
with the seller. It is both a contract, of bailment and an agreement to sell.
The purchaser has an option to buy goods by way of payments in stipulated installments.
After he pays all the installments with hire charges, he becomes the owner of the goods. In a hire
purchase agreement, the hirer becomes the possessor or bailee of the goods immediately and at the same
time has a right to terminate he agreement at his pleasure, for example he has an option to return the
goods. If there is no such option existing, the agreement would be an agreement to, sell and not a hire
purchase agreement even though payments are to be made by installments. Mere payments by installment
would therefore not make a transaction a hire purchase one. The hirer, if he chooses not to make any
further installments may discontinue the payment and in such a case, possession of the goods passes back
to the seller. The seller may seize the property and also sue for arrears of installments due. The
installments paid by the hirer to the seller are not returnable. These installments are adjusted towards the
hire charges. At the same time, the hirer has an option to pay the full amount at any time and purchase
that goods hired.
Supreme Court has laid down that the sum and substance of hire purchase agreement
is two fold. One, the owner under the hire purchase agreement enters into a transaction of hiring out the
goods on the terms and conditions mentioned in the agreement and second, the option to purchase
exercisable by the hirer on payment of all the installments of hire, arises when the installments are paid
and not until then. Here is no agreement to buy goods, the hirer being under no obligation to buy but has
an option to return the goods or to become its owner by payment in full of the agreed hire installments
and the price for exercising the option.
A hire purchase agreement in its very nature implies has two aspects. There is first an
aspect of bailment of the goods subjected to the hire purchase agreement and there is next an element of
sale which fructifies when the option to purchase, which is usually a term of hire purchase agreement, is
exercised by the intending purchaser. The distinguishing feature of a typical hire purchase agreement
therefore is that the property does not pass when the agreement is made out but only passes when the
option is finally exercised after complying with all the terms of the agreement.
Provisions relating to Conditions and Warranties
Condition [sec12(2)]
A condition is a term (oral or written) which goes directly 'to the written) which
goes directly 'to the root of the contract', or is so essential to its very nature that if it is broken the innocent
party can treat the contract as discharged. That party will not therefore be bound to do anything further
under that contract.

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Warranty [sec12(3)]
A warranty is a term of the contract which is collateral or subsidiary to the main
purpose of the contract. It is therefore not so vital as to affect a discharge of the contract. A breach of
warranty only entitles the innocent of warranty only entitles the innocent party to an action for damages;
he cannot treat the contract as discharged.
All of us who have bought electronic items or similar devices, ask about the
warranty periods. In some cases, you may have seen that even the warranty is sold separately as a
commodity. But does the law say about it? Here in this section on the concepts of condition and
warranty, we will see the manner in which we can define these terms and also the manner in which they
derive their legality in the light of The Sale Of Goods Act, 1930.
Warranty and Conditions
In a contract of sale, parties may make certain statements about the stipulation or
the course of trade. These stipulations in the contract of sale are made with reference to the subject matter
of the sale. These stipulations may either be a condition or in the form of a warranty. The provisions of
the conditions and warranty are provided in the sections 11 to 17 of the Act. The stipulations are the
essence of the contract of sale and a breach of these stipulations provides a remedy to the grieved party.
Stipulations as To Time – Sec 11
To understand the concept of warranty and conditions, we need to learn about the stipulation as to
time. The stipulation (നിബന്ധന) as to time may be with regards to the delivery of goods or it may be with regards
to the payment of the price. However, it may be noted that stipulations as to the time of delivery of the goods are
usually the essence of the contract. In Section 11 of the Act, the topic of the stipulation as to time has been
discussed. The Sec 11 states the follows:
Stipulations as to time: Unless a different intention can be ascertained from the
contract, stipulations as to the time of payment are not considered to be of the essence of a contract of
sale. Whether any other stipulation as to time is of the essence of the contract or not will ultimately
depend on the terms of the contract.
This means that whether the stipulations as to the time of payment of the price is of
the essence of the contract or not depends on the terms of the contract. Unless the terms of the contract
specify something different than this.
Conditions
A condition is a stipulation essential to the main purpose of the contract, the breach
of which gives the right to repudiate the contract and to claim damages. (Sec 12 (2)). We can understand
this with the help of the following example:
Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’
pointing at a particular vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on
that this car only has a top mileage of 15 km/ liter. This amounts to a breach of condition because the
seller made the stipulation which forms the essence of the contract. In this case, the mileage was a
stipulation that was essential to the main purpose of the contract and hence its breach is a breach of
condition.
Warranty
A warranty is a stipulation collateral to the main purpose of the said contract. The
breach of warranty which gives rise to a claim for damages. However, it does give a right to reject the
goods or treat the contract as repudiated. (Sec 12(3)). Let us understand this with the help of an example
below.
A man buys a particular car, which is warranted to be quite to drive and very
comfortable. It turns out that after some days the car starts to make a very unpleasant noise every time it
is operated. Also sitting inside it is also not very comfortable. Thus the buyer’s only remedy is to claim
damages. This is not a breach of condition but rather a breach of warranty, because the stipulation made
by the seller was only a collateral one.

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Identification of a Stipulation as a Condition or Warranty
Whether a stipulation is a condition or a warranty is a very important aspect to have the
knowledge about. A stipulation in a contract of sale is either a condition or is a warranty depending in
either case on the construction of the contract. A stipulation may be a condition, though called a warranty
in the contract.
CONDITION AND WARRANTY
WHAT IS A CONDITION
A condition is a stipulation essential to the main purpose of the contract ,breach of which
gives rise to treat the contract as repudiated or broken
WHAT IS WARRANTY
A warranty is a stipulation collateral to the main purpose of the contract the breach of which
gives rise to claim for damages but not to a right to reject the goods and could not treat the contract as
repudiated or broken.
DIFFERENCE BETWEEN CONDITION AND WARRANTY
CONDITION WARRANTY
Condition is an essential term or stipulation of the
contract which must be fulfilled for the
performance of the contract.
Warranty is a collateral or incidental stipulation to
the main purpose of the contract.
Breach of condition gives right to the party to reject
the contract and also a right to claim damages
Breach of warranty does not give right to the party
to reject the contract. It only give right to claim
damages only
Breach of condition may be treated as breach of
warranty
The breach of warranty cannot be treated as breach
of condition
IMPLIED WARRANTY AND CONDITION
A. 1) Condition as to title
There are three implied condition on the part of the seller regarding title to the goods.
A. In case of a sale, he has a right to sell the goods. In case of an agreement to sell, the seller will have a
right to sell the goods at the time when the property is to pass.
B. The buyer shall have and enjoy quiet possession of the goods
C. Goods shall encumbrance be free from any charge or
2) Sale by description
Where there is a contract for the sale of goods by description, there is an implied condition
that the goods shall correspond with the description.
3) Sale by sample
The sale by sample where there is a term in the contract express or implied to the that effect.
There are three implied condition when the goods are supplied according to sample.
A. That the bulk shall correspond with the sample in quality
B. That the buyer shall have reasonable opportunity of comparing the bulk with the sample
C. That the goods shall be free from any defect. The defect shall not be apparent on reasonable
examination.
4) SALE BY SAMPLE AND DESCRIPTION
The Sale Is By Sample As Well As By Description , It Is Not Sufficient That The Bulk Of
The Goods Corresponds With The Sample If The Goods Do Not Correspond With The Description.
Where The Sale Is By Sample As Well As By Description, The Goods Shall Correspond Both With The
Sample As Well As Description.
5) WARRANTY AS TO QUALITY OR FITNESS
There Is No Implied Warranty Or Condition As To The Quality Or Fitness For Any Particular
Purpose Of Good Supplied Under A Contract Of Sale. There Is An Implied Warranty As To Quality Or
Fitness Under The Following Circumstances Only.

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1) Where The Good Are Order For Specific Purpose.
2) Where The Buyers Relies On The Seller Skills Or Judgment.
3) Where the Goods Are Bought By Description from a Seller Who Deals In Goods Of That Description
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NEMO DAT QUOD NON HABET - THE PRINCIPLE
Literally mean “no one gives what he doesn’t have”
"Subject to this act, where goods are sold by a person who is not their owner, and who
does not sell them under the authority or with the consent of the owner, the buyer acquires no better title
to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying
the seller's authority to sell.
“The general rule is that only the owner of goods can sell the goods. Conversely the sale
of an article by a person who is not, or who has not the authority of the owner, gives no title to the buyer.
THE “NEMO DAT QUOD NON HABET” RULE SAFEGUARDS THE RIGHT OF
OWNERSHIP. HOWEVER, THERE ARE SOME EXPECTATIONS TO THE RULES .
a) Estoppel
b) Sale by Mercantile Agent
c) Sale by Joint Owner
d) Sale by Seller in Possession after sale
e) Sale by a Person in Possession under a voidable Contract
f) Sale by Buyer Obtaining Possession Before Property in Goods has Vested
g) Sale by an Unpaid Seller
h) Sale by Person Under Other law
a) ESTOPPEL
If the true owner stands by and allows an innocent buyer to pay over money to a third-party,
who professes to have the right to sell an article, the true owner will be estopped from denying the third
party’s right to sell.
b) SALE BY A MERCANTILE AGENT
A buyer will get a good title if he buys in good faith from a mercantile agent who
is in possession either of the goods or documents of title of goods with the consent of the owner,
and who sells the goods in the ordinary course of his business.
c) SALE BY A CO-OWNER
A buyer who buys in good faith from one of the several joint owners who is in sale
possession of the goods with the permission of his co-owners will get good title to the goods.
d) SALE BY SELLER IN POSSESSION AFTER SALE
Where a seller, after having sold the goods, continues in possession of goods, or
documents of title to the goods. and again sells them by himself or through his mercantile agent to
a person who buys in good faith and without notice of the previous sale, such a buyer gets a good
title to the goods.
e) SALE BY A PERSON IN POSSESSION UNDER A VOIDABLE CONTRACT
A buyer buys in good faith from a person in possession of goods under a contract
which is voidable, but has not been rescinded at the time of the sale.
f) SALE BY BUYER OBTAINING POSSESSION BEFORE TRANSFER OF OWNERSHIP
If a person has brought or agreed to buy goods obtains, with the seller's consent,
possession of the goods or of the documents of title to them, any sale by him or by his mercantile
agent to a buyer who takes in good faith without notice of any lien or other claim of the original
seller against the goods, will give a good title to the buyer. In any of the above cases, if the
transfer is by way of pledge or pawn only, it will be valid as a pledge or pawn.
g) SALE BY AN UNPAID SELLER

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Where an unpaid seller has exercised his right of lien or stoppage in transit and is in
possession of the goods, he may resell them and the second buyer will get absolute right to the
goods.
CONCEPT OF UNPAID SELLER
WHO IS UNPAID SELLER
1. Who has not received the whole of the price
2. Who has received payment in the form of negotiable instrument or bill of exchange which is
dishonored?
3. “ an unpaid seller is one who has not been paid or tendered the whole of the price or one who
receives a bill of exchange or other negotiable instrument as conditional payment and the
condition on which it was received has not been fulfilled by reason of the dishonor of the
instrument or otherwise.
RIGHTS OF AN UNPAID SELLER
Two heads –
1. When the property in the goods has passed to the buyer.
2. Right of lien
3. Right of stoppage in transit
4. Right of re-sale
2. When the property in the goods has not passed to buyer.
1. Right of withholding delivery
2. Other rights
MEANING OF LIEN
A lien is a right of any one person to retain that,
a) Which is in his possession,
b) belonging to another,
c) until certain demands of a person in possession are satisfied.
Right of lien means –
„Right to remain‟ the possession of the goods or property until the claim is paid or satisfied.
Lien may arise by –
a) Statute
b) express or implied contract
c) in ordinary course of dealing
LIEN IS OF TWO KINDS –
1. General Lien – Right to retain the goods until all the claims of the holder are satisfied.
2. Particular or specific lien – Right to retain the particular goods until all the claims arising on
those goods are satisfied.
RIGHT OF LIEN AS APPLICABLE TO UNPAID SELLER
Unpaid seller of goods, who is in possession of them is entitled to retain possession of them until
payment or tender of the price in following cases ::
a) Where the goods have been sold without any stipulation as to credit.
b) Where the goods have been sold on credit and the term of credit has expired.
c) Where the buyer insolvent and the seller is in possession of the goods.
d) The right of lien can be exercised only when the seller is in actual possession of the goods. If he
loses it, he loses the right of lien.
e) If the seller has parted with the documents of title of the goods, he does not loses his right of lien;
if he continues to have actual possession of the goods.
TERMINATION OF LIEN
Unpaid seller‟s lien is lost under following circumstances ::
a) When he delivers the goods to a carrier/other bailee for the purpose of transmission to the buyer
without reserving the right of disposal of goods.

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b) When the buyer or his agent lawfully obtains possession of goods.
c) When the seller waives his right of lien.
MEANING OF TRANSIT
a) If the goods are delivered to the carrier or bailee by the seller the transit is
commenced and it comes to an end when the buyer acquires possession thereof.
b) When goods are in the hands of a middle man, goods are said to be in transit.
c) When the right of lien ends, right of stoppage in transit begins.
RIGHT OF STOPPAGE IN TRANSIT
When the buyer of goods becomes insolvent the unpaid seller who has parted with the
possession of the goods has the right of stopping them in transit, that is to say, he may resume possession
of goods as long as they are in course of transit and may retain them until payment or tender of the price.
Right of stoppage in transit as applicable to the unpaid seller ::
1. The seller must be unpaid wholly or partly
2. The buyer must have become insolvent
3. The goods must be in transit
WHEN DOES TRANSIT OF GOODS COME TO AN END..??
1. When the buyer takes delivery of the goods from the carrier or other bailee
2. When the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the
appointed destination.
3. When the carrier or bailee on arrival of the goods at the appointed destination, acknowledges to
the buyer or his agent that he holds the goods on his behalf.
4. When the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent.
5. Transit of goods is not deemed to be at an end even if the goods are rejected by the buyer and the
carrie/bailee continues in possession of them.
HOW IS RIGHT OF STOPPAGE IN TRANSIT EFFECTED..??
1. By taking actual possession of the goods
2. By giving notice of his claim to the carrier/bailee, in whose possession the goods are or his
principal, to re-deliver the goods to seller or according to his directions.
3. Right of lien is to retain possession. Right of stoppage in transit is to regain possession.
RIGHT OF RE-SALE
When the unpaid seller has exercised his right of lien on his retaining the possession of the
goods or regaining it by exercising the right of stoppage in transit upon insolvency of the buyer he can re-
sale the goods under following conditions ::
a) Where the goods are of perishable nature
b) Where the seller gives notice to the buyer of his intention to re-sell the goods and the buyer does
not pay/tender the price within a reasonable time after the notice
c) No notice Is necessary in case of perishable goods
d) Where the seller has expressly reserved his right of re-sale in case the buyer makes default
SOME FEATURES OF RIGHT OF RE-SALE
1. Notice of re-sale is given to the buyer -unpaid seller is entitled to retain the profits
2. No notice to the buyer  no right to recover damages from the buyer - pay the profit arising
from re-sale to the buyer
3. Loss to the seller in re-sale  claim it from the buyer as damages for the breach of the contract
4. No notice required when the seller has expressly reserved the right of re-sale in case the
price is not paid
RIGHT OF WITHHOLDING DELIVERY
Where the property in the goods has not passed to the buyer, the seller has a right to withhold
delivery of the goods.
OTHER RIGHTS

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Besides these rights, the seller has the following rights against the buyer personally::
1. Sue the buyer for the price of goods
2. The seller may sue the buyer for damages for wrongfully neglecting or refusing to accept the
goods
3. Recover interest from the buyer where there is specific agreement to that effect or else the seller
may charge interest on the price when it becomes due.
Provisions Relating to Transfer of Property or Ownership
TRANSFER OF PROPERTY
Introduction
According to the Transfer of Property Act 1882,
“Transfer of Property“ means an act by which a person conveys property to one or more persons.
The act of transfer may be done in the present or for the future. The person may include an individual,
company or association or body of individuals, and any kind of property may be transferred, including the
transfer of immovable property.
Transfer of property
Sale is the first step in the “TRANSFER OF PROPERTY IN GOODS “ by the seller to the
buyer.
The Phrase “ TRANSFER OF PROPERTY IN GOODS “ means Transfer of ownership of the
Goods from one person to another.
Property in Goods is different from Possession of Goods.
Possession of Goods refers to the custody over the Goods whereas Property in Goods
means ownership over the Goods.
Importance of transfer of property
Risk follows ownership
If property has passed to the buyer, he becomes the owner of the goods and then the
risk of destruction, damage or loss.
Action against third parties
if goods are damaged by action of third parties, only owner of goods can take the action.
Suit for price Seller become entitled to recover price of goods only when property in
goods has passed to buyer.
Insolvency
If the ownership has passed to buyer and buyer became insolvent, buyer’s official
receiver can take possession of goods or vice versa...
Time when property passes
1) Specific or ascertained goods.
2) Unascertained goods.
Specific or ascertained goods
Goods that are existing at the time of contract of sale and it is identified and agreed upon
time of sale.
Section 19 of Sale of Goods Act provides “Where there s a contract for sale of specific or
ascertained goods, the property in them is transferred to buyer at such time as the parties to contract
intend to be transferred”.
Rules as regards ascertaining goods (sec.20-24)
1) Passing of property at time of contract
When there is an unconditional contract for the sale of goods in a deliverable state, the property in
goods passes to buyer when contract is made. The payment of price of delivery does not prevent property
in goods passing at once.
Passing of property delayed beyond date of contract
Goods not in deliverable state
Something has to be done by the seller to put them in a deliverable state, property passes
only when such thing is done, and the buyer has notice thereof.

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When price of goods to be ascertained by weighing or measurement
Where there is a contractor for the sale of specific goods in a deliverable state but seller is
bound to weigh, test or do some other thing with reference to them, for ascertaining the price, the property
does not pass till such act or thing is done and the buyer has notice of it.(sec.22).
Unascertained or future goods (sec.23)
There is a contract for the sale of unascertained goods, property in the goods in not
transferred to the buyer unless and until the goods are ascertained.(sec18).
Process of ascertainment involves separating, weighing, measuring, counting.
Sale “On Approval” or Sale or Return” basis
Where goods are delivered to the buyer ‘on approval’ or on ‘Sale or return’ or similar terms, the property
passes to the buyer:
Essentials of valid appropriation
1. The appropriation must be of goods answering contract description.
2. The appropriation must be intentional.
3. The appropriation must be made either by seller with the assent of buyer or by the buyer with the assent
of seller.
4. The appropriation must be unconditional.
Delivery to carrier[sec.23(2)].
Delivery to a carrier without reserving the right of disposal is a delivery to the buyer
and the property passes at once at a time of delivery to the carrier.
Reservation of right of disposal (sec.25)
Reserving a right to dispose of the goods until certain conditions(like payment of price)
are fulfilled.
Transfer of title by Non-owners (sec.27-30)
Transfer of title by Non-owners (sec.27-30)
The general rule is that only the owner of goods can transfer a good title. No one can give
better title than he himself has. This rule is expressed by the maxim “Nemo dat quod non habet,” which
mean “that no one can give what he himself has not.”
Exception of the rule
Sale by mercantile agent.(sec.27)
It as an agent having in the customary course of business as such agent authority either to
sell goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.
Sale by a joint-owner.(sec.28)
Several joint owners of goods has the sole possession thereof, with the consent of the others,
any purchaser from such person, for value without notice at the time, of the seller’s want of authority to
sell, acquire a good title thereof against the other joint owners.
Sale by a person in possession under a voidable contract (sec.29)
A person who has obtained possession of goods under a contract which is voidable on the
ground of fraud, misrepresentation, coercion, or undue influence, can convey a good title, provided the
sale takes place before the voidable contract is avoided
Sale by a seller in possession of goods after sale.(sec.30)
A seller having sold goods, continues in possession thereof or title to the goods, the transfer
by such person or by a mercantile agent acting for such person, of the same, by way of sale will pass a
good title to the transferee, if such latter person has acted in good faith and without notice of the previous
sale.
Sale by buyer in possession of goods.(sec.30(2))
A person having bought or agreed to buy obtains, with the consent of the seller, possession
of the goods or of the documents of title to the goods. The delivery of such person, of the goods or
documents, pledge or other disposition thereof will be valid and effective, if the person receiving the
same, acted bonafide and without notice of the seller’s lien, if any.
Sale by an unpaid seller.(sec.54(3))

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An unpaid of goods who has exercised his right of the lien or stoppage in transit can, even
though the ownership in them has passed to the buyer, resell the goods and convey a valid to another
buyer, though no notice of re-seller has been given to the original buyer.
Performance of contract of sale
There are many rules and definitions governing the law on sales in sections 31 to 40 of the
Sale of Goods Act, 1930. In this article, we will be looking at various definitions and duties of buyers,
sellers, and third parties (wherever applicable).
Definition of Delivery
According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary transfer of
possession of goods from one person to another. Hence, if a person takes possession of goods by unfair
means, then there is no delivery of goods. Having understood delivery, let’s look at the law on sales
Law on Sales
1] The Duty of the Buyer and Seller (Section 31)
It is the duty of the seller to deliver the goods and the buyer to pay for them and accept
them, as per the terms of the contract and the law on sales.
2] Concurrency of Payment and Delivery (Section 32)
The delivery of goods and payment of the price are concurrent conditions as per the law on
sales unless the parties agree otherwise. So, the seller has to be willing to give possession of the goods to
the buyer in exchange for the price. On the other hand, the buyer has to be ready to pay the price in
exchange for possession of the goods.
Rules Pertaining to the Delivery of Goods
The Sale of Goods Act, 1930 prescribes the following rules regarding delivery of goods:
a. Delivery (Section 33)
The delivery of goods can be made either by putting the goods in the possession of the buyer or
any person authorized by him to hold them on his behalf or by doing anything else that the parties agree
to.
b. Effect of part-delivery (Section 34)
If a part-delivery of the goods is made in progress of the delivery of the whole, then
it has the same effect for the purpose of passing the property in such goods as the delivery of the whole.
However, a part-delivery with an intention of severing it from the whole does not operate as a delivery of
the remainder.
c. Buyer to apply for delivery (Section 35)
A seller is not bound to deliver the goods until the buyer applies for delivery unless the
parties have agreed to other terms in the contract.
d. Place of delivery [Section 36 (1)]
When a sale contract is made, the parties might agree to certain terms for delivery, express or implied.
Depending on the agreement, the buyer might take possession of the goods from the seller or the seller
might send them to the buyer.
If no such terms are specified in the contract, then as per law on sales
1. The goods sold are delivered at the place at which they are at the time of the sale
2. The goods to be sold are delivered at the place at which they are at the time of the agreement to
sell. However, if the goods are not in existence at such time, then they are delivered to the place
where they are manufactured or produced.
e. Time of Delivery [Section 36 (2)]
Consider a contract of sale where the seller agrees to send the goods to the buyer, but not time of delivery
is specified. In such cases, the seller is expected to deliver the goods within a reasonable time.
f. Goods in possession of a third party [Section 36 (3)]
If at the time of sale, the goods are in possession of a third party. Then there is no delivery unless the third
party acknowledges to the buyer that the goods are being held on his behalf. It is important to note that

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nothing in this section shall affect the operation of the issue or transfer of any document of title to the
goods.
g. Time for tender of delivery [Section 36 (4)]
It is important that the demand or tender of delivery is made at a reasonable hour. If not, then it is
rendered ineffectual. The reasonable hour will depend on the case.
h. Expenses for delivery [Section 36 (5)]
The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the parties
agree to some other terms in the contract.
i. Delivery of wrong quantity (Section 37)
a) Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the contracted
quantity, then the buyer may reject the delivery. If he accepts it, then he shall pay for them at the
contracted rate.
b) Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the contracted
quantity, then the buyer may accept the quantity included in the contract and reject the rest. The
buyer can also reject the entire delivery. If he wants to accept the increased quantity, then he
needs to pay at the contract rate.
c) Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are mentioned
in the contract and some are not, then the buyer may accept the goods which are in accordance
with the contract and reject the rest. He may also reject the entire delivery.
d) Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
j. Installment deliveries (Section 38)
The buyer does not have to accept delivery in installments unless he has agreed to do so in the contract. If
such an agreement exists, then the parties are required to determine the rights and liabilities and payments
themselves.
k. Delivery to carrier [Section 36 (1)]
The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be ‘delivery to
the buyer’ unless contrary terms exist in the contract.
l. Deterioration during transit (Section 40)
If the goods are to be delivered at a distant place, then the liability of deterioration incidental to the course
of the transit lies with the buyer even though the seller agrees to deliver at his own risk.
m. Buyers right to examine the goods (Section 41)
If the buyer did not get a chance to examine the goods, then he is entitled to a reasonable opportunity of
examining them. The buyer has the right to ascertain that the goods delivered to him are in conformity
with the contract. The seller is bound to honor the buyer’s request for a reasonable opportunity of
examining the goods unless the contrary is specified in the contract.
Acceptance of Delivery of Goods (Section 42)
A buyer is deemed to have accepted the delivery of goods when:
a) He informs the seller that he has accepted the goods; or
b) Does something to the goods which is inconsistent with the ownership of the seller; or
c) Retains the goods beyond a reasonable time, without informing the seller that he has rejected
them.
Return of Rejected Goods (Section 43)
If a buyer, within his right, refuses to accept the delivery of goods, then he is not bound to return the
rejected goods to the seller. He needs to inform the seller of his refusal though. This is true unless the
parties agree to other terms in the contract.
Refusing Delivery of Goods (Section 44)
If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer fails to do
so within a reasonable time after receiving the request, then he is liable to the seller for any loss
occasioned by his refusal to take delivery. He is also liable to pay a reasonable charge for the care and
custody of goods.

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Rights of unpaid Seller
Unpaid seller
A seller of goods is deemed to be an unpaid seller when:-
The whole of the price has not been paid or tendered;
A bill of exchange or other negotiable instrument has been received as a conditional payment,
and the condition on which it was received has not been fulfilled by reason of the dishonor of the
instrument or otherwise.
The term "seller" includes any person who is in the position of a seller, as, for instance, an agent
of the seller to whom the bill of lading has been endorsed, or a consignor or agent who has himself paid,
or is directly responsible for, the price. The seller shall be called an unpaid seller even when only a small
portion of the price remains to be unpaid. It is for the nonpayment of the price and not for other expenses
that a seller is termed as an unpaid seller. Where the full price has been tendered by the buyer and the
seller refused to accept it, the seller cannot be called as unpaid seller.
Where the goods have been sold on credit, the seller cannot be called as an unpaid seller.
Unless : If during the credit period seller becomes insolvent, or On the expiry of the credit period, if the
price remains unpaid, then, only the seller will become an unpaid seller.
1) Right against goods:
Where the property in the goods has passed
a) Lien on goods
b) A right of stoppage-in-transit
c) A right of Re-sale
Where the property in the goods has not passed
a) Withholding delivery
b) Stoppage in transit
2) Right against the buyer:
a) Suit for price
b) Suit for damages
c) Repudiation o contract
d) Suit for interest
Right of lien
1. the goods are not sold on credit
2. the goods have been sold on credit, but the period of credit has expired
3. the buyer becomes insolvent
Right of stoppage in transit
1. The transit is end in following cases:
2. If the buyer obtains the possession of the goods before its arrival at the destination
3. If, after the arrival at their destination, the carrier acknowledges to the buyer that he holds on his
behalf
4. If the carrier wrongfully refuses to deliver the goods to the buyer
Right of Re-sale
1. Where the goods are of perishable nature
2. When the buyer does not pay the price
Rules as to delivery of Goods
The rules regarding the delivery of goods are contained in Sec.33 to Sec 38 of the sale of goods
Act, which may be grouped as under
Mode of delivery of goods (Sec.33)

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The delivery of the goods may be made in any of the modes as discussed above .It must have an
effect of putting the goods in possession of the buyer or his authorized agent. Thus the delivery of goods
should be such that it enables the buyer to exercise his control over the goods
Part delivery of goods (Sec.34)
The analysis of sec .34 reveals that in case of part delivery of goods, the following rules shall apply
1. Where the part delivery is made in progress of the whole delivery then it is treated as a delivery
of the whole. The ownership of the whole quantity is transferred to the buyer
2. Where the part delivery is made with the intention of separating it from the whole, it is not treated
as a delivery of the whole .The ownership of the whole quantity is not transferred to the buyer
Example 1
Amar sold certain goods which were lying in his warehouse to Akbar .Amar ordered his
warehouse keeper to deliver those goods to Akbar .Akbar weighed all the goods and took away a part of
them. It was held that this amounted to a delivery of the whole of the goods. In this case, Amar’s act of
ordering his warehouseman to deliver the goods to the buyer and the buyer’s act of weighing all the goods
show that the delivery of the whole of the goods was contemplated by the parties
Example 2
Amar sold 100 quintals of wheat lying in his go down to Akbar .After wards Amar sold 50
quintals of wheat from such 100 bags to Antony and delivered the same to him .Later Amar delivered 50
bags of wheat to Akbar. In this case, the part delivery of the wheat cannot be separating the wheat is clear
from Amar’s act of selling and delivering 50 Quintals of wheat to Anthony
Apply for delivery of goods (Sec.35)
Place for the delivery of goods. (Sec.36)
Time for the delivery of goods Sec .36(2)

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Goods in the possession of a third person Sec 36(3)
Expenses for the delivery of goods Sec 36(5)
Delivery of wrong quantity

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Delivery of goods by installments (Sec .38)
Delivery to a carrier

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Rules regarding acceptance of delivery by the buyer
Liability of buying for refusing to take delivery of the goods

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Unit 111
The Negotiable Instruments act, 1881,
The law relating to negotiable instruments is contained in the Negotiable Instruments Act,
1881 which applies and extends to the whole of India.
Definition:
The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a
written document by which a right is created in favour of some person.’ Thus, 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.
Free transferability or easy negotiability •
Negotiable instrument is freely transferable from one person to another without any
formality. •The property (right of ownership) in these instruments passes by either endorsement and
delivery (in case it is payable to order) or by delivery merely (in case it is payable to bearer) and no
further evidence of transfer is needed.
Title of holder is free from all defects •
A person who takes negotiable instrument bona-fide and for value gets the instrument free
from all defects in the title. The holder in due course is not affected by defective title of the transferor or
of any other party.
Characteristics of negotiable instruments
Transferee can sue in his own name without giving notice to the debtor: •
A bill, note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of the
creditor to recover something from hid debtor • The creditor can either recover this amount himself or can
transfer his right to another person • In case he transfers his right, the transferee of a negotiable instrument
is entitled to sue on the instrument in his own name in case of dishonor, without giving notice to the
debtor of the fact that he has become holder • In case of transfer or assignment of an ordinary “actionable
claim” (i.e., a book debt evidenced by an entry by the creditor in his account book, under the transfer of
property act, notice to the debtor is necessary in order to make the transferee entitled to sue in his own
name
Presumptions:
Certain presumptions apply to all negotiable instruments. Section 118 and 119 lay down the
following presumptions:
(a) For consideration : that every negotiable instrument, was made, drawn, accepted, endorsed or
transferred for consideration.
(b) As to date : that every negotiable instrument bearing a date was made or drawn on such date.
(c) As to time of acceptance : that every bill of exchange was accepted within a reasonable time after its
date and before its maturity.
(d) As to transfer: that every transfer of a negotiable instrument was made before its maturity
(e) As to time of endorsements : that the endorsements appearing upon a negotiable instrument were
made in the order in which they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of exchange or cheque was duly stamped.
(g) As to a holder in due course: that every holder of a negotiable instrument is holder in due course
(this presumption would not arise where it is proved that the holder has obtained the instrument from its
lawful owner, or from any person in lawful custody thereof, by means of an offence, fraud or for unlawful
consideration and in such a case the holder has to prove that he is a holder in due course
(h) As to dishonor: that the instrument was dishonored, in case a suit upon a dishonored instrument is
filed with the court and the fact of protest is proved

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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
Promissory Note
Definition:
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.”
Specimen of promissory Note
Parties to a promissory Note
There are primarily two parties involved in a promissory note. They are:
(i) The Maker or Drawer: The person who makes the note and promises to pay the amount stated
therein. In the above specimen, Sanjeev is the maker or drawer.
(ii) The Payee – the person to whom the amount is payable. In the above specimen it is Ramesh.
In course of transfer of a promissory note by payee and others, the parties involved may be –
(a) The Endorser – the person who endorses the note in favour of another person. In the above specimen
if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of Puneet, then Ramesh
and Ranjan both are endorsers.
(b) The Endorsee – the person in whose favour the note is negotiated by endorsement. In the above, it is
Ranjan and then Puneet.
Essentials of promissory Note
1. It must be in writing:
a) A promissory note has to be in writing
b) An oral promise to pay does not become a promissory note
c) The writing may be on any paper or book
d) Illustrations: A signs the instruments in the following terms:
1) “I promise to pay B or order Rs. 500”
2) “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand,
for value received”
Both the above instruments are valid promissory notes.
Essentials of promissory Note
It must contain a promise or undertaking to pay: •
1) There must be a promise or an undertaking to pay •
2) The undertaking to pay may be gathered either from express words or by necessary implication
3) A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an
agreement and may be sued upon as such •
4) Illustrations: A signs the instruments in the following terms:

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a) “Mr. B I owe you Rs. 1000”
b) “I am liable to pay to B Rs. 500”
The above instruments are not promissory notes as there is no undertaking or promise to pay. There is
only an acknowledgement of indebtedness. •
Where A signs the instrument in the following terms: “I acknowledge myself to be indebted to B in Rs.
1000, to be paid on demand, for value received,” there is a valid promissory note
The promise to pay must be unconditional: •
1) A promissory note must contain an unconditional promise to pay
2) The promise to pay must not depend upon the happening of some uncertain event, i.e., a
contingency or the fulfillment of a condition
3) Illustrations: A signs the instruments in the following terms:
a) “I promise to pay B Rs. 500 seven days after my marriage with C”
b) “I promise to pay B Rs. 500 as soon as I can”
c) The above instruments are not valid promissory notes as the payment is made depending
upon the happening of an uncertain event which may never happen and as a result the
sum may never become payable
4) It must be signed by the maker: • It is imperative that the promissory note should be duly
authenticated by the ‘signature’ of the maker • ‘Signature’ means the writing or otherwise
affixing a person’s name or a mark to represent his name, by himself or by his authority with the
intention of authenticating a document
5) The maker must be a certain person: The instrument must itself indicate with certainty who is
the person or are the persons engaging himself or themselves to pay Alternative promisors are
not permitted in law because of the general rule that “where liability lies no ambiguity must lie”
6) The payee must be certain: Like the maker the payee of a pronote must also be certain on the
face of the instrument A note in favour of fictitious person is illegal and void A pronote made
payable to the maker himself is a nullity, the reason being the same person is both the promisor
and the promisee
7) The sum payable must be certain:
For a valid pronote it is also essential that the sum of money promised to be payable
must be certain and definite The amount payable must not be capable of contingent additions or
subtractions
Illustrations: A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 and all other sums which shall be due to him”
• “I promise to pay B Rs. 500, first deducting there out any money which he may owe me”
The above instruments are invalid as promissory notes because the exact amount to be paid by A is not
certain
8. The amount payable must be in legal tender money of India:
A document containing a promise to pay a certain amount of foreign money or to deliver a
certain quantity of goods is not a pronote
Definition:
Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:
“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.”
Illustration:
Mr. X purchases goods from Mr. Y for Rs. 1000/
Mr. Y buys goods from Mr. S for Rs. 1000/
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of exchange.
Specimen of bill of Exchange

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Parties to a bill of Exchange
There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for making payment. In the above specimen, Rajiv is
the drawer.
(ii) The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. It
is Sameer in this case.
(iii) The Payee – The person to whom the payment is to be made. In this case it is Tarun.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here
the words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just like the
above specimen, is called a Time Bill. But a bill may be made payable on demand also. This is called a
Demand Bill.
Essentials of bill of exchange
1. It must be in writing
2. It must contain an order to pay. A mere request to pay on account, will not amount to an order
3. The order to pay must be unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain. A bill cannot be drawn on two or more drawees but
may be made payable in the alternative to one of two or more payees
6. The sum payable must be certain
7. The bill must contain an order to pay money only 8. It must comply with the formalities as regards
date, consideration, stamps, etc
Difference between bill of Exchange and promissory note
Points Bill of Exchange Promissory Note
1. Number of parties There are three parties –drawer
drawee and payee
There are two parties-Maker and
payee
2.Promise/Order It contains an unconditional order It contain and unconditional
promise given by a debtor to a
creditor
3.Nature of liability The liability of the drawer is
secondary and conditional
The liability of the maker is
primary and absolute
4. Acceptance It requires acceptance to become
a valuable instrument
It does not require any
acceptance since it is a valuable
instrument right from the
beginning
5. Same identity of payer and The drawer and payee may be The maker and payee cannot be

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payee dame person the same person
6. Payable to bearer It can be payable to bearer .It
cannot be drawn as payable to
bearer on demand
It cannot be payable to bearer
7. Protest for dishonor It requires the protesting for
dishonor
It does not require any protesting
8.Notice of dishonour Notice of dishonour must be
given to all persons(including
drawer)liable to pay
Such notice is not required to be
given to maker
Cheque
A cheque is the means by which a person who has fund in the hand of a bank withdraws the
same or some part of it. A cheque is a kind of bill of exchange but it has additional qualification namely-
1- it is always drawn on a specified banker and
2-it is always payable on demand without any days of grace.
Negotiation
One of the essentials feature of a negotiable instrument is its transferability. A negotiable
instrument may be transferred from one person to another in either of the followings way
1-By negotiation
2-By assignment
The transfer of an instrument by one party to another so as to constitute the transferee a holder is
called Negotiation. Negotiation means as the process by which a third party is constituted the holder of
the instrument so as to entitle him to the possession of the same and to receive the amount due thereon in
his own name.
Modes of negotiation
1) By delivery
2) Ex-A the holder of a negotiable instrument payable to bearer , delivers it to B’s agent to keep it
for B. The instrument has negotiated.
3) By endorsement
Capacity of minor
Not having power to contract but he may become promisee.
Discharge
“Discharge means release from obligation”.
a) By Payment
b) By express waiver
c) By cancellation
d) By material alteration or lapse of time.
Dishonor
1) It may be by non acceptance or non payment
2) A bill of exchange can be dishonored by non acceptance in the following ways
3) 1-Does not accept 48 hours from the time of presentment
4) 2-drawee is fictitious person
5) 3-Drawee has become insolvent or dead
6) 4-Drawee is incompetent
Crossing of Cheque
1) Open cheque or bearer cheque
2) Crossed cheque
Difference between cheque and bill of exchange

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Parties to negotiable instruments
On endorsement , the transferor becomes endorser and transferee becomes endorsee
Depending on the situation, other parties are also added to the negotiable instrument
Holder
Section 8
Any person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto
Requirements
He must be entitled in his own name to the possession of the instrument He must be entitled to
receive or recover the amount thereon from the parties thereto
Holder –In Due – Course
Section 9
Any person who for consideration became the possessor of promissory note, bill of exchange or
cheque if payable to bearer or the payee or endorsee thereof, if payable to order before the amount
mentioned in it became payable and without having sufficient cause to believe that any defect existed in
the title of the person from whom he derived his title
Conditions for holder in Due course
a) Must be a holder of the instrument
b) Must be a holder for valuable consideration
c) Must have obtained the instrument before maturity
d) Must have obtained the instrument in good faith and with reasonable caution
Privileges of holder in Due Course
1) Right in case of an inchoate stamped instrument (Sec. 20)
Promissory
Note
Bill of
Exchange
*Maker
•Payee
• Drawer
• Drawee & Payee

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2) Liability of prior parties (Sec. 36)
3) Right in case of a fictitious bill (Sec. 42)
4) Right when the instrument is delivered conditionally (Sec. 46)
5) Instrument purged of all defects (Sec. 53)
6) Right in case of prior defects in the instrument (Sec. 58)
7) Presumption as to title (Sec. 118)
8) Estoppel against denying the original validity of the instrument (Sec. 120)
Distinction between holder and holder in Due course
Capacity of parties (Sec .26-29)
every person capable of contracting, may bind himself and be bound by making, drawing, endorsing,
delivering and negotiating a promissory note, bill of exchange or a cheque
Extent of liability of different parties
1. Minor (Sec. 26): A minor may draw, endorse, deliver and negotiate a negotiable instrument so as to
bind all parties except himself
2. Person of unsound mind : Instruments made by persons of unsound mind are void against them though
the other parties remain liable thereon
3. Joint Stock Company
4. Agent : every person capable of binding himself or of being bound as mentioned in Sec. 26, may bind
himself or be bound by a duly authorized agent acting in his name
5. Partner
Negotiable Instruments
What is Negotiable Instruments? <
The term negotiable instruments means a written document which entitles a person to a sum of
money. A negotiable instruments is transferable by delivery or by endorsement and delivery. The transfer
entitles a person to the sum of money mentioned therein.
“Thus the negotiable instrument is a document which is legally recognized by custom of trade or law,
transferable by delivery or by delivery and endorsement”.
How many negotiable instruments we have?
We have three main negotiable instruments.
1. Promissory note
2. Bill of Exchange
3. Check
What is Negotiation?
When a Promissory note, Bill of exchange or check is transferred to any person, to make that
person the owner of the negotiable instruments, then the instrument is said to be negotiated.
Characteristics of the Negotiability
An instrument is negotiable by virtue of the following features,
1. Transferable by delivery
2. Entitled to receive money
3. Filing a suit
1. Transferable by delivery:

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The instrument is transferable by delivery or by endorsement and delivery.
2. Entitled to receive money:
The legal holder of the instrument is entitled to receive money mentioned in it.
3. Filing a suit:
The holder of a negotiable instrument has the right to file a suit in his name for payment from all or
any of the concerned parties.
What is Promissory note?
A Promissory note is the simplest and earliest kind of credit instrument. “It is an unconditional
written promise by one person to another in which the maker (payer) promise to pay on demand or at a
fixed or determinable date in the future, a stated sum of money to or to the order of a specified person or
the bearer of the instrument”.
Essential feature of the Promissory note
The following are the essential features of a Promissory note,
1. The promise to pay must be in writing.
2. The promise to pay must be signed by the maker or payer.
3. The promise to pay must be unconditional.
An instrument containing a promise to pay a sum after deducting necessary expenses or imposing any
other condition is not a promissory note.
I promise to pay asad or order $500 is promissory note.
I promise to pay asad $500 seven days after yasir arrival to Kabul.
4. The amount to be paid must be definite in terms of money.
5. The Promissory note must be payable on demand or at a fixed or determinable future date.
6. The Promissory note must be payable to a definite person. The Payee must be certain.
7. It must bear stamp at the rate prescribed by law of a country.
8. There are two parties a promissory note.
i) Maker
ii) Payee
i) Maker:
He is the person who draws and signs the Promissory note and promise to pay the amount. In the
specimen of Promissory note Rafiq Ahmad is the maker.
ii) Payee:
He is the person to whom the amount of the promissory note is payable.
In specimen Akram Khan is promised to payment. He is thus Payee.
Specimen of a Promissory Note
Bill of Exchange
A bill of exchange is playing an important part in the commercial life of the country. The
need for it arises where the buyer of goods needs a period of credit before paying it. It is drawn by the
creditors and is accepted by debtor.
What is Bill of Exchange?
5,000 Kabul
May 10, 2008
Stamp
Sixty days after for value received, I promise to pay, Akram khan or order the sum of Dollar
5,000 only
Akram Khan Rafiq Ahmad
Shehre new
Kabul Signature

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According to Muller, A bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time, a sum certain in money to or to the order of a certain
person or to bearer.
Features or Characteristics of the bill
The main characteristics or features of a bill of exchange are as follow:
A Bill of Exchange must be in writing. It must contain in order to pay. The order to pay must be
unconditional. If it is subject to the happening of some events, it will not be a bill of exchange. It must be
signed by the drawer and properly stamped. The parties to the bill, the drawer, the drawee, and payee
must be certain and definite individuals. The amount payable must be certain. The payment must be made
in money. The bill payable may be either on demand or after a specified period. The bill may be payable
either to the bearer or to the order of payee.
Parties to the Bill of Exchange
According to the definition there are three parties involved to a bill of exchange.
1. Drawer
2. Drawee
3. Payee
i) Drawer:
The drawer is the person who draws the bill. He is the person who orders to pay a certain sum of
money (In the specimen of the bill Hamid is drawer of the bill)
(ii) Drawee:
He is the person on whom the bill is drawn. He is the person who is ordered to make payment of
the bill (In the specimen of bill Rashid Ahmad is the drawee of bill).
iii) Payee:
He is the person to whom money is directed to be paid. He gets the payments of the bill. (In the
specimen of bill Kamal Akmal is the Payee of bill).
Specimen of a Bill of Exchange
CHECK
‘What is a Check?
A check may be defined as written order of a depositor upon a bank to pay to or to the order of
a designated party or to the bearer, a specified sum of money on demand. The person who draws the
check is called drawer, the bank on which the check is drawn is called drawee, and the person to whom
payment is to be made is called Payee.
Features or Characteristics of the Check
The main characteristics or features of a Check are as follow:
It is an order of the customer without condition. It is drawn upon a certain bank in writing. The bank has
always to pay it on demand. It is payable to a certain person or to his nominee or to the bearer of the
instrument.
Rs 8,000 Kabul
May 17, 2008
Stamp
Two months after date pay to Mr Kamal or his order the sum of Dollar 8,000 only, for
value received.
To
Rashid Ahmad Hamid Zafar
Jalal Abad
Afghanistan Signature

85. 85
Types of Check
How many types of checks we have?
We have two types of checks;
1. Open Check
2. Crossed check
What is open check?
Open Check:
Open checks are those checks which are paid across the counter of the bank. Open checks has
further two types
1. Bearer check
2. Order check
Types of Open check <
1. Bearer check:
If a drawer orders the bank to pay a stated sum of money to the bearer, it is called a bearer check.
Any person who lawfully possesses a bearer check is entitled to receive payment of that check.
2. Order check:
If the check is to the order of a person in whose favour the check is drawn, it is called order
check. The order check is paid by the bank only when the bank is satisfied about the identity of
the payee.
Crossed check
What is Crossed check?
If a check is crossed by drawing two parallel lines across the face of the check, with or with out the
words & Co or A/c payee only, it is called a Crossed check. The crossed check cannot be paid on the
counter of the drawee bank. It will be deposited in the account of a person in whose order or favor it is
drawn.
Kinds of Crossing
How many kinds of crossing we have?
Legally there are two kinds of crossing;
1. General crossing
2. Special crossing
Kinds of Crossing
General crossing:
The drawing up of two parallel lines on the face of the check at the top left hand corner with or
without the words & Co not negotiable or Account payee only is known as a General Crossing. The effect
of general crossing is that the crossed check cannot be paid at the counter of the bank. Its payment can
only be deposited into the payee’s account only.
Kinds of Crossing
Special crossing:
A check is deemed to be crossed specially when it bears across its face the name of the banker
either with or without the words not negotiable. In case of special crossing the payment can only be made
to the bank named therein the check.
Objectives of Crossing
The check is crossed to achieve the following objectives;
1. It prevent the payment of the check to a wrongful holder
2. It ensure safe payment to the concerned receiver
3. It facilitate in tracing the recipient of the payment if the check is wrongfully crossed
4. Further it is a guard against any cheating or theft.
Negotiable instrument

86. 86
A negotiable instrument is a document guaranteeing the payment of a specific amount of
money, either on demand, or at a set time, with the payer usually named on the document. More
specifically, it is a document contemplated by or consisting of a contract, which promises the payment of
money without condition, which may be paid either on demand or at a future date. The term can have
different meanings, depending on what law is being applied and what country and context it is used in.
What are the four types of negotiable instruments?
Most Common types of negotiable instruments are;
1. Promissory notes.
2. Bill of exchange.
3. Check.
4. Government promissory notes.
5. Delivery orders.
6. Customs Receipts.
Eight Requirements for Negotiable Instruments
The concept of negotiability is one of the most important features of commercial paper, a
contract for the payment of money. A negotiable instrument is a written document, signed by the maker
or drawer that contains an unconditional promise to pay a certain sum of money on delivery or at a
definite time to the bearer. It is essentially a piece of paper that can be transferred multiple times from one
person or entity to another without the use of actual cash. A check that can be endorsed multiple times by
different parties is an example of a negotiable instrument. Each time the check is endorsed and given to
another, it represents payment to that party. Because of this feature, negotiable instruments are highly
trusted and are used daily by millions of people.
When dealing with negotiable instruments, below are eight requirements to keep in mind:
1. Must be in writing.
· The writing can be on anything that is readily transferable and that has a degree of permanence.
2. Must be signed by the maker or drawer.
· The signature can be anyplace on the instrument.
· It can be in any form (such as word, mark or rubber stamp) that purports to be a signature and
authenticates the writing.
· It can be signed in a representative capacity.
3. Must be a definite order or promise to pay.
· A promise must be more than a mere acknowledgement of a debt.

