Essential business law for entrepreneurs


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Essential business law for entrepreneurs

  1. 1. ESSENTIAL BUSINESS LAW FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763
  2. 2. My words.... Ours is a great country with immense entrepreneurial potential. However, our legal system and taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. I wish that more people should become entrepreneurs, rather than becoming an expert in avoiding taxation. Let us wish that some likeminded person is able to reach policy making level and is able to change these. I have tried to simplify Indian legal system and taxation system for Indian entrepreneurs – but it is so complicated that even if you simplify it, it will remain complicated. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation, but our systems and processes force him to adopt unfair means ...
  3. 3. How does Indian Partnership Act 1932 defines partnership? According to Section 4 “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”.
  4. 4. A and B buy 100 bales of cotton agreeing to divide these between them. Are They partners No it doesnt fulfill essential conditions of partnership
  5. 5. A and B buy 100 bales of cotton, which they agree to sell for their joint account, each party sharing profits and bearing losses equally. Are they partners ? Yes they are partners
  6. 6. “ A” a trader, owed money to XY&Z. He agreed to pay XY&Z out of the profits of his business (run under the supervision of X, Y and Z). Are they partners ? No XYZ are not partners of A
  7. 7. Is mutual agency necessary for partnership ? Yes Mutual agency is the foundation of partner’s liability. Each partner is both an agent and principal for himself and others;
  8. 8. Is it necessary to have an agreement between partners ? Yes there must be an agreement between the partners of a partnership firm.
  9. 9. Can there be partnership just for a particular event ? Yes “ A person may become a partner with another person in a particular adventure or undertaking”. - Sec. 8 of India partnership act
  10. 10. How can partnership at will be dissolved ? “ Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. (sec. 7 )
  11. 11. Who is a sub-partner ? Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub-partner. Such a sub-partner has no rights or duties towards the firm and does not carry any liability for the debts of the firm. Also he cannot bind the firm or other partners by his acts.
  12. 12. What is partnership by holding out ? If the behaviour of a person creates misunderstanding that he is a partner in a firm (when actually he is not), such a person is estopped from later on denying the liabilities for the acts of the firm. Such person is called partner by estoppel and is liable to all third parties. It is also called partnership by estoppel
  13. 13. What are the cases where partnership by holding out does not apply ? 1. for cases relating to tort 2. for the case where the person holding out is a minor 3. partnership by holding out does not extend to estate of a deceased person
  14. 14. What are the rights of a minor in a partnership ? He is entitled to his agreed share and can inspect books of account of the firm [Section 30(2)]. He can bring a suit for account and his share when he intends to sever his connections with the firm, but not otherwise. [Section 30(4)] when he becomes a major (18 years of age), he will become a normal partner after 6 months (unless he gives a notice and elects out of the partnership).
  15. 15. What are the rights of a partner ? 1. he can take part in business 2 right of free access to all records, books and accounts of the business and also to examine and copy them. [Section 12(d)] 3 right of free access to all records, books and accounts of the business and also to examine and copy them. [Section 12(d)]
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  18. 19. Which of these is/are contracts ? When you invite B to your home for dinner and B accepts your invitation. = NO When you board a public bus. = yes When you call a taxi on the telephone = yes. When you put a one rupee coin in the slot of a weighing machine. = no When you eat a meal at a restaurant. = yes
  19. 20. Situation of a minor A, a minor, enters, into the following contracts. Is he and the other party bound by any of them? A contracts to marry B, aged 19 years. A boards a bus. = yes A lends Rs. 500 to B, aged 25 years. = yes A becomes an apprentice in an industrial concern. = yes A buys a TV set on credit.= no
  20. 21. SOLUTON Minor can make other person binding on his interest – but no person can make minor responsible for something. In the case the minor picks up a bus or gives loan, the minor can make other person to fulfill the commitment. But minor cannot be forced.
  21. 22. Distinguish between innocent misrepresentation and fraud and mistake. In case of mistake the contract is Void. In the case of misrepresentation, and fraud, the contract is voidable. Misrepresentation is covered in sec. 18, fraud in sec. 17, mistake in sec. 21 and 22. Damages can be claimed in fraud. Fraud has following components : false representation of facts so that the other person acts upon it.
