business laws, ethis & communication super compiler

BASED ON SUGGESTED ANSWERS AND REVISION TEST PAPER FOR IPCC/PCC EXAMS

COMPANY & BUSINESS LAWS

BUSINESS ETHICS

BUSINESS COMMUNICATION

May 2012 Nov 2012

COMPILER

PREPARED BY: BHAVIN PATHAK

Features: Based on latest publications by ICAI Authentic answers for easy understanding Point to point and descriptive approach For enhanced conceptuality Included all concepts Complete coverage Included past years asked questions for model answers

BUSINESS LAW, ETHICS & COMMUNICATION – SUPER COMPILER

Prepared by Bhavin Pathak 2

Mail me at: [email protected]

Contact me on: 08000054359 More notes: http://bhavinpathak.caclubindia.com

PART 1: COMPANY LAW & BUSINESS LAWS

UNIT 1: COMPANIES ACT, 1956 ...................................................................................................................... 3 UNIT 2: THE INDIAN CONTRACT ACT, 1872 .......................................................................................... 27 UNIT 3: NEGOTIABLE INSTRUMENT ACT, 1881 ................................................................................... 37 UNIT 4: THE PAYMENT OF BONUS ACT, 1965 ....................................................................................... 45 UNIT 5: THE PAYMENT OF GRATUITY ACT, 1972 ................................................................................ 50 UNIT 6: EMPLOYEES’ PROVIDENT FUND & MISCELLANEOUS PROVISIONS ACT, 1952 ...... 56

PART 2: BUSINESS ETHICS

QUESTION AND ANSWERS: BUSINESS ETHICS ..................................................................................... 63 PART 3: BUSINESS COMMUNICATION

QUESTIONS & ANSWERS: BUSINESS COMMUNICATION .................................................................. 73

Disclaimer: I am also an IPCC student not an expert. If there is any mistake in the given notes I apologize for it. This super compiler is prepared for better understanding and for helping purpose for self studies oriented students. Content may be adopted from various reference books and ICAI’s study materials and Practice Manuals published by Board of Studies.

Rules of my Life “Don't use anyone, but be useful for everyone.” “There is no tax on helping each other.” “If you light a lamp for somebody, it will also brighten your path.” “Happiness is a by-product of an effort to make someone else happy.”

DEDICATED TO MY FRIENDS

Prepared By Bhavin Pathak





PART 1: COMPANY & BUSINESS LAWS

COMPANY LAW

UNIT 1: COMPANIES ACT, 1956

Q. 1: What will be the consequence in case a Private Company incorporated under the provisions of Indian Companies Act,1956 defaults in complying with conditions constituting Private Company in terms of Section 3 (1) (iii) of the Companies Act, 1956.

Ans.: Consequence in case of private company acting in contravention of Section 3 (1) (iii) of the Indian Companies Act 1956: A private company which has been constituted under Section 3(1)(iii) has the following characteristics: Minimum 2 members Maximum 50, excluding employees and ex-employees who had become members when they

were employees Minimum 2 directors With restrictions on transferability of shares Restrained from inviting public for share capital and from issuing prospectus With minimum paid up capital of `1 lakh Prohibited from accepting deposits from persons other than its members, directors and their

relatives. Some other procedural concessions are also given under Indian Companies Act, 1956. In accordance with the provisions of Section 43 of the Indian Companies Act, 1956, if contravention is made against complying with the provisions contained in Section 3 (1) (iii), the company shall lose all the privileges and exemptions conferred on it by the Act, and the provisions of the Act shall apply to it as if it were not a private company. But the Company Law Board may relieve the company from such a consequence if it is satisfied that the failure in compliance with the said requirement was not deliberate but was accidental or inadvertent or that on other grounds it is just and equitable to grant relief.

Q. 2: What is meant by a floating charge? State the characteristics of a floating charge. When does a floating charge crystallize?