87. 87
· The words “I/We Promise” or “Pay” meet this criterion.
4. Must be unconditional.
· Payment cannot be expressly conditional upon the occurrence of an event.
· Payment cannot be made subject to or governed by another agreement.
· Payment cannot be paid out of a particular fund (except for a government issued instrument).
5. Must be an order or promise to pay a sum certain.
· An instrument may state a sum certain even if payable in installments, with interest, at a stated discount
or at an exchange rate.
· Inclusion of cost of collection and attorney’s fees does not disqualify the statement of a sum certain.
6. Must be payable in money.
· Any medium of exchange recognized as the currency of a government is money.
· The maker or drawer cannot retain the option to pay the instrument in money or something else.
7. Must be payable on demand or at a definite time.
· Any instrument payable on sight, presentation or issue is a demand instrument.
· An instrument is payable at a definite time even though it is payable on a stated date, or within a fixed
period after sight, or the drawer or maker has an option to extend time for a definite period.
· Acceleration clauses, even if unenforceable, do not affect the negotiability of the
instrument.
8. Must be payable to order or bearer.
· An order instrument must name the payee with reasonable certainty.
· An instrument whose terms intend payment to no particular person is payable to bearer.
Holder and holder in due course
While talking about negotiable instruments such as cheques, bills of exchange and
promissory note, we came across the terms holder and holder in due course, quite commonly. Holder
refers to a person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount due on the instrument from the parties thereto.
On the other hand, the holder in due course i.e. HDC implies a person who obtains the
instrument bonafide for consideration before maturity, without any knowledge of defect in the title of the
person transferring the instrument.
Comparison Chart
Basis for
Comparison
Holder Holder in Due Course (HDC)
Meaning
A holder is a person who legally obtains the
negotiable instrument, with his name
entitled on it, to receive the payment from
the parties liable.
A holder in due course (HDC) is a person
who acquires the negotiable instrument
bonafide for some consideration, whose
payment is still due.
Consideration Not necessary Necessary
Right to sue A holder cannot sue all prior parties.
A holder in due course can sue all prior
parties.
Good faith
The instrument may or may not be obtained
in good faith.
The instrument must be obtained in good
faith.
Privileges Comparatively less More

88. 88
Basis for
Comparison
Holder Holder in Due Course (HDC)
Maturity
A person can become holder, before or after
the maturity of the negotiable instrument.
A person can become holder in due course,
only before the maturity of negotiable
instrument.
Definition of Holder
As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name
and has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a party
who transferred it, by delivery or endorsement, to recover the amount from the parties liable to meet it.
The party transferring the negotiable instrument should be legally capable. It does not
include the someone who finds the lost instrument payable to bearer and the one who is in wrongful
possession of the negotiable instrument.
Definition of Holder in Due Course (HDC)
Holder in Due Course is defined as a holder who acquires the negotiable instrument in
good faith for consideration before it becomes due for payment and without any idea of a defective title of
the party who transfers the instrument to him. Therefore, a holder in due course.
When the instrument is payable to bearer, HDC refers to any person who becomes its
possessor for value, before the amount becomes overdue. On the other hand, when the instrument is
payable to order, HDC may mean any person who became endorsee or payee of the negotiable
instrument, before it matures. Further, in both the cases, the holder in both the cases he must acquire the
instrument, without any notice to believe that there is a defect in the title of the person who negotiated
it.
Key Differences Between Holder and Holder in Due Course
The significant differences between holder and holder in due course are discussed in the following points:
1. A person who legally obtains the negotiable instrument, with his name entitled on it, to receive
the payment from the parties liable, is called the holder of a negotiable instrument. A person who
acquires the negotiable instrument bonafide for some consideration, whose payment is still due, is
called holder in due course.
2. A holder can possess negotiable instrument, even without consideration. As opposed to a holder
in due course, possess the negotiable instrument for consideration.
3. A holder cannot sue all the prior parties whereas a holder in due course, has the right to sue all the
prior parties for payment.
4. A holder may or may not have obtained the instrument in good faith. On the other hand, the
holder in due course must be a bonafide possessor of the negotiable instrument.
5. A holder in due course as against a holder enjoys more privileges in many situations like in the
case of inchoate instruments, fictitious bills and so on.
6. A person can become a holder, before or after the maturity of the negotiable instrument. On the
contrary, a person can become a holder in due course, only before the maturity of the negotiable
instrument.
Holder & holder in due course
Holder
The definition given in section 8 implies that any person
(a) Who is entitled in his own name to the possession of the negotiable instrument and
(b) Has right to receive the amount from the parties thereto.
(a) Possession of instrument
(b) Entitled to receive the amount
HOLDER is owner ; Barring Theft;
i. Payee ( I promise to pay ₹ 5000 to X ; X is Holder)

89. 89
ii. Bearer ( I promise to pay ₹ 5000 to bearer ; bearer is holder )
NOTE :
a) Actual possession immaterial; de jure possession
b) He has right to sue PAYMENTS TO BE MADE TO HOLDER
Following persons are considered the holders of the negotiable instruments
1. A principal whose name appears on an instrument as the holder though it is executed in the name
of his agent for him.
2. Where a negotiable instrument is in the name of the partner of a firm, it naturally becomes a
holder, as it is not a separate entity from the partner.
3. Where a negotiable is a bearer one , any person who is in the possession of such instrument is the
holder. The endorsee of a cheque is called a holder.
4. If a holder of a negotiable instrument is dead, the heirs of the deceased holder become the
holders.
5. A principal on whose behalf a pronote is endorsed in blank and is delivered to his agent, he is a
holder of the instrument though his name appear on the instrument.
However the following persons are not called holders
1. A thief or a finder of an instrument is not a holder though he is in possession of an instrument.
2. The word “entitled” used in the person who claims to be the holder must be acquired in a lawful
manner. A person obtaining the instrument under forgery is not a holder.
3. When the endorsement of a bill is ‘ for collection only’ the endorsee cannot be a holder.
4. The above mentioned lists are not complete.
HOLDER IN DUE COURSE
The definition of holder in due course under Section 9 means that any person who for
the consideration paid becomes the possessor of a negotiable instruments, before its maturity, in good
faith and without any sufficient reason to believe that any defect existed in the title of the person from
whom he obtained it.
In simple words, any person for consideration becomes , possessor of negotiable
instruments, if payable to bearer, by possession. If negotiable instrument is order instrument – payable to
payee, by endorsement.
Elements
Possessor-
If negotiable instrument is payable to bearer.
Indorsee-
if negotiable instrument is payable to order. Payee can be HDC in India, even though the
instrument has not been negotiated by him; it’s been issued to him.
i) due consideration paid;
ii) Receive before maturity date (post maturity- holder (not HDC) has rights of the transferer)
iii) Good faith;due care and caution-about good title of transferer – no HDC
If :
a) He obtains the negotiable instrument after its maturity, or
b) He obtains it by way or a gift; or
c) He obtains it for any unlawful consideration, or
d) He obtains it by some illegal method, or
e) He does not obtain it bonafide
He is not considered to be a holder in due course.
Right and privileges of a HOLDER IN DUE COURSE
a) Liability of prior parties
b) Installment purged or clensed of all defects
c) Privilege in case of inchoate stamped instrument not affected
d) No effect of conditional delivery or of special delivery.
e) No effect of absence of consideration or presence of an unlawful consideration:

90. 90
f) Privilege in case of a fictitious bill
g) Estoppels against denying original validity of instrument
h) Estoppels against denying capacity of payee to endorsee
i) Estoppels against endorser to deny capacity of prior parties.
Difference between HOLDER AND HOLDER IN DUE COURSE
a) A holder can obtain an instrument without consideration while a person cannot be a holder in due
course unless he obtains an instrument with consideration and for value.
b) If an instrument is inchoate, a holder of such instrument cannot get good title in the instrument. While
holder in due course acquires a good title even if the instrument is inchoate.
c) A holder of an instrument may acquire the instrument if it becomes payable. But the persons is not
treated as a holder in due course if he acquires an instrument when it becomes payable.
d) A holder need not bother about the defect, if any, in the title. But no holder is considered a holder in
due course who acquires an instrument knowingly the defect of the title.
Negotiation and types of endorsements
Seven important kinds of endorsements
Important kinds of endorsements are given below:
1. Blank or genera endorsementl:
If the endorser signs his name only and does not specify the name of the endorsee, the
endorsement is said to be in blank Sec. 16(1). The effect of a blank endorsement is to convert the order
instrument into bearer instrument (Sec. 54), which may be transferred merely by delivery.
2. Endorsement in full or special endorsement:
If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned
in the instrument to, or to the order of, a specified person the endorsement is said to be in full [Sec.
16(1)].
If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to B, he would
write thus: “Pay to B or order, SdA4.” After such an endorsement it is only the endorsee, i.e., B, who is
entitled to receive the payment of the instrument and to further negotiate the instrument by his
endorsement.
A blank endorsement can easily be converted into an endorsement in full, According to
Section 49, the holder of a negotiable instrument endorsed in blank may, without signing his own name,
by writing above the endorser’s signature a direction to pay to any other person as endorsee, convert the
endorsement in blank into an endorsement in full; and since such holder does not sign himself on the
instrument he does not thereby incur the responsibility of an endorser.
3. Partial Endorsement:
Section 56 provides that a negotiable instrument cannot be endorsed for a part of the
amount appearing to be due on the instrument. In other words, a partial endorsement which transfers the
rights to receive only a part payment of the amount due on the instrument is invalid.
Such an endorsement has been declared invalid because it would subject the prior
parties to plurality of actions (one action by holder for part value and another action by endorsee for part
value) “and will thus cause inconvenience to them.
Moreover, it would also interfere with the free circulation of negotiable instruments. It
may be noted that an endorsement which purports to transfer the instrument to two or more endorses
separately, and not jointly is also treated as partial endorsement and hence would be invalid.

91. 91
Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in favour of C for
the remaining Rs 1,000, the endorsement is partial and invalid.
Section 56, however, further provides that where an instrument has been paid in part, a note to that effect
ma; be endorsed on the instrument and it may then be negotiated for the balance.
Thus, if in the above illustration the acceptor has already paid Rs 1,000 to A, the holder of the bill, A can
then make an endorsement saying “Pay B or order” Rs 1,000 being the unpaid residue of the bill.” Such
an endorsement would be valid.
4. Restrictive endorsement:
Stating the effect of endorsement, Section 50 provides that “the endorsement of negotiable
instrument followed by delivery transfers to the endorsee the property herein with the right of further
negotiation.” However, Section 50 permits restrictive endorsement.
An endorsement which, by express words, prohibits the endorsee from further negotiating
the instrument or restricts the endorsee to deal with his instrument as directed by the endorser is called
‘restrictive’ endorsement.
The endorsee under a restrictive endorsement gets all the rights of an endorser except the
right of further negotiation. In other words, such an endorsement entitles the endorsee to receive the
payment on due date and sue the parties for it but he cannot further negotiate the instrument.
Illustrations:
(a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is a restrictive
endorsement as C cannot negotiate the bill further.2
(b) B, the holder of the bill, makes an indorsement on the bill, saying “Pay C for my use or “Pay C or
order for the account of B.” In either case there is a restrictive endorsement as the right of further
negotiation by C has been excluded thereby.
The person liable on the hill must pay by drawing a cheque in the name of the holder (or
the endorser) B. If he makes the payment to C on C’s own account, he will still be liable to B, the
endorser; Hence C cannot endorse the bill further in his own name.
5. Conditional endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes
his liability, dependent on the happening of a specified event, although such event may never happen,
such endorsement is called a ‘conditional’ endorsement (Sec. 52).
The law permits a conditional endorsement and therefore it does not in any way affect the negotiability of
the instrument. Thus, endorsements can validly be made in the following terms:
(i) “Pay B or order on his marriage;”
(ii) “Pay B on the arrival of Pearless ship at Bombay.”
In the case of a conditional endorsement the liability of the endorser would arise only upon the happening
of the event specified. But the endorsee can sue other prior parties, e.g., the maker, acceptor, etc., if the
instrument is not duly met at maturity, even though the specified event did not happen.
6. Sans recourse endorsement (Sec. 52):
When the endorser expressly excludes his own liability on the negotiable instrument to the
endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is known as
‘sans recourse’ endorsement.
Such an endorsement is generally made by adding the words ‘sans recourse’ or ‘without
recourse.’ Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X or order at
his own risk” is examples of this type of endorsement.
7. Facultative endorsement:

92. 92
When the endorser expressly gives up some of his rights under the negotiable instrument,
the endorsement is called a ‘facultative’ endorsement. Thus, “Pay X or order, notice of dishonour waived”
is a facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to give notice of
dishonour to the endorser and the latter remains liable to the endorsee for the non-payment of the
instrument, even though no notice of dishonour has been given to him.
Negotiable Instruments Act,1881- Types of endorsements
Negotiable instrument
Negotiable Instrument is that document that includes a ‘promise to pay’ a certain amount of money to the
bearer of the document. It’s a mode of transferring a debt from one person to another. Negotiable
Instruments are always in written form.
Examples of Negotiable instruments are- a cheque, a promissory note, a bill of exchange.
Definition
“Negotiable” means transferable by delivery and “instrument” means a written document by which a right
is created in favor of some person. Thus, negotiable instrument means a document which is transferable
by delivery. According to Section 13(i) of negotiable instrument Act, 1881 a negotiable instrument
includes and means a promissory note, bill of exchange or cheque.
Characteristics of a Negotiable Instrument
a) Freely transferrable
b) Recovery
c) Presumption as to considerations
d) Holder’s title free from all defects
e) Presumption as to holder
Types Of Negotiable Instruments
Instruments Negotiable by Statute
The Negotiable Instruments Act mentions orgy three kinds of negotiable instruments
(Sec13). These are: Promissory Notes, Bills of Exchange, Cheques.
Instruments Negotiable by Custom or Usage
There are certain other instruments which have occupied the character of negotiability as a
result of usage or custom of trade.
For example
1. Exchequer bills
2. Banknotes
3. Share warrants
4. Circular notes
5. Bearer debentures
6. Dividend warrants
7. Share certificates with blank transfer deeds etc
Endorsement
Endorsement means the signature of the maker/ drawer or a holder of a negotiable instrument,
either with or without any writing, for the purpose of negotiation. The endorsement is done by the payee
or endorsee, as the case may be by signing on the instrument customarily on its back & where the space is
insufficient on a slip of paper annexed thereto called “allonge”.
Kinds Of Endorsement
1. Blank endorsement:
If the endorser signs his name only, the endorsement is said to be in blank and it becomes
payable to bearer e.g. MahbubulHaq.
2. Special or Full endorsement:
An endorsement “in full” or a special endorsement is one where the endorser not only puts his
signature on the instrument but also writes the name of a person to whom or to whose order the payment
is to be made.

93. 93
Kinds Of Endorsement
3. Conditional endorsement:
In conditional endorsement the endorser puts his signature under such a writing which makes
the transfer of title subject to fulfillment of some conditions of the happening of some events
Example: Pay to Mr.SarwarJahan or order after his marriage- Sd/Badrul Kamal.
4. Restrictive endorsement:
An endorsement is called restrictive when the endorser restricts or prohibits further
negotiation.
Example: “Pay to Miss. / A. Pereira only” Sd/HosneAra.
Kinds of Endorsement
5. Partial endorsement:
In Partial endorsement only a part of the amount of the bill is transferred or the amount of
the bill is transferred to two or more endorsees severally. This does not separate as a negotiation of the
instrument. The law lays down that an endorsement must relate to the whole instrument.
Dishonour of negotiable instruments
Dishonour of negotiable instrument by Non-payment: A promissory note, bill of
exchange, or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of
the bill, or drawee of the cheque commit default in payment upon being duly required to pay the same.
What is presentment of negotiable instrument?
Presentment.
In relation to Commercial Paper ,presentment is a demand for the payment or acceptance
of a negotiable instrument, such as a check. The holder of a negotiable instrument generally makes a
presentment to the maker, acceptor, drawer, or drawee.
Dishonour is of two types
1. When there is non-acceptance of a bill of exchange then it would amount to dishonour
2. When there is a failure to pay for a promissory note, bill of exchange or cheque then there will be
dishonour
Dishinour by Non- Acceptance

94. 94

95. 95
Sec 94 of the act contemplates that
1. The notice can be oral or in writing
2. The notice needs to be send by post or communicated by any other manner
3. The notice should convey that the instrument has been dishonoured
4. A reasonable time and place be given for removal of dishonour or making of payment
When notice is not required
As per sec 98 of the act notice of dishonour is not required when
1. It is waived by the party which is entitled to so :
2. In case where the drawer has revoked payment then to change him;
3. When the party who is charged cannot suffer damage due to notice
4. When the party to whom the notice is to be sent is not found after reasonable search
5. To charge drawer when acceptor is also a drawer
6. When the instrument is a promissory note and the same isn’t negotiable
7. In case where the party to whom the notice is to be made unconditionally promises to pay the
amount which is due as per the instrument
Dishonour of cheques

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There are certain conditions which need to be met
1. The cheque must have been presented within six months from the date in which it was issued
2. The payee or holder in due course must have sent a notice in writing about the dishonour within
thirty days from the date on which he was informed of the dishonour
3. The drawer of the cheque fails to pay the money of the cheque within a period of fifteen days
from the date when he received the notice or demand
Case Law
Conclusion

97. 97
What is meant by noting and protest?
Protesting (Sec.100) According to Sec.100, “when the promissory note or bill of
exchange has been dishonoured by non- acceptance or non-payment, the holder may, within a reasonable
time, cause such dishonor to be noted and certified by a notary public. Such certificate is called a
protest.”
Noting and protest
Nothing has the following details:
1. The fact about dishonour

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2. Date of that dishonour
3. Reasons for dishonour
4. If the instrument is not dishonoured then details behind the holder treating it as dishonour
5. The charges of the notary
Protesting
Contents of Protest
A protest certificate shall have information about
1. The instrument itself or its transcript;
2. The particulars such as name of the individual against whom and for whom the protest has been
made;
3. The reasons for the dishonour
4. The time and place where the dishonour happened
5. The signature of the public notary;
6. If the instrument is being accepted or paid for honour then the name of the individual who is
accepted or paid and the particulars of the individual for whom such homour has been made.
Protest for better security
Advantages of protesting

99. 99
Following are the advantages of protesting
1. It provides evidence of dishonour which is authentic to the drawer or endorser ;
Notice of Protest
Protest for non-payment after dishonour by non acceptance
Protest of foreign bills
When noting is equivalent to protest
Case law

100. 100
1. The particulars such as name of individual against whom and for whom the protest has been made;
2. The reasons for the dishonour
3. The time and place where the dishonour happened
4. The signature of the public notary
5. If the instrument is being accepted or paid for honour then the name of the individual who is
accepted or paid and the particulars of the individual for whom such honour has been made

101. 101
6. The court will only presume the fact of dishonour when there is a proper certificate as per the
provisions of the act,
Conclusion

102. 102
liability of Parties on negotiable instrument
"Negotiable Instrument" means a piece of paper in writing entitling a right to the holder, a
certain sum of money. It is a piece of paper which contains some value and is transferable by simple
delivery or sometimes by endorsement and delivery.
The expression "Negotiable Instrument" means a piece of paper in writing entitling a right to the holder,
a certain sum of money. It is a piece of paper which contains some value and is transferable by simple
delivery or sometimes by endorsement and delivery.
Characteristics of a Negotiable Instrument
1. Freely transferable. The property is a negotiable instrument passes from the one person to another by
delivery, if the instrument is payable to bearer, and endorsement and delivery if it is payable order
2. The title of holder free from all defects .a person taking in an instrument bona fide and for value,
known as the holder in due course, gets the instrument free from all defects in the title of the transferor.
He is not in any way affected by any defect in the title of the transferor of any prior party .he is not
affected by certain defense which might be available against the previous holder, for example, fraud,
provided he himself is not a party to it
3. Recovery, the holder in due course can sue upon a negotiable instrument in his own name for the
recovery of the amount further he need not give notes of the instrument to pay
4. Presumption. The Certain presumption applies to all negotiable instruments unless the contrary is
provided. This presumption is dealt with in secs, 118 and 119 and are as follows
(a) Consideration. Every negotiable is presumed to have been made drawn, accepted, indorsed,
negotiable or transferred for consideration. This would help a holder to get a decree from a court without
any difficulty.
(b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn on such

103. 103
date.
(c) Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted
within a reasonable time of its date and before its maturity
(d) Time of transfer. Every transfer of negotiable instrument is presumed to have been made before its
maturity.
(e) Order of endorsements. the endorsement appearing upon a negotiable are presumed to have been
made in the order in which they appear thereon
(f) Stamp. When an instrument has been lost it is presumed that it duly stamped.
(g) Holder a holder in due course. Every holder of a negotiable instrument is presumed to be holder in
due course (sec 118)
(h) Proof of protest .in a suit upon an instrument which has been dishonor, the court, on proof of the
protest presumes the fact of dishonor, unless and such fact is disproved (sec 119).
The above presumption is rebuttable by evidence .if any one challenge any of this presumption,
he has to prove his allegation again, this presumption would not arise where an instrument has been
obtained by any offense, fraud or unlawful consideration.
Section 30 to Section 32 and Section 35 to 42 of the Negotiable Instruments Act deal with the liability of
parties to Negotiable Instruments.
Liabilities of parties to Negotiable Instruments are as follows :
1. Liability of Drawer
2 Liability of Drawee of Cheque
3 Liability of endorse
4 Liability of Makers of note and acceptor of bill
5.Liability of Prior Parties to a holder in due course
1. Liability of Drawer:
According to Section 30 of the Negotiable Instrument Act 1881, The drawer of a bill of exchange
or cheque is bound in case of dishonor by the drawee or acceptor thereof, to compensate the holder,
provided due notice of dishonor has been given to, or received by, the drawer .
2 Liability of Drawee of Cheque
The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to
the payment of such cheque must pay the cheque when duly required so to do, and, in default of such
payment, must compensate the drawer for any loss or damage caused by such default (Section 31 of the
Negotiable Instrument Act 1881)
3 Liability of Makers of note and acceptor of bill :
The maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to
pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively,
and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder
on demand. In default of such payment as aforesaid, such maker or acceptor is bound to compensate any
party to the note or bill for any loss or damage sustained by him and caused by such default.(Section 32 of
the Negotiable Instrument Act 1881)
4 Liability of endorse :
Liability of endorser In the absence of a contract to the contrary, whoever endorses and delivers a
negotiable instrument before maturity, without, in such endorsement, expressly excluding or making
conditional his own liability, is bound thereby to every subsequent holder, in case of dishonor by the
drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such
dishonor, provided due notice of dishonor has been given to, or received by, such endorser as hereinafter
provided. Every endorser after dishonor is liable as upon an instrument payable on demand.(Section 35 of
the Negotiable Instrument Act 1881)

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5.Liability of Prior Parties to a holder in due course
Every prior party to a negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied.(Section 36 of the Negotiable Instrument Act 1881)
Indian Partnership acct, 1932
Under section 44(d) of the Act, a suit can be filed against the managing partner for dissolution
of the partnership firm.
THE INDIAN PARTNERSHIP ACT’ 1932 Section.4 of the Indian Partnership Act, 1932 defines
Partnership in the following terms: “ Partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them acting for all.”
"Section 464 of the Companies Act, 2013 empowers the Centre Government to prescribe
maximum number of partners in a firm but the number of partners so prescribed cannot be more than
100.The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule
10 of the Companies (Miscellaneous) Rules,2014.Thus, in effect, a partnership firm cannot have more
than 50 members".
Partnership Act
THE INDIAN PARTNERSHIP ACT’ 1932 Section.4 of the Indian Partnership Act, 1932 defines
Partnership in the following terms:
“ Partnership is the relation between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all.”
ESSENTIAL ELEMENTS OF A PARTNERSHIP
a.) There must be a contract.
b.) Between two or more persons.
c.) Who agree to carry on business.
d.) With the object of sharing profits.
e.) The business must be carried on by all or any of them acting for all.
KINDS OF PARTNERSHIP:
3. Partnership at will:
Where no provision is made by contract between the partners for the duration of their
partnership, the partnership is ‘partnership at will.’ The essence of a partnership at will is that the partners
do not fix any term of partnership and are free to break their relationship at their own sweet will. It is a
partnership for an indefinite period.
2. Particular partnership:
When a partnership is formed for a particular period or for a particular venture, it is called
particular partnership. In such a case, the partnership is automatically dissolved at the expiry of the fixed
term or on the completion of the venture.
Rights of Partners
3. Right to take part in the conduct of the business.
4.Right to be consulted.
5.Right to access the books.
6.Right to share the profits.
7.Right to interest on capital
8.Right to interest on advances.
9.Right to indemnity.
INCOMING AND OUTGOING PARTNERS
No partner can be admitted as a partner into a firm without the consent of all the existing
partners. Mutual trust and confidence among the partners being an essential ingredient of an ideal
partnership, it is essential that here must be a consent of all the partners.
Liability of an incoming partner

105. 105
A new partner becomes liable for the debts and acts of the firm only from the date he is
admitted as a partner. He cannot be held liable for the acts of the old firm. A new partner may, however,
agree to be liable for the debts existing prior to his admission but such agreeing will not give to a prior
creditor the right to sue him because of absence of ‘privity of contract.’
Retirement of a Partner:
A Partner is said to retire when the surviving partners continue to carry the business of the
firm, and the retiring member ceases to be a partner.
In case of ‘particular partnership’, a partner may retire with the consent of all the other partners,
unless otherwise agreed. In case of ‘partnership at will’, a partner may retire by giving a notice in writing
to all the other partners of his intention to retire, unless otherwise agreed.
A retiring partner continues to be liable for the acts of the firm done before his retirement.
He may, however, free himself from his liability towards the third parties for the debts of the firm
incurred before his retirement by an agreement with such third parties and the partners of the reconstituted
firm discharging the outgoing partners from all liabilities. The remaining partners alone cannot give this
freedom to the retiring partners. He may be discharged if the creditors agree.
Expulsion of a Partner
A partner may be expelled from a firm by majority of the partners only if:
a.) the power to expel has been conferred by contract between the partners.
b.) such a power has been exercised in good faith for the benefit of the firm.
The partner who has been expelled must be given reasonable opportunity to explain his position and to
remove the cause of his expulsion.
Insolvency of a partner
When a partner in the firm is adjudicated as insolvent, he ceases to be a partner on the date on
which the order of adjudication is made, whether or not the firm is thereby dissolved will depend upon the
agreement of partnership between the partners. The insolvent partner’s share in the firm’s assets will be
used for firm’s debts first and whatever remains will be utilised for the insolvent partner’s personal debts
Death of a Partner
Although on the death of a partner, the firm is dissolved, but if the other partners so agree the
firm may not be dissolved. When a firm is not dissolved, the estate of the deceased partner is not liable for
any acts of the firm done after his death. No public notice of death is required to relieve the deceased
partner’s estate from future obligations.
REGISTRATION OF FIRMS
Under the partnership Act, it is not compulsory for every partnership firm to get itself registered.
But an unregistered firm suffers from a number of disabilities.
An application in the prescribed format along with the prescribed fees has to be submitted to the
Registrar of firms of the State in which the place of business of the firm is situated. The application must
be signed by all the partners and must contain the following particulars:
a.) The name of the firm.
b.) The place of business of the firm.
c.) The names of any other places where the business of the firm is carried on.
d.) The date when each partner joined the firm.
e.) The names in full and permanent addresses of the partners.
Effect of non registration
3. No suit in civil court by a partner against the firm or other partners.
2. No suit in a civil court by a firm against the parties.
3. The firm or its partners cannot make a claim of set-off or other proceeding based upon a contract.
Dissolution of the Firm
Section. 39 provides that the dissolution of partnership between all the partners of a firm is called
‘dissolution of the firm.’
Modes of dissolution

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A firm may be dissolved in any one of the following ways:
9. By Agreement:
10.By Notice
11.On the happening of certain contingencies
12. Compulsory Dissolution
13. Dissolution by the Court
1. By Agreement: A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners. Partnership is created by a contract, it can also be
terminated by a contract.
2. By notice: Where the partnership is at will, the firm may be dissolved by any partner
giving the notice in writing to all the other partners of his intention to dissolve the firm. A notice of
dissolution once given cannot be withdrawn without the consent of all the other partners.
3. On the happening of certain contingencies: Subject to a contract between the
partners, a firm may be dissolved if:
a.) if constituted for a fixed term, by the expiry of that term.
b.) If constituted to carry out one or more adventures or undertakings, by the completion thereof.
c.) By the death of the partner.
d.) By the adjudication of partner as an insolvent.
4 . Compulsory Dissolution:
A firm may be compulsorily dissolved if:
a.) When all the partners, or all the partners but one, are adjudged insolvent.
b.) When some event has happened which makes it unlawful for the business of the firm to be carried on.
5. Dissolution by the Court: Dissolution by the court is necessitated when there is a difference of
opinion between the partners regarding the matter of dissolution in cases of:
a.) Insanity
b.) Permanent Incapacity
c.) Misconduct
d.) Persistent breach of agreement
e.) Transfer of interest
f.) Just and Equitable
Indian Partnership act, 1932 - Important features
Partnership Firm: Nine Characteristics of Partnership Firm!
According to the Indian Partnership Act, 1932: “Partnership is the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for all.”
The Act also explains that persons who have entered into partnership with one another are called
individually “partners” and collectively “a firm”.
1. Existence of an agreement:
Partnership is the outcome of an agreement between two or more persons to carry on
business. This agreement may be oral or in writing. The Partnership Act, 1932 (Section 5) clearly states
that “the relation of partnership arises from contract and not from status.”
2. Existence of business:
Partnership is formed to carry on a business. As stated earlier, the Partnership Act, 1932
[Section 2 (6)] states that a “Business” includes every trade, occupation, and profession. Business, of
course, must be lawful.
3. Sharing of profits:
The purpose of partnership should be to earn profits and to share it. In the absence of any
agreement, the partner should share profits (and losses as well) in equal proportions.
Here it is pertinent to quote the Act (Section 6) which talks of the ‘mode of determining
existence of partnership’. It says that sharing of profits is as essential condition, but not a conclusive

107. 107
proof, of the existence of partnership between partners. In the following cases, persons do share profits,
but are not the partners:
(a) By a lender of money to person engaged or about to engage in any business.
(b) By a servant or agent as remuneration.
(c) By the widow or child of a deceased partner, as annuity {i.e., fixed periodical payment), or
(d) By a previous owner or part-owner of the business as consideration for the sale of the goodwill or
share thereof, does not of itself make the receiver a partner with the persons carrying on the business.
Thus, in determining whether a group of persons is or is not a firm, whether a person is or is not a partner
in a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken
together, and not by profit sharing alone.
4. Agency relationship:
The partnership business may be carried on by all or any of them acting for all. Thus, the
law of partnership is a branch of the law of Agency. To the outside public, each partner is a principal,
while to the other partners he is an agent. It must, however, be noted that a partner must function within
the limits of authority conferred on him.
5. Membership:
The minimum number of persons required to constitute a partnership is two. The Act,
however, does not mention the upper limit. For this a recourse has to be taken to the Companies Act,
1956 [Section 11 (1) & (2)]. It states that the maximum number of persons is ten, in case of a banking
business and twenty, in case of any other business.
6. Nature of liability:
The nature of liability of partners is the same as in case of sole proprietorship. The liability
of partners is both individual and collective. The creditors have a right to recover the firm’s debts from
the private property of one or all partners, where firm’s assets are insufficient.
7. Fusion of ownership and control:
In the eyes of law, the identity of partners is not different from the identity of partnership
firm. As such, the right of management and control vests with the owners (i.e., partners).
8. Non-transferability of interest:
No partner can assign or transfer his partnership share to any other person so as to make him a
partner in the business without the consent of all other partners.
9. Registration of firm:
Registration of a partnership firm is not compulsory under the Act. The only document or even
an oral agreement among partners required is the ‘partnership deed’ to bring the partnership into
existence.
Partnership
When we talk about the forms a business organisation can take, one of the most prominent
ones is a partnership. In India particularly it is a very popular entity to carry out business. Let us take a
look at some important features of a partnership and also some types of partners.
In India, we have a definite law that covers all aspects and functioning of a partnership, The
Indian Partnership Act 1932. The act also defines a partnership as “the relation between two or more
persons who have agreed to share the profits from a business carried on by either all of them or any of
them on behalf of/acting for all”
So in such a case two or more (maximum numbers will differ according to the business being
carried) persons come together as a unit to achieve some common objective. And the profits earned in
pursuit of this objective will be shared amongst themselves.
The entity is collectively called a “Partnership Firm” and all the individual members are the
“Partners”. So let us look at some important features.
Features of a Partnership
1] Formation/Contract

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A partnership firm is not a separate legal entity. But according to the act, a firm must be
formed via a legal agreement between all the partners. So a contract must be entered into to form a
partnership firm.
Its business activity must be lawful, and the motive should be one of profit. So two
people forming an alliance to carry out charity and/or social work will not constitute a partnership.
Similarly, a partnership contract to carry out illegal work, such as smuggling, is void as well.
2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business. The partners are
all individually and jointly liable for the firm and the payment of all debts. This means that even personal
assets of a partner can be liquidated to meet the debts of the firm.
If the money is recovered from a single partner, he can, in turn, sue the other partners for their share of the
debt as per the contract of the partnership.
3] Continuity
A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy or
insolvency or insanity of a partner will dissolve the partnership. The remaining partners may continue the
partnership if they so choose, but a new contract must be drawn up. Also, the partnership of a father
cannot be inherited by his son. If all the other partners agree, he can be added on as a new partner.
4] Number of Members
As we know that there should be a minimum of two members for a partnership.
However, the maximum number will vary according to a few conditions. The Partnership Act itself is
silent on this issue, but the Companies Act, 2013 provides clarity.
For a banking business, the number of partners must not exceed ten. For a business of any other nature,
the maximum number is twenty. If the number of partners increases it will become an illegal entity or
association.
5] Mutual Agency
In a partnership, the business must be carried out by all the partners together. Or
alternatively, it can be carried out by any of the partners (one or several) acting for all of them or on
behalf of all of them. So this means every partner is an agent as well as the principal of the partnership.
He represents the other partners in some cases so he is their agent. But in other circumstances, he is bound
by the actions of any of the other partners aking him the principal as well.
Types of Partners
Not all partners of a firm have the same responsibilities and functions. There can be
various types of partners in a partnership. Let us study the types of partners and their rights and duties.
1. Active Partner:
As the name suggests he takes active participation in the business of the firm. He contributes to
the capital, has a share in the profit and also participates in the daily activities of the firm. His
liability in the firm will be unlimited. And he often will act as an agent for the other partners.
2. Dormant Partner:
Also known as a sleeping partner, he will not participate in the daily functioning of the business.
But he will still have to make his share of contribution to the capital. In return, he will have a
share in the profits. His liability will also be unlimited.
3. Secret Partner:
Here the partner’s association with the firm is not public knowledge. He will not represent the
firm to outside agents or parties. Other than this his participation with respect to capital, profits,
management and liability will be the same as all the other partners.
4. Nominal Partner:
This partner is only a partner in name. He allows the firm to use the name of his firm, and the
attached goodwill. But he in no way contributes to the capital and hence has no share in the
profits. He does not involve himself in the firm’s business. But his liability too will be unlimited.
5. Partner by Estoppel:

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If a person makes it out to be, through their conduct or behaviour, that they are partners in a firm
and he does not correct them, then he becomes a partner by estoppel. However, this partner too
will have unlimited liability.
Partnership Firms: Definition, Features, Advantages and Disadvantages!
Definition:
The proprietorship form of ownership suffers from certain limitations such as limited
resources, limited skill and unlimited liability. Expansion in business requires more capital and
managerial skills and also involves more risk. A proprietor finds him unable to fulfill these requirements.
This call for more persons come together, with different edges and start business. For example, a person
who lacks managerial skills but may have capital.
Another person who is a good manager but may not have capital. When these persons
come together, pool their capital and skills and organise a business, it is called partnership. Partnership
grows essentially because of the limitations or disadvantages of proprietorship.
Let us consider a few definitions on partnership:
The Indian Partnership Act, 1932, Section 4, defined partnership as “the relation
between persons who have agreed to share the profits of business carried on by all or any of them acting
for all”. The Uniform Partnership Act of the USA defined a partnership “as an association of two or more
persons to carry on as co-owners a business for profit”.
According to J. L. Hanson, “a partnership is a form of business organisation in which
two or more persons up to a maximum of twenty join together to undertake some form of business
activity”. Now, we can define partnership as an association of two or more persons who have agreed to
share the profits of a business which they run together. This business may be carried on by all or anyone
of them acting for all.
The persons who own the partnership business are individually called ‘partners’ and
collectively they are called as ‘firm’ or ‘partnership firm’. The name under which partnership business is
carried on is called ‘Firm Name’. In a way, the firm is nothing but an abbreviation for partners.
Main Features:
Based on the above definitions, we can now list the main features of partnership form of business
ownership/organisation in a more orderly manner as follows:
1. More Persons:
As against proprietorship, there should be at least two persons subject to a maximum of ten persons for
banking business and twenty for non-banking business to form a partnership firm.
2. Profit and Loss Sharing:
There is an agreement among the partners to share the profits earned and losses incurred in partnership
business.
3. Contractual Relationship:
Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business:
Partnership is formed to carry on some lawful business and share its profits or losses. If the purpose is to
carry some charitable works, for example, it is not regarded as partnership.
5. Utmost Good Faith and Honesty:
A partnership business solely rests on utmost good faith and trust among the partners.
6. Unlimited Liability:
Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the
partnership firm fall short to meet the firm’s obligations, the partners’ private assets will also be used for
the purpose.
7. Restrictions on Transfer of Share:
No partner can transfer his share to any outside person without seeking the consent of all other partners.
8. Principal-Agent Relationship:

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The partnership firm may be carried on by all partners or any of them acting for all. While dealing with
firm’s transactions, each partner is entitled to represent the firm and other partners. In this way, a partner
is an agent of the firm and of the other partners.
Advantages:
As an ownership form of business, partnership offers the following advantages:
1. Easy Formation:
Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively
ease to form. Legal formalities associated with formation are minimal. Though, the registration of a
partnership is desirable, but not obligatory.
2. More Capital Available:
We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership
overcomes this problem, to a great extent, because now there are more than one person who provide funds
to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions
also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is
spread over a number of partners rather than only one. .
3. Combined Talent, Judgement and Skill:
As there are more than one owners in partnership, all the partners are involved in decision making.
Usually, partners are pooled from different specialised areas to complement each other. For example, if
there are three partners, one partner might be a specialist in production, another in finance and the third in
marketing. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the
old maxim of “two heads being better than one” aptly applies to partnership.
4. Diffusion of Risk:
You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership,
the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the
share of loss in case of each partner will be less than that in case of proprietorship.
5. Flexibility:
Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and
quickly react to the changing conditions. No giant business organisation can stifle so quick and creative
responses to new opportunities.
6. Tax Advantage:
Taxation rates applicable to partnership are lower than proprietorship and company forms of business
ownership.
Disadvantages:
In spite of above advantages, there are certain drawbacks also associated with the partnership form of
business organisation.
Descriptions of these drawbacks/ disadvantages are as follows:
1. Unlimited Liability:
In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal
assets may be at risk if the business cannot pay its debts.
2. Divided Authority:
Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the
broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of
areas like policy formulation for the whole enterprise, there are chances for conflicts between the
partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.
3. Lack of Continuity:
Death or withdrawal of one partner causes the partnership to come to an end. So, there remains
uncertainty in continuity of partnership.
4. Risk of Implied Authority:
Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the
partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions.

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Risk involved in decisions taken by one partner is to be borne by other partners also. Choosing a business
partner is, therefore, much like choosing a marriage mate life partner.
Formation of partnership firms
Two or more people when come together with a common idea of business by infusing the sources
and funds together with the common goal of earning profit is termed as Partnership. Partnership Firm is
one of the common forms of business in India as it does not require stringent procedure to be followed
and avails the flexibility in administration to the Partners.
The formation of Partnership Firm shall be with mutual consent of Partners to the business. The firm shall
be formed and registered by following the procedure prescribed in this regards under Indian Partnership
Act, 1932.
TYPE OF PARTNERSHIP FIRMS:
Indian Partnership Act allows a firm to be formed and executed by entering into Partnership
Agreement. Further, it provides types of Partnership Firm as Unregistered Partnership Firm or Registered
Partnership Firm. Whether the firm is registered or not the Partnership firm is legal in the eyes of Law.
Unregistered Partnership Firm:
The Unregistered Partnership Firm is established by entering into agreement by the partners
of the proposed firm. The Unregistered Partnership Firm as stated to be legal allows the Partners to carry
on the business in manner stated and provided in the agreement.
Registered Partnership Firm:
The Partnership Firm is to be registered with the Registrar of Firm (RoF) having
jurisdiction over the Place of Business of the Firm. The registration of Partnership firm involves payment
of Government fees to Registrar, varied from state to state according to the State Law.
The registration of partnership firm is preferable as the unregistered Partnership Firm
cannot sue the third party or contracting party and vice-versa. Also, the Partners, in case of internal
disputes or issues, cannot approach the Court and shall resolve the disputes with the help of arbitrator or
alternate dispute resolution mechanism. Furthermore, the registration also helps the expansion and
conversion of the Firm into any other form of Business.
An unregistered Partnership Firm at any stage can be registered in order to remove the deficiencies as
prescribed above.
How to and Steps:- Partnership Firm Formation and Registration:
Preparation and Execution of Partnership Deed:
The Partnership Deed shall contain the covenants such as the name and business place of
the firm, business activities to be carried on, the contribution and profit sharing ratio of the Partners or
any other conditions required.
Payment of Stamp Duty and Notary:
The Partnership Deed prepared shall be executed by the payment of stamp duty as
applicable in accordance with the respective state law. One may either opt for execution on non-judicial
paper or franking i.e. payment of stamp duty from banking channel. Subsequently the deed shall be
notarised after providing the signature of all partners along with witnesses to agreement.
Registration of Partnership Firm with RoF:
The registration of Partnership Firm is voluntary, however is preferable by the
businessmen. The registration procedure prescribed by the respective Government shall be followed with
payment of requisite Government Fees and submitting the documents required.
Application for PAN:
The application for allocation of PAN shall be made to the Income Tax department as
the department identifies the Partnership different from its Partners.