  22. 23. A procured B a second wife on B’s promise to pay him Rs. 500. can the contract be enforced No – as it is not a legal contract
  23. 24. Enumerate the different modes of discharge of a contract. Lapse of time refusal to perform by both the parties by operation of law (when it becomes impossible) ' performance breach of contract mutual consent
  24. 25. Liquidated and unliquidated damages; -- - differentiate these When the amount of damages can be ascertained in advance, the parties may fix this amount in advance and therefore it is called liquidated damage. But when the amount of damage cannot be ascertained in advance, it is called unliquidated damage. Liquidated damanges are decided in advance.
  25. 26. Indemnity and Guarantee; Differentiate them There are two parties in idemnity, but 3 parties in guarantee. In indemnity, there is a promise to indemnify in case of loss by a person. Let us X and Y make a contract, X makes a mistake and he indemnifies to Y as per contract. This is indemnity. But instead of X, if Z indemnifies, it is guarantee by third party.
  26. 27. How will you enforce these contracts : B has promised to pay A Rs. 1,000 for his horse which had died before the contract - it is a void contract – as it is a mistake relating to fact of contract. (sec. 21,22) B, a minor, promised to pay A Rs. 10,000 for his car. = (contract with minor is void as it cannot be enforced against minor).
  27. 28. Reciprocal promises. - are they contracts No – they are not contracts Suppose Goti promises to give Pankaj rs 500 for his bike and Pankaj also promises to sell his bike to Goti for Rs. 500, still it is not a contract, it is only reciprocal promise.
  28. 29. Surety enjoys a right of subrogation. Do you agree Surety has the right to collect damages from the party in default. Suborgation means the surety gets the right to claims, once it has performed its role. For example, A and B has made a contract and C is surety for B. Due to a mistake by D, B fails to perform his part. C pays the damages (being surety). Now C can sue D for damages and collect the money to recover the damages paid. If C receives excess amount, it will go to B.
  29. 30. Failure to sue the principal debtor within time, discharges the surety. - do you agree Yes – law of limitation applies here. Suppose A promised to pay Rs 100 to B and C is surety for A. B didnt ask A to pay and now the amount is time barred. Thus C is free from his liability.
  30. 31. Money deposited in fixed deposit with a bank is bailment. - do you agree No – bailment is used with regards to goods or things which are delivered by one person to another for a specific purpose. It is defined as : Bailment is a voluntary delivery of goods for a temporary purpose on the understanding that they are to be returned in specie in the same or altered form. The ownership of the goods remains with the bailor,
  31. 32. What is gratuitous bailment? It is not for charge. Suppose I put my Car with Ravi for 2 days – and Ravi provides this facility to me not for charge – it is gratuitous bailment. Similarly : where you lend your book to a friend of yours for a week. (not for charge).
  32. 33. What is meant by ratification? It means approval. When a party approves the act of another party, it is ratification Ratification is not possible for ultra vires acts. Ratification is required when a person does something, which he / she was not allowed to do. For example A sells B's bike to C. now B has to ratify it then only this contract can be enforceable.
  33. 34. Distinguish between particular lien and general lien? General lien is towards all the property, but particular lien is towards only a specific property. Suppose Sachin buys a charter plane on credit with specific lien, then the creditor can only sell the plane if Sachin doesnt pay his liability. However, if it is general lien, the creditor can recover from any property of sachin.
  34. 35. A on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code. A afterwards sues B for breach of contract at Calcutta. Has A employed any coercion? Yes
  35. 36. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. Is the agreement valid? The agreement is VOID – as it is a contract based on mistake of fact. (sec. 21,22)
  36. 37. X having advanced money to his son Y, during the minority, upon Y’s becoming major obtains by misuse of parental influence a bond from Y for a greater amount than the sum due in respect of the advances. Has X employed undue influence? Yes
  37. 38. A sells by auction, to B a horse which A knows to be unsound. A says nothing to B about the horses unsoundness. Is A guilty of fraud. No – it is the duty of B to inquire about the horse..
  38. 39. A and B are traders and enter into some contract. A has private information of a change in price which would effect B’s willingness to proceed with the contract. Is A bound to inform B. No
  39. 40. A intending to deceive B falsely represents that five hundred paunds of indigo are made annually at A’s factory and thereby induces B to buy the factory. What is the remedy available to B. It is a contract based on fraud. So B can sue A for damages and rescind the contract. (sec. 17)
  40. 41. A’s son has forged B’s name to a promissory note. B, under threat of prosecuting A’s son obtains a bond from A for the amount of the forged note. Can B sue on this bond. No – as it is also based on coersion (Sec. 15) A's son has committed a crime. Reply to a crime should not be a crime.