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Opening Bank Account:
The current account in the name of the Partnership Firm shall be opened in order to
regulate the transaction of the Firm.
Documents required to register a Partnership Firm:
1. Self-attested copy of PAN card of Partners
2. Self-attested copy of Address Proof of Partners
3. Utility Bill as Business Address Proof
4. Rent or lease Agreement of Business Address (if place is rented)
5. NOC from the owner of Business Place (if place is rented)
6. Original Partnership Deed
7. Application form in the prescribed format
8. Any other documents as required by Registrar
The Partnership Firm is best suitable for starting any business having small
scale of operations and requires flexibility in operations. Also, where the business idea involves higher
risk of discontinuation or failure of products, can be started with Partnership Firm, which afterwards can
be converted into any other form of business with the stability and growth of the business.
The introduction of LLP has caused erosion of popularity of Partnership
Firm in India as LLP allows benefit of flexibility and tax advantages along with the benefit of Body
Corporate.
Forming a partnership
A partnership is a business arrangement in which two or more people own an
entity, and personally share in its profits, losses, and risks. The exact form of partnership used can give
some protection to the partners. A partnership can be formed by a verbal agreement, with no
documentation of the arrangement at all. However, there may be subsequent disagreements among the
owners at a later date, so it makes sense to create a written document that states how certain situations are
to be handled. This partnership agreement should at least cover the following topics:
1. The rights and responsibilities of each partner
2. Whether partners are designated as general partners or limited partners
3. The proportions of partnership gains and losses to be apportioned to each partner
4. Procedures related to the withdrawal of funds from the partnership, as well as any limitations on
these withdrawals
5. How key decisions are to be resolved
6. Provisions regarding how to add and terminate partners
7. What happens to partnership interests if a partner dies
8. What steps to follow to dissolve the partnership
9. The proportions of residual cash paid out to the partners in a liquidation
In addition to the partnership agreement, the partners must engage in a number of other formation
activities that are common to all types of businesses. These actions include:
1. Register the business name
2. Obtain an employer identification number
3. Obtain any licenses required by governments where the partnership plans to operate
4. Open a bank account in the name of the partnership
5. File an annual informational return with the Internal Revenue Service
“How Partnership Firms are formed?”
Partnership Agreement:
There must be an agreement among partners to carry on any business. The agreement
to carry on business in partnership may be oral or in writing. If it is in writing, the document in which the
terms are incorporated is called the Deed of Partnership or the Articles of Partnership.
It contains name of the firm; nature of business; names and addresses of the partners;
place of business and the business address; duration of the partnership and the mode of dissolution; the
amount of capital to be contributed by each partner; the share of profits to be taken by each partner; the

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mode of management; the powers of the partners; terms on which a partner can retire; expulsion of
partners; introduction of new partners, etc.
Registration of Firms:
The Indian Partnership Act, 1932 does provide for the registration of firms, yet the
registration of a partnership firm is not compulsory. Therefore, an unregistered firm is not an illegal
association. But an unregistered firm suffers from certain disabilities, and therefore, registration is
desirable for carrying on business.
Formalities of Registration:
The registration of a firm may be effected sending by registrar of Firms of the locality,
statement in the prescribed form duly signed and verified by all the partners or their agents specially, and
accompanied by the prescribed fee, stating the following particulars :
(a) The name of the firm,
(b) The place or principal place of business of the firm
(c) The names of any other places where the firm carries on business,
(d) The date when each partner joined the firm,
(e) The names in full and permanent addresses of the partners, and
(f) The duration of the firm.
Consequences of non-registration:
An unregistered firm and the partners thereof suffer from certain disabilities due to non-
registration:
1. A partner cannot file a suit (against the firm or any partner thereof) for the purpose of enforcing a right
arising from contract or a right conferred by the Partnership Act.
2. -No suit can be filed on behalf of an unregistered firm against any third party for the purpose of
enforcing a right arising from a contract.
3. An unregistered firm cannot claim a set-off in a suit.
Exceptions:
There are certain exceptions to the rules stated above.
1. A partner of an unregistered firm can file a suit for the dissolution of the firm and for accounts.
2. Suits can be filed for the realization of the properties of a dissolved firm even though it was
unregistered.
3. The Official Assignee or Receiver can realize the properties of an insolvent partner of an unregistered
firm.
4. There is no bar to suits by unregistered firms and by the partners therefore, in areas where the
provisions relating to the registration of firms do not apply by notification of a State Government.
5. An unregistered firm can file a suit (or claim a set-off) for a sum not exceeding Rs. 100 in value,
provided the suit is of such a nature that it has to be filed in the small causes court. Proceedings incidental
to such suits, e.g., execution of degrees, are also allowed.
Kinds of partners
8 Different Kinds of Partners
(i) Active Partner:
An active partner is one who takes active part in the day-to-day working of the business.
He may act in different capacities such as manager, organiser, adviser and controller of all the affairs of
the firm. He may also be called a working partner.
(ii) Sleeping or Dormant Partner:
A sleeping partner is one who contributes capital, shares profits and contributes to the
losses of the business but does not take part in the working of the concern. A person may have money to
invest but they may not be able to devote time for the business: such a person may become a sleeping
partner. Sleeping partner is liable for the liabilities of the business like other partners. He cannot bind the
business, i.e., firm, to third parties, by his acts. He is not known to the public as a partner; so he may be
called as a ‘secret partner’.

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(iii) Nominal Partner:
A nominal partner is one who lends his name to the firm. He does not contribute any
capital nor does he shares profits of the business. He is known as a partner to the third parties. On the
strength of his name, the business may get more credit in the market or may promote its sales. A nominal
partner is liable to those third parties who give credit to the firm on the assumption of that person being a
partner in the firm.
(iv) Partner in Profit:
A person may become a partner for sharing the profit only. He contributes capital and is
also liable to third parties like other partners. He is not allowed to take part in the management of the
business. Such partners are associated for their money and goodwill.
(v) Partner by Estoppel or Holding Out:
When a person is not a partner but poses himself as a partner, either by words or in
writing or by his acts, he is called a partner by estoppel or by holding out. A partner by estoppel or by
holding out shall be liable to outsiders who deal with the firm on the presumption of that person being a
partner in the business even though he is not a partner and does not contribute anything to the business.
(vi) Secret Partner:
The position of a secret partner lies between active and sleeping partner. His
membership of the firm is kept secret from outsiders. His liability is unlimited and he is liable for the
losses of the business. He can take part in the working of the business.
(vii) Sub-Partner:
A partner may associate anybody else in his share in the firm. He gives a part of his
share to the stranger. The relationship is not between the sub-partner and the firm but between him and
the partner. The sub-partner is a non-entity for the partnership. He is not liable for the debts of the firm.
(viii) Minor as a Partner:
A minor is a person who has not yet attained the age of majority. A minor cannot
enter into a contract according to the Indian Contract Act because a contract by a minor is void ab initio.
However, a minor may be admitted to the benefits of an existing partnership with the consent of all
partners. The minor is not personally liable for liabilities of the firm, but his share in the partnership
property and profits of the firm will be liable for debts of the firm.
A minor has the following rights and liabilities under the Partnership Act:
(a) A minor has a right to such share of property and of profits of the firm as may be agreed upon by all
the partners.
(b) A minor may inspect the accounts of the firm or take note of the accounts.
(c) The personal property of the minor is not liable for the debts of the firm. But his share in property of
the firm and profits is liable for the debts and obligations of the firm.
(d) So long as a minor remains a partner he cannot file a suit against other partners for the accounts or for
the payment of his share in the property or profits of the firm. He can do this only when he wants to
severe his relations with the partnership firm.
(e) At any time within 6 months of his attaining majority (i.e., completing 18 years of age) the minor may
give public notice of the fact that he has decided to become or not to become a partner in the firm. In case
he does not give any such notice within six months, it shall be presumed that he has opted to become a
partner.
(f) In case minor decides to become a partner, he will be personally liable to third parties for all acts of the
firm, since he was admitted to the benefits of the firm.
(g) If a minor decides not to become a partner, his rights and liabilities continue to be those of a minor up
to the date on which he gives public notice. His share will not be liable for any acts of the firm done after
the date of the notice.

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Rights and duties of partners
Duties of partners
1. To work for common advantage
2. To be faithful
3. Render true account
4. To indemnify for fraud
5. Not to claim remuneration
6. To share profits and losses
7. To act within authorities given

116. 116

117. 117
Duties and responsibility of partners
Partnership: Definition, Rights and Duties of Partner!
Definition:
The Indian Partnership Act defines partnership as “the relation between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all.”
The Essential Features of Partnership :
1. An association of two or more persons;
2. An agreement entered into by all persons concerned;
3. Business;
4. The business being carried on by all or any of them acting for all; and
5. Sharing of profits (including losses) of the business.
From the accounts point of view, the chief point to remember is that the relations
among the partners will be governed by mutual agreement called Partnership Deed.
It is usual, therefore, to find out, in the Partnership Deed, clauses covering the following:
1. The name of the firm and the nature and location of the partnership business.
2. The commencement and duration of the partnership.
3. The amount of capital to be contributed by each partner.
4. The rate of interest to be allowed to each partner on his capital and on his loan to the firm, and that to
be charged on his drawings.
5. The disposal of profits, particularly the ratio in which the profits are to be shared by the partners.
6. The amount to be allowed to each partner as drawings and the timing of such drawings.

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7. Whether a partner will be allowed a salary.
8. Any variations in the usual rights and duties of partners.
9. The method by which goodwill is to be calculated on the retirement or death of a partner.
10. The procedure by which a partner may retire and the method of payment of his dues to him.
11. The basis of determination of the sums due to the executors of a deceased partner and the method of
payment.
12. The treatment of losses arising out of the insolvency of a partner.
13. The procedure to be followed for settlement of disputes among partners.
14. Preparation of accounts and their audit.
The Deed has to be properly stamped.
Often there is no Partnership Deed or, even if there is one, it may be silent on a particular
point. If on any point, the Partnership Deed contains a clause, it will hold good; otherwise the provisions
of the Partnership Act relating to the question will apply.
Rights of Partners:
Broadly, the provisions of the Act regarding rights, duties and powers of partners are as under:
(a) Every partner has a right to take part in the conduct and management of business.
(b) Every partner has a right to be consulted and heard in all matters affecting the business of the
partnership.
(c) Every partner has a right of free access to all records, books and accounts of the business, and also to
examine and copy them.
(d) Every partner is entitled to share the profits equally.
(e) A partner who has contributed more than the agreed share of capital is entitled to interest at the rate of
6 per cent per annum. But no interest can be claimed on capital.
(f) A partner is entitled to be indemnified by the firm for all acts done by him in the course of the
partnership business, for all payments made by him in respect of partnership debts or liabilities and for
expenses and disbursements made in an emergency for protecting the firm from loss provided he acted as
a person of ordinary prudence would have acted in similar circumstances for his own personal business.
(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the
partnership property used exclusively for the purposes of the partnership.
(h) A partner has power to act in an emergency for protecting the firm from loss, but he must act
reasonably.
(i) Every partner is entitled to prevent the introduction of a new partner into the firm without his consent.
(J) Every partner has a right to retire according to the Deed or with the consent of the other partners. If the
partnership is at will, he can retire by giving notice to other partners.
(k) Every partner has a right to continue in the partnership.
(l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits earned
with the aid of the proportion of assets belonging to such outgoing partner or interest at six per cent per
annum at the option of the outgoing partner (or his representative) until the accounts are finally settled.
Duties of Partners:
(a) Every partner is bound to diligently carry on the business of the firm to the greatest common
advantage. Unless the agreement provides, there is no salary.
(b) Every partner must be just and faithful to the other partners.
(c) A partner is bound to keep and render true, proper, and correct accounts of the partnership and must
permit other partners to inspect and copy such accounts.
(d) Every partner is bound to indemnify the firm for any loss caused by his willful neglect or fraud in the
conduct of the business.
(e) A partner must not carry on competing business, nor use the property of the firm for his private
purposes. In both cases, he must hand over to the firm any profit or gain made by him but he must himself
suffer any loss that might have occurred.
(f) Every partner is bound to share the losses equally with the others.
(g) A partner is bound to act within the scope of his authority.

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(h) No partner can assign or transfer his partnership interest to any other person so as to make him a
partner in the business.
Rights and Duties of Partners in a Partnership Firm
The mutual relations between the partners of a firm comes into existence through an
agreement between the said partners. This gives rise to mutual right and duties to every partner involved
in the firm’s business. Section 9 to 17 of the Indian Partnership Act of 1932 lays down the provisions
governing the mutual relations of all the partners. These relations are governed by an existing contract
among them which may be implied or expressed by the course of dealing. The agreement may vary
depending on the consent of all the partners. In this article, we look at the various rights and duties fo
partners in a partnership firm in detail.
Rights of a Partner
The following are the rights of a partner in a partnership firm.
Section 12(a): Right to take part in the conduct of the Business
All the partners of a partnership firm have the right to take part in the business conducted
by the firm as a partnership business is a business of the partners, and their management powers are
generally coextensive. If the management power of a particular partner is interfered with and the
individual has been wrongfully precluded from participating, the Court of Law can intervene under such
circumstances. The Court can, and will, restrain the other partner from doing so by injunction. Other
remedies are a suit for dissolution, a suit for accounts without seeking dissolution and so on for a partner
who has been wrongfully deprived of the right to participate in the management.
The previously mentioned provisions of the law will be applicable unless there is no existing contract to
the contrary among the partners. It is common to find a term in partnership agreements that gives only a
limited power of management to a specific partner or a term that the control of the partnership will remain
vested with one or more partners to the exclusion of others. In such a case, the Court of Law would
generally be unwilling to interpose with the management with such partner (s), unless it is proven that
something was done illegally or in the breach of trust among the partners.
Section 12(c): Right to be consulted
When a difference of any sorts arises between the partners of a firm concerning the
business of the firm, it shall be decided by the views of the majority among the partners. Every partner in
the firm shall have the right to express his opinion before the decision is made. However, there can be no
changes like the business of the firm without the consent of all the partners involved. As a routine matter,
the opinion of the majority of the partners will prevail. Although, the majority rule would not apply when
there is a change like the firm itself. In such situations, the unanimous consent of the partners is required.
Section 12(d): Right of access to books
Every partner of the firm, regardless of being an active or a sleeping partner, is entitled
to have access to any of the books of the partnership firm. The partner has the right to inspect and take a
copy of the same if required. However, this right must be exercised bonafide.
Section 13(a): Right to remuneration
No partner of the firm is entitled to receive any remuneration along with his share in
the profits of the business by the firm as a result of taking part in the business of the firm. Although, this
rule may always vary by an express agreement, or by a course of dealings, in which case the partner will
be entitled to remuneration. Thus, a partner may claim remuneration even in the absence of a contract,
when such remuneration is payable under the continued usage of the firm. In simpler words, where it is
customary to pay remuneration to a partner for conducting the business of the partnership firm, the
partner may claim it even in the absence of a contract for the payment of the same.
It is common for partners to agree that a managing partner will receive over and above his share, salary or
commission for the trouble that he will take while conducting the business of the firm.
Section 13(b): Right to share profits
Partners are entitled to share all the profits earned in the business equally. Similarly,
the losses sustained by the partnership firm is also equally contributed. The amount of a partner’s share
must be ascertained by inquiring whether there is an agreement in that behalf among the partners. If there

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is no agreement, then it can be presumed that the share of profit is equal and the burden of proving that
the shares are unequal, will lie on the party alleging the same.
The is no relation between the proportion in which the partners shall share the profits and the percentage
in which they have contributed to the capital of the partnership firm.
Section 13(c): Interest on capital
If a partner subscribes interest on capital is payable to the partner under the
partnership deed, then the interest will be payable out of the profits only in such a case. In a general rule,
the interest on a capital subscribes by partners is not permitted unless there is an agreement or a usage to
that effect. The underlying principle in this provision of law is that with concern to the capital brought by
a partner in the business, the partner is not a creditor of the firm but an adventurer.
The following elements must be ensured before a partner can be entitled to interest on the capital brought
by the partner in the business.
1. An express agreement to the same effect or the practice of a particular partnership.
2. Any trade custom to that effect; or
3. A statutory provision which entitles him to such interest on the capital.
Section 13(d): Interest on advances
If a partner makes an advance to the partnership firm in addition to the amount of capital to
be contributed by him, the partner is entitled to claim interest thereon at 6 per cent per annum. While the
interest on capital account ceases to run on dissolution, the interest on advances keeps running even after
dissolution and up to the date of payment. It can be noted that the Partnership Act makes a distinction
between the capital contribution of a partner and the advance made by him to the firm. The advance by
the partner is regarded as loans which should bear interest while the capital interest takes interest only
when there is an agreement to this effect.
Section 13(e): Right to be indemnified
All the partners of the firm have the right to be repaid by the firm in respect of the payments
made and the liabilities incurred by him in the ordinary and proper conduct of the business of the firm.
This also includes the performance of an act in an emergency for protecting the firm from a loss, if the
payments, liability and action are such as a prudent man would make, incur or perform in his case, under
similar circumstances.
Section 31: Right to stop the admission of a new partner
All the partners of a partnership firm have the right to prevent the introduction of a new partner
in the firm without the consent of all the existing partners.
Section 32(1): Right to retire
Every partner of a partnership firm has the right to withdraw from the business with the
consent of all the other partners. In the case of a partnership formed at will, this may be done by giving a
notice to that effect to all the other partners.
Section 33: Right not to be expelled
Every partner of a partnership firm has the right to continue in the business. A partner
cannot be dismissed from the firm by any majority of the partners unless conferred by a partnership
agreement and exercised in good faith and for the advantage of the partnership firm.
Section 36(1): Right of outgoing partner to carry on a competing business
A partner outgoing from the partnership firm may carry on a business competing with that
of the firm. The partner may even advertise such activity but has to do so without using the firm’s name
or representing himself as carrying on the business of the firm or soliciting the clients who were dealing
with the firm before the partner ceased to be a part of the partnership firm.
Section 37: Right of outgoing partner to share subsequent profits
If a partner has passed away or ceased to be a partner and the existing partners carry on
the business of the firm with the property of the firm without any final settlement of accounts as between
them and the outgoing partner or his estate, the outgoing partner or his estate has, at his or his
representative’s option, the right to such share of profit made since he ceased to be a partner as may be

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attributable to the use of his share of the property of the firm or interest at 6 per cent per annum on the
amount of the partner’s share in the property of the firm.
Section 40: Right to dissolve the firm
A partner of a partnership firm has the right to dissolve the partnership with the consent of
all the other partners. However, where the partnership is at will, the firm may be dissolved by any partner
by giving notice in writing to all the other partners of his intention to dissolve the firm.
Duties of a Partner
The following are the duties of a partner in a partnership firm.
Section 9: General duties of a partner
Partners are legally bound to carry on the business of the partnership firm. The general responsibilities of
a partner are listed below.
1. A partner is required to carry on the business to the highest common advantage.
2. A partner is required to be just and faithful to each other
3. A partner has to render to any other partner or his legal representative about the true account and
all the information of all the things affecting the partnership firm.
Section 10: To indemnify for fraud
According to Section 10, a partner of the partnership firm is liable to compensate the firm for any
damages caused to its business or the firm because of a partner’s fraud in the conduct of the business of
the firm.
Section 13(f): To indemnify for willful neglect
According to the Section, a partner of a partnership firm must compensate the firm for
any damages or loss caused to it by willful neglect in the conduct of the business of the firm.
Section 12(b) & Section 13(a): To attend duties diligently without remuneration
According to Section 12(b) of the Indian Partnership Act, every partner is legally bound to
attend to his duties diligently to his duties relating to the conduct of the firm’s business. Moreover,
Section 13(a) enumerates that a partner is not, however, generally entitled to remuneration for
participating in the conduct of the business. A partner is also bound to let his partners have the advantage
of his knowledge and skill.
Section 13(b): To share losses
All the partners of a partnership firm are liable to contribute equally to the injury sustained
by the firm.
Section 16(a): To account for any profit
If a partner of a partnership firm derives any profit for himself for any transaction of
the firm or from the use of the property or business connection of the firm or firm’s name, then the
partner is bound to account for that profit and refund it to the firm.
Section 16(b): To account and pay for profits of competing for business
If a partner carries on a company of the same nature as the firm and competes with
that of the firm, the partner must be accountable for and pay to the firm all the profits made in the
business by the partner. The partnership firm will not be held liable for any losses caused in the business.
Dissolution of a Partnership Firm
For a partnership firm to cease to exist, it needs to be dissolved. The process, known as
dissolution of a partnership firm, involves the sale or disposal of all assets of the firm, final settlement of
all of its liabilities, and the settling of the accounts. Any sum that remains in the business is then
transferred to the partners in the profit-sharing ratio mentioned in the partnership feed.
Hence, the dissolution of a partnership firm is the decision of all partners collectively
to terminate the business agreement made between them. There are many ways in which a partnership
firm can be dissolved.
Dissolution by Mutual Consent
The best and the easiest way to dissolve a partnership firm is by mutual consent. When
the contract that specifies the partnership comes to an end or the partners mutually agree, due to various
business or personal reasons to end the partnership, they can produce an agreement for dissolving it.

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It is essential for all the partners to agree mutually for dissolving partnerships through the Dissolution by
Mutual Consent clause in the partnership agreement.
Dissolution by Notice
If the partnership business is at will, any one partner (or more) can, through a simple
and advanced notice, dissolve a partnership. The notice should specify the date on which the dissolution
comes into force. Such a dissolution can be initiated by any individual partner, after proper notice is
issued.
Dissolution Due to Contingencies
There are certain clauses/situations wherein the partnership firm can be/is dissolved:
1. On account of the end of a project/endeavor which the firm was formed to undertake.
2. by the death of a partner.
3. by the adjudication of a partner as an insolvent or one or more partners.
4. by the expiry of a partnership period. Some firms are started with a clear view of the tenure for which
the partnership will exist. Such partnerships will, naturally, come to an end once the period of partnership
is complete.
The contingencies may vary depending upon the clauses specified in the agreement prepared at the time
of forming the partnership. The agreement should specify the terms on which the dissolution may be
undertaken under such circumstances.
Compulsory Dissolution
Certain occurrences can make the dissolution of a firm compulsory. For example, by
occurrence of any event judged as illegal and thus, making it difficult for the partnership firm to continue
its tenure
Dissolution by Court
A partnership business involves working with various individuals at a time. Even if
they are friends and relatives, there are instances where one or more partner may find it not suitable for
him or her under circumstances to continue. In these cases, the court may also dissolve the firm. Let us
look at some of the reasons why or how the partnership firms can be dissolved through court cases. Do
note, however, that for this to be possible, the partnership deed should be registered
Due to Mental Instability
When a partner becomes mentally unstable/incapacitated
A business venture cannot proceed in case a partner is unable to deal with the pressures
of the job at hand because of mental instability. In such instances, the other partner/partners can file a
case/request to dissolve the partnership firm.
Illness or incapacity of a partner due to medical or any other reasons can also result in
dissolution of partnership through a court case. The partner, other than the one incapacitated/mentally
unstable, needs to file the request for dissolution of partnership through the court.
Due to Misconduct
The other reason for dissolution by the court is misconduct. Any partner/partners in
the partnership misbehaving with others or not heeding to the signed agreement of the partnership will
find themselves ousted by their partners through a court case.
The agreement (if registered) that the partners sign is a legally binding one, and any
partner who misses out on any particular clause, and even after giving warnings, are not heeding to it, can
be made to face the court. The partnership firm may be dissolved through court interference in such
instances.

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Transfer of Equity/Interest
A partner may decide to dissolve the partnership through the court if the other
individual in the partnership has transferred their interest/equity of the firm to a third party without
consulting them.
Dissolution of partnership firm leads to dissolution of partnership as well. However,
dissolution of partnership does not lead to dissolution of a partnership. This leads us to a conclusion that
the two are not same but different concepts.
Dissolution of partnership:
When a new partner is admitted or when an existing partner retires or leaves the
partnership, dissolution of partnership is said to take place. Irrespective of the change in the partners’
composition, the remaining partners decide to continue the business. To put in other words, since there
takes place a change in the partners, the partnership that existed among the partners just before the change
is said to be dissolved. In place of the old partnership, new partnership is formed. The relation between
partners is revised. However, a point worth noting here is that the new firm takes the assets and liabilities
of the old firm. Also, dissolution of partnership does not contribute to any break in the business.
This, many a times, is referred to as technical dissolution.
Dissolution of firm
When the relation between partners comes to an end resulting in the breakdown of the
business, it is referred to as dissolution of a firm. Here, the partnership firm is wound-up and the accounts
are settled. The assets are sold, liabilities are paid for and all the claims of the partners are discharged.
This is referred to as general dissolution.
Let’s look at the various reasons that lead to a general dissolution:
1. By an agreement between partners or through their mutual consent
2. The following two events warrant for compulsory dissolution:
3. Insolvency of all the partners or all partners except one
4. In case the firm indulges in unlawful business activities
5. On the happening of a contingent event, like the attaining of the objective for which the firm has
been set up.
6. Where the partnership provides for a clause that a partner can call for dissolution by serving a
notice.
7. In the following circumstances the court may order for dissolution of the firm:
8. Insanity or incapacity of a partner
9. Misconduct or constant breach of terms by a partners
10. Continuous losses with no capital to vouch for future growth of the firm.
11. Any just and equitable ground
Here is a case study for better understanding:
In January 20X2, A and Z entered into a partnership to supply 10,000 trucks to a
manufacturing company. Miss Y joined the firm in March 20X2. Five months later Mr A ceased to be a
partner. In October 20X3 the firm has fulfilled its objective of supplying the trucks to the manufacturing
company. It was then dissolved.
In the above example, the following two events indicate dissolution of partnership:
1. Partnership between A and Z has been dissolved on admission of Miss Y.
2. Partnership between A, Y and Z has been dissolved on Mr A leaving the firm.
The event when the supply of the requisite number of trucks has been completed, the firm is said to be
dissolved.
Settlement of accounts
Dissolution of a firm demands for settlement of accounts. To materialise this, the assets of
the firm are sold. The proceeds earned from the disposal of assets are then utilised to settle the claims of
creditors. The surplus, if any, is used to repay partners’ capital.
In case of insolvency of a partner, the remaining solvent partners shall bear the loss on dissolution in their
capital ratio.

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On dissolution of a firm, the accounts of partners are settled according to the partnership agreement, if
any. In the absence of a partnership agreement between the partners or where this clause is not discussed
in the agreement, the following rules should be observed:
1. Losses shall be paid out of the following in chronology:
2. Profits
3. Capital
4. Partners individually, in their profit-sharing ratio
5. The manner and order of application of assets shall be as follows:
6. Payment of debts of the firm to third parties
7. Payment of debts to each partner for the advances
8. Payment to each partner on account of capital
9. Any surplus shall be distributed among the partners in the profit-sharing ratio.
Accounting treatment
By now, we are pretty much clear that dissolution of a firm involves settlement of accounts.
So what exactly happens when you say accounts are settled? Ideally, all the accounts are closed. This
necessitates the opening of the realisation accounts, cash/bank account and the partners’ capital accounts.
1. Realisation account:
This account is debited and credited for all the activities concerning the realisation of assets
and paying off the liabilities.
Debits to the account
All the assets of the firm are transferred at their book values. Yet, cash being in liquid form
already, is not transferred. Paying off any outside liability is debited to the account. The expenses of
realisation of assets are also debited.
All the outside liabilities are credited to the account. The realisation from assets sold or taken
by any partner is reflected on the credits portion of the accounts.
The profit or loss resulting from the account is transferred to the partners’ capital account
in their profit sharing ratio.
2. Capital Accounts
The individual accounts of the partners are prepared. The opening balances of their
capitals shall form the starting point of the preparation of these accounts. The result of this account shows
the balance to be paid to the partners after dissolution. Any outside liabilities settled by the respective
partner is transferred to his respective account.
The credit side also show the transfer of general reserve share and any profit share on
realisation. If the firm maintains current accounts, these accounts are also transferred to the capital
accounts in the event of dissolution. The capital accounts are finally closed by receipt or payment of cash.
3. Cash/Bank Account
All the receipts and payments of cash bank are reflected in this account. This account is
to be balanced by the debits and credits showing same amounts at the end of settlement. This is because
any loss is borne by the partners and also any profit out of realisation is shared among them in the profit
sharing ratio.
In a nut shell, the balance of cash and bank on the realisation of assets and payment of
liabilities should be equal to the amount due to/ from the partners’ capital account. The principle of
unlimited liability is applied.
Thus, all the accounts are settled.
When the partnership between all the partners of a firm is dissolved, then it is called
dissolution of a firm. It is important to note that the relationship between all partners should be dissolved
for the firm to be dissolved. Let us look at the legal provisions for the dissolution of a firm.
Modes of Dissolution of a Firm
A firm can be dissolved either voluntarily or by an order from the Court.
Voluntary Dissolution of a Firm (without the order of the Court)
Voluntary dissolution can be of four types. Let us take a look.

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1] By Agreement (Section 40)
According to Section 40 of the Indian Partnership Act, 1932, partners can dissolve the
partnership by agreement and with the consent of all partners. Partners can also dissolve the partnership
based on a contract that has already been made.
2] Compulsory Dissolution (Section 41)
An event can make it unlawful for the firm to carry on its business. In such cases, it is
compulsory for the firm to dissolve. However, if a firm carries on more than one undertakings and one of
them becomes illegal, then it is not compulsory for the firm to dissolve. It can continue carrying out the
legal undertakings. Section 41 of the Indian Partnership Act, 1932, specifies this type of voluntary
dissolution.
3] On the happening of certain contingencies (Section 42)
According to Section 42 of the Indian Partnership Act, 1932, the happening of any of
the following contingencies can lead to the dissolution of the firm:
1. Some firms are constituted for a fixed term. Such firms will dissolve on the expiry of that term.
2. Some firms are constituted to carry out one or more undertaking. Such firms are dissolved when
the undertaking is completed.
3. Death of a partner.
4. Insolvent partner.
4] By notice of partnership at will (Section 43)
According to Section 43 of the Indian Partnership Act, 1932, if the partnership is at will,
then any partner can give notice in writing to all other partners informing them about his intention to
dissolve the firm. In such cases, the firm is dissolved on the date mentioned in the notice. If no date is
mentioned, then the date of dissolution of the firm is the date of communication of the notice.
Dissolution of a Firm by the Court
According to Section 44 of the Indian Partnership Act, 1932, the Court may dissolve a firm on the suit of
a partner on any of the following grounds:
1] Insanity/Unsound mind
If an active partner becomes insane or of an unsound mind, and other partners or the next
friend files a suit in the court, then the court may dissolve the firm. Two things to remember here:
The partner is not a sleeping partner
The sickness is not temporary
2] Permanent Incapacity
If a partner becomes permanently incapable of performing his duties as a partner, and other
partners file a suit in the court, then the court may dissolve the firm. Also, the incapacity may arise from a
physical disability, illness, etc.
3] Misconduct
When a partner is guilty of conduct which is likely to affect prejudicially the carrying on
of the business, and the other partners file a suit in the court, then the court may dissolve the firm. Further,
it is not important that the misconduct is related to the conduct of the business. The court looks at the
effect of the misconduct on the business along with the nature of the business.
4] Persistent Breach of the Agreement
A partner may willfully or persistently commit a breach of the agreement relating to –
1. the management of the affairs of the firm, or
2. a reasonable conduct of its business, or
3. conduct himself in matters relating to business that is not reasonably practicable for other partners
to carry on the business in partnership with him.
In such cases, the other partners may file a suit against him in the court and the court may order to
dissolve the firm. The following acts fall in the category of breach of agreement:
1. Embezzlement
2. Keeping erroneous accounts
3. Holding more cash than allowed

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4. Refusal to show accounts despite repeated requests, etc.
5] Transfer of Interest
A partner may transfer all his interest in the firm to a third party or allow the court to
charge or sell his share in the recovery of arrears of land revenue. Now, if the other partners file a suit
against him in the court, then the court may dissolve the firm.
6] Continuous/Perpetual losses
If a firm is running under losses and the court believes that the business of the firm
cannot be carried on without a loss in the future too, then it may dissolve the firm.
7] Just and equitable grounds
The court may find other just and equitable grounds for the dissolution of the firm.
Some such grounds are:
1. Deadlock in management
2. Partners not being in talking terms with each other
3. Loss of substratum (the foundation of the business)
4. Gambling by a partner on the stock exchange.
Difference between Dissolution of a firm and Dissolution of a Partnership
Parameters Dissolution of a Firm Dissolution of a Partnership
Continuation of business The business discontinues.
The business continues. However, the
partnership is reconstituted.
Winding up
The firm is wound up. Assets are
realized and liabilities are settled.
Assets and liabilities of the firm are only
revalued.
Court order A Court Order can dissolve a firm.
A Court Order cannot dissolve a
partnership.
Scope
It involves the dissolution of
partnership between all partners.
It does not involve the dissolution of the
firm.
Final closure of books Yes No

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Unit IV
The companies act, 1956 -
Introduction
The Companies Act 1956 is administered by the Government of India through the
Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc. The Act is 658 sections long. The Act contains
provisions about Companies, directors of the companies, memorandum and articles of associations, etc.
This act states and discusses every single provision requires or may need to govern a company. It
mentions what type on companies their differences, constitution , management, members , capital, how
should the shares should be issues, debentures, registration of charge, at the end of the act it concludes the
about winding up of a company, discussing the situations a company needs to be winded up. The ways it
should be done by volunteer or through courts.
Provisions of the Act
Article 3 of the act describes the definition of a company, the types of companies that
can be formed e.g. public, private, holding, subsidiary, limited by shares, unlimited etc. Further on in
Article 10 E it explains about the constitution of board of company, it explains the companies’ name, the
jurisdictions, tribunals, memorandums and the changes that can be made. Article 26 and further on
explains about the article of association of the company which a very important part when forming a
company and various amendments that can be made. Article 53 to 123,it explains about the shares, the
share holders their rights, it explains about debentures, share capital, their procedure and powers within
the company. Article 146 to 251 it explains about the management and administration of the company and
the provisions registered office and name. Article 252 to 323 elaborates on the provisions of duties,
powers responsibility and liability of the directors in the company which is a very integral part of the
company when it is formed. Article 391 to 409 explains about the arbitration, the prevention and
obsession of the company Article 425 to 560 it explains the procedure of winding up of a company, the
preventions the rights of shareholders, creditors, methods of liquidations, compensation provided and
ways of winding up the company. Article 591 and further on explains about setting up companies outside
India and their fees and registration procedure and all.
An overview of Companies Act 1956
Companies Act 1956 explains about the whole procedure of the how to form a company,
its fees procedure, name, constitution, its members, and the motive behind the company, its share capital,
about its general board meetings, management and administration of the company including an important
part which is the directors as they are the decision makers and they take all the important decisions for the
company their main responsibility and liabilities about the company matter the most. The Act explains
about the winding of the business as well and what happens in detail during liquidation period.
Company objective and legal procedure based on the Act
The basic objectives underlying the law are:
1. A minimum standard of good behaviour and business honesty in company promotion and
management.
2. Due recognition of the legitimate interest of shareholders and creditors and of the duty of
managements not to prejudice to jeopardize those interests.
3. Provision for greater and effective control over and voice in the management for shareholders.
4. A fair and true disclosure of the affairs of companies in their annual published balance sheet and
profit and loss accounts.
5. Proper standard of accounting and auditing.
6. Recognition of the rights of shareholders to receive reasonable information and facilities for
exercising an intelligent judgment with reference to the management.
7. A ceiling on the share of profits payable to managements as remuneration for services rendered.

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8. A check on their transactions where there was a possibility of conflict of duty and interest.
9. A provision for investigation into the affairs of any company managed in a manner oppressive to
minority of the shareholders or prejudicial to the interest of the company as a whole.
10. Enforcement of the performance of their duties by those engaged in the management of public
companies or of private companies which are subsidiaries of public companies by providing
sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of
law applicable to public companies.
Companies Act empowerment and mechanism
In India, the Companies Act, 1956, is the most important piece of legislation that
empowers the Central Government to regulate the formation, financing, functioning and winding up of
companies. The Act contains the mechanism regarding organizational, financial, and managerial, all the
relevant aspects of a company. It empowers the Central Government to inspect the books of accounts of a
company, to direct special audit, to order investigation into the affairs of a company and to launch
prosecution for violation of the Act. These inspections are designed to find out whether the companies
conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial
to the public interest are being resorted to by any company or a group of companies and to examine
whether there is any mismanagement which may adversely affect any interest of the shareholders,
creditors, employees and others. If an inspection discloses a prima facie case of fraud or cheating, action
is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of
Investigation. The Companies Act, 1956 has been amended from time to time in response to the changing
business environment.
Companies act 1956
Introduction
WHAT IS COMPANY
a) A company is an artificial person created by law
b) A company means a group of persons associated together for the attainment of a common end,
social or economic.
c) Section 3(1)(i) of the Companies Act, 1956 defines a company as: “a company formed and
registered under this Act or an existing company”
d) ‘Existing Company’ means a company formed and registered under any of the earlier Company
Laws.
Characteristics of a company
a) Separate legal entity
b) Limited liability
c) Perpetual succession
d) Common seal
e) Transferability of shares
f) Separate property
SEPARATE LEGAL ENTITY
A company is in law regarded as an entity - separate from its members. It has an independent
corporate existence.
Any of its member can enter into contracts with it in the same manner as any other individual can
and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
The company’s money and property belongs to it and not to the shareholders (although the
shareholders own the company)
LIMITED LIABILITY
A company may be a company limited by shares or a- company limited by guarantee. In a
company limited by shares, the liability of members is limited to the unpaid value of the Share

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PERPETUAL SUCCESSION
Being an artificial person a company never dies, nor does its life depend on the life of its
members. Members may come and go but the company can go on forever. It continues to exist even if all
its members are dead. The existence of company can be terminated only by law.
It means that a company’s existence persists irrespective of change in the composition of its
membership
COMMON SEAL
Since a company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must be under a seal of the company. The common seal acts as the
official signature of the company.
TRANSFERABILITY OF SHARES
The capital of a company is divided into parts called shares. These shares are, subject to
certain conditions, freely transferable, so that no shareholder is permanently wedded to the company.
When the join stock companies were established the great object was that the shares should be capable of
being easily transferred.
SEPARATE PROPERTY
As a company is a legal person distinct from its: members, it is capable of owning,
enjoying and disposing of property in its own name. Although its capital and assets are contributed by its
shareholders, they are not the private and joint owners of its property. The company is the real person in
which all its property is vested and by which it is controlled, managed and disposed of.
Types of companies (Registered under company act 1956)
ON THE BASIS OF INCORPORATIONS
Statutory companies-
These are the companies which are created by a special Act of the legislature e.g. RBI,
SBI, LIC, etc. These are mostly concerned with public utilities as railways, tramways, gas and electricity
companies and enterprises of national level importance.
Registered companies- These are the companies which are formed and registered under the Companies
Act,1956 .
Companies
Incorporated Liability Number of members Control Ownership
Charted
companies
HoldingPrivateLimited
Liability
Registered
Companies
Statutory
Companies
Government
Subsidiar
y
PublicUnlimited
Liability
Non-
Government

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ON THE BASIS OF LIABILITY
1) Companies with limited liability:
LIMITED BY SHARES:
Where the liability of the members of a company is limited to the amount unpaid on
the shares, it is known as company limited by shares. If the shares are fully paid, the liability of the
members holding such shares is nil. It may be a public or a private company.
LIMITED BY GUARANTEE
Where the liability of the members of a: company is limited to a fixed amount which the
members undertake to contribute to the assets of a company in the event of its being wound up, the
company is called a company limited by guarantee.
These companies are not formed for the purpose of profit but for the promotion of art, science,
charity, sports or for some similar purposes. They may or may not have a share capital.
2) Companies with unlimited liability
Sec 12 specifically provides that any 7 or more persons may form an incorporated company
with or without limited liability. In such case every member is liable for the debts of the company
An unlimited company may or may not have share capital. If it has a share capital, it may be
a public company or a private company. It must have its own Articles of Association.
ON THE BASIS OF NUMBER OF MEMBERSPRIVATE COMPANY-
Private company
A company which has a minimum paid-up capital of Rs 1,00,000 or such higher paid up
capital as may be prescribed, and by its articles
a. Restricts the right to transfer its shares, if any
b. Limits the number of its members to 50.
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company,
d. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or
their relatives.
PUBLIC COMPANY:
A public company means a company which-
(a) Has a minimum paid-up capital of Rs. 5 lakh or such higher paid-up capital, as may be prescribed;
(b) Is a private company which is a subsidiary of a company which is not a private company;
Every public company, existing on the commencement of the Companies Act, 2000, with a
paid-up capital of less than Rs. 5 lakh, within a period of two years from such commencement, enhance
its paid-up capital to Rs. 5 lakh.
ON THE BASIS OF CONTROL
Holding companies-
A company is known as the holding company of another company if it has the control over that
other company. A company is deemed to be the holding company of another if, but only if, that other is
its subsidiary.
Subsidiary company-
A company is known as a subsidiary of another company when control is exercised by the
holding company over the former called a subsidiary company.
ON THE BASIS OF OWNERSHIP
Government company –
A government company means any company in which not less than 51% of the paid-up
share capital is held by-
a) The central government, or
b) Any state government, or governments, or
c) Partly by central government and partly by one or more state government.
Foreign company- It means any company incorporated outside India which has an established place of
business in India.Where a minimum of 50% of the paid up share capital of a foreign company is held by
one or more citizens of India or/and by one or more bodies corporate incorporated in India, whether

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singly or jointly, such company shall comply with such provisions as may be prescribed as if it were an
Indian company.
Company definition, meaning,
A company is a body corporate or an incorporated business organization registered
under the companies act. It can be a limited or an unlimited company, private or a public company,
company limited by guarantee or a company having a share capital, or a community interest company.
According to the law in the USA:
A company can be a “corporation, partnership, association, joint-stock
company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official
capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the
foregoing”
The Companies Act 2013 of India defines a company 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.
A more precise, global and modern definition of a company could be:
A business entity which acts as an artificial legal person, formed by a legal person or a group of legal
persons to engage in or carry on a business or industrial enterprise.
Few points that should be noted in this definition:
Legal Person:
A legal person could be human or a non-human entity which is recognised by law as having
legal rights and is subject to obligations.
A person or a group of persons:
It is no more required to be an association of persons to form a company. A company can also
be started as a single person company (one-person company).
Since the definition, features, characteristics, and types of companies differ in different
countries (especially in the United States), all the following sections will be focused on an Indian and UK
perspective of a company.
Features & Characteristics of a Company
Incorporated association:
A company comes into existence when it is registered under the Companies Act (or other
equivalent act under the law). A company has to fulfil requirements in terms of documents (MOA, AOA),
shareholders, directors, and share capital to be deemed as a legal association.
Artificial Legal Person:
In the eyes of the law, A company is an artificial legal person which has the rights to
acquire or dispose of any property, to enter into contracts in its own name, and to sue and be sued by
others.
Separate Legal Entity:
A company has a distinct entity and is independent of its members or people controlling it.
A separate legal entity means that only the company is responsible to repay creditors and to get sued for
its deeds. The individual members cannot be sued for actions performed by the company. Similarly, the
company is not liable to pay personal debts of the members.
Perpetual Existence:
Unlike other non-registered business entities, a company is a stable business organisation.
Its life doesn’t depend on the life of its shareholders, directors, or employees. Members may come and go
but the company goes on forever.
Common Seal:
A company being an artificial legal person, uses its common seal (with the name of the
company engraved on it) as a substitute for its signature. Any document bearing the common seal of the
company will be legally binding on the company.