  41. 42. “ Mere silence may amount to fraud”. COMMENT This is applicable in the case of contract of uberrmae fedei . Uberrmae Fedei means contract of utmost faith. Following are contracts of uberrmae fedei : 1. prospectus by company, 2. sale of land 3. family arrangement 4. insurance contracts. Thus in these cases mere silence may amount to fraud. In other cases, mere silence is not a fraud.
  42. 43. “ The legal effect of a contract is confined to the contracting parties”. Comment The legal effect of contract is binding on both the parties to the contract, but sometimes, it may be related to third parties also. Quasi contracts are such examples where a party which has not signed the contract is also bound by the contract. Quasi contract is an obligation created by law (not by agreement). For example finder of lost goods has the responsibility to return the goods.
  43. 44. “ The essence of every agreement is that there ought be free consent on both the sides”. As per section 10 free consent is essential for a contract. Further, consent based on coercion, misrepresentation (sec. 18) , fraud (sec. 17) ,are not allowed. All these contracs will be voidable. Contracts based on mistakes (sec. 20,21) will be void
  44. 45. X entrusts Y with a negotiable instrument endorsed in blank. Y makes over the instrument to C in violation of the private orders of X. Is it a valid act? Yes – it is a negotiable instrument, and a holder in due course gets good right to the instrument and also the rifht to endorse it to others.
  45. 46. A enters into a contract with B to sell him 100 bales of cotton and afterwards discovers that B was acting as agent for C. Whom can A sue? A can sue either of B or C.
  46. 47. A employs B to beat C and agrees to indemnify him against all consequences. B beats C and had to pay damages to C. Is A bound to indemnify B? No – it is an illegal contract and has no validity
  47. 48. X directs Y his agent to buy a certain house for him. Y tells X that it cannot be bought but buys the house himself later. Can X on discovering this compel Y to sell it to him? Yes – as Y was working as the agent of X and has misused his position.
  48. 49. A has authority from his principal B to sell goods on credit. A sells goods on credit to C without making the proper and usual enquiries as to C’s solvency. C at the time of such sale was insolvent. Should A compensate B? Yes as per sec. 212, agent is bound to act diligently
  49. 50. A authorises B to let A’s house. Afterwards A lets it himself. Is the authority of B revoked? Yes – here the principal has revoked the authority of B (sec. 207)
  50. 51. X gives authority to Y to sell X’s land, to pay himself out of the proceeds the debts due to him. Can X revoke this authority? No – as X has liability to Y and the authority is given in relation to that liability : Sec. 202 (it is not simple agency, but it is agency with interest)
  51. 52. A holds a lease from B terminable on 3 months notice. C an unauthorised person gives notice of termination to A. Can the notice be ratified by B? Here lease is given by B so notice should also be given by B. Therefore the answer is NO (sec. 200)
  52. 53. A without authority buys goods for B. Afterwards B sell them to C on his own account. Does he ratify the act of A? Yes now B has ratified the act of A. Sec. 197 .
  53. 54. A has an agent at Calcutta namely B to whom he sends certain goods with directions to send them immediately to Lucknow. But B finds that the goods may not stand the journey to Lucknow and sells them at Calcutta itself. Is he justified in doing so? Yes in order to protect the interest of principal, the agent can take such measures. Sec. 189 : an agent may do all things which may be necessary to protect the principal
  54. 55. A delivers his two wrist watches for repair to B. B keeps both the watches duly repaired. A is prepared to take back one of the watches on payment of the charge for repairing it but B refuses ans wants to deliver both the watches. Is B justified?
  55. 56. Solution No B is not justified B has lien on the other watch, and can keep it till he receives the payment sec. : 170 : particularlien
  56. 57. A leaves a cow in the custody of B to be taken care of. The cow begets a calf. Is B bound to redeliver the calf also. Yes – B has to deliver calf also. Sec. : 163 : it is a case of bailment
  57. 58. A lends his car to B on the express understanding that only B should drive it. But B’s son drives the car. In spite of all his diligence the car meets with an accident and is severely damaged? Is B liable for damage? Yes
  58. 59. A lends a cycle which he knows is defective to B. B is injured while driving. Is A liable for injuries sustained? Yes A should have told B about it earlier Sec. 150 :
  59. 60. A, B and C as sureties for D enter into several bonds each in a different penalty namely, A in the penalty of Rs. 10,000, B in that of Rs. 20,000 and C in that of Rs. 40,000 conditioned for D’s duty accounting to E. D makes a default to the extent of Rs. 30,000. How much A, B and C are liable to pay?
  60. 61. Solution Rs. 10000 each as per sec. 147
  61. 62. X guarantees to Z payment for iron to be supplied by him to Y to the extent of 20,000 tonnes. Y and Z have privately agreed that Y should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of old debt. This agreement is concealed from X. Is X liable. No - the surety is not responsible if there is a private secret agreement (sec. 143)
  62. 63. A owes money to B which has been guaranteed by C. The debt becomes due, but B does not sue A for a year thereafter. Is C discharged from liability? No : the surety is not discharged unless there is some agreement to the contrary Sec. 137
  63. 64. A agrees to appoint B as salesman in his office at a monthly salary of Rs. 300 upon C becoming a surety for B’s duty accounting of the monies received by him. Afterwards without C’s knowledge or consent, A agreed to pay B commission on the collections instead of monthly salary. Is C liable for any subsequent misconduct of B? No (sec. 133, the terms cant be changed without the consent of surety)
  64. 65. A guarantees to B to the extent of Rs. 1,000 that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives a notice of revocation. Is A liable if C dishonours the bill at maturity?
  65. 66. Solution Yes – sec. 130 revocation was done after the deal. `this revocation will apply on future transactions only
  66. 67. A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. Is A liable for the interest on the amount of the bill due.
  67. 68. Solution Sec. 128 : the liability of surety is equal to that of principal debtor, so the surety is liable for interest also
  68. 69. What is the difference between a bailment and pledge? Bailment (sec. 148), here goods / any assets are transferred for some purpose. It may be against payment / without payment. Pledge ( Sec. 172 ) : here goods / articles are given by the debtor as security for performance of loan taken by the debtor. This is kept by the creditor / lender till the repayment of loan. It is also called pawn.
  69. 70. What are the various bodies in contracts of pledge, bills and bailment In pledge the parties are : Pawner : the person who gives the article. Pawnee – the person who keeps the security in bailment : bailor and bailee just like pawner and pawnee. In bills we have : 1. drawer, drawee, and holder. Drawer prepares bill and gives to holder to collect payment on due date from drawee.
  70. 71. Pawan delivered some jewellery to Amir for his approval. Amir pledged the same with Pankaj, Pawan wants to get back the jewellary from Pankaj. Would he succeed? The jewellery was given by Amir to Pankaj, so only Amir can collect it back from Pankaj. Since the jewellery was given by Amir to Pankaj, it is assumed that Amir has accepted the jewellery and thus there is a sale between Pawan and Amir, thus Pawan should collect payment from Amir. So answer : NO
  71. 72. A contracts to sell and deliver 25,000 tonnes of certain raw material to B on a fixed day. A knows nothing of B’s mode of conducting his business. A breaks his promise and B having no raw material is obliged to close his factory. Is B entitled to recover the loss caused by such closure?
  72. 73. Solution .. No – the buyer should have clarified the terms and made a provision for such compensation (sec. 73)
  73. 74. A contracts to buy B’s scooter for Rs. 7,800, but breaks his promise. B could obtain another scooter immediately after the breach for Rs. 8,500. Can B recover the excess of Rs. 700.
  74. 75. Solution Yes sec. 72
  75. 76. X and Y jointly owe Rs. 1,000 to Z. X of his own pays the whole amount to Z and Y not knowing this also pays the amount to Z. Can Y subsequently recover the amount from Z.
  76. 77. Solution Yes Sec. 72
  77. 78. X, a trader leaves goods at Y’s house by mistake. Y treats the goods as his own. What is remedy available to X. X can recover damages or goods (if they are intact) sec. 70
  78. 79. X owes money to Y under a contract. It is agreed between X, Y and Z that Y will accept Z as his debtor instead of X. Is the old debt extinguished? Yes : as per sec. 62
  79. 80. P contracts with Q to execute some construction work for a fixed price, Q supplying the scaffolding and timber necessary for the work. Q fails to supply the necessary scaffolding and timber. Can P refuse to execute the construction work? Can P claim damages for loss arising for Qs non-performance.