132. 132
Limited Liability:
A company may be limited by guarantee or limited by shares. In a company limited by
shares, the liability of the shareholders is limited to the unpaid value of their shares. In a company limited
by guarantee, the liability of the members is limited to the amount they had agreed upon to contribute to
the assets of the company in the event of it being wound up.
Types of companies
A company can be classified into various types depending upon the following requirements:
Classification of Companies by Mode of Incorporation
Royal Chartered Companies
These companies are formed under a special charter by the monarch or by a special order of
a king or a queen. Few examples of royal chartered companies are BBC, East India Company, Bank Of
England, etc.
Statutory Companies
These companies are incorporated by a special act passed by the central or state legislature.
These companies are intended to carry out some business of national importance. For example, The
Reserve Bank of India was formed under RBI act 1934.
Registered or Incorporated Companies
These companies are formed/incorporated under the companies act passed by the
government. These companies come into existence only after these are registered under the act and the
certificate of incorporation is passed by the Registrar of companies.
Classification of Companies based on the liability of the members
The registered companies can be classified into the following categories based on the
liabilities of members:
Companies Limited By Shares
These companies have a defined share capital and the liability of each member is limited by
the memorandum to the extent of the face value of shares subscribed by him.
Companies Limited By Guarantee
These companies may or may not have a share capital and the liability of each member is
limited by the memorandum to the extent of the sum of money (s)he had promised to pay in the event of
liquidation of the company for payments of debts and liabilities of the company.
Unlimited Companies
There is no formal restriction to the amount of money that the shareholder/member of the
company has to pay in the event of the liquidation of an unlimited company.
Classification of Companies based on The Number of Members
Public Company (or Public Limited Company)
A public company is a corporation whose ownership is open to the public. In other
words, anyone can buy the shares of a public company. There are no restrictions to the number of
members of a public company or to the transferability of shares. However, there are some other
restrictions:
(In UK) A public limited company should have at least 2 shareholders and 2 directors,
have allotted shares to the total value of at least £50,000, be registered with company house, and have a
qualified company secretary.
(In India) A public company should have at least 7 members and 3 directors, and
issue a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.
Private Company (or Private Limited Company)
A private company cannot be owned by the public; it restricts the number of members,
the right to transfer its shares and prohibits any invitation to the public to subscribe for any shares or
debentures of the company.

133. 133
(In UK) A private company is a separate legal entity with a suitable company
name, an address, at least one director, at least one shareholder, and memorandum of association and
article of association.
(In India) A private company is a separate legal entity with a suitable company
name, an address, at least 2 members and at most 200 members, and at least two directors with one being
an Indian resident.
One Person Company
A one-person company is an Indian private limited company which has only one
founder/promoter. The founder should be a natural person who is a country resident. There is also a
threshold of paid-up capital (₹ 50 lakh) and average turnover (₹ 2 crores in 3 immediate preceding
financial years) for a one-person
Company Definition, Meaning, Features, Types and Level
Definition -
“A company can be defined as an "artificial person", invisible, intangible, created by or under
law, with a discrete legal entity, perpetual succession and a common seal.[citation needed] It is not
affected by the death, insanity or insolvency of an individual member”
Features of Company as per Companies Act, 1956
1. An Association of Persons
2. Incorporated Association
3. Artificial Legal Person
4. Distinct Legal Entity
5. Perpetual Succession
6. Limited Liability
7. Transferability of Shares
8. Diffused Ownership
9. Separation of ownership and management
10. Common Seal
11. Corporate Finance
12. Object clause of Business
13. Publication of Accounts
TYPES OF COMPANIES
On the basis of Incorporation
Chartered
Companies
•Incorporated
under a special
royal charter
issued by the king
or head of the state
•E.g. The East
India Company,
Bank of England,
Hudson's Bay
Company
Statutory
Companies
•Established by a
Special Act of the
Parliament to State
Legislature
•May not use Ltd.
•E.g. RBI, IFCI,
IDBI, LIC etc.
Registered
Companies
•Formed and
registered under the
Indian Companies
Act, 1956
•E.g. Infosys,
Wipro etc.

134. 134
On the basis of Liability
On the basis of No. of Members
Limited companies Unlimited Companies
Limited by Shares
•Liability of
members (share
holders) is limited
to the extent of
face value of
shares held by
them
Limited by Guarantee
Liability of members is
limited to a fixed
amount which they have
guaranteed on Limited
Companies
Unlimited Companies
•Liability of members is
unlimited. They have to
pay the liabilities of the
company from their
personal assets
Private Companies
•Restricts the rights
of the members to
transfer shares
•Limits the number
of members to 200
(Act 2013)
excluding past or
present employees
of the company
•Prohibits any
invitation to the
public to subscribe
for its shares,
debentures and
public deposits
Public Companies
•A public company is
one which is not a
private company
•To form a company
at least 7 members
and there is no limit
•Has to use the word
'Limited' at the end
of its name
Introduced 10 Act 2013
•One-Person- Company
•Dormant Company

135. 135
On the basis of Ownership and Control
On the basis of Nationality
Structure of Company
It mainly consists of three levels of management. They are as follows:
1) TOP LEVEL MANAGEMENT
2) MIDDLE LEVEL MANAGEMENT
3) LOWER LEVEL MANAGEMENT
1) TOP LEVEL MANAGEMENT
Top-level management consists of boards of directors, presidents, vice-presidents, CEOs,
general managers and senior managers, etc. They develop goals, strategic plans, and company policies
and make decisions about the direction of the business. Top managers need to have more conceptual skill
than technical skill. They understand how competition, world economies, politics, and social trends affect
organizational effectiveness.
Govt. Companies
•Not less than 51% of
the share capital of the
company owned by the
Govt.
(Central/State/together)
Holding Companies
•Owns more than 50%
of nominal value of
equity share capital of
another company or is
controlling the
composition of the
board of directors of
another company
•E.g. Tata Group
Subsidiary Companies
•Controlled by a holding
company since it owns
less than 50% nominal
value of equity share
capital
•E.g. Reebok, Audi, TCS
Domestic Companies
* Is a company that is
incorporated in the
country(India)
Foreign Companies
* The company which is
incorporated outside
India but has a place of
business in India through
its branches or agencies
is known as foreign
company

136. 136
2) MIDDLE LEVEL MANAGEMENT
Middle management is at the center of a hierarchical organization, subordinate to the senior
management but above the lowest levels of operational staff. They are accountable to top management
for their department's function. They provide guidance to lower-level managers and inspire them to
perform better. Middle-management functions generally revolve around enabling teams of workers to
perform effectively and efficiently and reporting these performance indicators to upper management.
3) LOWER LEVEL MANAGEMENT
Low-level managers focus on controlling and directing. They serve as role models for the
employees they supervise. Assigning employees tasks. Guiding and supervising employees on day-to-
day activities. Ensuring the quality and quantity of production.
Features and types of Companies
Types of Companies
1.On the basis of Incorporation:
(i) Statutory Companies
(ii) Registered Companies
(II) On the basis of Liability:
(i) Limited liability companies
- limited by share
- limited by guarantee
(ii) Unlimilited liability companies
(III) On the basis of Number of members:
(i) Public Companies
(ii) Private Companies
(IV) On the basis of Ownership:
(i) Government companies
(ii) Non-government companies
(V) On the basis of Control:
(i) Holding company
(ii) Subsidiary company
(VI) Others:
1. Foreign company
2. Associate companies
3. One person company
4. Small company
5. Dormant company
Private Company
“private company” means a company having a minimum paid-up share capital of one lakh
rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
Features:
1. Must necessarily have its own Articles of Association.
2. Should have at least two directors.
3. The word 'Private Limited' must be added at the end of its name.
Conversion of a private company into a public company
Public company
“Public company “ means a company which
(a) is not a private company;
(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital,

137. 137
As may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles ;
Conversion of a public company into a private company
Note: Number of directors can exceed 15 by passing a special resolution but with at least 1 women
director
Holding & Subsidiary Company
Holding company:
“ a company is known as holding company of another company if it has control over that other
company
Subsidiary company:
A company is deemed to be a subsidiary of another company in the following 3 cases-
(i) company controlling composition of BoD
(ii) Holding of majority shares
(iii) subsidiary of another subsidiary
Government Company
“Government company” means any company in which not less than 51% of the paid-up share
capital is held
(i) By the Central Government, or by any
(ii) State Government or Governments, or
(iii) Partly by the Central Government and partly by one or more State Governments,
And includes a company which is a subsidiary company of such a Government company.
Foreign Company
Any company incorporated outside India which has an established place of business in
India or through an agent physically or electronic mode.
Associate company
A company is considered to be an associate company of the other, if the other company has
significant influence over such company (not being a subsidiary) or is a joint venture company.
Significant influence means control of at least 20 %of total share capital of a company or of
business decisions under an agreement
One person company (OPC)
NOTE : A single person is entitled to incorporate maximum of 5 OPCs
A company in which one man holds practically the whole of the share capital of the company.
Features:
a) Dummy members are usually nominees
b) Can only be incorporated as a private limited company
c) Can have only one member
d) May have only 1 director though more are allowed
e) Words One person company to be added with the company’s name
f) AGM not mandatory but if directors are more than 1, it should be held
Small company
‘‘Small company’’ means a company, other than a public company, -
(i) paid-up share capital of which does not exceed 50 lakh rupees or such higher amount as may be
prescribed which shall not be more than 5 crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed 2 crore rupees or such higher
amount as may be prescribed which shall not be more than 20 crore rupees:
Provided that it shall not apply to:
a) Holding/subsidiary co.
b) A company regd. Under Sec 8 (associations not for profit)
c) A co. governed by any special act

138. 138
Dormant Company
Companies which are not carrying on any significant accounting transaction for a period of 2
years can apply to RoC for getting declared as ‘dormant’ OR annual returns not filed for 2 financial years
consecutively
Association Not for profit
Section 8 Company – Companies with Charitable Objects
A non-profit organisation can be registered as Trust or as a Society or as a private limited
nonprofit company under Section 8 Company under the Companies Act 2013. A Section 8 Company is
the same as the popular Section 25 company under the old Companies Act, 1956 A Section 8 company
can be established for promotion of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment etc.
a) Section 8 company may be limited or private limited both .
One Person Company cannot be a Sec 8 Company
b) The requirement of having minimum paid up share capital shall not apply .
c) A company registered u/s 8 may have any number of Directors
Public company Private company
NOTE : Number of directors can exceed 15 by passing a special resolution but with atleast 1 woman
director
Public vs. Private company
Public Company Private company
1.No restriction on invitation to subscribe for
shares
1.Restriction on invitation to subscribe for shares
2.Transferability of shares/debentures: Free 2.Transferability of share/debentures :restricted by
article
3.Quorum 3.Quorum:2
a) 5.If the member are not more than 1000
b) 15.if more than 1000<5000
c) 30,if exceeds 5000
Incorporation of a Company
Incorporation is the legal process used to form a corporate entity or company. A
corporation is a separate legal entity from its owners
Incorporation of a company refers to the legal process that is used to form a corporate
entity or a company. An incorporated company is a separate legal entity on its own, recognized by the
law. These corporations can be identified with terms like ‘Inc’ or ‘Limited’ in their names. It becomes a
corporate legal entity completely separate from its owners.
Steps in Incorporation of a Company
A group of seven or more people can come together so as to form a public company
whereas, only two are needed to form a private company. The following steps are involved in the
incorporation of a company.
1. Ascertaining Availability of Name
The first step in the incorporation of any company is to choose an appropriate name. A
company is identified through the name it registers. The name of the company is stated in the
memorandum of association of the company. The company’s name must end with ‘Limited’ if it’s a
public company and ‘Private Limited’ if its a private company.
To check whether the chosen name is available for adoption, the promoters have to write an application to
the Registrar of Companies of the State. A 500 rupee is paid with the application. The Registrar then
allows the company to adopt the name given they fulfil all legal documentation formalities within a
period of three months.

139. 139
2. Preparation of Memorandum of Association and Articles of Association
The memorandum of association of a company can be referred to as its constitution or
rulebook. The memorandum states the field in which the company will do business, objectives of the
company, as well as the type of business the company plans to undertake. It is further divided into five
clauses
a) Name Clause
b) Registered Office Clause
c) Objects Clause
d) Liability Clause
e) Capital Clause
Articles of Association is basically a document that states rules which the internal
management of the company will follow. The article creates a contract between the company and its
members. The article mentions the rights, duties, and liabilities of the members. It is equally binding on
all the members of the company.
3. Printing, Signing and Stamping, Vetting of Memorandum and Articles
The Registrar of Companies often helps promoters to draw up and draft the
memorandum and articles of association. Above all, with promoters who have no previous experience in
drafting the memorandum and articles.
Once these have been vetted by the Registrar of Companies, then the memorandum of
association and articles of association can be printed. The memorandum and articles are consequently
divided into paragraphs and arranged chronologically.
The articles have to be individually signed by each subscriber or their representative in the presence of a
witness, otherwise, it will not be valid.
4. Power of Attorney
To fulfil the legal and complex documentation formalities of incorporation of a
company, the promoter may then employ an attorney who will have the authority to act on behalf of the
company and its promoters. The attorney will have the authority to make changes in the memorandum
and articles and moreover, other documents that have been filed with the registrar.
5. Other Documents to be Filed with the Registrar of Companies
1. The First – e-Form No.32 – Consent of directors
2. The Second – e-Form No.18 – Notice of Registered Address
3. The Third – e-Form No.32. – Particulars of Directors
6. Statutory Declaration in e-Form No.1
This declaration, furthermore states that ‘All the requirements of the Companies Act and the
rules there under have been compiled with respect of and matters precedent and incidental thereto.’
7. Payment of Registration Fees
A prescribed fee is to be paid to the Registrar of Companies during the course of
incorporation. It depends on the nominal capital of the companies which also have share capital.
8. Certificate of Incorporation
If the Registrar is completely satisfied that all requirements have been fulfilled by the
company that is being incorporated, then he will register the company and issue a certificate of
incorporation. As a result, the incorporation certificate provided by the Registrar is definite proof that all
requirements of the Act have been met.

140. 140

141. 141
Incorporation of a company
1. Documents
a) Memorandum of Association (MOA)
b) Article of Association (AOA)
Memorandum of Association
a) Main document of the company.
b) It defines the objects of the company for which it is established.
c) Lays down the conditions upon which alone the company allowed to be formed. Charter of the
constitution of the company
d) It defines the scope of its activity and also states that anything beyond it is unauthorized and
illegal.
e) The Memorandum of Association
1. Must be printed
2. Divided into paragraphs
3. Signed by each subscriber (seven or more in case of a public company)
a. Add his name, address and description
b. Name of the company
c. Registered office of the company
d. Objects of the company
e. Liability of the members
f. Details of the capital of the company
g. Subscription or Association clause
Name Clause
The Company is a legal entity. Therefore, it must have its name to establish its identity. The name
of the company should not be Similar, Undesirable, or which will mislead the public.
E.g. Indian National flag, name or pictorial representation of Mahatma Gandhi or Prime Minister of India,
etc. Its use has been, therefore, prohibited by the Government under the Emblems and Names (Prevention
of Improper Use) Act, 1950. The company can change its name by passing a special resolution and
obtaining he approval of the Central Government.
Registered Office Clause
Every company must have a registered office from the day it starts its business or within 30 days of
getting the Certificate of Incorporation, whichever is earlier. Memorandum of Association must state the
name of the State in which the registered office of the company is situated. This clause is important as it
mentions the residence for the purpose of the communication with the company. It determines the
jurisdiction of the company and also mentions the place where all the records of company are maintained.
Where the company wants to change its registered office from one state to another then it can do so by
passing a special resolution as well as by confirmation of Company Law Board.
Object Clause
It defines the limits and extent of the activities of the company.
The 3 types of objects are:
a) Main objects
b) Objects incidental or ancillary to the attainment of the main objects.
c) Other objects.
Objects stated in the main objects are to be pursued by the company immediately after incorporation or
within reasonable time thereafter.
Liability clause
This clause states that the liability of the members is limited to the extent of the shares subscribed
by the member or shareholders if the company is formed with share capital. Amount of capital with which
the company is to be registered and its division into shares of a fixed amount must be stated in the MOA
of a company. The capital with the company is registered is called “Authorized capital” or “Registered
Capital”.

142. 142
Alteration of MOA
Sec – 21 Change in Name:
Application is made with the registrar of the company for availability of new names. Special
resolution is passed in the general meeting of the company with members. Approval of Central Govt. is
required. No approval is needed when a company changes its name by addition or deletion of word
“Private”. The change of name is complete only after the issue of fresh certificate of incorporation by the
registrar.
Article of Association
Defines the responsibilities of the directors, the kind of business to be undertaken, and the means
by which the shareholders exert control over the BOD. Contains the rules & regulations for the internal
management of the company. AOA needs to be filed with the Registrar of Company. AOA can be
altered from time to time.
Contents of AOA
a) Share capital
b) Payment, calls, transfer, lien, conversion, transmission, forfeiture etc. Of shares
c) Share certificate & warrants
d) Rights of shareholder
e) Accounts & Audit
f) Meetings
g) Payment of dividends
h) Appointment, remuneration, qualification, powers etc. Of Board of Directors
i) Winding up
j) Indemnity
Alteration of Article of Association
It can be altered with special resolutions. Approval of the central government for conversion of
company from public to private. AOA should not violate provisions of MOA and company law board.
Special resolution passed or approved by central government must be filed with the Registrar within 1
month.
Limitations of Article of Association
The alteration cannot be made so as to increase the liability of members without his/her written
consent. Limit the number of members to 50. Prohibit any invitation to the public to subscribe for any
share in, or debenture of the company. Restrict the right to transfer shares. Approval of central
government:
a) Appointment or re-appointment of Director
b) Increase in remuneration of Director
Memorandum of Association Article of Association
It is a charter of a company determining
constitution and activities of the company.
It contains rules & regulations regarding internal
management of the company.
Every company must have a memorandum Public companies limited by shares may or may not
have articles
Alteration of Memorandum is much difficult and
strictly regulated.
Articles can be easily altered by a special
resolution.
Prior permission is required. No need for permission(in some cases)
Defines the relationship between company &
outsiders.
Defines the relationship between management &
shareholder.
Constructive Notice of MOA & AOA
a) MOA & AOA are public documents.
b) Lodged with the Registrar and are open for inspection.
c) Any person can obtain the inspection of these documents.

143. 143
d) Duty of every person to inspect the documents before dealing with the company.
e) Thus MOA & AOA is presumed to be notice of public.
f) Such notice is called “Constructive Notice”.
g) Constructive Notice – Special resolution of the company etc.
Membership of a Company
Who is a member of a company:
The subscriber to the memorandum of a company shall be deemed to have agreed to become
members of the company and on its registration, shall be entered as members in the register of the
members. Every other person who agrees in writing to become a member of a company and whose name
is entered in its register of members, shall be a member of the company. Every person holding equity
share capital of the company.
Other ways:
a) Succession
b) Insolvency of a member
c) Beneficial owner
Who can be a Member?
a) Minor
b) Company
c) Trust
d) Partnership Firm
e) Society
f) Non-Resident
Rights of a Member
1. To receive notices of all general meetings.
2. To attend and vote at general meetings, appoint directors and auditors of the company.
3. To receive copies of accounts of the company.
4. To transfer his/her shares.
5. To receive share certificate.
6. To receive dividends in case of preference shares.
7. To make an application to the central government for ordering investigation into the affairs of the
company.
8. To be registered as a shareholder in company books.
9. To present a petition to the court for winding up of the company.
Liabilities, Duties & Obligation
To pay calls on the shares whenever demanded by the company. To pay the full nominal value of
the shares held by him in case of a company limited by shares. To pay all the debts of the company, in
case of a company with unlimited liability.
Provisions of Private Companies
Minimum 2 and maximum 50 members. Prohibits any invitation to the public to subscribe
for any shares. Prohibits any invitation or acceptance of deposit from persons other than its members,
directors or their relatives.
Provisions for Holding Company
Holds 50% equity capital of the company. Holds 50% of voting rights. By securing itself
the right to appoint, the majority of directors of the company.

144. 144
Memorandum of Association
A Memorandum of Association (MOA) is a legal document prepared in the
formation and registration process of a limited liability company to define its relationship with
shareholders. The MOA is accessible to the public and describes the company’s name, physical address of
registered office, names of shareholders and the distribution of shares. The MOA and the Articles of
Association serve as the constitution of the company. The MOA is not applied in the U.S. but is a legal
requirement for limited liability companies in European countries including the United Kingdom, France
and Netherlands, as well as some Commonwealth nations.
Legal Name of the Company
The name clause requires you to state the legal and recognized name of the
company. You are allowed to register a company name only if it does not bear any similarities with the
name of an existing company. Your company name must end with the word “limited” because the
preparation of an MOA is a legal requirement for limited liability companies only.
Physical Address of the Registered Office
The registered office clause requires you to show the physical location of the
registered office of the company. You are required to keep all the company registers in this office in
addition to using the office in handling all the outgoing and incoming communication correspondence.
You must establish a registered office prior to commencing business activities.
Objectives of the Company
The objective clause requires you to summarize the main objectives for
establishing the company with reference to the requirements for shareholding and use of financial
resources. You also need to state ancillary objectives; that is, those objectives that are required to
facilitate the achievement of the main objectives. The objectives should be free of any provisions or
declarations that contravene laws or public good.
Liability of Shareholders
The liability clause requires you to state the extent to which shareholders of
the company are liable to the debt obligations of the company in the event of the company dissolving.
You should show that shareholders are liable only their shareholding and/or to their commitment to
contribute to the dissolution costs upon liquidation of a company limited by guarantee.
Authorized Share Capital
The capital clause requires you to state the company’s authorized share capital,
the different categories of shares and the nominal value (the minimum value per share) of the shares. You
are also required to list the company’s assets under this clause.
Association and Formation of a Company
The association clause confirms that shareholders bound by the MOA are
willingly associating and forming a company. You require seven members to sign an MOA for a public
company and not less than two people for a MOA of a private company. You must conduct the signing in
the presence of witness who must also append his signature.
Memorandum of association and articles of association
Memorandum of Association
The first step is the formation of a company is to prepare memorandum of association. This
is also known as constitution of the company.
What is Memorandum of Association of a company?
• Is the constitution or charter of the company and contains the powers of the company. No
company can be registered under the Companies Act, 2013 without the memorandum of association.
Under Section 2(56) of the Companies Act, 2013 the “memorandum” means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of any
previous company law or of this Act;

145. 145
Six Clauses
CONTENTS OF MEMORANDUM OF ASSOCIATION
1. Name
2. Registered office
3. Liability
4. Capital
5. Association or subscription
6. Objects
1.Name Clause •
The memorandum must state the name of the company with ‘limited ‘ as the word ,in
case of a public limited company and with ‘private limited', in the case of a private limited company • the
company is free to choose any name but it must not be undesirable or must not resemble the name of any
other registered company. • i.e. President, Prime Minister, Govt. etc
2. Registered office clause [section 13(1) (b)] •
The state in which the registered office of a company will be situated is mentioned in
this clause • the registered office of the company is the official address of the company where the
statutory books and records must normally be kept
3. Object Clause section 13(1)(c)&(b)]
This clause is quite important and must be very carefully drafted as it determines the
activities of the company. In the object clause each and every detail of activities of the business to be
carried out must be laid down.
Main object:- this sub-clause contains the main objects of the company to the pursued on its
incorporation
Objects incidental or ancillary: - it covers the objects which are incidental or ancillary to the attainment
of the main object other objects: - this sub-clause will cover any objects which are not included in the
‘main objects ‘
4. Liability Clause [section 13(2)]
This clause states the nature of liability of the members of the company .In the case of a
company limited by share or by guarantee the fact that the liability of its members is limited must be
made absolutely clear. In case of a company limited by shares the liability of a member is limited to the
nominal value of the share held by him .if the share are fully paid up his liability is nil. But in case of
partly paid-up shares the liability is limited to the amount which is unpaid. In case of a company limited
by guarantee, the liability clause must state the amount which every member undertakes to contribute to
the assets of the company in the event of its winding up
5. Capital Clause [section 13(4)(a)]
• This clause states that amount of the capital with which the company is to be registered
• this clause should also state the number and face value of shares into which the capital of the company
is divided • the capital with which the company is ‘registered’ or ‘nominal’ or ‘authorized’
6. Association clause [section 13(4)(c)]
• The association clause states – in this cause , the subscribes declare that they desire
to be formed into a company and agree to take the shares stated against their names. • The names, address
and occupation of the subscribers must be given each subscriber must sign in the presence of at least 10
MEMORANDUM OF ASSOCIATION PRIMARY DOCUMENT OF INCORPORATION.
INTRODUCTION
IN order to incorporation of the company, promoters have to deposit along with the
application a copy of
1. Memorandum of Association
2. Articles of Association
3. Prospectus.
These documents are called the primary document of incorporation.

146. 146
Memorandum of Association •
It is the first and the most important document to be filled with the registrar at the time of
formation of a company. It is in fact the foundation on which the structure of the company is based. MOA
is the charter of the company and define the company limitations and the powers of the company. It
contains the powers, scope, fundamental conditions for guidance and benefit of creditors, shareholders
and outsiders who deal with the company. It contains the relationship between the company and outsiders.
No company can be registered under the Companies Act, 1956 without the MOA. MOA is a public
document and every person who deals with the company is presumed to have a sufficient knowledge of
its contents and provisions.
Memorandum of Association
THUS, a company cannot act beyond the provision of memorandum and if
company acts beyond the provision of memorandum it amounts “ULTRA VIRUS ACT” and is “VOID”.
DEFINITION
According to sec2(28) of Companies ACT 1956 Memorandum means:-
“Memorandum of Association of a company as originally framed or altered from time to time in
pursuance of any previous companies law or of this Act”.
PURPOSE
a) THIRD PARTIES
1. Work related contract
2. whether this is within the
3. Object power, scope of the company.
b) SHAREHOLDERS
c) Investment
d) Amount of risk involved
PURPOSE
The main purpose of MOA is to enable shareholders, creditors and all those who deals with
the company to know what is its permitted range of enterprise.
FORM OF MEMORANDUM, under old and new Companies Act (sec14)
Types of company Table of the schedule1 of
Companies Act, 2013
Table of the schedule1 of Companies
Act, 1956
Company limited by shares Table-A Table-B
Company limited by guarantee not
having a share capital
Table-B Table-C
Company limited by guarantee
having a share capital
Table-C Table-D
Unlimited company not having a
share capital
Table-D Table-E
Unlimited company having a share
capital
Table-E
PRINTING AND SIGNATURE OF MEMORANDUM (sec15)
(SEC15) of this Act,
a) MOA .
b) MUST BE printed,
c) Divided into paragraphs •
d) Serially Numbered •
e) Signed by 7 members-public company & 2 members- pvt co. •
f) In the presence of at least one witness who will attest the signature.

147. 147
CONTENTS OF MEMORANDUM (sec13)
a) The Name clause
b) The Registered clause
c) The Object clause
d) The Liabilities clause
e) The Capital clause
f) The Association or subscription clause
1. NAME CLAUSE [SEC 13(1)(A)]
NAME CLAUSE SEPARATE NAME SEPARATE IDENTITY
NAME CLAUSE [sec13(1)(A)]
Prohibited names should not be used
1. U.N.O and World Health Organisation.
2. Indian National Flag.
3. The official seal and Emblem of Central and State Govt.
4. The name and pictorial representation of Mahatma Gandhi and Prime Minister of India.
USE of some key words according to authorized capital
1. If a company uses some key words in its name, it must have a minimum authorized capital .
EXP:- IF A COMPANY USES THE WORED CORPORATION IN ITS NAME, IT MUST
HAVE A MINIMUM AUTHORISED CAPITAL OF RS5 crore .
APPROVAL FROM
ROC (REGISTRAR
OF COMPANY)
AVAILABLE
NAME
WHEN EXISTING COMPANY IS
REGISTERED WITH THIS NAME
Exp:-
“BUTTERCUP
DAIRYCOMPANY
” V/S
“BUTTERCUP
MARGARINE
COMPANT Ltd”
SHOULD NOT BE
UNDESIRABLE
USE OF WORD
EITHER
REGD.TRADE MARK
Limited
Private Limited
PUBLIC COMPANY
PRIVATE COMPANY

148. 148
PUBLICATION OF NAME (SEC 147)
2. REGISTERED OFFICE Clause of Memorandum of Association [sec 13(1)(b)]
1. In this clause, the name of the State where the Company’s registered office is located should be
mentioned.
2. Registered office means a place where the common seal, statutory books etc., of the company are
kept.
3. The company should intimate the location of registered office to the registrar within 30 days from
the date of incorporation or commencement of business.
4. If default is made in complying with these requirement, the company and every officer of the
company who is in defaults shall be punishable with line which may extend to RS 50 for every
day during which default continues
3. Objects Clause of Memorandum of Association [sec13(1)(c)& (d)]
1. This clause specifies the objects for which the company is formed.
2. It is difficult to alter the objects clause later on. Hence, it is necessary that the promoters should
draft this clause carefully.
3. This clause mentions all possible types of business in which a company may engage in future.
4. The objects clause must contain the important objectives of the company and the other objectives
not included above.
Types of objects clause •
MAIN OBJECT: - THE main objects to be pursued by the company on incorporation. Exp main object
of the company is manufacturing cloths.
Objects incidental or ancillary .:- to the attainment of the main object. Exp raw material
Other objects:- This clause include other objects which are not main objects of the company.
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.
Company limited by shares: - In the case of company limited by shares no member can be called upon
to pay more than unpaid value of the shares held by him.
NAME OF THE COMPANY AND ADD Only name
PAINTED PRINTED
•Registered
office wall.
•Place of
business
•Letter heads.
•Negotiable
instruments.
•Bill.
•Official
document.
Company common seal
Penalty 5000 RS
Penalty 500rs per
day
Penalty 5000rs

149. 149
In the case of fully paid, he shall not be required to pay any more even if the company owes
huge debts to its creditors.
Liability Clause of Memorandum of Association
COMPANY LIMITED BY GURANTEE, NOT HAVING SHARE CAPITAL:-
A member of a company limited by guarantee not having share capital cannot be called upon
to contribute an amount more than his guarantee in the event of liquidation of the company. •
COMPANY LIMITED BY GUARANTEE but HAVING A SHARTE CAPITAL:-
The members cannot be called upon to contribute more than the amount guaranteed by them
and the amount unpaid on their shares, if any.
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 2 in case of a private
company and 7in case of a public company.
ALTERATION OF MEMORANDUM
Provisions relating to alteration of Memorandum
The following are the provisions related to alteration in
1. Name Clause,
2. Objects Clause,
3. Liability Clause,
4. Capital Clause and
5. Subscription Clause.
6. Alter means change.
7. Alteration in the Memorandum of Association can be carried out only by a special resolution at
the Shareholders meeting.
1. Alteration of Name Clause in Memorandum of Association •
SPECIAL RESOLUTION:-A company may by passing a special resolution alter is name with the
approval of the Central Government. If the alteration involves change of the name to private limited or
public limited, permission of Central Government is not required.(SEC 21) •
ORDINARY RESOLUTION:- In case a company has been registered with a name which resembles a
name of an existing company, the Central Government may ask it to change its name. In such case
ordinary resolution is sufficient.[(SEC21(1)(a)]
2. CHANGE OF REGISTERED OFFICE •
CHANGE WITHIN THE SAME CITY:-
In case registered office has to be shifted within the same city, town or village, one place to
another, ALL that is required of the board of directors and the notice to be given to the Registrar within
30 days of the change.
CHANGE FROM ONE CITY TO ANOTHER CITY IN THE SAME STATE: -
In case registered office has to be shifted from one town to another town or one village to
another village, within a same state, a special resolution has to be passed at a meeting of the shareholders
and a copy of the said resolution is to be filed with registrar within 30 days of the passing of the
resolution. Notice of the new location must be given to the registrar within the 30 days of the shifting of
the office.
3. Alteration of Objects Clause in Memorandum of Association
A company can alter is objects clause by passing a special resolution. Alteration of objects clause
can be done for the following reasons:
1. For the purpose of carrying on its business more economically and efficiently.

150. 150
2. For the purpose of obtaining the main business of the company by new and improved means
3. For the purpose of enlarging or changing the local area of its operations.
4. For the purpose of carrying on some business, which may be conveniently or advantageously combined
with the existing business.
4. Alteration of Liability Clause in Memorandum of Association •
The liability clause can be altered only when a public company is converted to a private
company.
5. Alteration of Capital Clause in Memorandum of Association •
1. A company can alter its capital clause by passing an ordinary resolution in a general meeting.
Alteration of capital may relate to:
2. Sub division of shares
3. consolidation of shares
4. Conversion of shares into stock and cancellation of unsubscribed capital.
Within thirty days of passing a resolution, the altered Articles and Memorandum have to be submitted to
the Registrar.
Articles of Association and Prospectus
What is Article of Association and its contents?
Articles of Association is an important document of a Joint Stock Company. It
contains the rules and regulations or bye-laws of the 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.
Memorandum of Association
Introduction
Purpose of memorandum
The purpose of memorandum is two fold
1. To let the share holder who contemplates the investment of his capital know within what
field it is to be put at risk
2. Anyone who will deal with the company will know without reasonable doubt whether the
contractual relation into which he decides entering with the company is one relating to a
matter within its corporate objects .At least seven persons in the case of public company
and at least two in the case of a private company must subscribe to the memorandum
.The memorandum shall be printed, divided into consecutively numbered paragraphs ,and

151. 151
shall be signed by each subscriber, with his address, description and occupation added
,the presence of at least one witness who will attest the same
Contents of memorandum
According to section 13, the memorandum of association of every company must contain the
following clauses
1. The name of the company with “Limited “ as the last word of the name in the case of a
public limited company and with “private limited “ as the last word in the case of private
limited company
2. The state in which the registered office of the company is to be situated
3. The objects of the company to be classified as
a) The main objects of the company to be pursued by the company on its
incorporation and objects incidental to the attainments of the main objects, and
b) Other objects not included above
4. In the case of companies with object not confined to one state .the states to whose
territories the objects extend
5. The ability of members is limited if the company is limited by shares or by guarantee
6. In the case of company having a share capital, the amount of share capital with which the
company proposes to be registered and its division into shares of a fixed amount.
An unlimited company need not include items 5 and 6 in its memorandum
Every subscriber to the memorandum shall take at least one share and shall write
opposite to his name the number of shares taken by him.
Different Clauses
A brief discussion of the various clauses is as follows:

152. 152
2. Registered office clause:( DOMICLE CLAUSE)

153. 153
5. Capital Clause:
6. Association or subscription clause:
Alteration of memorandum of association:

154. 154
Alteration conditions
The change of name will not affect any rights and obligations of the company, or legal
proceedings commenced under the old name.
2. Change in registered office

155. 155
are considered and either he is satisfied or is paid off
CLB/CG shall arrange to serve notice to ROC for his objections also, if any
Notice may also be served on the state government concerned for its objections or suggestions

156. 156
3. Alteration of objects clause of the company

157. 157
Article of Association
Nature of articles

158. 158
Registration of articles

159. 159
Contents of articles
Alteration of articles of association
A company has a statutory right to alter its articles of association subject to the provisions of MOA and
the Act.
Effect of Altered Articles
Alteration binds members in the same way as original articles.
Distinction Between memorandum articles

160. 160
Doctrine of ultra vires

161. 161

162. 162
Doctrine of indoor management

163. 163
Article of Association and Prospectus
Articles of Association
Section 20 (1), (2), (3) & (4) of Company Act 2063 B.S.B.S. has a provision for AoA .
Regulations or bye-laws for internal management and conduct of the affairs of the company . Subordinate
to the MoA . Can be altered by special resolution in the general meeting . Bonafide interest for alteration
Articles of Association
MoA •
1. What is to be done
2. Principal document
3. Alteration with the approval of Company Law Board
4. Ultra vires which cannot be ratified by shareholders
AoA
1. How it is to be done
2. Subordinate to MoA
3. Can be altered by special resolution in the general meeting
4. Ultra vires but can be ratified by shareholders
Effects of MoA and AoA
1. Members bound to a company
2. Company bound to members – Obligations towards the members
3. Member bound to member
4. Member to member
Contents of AoA
a) Procedure for calling general meeting
b) Procedure for conducting general meeting
c) Number of directors and their tenure
d) Qualification shares
e) Board of directors and power and duties of managing director
f) Notices of the board meeting, quorum and procedure of meeting
g) Share transfer
h) Reduction and increment of share capital
i) Appointment of company secretary
j) Auditing of company's account
k) Remuneration, allowances and amenities of directors
l) Merger of a company
m) Any other matters
Prospectus
A public company limited by shares seeking to float the shares to the public has to issue a
prospectus. In Company Act 2063 B.S., there is no definition of prospectus. ‘A prospectus means any
document described or issued as prospectus and includes any notice, circular, advertisement or the
document inviting deposits from the public or inviting offers from the public for the subscription of
purchases of any shares in or debentures of a body corporate’. Invitation for the subscription of shares
Signed by the directors ,a written application to the Securities Exchange Board (SEB) for
the approval. After approval from the SEB for the publication, it has to be registered in the Office of
Company Registrar. Then publish in the newspaper
Liability
Directors who have signed the prospectus shall be personally liable and answerable for all the
written contents in the prospectus. Liable to pay compensation to every subscriber for any loss or damage
caused to him by reason of any untrue statement included in the prospectus on the faith of which he had
applied for the shares or debentures. Those who resign before those who expose the misleading and
untrue facts those who are not aware

164. 164
Share Capital
Through the course of time, Business Law has evolved in the field of the division and
flexibility in transferability of the ownership of a company. Each shareholder is considered an owner of
the company. The degree of ownership depends on the number of shares each individual buys.
Any kind of shares can be issued in accordance with the company’s articles of association.
The articles of association are a set of guidelines, which provide the rules for buying, selling and
transferring different types of shares. The articles of association also mention the types of shares, which
could be transacted by the company. Ordinary shares constitute the biggest amount of shares, but special
types of shares like the alphabet shares also exist.
a) Share capital is considered as the total amount of money a company owns plus the total valuation
of its assets in terms of money.
b) Share capital is divided into shares.
c) Shares are valued in terms of money.
d) In other words, the amount of money collected by the company from its consumers to contribute
to its capital is collectively known as share capital and individually known as shares.
e) A share contains bundles of rights and obligations contained in the articles of association.
f) A share can be considered as an interest measured by a sum of money.
g) A person who invests in the shares of a company contributes to partial ownership of the company.
h) The degree of ownership of the company of a shareholder is directly proportionate to the number
of shares the individual buys.
Types of Shares
According to the section 85 of the Companies Act, 1956, the share capital of a company consists of two
kinds of shares −
1. Preference shares
2. Equity shares
Preference Shares
As per section 85(1) of the Companies Act, 1956, a share is considered as a preference share if
it carries the following preference rights −
1. Before paying dividends to equity shareholders, the payment of dividend should be at fixed rate.
2. Before the payment to the equity shareholder, the capital must be returned at the time of winding
up of the company.
No voting rights are given to the shareholders for the internal affairs of the company.
However, the shareholders can enjoy voting rights in the following situations −
1. If dividend is outstanding for more than two years in case of cumulative preference shares
2. If dividend is outstanding for more than three years in case of non-cumulative preference of
shares
3. On resolution of winding-up
4. On resolution of capital reduction
Types of Preference Shares
The important types of preference shares are as follows −
Cumulative Preference Shares
If dividend is not paid at the end of any year due to loss or inadequate profit, the dividend will accumulate
and will be paid in the forthcoming years.
Non-Cumulative Preference Shares
Dividends cannot accumulate in the case of non-cumulative preference shares.
Participating Preference Shares
In addition to basic preferential rights, these shares may carry one or more of the following participation
rights −
1. Receiving dividends out of surplus profits left after paying dividends to equity shareholders.
2. Having shares in surplus assets, which remain after the winding-up of the company.

165. 165
Non-Participating Preference Shares
In addition to basic preferential rights, these shares do not carry any of the following participation rights −
1. Receiving dividends out of surplus profits left after paying dividends to equity shareholders.
2. Having shares in surplus assets which remains after winding up of the company.
Convertible Preference Shares
These shares can be converted into equity shares on or after specific dates as mentioned in the prospectus.
Non-Convertible Preference Shares
These shares cannot be converted into equity shares.
Redeemable Preference Shares
These shares can be redeemed by the company on or after a certain date after giving the prescribed notice.
Irredeemable Preference Shares
These types of shares cannot be redeemed by the company. The shares are redeemed only on the occasion
of winding up.
Equity Shares
As per section 85(2) of the Companies Act, 1956, equity shares are defined as the shares, which do not
have the following preferential rights −
1. Preference of dividend over others.
2. Preference of repayment of capital over others at the time of repayment of the company.
3. These shares are also called ‘risk capitals’.
4. They only claim dividends.
5. The equity shareholders have the right to veto on each and every resolution passed by the
company.
Shares Capital
Shares capital may mean any of the following divisions in capital −
Authorized capital
It is the amount stated as share capital in the Capital Clause of the memorandum of
association of the company. This is the maximum limit amount, which is authorized to be raised by a
company. A company cannot raise money above this amount unless the memorandum of association is
amended.
Issued Capital
It is a nominal part of the authorized capital, which has been
1. Subscribed by the signatories of the memorandum of association.
2. Allotted for cash or cash equivalents and
3. Allotted as bonus shares.
Transfer & Transmission of Shares
Transfer of shares is a voluntary act. It is the phenomenon of transferring the ownership of one
shareholder to another person.
Free Transferability of Securities of Public Companies
1. The shares of a public company are freely transferrable.
2. The board of directors or any higher official does not have the authority to refuse or hold any
transfer of shares.
3. The transfer should be made effective immediately by the company as soon as the notice of
transfer is made.
Restrictions on Transfer of Shares
The articles of association empower the directors to reject any transfer of shares under the following
grounds −
1. Transfer of partly paid shares to paupers or minorities.
2. The transferee is of unsound mind.
3. Unpaid call against the share of transfer.
4. The company has lien on shares because the transferee is in debt of the company.

166. 166
Procedure for Transfer of Shares
1. An instrument of transfer should be executed in the form prescribed by the government.
2. Before it is signed by the transferor and before making any entry, it is given to a prescribed
authority who will attest it with a stamp and the authorized date.
3. The transferor and the transferee must duly sign the instrument of transfer.
4. The share certificate must also be attached to it.
5. A letter of allotment must be attached to the transfer form if no certificate of transfer has been
issued.
6. The complete transfer form along with the transfer fees should be given at the head office of the
company.
7. The work of registration of transfer is taken up if no objection is received by the transferor or the
transferee.
8. The details of transfer are entered by the secretary in the register of transfers.
9. The secretary presents the instrument of transfer along with the share certificates and the register
of transfers to the board of directors.
10. The board of directors passes a resolution and approves the transfer.
Buy-back of Shares
Buy-back of shares refers to the buying of sold shares. In case of buy-back, the company buys the shares
back from the shareholders.
Objectives of Buy-back
A company may buy its shares back from its shareholders for one or more of the following reasons −
1. For increasing promoters holding.
2. For increasing the earnings per share.
3. For rationalizing the capital structure by writing off capital not represented by capital assets.
4. For supporting share value.
5. For paying surplus pay back not required by business.
Resources of Buy-back
The shares of a company can be bought back by the company from the following resources −
1. Free reserves
2. Securities premium account
3. Proceeds of any shares or any specified securities.
Conditions of Buy-back
The authorization of the buy-back is done by the articles of association of the company. For
authorization of buy-back, a special resolution has to be passed at the general meeting.
1. The shares involved in the buyback must be free from non-transferability.
2. The buy-back must be less than twenty-five percent of the total paid-up capital.
3. The ratio of debts taken by the company should not exceed twice the capital and its free reserves.
Procedure for Buy-back
When a company decides to buy-back its shares, it should publish an announcement notice
about the decision in at least one English, one Hindi and one regional language daily newspapers in the
place where the registered office of the company is located. The notice of announcement must include a
specific date for determining the names of the shareholders to whom the letter of offer is to be sent.
1. A public notice containing the disclosures as specified in accordance with the SEBI regulations
must be given.
2. A draft containing the offer letter shall be filed with SEBI through a merchant banker. This offer
letter shall be dispatched to the members of the company.
3. A copy of board resolution should authorize the buy-back and should be filed with the SEBI and
stock exchanges.
4. The opening date of the offer letter should neither be earlier than seven days nor be later than
thirty days of the specified date.
5. The offer shall remain open for at least fifteen days and thirty days at the most.