  80. 81. Solution Yes sec. 53
  81. 82. X promises to build a stable for Y’s horse and Y promises to pay X on completion of the work. Half-way during construction X demands money from Y. Can Y refuses to pay? Yes – he will pay after complete construction as per contract sec. 52
  82. 83. X undertakes to deliver 100 bags of wheat to Y on an appointed day. Is X bound to fix the place of delivery? Yes Sec. 49
  83. 84. A promises to deliver 50 rice bags at B’s warehouse on 1st January. A brings the goods as promised but after the usual business hours. Has A performed his promise? No Sec. 47
  84. 85. A, B and C jointly promise to pay D a sum of Rs. 1,500. C is compelled to pay the whole amount. A is insolvent but his assets are sufficient to pay one half of his debts. How much C is entitled to recover from A and B’s estates. 250 from A and 625 from B. (sec. 43 )
  85. 86. A, a singer enters into a contract with B, the manager of a theatre, to sing at this theatre two nights in every week during the next two months and is engaged to pay her Rs. 100 for each night’s performance. On the sixth night, A wilfully absents herself from the theatre. Can B put an end the contract. Yes : Sec. 39
  86. 87. A promises to paint a picture for B within a month for a price. A dies shortly thereafter. Can B enforce the contract against the legal representatives of A. No sec. 37
  87. 88. A agrees to pay B a sum of money if B marries C. C married D. What is the consequence? The contract is now void Sec. 36
  88. 89. A makes a contract with B to buy B’s car if A survives C. Can contract be enforced before C dies? No Sec. 32
  89. 90. C contracts to pay A Rs. 10,000 if his car is destroyed. What is the nature of his contract? Contingency contract Sec. 31
  90. 91. A agrees to sell B all the rice in his godown. Is it a valid agreement? Yes there is certainity
  91. 92. A is dealer in different kinds of oil. He agrees to sell B “a hundred tonnes of oil. “Is there any agreement”? No Sec. 29 it is a mistake
  92. 93. A owes to B Rs. 1,000 but the debt is barred by the Limitation Act. A orally promises to pay the debt. Can B recover the money from A. No it requires written consent now
  93. 94. X promises to superintend on behalf of Y a legal manufacturer of indigo and illegal traffic in cosmetic. Y promises to pay to X Rs. 20,000 a year for this. Is the agreement valid? No it is invalid Sec. 24
  94. 95. A’s estate is sold for arrears of revenue under the provisions of an Act of legislature by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser and agrees to convey the estate to A upon receiving from him the price which B has paid. Is the agreement valid.
  95. 96. Solution ... This agreement will defeat the purpose of law. If it is noticed later, it will be invalid.
  96. 97. A promises to obtain for B an employment in the public service and B promises to pay Rs. 1,000 to A. Is this valid contract. No Sec. 23
  97. 98. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. Is the agreement valid? No Sec. 20 (mistake of facts)
  98. 99. distinguish between a condition and a warranty. Condition is essential, if it is broken, the contract of sale is broken. Warranty is collateral to the main purpose of ( second part of a) contract, if it is broken damages can be claimed. Read sec. 10 to 17 of Sale of goods act for detail. Condition is more important and binding than warranty.
  99. 100. DISTINGUISH Sale and Hire Purchase Agreement There is immediate transfer of property in case of sale. In hire purchase, the property transfers at the end of the period (when all the instalments are paid). If you buy a car from a showroom on hire purchase, you will be its true owner only when you payback all the instalments and thus hire purchase doesnt give the buyer complete powers. The hire purchase agreement only gives an option to buy the goods to the buyer, but there is a clear agreement in the case of sale.
  100. 101. Can you sell future goods? Yes – as per sec. 2(6) : these goods must be specific, identifiable and certain. If they are not certain, you cannot sell them. Example : In your factory you make bisxuits. You make a contract to supply 1000 kg of biscuits to a buyer on certain price and the goods will be manufactured in next 1 month.
  101. 102. What is the Doctrine of ‘Nemo dat quod non habet’. It is related to transfer of ownership. It means : no one can pass a better title than he himself has. You cant sell a property, which doesnt belong to you. If you are owner of something then only you can sell it. If you are not owner, how can you sell something?
  102. 103. Discuss the rights of an unpaid seller. The unpaid seller can take possession of the goods, he can stop the goods in transit (which are going to the buyer) or can sell these goods to some other person. (sec.,50,52, 54 of sale of goods act) He has right to lien on the goods He can withhold delivery of goods (if the goods are with him). (sec. 55 of sale of goods act)
  103. 104. WHAT IS THE Doctrine of Caveat Emptor Sec 16 : the buyer should satisfy himself about the goods before buying. Thus buyer should be alert and careful while buying the goods.
  104. 105. A and B are co-owners of a T.V. while the T.V. is in possession of B. A's secretary takes it away and sells it to C, a bonafide purchaser for value. As per sec. 14(a) and rule of Nemo Dat Quod Non-Habet the secretary of A cant sell the TV to C. C will have to return the TV back to A & B. However, C can recover his money from secretary of A.
  105. 106. X by way of undue influence buys a car from Y at a very low price and sells it to Z, an innocent purchaser. Here this is a case of voidable contract between X and Y. However, Z purchased from X without any knowledge of this. As per sec. 27 of Sale of Goods act, the buyer gets a good title, if he buys innocently and after fulfilling regular checkups. Thus Z cant be forced to return car. X can recover his remaining money from Y.
  106. 107. Why it is important to know the time of passing of property? If the goods are damaged after that time, the responsibility is that of buyer, if the goods are destroyed before that time, the responsibility will be that of the seller. The time is important, as if there is some special circumstances, it may lead the contract to a null / void contract.
  107. 108. What are implied conditions and warranties? These conditions are assumed to be there in every sale contract. 1. condition to the title of the goods : it is assumed that the seller has title to the goods. 2. quite possession / freedom from encumbrances (nobody should disturb the enjoyment of the goods). 3. in case of sale by description, the goods must be similar to description, and in case of sale by sample, the goods should be similar to the sample 4. quality / fitness : the goods must be fit for use for the purpose for which they have been bought. 5. the seller has to disclose dangerous nature of goods. 6. as per business practices. ... ..
  108. 109. Define negotiable instrument. Negotiable instrument is one instrument which can be transferred by one person. Thus ownership is transferable in the case of negotiable instrument. It is of two types : 1. bearer 2. order bearer instrument doesnt require any endorsement – transfer is by only delivery. In case of order instrument, the owner has to endorse it in favour of transferee.
  109. 110. contd... Sec. 13(1) : negotiable instrument means – a promissory note – a bill of exchange – a cheque payable to order or bearer promissory note is a promise to pay certain amount to the bearer of the instrument or to order on specified date
  110. 111. What is the difference between a bill and promissory note? Promissory note is a promise to pay, it is prepared by the debtor himself and it is given to creditor. A bill is an order to a party to pay some amount. Thus it is prepared by creditor on a debtor. A bill has to be accepted by the debtor (that the debtor will pay on specified date / on demand).
  111. 112. What is dishonour of a bill ? When the debtor (drawee) is not able to pay a bill on due date, it is called dishonour of a bill. It is the inability of the debtor to pay the bill on due date. When there is dishonour of bill, the holder of the bill will give a notice to the drawee. This notice must be noted with notary. Read sec. 91 to 99 of negotiable instrument act.
  112. 113. Do you think : Forgery of drawers’ signatures protects the paying bank. No. Forgery is a crime. The bank has to recover the amount from the person who is doing forgery.
  113. 114. What is the difference between holder and holder in due course ? Holder means the bearer of an instrument. Holder in due course means a person who has acquired instrument properly through proper legal procedure and therefore that person has proper legal right on the instrument. A holder in due course is a person, who gets full right to the instrument.
  114. 115. Some furniture was delivered by X to A on hire purchase basis so that he could become owner after the payment of the last instalment. A sold the furniture to B even before such payment. A failed to make the last payment. X wanted to recover the furniture from B. Would he succeed? A is not the owner of the property, so he cant sell the property, so the property belongs to X. If B is able to proove that he had some criteria to believe that A was owner, then he may be able to retain the property. In that case X should get damages from A.