167. 167
6. An escrow account should be opened by a company opting for buy-back through public offer or
tender offer.
Penalty
If a company is found to be a defaulter, the company or any of its officers who is found
guilty may be punished in accordance with Section 621A of the Companies Act, 1956.
The punishment may include imprisonment of up to two years and/or fine up to fifty
thousand rupees.
Directors, as the word suggests, are a special group of people who direct the company. The
directors give certain direction to all the other members of the company to achieve certain goals.
There may be one director or a board of directors of a company depending on the company.
All the important decisions of the company are made by the board of directors of the company. Many
general and special board meetings are conducted by the company for the directors to make crucial
decisions pertaining to the company. All the important future planning is also done by the board of
directors. The board of directors plays the most vital role in the rise and fall of a company.
In other words, the board of directors actually is the leading body of the company. All the
other members of the company have to comply with the decisions made by the board of directors.
Powers of Directors
The powers of the directors are normally written in the articles of association of the company.
The shareholders cannot meddle with the affairs undertaken by the board of directors till the board makes
the decisions within their specified power. The general powers of the board of directors are specified in
section 291 of the Companies Act, 1956.
1. The director must not exhibit any power or do any act, which is not in accordance with the
memorandum of association of the company or which violates the Companies Act, 1956.
2. No powers are given to the directors individually.
3. Directors have their powers only when they are with the board of directors.
4. Directors are considered to be the first shareholders of the company.
5. Any decision is made if majority of directors from the board of directors agree to the decision.
6. Resolutions must be passed at the meetings held by the board of directors for the directors to
enjoy any special powers.
Some of the powers exhibited by the directors are as follows −
1. The power to call shareholders on the context of any unpaid money
2. The power to announce buy-back of shares
3. The power of issuance of debentures
4. The power to borrow any amount of money in case of debentures
5. The power of investing funds of the company on various commercial ventures
6. The power of making loans
The board of directors is entitled to do all such acts and exhibit such powers as
authorized by the memorandum of association and articles of association of the company and as
prescribed by the Companies Act, 1956. However, when an authorization is required by a law to be
invoked, the directors can do such an act only when they are authorized to do so.
1. However, whenever a delegation is required, the board of directors can delegate their powers to
their lower ranking officers.
2. The delegation is done by passing a resolution in the presence of a committee comprising of the
directors, the managing director, the managers and other high ranking officers of the company.
3. Delegation is defined as the transfer of powers of a higher officer to a lower ranking officer with
the consent of the officer whose power is to be delegated, the officer to whom the power is being
delegated and other important officers of the company as and when required.
4. Usually delegation is done in case of the absence of the higher officers.

168. 168
Duties of Directors
Directors are held responsible for the company’s compliance with the law. These duties are
normally delegated to a company secretary, a director or a trusted employee of the company. It must be
ensured that these responsibilities are being carried out.
1. Abbreviated accounts of the responsibilities can be submitted by small to medium-sized
companies in most of the cases.
2. It is not mandatory for small-scale with a maximum turnover of INR 6.5 million and asset value
of INR 3.26 million to audit their accounts and recruit auditors for their companies.
3. It is no longer a matter of obligation to most of the private companies to conduct an Annual
General Meeting every year.
4. However, it is compulsory to hold an Annual General Meeting for a company if any director or at
least five percent of the members of the company request to hold one.
5. The section of the Amendment Act, 1996, states that it is forbidden for a company to issue
irredeemable preference shares or preference shares redeemable beyond 20 years.
6. Directors found responsible for any such issues are termed responsible for default and a fine of up
to INR 10,000 may be imposed as a penalty.
7. In case of a proposed contract, the required disclosure should be made at the board meeting.
8. The decision of whether to enter the contract has to be taken in the board meetings.
9. A director, who fails to comply with the requirements as to the disclosure of the contract, will be
punishable with a fine, which may extend up to INR 50,000.
10. For disclosure of receipt of a transfer of property, any money received by the directors from the
transferee in the context of the transfer of the property inside the company, the property of
undertaking must be disclosed.
11. If the loss of office of a director of a company results due to transfer of any or all shares of a
company, the director does not receive any compensation unless it is foresaid in a general
meeting.
12. A number of powers and duties can be exercised by the board of directors in board meetings.
13. It is the duty of a director to attend board meetings.
14. Board meetings should be held from time to time.
15. If a director is unable to attend three consecutive board meetings or all the meetings for three
months without the consent of the other board members, his office will fall vacant.
General Duties of a Director
A director must fulfill the following general duties −
Duty of Good Faith
The directors should act in the best interests of the company. The foundation of the
company, i.e., the interest of the company, defined as the interest of the present and future members of the
company, would be continued as going concern.
Duty of Care
A director must show care and dedication towards the work he has been assigned although
he should not be too much obsessive towards his work. Any provision in agreement with the articles that
excludes the liability of the directors for default, negligence, breach of duty, breach of trust, or
misfeasance is considered to be void. The directors cannot be even indemnified by the company against
such liabilities.
Duty Not to Delegate
A director who has become an acting director as a result of delegation offered by a director of
higher order cannot delegate any further. The functions of a director must be performed by the director
personally, avoiding delegation as best as possible. However, a director may delegate his powers under
certain circumstances.

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Liabilities of Directors
The liability of directors to the company arises under few circumstances.
Breach of Fiduciary Duty
A director will be liable for the breach of fiduciary duty when he acts dishonestly to the
interest of the company. The powers of the directors must be invoked keeping in mind the advantage and
interest of the company and not in the interest of the directors or any member of the company.
Ultra-verse Acts
Directors are needed to exercise their powers within the limits provided by the
Companies Act, 1956, the memorandum of association and the articles of association of the company.
The articles of association of a company may invoke further specific restrictions on the powers of the
board of directors of the company. Being ultra-verse, the directors will be held liable personally, if they
act beyond the powers limited by the articles of association of the company.
Negligence
Reasonable skill and care is expected from the directors of a company as long as they hold
their designation. The directors may be deemed for acting negligently in discharge of their duties and they
will be both responsible and liable, if any loss or liability is faced by the company due to their negligence.
Mala Fide Acts
The directors are considered to be the trustees of the money and the property of the
company handled by them. If the directors of a company perform their duties dishonestly or in a mala fide
manner, they will be liable to the company in the context of mala fide and they will personally provide
any compensation for any loss taken by the company as a result of their dishonest performance.
1. This will be considered as a breach in trust.
2. They are also accountable for any secret profits they have earned in past ventures on the behalf of
the company.
3. Directors also face certain liabilities on the context of misconduct and misuse of their powers.
Liabilities under the Companies Act
The following duties and liabilities have been imposed on the directors of companies
under the Companies Act −
Prospectus
Any misstatement in the prospectus of a company or failure to state any particulars in
the prospectus of a company, according to the prerequisites of the section 56 and schedule II of the
Companies Act, 1956, will result in liability of the directors.
1. The directors will be personally liable for the above mentioned defaults and will compensate for
any damage or loss taken by the third party.
2. According to section 62 of the Companies Act, 1956, if any loss is faced by a shareholder due to
untrue or misleading statements in the prospectus of a company, then the directors will be held
liable and will have to compensate for the loss.
With Regard to Allotment
1. The directors of a company are also considered liable if they conduct irregular allotments.
Irregular allotment may be either allotment before minimum subscription is received or filing a
copy of the statement in the prospectus of the company.
2. A director may be held liable to the company and compensate for any loss faced by the company
if he fully authorizes the contravention of any of the provisions of section 69 or 70 of the
Companies Act, 1956, with respect to all allotment.
Failure to Repay Application Money when Minimum Subscription Having Not Been Received
within 120 Days of the Opening of the Issue
According to section 69 (5) of the Companies Act, 1956, and in compliance with SEBI
guidelines, if the application money is not repaid with in 130 days, the directors will beheld severally
liable and will have to pay the money with six percent annual interest on and after the completion of the
130th day. However, a director can be saved from beingliable if he can prove that the default in
repayment is not a result of his misconduct or negligence.

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Failure to Repay Application Money when Application for Listing of Securities Is Not Made or Is
Refused
If the permission for lifting of shares has not been granted, the company shall repay all
the money received from all the applicants pursued by the prospectus without any interest.
The company and its directors may be held liable if the money is not paid back within
eight days. On completion of the eighth day, the company and its directors have to pay the money back
with four percent to eight percent interest to the applicants. The rate of interest will be directly
proportional to the delay in time.
Appointment and Removal of Directors
The appointment and recruitment of directors is a crucial procedural requirement of a
company. In accordance with the Companies Act, 1956, only an individual can be appointed as a director
of a company.
1. An association, a firm, a corporation or any other body with artificial legal identity cannot be
appointed as a director.
2. For a public company or a private company, which is a subsidiary of a public company, two-
thirds of the total number of directors are appointed by the shareholders. The remaining one-third
of the directors are selected in accordance with the manner prescribed in the articles of
association of the company, failing which, the remaining one-third is also appointed by the
shareholders.
3. The articles of a company may provide the conditions for retirement of the directors at every
annual general meeting.
4. If the articles remain silent, all the directors are appointed by the shareholders.
5. Formal, considered and transparent elections can be conducted for election of directors.
6. Evaluation of skills and abilities of the board is done from time to time to ensure smooth progress
and need for succession in the board.
7. Re-elections and re-appointments of the directors are conducted from time to time.
8. In case of oppression and mismanagement, third parties or the government may propose for the
appointment of nominee directors.
9. A statement comprising the name of the first director of the company must be sent to the
Registrar of Companies.
10. The appointment of the subsequent directors is governed by the articles of association of the
company.
Qualifications of Directors
The Companies Act does not provide any qualifications for the directors. However,
specific qualifications can be stipulated in the articles of association of a company for the appointment of
various directors. The specified share qualification of the directors is however limited by the Companies
Act, which can be prescribed by a company to be five thousand rupees.
In some cases, the articles of association of the company impose some shareholding
qualifications, which must be complied with to become eligible for the nomination as a director.
Directors having special expertise and experience in various fields constitute to form
the board of directors. The main objective here is a balanced management and smooth functioning of the
board of directors.
The board of directors has the following two primary objectives −
1. To provide support for the management with good corporate governance.
2. To formulate business strategies to achieve various business goals.
General Qualifications
A director having a professional and ethical mind should have knowledge and
experience in specific fields. With a commitment to create long term values and commitment to the
shareholders, a director should fully understand his obligations and practices.
1. Enough time should be given to the director to perform his duties effectively.

171. 171
2. A director should be able to judge himself and inform the board if he faces any hindrances or
obstructions in the course of his work.
Specific Qualifications
The chairman of the board of directors, beyond the duties mentioned above, must fulfill the following
responsibilities −
1. To act as the chairman of the board in the board of directors’ meetings.
2. To exercise a casting vote in case of tie in the directors’ meeting.
3. To call for the meetings of the board of directors.
4. To preside over the shareholders’ meetings.
5. The qualifications of the chairman are slightly different from the qualifications of directors as
follows −
6. The chairman must not be an executive director.
7. The chairman must not be involved in day to day management.
8. The chairman must not be an auditor.
9. The chairman must not be a legal consultant.
10. The chairman must not be an employee of the company.
11. The chairman must not be a staff of the company.
12. The chairman must not be an advisor of the company.
13. The chairman must not be a person controlling power of the company.
14. The chairman must not be a person controlling power of the associated company.
15. The chairman must not be a person controlling power of the auditing company.
16. The chairman must not be a person who may have conflict of interest.
Removal of Directors
The removal of a director before the expiry of his term in the office can be done by passing an
ordinary resolution in the general meeting of a company after the issuance of a special notice. However,
the above process is not applicable for promotional directors or directors appointed by the government.
1. A director may be removed from his office by other directors before the expiry of his term in case
of any conduct of offence and in case the director is no longer found to be qualified to hold his
designation and does not resign from his post voluntarily.
2. The resulting vacancy may be fulfilled by the appointment of another director.
3. Voluntary resignation and rotations are the most common ways for the removal of directors
4. The company must issue a special notice to all the directors of the company in case of the
removal of any director/s.
5. A written representation from the director who is subjected to be removed concerning
circumstances of his proposed removal must be issued to the company.
6. However, the written representation may not be read if the company is able to convince a federal
high court judge that the written representation of the director intends to create adverse publicity
and/ or is defamatory in nature.
7. Therefore, an abuse of the statutory rights is conferred on the director according to the Companies
and Allied Matters Act.
8. The removal of a director is considered to be null by the constituted court of law if a copy of the
notice of removal has not been delivered to all the directors.
9. By passing an ordinary resolution by a simple majority, the members of a company may remove a
specific director or any number of directors.
10. A person appointed as a director throughout his life can be removed by making various changes
in the articles and the memorandum of association.
11. A removed director cannot be deprived of compensation or damages to which he is entitled under
a contract of employment.
12. ‘Corporate democracy’ is a practice, according to which, a director holds substantial number of
shares in a company or represents a group of shareholders.
13. Considerable litigation follows a decision to remove a director from the board.

172. 172
14. The litigation concerned with the removal of a director becomes too much complicated to deal
with if the director subjected to the removal or the group of people he represents are extremely
resistant to the act of the removal of the specific director.
15. Usually the issue of removal of a director is agitated in the high court or the Company Law board
under section 397/398 of the Companies Act, 1956.
16. Generally, many conflicts and controversies arise in the general meetings amongst groups of
shareholders during the process of the removal of a director.
17. A removed director may seek justice from the court of law if he perceives his removal to be on
illegal grounds.
18. Winding up of a company is defined as the condition when the life of the company is brought to
an end. The properties of the company are administered for the profit of its members and its
creditors.
Steps of Winding Up
The following steps are followed in the case of a company winding up −
1. An administrator, usually denoted as a liquidator, is appointed in the context of liquefaction or
winding up of a company.
2. The liquidator takes control over the company, assembles its assets, pays debts of the company
and finally distributes any surplus amongst the members according to their rights and liabilities.
3. The company has no assets or liabilities at the end of liquefaction or winding up.
4. The dissolution of a company takes place when the assets and liabilities of a company are
completely wound up.
5. On the context of winding up, the name of the company is stuck off from the list of companies
and its identity as a separate legal person is lost.
6. If a company is unable to pay its debts or the debts taken by the company is worth more than the
assets it owns and no agreements have been made with the creditors, then the company is
considered insolvent and is subjected to compulsory liquidation or compulsory winding up.
7. If an insolvent owes money to a natural person, he may ask the court of law to make a
compulsory winding up order against the company.
8. On the issuance of the order, the order is informed by the court to the official receiver, who
eventually becomes the liquidator.
9. The official receiver informs the creditors and conducts interviews with the directors of the
company on the context of the winding up.
10. If it is believed by the official receiver that the company has enough assets to pay its creditors,
then the official receiver will seek for the appointment of an insolvency practitioner as the
liquidator.
11. The appointment of the liquidator is done either by calling a creditors’ meeting for the creditors to
elect a liquidator by vote or by requesting the Secretary of the State to appoint one.
12. If there are no assets left, then the official receiver will become the liquidator.
13. A person must be owed a minimum amount of INR 750 without dispute before he can ask for a
winding up.
14. Other business corporations or individuals can request the order of winding up of a company.
15. Insolvency Service, an agent of the government, is an investigating agency, which investigates
the winding up of a company.
16. The Insolvency Service investigates financial failure and misconduct of individuals and
companies.
17. The official receiver works for the Insolvency Service.
18. The official receiver finds out when and why an individual became bankrupt and finds out the
primary cause behind the liquidation of a company.
19. The procedure of winding up differs according to the registration status of the company, i.e., if
the company is registered or if it is an unregistered company.

173. 173
20. If the winding up of a company is processed in the court of law, the liquidator is termed as
official liquidator.
21. The official liquidator acts through a recognized reporting system under the supervision of the
court.
Powers of a Liquidator
An administrator, usually denoted as a liquidator, is appointed in the context of liquefaction or
winding up of a company. The liquidator takes control over the company, assembles its assets, pays debts
of the company and finally distributes any surplus amongst the members according to their rights and
liabilities.
The following are the general powers of a liquidator –
1. Illustrating or defending any action, suit, prosecution or any legal proceedings on behalf of the
company
2. Carrying out the business of the company as far as it is beneficial for the company
3. Paying the creditors
4. Making any compromise or arrangements with the creditors
5. Compromising all the calls, debts and liabilities, which may result in further debts on the
company
6. Selling all the mobile and immobile assets of the company by conducting public auctions or by
private contracts, with power to transfer the assets to a single person or to various persons in
parcels
7. Performing all the acts and deeds needed for the winding up with receipts and documents using
the company’s seal and name
8. Drawing, accepting, making and endorsing any bill of exchange or promissory note in the name
and on behalf of the company
9. Raising the security of the properties and money of the company
Compulsory Winding Up
Compulsory winding up takes place when a creditor of an insolvent company asks the court
for a wind up. If the company goes into liquidation, the court of law appoints a liquidator for the
liquidation.
1. The primary objective of the liquidator is to raise as much funds as needed to pay the creditors.
2. The company will then be dissolved and its name will be struck off from the list of companies in
the registrar’s office.
3. Any surplus money left will be distributed amongst the shareholders of the company.
4. This legal process ends with the company’s name struck off from the list of companies in the
registrar’s office.
5. After the name is struck off, the company ceases to exist anymore.
Winding up involves the following −
1. Every contract of the company, including individual contracts are completed, transferred or
ended. The company is no more able to do business.
2. Any outstanding legal disputes are settled.
3. All the assets of the company are sold.
4. Money owed to the company, if any, is collected.
5. Funds raised are distributed to the creditors.
6. Surplus funds left after all the transactions are distributed amongst shareholders.
Consequences of Winding Up
The most important consequences of the winding up of a company are as follows −
As Regards the Company Itself
1. Winding up doesn’t take away the existence of the company completely.
2. The company continues to exist as a corporate entity till its dissolution.
3. All the ongoing business of the company is administered by the liquidator during the phase of
liquidation.

174. 174
As Regards the Shareholders
1. Contributors − a new statutory liability comes into existence.
2. Every transaction of share during the liquefaction done without the approval of the liquidator is
termed void.
As Regards the Creditors
1. The creditors cannot file a case against the company except with the consent of the court.
2. If the creditors already have decrees, they cannot proceed with the execution.
3. They must explain their claims and justify their claims to the liquidator.
As Regards the Management
1. With the appointment of the liquidator, all the powers of the directors, chief executives and other
officers tend to cease.
2. 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.
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.
Circumstances in which a Company May Be Wound Up
A company may be wound up by a tribunal where the petition has been filed under the following
circumstances −
1. A special resolution is passed by the company that the company shall be wound up by the
tribunal.
2. Failure of the company in reporting a statutory report at the registrar’s office.
3. Non-commencement of the company in business within one year of incorporation.
4. Number of members has reduced below 7 for a public company or 2 for a private company
respectively.
5. The debts of the company are unpayable by the company.
6. The tribunal is just equitable to wound up the company.
7. The company is unable to file its balance sheet or annual return for five financial years
consecutively.
8. The company has acted against the sovereignty and integrity of the country.
Application of Winding Up
An application of winding up must be filed with the petition of winding up by the following
entities −
1. The company
2. Any creditor or creditors of the company
3. Any of the contributory company
4. Any person authorized by the central government
5. The state government or the central government
According to the procedures mentioned in section 439-481 of the Companies Act, the tribunal will move
on upon the receipt of the petition.
Winding Up of the Company by Tribunal
When a resolution for the winding up of a company is passed inside the company, the court may make an
order for the voluntary winding up to continue.
1. However, the court remains in supervision of the winding up.
2. The freedom and liberty of the creditors, contributors or others to apply to the court at such times
is limited by the court.
3. A petition for the winding up must be filed at the court for the supervision of the court over the
winding up.
4. The winding up of a company by the order of the court is also regarded as a compulsory wind up.
Section 305 of the ordinances justifies the following circumstances where the court may
wind up the company based upon a petition submitted to a court.

175. 175
1. If the company decides by a special resolution that the company should be wound up by the court.
2. If the company is found to be a defaulter in delivering statutory reports at the registrar’s office or
holding statutory meetings or holding two annual general meetings for two consecutive years.
3. If the company does not start its business for one year of incorporation or its business in
suspended for one year.
4. If the number of members is reduced below 2, 3 and 7 for private, public and listed company
respectively.
5. If the company is found no more able to pay its debts.
6. If the company is −
a) Carrying out or complying unlawful and fraudulent activities
b) Carrying out business activities not authorized by its memorandum of association
c) Carrying out business in an oppressive manner towards its members concerned with the
promotion of the company
d) Running and is managed by the hands of persons who are in a default in maintaining proper
accounts or are involved in fraudulent and dishonest activities
e) Managed by persons who fail to work in sync with the memorandum of association of the
company or fail to comply with the registrar and the court of law.
7. If the company, being a listed company, does not stand out to act like one.
8. If the court’s opinion is to wind up the company or
a) Complete deadlock in the management of the company
b) Failure of company’s main objective
c) Recurring losses
d) Oppressive or aggressive policies of the majority of shareholders
e) Incorporation of a company with intent to fraudulent or illegal purpose
f) Public interest
9. If the company ceases to have a member.
Procedure for Winding Up of a Company
1. A special resolution must be passed in the company in the context of winding up and the consent
of 3/4th of its members is required for the winding up to be carried out by the court.
2. A list of the total assets must be prepared in order to confirm that the company is no more able to
pay its debts.
3. A list of the creditors must be prepared.
4. In the context of any defaults in payments, the creditors of a company are required to make a
decision for filing a petition in the court of law.
5. Advocates must be engaged to prepare and file the petition.
Voluntary Winding Up
A company may be wound up voluntarily under the following circumstances −
1. An ordinary resolution is passed in the general meeting of the company on the context of
winding up −
a) If the period pre-fixed by the articles of association of the company has been expired.
b) In case of an event according to the articles of association of the company, under which the
company needs to be dissolved.
2. If a special resolution is passed by the members of the company for the voluntary liquidation of
the company.
3. A minimum notice of 21 clear days must be given in order to convene a general meeting.
4. However, with the consent of the members, a general meeting can be convened with a shorter
notice.
5. A voluntary winding up is commenced just after the above mentioned resolution has been
passed.

176. 176
6. The notice for the beginning of the winding up of a company must be made in an official
gazette, i.e., by applying to the registrar of companies within 14 days of commencement of the
liquidation.
7. Again, the notice of the winding up of the company must be published in a newspaper in the
place where the registered office of the company is situated.
8. The company becomes unable to conduct any commercial business activities after the
commencement of the winding up.
9. However, business can be conducted for the benefit of the company’s winding up process, i.e.,
paying debts to the company’s creditors, etc.
10. The corporate state and its corporate power continue to remain in existence until the company is
finally dissolved.
11. Further, there two kinds of voluntary winding up −
a) Members voluntary winding up
b) Creditors voluntary winding up
12. The rules for both kinds of winding up are the same.
13. The Companies Act however provides some specific criteria for these two types of winding up.
Members’ Voluntary Winding Up
This type of winding up is carried out when the company is solvent and is able to pay its liabilities totally.
The important aspects of members’ voluntary winding up are as follows −
Declaration of Solvency
1. For the winding up of a company, it is needed for the directors to conduct a meeting, where the
majority of the directors make a declaration approved by an affidavit that they have made a full
assessment of the company and the company is able to pay all its debts within three years of the
winding up of the company.
2. It is necessary for such a declaration to be made at least 5 weeks before the resolution to become
effective.
3. It should be necessarily delivered to the registrar’s office.
Appointment and Remuneration of Liquidators
The company, in a general meeting, must exercise the following things &minsu;
1. Appointment of liquidators for the purpose of winding up of the company as and when the
company is about to be wound up and for the distribution of the assets of the company
2. Fixing an adequate remuneration to be paid to the liquidators. This fixed remuneration cannot be
changed in any circumstances. The liquidator does not take charge of his office unless the
remuneration is fixed.
Board’s Power to Cease
1. During the course of liquidation, all the powers of the directors and managers are ceased.
2. However, the power to give notices and the power to make appointments to the registrar is not
ceased.
3. However, the powers of the directors may continue to exist upon the sanction of their powers by
the shareholders or the liquidator.
Notice of Appointment of the Liquidator Is Given to the Registrar
Power of Liquidator to Accept Shares as Consideration as Sale of Property of the Company −
1. The liquidator can accept shares, policies or take interests to consider the sale of the company’s
belongings to another company.
2. He may do so with an aim to distribute the same amount of members of the transferor company,
provided −
a) A special resolution is passed in the company for this act to be effective.
b) He buys the interest of any dissenting member at a price to be determined by an agreement or
arbitrarily.s

177. 177
Duty of Liquidator to Call Creditors’ Meeting in Case of Insolvency
If the liquidator, for any reason, realizes that the company is on the verge of insolvency, i.e.,
thinks that the company will be unable to pay its debts and liabilities within the limited time as specified
by the declaration of insolvency, he must summon a meeting of the creditors where the statement of all
the assets and liabilities is laid before them.
Duty of the Liquidator to Inform the Income Tax Officer
a) Upon the appointment of a liquidator, the income tax office must be informed of the appointment
of the liquidator.
b) This must be done within 30 days of the appointment of the liquidator.
c) The tax assessment of the company is to be carried out.
Duty of the Liquidator to Call General Meeting at the End of Each Year
a) In case the process of winding up takes more than one year, the liquidator must call for general
meetings at the end of each year.
b) The meetings should be held within three months from the end of each year or as specified by the
central government of India.
c) The liquidator must present a brief account of his actions and the matters he is dealing with and
the progress of the winding up at the general meeting before all the other members of the
company.
Final Meeting and Dissolution
When the affairs of the company are fully finished, the liquidator must do the following things −
1. Make a report on how the process of winding up progressed, ensuring all the property of the
company has been disposed.
2. Conduct a general meeting of the company for laying the report before the company and provide
justification of the steps he has taken for the successful winding up of the company.
3. Send a copy of the report to the registrar’s office and meet the registrar to return the report within
one week and make a report to the tribunal about the conduct of the winding up to ensure that that
the liquidation went as per the members of the company’s interest.
Dissolution of the Company
1. Bringing an end to the life of a company is termed as dissolution.
2. No property can be held by a dissolved company.
3. The company cannot be sued by the court after liquidation.
4. If any property of the company still remains after the dissolution of the company, the property
will be taken over by the government immediately.
Creditors’ Voluntary Winding Up
Creditors’ voluntary liquidation is a procedure in which the company's directors choose
to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency
practitioner) to liquidate all its assets. The important provisions of the creditors’ voluntary winding up are
as follows −
Meeting of the Creditors
1. A creditors’ meeting must be called up within two days of the day when the resolution for
winding up of the company, as proposed by the creditors, is passed.
2. A notice of the creditors’ meeting along with the notice of the general meeting of the company
must be delivered to all the creditors of the company.
3. A full-fledged report on the company’s affairs, the list of the creditors of the company and the
estimated amount of claims made by the creditors should be presented by the directors before the
creditors of the company.
Notice of Resolution to Be Given to the Registrar −
When a resolution of winding up of a company, as proposed by the creditors, is passed,
a notice of the resolution must be delivered at the registrar’s office within 10 days from the day when the
resolution is passed.

178. 178
Appointment of the Liquidator
1. A liquidator for the purpose of the winding up of the company may be nominated by the creditors
of a company at the creditors’ meeting.
2. However, if there are different persons nominated at the general meetings of the company and the
creditors meeting of the company, then the person nominated by the creditors is appointed as the
liquidator of the company.
Appointment of the Inspection Committee
If the creditors wish, they may appoint an inspection committee for watching over the entire
process of winding up of the company.
Remuneration of the Liquidator
1. The creditors fix the remuneration of the liquidator.
2. If the creditors fail to fix the remuneration of the liquidator, the remuneration shall be fixed by the
tribunal.
3. No liquidator shall join unless a respectable remuneration is fixed.
4. Once fixed, the remuneration cannot be changed.
Power of the Liquidator
1. The liquidator enjoys all the powers as vested on a director.
2. Further the liquidator enjoys all the powers as vested on a liquidator in case of members’
voluntary winding up according to section 494 of the Companies Act, 1956.
Duty of the Liquidator to Call General Meeting at the End of Each Year
1. In case the process of winding up takes more than a year, the liquidator must call for general
meetings and creditors’ meetings at the end of each year.
2. The meetings should be held within three months from the end of each year or as specified by the
Central Government of India.
3. The liquidator must present a brief account of his actions and the matters he is dealing with and
the progress of the winding up at the general meeting before all the other members of the
company.
Final Meeting and Dissolution
When the affairs of the company are fully finished, the liquidator must do the following things −
1. Make a report on how the process of winding up went, ensuring all the property of the company
has been disposed.
2. Conduct a general meeting of the company for laying the report before the company and give
certain explanation about the justification of the steps he has taken for the successful winding up
of the company.
3. Send a copy of the report to the registrar’s office and meet the registrar to make a return of the
report within one week and make a report to the tribunal about the conduct of the winding up to
ensure that the liquidation went as per the members of the company’s interest.
Dissolution of the Company
1. Bringing an end to the life of a company is termed as dissolution.
2. No property can be held by a dissolved company.
3. The company cannot be sued by the court after liquidation.
4. If any property of the company still remains after the dissolution of the company, the property
will be taken over by the government immediately.
A company is considered as a legal entity separate from its members in the eyes of
law. All the affairs of the company are practically carried out by the board of directors. The board of
directors of a company carries out these affairs within the limitations of their powers, as invoked by the
articles of association of the company. The directors also exercise certain powers of their own with the
consent of other members of the company.
The consent of the other members is ensured at the general meetings held by the
company. Any mistakes committed by the board are rectified by the shareholders (who are also
considered as owners of the company) at the meetings of the company.

179. 179
1. The shareholders’ meetings are conducted for the shareholders to give their verdict on the
decisions and steps taken by the board of directors.
2. Meetings are a crucial part of the management of a company as mentioned in the Companies Act,
1956.
3. Meetings enable the shareholders to know the ongoing proceedings of the company and allow the
shareholders to deliberate on certain issues.
4. There are various types of meetings held by a company.
5. Various criteria must be fulfilled for the calling, convening and conduct of the meetings.
Statutory Meeting
A statutory meeting is held once during the life of a company. Generally, it is held just after
a company is incorporated. Every public company, limited either by shares or by guarantee, must
positively hold a statutory meeting as soon as the company is incorporated.
1. A statutory meeting should be held between a minimum period of one month and a maximum
period of six months after the commencement of business of the company.
2. A meeting before a period of one month cannot be considered as a statutory meeting of the
company.
3. The notice for a statutory meeting should mention that a statutory meeting is going to be held on a
specific date.
4. Private companies and government companies are not bound to hold any statutory meetings.
5. Only public limited companies are bound to hold statutory meetings within the specified period of
time.
Procedure of the Statutory Meeting
The board of directors must forward a statutory report to every member of the company.
This report must be sent at least 21 days before the meeting. Members attending the meeting may discuss
topics regarding the formation of the company or topics related to the statutory report.
1. No resolutions can be taken in the statutory meeting of the company.
2. The main objective of the statutory meeting is to make the members familiar with the matters
regarding the promotion and formation of the company.
3. The shareholders receive particulars related to shares taken up, moneys received, contracts
entered into, preliminary expenses incurred, etc.
4. The shareholders also get a chance to discuss business ideas and methods and the future prospects
of the company.
5. An adjourned meeting is called if the statutory meeting does not meet a conclusion.
6. According to section 433 of the Companies Act, 1956, a company may be subjected to winding
up if it fails to submit a statutory report or fails to conduct a statutory meeting within the
aforementioned period.
7. However, the court may order the company to submit the statutory report and to conduct the
statutory meeting and impose a fine on the persons responsible for the default instead of directly
winding up the company.
Adjournment of Statutory Meeting
According to section 165(8) of the Companies Act, a statutory meeting may be adjourned from time to
time. Any resolution on which notice has been given according to the provision of the Companies Act
may be passed whether the resolution was taken up before or after the last meeting.
1. The adjourning meeting has the same power as the original statutory meeting.
2. The power to adjourn depends on the decision of the meeting.
3. The meeting cannot be adjourned by the chairman without the consent of the members of the
meeting.
4. The chairman is expected to adjourn the meeting if the members wish to do so, without invoking
any discriminatory powers given to the chairman by the articles of association of the company.
5. Usually, the chairman is not bound to adjourn a meeting even if majority of the members wish for
the adjournment.

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6. The statuary meeting provides an exception in the rule that only unfinished business at the
original meeting must be carried out at the adjourned meeting.
7. Members have the right to initiate new topics of discussion in the adjourned meeting.
8. The advantage of adjourned meetings over statutory meetings is that a resolution can be passed in
an adjourned meeting, which is not possible in the case of the latter.
9. If any resolution is needed to be passed based on the topics discussed in the statutory meeting, it
must be passed at an adjourning meeting to go in accordance with the law.
Default
In case of any default made in filing the statutory report or in conduct of the statutory
meeting, the members responsible will be liable to fine according to section 165(9) of the Companies Act.
The fine may extend to INR 5000.
The court can also order compulsory winding up of the company in accordance to section 433(b) of the
Companies Act if the statutory meeting is not held within the prescribed time.
Statutory Report
The board of directors must forward a statutory report to every member of the company. This report must
be sent at least 21 days before the meeting.
The particulars to be mentioned in the report are as follows −
1. The total number of allotted shares with the account of fully paid and partly paid shares and the
reasons for considerations and extension of the partly paid shares
2. The net amount of cash collected after the allotment of shares
3. A brief insight, i.e., an abstract of receipts and payments made within 7 days of the date of the
report, balance remaining in the hands of the company and an estimation of the preliminary
expenses of the company
4. The names, addresses, and designations of the directors, managers, secretaries, and auditors along
with the change log in case of any replacements made from the date of incorporation of the
company
5. The details of any modifications or contracts to be submitted in the meeting for approval
6. The limit of non-carrying out of any underwriting contract along with justified reasons for the
non-carrying out of the aforementioned contracts
7. The arrears due on the calls of every manager and director
8. Details on the context of commission or brokerage paid to any director or any manager for the
issue of sale of shares or debentures
Annual General Meeting
An Annual General Meeting, as the name suggests, is a general meeting, which is held
on a yearly basis. According to section 166 of the Companies Act, all companies must hold Annual
General Meetings at stipulated time intervals. The notice for an Annual General Meeting must contain all
the particulars of the meeting. However, the time to hold the first Annual General Meeting for a company
is relaxed to 18 months from the date of incorporation.
1. As per section 166(1) of the Companies Act, a company is not bound to hold any general
meetings till the first Annual General Meeting is held.
2. This relaxation is intended for the company to set up its final reports on the basis of a longer
period of time.
3. One more relaxation provided by section 166(1) of the Companies Act is that with the registrar’s
consent, the date of an Annual General Meeting can be postponed.
4. This date can be postponed to a maximum time period of three months.
5. However, this relaxation is not applicable for the first Annual General Meeting.
6. A company may not hold an Annual General Meeting in a year if the extension of the date of the
meeting is made under the consent of the registrar.
7. However, the reasons for the extension of the meeting should be genuine and should be properly
justified.

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Interval between Two Annual General Meetings
As per section 166(1) of the Companies Act, the time gap between two Annual General
Meetings must not exceed fifteen months. According to section 210 of the Companies Act, a company
must present a report containing the accounts of all the profits and losses. In case the company is not
trading for profit, an income and expenditure account report must be made.
1. The account shall state all the profits and losses earned and endured by the company from the day
of its incorporation.
2. The account shall be updated for at least 9 months from the date of the last annual general
meeting.
3. A balance sheet is also required to be attached along with the account.
The Annual General Meeting is subjected to three rules −
1. The meeting must be held every year.
2. A maximum gap of 15 months is allowed between two Annual General Meetings.
3. The meeting must be held within six months from the preparation of the balance sheet.
Failure to comply with the above rules will be considered as an offence to the Companies Act by the law
and will be treated as a default unless the registrar grants extension of time for holding a meeting.
Date, Time and Place
An Annual General Meeting can be held at any time during business hours. The day of
the Annual General Meeting must not be a public holiday. The meeting can be held either at the registered
office of the company or any preselected venue within the area of jurisdiction of the place where the
registered office of the company is situated.
1. A public company or a private company, which acts as a subsidiary of a public company, may fix
the time of the meeting according to the articles of association of the company.
2. A resolution may also be passed at a general meeting for the selection of time of the subsequent
general meetings.
3. However, for a private company, the time and venue of the meetings is fixed by passing a
resolution in any of the meeting.
4. The venue for the meeting of the private company may not be situated within the area of
jurisdiction of the place where the registered office of the company is situated.
5. The section 25 of the Negotiable Instruments Act, 1881, defines a public holiday to be a Sunday
or any other day as declared by the Central Government to be a public holiday. A day may be
declared as a public holiday after the notice for a meeting has been issued. For avoiding
difficulties that may be caused in the above mentioned scenario, section 2(38) of the Companies
Act says that, “no day declared by the Central government to be a public holiday shall be a
holiday in relation to such a meeting, unless the notice of declaration was issued before the
declaration of the meeting.”
Default in Holding Annual General Meeting
Not holding an annual general meeting according to section 166 of the Companies Act is considered to be
a serious offence in the eyes of the law. Every member of the company who is in default and the company
will be rendered as defaulters.
1. A fine of up to INR 50,000 may be imposed on the defaulters.
2. According to section 168 of the Companies Act, if the default is found to be continuing, then a
fine of INR 2,500 will be imposed on the defaulters on a daily basis till the default continues.
Extraordinary General Meeting
Any general meeting of a company is considered to be an extraordinary general meeting,
except the statutory meeting, an Annual General Meeting or any adjournment meeting. Such types of
meetings can be fixed by the directors at any time that seems appropriate to the directors. However, the
meetings must be held in accordance with the guidelines mentioned in the articles of association of the
company.

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These meetings are held generally for the transaction of the business of a special
character. Various administrative affairs of a company, which can be transacted only by resolutions
passed in general meetings, are carried out in these meetings.
It is not possible for the members of the company to wait for the next Annual General
Meeting for clearance of such issues. The articles of association of a company, therefore, provides
freedom to conduct extraordinary general meetings to sort out such issues.
An extraordinary general meeting can be convened −
1. By the board of directors or on the requisitions of members.
2. By the requisitionists themselves on the failure of the board to call for a meeting.
3. By the Company Law board.
By the Board of Directors
If some business of special importance requires an approval of the members of the
company, the board of directors may call for an extraordinary general meeting of the company. Going in
accordance with the articles of association of the company, the board of directors of a company may call
for an extraordinary general meeting whenever they feel appropriate.
The power of a director to convene an extraordinary general meeting must be exercised
at a board of directors’ meeting as in the case of all the powers exercised by the director.
According to the provision of the articles, if a resolution is signed by all the members of
the board and is as effective as a passed resolution, a general meeting may be convened on the context of
the resolution. The articles also provide the facility that there may not be sufficient number of directors to
call for a general meeting.
Thus in case of insufficient number of directors, any director or any two members of the
company can call for the general meeting in the same way as called by the board of directors.
On Requisition of Members
The members of the company may also request for an extraordinary general meeting to be conducted. A
request for holding an extraordinary general meeting can be made by the members −
1. Holding at least 10% of the company’s paid up share capital and having the right to vote on the
context of the matter to be discussed at the meeting.
2. Holding 10% of voting powers of the members in case the company has no capital.
3. Preference shareholders can also call for a general meeting if the proposed resolution is going to
affect their interest.
4. If a member ceases to withdraw after the requisition is made, the withdrawal will not invalidate
the requisition.
5. The appointment of shares does not affect the rights of a member to make requisitions or vote at a
meeting.
By the Requisitionists Themselves
In case the directors fail to call for the meeting within 21 days of a requisition for a meeting to be held
within 45 days after the submission of the requisition, the following consequences may be called −
1. In context of a company having a share capital, by the requisitionists who represent either a major
value of the paid up share capital or not less than one tenth of the company’s total share capital.
2. For a company not having a share capital, by the requisitionists holding at least one-tenth of the
total voting power
3. This kind of meetings must be called within three months from the date when the requisition is
filed.
4. These kinds of meetings should be held similar to board meetings.
5. It is not necessary for the requisitionists to disclose the reasons for the resolution to be proposed
at the meeting.

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By the Company Law Board
If it is practically impossible to call a meeting other than an Annual General
Meeting for any arbitrary reasons, the Company Law Board, under section 186, may order a meeting to be
called, either of its own accord or by an application of any director of the company to the Company Law
Board.
A petition needs to be filed under section 186 of the Companies Act for the Company Law Board to call
for a meeting.
Meeting of BoD
The meeting held by the Board of Directors is an important aspect for the smooth
functioning and working of a company. For ensuring that the actions approved by the board are in the
interest of the company, the Companies Act, 1956, incorporates several statutory prescriptions.
Periodicity of the Board Meetings
According to section 285 of the Companies Act, the board meetings should be held
every three months. The board of directors can meet any day between the 1st January and the 31st of
March. Accordingly, the next meeting should be held between 1st April and 30th June. There is no scope
in the section 285 of the companies act for backward calculation.
Notice of Board Meeting
According to section 286 of the Companies Act, appropriate notice should be given to all
the directors about the meeting. The meeting can be held only after the notice is given. The notice should
be delivered to every director of the board.
The notice should be delivered at least seven days before the meeting. It is not mandatory to
give notice to a foreign director staying outside India. However, it is advised to deliver notices to all the
directors whether inside India or outside.
Day of Holding Meeting
Generally, board meetings are held during the day within business hours. However, board
meetings can also be held on a public holiday.
Time of Holding Board Meeting
The Companies Act, 1956, does not impose any restrictions on the timing of board meetings.
They can be held during or outside business hours, as per the convenience of the board.
Place for Holding Board Meetings
Board meetings can be held anywhere as per the convenience of the board. The board is
not bound to select a venue for the meeting in the same city where the company’s registered office is
situated as in the case of general and statutory meetings. Board meetings can also be held abroad.
Quorum of the Board Meeting
According to the provisions given by the Companies Act, at least one-third of the
directors or two directors (whichever is higher) must be present to conduct a board meeting. If a fraction
arises during the counting of one-third, the fraction is counted as one. These rules also apply to a private
company. According to section 287(2) of the Companies Act, the company can raise the number of
quorum through its articles of association.
Business Law –Various Laws and Acts
Laws can be defined as a set of guidelines and rules, which must be followed by every
business entity to carry out smooth, just and legal business. Any violation in the law is treated as an
offence to the Indian constitution. A huge number of laws and Acts were passed in the Indian history in
the field of business. Still new laws are being made according to the market scenarios. Many laws have
also been removed as and when required.
1. The law also provides certain rights and privileges to certain groups or ranks of people.
2. Since the creation of the constitution, various Acts were made.
3. These acts may contain hundreds of sections.
4. The sections are again subdivided into various parts or articles.
5. Although the laws are considered to be rigid and strict, corrections, termed as amendments, can
be made to rectify a certain law for a specific amount of time.

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6. Any default or offence committed against the laws may be punishable by the Court of Law.
7. Depending on the intensity of the offence, the punishment may vary from a penalty of few
thousand Rupees to imprisonment for several months.
8. All the companies must respect and maintain the integrity of the law.
Business Law - Law of Contract Act
The Indian Contract Act was passed by British India in 1872. This law is applicable
throughout the country, except the states of Jammu and Kashmir. This act deals mostly with the
guidelines and principles related to contracts.
This law can be subdivided into two parts −
1. Sections 1 to 75 are related to general principles of contracts.
2. Sections 124 to 238 are related to special kinds of contracts such as indemnity and guarantee,
bailment, pledge and agency.
a) According to the Contract Act, a contract can be defined as an agreement which can be enforced
by law. When two parties mean the same thing in the similar sense at the same time and work for
the same purpose, they are termed to be at a point of agreement.
b) Section 2(e) of the Contract Act defines an agreement to be a set of promises, which form the
considerations of both the parties. Obligation can be defined as an action or a duty to which a
person is committed morally as well as legally.
c) Both agreement and obligation constitute to form a contract. Any agreement related to social
matters cannot be considered as a contract. A legal relationship must be created between the two
parties to constitute a contract.
Essential Elements of a Valid Contract
The following are the essential elements for a valid contract −
a) An offer proposed by one party should be accepted by the other party which results in a point of
agreement.
b) Both the parties should be in consent of creating a legal relation and stay prepared for legal
consequences.
c) The agreement should be in the consent of the law.
d) The contracting parties must be legally eligible for the contract.
e) The consent of both the parties must be genuine.
f) The aims and objective of the contract should be legally acclaimed and should not oppose any
policy of the public.
g) There should be precise and clear terms and conditions in the contract.
h) The agreement should be practically possible to be enacted.
Proposal or Offer
Making an offer is one of the initial steps in creating a contract. An offer or a proposal
must be made by the first party, which initiates the contract to the second party. The first party is often
termed as the offeror and the second party is often termed as the offeree. If the offeree accepts the entire
offer without any negotiations or changes, the contract comes into existence.
Rules Administrating Offers
a) The following rules must be followed for the validation of an offer −
b) It is mandatory for an offer to be clear, complete, definite and final.
c) For an offer to be effective, it must be conveyed to the offeree so that the offeree gets the choice
to accept or reject the offer.
d) The offer can be conveyed orally or in a written document or may be implied by the conduct.
e) An offer may be made to the general public or to a specific person or to a specific group of
people.
Acceptance
It is only upon the acceptance of an offer that a contract comes into existence. Acceptance of
an offeree can be defined as the point when the offeree agrees with the terms & conditions and interest of

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the offer and gives his consent in compliance of the offer. A proposal becomes a promise when it is
accepted.
Rules Administrating Acceptances
a) It is mandatory for the acceptance to be unqualified and absolute.
b) The acceptance must comply with all the terms and conditions of the offer.
c) Acceptance can be expressed orally or in a written document or may be implied by the conduct.
d) A conditional acceptance or a return offer may is considered as a rejection to the offer and may
contribute to lapse of the offer.
e) The offerer should be conveyed of the acceptance by the offeree. If, in any case, the offeree
intends to accept the offer but does not convey the acceptance, the offer is not considered
accepted.
f) No communication to the offerer is required for acceptance of an offer that requires some actions
to be invoked as a response or sign of acceptance.
g) The offeree must accept the offer within the specified time limit of the offer.
Contract of Indemnity and Guarantee
Contract of Indemnity
A contract of indemnity is defined as a special contract by virtue of which two parties’ enter
into a contract, if and only if, one party promises the other party to save it from any losses incurred due to
the contract or any other specific reasons. The party which makes the promise is termed as indemnifier.
The party which is protected by the promise is termed as indemnified. The best possible example of a
contract of indemnity would be the contract of insurance.
Contract of Guarantee
A contract of guarantee may be defined as a contract to carry out the promise of a third
person in case of any defaults. The person who gives the guarantee is termed as surety.
a) ‘Debtor’ is the term used for the person for whom the guarantee is given.
b) The person to whom the guarantee would be given is called creditor.
c) A guarantee can either be oral or written.
d) A contract must qualify all the norms of a valid contract just like an indemnity.
e) There is however a special consideration according to section 127 of the Contract Act, i.e., it may
be a sufficient condition for the surety to give the guarantee that something is done or some
promises are made for the benefit of the principal debtor.