  115. 116. In a contact through sea, where the seller has to put the goods on board ship at his own expenses, the contract is known as : There is are three popular types : .1 FOB 2 CIF 3. EX-FACTORY this is the case of FOB – free on board – because here the seller is responsible to put the goods on board. In the case of CIF, the seller bears carriage, insurance and freight (all the three expenses). In ex-factor or ex-godown, the seller gives the delivery of goods at factory and is not responsible thereafter.
  116. 117. What is Stale cheque. A cheque which is out of date is called stale cheque. A chaque has life of 6 months from the date which it bears. In some cases, the life of cheque is only 3 months. (for example in the cae of banker's cheque)
  117. 118. What is banker's cheque? A cheque drawn by one bank on another bank. It is used for transfer of money to another person within the same city. It is similar to bank draft.
  118. 119. What is hundi? It is a traditional financial instrument, which has been in use for hundreds of years. It was used by Marwari traders to undertake financial transactions. Suppose Y is your debtor (you have sold him some goods on credit) by Rs. 3000 and you have to pay Rs. 3000 to Z. You can draw a hundi on Y payable to Z. Thus on due date, Z will collect Rs. 3000 from Y on your behalf and thus your account will be settled. It is like bill of exchange.
  119. 120. What is an Accommodation Bill It is a means of financing. Example : I need Rs. 9 Lakh urgently urgently. I draw a bill on you for 6 months and get the bill accepted by you for Rs. 9 lakhs. I go to the bank and get the bill discounted. The bank gives me some 8.9 lakhs. On due date (after 6 months), the bank will collect Rs. 9 lakhs from you. (by that time I will also give you Rs. 9 lakhs, so that you may pay to the bank).
  120. 121. Who is a Holder-in-due course As per sec. 9 of Negotiable Instrument : A holder in due course is a person who obtains possession of a negotiable instrument for consideration and without any cause to believe that any defect exists in the title of the person from whom he derives his title. The instrument must be obtained before the date of expiry of the instrument and with proper endorsement (in case of to order instrument). Sometimes, holder in due course gets better title than a holder.
  121. 122. A draws a bill payable three months after sight on B. It passes several hands before X becomes its holder. On presentation by X, B refuses to accept the bill. Discuss the rights of X.
  122. 123. Solution ... X has right to collect payment from B or from the person who gave this instrument to X. The concerned person will than collect throug the chain, ultimately, A will be responsible, who will finally collect payment from B. X will have to give a notice of dishonour to B and then he will be able to recover money from the person who passed him this bill.
  123. 124. What is Endorsement. If I have some bill / cheque / promisory note (a negotiable instrument – of any type), and I want to give it to someone else, I can give it by delivery (in case of bearer instrument) or by endorsement (in case the instrument is to order). Thus endorsement is required when the instrument is to order. It enables a person to transfer ownership of the negotiable instrument. Here the endorser rights at the back of the instrument the name of the endorsee, and the details.
  124. 125. Example of endorsement I T.K. Jain give the right of this cheque to Mr M. K. Jain for money and consideration received. Signature.
  125. 126. What is a valid endorsement It must be made before the instrument expires it must be made by a holder in due course it must be made by a person who has clear title to the instrument. It must be against consideration. (read Sec. 15 and 16 of Negotiable instrument act for detail) Sec. 52 : endorser may exclude his own ultimate liability in some cases.
  126. 127. Describe legal presumption in case of negotiable instruments. Negotiable instruments are transferable by the holder in due course. It is assumed that the negotiable instrument was prepared for consideration. It was transferred before its maturity date. It was duely signed / stamped as per legal requirements. The holder of the instrument is assumed to be the holder in due course. (read sec. 118 and 119 of N.I. Act 1881)
  127. 128. Discuss the penal provisions in case of dishonour of cheque? Dishonour means payment is not made by the banker against the cheque. The banker may refuse payment when – 1. there is insufficient balance 2. there is signature mismatch 3. when there is stop payment instruction by the drawer 4. other reasons approved by law. 138-142 say : Imprisonment upto 2 years / fine upto twice the amount of cheque (or both) penaly if there is dishonour due to lack of funds. (proper procedure regarding notice must be followed). (case: G.M. Mittal Stainless Steel v/s Nagarjun Investments 1997)