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Unit V
Labour Laws
Labour law (US spelling: labor law, sometimes incorrectly conflated with employment
law) is the area of law most commonly relating to the relationship between trade unions, employers and
the government.
While the development of the field in different jurisdictions has resulted in different
specific meanings of what is meant by labour law, it is generally used in reference to employment
contexts that involve a trade union, while the term employment law is usually used for workplaces where
the legal relationship is directly between the employer and the employee. While in some jurisdictions the
term may be used to refer to such law that may not involve trade unions, the genesis of the term is
historically inseparable and begins with the labour union movements.
At the statutory level, Labour law is concerned with the establishment of a labour-relations
framework that provides for orderly and peaceful industrial relations between employers and organized
workers, and usually includes rules on forming a union, conditions under which the union becomes
bargaining agent, strikes and lock-outs, process for negotiations, and other structural elements that then
permit the employer and the union to bargain a collective agreement and fill-in the rest specific to rules
and conditions relating to the workplace. It arises primarily from and in the context of British common
law and related jurisdictions, to which it is also historically linked as wage work begins in the Industrial
Revolution, and in this way, labour law and related concepts mark a departure from the tradition of
contract law that existed previously for master-servant relations to that point. Labour law is not the law
that regulates minimum standards of employment in most British common law jurisdictions, but is the
law that pertains to the rules meant to provide a framework for labour relations and collective bargaining.
Employment law, or employment standards law, refers to the regulations in statute law that establish
minimum conditions relating to the employment of persons, such as minimum working age, minimum
hourly wage, and so on.
"Labour Laws in India"
What’s Labour Law?
Labour Law is the “Body of Laws, Administrative Rulings, & Precedents” which
address the Relationship between & among “Employers, Employees & Labour Organizations”, often
dealing with issues of Public Law. The terms Labour Laws & Employment Laws, are often interchanged
in the usage. This has led to a big confusion as to their meanings. Labour Laws are different from
Employment laws which deal only with employment contracts and issues regarding employment and
workplace discrimination & other Private Law issues.
“Labour Laws” harmonize many angles of the Relationship between “Trade
Unions, Employers & Employees”. In some countries (like Canada), Employment Laws Related to
Unionised workplaces are different from those relating to particular Individuals. In most countries
however, no such distinction is made.
The “Final Goal” of Labour Laws is to bring both “Employer & Employee” on
the same Level, thereby mitigating the differences between the two ever- warring groups.
Origins of Labour Laws
“Labour Laws” emerged when the Employers tried to Restrict the Powers of
Worker’s Organisations & keep Labour Costs Low. The Workers began Demanding better Conditions &
the Right to Organize so as, to improve their Standard of Living. Employer’s costs increased due to
workers demand. This led to a chaotic situation which required the Intervention of Government. In order
to put an end, the “Government” enacted many Labour Laws in the Country.
The History of Labour Legislation in India can be traced back to the History of
British Colonialism. In the beginning it was difficult to get enough Regular Indian workers to run “British
Establishments” & hence Laws for chartering workers became necessary. This was obviously Labour
Legislation in order to protect the interests of British employers.
The “Factories Act” was first introduced in 1883 because of the pressure
brought on the British Parliament by the textile moguls of Manchester and Lancashire. Thus we Received

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the First Stipulation of Eight (08) Hours of work, the abolition of Child Labour, & the Restriction of
Women in Night employment, and the introduction of “Overtime Wages” for work beyond Eight Hours.
“India” has Various Labour Laws, such as Resolution of Industrial Disputes, Working Conditions, Labour
Compensation, Insurance, Child Labour, Equal Remuneration etc.
Individual Labour Law
“Contract of Employment & At-will Employement”
The Basic Feature of “Labour Law” in almost Every Country is that the “Rights &
Obligations” of the “Employee & Employer” between One-another are mediated through the “Contract of
Employment” between them. This has been the case since the collapse of feudalism & is the core reality
of Modern Economic Relations. Many terms & conditions of the contract are however implied by
Legislation or Common Law, in such a way as to restrict the freedom of people to agree to certain things
to protect employees, and facilitate a fluid Labour Market.
In the “United State of America” for example, Majority of State Laws allow for
Employment to be “At Will“ meaning the Employer can Terminate an Employee from a Position for any
Reason, so long as the Reason is not an “Illegal Reason”, including a Termination in Violation of Public
Policy.
In Many Countries it’s Employer’s Duty to Provide Written Particulars (Contract) of
Employment to an Employee. This aims to allow the Employee to know concretely what to expect and is
expected; in terms of “Wages, Holiday Rights, Notice in the event of Dismissal, Job Description” and so
on. An Employee may not for instance agree to a contract which allows an Employer to dismiss them
unfairly.
Labour Policy in India “Labour Policy in India” has been evolving in response to specific needs of the
situation to suit requirements of planned “Economic Development & Social Justice” has two-fold
Objectives, viz., Labour Policies are devised to maintain Economic Development, Social Justice,
Industrial Harmony & Welfare of Labour in the country.
Highlights of Labour Policy:-
1. Creative Measures to attract Public & Private Investment.
2. Creating New Jobs with New Social Security Schemes for workers.
3. Unified and Beneficial Management of funds of Welfare Boards.
4. Model Employee – Employer Relationships with Long Term Settlements.
5. Vital Industries & Establishments declared as “Public Utilities”.
6. Special conciliation mechanism for projects with investments of Rs. 150 cr or more.
7. Industrial Relations committees in more sectors.
8. Labour Law Reforms with Times. Empowered body of experts to suggest required changes.
9. Statutory amendments for expediting & streamlining the mechanism of Labour Judiciary.
10. Efficient functioning of Labour Department. More labour sectors under Min. Wages Act.
11. Modern Medical Facilities for workers. Rehabilitation packages for displaced workers.
12. Restructuring in functioning of Employment Exchanges with morden Technology.
13. Revamping of Curriculum & Course content in Industrial Training.
14. Joint Cell of Labour & Industries Department to study changes in Laws & Rules.
Important Acts of Indian Labour laws
1. The Apprentices Act - 1961
2. The Payment of Wages Act -1936
3. The Workmens’ Compensation Act -1923
4. The Factories Act -1948
5. The Industrial Disputes Act - 1947
6. The Employees PF & MP Act - 1952
7. The Employees State Insurance Act - 1948
8. The Maternity Benefit Act - 1961
9. The Payment of Bonus Act - 1965

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10. The Payment of Gratuity Act - 1972
The Apprentices Act - 1961
Object of the Act :- The Main Objectives of Apprentices Act, 1961 is “Promotion of New
Manpower at skills”. Improvement / Refinement of Old Skills through Theoretical & Practical Training in
number of “Trades & Occupation”. The Scheme is also extended to Engineers & Diploma Holders.
In India the “Apprentices Act” came into force in 1961 and was amended by the Act 41 of
1986. It’s also a “Statutory Obligation” on the part of every Employer covered under the Act.
Applicability of the Act :- The “Apprentices Act” applies to all Areas & Industries as
notified by Central Government. [Sec-1(4)]. The Act extends to “Across all over the India”. It shall come
into force on such date as the Central Government may, by notification in the Official Gazette, appoint;
and different dates may be appointed for different States. The Act shall also “Not Apply” to any Area or
Industry as per the notification by the Govt.
Guidelines @ Apprentice Act
“Apprentice” means a Person who is undergoing “Apprenticeship Training” in pursuance
of a Contract of Apprenticeship. “Apprenticeship Training” means a Course of Training in any Industry
or Establishment undergone in pursuance of a Contract of Apprenticeship & under prescribed Terms &
Conditions which may be different for different categories of Apprentices.
Eligibility & Duities of Apprentice:
1. Qualifications: A Person shall not be Qualified for being engaged as an Apprentice to undergo
Apprenticeship Training in any designated trade, unless he or she,
2. The “Candidate” is not Less than Fourteen (14) Yrs of age, & has to Satisfies such Standards of
“Education & Physical Fitness” as may be prescribed.
3. Duration of Training:- Duration of Apprenticeship may be from “06 Mths to 04 Yrs” depending
on the Trade, as prescribed in Rules.
4. The “Apprentice” has to learn his Trade Conscientiously & Diligently. Also attend Practical &
Theoretical classes regularly. Has to carry out all Lawful Orders of Employer with Contractual
Obligations.
5. The Apprentice has to work 42 to 48 Hours in a week, but not allowed to work between 10 pm to
06 am unless approved by “Apprenticeship Advisor”.
Duties of Employer under the Act:
1. Contract with Apprentice :- The Apprentice appointed has to execute a Contract of
Apprenticeship with the Employer. The Contract has to be Registered with Apprenticeship
Adviser. If Apprentice is Minor, Agreement should be signed by his Guardian. [Sec 4(1)] .
2. Leaves for Apprentice :- An Apprentice is entitled to Casual Leave of 12 days, Medical Leave of
15 days & Extraordinary Leave of 10 days in a year.
3. The “Employer” has to provide Apprentice the Training in his Trade, & ensure that the Person
duly Qualified is placeed as In-charge . To Carry out all Legal Contractual Obligations.
4. Payment to Apprentice :- The Minimum Rates of Stipend prescribed under the Rules as follows.
(Revised Rate w.e.f. 23rd Mar 2011). # Graduate Apprentices @ Rs:- 3560/- p.m. , # Sandwich
Course (Students from Degree Inst.) @ Rs:- 2530/- p.m., # Technician Apprentices @ Rs:- 2530/-
p.m., # Sandwich course (Students from Diploma Inst.) @ Rs:- 2070/- p.m., # Technician
(Vocational) Apprentices @ Rs:- 1970/- p.m.
Payment of Wages Act – 1936
Objective of the Act:- The “Payment of Wages Act 1936” regulates payment of wages to
Employees (Direct & Indirect). The Act is intended to be a remedy against unauthorized deductions made
by the “Employer” or unjustified delay in payment of wages. All Employees are covered under the Act,
those are drawing Average wages Rs:- 10000/- per month.
Applicability of the Act: - The “Payment of Wages Act 1936” is Applicable to All Factories,
Industrial Establishment, Tramway Service, or Motor Transport Service engaged in carrying Passengers
or Goods both by road for hire or reward. Air Transport Service, Dock, Wharf or Jettly, Inland Vessel,
Machinically propelled, Mines, Quarry or Oil-Field, Plantation, Workshop or other Establishement, etc..

189. 189
Meaning of Wages:- “Wages” means all Remuneration expressed in terms of Money and include
Remuneration payable under any Award or Settlement, Overtime Wages, Wages for Holiday & any sum
payable on Termination of Employment. However, it does not include “Bonus” which does not form part
of Remuneration payable, value of House Accommodation, Contribution to PF & ESI, Traveling
Allowance, or Payment of Gratuity. [section 2(vi)]
Time of Wages Payment :
1. If the Employee strength is Less then “1000” in any Organization, then Wages shall be paid
before the expiry of the 07th Day of the following month.
2. If the Employee strength is More then “1000” in any Organization, then Wages shall be paid
before the expiry of the 10th Day of the following month.
3. In case of “Termination” of Employee by the Employer the wages shall be paid before the expiry
of the Second working day from the Date of Termination “DOT”.
Deduction from Wages: - The Maximum Deduction can be 50% of Monthly wages, However,
maximum deduction upto 75% is permissible if deduction is partly made for payment to Co-operative
Society. [section 7]. Deduction on Account of Absence of Duty, Fines, House Accommodation if
provided by Organization, Recovery of Advance, Loans given, Income Tax, PF, ESI contribution, LIC
premium, amenities provided, deduction by order of Court etc. is permitted.
Deducation of Fines: - The Maximaum deducation as Fines from Wages should not exceed 03% during
the same wage period. It should be recovered within 90 days from the date it was imposed. Roecord of
Fines should be maintain in Fine Register (Form-II).
Guidelines @ Wages Act
Mode of Wages Payment:
1. All wages shall be paid in Current Coins or Currency Notes or in both.
2. Employer Can also pay the Wages either by cheque or by crediting the Wages in Employee’s
Bank Account with Employee’s Authorization in written.
3. Wages can be paid on Daily, Weekly, Fortnightly or Monthly basis, but wage period cannot be
more than a month. Most Organization preffred Monthly Payment basis.
Records Maintainance: The Employer has to maintain Various Register under the Act i.e. Register of
Fines (Form-II), Register of Deducation (Form-III), Register of Advance (IX), Register of Wages (Form-
IV & V), Muster Roll-cum-Register of Wages (Form –VI) & Annual Return (for Air Transport Services).
All the above mentioned Register & Records shall be maintained up-to-date. The attendance of the
employee shall be marked not later than one hour after employee starts work for the day.
Penalty to Employer:
On Conviction for any Offence & Again Guilty of Contravention of same provision
1. Imprisonment not less than one month Extendable up to six months and fine not less than
Rs.2000, Extendable up to Rs.15000.
Workmens’ Compensation Act -1923
Object of the Act: - This is an Act to provide for the payment by certain classes of Employers to their
workmen (Employee) of compensation for injury by accident during the course of Employment. The Act
is applicable all over the India & came into force w.e.f. 01st July 1924.
Coverage of Employees:- All Employees of Any Categories / Capacity Irrespective of their Status or
Salaries either Directly or hired through Contractor or a person recruited to work abroad for the
Orgazition.
Employer’s Liability @ Compensation: In case of Death or Personal injury resulting into Total or
Partial Disablment or Occupational Disease caused to a workman / Employee by accident arising out of
and during the course of his employment, his Employer shall be liable to pay compensation under the Act.
Guidelines @ Compensation Act
Employer Shall not be so Liable:
1. In Respect of Any Injury which does not Result in the Total or Partial Disablement of the
Workman for a Period Exceeding Three (03) days.

190. 190
2. In Respect of Any injury, not resulting in Death or Permanent Total Disablement (PTD), caused
by an Accident which is directly attributable to;
(i) The Workman having been at the time thereof under the Influence of Drink or Drugs.
(ii) The Wilful Disobedience of Workman to an order expressly given, or avoiding safty
guidilines.
(iii) The Wilful Removal or Disregard by the workman of any safety guard during On-Duty.
Payment of Compensation Amount:
In Case of Death of a Workman Results from the Injury during the Employment.
Minimum Compensation for Death under the Act is Rs:- 120000/- or an amount equal to 50% (Fifty per
cent) of the Monthly wages of the Workman’s multiplied by the relevant factor, whichever is higher.
(Subject to Max. Rs:- 8000/- per month w.e.f. 31st May 2010 or as per the Minimum Rates of wages of
the State.).
In Case of Permanent Total Disablement (PTD) of a Workman Results from the Injury. Minimum
Compensation for PTD under the Act is Rs:- 140000/- or an amount equal to 60% (Sixty per cent) of the
Monthly wages of the Injured workman’s multiplied by the relevant factor, whichever is higher.
Guidelines @ Compensation Act
Calculation @ Compensation Amount:- Completely Depends on the Age:- Higher the Age – Lower the
Compensation Amount. Find out the Relevant factor specified in Schedule IV giving slabs depending
upon the age of the concerned workman.
Example : In case of Death. Monthly Wages @ Rs:- 7700/-, Age of Workman:- 35 Yrs., Relevant Factor
is:- 197.06, Then Compensation Amt Rs:- (50% of Rs:- 7700/- * 197.06) = Rs:- 758681/-
As its higher then Min. Compensation Rs:- 120000/-, so Compensation Amt. Rs:- 758681/-.
In case of Total Disablement (PTD) = (60% of Rs:- 7700/- * 197.06) = Rs:- 910417/-
Permanent Partial Disablement = (% as per Schedule II of 7700/- * Relevant Factor)
Temporary Disablement = A Half Monthly Payment, equal to 25% of Monthly wages.
Funeral Expenses :- Employer shall Deposit Rs:- 2500/- to the Commissioner for the payment to Eldest
Dependant of the Workman.
Report of Accident under Rule 11 Form EE - Report of Fatal Accident and Serious Injury within 7 days
to the Commissioner (not application when ESI Act applies). {Sec-10B}
Penalty to Employer:- In case of Employer found defaulter then Employer has to pay 50% of the
Compensation Amount + Interest to the Workman or his Dependents as the case may be. {Sec-4A}
The Factories Act -1948
Applicability of the Act : Any premises whereon Ten (10) or more persons with the Aid of Power or
Twenty (20) or more Workers were working without Aid of Power on any day preceding 12 months,
wherein Manufacturing process is being carried on. It extends to whole of India and Covers all
Manufacturing processes & Establishments falling within the definition of “Factory” Sec.2 (ii).
Objective of the Act: This Act has been come into force to Consolidate and Amend the Law Regulating
the Workers working in the factories. To ensure the Safeguard the interest of workers and Protect them
from exploitation, the Act prescribes certain standards with regard to Safety, Welfare and Working Hours
of workers, apart from other provisions.
History of Factory Act: The Factories Act 1948 was an “Act of Parliament” passed in the “United
Kingdom” by the Labour Government of Clement Attlee. It was passed with the intention of safeguarding
the health of workers. It extended the age limits for the medical examination of persons entering factory
employment, while also including male workers in the regulations for providing seats and issuing
extensive new building regulations.

191. 191
Duties of Employer under the Act:
Necessary facilities required Safety Measures for Employee
The Factory should be kept Clean always. [Section 11]. All Machinery should be properly Fenced to
protect Workers when Machinery is in Motion.
[Sec- 21 to 27].
There should be arrangement to Dispose of Wastes and
effluents. [Section 12].
Hoists and Lifts should be in good condition &
tested Periodically. [Sec- 28 & 29].
Reasonable Temperature for Comfort of employees
should be Maintained. [Section 13].
Pressure of plants should be check as per rules.
[Sec-31].
Dust & Fumes should be controlled below permissible
limits. [Section 14].
Floor, Stairs & Means of access should be of
sound construction & free form obstructions.
[Sec - 32].
Artificial Humidification should be at prescribed
standard level. [Section 15].
Safety appliances for Eyes, Dangerous Dusts,
Gas, Fumes should be provided. [Sec - 35 &
36].
Overcrowding should be avoided. [Section 16]. Worker should not Misuse any appliance,
Convenience or Other things provided. [Sec -
111].
Adequate Lighting, Drinking Water, Latrines, Urinals
& Spittoons should be provided. [Sections 17 to 19].
In Case of Hazardous substances, Additional
Safety Measures have been prescribed. [Sec -
41A to 41H].
Adequate Spittoons should be provided. [Section 20]. Adequate Fire Fighting Equipment should be
available. [Section 38].
Proper Vantilation for Air & Light inside the Factory
Building
Safety Officer should be appointed if number
of workers in factory are 1,000 or more. [Sec -
40B].
Duties of Employer under the Act:
Welfare of Employee:
1. Adequate Facilities for Washing, Sitting, Storing of cloths during Off Working hours. [Sec - 42].
2. If a worker has to work in Standing Position, Sitting Arrangement to take Short Rests. [Sec - 44].
3. Adequate First Aid Boxes shall be provided & Maintained with all required medicines. [Sec - 45].
Facilities for Large Factories:
1. Ambulance Room if 500 or More Workers are Employed in the Factory.
2. Canteen if 250 or More workers are employed. [Sec - 46].
3. Rest Rooms / Shelters with Drinking Water when 150 or More workmen are Employed. [Sec -
47]
4. Crèches if 30 or More Women workers are employed. [Sec - 48]
5. Full time “Welfare Officer” if factory Employs 500 or More workers [Sec - 49]
Working Hours under the Act:
1. The Maximum Working hours can’t be more then 48 Hours in a week. [Sec - 51].
2. The Maximum Daily Working Hours can’t be more then 09 Hours. [Sec - 54].
3. One Weekly Holiday is Compulsory which is Sunday. If Employee works on Sunday, then he
should Compenste with any Other day of the Week. [Sec - 52(1)].
4. At least Half an hour Rest should be provided after 5 hours of work. [Sec - 55].
5. Total period of work inclusive of rest interval cannot be more than 10.5 hours. [Sec - 56].
6. A Worker should be given a Weekly Holiday. Overlapping of Shifts is not Permitted. [Sec - 58].
7. Notice of Period of Work should be displayed. [Sec - 61].
Guidelines @ Factories Act Overtime

192. 192
Wages under the Act:-
1. If a Worker works beyond 09 hours a day or 48 hours a week, Overtime Wages are Double the
Rate of Wages are payable. [Sec - 59(1)].
2. A Workman cannot work in two factories. There is Restriction on Double Employment. [Sec -
60]. However, Overtime Wages are not Payable when the Worker is on Tour.
3. Total Working Hours including Overtime should not exceed 60 Hours in a week and Total
Overtime Hours in a quarter should not exceed 50 Hours. Register of overtime should be
maintained.
Employment of Young Persons: - Any Child below age of 14 Yrs can’t be employed. [Section 67].
Child above 14 but below 15 years of age can be employed only for 4.5 hours per day. [Section 71]. He
should be certified fit by a certifying surgeon. [Section 68]. He cannot be employed during night between
10 pm to 6 am. [Sec-71].
Annual Leave: - A Worker having worked for 240 days @ One Day Leave for every 20 days & for a
Child One Day Leave for working of 15 days. Accumulation of leave for 30 days. [Section – 79]
Display on Notice Board: - A Notice Containing Abstract of the Factories Act & the Rules made there
under, with Name & Address of Factories Inspector & Certifying Surgeon in English & Regional
Language should be displayed on Notice Board. [Sec - 108(1)].
Guidelines @ Factories Act
Notice of Accidents, Diseases Etc.,:-
Notice of Any Accident causing Disablement of more than 48 hours, Dangerous
Occurrences & any worker contacting Occupational Disease should be informed to Factories Inspector.
[Sec - 88]. Notice of Dangerous Occurrences & Specified Diseases should be given. [Sec - 88A & 89].
Obligation Regarding Hazardous Processes:-
Information about hazardous substances / processes should be given. Workers and
General Public in vicinity should be informed about Dangers & Health Hazards. Safety Measures &
Emergency plan should be ready. Safety Committee should be appointed.
Penalties to the Employer:-
If there is Any Contravention of any of the Provisions of this Act or any Rules,
“Employer & Manager” will be Punishable with Imprisonment up to 2 years or fine up to Rs:- 1,00,000 or
both. (Section – 92). Please check the Penalties Chart for various contraventions under the Act.
The Industrial Disputes Act - 1947
Objective of the Act:- The Main Objective of the Act to make Provision for the
Investigation & Settlement of “Industrial Disputes” between Employer & Employee, and for certain other
purposes. This Act extends to the whole of India, w.e.f. 01st April, 1947.
Definition of the Following:
Industry :- Has attained wider Meaning than Defined except for Domestic Employment, covers from
Barber shops to Big Steel companies. [Sec - 02 (I)].
Works Committee:- Joint Committee with equal number of Employers & Employees’ Representatives
for discussion of certain common problems. [Sec - 03]
Conciliation :- Is an attempt by a Third Party in helping to settle the disputes. [Sec - 04]
Adjudication:- Labour Court, Industrial or National Tribunal to Hear & Decide Dispute. [Sec 7,7A &
7B].
Power of Labour Court to give Appropriate Relief :- Labour Court / Industrial Tribunal can Modify
the Punishment of Dismissal or Discharge of Workmen & give Appropriate Relief including
Reinstatement. [Sec. -11A]
Right of a Workman during Pendency of Proceedings in High Court:- Employer has to Pay last
drawn Wages to Reinstated workman when proceedings challenging the award of his Reinstatement are
pending in the Higher Courts. [Sec -17B]

193. 193
Guidelines Industrail Disputes Act
Persons Bound by Settlement:-
When in the Course of Conciliation proceedings etc., all Persons Working or Joining
subsequently. Otherwise than in Course of Settlement upon the parties to the Settlement. [Sec -18]
Period of Operation of Settlements & Awards:-
A Settlement for a period as Agreed by the Parties, or Period of Six Months on signing of
Settlement. An award for one year after its enforcement. [Sec -19]
Lay off & Payment of Compensation:-
Failure, Refusal or Inability of an Employer to Provide work Due to:- Shortage of Coal,
Power or Raw Material, Accumulation of Stocks, Breakdown of Machinery & Natural Calamity. [Sec.25-
C].
Notice of Change:- In case of any change about the Conditions of Service the Employer has to give 21
days prior Notice to the Employee, as provided in IV Schedule. [Sec.9A].
Prior Permission for Lay off :- When there are more than 100 workmen during proceeding 12 months.
[Sec.25-M]
Prohibition of Strikes & Lock Outs:
1. Without Giving to the Employer Notice of Strike, within Six weeks before Striking.
2. Within Fourteen days of giving such notice.
3. Before the Expiry of the Date of Strike specified in any such Notice as aforesaid.
4. During the Pendency of any Conciliation Proceedings before a Conciliation Officer & Seven days
after the conclusion of such proceedings.
5. During the Pendency of Conciliation Proceedings before a Board & Seven days after the
Conclusion of such Proceedings.
6. During the Pendency of Proceedings before a Labour Court, Industrail or National Tribunal.
7. During the Pendency of Arbitration Proceedings before an Arbitrator and Two Months after the
Conclusion of such Proceedings, where a Notification has been issued under Sub-Section(3A) of
section 10A.
8. During any period in which a Settlement or Award is in Operation, in Respect of any of the
Matters covered by the Settlement or Award. [Sec – 22 & 23]
Retrenchment of Workmen Compensation & Conditions:
1. Workman must have worked for 240 days.
2. Retrenchment Compensation @ 15 days’ wages for every year.
3. One Month’s Notice or Wages in lieu thereof.
4. Reasons for Retrenchment.
5. Complying with Principle of “Last come First go”.
6. Sending Form P to Labour Authorities.
Employees PF & MP Act, 1952 ?
Obejectives & Mission Statement:-
The Mission of EPFO, is to Extend the Reach and quality of publicly managed Old-age
Income Security programs through consistent and ever-improving standards of compliance and benefit
delivery in a manner that wins the approval and confidence of Indians. The EPF & MP Act, 1952 was
enacted by Parliament and came into force w.e.f. 04th March, 1952. Presently, the following three
schemes are in operation under the Act:
1. Employees’ Provident Fund Scheme, 1952.,
2. Employees’ Deposit Linked Insurance Scheme, 1976.
3. Employees’ Pension Scheme, 1995. (replacing the Family Pension Scheme, 1971).
**The Employees' Provident Fund Organization, India, is one of the largest provident fund institutions in
the world in terms of members and volume of financial transactions that it has been carrying on.

194. 194
Applicability of the Act:-
Under Section-1(3), Every Factories or Establishments Employing 20 (Twenty) or More
Persons from the Date of its Setup are covered under the Act. Cinema Theatres employing 05 (Five) or
more Persons are covered under the Act.
“Government of India” after giving two-months notice may apply the provisions of this Act to
Establishments where less than 20 (Twenty) persons are employed. This Act applies to the whole India,
(except Jammu & Kashmir). Any establishment employing even less than 20 persons can be covered
voluntarily u/s 1(4) of the Act.
** The Current Wages Ceiling Limit for coverage under the Act is ₹: 15,000/- (Basic + DA) p/m month
w.e.f: Sep’ 2014, (Earlier it was ₹ : 6,500/- w. e. f.: June, 2001, & before that it was ₹ : 5000/- p/m).
Guidelines EPF & MP Act
“Employee’s Deposit Linked Insurance” is basically an “Life Insurance” for all covered employees
under EPF & MP Act, 1952, Since Aug 01, 1976. Here deposit means Average Deposit in EPF A/c.
When an employee dies while in service, his or her family will get some Compensation based on deposit
in EPF Account. Since May 24, 2016, the Maximum benefit of life insurance set under EDLI is ₹: 6.0
Lacs (₹: 4.5+1.5 Lacs). It is based on Employee’s last 12 months average (Max ₹: 15000/-) Salary
Multiplied by 30 times. Along with that ₹:1.5 Lacs is also payable as a bonus. Earlier it was ₹: 3.6 Lacs
since Sep 2014 and before that it was ₹: 1.3 Lacs, since May 2010).
Claim Amount Calculation: Average Salary ₹: 15000 * 30 times = ₹: 4,50,000/- + ₹: 1,50,000/- = ₹:
6,00,000/- (Max Claim Amount).
PF Contribution Submission: PF Total Amount of Monthly Contribution of (Employee’s & Employer’s
share) is to be deposited through Online Generated Combined Challan in respective Ac.: 01, 2, 10, 21 &
22 from EPFO website, w.e.f. April 01, 2012. Payment of total Contribution will only via Online
Payment (Retail / Corporate Banking) with 56 Banks of India w.e.f. May 01, 2015. Online payment of PF
contribution make the process so simple to pay the dues to the EPFO in few minutes.
Web-link: https://www.onlinesbi.com/sbicollect/sbclink/displayinstitutiontype.htm
Benefits of EPF Scheme 1952:-
Retirement, Medical Care, Housing, Family Obligations, Education of Children &
Financing of Insurance Policy
Benefits of Pension Scheme 1995:- Monthly Member’s Pension Scheme, Widow & Children Pension,
Orphan Pension, Reduced Pension & Disablement Pension.
Penalties under the Act:
1. Less than 2 months :- 17% p.a. on total due Contribution.
2. 02 months & above, but less then up to
3. 04 months:- 22% p.a. 04 months & above, but less then up to
4. 06 months:- 27% p.a. 06 months & above :- 37 % p.a. on total due contribution.

195. 195
Employee’s and Employer’s contribution
PF Contribution Account-wise w.e.f “April 01, 2017
Various forms of EFF
Forms & DSC for Employer Forms Employee
Establishment Registration: On the EPFO
website web-link is available for New
Registration of the Establishment.
{https://unifiedportal-
emp.epfindia.gov.in/epfo/}
Composite Claim Form: (AADHAR & NON -
AADHAR): New PF Claim Form has been introduced by
EPFO as Combined PF Claim {Form 19 (Pf Final
Settlement) / 10c (Pension Withdrawal Benefits) / 31 (Pf
Part Withdrawal). Note: If KYC Approved on EPFO
Portal by Employer & UAN Activate, “No Need for
Employer’s Signature” on the PF Claim Form Note:
Employer need to Attest the Non-Aadhar PF Claim
Forms. {In case of KYC not Approved on the EPFO
Portal, then Employer’s Signature Required on Non-
Aadhar Combined PF Claim Forms}.
{http://www.epfindia.com/site_en/WhichClaimForm.php}
Digital Signature of Employer: DSC is
must for Employer to Approve all Required
action via Online Process on EPFO Login.
Old PF Claim Forms: 19, 10C & 13 are Out of Order as
Aadhar Based Combined Claim Forms introduced by
EPFO from April 2017.
Form - 5A : Online Updation is Required
for details of “Directors / Proprietors” of the
Organization.
Form - 20 :- Application Form for Provident Fund ( In
case of Employee’s Death).
Form - 9 : Details of all Covered Employees
under the EPF & EPS should be maintain.
Form - 10 D:- Application Form for Pension to Nominee.
(In case of Employee’s Death).
New Form No - 11 {Declaration Form}
Declaration Form to be filled by New Joinee
with their UAN Details (if Any), which
helps to find the PF Eligibility & & Mapping
proper UAN of New Joinee.
Form - 5 (IF) :- EDIL Claim Amount Form. ( In case of
Employee’s Death).
Employer’s Share (to EPF & Pen. fund) Ac :
01
Employee’s Share (to EPF Fund) AC: 01 & 10
12 % of Basic + DA (Ac: 01) 3.67% of Basic + DA or
(12% ₹ 1250) (Ac: 01)
8.33% of Basic + DA or Max ₹ 1250/-
(Ac: 10)
EPF Total in Ac. 01: @ 15.67% or
(12% + (12% - ₹ : 1250/-)
EPS Total in Ac. 10: 8.33% or
Max ₹ : 1250/-
Total Contribution to EPF & Pension Fund , Ac: 01 & 10 ( @ 15.67 + 8.33 ) = 24 %
PF Administrative Charges in Ac: 02 ( @ 0.65 % of Basic + DA)
(Minimum ₹ : 500/- functional & ₹ : 75/- for non functional Org.)
Contribution to EDLI, Ac: 21 @ 0.5 % of Basic & DA or Max upto on ₹ : 15000/-
(Minimum ₹ : 200/- functional & ₹ : 25/- for non functional Org.)
Total Monthly Contribution in { Ac 01, 10, 02, 21 & 22 }
W.e.f: April 01, 2017: (12%+12%+0.65%+0.50%+0.00%) = 25.15 %
For EDLI Exempted Org. (EDLI Inspection Charge @ 0.005% of Basic & DA or Max upto on ₹ : 15000/-) Note: EPFO has
Removed the EDLI Admin Charges @ 0.01% w.e.f “April 2017” PF Contribution Account-wise w.e.f “April 01, 2017”

196. 196
Employees State Insurance Act - 1948
Mission Statement :-
To Provide for Certain Benefits to Employees in case of Sickness, Maternity and Employment
Injury & to make the Provisions for Related Matters.
Objective of the Act:- The ESI Scheme is an Integrated Measure of “Social Insurance” come to the Life
through the “Employees' State Insurance Act – 1948”, and is Designed to complete the task of Protecting
‘Employees' as defined in the ESI Act – 1948, against the Hazards of Sickness, Maternity, Disablement or
Death due to Employment Injury & to provide full Medical Care to Insured Persons (IP) & their Families.
The ESI Act is applicable across the length and breadth of the India.
Applicability of the Act :
1. Under Section - 2(12) of The Act, ESI is applicable to the all Factories employing 10 (Ten) or
More Persons irrespective of whether Power is used in process of Manufacturing or not.
2. Under Section - 1(5) of The Act, the Scheme has been Extended to Shops, Hotels, Restaurants,
Cinemas including Preview Theatre, Road Motor Transport undertakings & Newspaper
Establishment employing 20 (Twenty) or More persons.
3. Further, Under Section - 1(5) of the Act, the Scheme has been Extended to Private Medical &
Educational Institutions employing 20 (Twenty) or More persons in certain States .
4. The Existing Wage-Limit for Coverage under the Act, is Rs. 15,000/- per month. (Excluding
Remuneration for Overtime) w. e. f:- May 01, 2010.
“At an Average the ESI Corporation makes 40 Lacs Individual Payments each year Amounting to about
Rs. 300 crores through its wide spread network of branch Offices in the implemented areas”.
ESI Contribution
Employer's contribution (4.75% of gross salary) +Employee's contribution (1.75% of gross salary) =Total
Esi contribution (6.5% of gross salary)
Due Date, Contribution & Benefit Period
The Contribution’s Amount (Employee’s & Employer’s Share) is to be Deposited at
State Bank of India through Online Generated Challan from ESIC Website via Employer’s ID, on or
before 21st day of following month.
“Employers” covered under the ESI Act, are required to Pay Contribution towards the scheme on a
Monthly basis. There are Two Contribution Periods each of Six Months and Two Corresponding Benefit
Periods also of Six Months duration linked with each other.
Contribution Period Benefit Period
1st April to 30th Sep. 1st Jan to 30th June (of the following year)
1st Oct to 31st Mar. 1st July to 31st Dec.
IP & his family will receive the Medical & Others Benefits of ESI as per his Contribution
during the Contribution Period with total contribution days required for Specific Benefits.
Guidelines ESI Act
Benefits of ESI :- Medical Benefit, Sickness Benefit, Maternity Benefit, Disablement Benefit,
Dependents Benefit, Funeral Expenses & Others Benefits.
Form - 2, Nomination Form with details of
Employees, Nominee & PF A/c No.
“Combined Online Generated Challan”
for Submission of PF Contributiuon. PF
Dues payment via Online Banking. No Need
to file Monthly & Annual Return to EPFO,
as the process is Completely Online w.e.f
March 2012.
Form - ASR :- To Receive the Claim cheques again of
Settle Account. (In case of first Cheque Rejected by Bank
to EPFO)

197. 197
Obligation of the Employers :
1. Deducate & Deposit the ESI Contribution with Own Share Monthly.
2. Generated the TIC & Handover to Employee for Smart Card.
3. Submit the Accident Report in Form – 16 within 24 hours of the Accident.
4. Grant Leave to Insured Employees on the basis of Sickness Certificates.
Records Maintenance :
1. Maintain the Register of Employees in Form -6 (under Reg.:- 32).
2. Maintain the Accident Book in Form - 11 (under Reg.:- 66).
3. Maintain the Inspection Book (under Reg.:- 102A).
4. Maintain the Form – 32 of Contribution Details of Employees.
5. File all the copies of Return of Contribution, Challans, etc.
6. File all the General Correspondence & Copies of Accident Reports.
Delay in Contribution Payment Rate of Damages on Due Amount
i). Up to less than 2 months 05 %
ii). 2 months and above but less than 4 months 10%
iii). 4 months and above but less than 6 months 15%
iv). 6 months and above 25%
The Maternity Benefit Act - 1961
“An act to Regulate the Employment of Women in certain Establishment for certain
period before and after Child-Birth & to provide for Maternity Benefit & Certain other benefits”.
Objective of the Act:-
The Maternity Leave & Benefit Act is to Protect the Dignity of Motherhood by providing
the Complete & Healthy Care to the Women & Her Child, when she is not able to perform her duty due to
her health condition. In the morden world, as the participation of Women Employees is growing in Every
Industry, so the need of the Maternity Leave & other Benefits are becoming increasingly common.
Applicability of the Act:-
The Act extends to whole of India. In the first instance, to every establishment being a
Factory, Mine or Plantation in which 10 or More persons are or were employed on any day of the
preceding (12) Twelve months. (including any such establishment belonging to Government & to every
establishment wherein persons are employed for the exhibition of equestrian, acrobatic and other
performances. except employees covered under the “ESI Act 1948”.
Right of Maternity Benefit:-
Every Pregnant working women in any Establishment are Eligible for Maternity Benefit,
provided they have Served in the Establishment for at least 80 days in (12) Twelve months before the
expected date of delivery. However, if a woman is earning less than Rs:- 15,000/- she may be offered ESI
scheme by her employer & she will receive the Maternity Bebefit under ESI Scheme.
Guidelines Maternity Act
Notice to the Employer:- Ten (10) weeks before the date of her expected delivery, she may
ask the Employer to give her light work for a Month. She should give written Notice to the Employer
about Seven (07) weeks before the date of her delivery that she will be on Maternity Leave for Six weeks
before & after her delivery.
Benefits under the Act:-
1. Leave with Average Pay for Twenty Six (26) Weeks, up-to 02 Children's. In Case of more than
02 Children's ML Benefit will be (12) Weeks Only. Employee Can avail ML 08 weeks Before the
Delivery or She can avail 26 weeks together immediate proceeding for delivery.
2. Female employee shall be eligible for 12 of weeks of leave with wages in case she adopts a child
who is below the age of [03] Three Months. {From the Date of Adoption}.
3. A “Commissioning Mother” shall be eligible for leave with wages of 12 weeks immediately from
the date the child is handed over to the commissioning mother. {Refer the Notification for
Details}
4. She can take the Pay for the first Eight (08) weeks before start of Maternity leave.

198. 198
5. In case of Miscarriage, Six (06) weeks leave with average pay w.e.f :- Date of Miscarriage.
6. For Tubectomy Operation : Leave with wages of maternity benefit for a period of 2 weeks.
7. No deduction from Normal & Usual Daily wages of a woman entitled to maternity benefit.
8. Light work for Ten (10) weeks before the date of her expected delivery, if she asks for it.
9. Two Nursing breaks until the child will became (15) fifteen months old.
10. No Discharge or Dismissal while she is on Maternity Leave. (Section 5)
11. No charge to her Disadvantage in any conditions of her employment.
12. Under this Act, “No Employer” can knowingly employ a woman in his establishment during the
Six weeks following the day of her delivery or her miscarriage.
13. Dismissal during Absence of Pregnancy:- When a woman absents herself from work in
accordance with the provisions of this Act, it shall be unlawful for her Employer to “Discharge or
Dismiss” her during or on account of such absence.
14. Forfeiture of Maternity Benefit:- In case of Gross Misconduct the Employer in written can
communicate about depriving such benefit. Within 60 days from date of deprivation of maternity
benefit, Women can appeal to the authority prescribed by law.
15. Abstract of Act & Rules:- An Abstract of the Provisions of this Act & Rules made thereunder in
the language or languages of the locality shall be exhibited in a conspicuous place by the
Employer in Establishment in which women are employed.
16. Records Managment:- Every employer shall prepare and maintain such registers, records and
muster-rolls and in such manner as may be prescribed under the Maternity Act.
17. Penalty for Contravention of Act:- If any Employer fails to pay any amount of maternity
benefit to a woman entitled under this Act or discharges or dismisses such woman during or on
account of her absence from work in accordance with the provisions of this Act, the employer
shall be punishable with imprisonment which shall not be less than (03) three months but which
may extend to (01) one year and with fine which shall not be less than Rs:- 2000/-, which may
extend to Rs:- 5000/-.
Payment of Bonus Act – 1965
Objective of the Act:- An Act to Provide for the “Payment of Bonus” to Persons employed in certain
Establishments on the basis of Profits or on the basis of Production or Productivity & for matters
connected therewith.
History of Bonus:- “Bonus” is really a Reward for Good work or Share of Profit of the unit where the
Employee is working. The practice of Paying Bonus in India appears to have Originated during 1st World
War when certain textile mills granted 10% of wages as War Bonus to their workers in 1917. In certain
cases of Industrial Disputes Demand for Payment of Bonus was also included. In 1950, the Full Bench of
the Labour Appellate evolved a formula for determination of bonus.
Applicability of the Act: - The Act is applicable to any Factory employing 10 or More persons where
any processing is carried out with Aid of Power & also to Other Establishments (established for purpose
of profit) employing 20 or More persons. This Act extends to the whole of India, w.e.f – 1965.
Eligibility for Bonus:- Every Employees drawing wages upto Rs:-10000/-, shall be entitled for Bonus
with minimum 30 (Thirty) Days worked performed by Employee during the Accounting period. {Sec –
08}.
Guidelines Bonus Act
Disqualification for Bonus:- An Employee shall be Disqualified from Receiving the Bonus under this
Act, if he is Dismissed from service for “Fraud, Riotous or Violent Behaviour” while on the Premises of
the Establishment; or Theft, Misappropriation or Sabotage of any Property of the Establishment. Payment
Rate & Calculation of Bonus:
Payment Rate Bonus : Minimum 8.33% & Maximum upto 20% of the salary or Rs.100 (on completion
of 5 years after 1st Accounting year even if there is No profit). {Sec. 10.}
For Calculation purposes Rs:- 3500/- per month maximum will be taken even if an Employee is drawing
upto Rs:- 3500/- per month. (Sec. 12)

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Time Limit for Payment of Bonus: Within 08 Months from the Close of Accounting year. Mostly
Organization paid the Bonus before the Diwali (Sec. 19)
Computation of gross profits : For banking company, as per Schedule - I. Others, as per Second - II
Set-off and Set-on : As per Schedule IV. Sec. 15
Submission of Return : In Form D to the inspector within 30 days of the expiry of time limit under
Section 19. Rule 5
Guidelines Bonus Act
1. Maintenance of Registers: Maintain a Register showing the computation of the allocable Surplus
referred to in clause (4) of section 2, in Form A.
2. Maintain a Register showing the Set-on & Set-off of the allocable Surplus, under section 15, in
Form B.
3. Maintain a Register showing the Details of the Amount of Bonus due to each of the Employees,
the deductions under section 17 & 18 and the amount actually disbursed, in Form C. Sec.26, Rule
4
Rights of Employee:
1. Right to Claim Bonus Payable under the Act & to make an Application to the Government, for
the recovery of Bonus due & unpaid by Employer, within one year.
2. Employee has the Right to refer any Dispute to the Labour Court / Tribunal.
3. Right to Seek Clarification & Obtain information from accounts of the Establishment.
The Bonus Act is “Not Applicable” to certain Employees of LIC, General Insurance, Dock Yards, Red
Cross, Universities & Educational Institutions, Chambers of Commerce, Social Welfare Institutions &
Building Contractors, etc. {Sec.32}.
Penalty under the Act:-
For Contravention of the provisions of the Act or Rules the Penalty is Imprisonment up to 6
months, or fine up to Rs:- 1000, or both.
For Failure to Comply with the directions or requisitions made the penalty is Imprisonment up
to 6 months, or fine up to Rs:- 1000, or both.
Payment of Gratuity Act - 1972
Objective of the Act:-
An act to Provide for a Scheme for the Payment of Gratuity to Employees engaged in
“Factories, Mines, Oilfields, Plantations, Ports, Railway Companies, Shops or Other Establishments” and
for matters connected therewith or incidental thereto, so far as it Relates to “Ports & Plantations” it does
not apply to the State of Jammu and Kashmir. This Act Extends to the whole of India.
Applicability of the Act:-
The Act shall apply to Every “Factory, Mine, Oilfield, Plantation, Port, Railway Companies,
Every Shop or Establishment within the Meaning of any Law for the time being in force in Relation to
Shops & Establishments in a State, in which Ten (10) or More persons are employed, or were employed,
on any day of the preceding 01 year. The Act is applicable to “All Employees”, irrespective of the salary.
Meaning of Gratuity:-
The “Payment of Gratuity Act 1972” is a Social Security enactment. It is derived from the
word “Gratuitous” which means ‘Gift’ or ‘Present’. “The Gratuity” is a Lump Sum Payment to Employee
when he / she Retires or Leaves the Service. It is Basically a “Retirement Benefit” to an Employee so,
that he / she can Live Life Comfortably after Retirement. However, under the “Gratuity Act”, gratuity is
payable even to an employee who Resigns after completing at least “5 years” of service. In case
uninterrupted continuous service of ‘04 years & 240 days’ also be consider for Gratuity Payment.
Eligible for Gratuity:-
“Employee” means any Person (other than Apprentice) employed on wages in any
Establishment, Factory, Mine, Oilfield, Plantation, Port, Railway Company or Shop, to do any Skilled,
Semi-skilled or Unskilled, Manual, Supervisory, Technical or Clerical work, whether terms of such
Employment are express or implied, and whether such Person is Employed in a Managerial or
Administrative capacity.

200. 200
Time of Gratuity Payment:- Gratuity is Payable to a Person on (a) Resignation (b) Termination on
account of Death or Disablement due to Accident or Disease (c) Retirement (d) Death. Normally, Gratuity
is payable only after an Employee completes Five Years of Continuous service. “In case of Death and
Disablement, the condition of minimum 5 years’ service is not applicable”. [Section 4(1)].
Amount of Gratuity Payable:- Gratuity is Payable @ 15 days wages for Every year of Completed
service. In the last year of service, if the employee has completed more than 6 months, it will be treated as
full year for purpose of gratuity. “In case of seasonal Establishment, Gratuity is Payable @ 7 days wages
for each season.” [Section 4(2)].
“Wages” shall consist of Basic plus D.A, as per Last drawn salary. However, allowances like Bonus,
Commission, HRA, Overtime etc. are not to be considered for calculations of Gratuity Payable Amount.
[Section 2(s)].
Guidelines Gratuity Act
Maximum Gratuity:-
The Maximum Gratuity Limit as per Section 4(3) has been raised from “3.5 lakhs to 10
lakhs”. This will give advantage to both Private & Public sector employees.
Compulsory Insurance for Gratuity Liability:-
Every Employer has to Obtain an Insurance in the manner prescribed, for his Liability for
payment towards the Gratuity under this Act, from the Life Insurance Corporation of India established
under the LIC of India Act, 1956 (31 of 1956) or any Other prescribed Insurer of the Country.
Nomination under the Act:-
Each Employee who has completed one year of service is required to make a nomination
for the purposes of gratuity in case of his death. There can be more than one nominee in – “Form F”.
Nominees may be changed at any time by the employee, by giving a written notice to the employer.
(Form H).
Payment Gratuity:- Last Drawn Basic Salary + DA * 15 * Total Service Period
26 Days
Forfeiture of Gratuity:-
Gratuity can be forfeited {Sec 4(6)} where an employee has been terminated:
(A) For any act, willful omission or negligence causing any damage or loss to or destruction of any
property belonging to the employer.
(B) For riotous or disorderly conduct or any act of violence on his part.
(C) For any act which constitutes an offence involving moral turpitude, provided the offence has been
committed by him in the course of his employment.
Major Provisions of Industrial Disputes act, 1947,
Salient features of industrial disputes act , 1947
Industrial dispute an industrial dispute may be defined as a conflict or difference of
opinion between management and workers on the terms of employment. It is a disagreement between an
employer and employees' representative; usually a trade union, and other working conditions and can
result in industrial actions.
Definition of ID
Disagreement or controversy between management and labour with respect to wages,
working conditions, other employment matters or union recognition. As per Section 2(k) of Industrial
Disputes Act,1947, an industrial dispute in defined as any dispute or difference between employers and
employers, or between employers and workmen, or between workmen and which is connected with the
employment or non-employment or the terms of employment or with the conditions of labor.
OBJECTIVES
1. Promotion of measures for securing and preserving amity and good relation between the
employers and workers
2. Investigation and settlement of industrial disputes
3. Prevention of illegal strikes and lock outs

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4. Relief to workmen in the matter of lay–off Promotion of collective bargaining
Causes of Industrial Disputes. •
1. Lack of proper fixation of wages. •
2. Bad working conditions. •
3. Lack of training given to employees •
4. Lack of strong and healthy trade unionism •
5. Difference in regard to sharing the gains of increased productivity
Salient features of i.d. act , 1947
1. This act extends to the whole of India including the state of Jammu and Kashmir
2. It encourages arbitration over the disputes between employers and employees
3. It provides for setting up of works committees as machinery for mutual consultation between
employers and employees to promote cordial relation
4. This Act paved the way for setting up permanent conciliation machinery at various stages having
definite time limits for conciliation and arbitration
5. This Act emphasis on compulsory adjudication besides conciliation and voluntary arbitration of
Industrial Disputes
6. The Act empower the Government to make reference of the dispute to an appropriate authority
ie, Labour court, Industrial tribunal and National tribunal depending upon the nature of the
dispute either on its own or on the request of the parties
7. The right to strike by the workers and lock–out by the employees has been subjected to the
restriction as laid down in the Act
8. The act prohibits strikes and lock–outs during the pendening of conciliation and arbitration
proceedings and in public utility service and it empowers government to take adequate action
Forms of dispute
• Strike –
Section 2 (q) of the Industrial Disputes Act. Defines “strike” to mean: a cessation of work by a
body of persons employed in any industry acting in combination, or a concerted refusal.
• Lock out –
Section 2(1) of the Industrial Disputes Act, 1947 defines "Iock- out" to mean: The temporary
closing of employment or the suspension of work, or the refusal by an employer to continue to employ
any number of persons employed by him.
•Gherao –
means encirclement of the managers to criminally intimidate him to accept the demands of the
workers.
•Lay off
Employer refuses to give employment due to specified reasons such as shortage of coal,
power, raw materials , break down of machinery , natural calamity or any other reasons.
Terms under Industrial Disputes Act, 1947
APPROPRIATE GOVERNMENT – Sec 2 (a)
Refers to Central Government/State Government
ARBITRATOR – Sec2 (aa)
Referred as an umpire.
It means any person who is appointed to determine differences and disputes between two parties.
WAGES – Sec 2(rr)
It means all remuneration capable of being expressed in terms of money, if the term of
employment were fulfilled, be payable to a workman in respect of his employment or of work done in
such employment.
INDUSTRY- Sec 2(i)
Industry means any systematic activity carried on by co- operation between an employer
and his workmen whether such work men are employed by such employee directly or by or through any
agency including a contractor for the production, supply or distribution of goods or services with a view

202. 202
to satisfy human wants or wishes with a motive to make any gain or profit; not merely spiritual or
religious.
WORKMEN - Sec 2(s)
Means any person including an apprentice employed in any industry to do any manual,
unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward the terms of
employment be express or implied and there should be a contractual relationship between master and
servant
FACTORIESACT,1948
THE FACTORIES ACT, 1948.
INTRODUCTION
In India the first Factories Act was passed in 1881. This Act was basically designed to
protect children and to provide few measures for health and safety of the workers. This law was
applicable to only those factories, which employed 100 or more workers. In 1891 another factories Act
was passed which extended to the factories employing 50 or more workers.
THE FACTORIES ACT, 1948
Definition of a Factory:-
“Factory” is defined in Section 2(m) of the Act. It means any premises including the precincts
thereof-
1. W h e r e o n t e n o r m o r e w o r k e r s a r e w o r k i n g , o r w e r e w o r k i n g
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 i i .
2. W h e r e o n t w e n t y o r m o r e w o r k e r s a r e w o r k i n g , o r w e r e 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 does not include a mine subject to the operation of the MinesAct,1952 or a mobile unit belonging to
the Armed forces of the Union, a railway running shed or a hotel, restaurant or eating place.
THE FACTORIES ACT, 1948
The following have held to be a factory:-
1. Salt works
2 . A s h e d f o r g i n n i n g a n d p r e s s i n g o f c o t t o n
3 . A B i d i m a k i n g s h e d
4 . A R a i l w a y W o r k s h o p
5 . C o m p o s i n g w o r k f o r L e t t e r P r e s s P r i n t i n g
6 . S a w M i l l s
7 . Place for preparation of foodstuff and other eatables
HIGHLIGHTS:
The Factories Act, 1948 came into force on the 1st
day of April,1949 and extends to the whole of India. It
was, in fact, extended to Dadra & Nagar Haveli, Pondicherry in 1963, to Goa in 1965 and to the State of
Jammu &Kashmir in 1970
The Factories Act was amended in 1949, 1950, 1954, 1956, 1976 and 1989
In Bhikusa Yamasa Kshatriya (P) Ltd. v UOI, the court observed that the Act has been enacted primarily
with the object of protecting workers employed in factories against industrial and occupational hazards.
For that purpose, it seeks to impose upon the owner or the occupier certain obligations to protect the
workers and to secure for them employment in conditions conducive to their health and safety.
THE FACTORIES ACT, 1948.
Some of the crucial Sections
Sec6 Registration & Renewal of Factories
To be granted by Chief Inspector of Factories on submission of prescribed form, fee and plan

203. 203
Employer to ensure health of workers pertaining to
C l e a n l i n e s s D i s p o s a l o f w a s t e s a n d e f f l u e n t s - S e c 1 2
V e n t i l a t i o n a n d t e m p e r a t u r e d u s t a n d f u m e - S e c 1 3
Overcrowding Artificial humidification Lighting – Sec. 14
Drinking water Spittoons. - Sec. 18
Safety Measures
Fencing of machinery – Sec. 21
Work on near machinery in motion. – Sec 22
Self-acting machines.- Sec 25
Employment prohibition of young person’s on dangerous machines. – Sec 23
Casing of new machinery.- Sec 26
Striking gear and devices for cutting off power. – Sec 24
Prohibition of employment of women and children near cotton-openers.- Sec 27
Hoists and lifts.- Sec 28
Welfare Measures
1. Washing facilities – Sec 42
2. Facilities for storing and drying clothing – Sec 43
3. Facilities for sitting – Sec 44
4. First-aid appliances – one first aid box not less than one for every 150 workers– Sec 45
5. Canteens when there are 250 or more workers. – Sec 46
6. Shelters, rest rooms and lunch rooms when there are 150 or more workers. – Sec 47
7. Creches when there are 30 or more women workers. – Sec 48
8. Welfare office when there are 500 or more workers. – Sec 49
Working Hours, Spread Over & Overtime of Adults
1. Weekly hours not more than 48 - Sec: 51
2. Daily hours, not more than 9 hours. - Sec: 54
3. Intervals for rest at least ½ hour on working for 5 hours. - Sec: 55
4. Spread over not more than 10½ hours. - Sec: 56
5. Overlapping shifts prohibited. - Sec: 58
6. Extra wages for overtime double than normal rate of wages - Sec:59
7. Restrictions on employment of women before 6AM and beyond 7 PM. - Sec: 60
Annual Leave with Wages
A worker having worked for 240 days @ one day for every 20 days
and for a child one day for working of 15 days
Accumulation of leave for 30 days Sec. 79
Sec.92to106
Offence Penalties
For contravention of the Provisions of the Act or
Rules
Imprisonment up to 2 years or fine up to
Rs.1,00,000 or both
On Continuation of contravention Rs.1000 per day
On contravention of Chapter IV pertaining to safety
or dangerous operations
Not less than Rs.25000 in case of death
Subsequent contravention of some provisions Imprisonment up to 3 years or fine not less than
Rs.10, 000which may extend to Rs.2,00,000
Obstructing Inspectors Imprisonment up to 6 months or fine up to Rs.10,
000 or both
Wrongful disclosing result pertaining to results of
analysis.
Imprisonment up to 6 months or fine up to Rs.10,
000 or both

204. 204
For contravention of the provisions of Sec.41B,
41C and41H pertaining to compulsory disclosure of
information by occupier, specific responsibility
of occupier or right of workers to work imminent
danger
Imprisonment up to 7 years with fine up to Rs.2,
00,000 and on continuation fine @ Rs.5, 000 per
day
Imprisonment of 10 years when
The factories act, 1948
What is a factory?
A premises whereon 10 or more persons are engaged if power is used, or 20 or more
persons are engaged if power is not used, in a manufacturing process. [section 2(m)].
Objective of the Act
The Act has been enacted primarily with the object of protecting workers employed
in factories against industrial and occupational hazards.
For that purpose, it seeks to impose upon the owner or the occupier certain
obligations to protect the workers and to secure for them employment in conditions conductive to their
health and safety.
Applicability of the Act
At any place wherein manufacturing process is carried on with or without the aid of
power or is so ordinarily carried on, not withstanding that:
The number of persons employed therein is less than ten, if working with the aid of
power and less than twenty if working without the aid of power, or
The persons working therein are not employed by the owner thereof but are working
with the permission of, or under agreement with, such owner.
What is a manufacturing process?
Manufacturing process means any process for-
(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up,
demolishing, or otherwise treating or adapting any article or substance with a view to its use, sale,
transport, delivery or disposal; or
ii) Pumping oil, water, sewage or any other substance; or
iii) Generating, transforming or transmitting power; or
(iv) Composing types for printing, printing by letter press, lithography, photogravure or other similar
process or book binding
v) Constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels;
vi) Preserving or storing any article in cold storage. section 2(k)].
Who is a worker?
1. A person employed in any manufacturing process or cleaning or any work incidental to
manufacturing process.
2. A person employed, directly or by or through any agency with or without knowledge of the
principal employer.
3. Whether for remuneration or not.
4. Relationship of master & servant
5. section 2(l)].
Definitions[Sec.2]
1. “ Adult” means a person who has completed his eighteenth year of age
2. “ Adolescent” means a person who has completed his fifteenth year of age but has not
completed his eighteenth year
3. “ Child” means a person who has not completed his fifteenth year of age
4. “ Young person” means a person who is either a child or an adolescent

205. 205
Definitions[Sec.2]
“Day” means a period of twenty-four hours beginning at midnight;
“Week” means a period of seven days beginning at midnight on Saturday night
“Calendar year” means the period of twelve months beginning with the first day of January in any year
“Power” means electrical energy, or any other form of energy which is mechanically transmitted and is
not generated by human or animal agency;
“Prime mover” means any engine, motor or other appliance which generates or otherwise provides
power
Who is the occupier?
The person who has ultimate control over the affairs of factory. It includes a partner in case of
firm and director in case of a company. In case of Government company, 'occupier' need not be a director.
In that case, person appointed to manage affairs of the factory shall be occupier. [section 2(n)].
Approval, Licensing & Registration of Factories [sec.6]
Making an application to the Government or Chief Inspector , along with the duly certified plans and
specifications required by the rules,
Sent to the State Government or Chief Inspectors by registered post, And no order is communicated to the
applicant within 3 months from the date on which it is so sent, the permission deemed to be granted . If
the application is rejected appeal can be made to the government within 30 days of the date of such
rejection.
Notice by Occupier [sec.7]
The occupier shall, at least 15 days before he begins to occupy or use any premises as a
factory, send a notice to the Chief Inspector containing-
(a) The name and situation of the factory;
(b) The name and address of the occupier;
(c) The name and address of the owner of the premises
(d) The address to which communications relating to the factory may be sent;
(e) The nature of the manufacturing process;
(f) The total rated horse power installed or to be installed in the factory;
(g) The name of the manager of the factory for the purposes of this Act;
(h) The number of workers likely to be employed in the factory;
(i) Such other particulars as may be prescribed
General duties of the Occupier
1. Occupier shall ensure, the health, safety and welfare of all workers while they are at work in the
factory.
2. Every occupier shall prepare, a written statement of his general policy with respect to the health
and safety of the workers.
3. Bring such statement and any revision thereof to the notice of all the workers.
The Inspecting Staff[Sec.8]
State government may appoint Chief Inspector, Additional Chief Inspectors, Joint Chief
Inspectors, Deputy Chief Inspectors, and Inspectors.
Prescribe their duties and qualifications
Every District Magistrate shall be an Inspector for his district
Every inspector is deemed to be a public servant within the meaning of the Indian Penal Code
Powers of Inspectors[sec.9]
1. Enter factory premises for investigation
2. Examine the premises
3. Inquire into any accident or dangerous occurrence
4. Require the production of any prescribed register or document
5. Seize, or take copies of, any register, record or other document
6. Take measurements and photographs and make such recordings
7. Exercise such other powers as may be prescribed

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8. No person shall be compelled under this section to answer any question or give any evidence
tending to incriminate himself .
Certifying Surgeon[Sec.10]
1. State Government may appoint qualified medical practitioners to be certifying surgeons
2. Duties of surgeons
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
c) supervising the factories where
i) cases of illness have occurred which are due to the nature of the manufacturing process or
ii) due to manufacturing process there is a likelihood of injury to the health of workers or
iii) young persons are employed in any work which is likely to cause injury to their health.
Health Provisions[Sec.11-20]
Chapter III of Factories Act contain details regarding health of workers. Let us discuss these
provisions.
Cleanliness [sec.11]
1. The working conditions should be clean and safe.
2. Clean the floor at least once a week by washing, or by some effective method.
3. Effective means of drainage shall be provided.
4. White wash every 14 weeks
5. Paint / varnish every 5 years
Disposal of wastes and effluents [sec.12]
a) There should be proper arrangements or disposal of wastes and effluents.
b) Follow state govt. rules
Ventilation & Temperature [sec.13]
Proper level of ventilation temperature and humidity must be maintained. Make provisions for
reducing excess heat.
Dust and fume[sec.14]
Effective measures should be taken to prevent inhalation or accumulation of dust &
fume. If any exhaust appliance is necessary for, it shall be applied as near as possible to the point of
origin of the dust, fume or other impurity.
Artificial Humidification[sec.15]
Factories in which the humidity of the air is artificially increased (like in textile units), keep it
in limits. The water used for artificial humidification to be clean.
Overcrowding [Sec.16]
14.2 cubic metres space per worker. While calculating this space, space above the worker beyond
4.2 meters will not be taken into account.
Notice specifying the maximum number of workers, which can be employed in any work room
shall be displayed in the premises.
Lighting [Sec17]
Sufficient & suitable lighting in every part of factory. There should natural lighting as far
as possible. All glazed windows and skylights used for the lighting of the workroom shall be kept clean.
Formation of shadows to such an extent as to cause eye-strain or the risk of accident to any worker shall
be prevented.
Drinking water[Sec.18]
There should be drinking water (wholesome water) .Drinking points to be marked as
drinking water. They should be at least 6 meters away from wash room/urinal/ latrine/spittoons. If >250
workers are working, then have cool water facility also.
Latrines and Urinals[Sec.19]
There should be separate – for male and female. Proper cleaning should be there.

207. 207
Spittoons[Sec.20]
There should be sufficient number of spittoons. No person shall spit within the premises of a
factory except in the Spittoons provided for the purpose Whoever spits in contravention shall be
punishable with fine not exceeding five rupees
Safety of Worker[Sec.21-41]
CHAPTER IV DEALS WITH SAFETY OF WORKERS.
Fencing of Machinery[Sec.21]
a) Every dangerous parts must be securely fenced.
b) The State Government may by rules prescribe such further precautions.
Machines in motions[Sec.22]
Examination of machinery in motion only by a specially trained adult male worker wearing tight fitting
clothing. No women or child should be allowed to work.
Employment of young persons on dangerous machines[Sec.23]
No young person should be allowed to work on dangerous machines (unless he has been trained, and is
under supervision). Young person = 14 to 18.
Striking gears[Sec.24]
There should be suitable striking gears etc. to switch off the power, so that if there is any emergency,
problem can be solved.
Self acting machines[Sec.25]
Make sure that no person should walk in a space within 45 cm from any fixed structure
which is not a part of machine.
Casing of new machines[Sec.26]
All machinery driven by power & installed should be so sunk, encased or otherwise
effectively guarded as to prevent danger.
Cotton openers[Sec.27]
No women and children are allowed to work on cotton openers.
Hoists and lifts[Sec.28]
Every hoist and lift should be in good condition, and properly checked. The maximum load
it can carry – must be clearly mentioned. The gates should be locked by interlocking / safe method (it
should not open in between). To be properly examined in every 6 months.
Lifting machines, chains, ropes & lifting tackles[Sec.29]
a) Cranes & lifting machines, etc. to be of good construction & to be examined once in every 12
month.
b) Cranes and lifting machines not to be loaded beyond safe working load.
c) Cranes not to be approach within 6 metres of a place where any person is employed or working.
Revolving machines[Sec.30]
a) Maximum safe speed must be mentioned for each machine.
b) Speed indicated in notices should not to be exceeded.
Pressure plant[Sec.31]
There should be safe working pressure on pressure plants. Effective measures should be
taken to ensure that the safe working pressure is not exceeded.
Floors, Stairs etc.[Sec.32]
All floors, steps, stairs, passages & gangways should be of sound construction & properly
mentioned.
Pits, sumps, openings in floors etc.[Sec.33]
Pits, sumps etc. should be securely covered or fenced.
Excessive weights[Sec.34]
No person should be employed to hold more weight than the person can hold.
Protection of eyes[Sec.35]
Provide goggles if workers have to work on something stretching to the eyes.

208. 208
Dangerous fumes etc[Sec.36]
Prohibited to employ workers in places where dangerous gas / fume is present. Practicable
measures should be taken for removal of gas, fume, etc.
Portable electric light[Sec.36A]
It should not be above 24 volts
Explosive or inflammable dust, gas, etc.[Sec.37]
Take all measures for safety and to prevent explosion on ignition of gas, fume etc.
Precautions in case of fire[Sec.38]
There should be separate exit for cases of fire. There should be facilities for extinguishing
fire.
Role of inspector[Sec.39,40]
Section 39, 40 and 40A talk about various roles that have been assigned to the inspector. He may
call for details regarding building, machines etc.
Safety officer[Sec.40B]
If 1000 or more workers are employed, appoint a separate safety officer.
Power to make rules to supplement the above provisions[Sec.41]
The State Government may make rules requiring the provision in any factory of such
further devices & measures for securing the safety of persons employed therein as it may deem necessary.
Welfare Provision[Sec.42-50]
Chapter V
There are a number of provisions in the factories act regarding welfare facilities for the workers.
Welfare Issues
1. Washing facilities(Sec 42)
2. Facilities for, storing & drying clothes(Sec43)
3. Facilities for sitting(Sec 44)
4. First aid appliances(Sec 45)
5. Canteen( Sec46)
6. Rest room, shelters, lunch room( Sec 47)
7. Creches (Sec 48)
8. Welfare Officers(Sec 49)
9. Power to make rule(Sec 50)
Washing facilities[Sec.42]
1. There should be washing facilities in every factory for the workers–separate for male and female
workers-properly screened.
2. conveniently accessible and shall be kept clean.
Facility for storing and drying of clothing[Sec.43]
There should be facility so that worker can place their cloth not worn during the
manufacturing process. There should be facility so that worker can dry their wet cloth.
Facilities for sitting[Sec.44]
Suitable arrangements for sitting shall be provided and maintained for all workers obliged to
work in a standing position .If the worker can do the work by sitting, - there should be sitting arrangement
for the worker.
First-aid appliances[Sec.45]
There should be at least 1 first aid box for every 150 workers. It should have the prescribed contents. A
responsible person should hold a certificate on first aid treatment. An ambulance room should be there if
the number of workers is more than 500.
Canteen [sec.46]
If the number of workers is more than 250, the govt. may make rules for canteen. The govt.
may make rules regarding foodstuff, construction, furniture, equipment of the canteen.

209. 209
Shelter, rest room, lunch room[Sec.47]
When 150 workers are working, there should be rest rooms, lunch room, etc. Such places should
be having drinking water facilities etc.
Creches[Sec.48]
If the number of women workers is more than 30, there should be the creches. It should be
sufficiently lighted, ventilated & to be under the charge of trained women
Welfare Officer[Sec.49]
If the number of workers is 500 or more, there should be a welfare officer to look after the
welfare of the workers.
In Nutshell
1. Crèche - > 30 women workers
2. Restroom / shelters and lunch room - > 150 workmen
3. Cooled drinking water - > 250 workers
4. Canteen - > 250 workers
5. Ambulance room – Doctor, Nurse and Dresser cum compounder - > 500 workers
6. Welfare officer - > 500 workers
7. Lady welfare officer - > more nos. of women workers
Working hours Of Adults
Chapter VI
The rule as to the regulation of hours of work of adult workers in a factory and holidays.
Working Hours
1. Sec.51-Weekly hours not more than 48 hours a week
2. Sec.52-First day of the week i.e. Sunday shall be a weekly holiday
3. Sec.53-Compensatory holidays
4. Where a weekly holiday is denied he shall be allowed to avail the compensatory holiday within a
month.
Working Hours
Sec.54-Daily working hours- no adult worker shall be allowed to work in a factory for
more than nine hours in any day
Sec.55-Intervals for rest-no worker shall work for more than 5 hours before he has had
an interval for rest of at least 1/2 an hour. Inspector may increase it up to six hours.
Spread over [sec.56]
Inclusive of rest intervals they shall not spread over more than 10-1/2 hours in any
day Inspector may increase the spread over up to 12 hours .
Night Shifts[Sec.57]
If shift extends beyond midnight , a holiday for him will mean a period of 24 hours
beginning when his shift ends.
Prohibition Overlapping Shifts[Sec.58]
Work shall not be carried in any factory by means of system of shifts so arranged that more
than one relay of workers is engaged in the work of same kind at the same time.
Extra Wages for Overtime[Sec.59]
If workers work for more than 9 hours a day or more than 48 hour a week, extra wages should
be given. Wages at twice the ordinary Rate.
Restriction on Double Employment[Sec.60]
No worker is allowed to work in any factory on any day on which he has already been working
in any other factory
Notice of periods of work for Adult Workers[Sec.61]
Notice to be displayed at some Conspicuous place. Periods to be fixed beforehand
Classification of workers-Groups. Copy of Notice in Duplicate & any change to be sent to Inspector.

210. 210
Register of Adult Workers[Sec.62,63]
The manager should maintain Register of Adult workers showing-
1. Name
2. Nature of work
3. The Group etc.
Of each & every Adult Worker in the factory.
The Register shall be available to the Inspector at all time during working hours.
Employment of young persons
Prohibition of employment of young Children[Sec.67]
No child who has not completed his 14 th year allowed to work in Factory.
Non-Adult workers to Carry Tokens [Sec.68]
A child who has completed his 14 th year may be allowed to work in factory if:-
a) a certificate of fitness for such work is in custody of manager of factory.
b) Such child or adolescent carries , a token giving a reference to such Certificate.
Certificate of fitness
1. Is a certificate issued by a certifying surgeon after examining him & ascertaining his
fitness for work in factory. Valid for 12 Months.
2. Revocation of Certificate by surgeon , if child is no longer fit.
3. Fee payable by Employer:-Fee & Renewable Fee
4. Effect of Certificate of Fitness:-deemed to be an adult for the purpose of hours of work.
Working Hours for Young persons[Sec.71,72]
1. Working Hours limited to 4-1/2
2. Not during Nights.
3. Period of work limited to 2 shifts.
4. Entitled to weekly Holidays.
5. Female to work only between 6am to 7 pm.
6. Fixation of periods of work beforehand. </li></ul>Kumar Ranjeet
Register of Young persons
The manager should maintain Register of Adult workers showing-
1. Name
2. Nature of work
3. The Group etc.
Of each & every Adult Worker in the factory. The Register shall be available to the Inspector at all time
during working hours.
Power to require Medical Examination[Sec.73]
Inspector has the power to direct manager to have medical examination of young persons
working in case- Young Persons working without License. They no longer seem to be Fit.
Employment of Women
Prohibition of women workers at night shift .Women shall not be allowed to work in any
factory except between the hours of 6 A.M. and 7 P.M.The inspector may relax this norm but prohibited
between 10 P.M. and 5 A.M. Working hours not more than-weekly 48 hours & daily 9 hours
Annual Leave with Wages[Sec.78-84(Chapter- VIII) ]
Rules:
1) Leave Entitlement-
One day for every 20/15 days of work performed in case of adult/Child who has worked for period of 240
days.
2) Computation of Period of 240 days-
The days of lay-off, maternity leave not exceeding 12 weeks,& earned leave in previous year
should be included.
3) Discharge, Dismissal, Superannuation, death, quitting of employment-
He, his heir, nominee as the case may be entitled to wages.

211. 211
4) Treatment of Fraction of Leave:-
Half day or more is treated as full while less than half is omitted.
5) Treatment of Un-availed leave:
Should be carried – forward to next calendar year but shall not exceed 30 in case of an adult & 40 in
case of child.
6) Application for leave to be made in writing within specified time.
7) Scheme for grant of leave.
8) Display of Scheme for grant of leave.
9) Refusal of leave to be in accordance with Scheme
10)Payment of wages to worker for leave period if he is discharged or if he quits service.
Wages during leave period[sec.80]
Worker is entitled to wages at a rate equal to the daily average of his total full time
earnings for the days on which he actually worked during the month immediately preceding his leave.
General Penalty for Offences [Sec.92]
If there is any contravention of any of the provisions of the act, the Occupier &
Manager each shall be Guilty & punishable with .Imprisonment for a term up to 2 years. with a fine up to
Rs.100000 or with Both.
Sec.93] further extends ,
if the contravention under section 92 continued after conviction
,they(Manager& Occupier) shall be punishable with further fine which may extend to Rs. 1000 for each
day on which contravention is so continued.
Enhanced Penalty after Conviction[Sec.94]
If a person convicted of any offence punishable under Sec 92, is again guilty
involving contravention of same provision ,he shall be punishable with Imprisonment for a term which
may extend to 3 years. Or fine which shall not be less than 10000 or both. If any contravention of
provision relating to safety, has resulted in an accident causing death /serious bodily injury, Fine shall not
be less than Rs.35000/Rs.10000
Cognizance of Offences[sec.105]
No court shall take cognizance of any offence under this act except on a complaint by or
with the previous section in writing of an Inspector. The complaint shall be filed within 3 months of the
date on which offence comes to the knowledge of an Inspector. But it can be six months , if offence
consists of disobeying a written order made by an Inspector.
Appeal[Sec.107]
The manager of the Factory or the Occupier on whom an order in writing by an inspector
has been served, within 30 days of the notice, can appeal against it to the prescribed Authority.
Display of Notices[Sec.108]
A notice containing Abstracts of this Act & the rules made there under and also the
name & address of the Inspector and the certifying surgeon. Shall be in English& Language Understood
by the majority of the workers. Convenient Places or near main Enterance.
Returns[Sec.110]
The State Govt. may make rules requiring Owner , Occupier, Manager of factories to submit Returns as
may be required.
Power to make rules & give directions[Sec.112,113,115]
Sec 112) The State Govt. may make rules providing for any matter which may be
discovered expedient In order to give effect to the purposes of the act.
Sec 113) The central Govt. may also give directions to the State Govt. as to carrying to
the execution of the provisions of the act.
Sec 115) provides for the publication of the rules made under the act in the official
Gazette.

212. 212
Restriction on Disclosure of Information[Sec.118-A]
Every Inspector shall treat as confidential the source of any complaint brought to his
notice on the breach of any provision of this act. Further he shall not disclose to manager or occupier that
the inspection is made in pursuance of the receipt of complaint.
The Trade Union Act, 1926
Trade Union [Sec. 2(h)]: Trade Union means any combination, whether
temporary or permanent, formed primarily for the purpose of regulating the relations between workmen
and employers or between workmen and workmen or between employers and employers for imposing
restrictive conditions on the conduct of any trade or business and includes any federation of two or more
Trade Unions.
Provided that this Act shall not affect -
(i) any agreement between partners as to their own business;
(ii) any agreement between an employer and those employed by him as to such employment; or
(iii) any agreement in consideration of the sale of the goodwill of a business or of instruction in any
profession trade or handicraft.
The law relating to the registration and protection of the Trade
Unions is contained in the Trade Unions Act, 1926 which came into force with effect from 1st June 1927.
The Act extends to the whole of India except the State of Jammu and Kashmir.
In common parlance, Trade Union means an association of
workers in one or more occupations. Its object is the protection and promotion of the interests of the
working class. Trade Unions have a home grown philosophy based on workers' experience and
psychology. It grows out of the workers' day-to-day experience.
The Trade Union Act, 1926

213. 213
Trade union is a voluntary organization of workers relating to a specific trade,
industry or a company and formed to help and protect their interests and welfare by collective
action. Trade union are the most suitable organisations for balancing and improving the relations
between the employees and the employer. They are formed not only to cater to the workers'
demand, but also for imparting discipline and inculcating in them the sense of responsibility.
They aim to:-
1. Secure fair wages for workers and improve their opportunities for promotion and
training.
2. Safeguard security of tenure and improve their conditions of service.
3. Improve working and living conditions of workers.
4. Provide them educational, cultural and recreational facilities.
5. Facilitate technological advancement by broadening the understanding of the workers.
6. Help them in improving levels of production, productivity, discipline and high standard
of living.
7. Promote individual and collective welfare and thus correlate the workers' interests with
that of their industry.
8. to take participation in management for decision-making in connection to workers and to
take disciplinary action against the worker who commits in-disciplinary action.

214. 214
Well known Central Trade Union Organizations in India:
1. All India Trade Union Congress (AITUC)
2. Bharatiya Mazdoor Sangh (BMS)
3. Centre of Indian Trade Unions (CITU)
4. Hind Mazdoor Kisan Panchayat (HMKP)
5. Hind Mazdoor Sabha (HMS)
6. Indian Federation of Free Trade Unions (IFFTU)
7. Indian National Trade Union Congress (INTUC)
8. National Front of Indian Trade Unions (NFITU)
9. National Labor Organization (NLO)
10. Trade Unions Co-ordination Centre (TUCC)
11. National Mazdoor Union (NMU)
June 2012: The National Mazdoor Union (NMU) gave a strike notice to APSRTC ( Andhra
Pradesh State Road Transportation Corporation) Managing Director with nearly 36 demands. In case
management fails to react, union members have decided to strike from following month.
National Mazdoor Union (NMU) said the 36 demands, four were most important. "Abolition of
contract system in APSRTC, regularization of nearly 22,000 contract drivers and bus conductors,
constitution pay commission were among these.
June 2012: one of the unions of Visakhapatnam steel plant, Indian National Trade Union
Congress (INTUC), has demanded rupees 1 crore ex-gratia ( compensation) for the families of the victims
of the explosion had occurred at the 'oxygen control unit' near the Steel Melting Shop-II at
Visakhapatnam steel plant which claimed the lives of 20 persons on 12-june-2012.
Visakhapatnam steel plant had already paid 20 lakh rupees to each of the families of the deceased workers
and officers. The union also demanded a permanent job for the Kin of the victims. The deceased include
Deputy General Manager (Construction) L Sri hari and Deputy General Manager (instrumentation) P V
Karunakar.
Definitions
Appropriate Government [Sec. 2]:
In relation to Trade Unions whose objects are not confined to one state 'the appropriate Government'
is the Central Government. In relation to other Trade Unions, the 'appropriate Government' is the State
Government.
Executive [Sec. 2(a)]:
Executive means the body of which the management of the affairs of a Trade Union is entrusted.
Trade Dispute [Sec. 2(g)]:
A trade dispute means any dispute between the employers and workmen, the workmen and workmen
and the employers and employers which is connected with the employment or non-employment, or the
terms of employment, or the conditions of labour of any person. 'Workmen' mean all persons employed in
trade or industry whether or not in the employment of the employer with whom the trade dispute arises.
Trade Union [Sec. 2(h)]:
Trade Union means any combination, whether temporary or permanent, formed primarily for the
purpose of regulating the relations between workmen and employers or between workmen and workmen
or between employers and employers for imposing restrictive conditions on the conduct of any trade or
business and includes any federation of two or more Trade Unions.
Provided that this Act shall not affect -
(i) any agreement between partners as to their own business;
(ii) any agreement between an employer and those employed by him as to such employment; or
(iii) any agreement in consideration of the sale of the goodwill of a business or of instruction in any
profession trade or handicraft.

215. 215
5. Registered Trade Union [Sec. 2(e)]: A registered Trade Union means a 'Trade Union' registered under
the Act.
[Sec 14] CERTAIN ACTS DO NOT APPLY TO TRADE UNIONS
Below mentioned acts will not apply to any registered Trade Union, had the registration of any such
Trade Union under any such Act shall be void.
1. The Societies Registration Act, 1860.
2. The Cooperative Societies Act, 1912.
3. The Companies Act, 1956
Trade Unions can be registered only under the Trade Union Act, 1926.
REGISTRATION OF TRADE UNIONS
[Sec 3] Appointment of Registrars.
1. The government will appoint a person to be a Registrar.
2. The government will appoint required number of person as the Addition and deputy Registrar of
the Trade Unions. These office will be under the Registrar of the Trade Union.
[Sec 4] Mode of registration
Minimum Requirement of Registration of Trade Union (2001 amendment)
(1) Any seven or more members of a trade union may, by subscribing their names to
the rules of the trade union and by otherwise complying with the provisions of this Act with respect to
registration, apply for registration of the trade union under this Act.
Provided that no Trade Union of workmen shall be registered unless at least ten per
cent. or one hundred of the workmen, whichever is less, engaged or employed in the establishment or
industry with which it is connected are the members of such Trade Union on the date of making of
application for registration:
Provided further that no Trade Union of workmen shall be registered unless it has on
the date of making application not less than seven persons as its members, who are workmen engaged or
employed in the establishment or industry with which it is connected .''.
(2) Where an application has been made under sub-section (1) for the registration of a
trade union, such application shall not be deemed to have become invalid merely by reason of the fact
that, at any time after the date of the application, but before the registration of the trade union, some of the
applicants, but not exceeding half of the total number of persons who made the application, have ceased
to be members of the trade union or have given notice in writing to the Registrar dissociating themselves
from the application.
Commentary:
1. It is understood that for the purpose of registration a minimum of seven members are necessary to
form a trade union. the reason for fixation of minimum seven members is to encourage formation
of more trade unions so that the trade union would grow.
2. Under the trade union act 1926, employers can register their trade unions.
[Sec 5] Application for Registration.
Every application for registration of a trade union shall be made to the Registrar and shall be
accompanied by a copy of the rules of the trade union and a statement of the following particulars,
namely-

216. 216
(a) the names, occupations and addresses of the members making application;
(aa) in the case of a Trade Union of workmen, the names, occupations and addresses of the place of work
of the members of the Trade Union making the application;''.
(b) the name of the trade union and the address of its head office; and
(c) the titles, names, ages, addresses and occupations of the 8[office-bearers] of the trade union.
If Trade Union has already been existing for one year or more, for its
registration the members should submit all the details such as general statement of the assets and
liabilities of the Trade Union going to be registered by the Registrar of Trade Union.
[sec. 6] Provisions to be contained in the rules of a Trade Union (2001 amendment)
For registration of the Trade Union, provision or rules mentioned below should be
followed by the member for registration of the Trade Union according to this act.
a) The name of the Trade Union.
b) The object of the Trade Union.
c) General funds of the Trade Union by its members should be properly used for Lawful purpose.
d) Maintenances of list of members in the Trade Union and their facilities to be provided.
e) Half of the members of the trade union must be the member who actually engaged in an industry with
which trade union is connected.
(ee) the payment of a minimum subscription by members of the Trade Union which shall not be less
than—
(i) one rupee per annum for rural workers;
(ii) three rupees per annum for workers in other unorganized sectors; and
(iii) twelve rupees per annum for workers in any other case;
f) Disciplinary action against member of the Trade Union and procedures in imposition of fines on
members.
g) the manner in which the rules shall be amended, varied or rescinded;
h) the manner in which the members of the executive and the other of the Trade Union shall be elected
and removed
(hh) executive members and other office bearers should be elected for the period of maximum 3 years..
i) Funds of the Trade Union should be safe guarded, annual audit is necessary, and account books should
be maintained for the purpose of inspection if necessary.
j) Procedure how to wind up the Trade Union

217. 217
Power to call for further particulars and to require alteration of name. [Sec 7]
If Registrar is not satisfy with information provided by the members of the Trade Union
going to be registered, Registrar is having power to call its members for submitting the additional and
required information for registering the Trade Union.
If the Name of the Trade Union is already existed or similar to other Trade Unions
names, registrar is having power to order for changing of the name.
Registration [Sec 8]
All the documents submitted with details and information is correct by the members of the Trade Union
going to be registered, the Registrar will register the Trade Union.
Certificate of Registration. [Sec 9]
The Registrar registering a Trade Union under Section 8, shall issue a certificate of registration in the
prescribed form which shall be conclusive that the Trade Union has been duly registered under this Act.
Minimum requirement about membership of a Trade Union. [Sec 9A]
A registered Trade Union of workmen shall at all times continue to have not less than 10% or 100 of the
workmen, whichever is less, subject to a minimum of seven, engaged or employed in an establishment or
industry with which it is connected, as its members.
Cancellation of registration [sec. 10] (2001 amendment)
Registrar of the Trade Union can cancel the registration of the Trade Union in following circumstances
1. When Trade Union registration certificate has been obtained by fraud or other illegal means.
2. Disobey the rules and regulation of Trade Union act.
3. All the provision contained in section 6 of this act not followed by the members of the Trade
Union.
4. When there are no minimum required numbers of members in the Trade Union.
Appeal [Sec 11]
1. If Registrar of the Trade Union stops registration of the Trade Union or withdrawal of the
registration, members can appeal to Labour Court or an Industrial Tribunal, with in jurisdiction.
2. Court may dismiss the appeal, or pass an order directing the Registrar to register the Union and to
issue a certificate of registration under the provisions of Section 9 or setting aside the order for
withdrawal.
[Sec 13] Features of Registered Trade Union.
1. Registered Trade Union will have perpetual succession (will no stop after the death of the
members of the Trade Union.
2. Every registered Trade Union will have common seal.
3. Every registered Trade Union can acquire and hold both movable and immovable property.
4. Every registered Trade Union can sue others.
5. Every registered Trade Union can sued by others also.

218. 218
RIGHTS AND LIABILITIES OF REGISTERED TRADE UNIONS
A registered Trade Union has the right to maintain
(a) a general fund, and
(b) a separate fund for political purposes:
But the Unions are bound to utilize the funds only for the purposes specified in the Act.
OBJECTS ON WHICH GENERAL FUNDS MAY BE SPENT [Sec. 15]
The following are the purposes for which the general funds of the Union may be spent:
1. Payment of salaries, allowances, etc., to the office bearers of the Union.
2. Payment of expenses for the administration of the Union including other expenses spent on
defending any legal proceedings by or against the Union.
3. Settlement of trade disputes.
4. Special allowances to the members (including dependants) of the Trade Union on account of
death, sickness or accidents, etc.
5. Compensation to members for loss arising out of trade disputes.
6. Providing educational, social and religious benefits to the members.
7. Issue of assurance policies on the lives of members and also against sickness, accidents,
unemployment, insurance, etc.
8. Providing for publication of periodicals for the use of which is intended for the members benefit.
9. Any other object that may be notified by the appropriate Government in the Official Gazette.
If funds are spent for any purposes other than the above, such expenditure is treated as unlawful and the
Trade Union can be restrained by the Court for applying its funds in any other purposes.
Construction of separate fund for political purposes [sec. 16]
Apart from the primary objects, a Trade Union may have certain other political objects. As per
Sec. 16 a registered union may constitute a separate fund in addition to the general fund and the payment
of such a fund shall be utilized for serving civic and political interest of its members. The fund can be
utilized for the following purposes:
1. Holding of any meeting or distribution of any literature or document in support of any candidate
for election as a member of legislative body constituted under the constitution or of any local
authority.
2. For maintenance of any person who is a member of any legislative body constituted under the
constitution.
3. For convening of political meeting of any kind or distribution of political literature or documents
of any kind.
4. The registration of electors for selection of a candidate for legislative body.
The funds collected for political purposes shall not be clubbed with
the general fund. No workman is compelled to contribute in this fund and the nonpayment in this fund
cannot be made a condition for admission to the Trade Union.
Immunity from Punishment for Criminal Conspiracy [Sec. 17]:
No office bearer or member of a registered Trade Union will not be punished
under the Sec .120B punishment of criminal conspiracy of the Indian Penal Code (Conspiracy cases are
defined as cases in which two or more persons agree to commit a crime or to commit an illegal act.)
regarding the matters of the spending the general funds for proper purpose.

219. 219
Immunity from civil suit to certain cases [Sec 18]:
No suit or other legal proceeding shall be maintainable in any Civil Court against any
registered Trade Union in the following activities and circumstances.
1. Delay in the matters relating to the member of the Trade Union regarding the trade disputes like
‘contract of employment’, (is an agreement between an employer and an employee which sets out
their employment rights, responsibilities and duties.)
2. Trade Union or its members showing interest or interfering in matters of the trade or business.
3. Trade Union or its members showing interest or interfering in matters of the employment of the
persons.
4. Trade Union or its members showing interest or interfering in matters of the removal of labour.
5. Trade Union or its members showing interest or interfering in matters of compensating or
remunerating the employees.
6. Registered Trade Union shall not be liable in any suit or other legal proceeding in any Civil Court
for the tortious act (wrongful act) committed by the agent of the Trade Union.
7. Registered Trade Union is not liable for the vicarious liability (if agent commits mistake
intentionally without the knowledge of the Trade Union, agent is liable but not the Trade Union)
Right to inspect books of Trade Union. [Sec 20 ]
The account books of a registered Trade Union and the list of
members thereof shall be open to inspection by office-bearer or member of the Trade Union at such times
as may be provided for in the rules of the Trade Union.
Rights of minors to membership of Trade Unions.[Sec 21]
Any person who has attained the age of 15 years may be a member
of a registered Trade Union and enjoy all the rights of a member.
Disqualifications of office-bearers of Trade Unions. [Sec 21A]
Person shall be disqualified for being chosen as, and for being member of the executive
or any other office-bearer of a registered Trade Union if—
1. he has not attained the age of 18 years;
2. he has been convicted by a Court in India of any offence involving moral turpitude and sentenced
to imprisonment, unless a period of 5 years has elapsed since his release.
Change of name [Sec 23] - Any registered Trade Union may, with the consent of not less than 2/3rd of
the total number of its members can change its name.
AMALGAMATION OF TRADE UNIONS
[Sec 24] Any 2 or more registered Trade Unions may become amalgamated together as
one Trade Union with or without dissolution or division of the funds of such Trade Unions or either or
any of them, provided that the votes of at least one-half of the members of each or every such Trade
Union entitled to vote are recorded, and that at least 60% of the votes recorded are in favor of the
proposal.
[Sec 25]
i. in case of change in the name of the Trade Union, written notice of the change of
name must be signed by secretary and 7 member of the Trade Union are required
to sent to registrar of the Trade Union.

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2. in case of an amalgamation of the Trade Union, written notice of an amalgamation must be
signed by secretary and 7 member of the Trade Union are required to sent to registrar of the Trade
Union.
3. Trade Union name should not match with the other Trade Union names.
4. If Registrar satisfies with all requirements provided by the members of Trade Union, Registrar
will change the name and the same entered in the register.
5. If Registrar satisfies with all requirements provided by the members of Trade Unions, Registrar
will validate amalgamation and entered in the register.
Dissolution of Trade Union [sec. 27]
1. notice of dissolution signed by secretary and 7 member of the Trade Union, should be sent to the
Registrar of the Trade Union within 14 days from the date of the dissolution of the Trade Union.
2. If registrar satisfies with provisions and rules followed by the members of the Trade Union for
dissolution, he will confirm the dissolution.
3. Funds shall be divided by the Registrar among its members if there is no rules mention by the
Trade Union in distribution of the funds.
RETURNS TO THE REGISTRAR
Every registered Trade Union shall have to submit annually to the Registrar a
general statement of all receipts and expenditures during the year ended the 31st day of December. Such a
statement shall be accompanied by another statement containing assets and liabilities of Trade Union as
existing on 31st December each year.
A Supreme Court judgment poses an old question to India’s labour movement: how to unionise contract
workers.
[Ambit of Sec 9A]
As per the Trade Unions Act, 1926, any workman who works in a factory can
join a union of that factory. But trade unions typically have only permanent workers as members. The
reason cited is that contract workers are not employees of the employer in question (the manufacturing
unit), and so should not find representation in a union body formed for the purpose of negotiating with the
said employer. Contract workers are hired by the labour contractor, who is empanelled with the employer
as a supplier of contract labour, and who pays their salaries.
But not being on the rolls of an employer does not disqualify a contract
worker from being a member of a factory’s union. Labour law experts point to section 2 (g) of the Trade
Union Act, which defines “workmen”, for the purposes of a trade union, as “all persons employed in trade
or industry whether or not in the employment of the employer with whom the trade dispute arises”.
This question of who can become a member of a trade union also came up
recently in the case of Chander Bhan, etc versus Sunbeam Autoworkers Union in the Gurgaon
District Court. In a judgment that went largely unnoticed, the court ruled that any workman
employed by a factory — irrespective of whether he was a permanent worker or not, fulfilled the
Industrial Dispute (ID) Act’s definition of workman or not — was eligible to participate in union
activities.
In the Gurgaon industrial belt, Sunbeam Autoworkers Union is probably the
only union that gives membership to workers with less than 240 days’ service, and it needed a court
intervention to be able to do so. But even it does not offer membership to contract workers. In fact, no
union anywhere gives membership and voting rights to contract workers. The reasons are many. First, in
an industrial climate extremely hostile to any union activity, workers believe that forming a union that
also includes contract workers is bound to provoke the management into even greater hostility. Second,
managements refuse point blank to discuss with unionists any issues concerning contract workers. Third,
contract workers are far more insecure compared to regular workers. In an era where companies

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frequently terminate even a permanent worker for engaging in union mobilisation, the stakes are too high
for contract workers, who could be summarily dismissed, without any consequences, by the management.
Fourth, and this is an unpalatable truth for most trade unionists, permanent workers
themselves don’t want to extend union membership to contract workers. In a factory, say, that employs
300 permanent workers and 1,200 contract workers, any union that gives voting rights to contract workers
would instantly marginalise permanent workers. Given that permanent workers’ salaries are much higher,
economic self-interest militates against the inclusion of contract workers in union membership.
As a result, India’s contract workers, with the exception of some PSUs in select
sectors such as steel and coal, remain both heavily exploited and largely un-unionised, with the lack of
unionisation and exploitation reinforcing each other.
The indian trade union act 1926
THE TRADE UNION ACT 1926
The Trade Union Act was passed in 1926 under the title of the Indian Trade Union Act
and was brought into effect from 1st June 1927 by a notification in the Official Gazette by the Central
Government. The Act was amended in 1947, 1960 and 1962, Subsequently the word „Indian‟ was deleted
from the amended Act of 1964, which came into force from 1st April 1965. A comprehensive trade
unions (Amendment) Act was passed in 1982.
OBJECTIVES OF THE ACT
The Act enacted with the object of providing for the registration of trade unions and
verification of the membership of trade unions so registered so that they might acquire a legal and
corporate status. As soon as a trade union is registered, it is treated as an artificial person in the eyes of
the law, capable of enjoying rights
TRADE UNION ACT
DEFINITION
Section 2 (h) of the Trade Union Act 1926 defines the term „Trade Union‟ as “ any
combination, whether temporary or permanent, formed primarily for the purpose of regulating the relation
between workmen and employers, between workmen and workmen, or between employers and employers
or for imposing restrictive conditions on the conduct of any trade or business, and includes any federation
of two or more Trade Unions”.
FUNCTIONS & ROLE OF TRADE UNIONS.
1. To improve working and living conditions.
2. To secure for workers fair wages.
3. To enlarge opportunities for promotion and training.
4. To promote individual and collective welfare.
5. To provide for educational, cultural and recreational facilities.
6. To safeguard security of tenure and improve conditions of service.
7. To promote identity of interests of the workers with their industry .
TRADE UNIONS IN INDIA
a) INTUC (Indian National Trade Union Congress)
b) AITUC (All India Trade Union Congress)
c) CITU (Centre of Indian Trade Unions)
d) NLO (National Labour Organization)
e) TUCC (Trade Union Congress Committee)
PROVISIONS OF THE TRADE UNION ACT
a) Definitions.
b) Formation and Registration.
c) Duties and Liabilities.
d) Rights and Privileges.
e) Amalgamation and Dissolution.

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f) Submission of Return.
g) Penalties and Fines.
h) Power to Make Regulations.
FORMATION AND REGISTRATION OF TRADE UNIONS
Sections 4 to 9 deals with the procedures for registration of Trade Unions.
1) Mode of Registration [Sec. 4 (1)].
Any seven or more members of Trade Union may apply for registration. All the members
applying for registration must subscribe their names to the rules of the Trade Union
2) Application for Registration (Sec. 5).
The application for registration should be made to the Registrar for Trade Union. It contains,
a) The names, occupation and Address of the members .
b) The name of the Trade Union and the Address its head office.
c) The titles, names, ages, addresses and occupations of office bearers of the Trade Union.
3) Contents of the copy of rules (Sec. 6).
The application should also be accompanied with a copy of rules of the Trade Union, it contains.
i. The name of the Trade Union.
ii. The whole of the object for which the Trade Union has been established.
iii. The whole of the purpose for which the general funds of a Trade Union shall be applicable.
iv. The payment of a subscription by members of the Trade Union which shall not be less than
a) one rupee per annum for rural workers
b) three rupee per annum other organized sectors
c) twelve rupees per annum for workers in any other case.
4) Power of the Registrar to call for further Particulars (Sec. 7).
When the application for registration is filed before Registrar, he has got the powers to call
further particulars regarding the Trade Union.
5) Registration and Certificate (Sec. 8 & 9).
If all the requirements of the Act have been complied with, the Registrar of Trade Union
shall register the Trade Union and issue “certificate of Registration.
Registered Trade Union [Sec. 2 (e)].
A “Trade Union” which is registered as per provisions under the Trade Union Act 1926
which has the certificate of registration is called Registered Trade Union.
DUTIES AND LIABILITIES OF A REGISTERED TRADE UNION
1) Change of registered office (Sec. 12).
If any change in the address of the head office of a Trade Union takes place, notice of
change must be given to the Registrar in writing within 14 days.
2) Objects on which general fund may be spent (Sec. 15).
The general funds of a registered Trade Union can be spent only the objects.
3) Constitution of a fund for political purposes (Sec. 16).
A registered Trade Union may constitute a separate fund from which payments may be
made for the promotion of the civic and political interests of its of its members.
4) Proportion of officers bearers be connected with the industry (Sec. 22).
5) Returns to be submitted (Sec. 28).
Every Registered Trade Unions is required by Section 28 to send annually to the Registrar on
or before a prescribed date, a general audited statement of all receipts and expenditure during the year
ending 31st day of Dec.
6) Account books and list of members. The account books of registered Trade Union and the list of
members thereof is open to inspection by any office bearer or member of the Trade Union at such times
as may be provided of in the rules.

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TRADE UNION FUNDS
Registered Trade Union raise their fund through,
a) General Funds.
b) Separate Funds
a) GENERAL FUNDS
1. Section 15 of the Act provides certain restrains against expenditure out of the general funds of the
registered trade union.
2. It lays down that the general fund of a registered trade union shall not be spent on any other
objects than the following, namely:
3. The payment of salaries, allowances and expenses to the officebearers of the Trade Union;
4. The payment of expenses for the administration of the Trade Union including audit of accounts of
general funds;
5. The allowances and compensation of members for loss arising out of Trade Unions.
6. The provisions of education, social or religious benefits for members or for the dependants of
members.
b) SEPARATE FUNDS
Sec. 16 of The Trade Union Act has made suitable provisions for the constitution of a separate
fund for political purposes. The Act empowers a registered Trade Union to constitute a separate fund
from contribution separately levied for that fund. Out of this fund payments maybe made for the
promotion of the political interest of its members in order to promote the political objects. But the general
funds should not be utilized for political purpose .
THE TRADE UNION ACT, 1926 TRADE UNION ACT, 1926
Trade Unions "Trade Union" means any combination, whether temporary or permanent,
formed primarily for the purpose of regulating the relations between workmen and employers or between
workmen and workmen, or between employers and employers, or for imposing restrictive conditions on
the conduct of any trade or business Trade unions are formed to protect and promote the interests of their
members. Their primary function is to protect the interests of workers against discrimination and unfair
labor practices.
DEFINITION OF TRADE UNION
A trade union is such an organisation which is created voluntarily on the basis of
collective strength to secure the interests of the workers.
SCOPE OF THE ACT
1. This Act provides for the registration of trade unions and in certain respects in define the law
relating to registered Trade Unions.
2. The act applies to registered Trade Unions.
COVERAGE OF THE ACT
This act specifies the mode of their registration:.
The act was passed to regulate :
a) Conditions governing the registration of a trade union.
b) Obligation imposed upon a registered trade unions and
c) Rights and Liabilities of Registered Trade unions.
Registration of trade unions
1. Appointment of Registrars.
2. Mode of registration
3. Application for registration
4. Provisions to be contained in the rules of a Trade Union
5. Power to call for further particulars and to require alterations of names
6. Registration
7. Certificate of registration

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Registration of trade unions
1) Appointment of registrars(Sec. 3)
a) -Appointed by “appropriate Government(Can be central or state government (In relation to trade
union’s objects are confined)”
b) - Appropriate Government can also appoint as many additional and Deputy Registrars of trade
unions. -But limits will be defined by Registrar
2) Mode of registration(Sec. 4)
-Any 7 or more members of Trade Union can subscribe to the charter of TU by application and
complying with the provisions of this Act.
a) Cease to be a member
b) Registration is invalid
c) Cease to be a member
d) Registration is valid
3) Application for Registration(Sec. 5)
-Application for registration of TU shall be made to Registrar in comply with Rules
and statement of following particulars:
1. Names, Occupations & Address of the members
2. Name of the Trade Union & Address of its head office
3. Titles, Names(Any member to which TU is entrusted ), Ages, Addresses & Occupations of office
Bearers of TU
4. Where is Existence of TU from past 1 Year before making this application
4) Provisions to be contained in the Rules of Trade Unions(Sec. 6)
1. Name of TU
2. Whole of the purpose for which the general funds of the TU shall be applicable.
3. Conditions under benefit entitled to members
4. Whole of the objects for which the TU has been established.
5. admission of ordinary members(employee) to whom TU is Payment of Manner for 25 connected
& the subscription every appointment and removal of number of temporary paise/month/memb
office-Bearer/ members as officeer Dissolve of TU beares (forms the executive of TU)
6. list of members of TU and their inspection
7. Manner of Annual Audit of the account books
5) Power to call for further particulars and to require alterations of names(Sec. 7)
1. If TU is proposed to be registered is identical with that by which any other existing
2. shall refuse to register TU until such alteration has been made.
6) Registration(Sec. 8)
Registrar, on being satisfied that the TU has complied with all the requirements of this Act in
regard to registration, shall register the TU within a period of 60 from the date days of such compliance.
7) Certificate of registration
In the prescribed form which shall be conclusive evidence that the Trade Union has been
duly registered under this Act.
Cancellation of registration
by the Registrar
1. on the application of the TU
2. certificate has been obtained by fraud or mistake
3. TU has ceased to exist or has willfully and after notice from the Registrar contravened
any provision of this Act
Provided that not less than 2 months previous notice in writing specifying the ground on which it is
proposed to withdraw or cancel the certificate shall be given by the Registrar to the Trade Union

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Rights and liabilities of registration trade union
1. Objects on which general funds may be spent
2. Constitution of a separate fund for political purposes
3. Criminal conspiracy in trade disputes
4. Immunity from civil suit in certain cases
5. Enforceability of agreements
6. Right to inspect books of Trade Union
7. Rights of minors to membership of Trade Unions
Objectives of Trade unions
1. Wages salaries
2. Working conditions
3. Discipline
4. Personnel policies
5. Welfare
6. Employee-employer relation
7. Negotiating machinery
8. Safeguarding organizational health and interest of the industry
TRADE UNION FINANCE AND FUNDS
A. Rate of subscription of Union Members:- Section(6)(ee) of the trade union act 1926, provides that
the payment of minimum subscription by member shall not be less than;
I. One rupee per annum for rural workers;
II. Three rupee per annum for workers in other un recognized sectors; and
III. Twelve rupees per annum for workers in other cases.
B. General Fund
Section 15 of the trade union act, 1926 lays down the purpose for which general fund of a
registered Trade union can be utilized namely
1. The payment of salary allowances and expenses to office bears of trade union;
2. The payment of expenses for the administration of the trade union including Audit of the accounts of
general funds of the trade union
3. The conduct of trade disputes on behalf of then trade union or any member thereof;
C. Political Fund:
Trade unions compelled to get into political spheres. Trade Unions which are registered
are permitted as per Section 16 of the Act, to raise separate Political Fund for is members. The political
Fund can be use for the following expenses.
1. For holding the meeting.
2. For distribution of any document.
3. For holding Political meeting.
4. For registration of electors.
AMALGAMATION OF TRADE UNION (SEC 24 & 25)
Any Registered trade union may amalgamate with any other union provided that at least
50% of the members of each such union record their votes and at least 60% of votes so recorded are in
favour of amalgamation. A notice of amalgamation signed by the secretary and at least seven members of
each amalgamating union should be sent to the registrar and the amalgamation shall be in operation after
the registrar registers the notice.
DISSOLUTION OF TRADE UNION
A Registered trade union can be dissolved in accordance with the rule of the union. A
notice of dissolution signed by any seven members and the secretary of the union should be sent to
register within 14 days of the dissolution. On being satisfied The registrar shall register the notice and the
union shall stand dissolved from that date.

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CASE STUDY OF HOTEL OBEROI
1. The employees of the hotel used to get 65 days holiday per year, but the management wanted to
reduce it by 15 days due to some managerial issues.
2. The workers readily and strongly opposed this proposal and approached Maharashtra Samarth
Kamgar Sanghatna to solve this issue.
3. MSKS understood the workers dilemma and went to the management to reach an understanding
via collective bargaining.
COLLECTIVE BARGAINING PROCESS
1. MSKS agreed to convince the workers but in return asked the management to pay 20 days extra salary
in the month of December.
2. The management and workers debated over the issue. The management found that they had the workers
working for 15 extra days and the workers found that they were being paid for 20 days just for 15 days of
extra work.
3. Both the parties reached an agreement. Thus, MSKS was successful in creating a win-win situation via
collective bargaining.
The minimum Wages Act, 1948
The Minimum Wages Act 1948 is an Act of Parliament concerning Indian labour law that
sets the minimum wages that must be paid to skilled and unskilled labours.
The Indian Constitution has defined a 'living wage' that is the level of income for a worker
which will ensure a basic standard of living including good health, dignity, comfort, education and
provide for any contingency. However, to keep in mind an industry's capacity to pay the constitution has
defined a 'fair wage'. Fair wage is that level of wage that not just maintains a level of employment, but
seeks to increase it keeping in perspective the industry’s capacity to pay.
To achieve this in its first session during November 1948, the Central Advisory Council
appointed a Tripartite Committee of Fair Wage. This committee came up with the concept of a minimum
wage, which not only guarantees bare subsistence and preserves efficiency but also provides for
education, medical requirements and some level of comfort.
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 difference in costs of living, regional 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. The highest minimum wage rate as updated in 2012 was Rs. 322/day in Andaman and
Nicobar and the lowest was Rs. 38/day in Tripura. In Mumbai, as of 2017, the minimum wage was Rs.
348/day for a safai karmachari (sewage cleaner and sweeper), but this was rarely paid.
Minimum wages act 1948
History of minimum wages.
1. The initiative by Shri K.G.R.Choudhary in 1920 set up boards for determination of wages.
2. The International Labour Conference adopted convention no.26 and 30 in 1928 relating to wage
fixing machinery in trades or parts of trades.
3. A Minimum Wages Bill was introduced in the Central Legislative Assembly on 11.04.1946 and
came into force with effect from 15.03.1948.
The Minimum wages .
The minimum wages Act 1948, was to secure the welfare of unorganized workers in
certain industries by fixing the minimum rates of wages. The Act contemplates that minimum wages rates
must ensure for him not only his subsistence and that of his family but also preserve his efficiency as a
workman.

227. 227
The Act empowers the appropriate Government for fixation of minimum wages in
employments enumerated in the schedule to the Act. The fixation of minimum wages relates to the
industries where sweated labour is most prevalent or where there is inevitable chance of exploitation. In
prescribing the minimum wages rates, the capacity of the employers need to be considered as the State
assumes that every employer must pay the minimum wages if he employs labour.
Objectives of the act.
1. To provide minimum wages to the workers working in organized sector.
2. To stop exploitation of the workers.
3. To empower the government to take steps for fixing minimum wages and to revising it in a
timely manner.
4. To apply this law on most of the sections in organized sector.
Short title and extent (sec. 1)
1. This Act, the Minimum Wages Act, 1948 extends to the whole of India.
2. This Act may be called the MinimumWages Act, 1948.
Interpretation/Definition (sec.2)
(a) ‘Adult', ‘Adolescent’ and ‘Child’
Adult- is who has completed his eighteen years of age.
Adolescent – completed his fifteen years but not eighteen years of age.
Child –who has not completed his fifteen years of age
(b) Appropriate government India has federal form of Government at the centre and state level . The
minimum wages act provides separate areas of jurisdiction for both centre and state government.
(e) Employer means any person who employs one or more employees in any schedule of employment.
(h) Wages means all remuneration capable of being expressed in terms of money.
(i) Employee means any person employed for hire or reward and includes an out –worker.
FIXATION AND REVISION OF MINIMUM WAGES
fixing of minimum rates of wages (sec.3)
1. The minimum rates of wages will be reviewed/ revised, for every five years, by the appropriate
govt.
2. Appropriate govt. can add any employment, to the schedule(part-I or part – II), wherein one
thousand or more employees are found working
3. Different minimum rates of wages may be fixed for different scheduled employments/ different
classes of work /different localities
Minimum rates of wages (sec.4)
1. Basic + Special Allowance (Which varies with the cost of living index).
2. Basic + Cash value of concessional supply of materials like food, clothes, etc.
3. An all inclusive rate which includes Basic + Cost of living Allowance + Cash value of concessional
supply of materials.
Procedure for fixation and revision of minimum rates of wages (sec.5)
Publish its proposals in the official gazette asking comments from the affected parties.
Constitute committees/sub committees for the purpose.
The committees/sub-committees and advisory boards constituted by the Government consist of equal
number of members of:
1. Employers
2. Employees, and
3. Independent persons
Fixation of minimum wages
1. Recommendation of Advisory Board for different class [unskilled, skilled, Clerk, Supervisor]
2. Publish recommendations in National Publications [for public comments/representations from
Trade Unions etc.]
3. Hearing of the Representatives

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4. Notification of Minimum wages
Advisory board (Sec.7)
Appointed by appropriate government. .
To co-ordinate the work of committees and sub committees appointed under Section 5.
Central advisory board (sec.8) .
To advise the Central and State Governments in fixation and revision of minimum rates of wages. .
To co-ordinate the work of the Advisory Boards. .
Composition of Committees, etc. (Sec. 9)
Each of the committee, sub-committee and the Advisory Board shall consist of:
A. persons to be nominated by the appropriate Government.
B. representing the employers and employees in the scheduled employments who shall be equal in
number and
C. 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.
PAYMENT OF MINIMUM WAGES
Wages in kind (sec. 11)
1. Minimum wages shall be paid in cash.
2. The appropriate govt. may authorize, where there has been a custom of payment in this manner,
payment of minimum wages either wholly or partly in kind.
3. The appropriate govt. may authorize supply of essential commodities at concessional rates.
Payment of minimum rate of wages (sec. 12)
1. The Minimum Wages has to be paid without any deductions other than Statutory Deductions.
2. Payment of wages less than minimum wages on the ground of less performance or output is
illegal.
Fixing hours of work (sec. 13)
For an Adult Worker working in Factories:
Number of Working Hours should not exceed 48 Hours in a week with a weekly Holiday.
The Daily Hours should not exceed more than 9 Hours with 1 Hour Rest Interval.
Provision of Compensatory Holiday/Overtime Wages if working on holiday.
Overtime wages (sec. 14)
If the person has worked for more than 48 hours in a week then, the excess hours worked will be
treated as Overtime. Overtime wage rate will be twice of the normal wage rate .
Wages for a person who has worked less than normal working hours (sec. 15)
Employer could not provide the activities of the job then, the employee is entitled to receive full
salary. Employee has not worked due to his unwillingness then, the employee is not entitled to receive
full salary.
Records to be maintained (sec. 18)
The Registers should contain the following particulars-
(i) particulars of employed persons
(ii) the work performed by them
(iii) the wages paid to them
(iv) the receipts given by them
Claims (sec. 20)
A Labour Commissioner or any other appointed authority is authorized to hear claims regarding
non-payment of minimum wages
Any aggrieved person may apply to the authority for settling his claims within 6 months
Penalties (sec. 22)
Offence Punishment
Payment of less than Minimum Wages to employee Imprisonment which may extend up to 6 Months or
Fine which may extend up to Rs 500/- or Both

229. 229
Contracting out (Sec. 25)
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 so far as it purports to reduce the
minimum rate of wages fixed under this Act.
Power of State Government to add schedule (sec.27)
The State Government has to notify in the Official Gazette not less than three months of its
intention to do so.
Power of Central Government to give directions (sec.28)
The Central Government may give directions to a State Government as to the carrying into execution of
this Act in the State.
Workmen’s Compensation Act, 1923
What is the Workmen's Compensation Act?
The Workmen's Compensation Act 1906 was an Act of the Parliament of the United
Kingdom which deals with the right of working people for compensation for personal injury. The Act
expanded the scheme created by the Workmen's Compensation Act 1897. ... the British act of 6 Edw.
VII.
The workmen’s compensation act 1923
Objectives
The Workmens Compensation Act, 1923 is one of the important social security legislations. It
aims at providing financial protection to workmen and their dependants in case of accidental injury by
means of payment of compensation by the employers.
Definitions(Section 2)
1. COMMISSIONER
2. DEPENDANT
3. EMPLOYER
4. DISABLEMENT
5. WAGES
6. WORKMAN
Commissioner
Sec.2 (1)(b)
A Commissioner means a Commissioner for Workmen’s Compensation appointed under section 20
Dependent
1. Means any of the following relatives of a deceased workman, namely
a. a widow, a minor legitimate or adopted son, and unmarried legitimate or adopted
daughter, or a widowed mother; and
b. if wholly dependent on the earnings of the workman at the time of his death, a
son or a daughter who has attained the age of 18 years and who is infirm;
c. if wholly or in part dependent on the earnings of the workman at the time of his
death,
(a) a widower,
(b) a parent other than a widowed mother,
(c) a minor illegitimate son, an unmarried illegitimate daughter or a daughter
legitimate or illegitimate or adopted if married and a minor or if widowed
&minor,
(d) a minor brother or an unmarried sister or a widowed sister if a minor,
(e) a widowed daughter-in-law,
(f) a minor child of a pre-deceased son,
(g) a minor child of a pre- deceased daughter where no parent of the child is
alive,

230. 230
(h) a paternal grandparent if no parent of the workman is alive.
Employer (sec 2(1)e)
Anybody of persons whether incorporated or not .Any managing agent of an employer; and
The legal representative of a decease employer
Disablement
Disablement means any loss of capacity to work or move May result in loss or reduction of
his earning capacity
2. Disablement may be-
3. Total {sec.2.1(g)
4. Partial {sec 2.1(l)
5. Temporary
6. permanent
Disablement, is said to be total when if Incapacitates a worker for all work he was capable of doing
at the time of the accident resulting in such disablement. "Total disablement" is considered to be
permanent if a workman, as a result of an accident, suffers from the injury specified in Part I of Schedule
I or suffers from such combination of injuries specified in Part l of Schedule I as would be the loss of
earning capacity when totaled to one hundred per cent . Disablement is said to be permanent partial when
it reduces for all times, the earning capacity of a workman in every employment which he was capable of
undertaking at the time of the accident. Every injury specified in Part II of Schedule I is deemed to result
in permanent partial disablement. Where the disablement is of a temporary nature and reduces the earning
capacity of a workman in the employment in which he was engaged at the time of the accident it is
"temporary partial disablement.
WAGES(Sec.2.1(m))
“wages” includes any privilege or benefit which is capable of being estimated in money, other than
travelling concession or a contribution paid by the employer to the workman towards any pension or
provident fund or a sum paid to a workman to cover any special expenses entailed to him by the nature of
his employment
WORKMAN(Sec.2.1)
Any person who is:
(a) a railway servant as defined in clause (34) of section 2 of The Railways Act 1989not permanently
employed in administrative, district or sub-divisional office of a railway and employed in any such
capacity as is specified in schedule II or,
(b) a master, seaman, or other member of the ship or crew
It does not include a person whose employment is of a casual nature
ENTITLEMENT
Every employee (including those employed through a contractor but excluding casual
employees), who is engaged for the purposes of employers business and who suffers an injury in any
accident arising out of and in the course of his employment, shall be entitled for compensation under the
Act. Workers employed in any capacity specified in Schedule II of the Act which includes Factories,
Mines, Plantations, Mechanically Propelled Vehicles, Construction Work and certain other Hazardous
Occupations and specified categories of Railway Servants. The Act extends to the whole of India except
the States/Union Territories of Arunachal Pradesh, Mizoram, Nagaland, Sikkim and Daman & Diu and
Lakshadweep. The coverage of this Act is also to cooks employed in hotels and restaurants The Act does
not apply to members of the Armed Forces of the Union & workmen who are covered by the ESI Act
EMPLOYER’S LIABILITY
to compensate any employee: Who has suffered an accident arising out of and in the course of his
employment, resulting into:
(i) death,
(ii) permanent total disablement,
(iii) permanent partial disablement,
(iv) temporary disablement whether total or partial, or

231. 231
who has contracted an occupational disease.
HOWEVER THE EMPLOYER SHALL NOT BE LIABLE -In respect of any injury which does not
result in the total or partial disablement of the workmen for a period exceeding three days; In respect of
any injury not resulting in death, caused by an accident which is directly attributable to- the workmen
having been at the time thereof under the influence of drugs, or 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 the willful removal or disregard by the workmen of any safeguard or other device which he
knew to have been provided for the purpose of securing the safety of workmen. The burden of proving
intentional disobedience on the part of the employee shall lie upon the employer. when the employee has
contacted a disease which is not directly attributable to a specific injury caused by the accident or to the
occupation; or When the employee has filed a suit for damages against the employer or any other person,
in a Civil Court.
Condition for receiving compensation for personal injury
The three tests for determining whether an accident arose out of employment are : At the time
of injury workman must have been engaged in the business of the employer and must not be doing
something for his personal benefit; That accident occurred at the place where he was performing his
duties; and Injury must have resulted from some risk incidental to the duties of the service, or inherent in
the nature or condition of employment.
The general principles
There must be a causal connection between the injury and the accident and the work done in
the course of employment; The onus is upon the applicant to show that it was the work and the resulting
strain which contributed to or aggravated the injury; It is not necessary that the workman must be actually
working at the time of his death or that death must occur while he was working or had just ceased to
work; and Where the evidence is balanced, if the evidence shows a greater probability which satisfies a
reasonable man that the work contributed to the causing of the personal injury it would be enough for the
workman to be entitled. But where the accident involved a risk common to all humanity and did not
involve any peculiar or exceptional danger resulting from the nature of the employment or where the
accident was the result of an added peril to which the workman by his own conduct exposed himself,
which peril was not involved in the normal performance of the duties of his employment, then the
employer will not be liable.
Doctrine of Notional Extension
The expression in the course of his employment, connotes not only actual work but also
any other engagement natural and necessary thereto, reasonably extended both as regards work-hours and
work- place. It refers to the time during which the employment continues. . However, this is subject to the
theory of notional extension of the employers premises so as to include an area which the workman
passes and re-passes in going to and in leaving the actual place of work. There may be some reasonable
extension in both time and place and a workman may be regarded as in the course of his employment
even though he had not reached or had left his employers premises. This is also called as the Doctrine of
Notional Extension. The doctrine of notional extension could not be placed in a strait jacket; it is merely a
matter of sound common sense as to when and where and to what extent this doctrine could be applied.
Payment of compensation to contract Labour
The principal employer is liable to pay compensation to contract labour in the same manner
as his departmental labour. He is entitled to be indemnified by the contractor. The principal employer
shall not however be liable to pay any interest and penalty leviable under the Act
Occupational Diseases
Workers employed in certain types of occupations are exposed to the risk of contracting
certain diseases which are peculiar and inherent to those occupations. A worker contracting an
occupational disease is deemed to have suffered an accident out of and in the course of employment and
the employer is liable to pay compensation for the same. Occupational diseases have been categorized in
Parts A, B and C of Schedule III. The employer is liable to pay compensation: When a workman contracts
any disease specified in Part B, while in service for a continuous period of 6 months under one employer.

232. 232
(Period of service under any other employer in the same kind of employment shall not be included),
When a workman contracts any disease specified in Part C, while he has been in continuous service for a
specified period, whether under one or more employers. (Proportionate compensation is payable by all the
employers, if the workman had been in service under more than one employer). If an employee has after
the cessation of that service contracted any disease specified in Part B or Part C, as an occupational
disease peculiar to the employment and that such disease arose out of the employment, the contracting of
the disease shall be deemed to be an injury by accident within the meaning of the Act.
Accident Report
Where the accident results in death or serious bodily injury, the employer should send a report
to the Commissioner, within 7 days of the accident, in the prescribed form giving the circumstances
attending the death or serious bodily injury
Notice of Accident
A notice of accident should be sent to the Commissioner, by the concerned employee as soon
as practicable after the happening thereof. The notice should contain such particulars as the name and
address of the person injured, the date and cause of accident, etc. A Copy of the notice should also be sent
to the establishment wherein he was employed. The notice of accident may be served either personally or
by registered post or by means of an entry in the notice-book maintained by the employer.
Medical Examination
The employer may get the concerned workman examined by a qualified medical
practitioner, within 3 days from receiving the notice of accident. The employee must present himself for
such examination otherwise he shall loose his right to the compensation. Failure of employer to have the
workman medically examined does not debar him from challenging the medical certificate produced by
the workman.
Statement of fatal accidents
Where a commissioner receives information from any source that a workman has died as a
result of an accident arising out of and in the course of his employment, he may require the employer, by
serving upon him a registered notice, to submit within 30 days of its service, a statement in the prescribed
form ;
(a) Giving the circumstances attending the death of the workman, and
(b) Indicating whether he is or, is not, liable to pay accident compensation.
If the employer feels that he is liable to pay compensation, he shall make the deposit within 30 days of the
service of the notice. If the employer disclaims his liability, he should indicate the grounds for such
disclaimer.
Amount of compensation (Sec.4)
The amount of compensation payable to a workman depends on
-the nature of injury caused by accident
-the monthly wages of the workman concerned and the relevant factor
-the Relevant Factor is specified in schedule IV for working out the lump sum amount of compensation
THERE IS NO DISTINCTION BETWEEN AN ADULT AND A MINOR WORKER WITH RESPECT
TO THE AMOUNT OF COMPENSATION
Compensation for death
In case of death resulting from injury, the amount of compensation shall be equal 50% of the monthly
wages of the deceased workman multiplied by Or an amount of Rs 80,000/-the relevant factor. Whichever
is more.
Example
A workman is employed in a factory on a monthly wage of Rs 3000. While working he met
with an accident and dies on oct 2000. His date of birth is july 18 , 1970. The amount of compensation
payable to his dependent would be
50* monthly wages* Relevant factor of age 30
100
0r 80,000 whichever is higher

233. 233
50* 3000* 207.98 = 3,11,970
100
Since Rs 311970 is more than 80000 the compensation payable to him shall be Rs 311,970
Compensation for permanent total disablement
In case of permanent total disablement resulting from the injury, the amount of
compensation shall be 60% of the monthly wages of the injured workman multiplied by the relevant
factor or Rs 90,000/- thousand whichever is more.
Compensation for permanent partial disablement
Where permanent partial disablement occurs, the amount of compensation payable shall be as
follows: in case of an injury specified in part II of the schedule I, the amount of compensation shall be
such percentage of the compensation which would have been payable for the percentage of loss of earning
capacity caused by that injury. in case of an injury not specified in schedule I, such percentage of the
compensation is payable which is proportionate to the loss of earning capacity (as assessed by a qualified
medical practitioner) permanently caused by the injury.
Compensation for temporary disablement (Total or partial)
If the temporary disablement, whether total or partial results from the injury, the amount of
compensation shall be a half monthly payment of the sum equivalent to 25% of the monthly wages of the
workman to be paid in accordance with the provisions. The half monthly payment shall be payable on the
sixteenth day from the date of disablement In cases where such disablement lasts for a period of 28 days
or more compensation is payable from the date of disablement In other cases After the expiry of a waiting
period of three days from the date of disablement.
Compensation to be paid when due and penalty for default (Section 4A)
As per this section, compensation has to paid as soon as it is In case the employer does not
accept the liability of due paying the compensation, he is bound to make provisional payment to the
extent of the liability he accepts. Such amount has to be deposited with the commissioner or paid to the
workman. If he defaults, the commissioner the payment of the amount with interest at12 % permay
order: ifyear the default to be unjustifiable then the commissioner may order payment of a further sum
not exceeding 50% of the amount due, by way of penalty.
Mode of payment
The employer becomes liable to pay the compensation as soon as the personal injury was
caused to the workman by the accident which arose out of and in the course of the employment. The
amount of compensation should be paid as soon as it falls due. It will be computed on the date of
accident. If the amount is not paid within one month from the date it fell due, the Commissioner may after
giving reasonable opportunity of being heard, direct the employer to pay simple interest @ 12% p.a. or at
such higher rate as may be specified not exceeding the. Maximum lending rate of any scheduled bank.
Besides, if there is no justification for the delay, the Commissioner may after giving reasonable
opportunity of being heard, direct the employer to pay a further sum not exceeding 50% of the
compensation, by way of penalty. The amount of penalty and also interest shall be paid to the workman or
his dependent as the case may be The half-monthly installments of compensation (payable in case of
temporary disablement) should be paid within the time specified. The half-monthly installments can be
converted into a lump sum payment, by an agreement between the employer and the employee or by
applying to the Commissioner.
Compensation to be deposited with commissioner
The amount of compensation is not payable to the workman directly. It is generally
deposited along with the prescribed statement, with the Commissioner who will then pay it to the
workman. Any payment made to the workman or his dependents, directly, in the following cases will not
be deemed to be a payment of compensation :
(i) in case of death of the employee;
(ii) in case of sump sum compensation payable to a woman or a minor or a person of unsound mind or
whose entitlement to the compensation is in dispute or a

234. 234
Besides, compensation of Rs. 10 or person under a legal disability. more may be deposited with the
Commissioner on behalf of the person
The receipt of deposit with the Commissioner shall beentitled thereto. a sufficient proof of discharge of
the employers liability.
Amount permissible to be paid directly to the workman/dependant
Following amounts may be paid directly to the workman or his dependents: In case of death
of the workman, any advance on account of compensation up to an amount equal to three months wages
of such workman] may be paid to any dependent. In case of lump sum compensation payable to an adult
male worker not suffering from any legal disability. In case of half-monthly payments payable to any
workman Employer is exonerated from his liability if he deposits the compensation amount with the
commissioner within the stipulated time. The commissioner shall call all dependents of the deceased and
determine the method for distribution of compensation among them. If no dependents are found then
amount shall be refunded to the employer. On request by the employer the commissioner shall furnish the
details of disbursement.
Funeral Expenses
In case of death of a workman funeral expenses amount of 2500/- shall be payable to the
dependent of the deceased workman or to anyone who incurs the expenses of the funeral
Administrative Authority
Jurisdiction of Commissioner - Any matter under this Act, to be done by or before a Commissioner,
shall be done by or before the Commissioner for the area in which
(a) The accident resulting in the injury, took place or
(b) The workman, or his dependent, claiming the compensation ordinarily resides, or
(c) the employer has his registered office.
Where a Commissioner is satisfied that any proceedings can be more conveniently disposed of by any
other Commissioner, he may transfer the matter to such other Commissioner.
Monthly wage (Sec.4 (A))
One-twelfth of the total wages fallen due for payment by the employer during the last twelve
months of that period Where the whole of the continuous period immediately preceding the accident was
less than one month the average monthly amount earned by a workman employed in the same work by the
same employer or if no such workman is employed, by a workman employed in a similar work in the
same locality In any other case, thirty times the total wages earned in the last continuous period of service
divided by the no. of days comprising such period Where the monthly wages of a workman exceeds
4000/-, his monthly wages will be deemed to be 4000/- only
Contracting out
Any contract or agreement which makes the workman give up or reduce his right to
compensation from the employer is null and void insofar as it aims at reducing or removing the liability
of the employer to pay compensation under the Act.
Registration of agreements
Where the amount payable as compensation has been settled by agreement a memorandum
thereof shall be sent by the employer to the Commissioner, who shall, on being satisfied about its
genuineness, record the memorandum in a registered manner. However where it appears to the
Commissioner that the agreement ought not to be registered by reason of the inadequacy of the sum or
amount,, or by reason that the agreement has been obtained by fraud or undue influence or other improper
means he may refuse to record the agreement and may make such order including an order as to any sum
already paid under the agreement as he thinks just in the circumstances. An agreement for payment of
compensation which has been registered shall be enforceable under this act notwithstanding anything
contained in the Indian Contract Act, or any other law for the time being in force.

235. 235
Failure to register agreement
When a memorandum of any agreement is not sent to the Commissioner for registration, the
employer shall be liable to pay the full amount of compensation, which he is liable to pay under the
provisions of this Act.
Filing of claims
No claim for compensation shall be entertained by the Commissioner unless the notice of
accident has been given by the workman in the prescribed manner, except in the following
circumstances: in case of death of workman resulting from an accident which occurred on the premises
of the employer, or at any place where the workman at the time of the accident was working died on such
premises or such place or in the vicinity of such premises or place; in case the employer has knowledge of
the accident from any other source, at or about the time of its occurrence; in case the failure to give notice
or prefer the claim, was due to sufficient cause.
Limitation
Workman, to the Commissioner, may file the claim for accident compensation in the
prescribed form, within 2 years from the occurrence of the accident or from the date of death. The claim
must be preceded by
(i) a notice of accident, and
(ii) the claimant-employee must present himself for medical examination if so required by the employer.
Duties of employers
Pay compensation for an accident suffered by an employee, in accordance with the Act.
To submit a statement to the Commissioner (within 30 days of receiving the notice) in the prescribed
form, giving the circumstances attending the death of a workman as result of an accident and indicating
whether he is liable to deposit any compensation for the same. To submit accident report to the
Commissioner in the prescribed form within 7 days of the accident, which results in death of a workman
or a serious bodily injury to a workman? To maintain a notice book in the prescribed from at a place
where it is readily accessible to the workman. To submit an annual return of accidents specifying the
number of injuries for which compensation has been paid during the year, the amount of such
compensation and other prescribed particulars.
Duties of Employees
To send a notice of the accident in the prescribed form, to the Commissioner and the employer, within
such time as soon as it is practicable for him. The notice is precondition for the admission of the claim To
present himself for medicalfor compensation. examination, if required by the employer
Amendments and changes
The Act is now known as „Employee‟s Compensation Act Throughout the Act where „workman‟ or
„workmen‟ occur, the words ‟employee‟ and „employees‟ shall be substituted Clerical employees are
included in the definition of „employee‟ Compensation for death raised from 80,000 to 12oooo
Compensation for permanent total disablement raised from 90,000 to 14oooo New subsection is added for
medical reimbursement The employee shall be reimbursed the actual medical expenditure incurred by
him for treatment of injuries caused during the course of employment” Funeral expenses amount is
increased from Rs.2500 to “not less than Rs.5000” No changes in definition of “wages It reserves the
right for Central Government to enhance the amount of compensation
Explanation II: Where the monthly wages of a workman exceed four thousand rupees, his monthly wages
for the purposes of clause
(a) and clause
(b) shall be deemed to be four thousand rupees only:” Now the above explanation has been revised as:
Where the monthly wages of a workman exceed Eight thousand rupees, his monthly wages for the
purposes of clause
(a) and clause
(b) shall be deemed to be Eight thousand rupees only;”

236. 236
Limitation on maximum compensation
The maximum compensation payable is upon the following scale (as per W.C. Amendment Act 2000)
1. Fatal Injury - Rs.4,57,080
2. Permanent Total Disablement - Rs.5,48,496
3. Permanent Partial Disablement - According to incapacity caused
4. Temporary Disablement - Rs. 2000 per month upto a period of 5 years
Legal disability
Definition
Lack of legal capacity or qualification, such as that Definition of a minor or a mentally impaired
person, to enter into a binding contract
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.
The amount of compensation to be paid depends on the nature of the injury and the average
monthly wages and age of workmen.The 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.
The main provisions of the Act are:-
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.

237. 237
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 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.