Ans.: A floating charge is an equitable charge which is not a specific charge on any property of the company. Thus, the company may, despite the charge, deal with any of the assets in the ordinary course of business. It is of the essence of a floating charge that it remains dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge is created, intervenes. The main characteristics of a floating charge as described in Re. Yorkshire wool combers Association are as follows: 1. It is a charge on a class of the company’s assets, present and future, that class being one which,

in the ordinary course of the business is changing from time to time. 2. Generally, it is contemplated that the company carry on its business in an ordinary way with

such a class of assets till some event occurs on which the charge is to settle down on the property as then existing and the charge becomes fixed. The moment the charge crystallizes, it becomes a fixed charge.

A floating charge crystallises or gets fixed when: (i) The company goes into liquidation or (ii) The company ceases to carry on business (iii) A receiver is appointed or (iv) A default is made in paying the principal and/ or interest and the holder of the charge brings

an action to enforce his security

Q. 3: Discuss the concept of shelf prospectus, the provisions for issue and filing of such prospectus under the Companies (Amendment) Act, 2000





Ans.: The Companies (Amendment) Act, 2000 introduced a new section 60 A relating to the issue of Shelf Prospectus. Shelf Prospectus means a Prospectus issued by any financial institution or bank for one or more issues of securities or class of securities specified in that Prospectus. 1. Any public financial institution, public sector bank or scheduled bank whose main object is

financing shall file a Shelf Prospectus. Financing means making loans to or subscribing in the capital of a private industrial enterprise engaged in infrastructural financing or such other company to be notified by the central government.

2. A company filing a Shelf Prospectus with the Registrar is not required to file Prospectus every time it seeks to make a public issue.

3. A company filing a Shelf Prospectus is required to file an Information Memorandum on all material facts relating to (i) New charges created; (ii) Changes in the financial position as have occurred between the first offer of securities (iii) Previous offer of securities and the succeeding offer of securities within the time to be

prescribed by the central government. 4. An Information Memorandum shall be issued to the public along with the Shelf Prospectus filed

at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of the opening of the first issue of securities under the Prospectus. Where an update of Information Memorandum is filed every time an offer of securities is made, such memorandum together with the shelf Prospectus shall constitute the Prospectus.

Q. 4: What are the authorities whose approval must be sought for issue of prospectus? Ans.: Approval of prospectus by various agencies: The draft prospectus has to be approved by various

agencies before it is filed with the ROC of the concerned State. The various authorities who approve the prospectus are the following: (a) All the lead managers to the issue. (b) Each of the stock exchanges where the shares of the company are listed and where the

shares/debentures are proposed to be listed. (c) The lead financial institution underwriting the issue, if applicable. The draft prospectus is

vetted by SEBI to ensure adequacy of disclosures. However, vetting by SEBI does not amount to approval of prospectus. SEBI does not take any responsibility for the correctness of the statements made or opinions expressed in the prospectus.

The Department of Company Affairs, vide its circular 10/8/87-CL V No. 7/91, dated 28-2-1991 advised the ROCs to ensure that in respect of every prospectus of public issues which comes up for filing with them the merchant bankers to the issue, whether as lead managers, co-managers, advisers or consultants are only those authorised by SEBI. Each merchant bankers has been given a code number. It was also decided that ROC shall not register a prospectus where prior to registration of the prospectus, the ROC before whom the prospectus is filed for registration is informed by SEBI that the contents of prospectus filed are in contravention of any law or statutory rules and regulations. In connection with the above, the SEBI has recently issued in its Circular No. 3(95-96) dated 29-9-1995, Clarification No. XII, under Guidelines for disclosure and investor protection that the draft prospectus filed with SEBI is not a public document. The final prospectus becomes available to the public only 2-3 weeks prior to the opening of the issue. To introduce greater transparency, the draft prospectus filed with SEBI would be made as a public document. The Lead managers shall simultaneously file copies of the draft document with the stock exchanges where issue is proposed to be listed, and can charge an appropriate sum to the person requesting such copy (ies).

Q. 5: When is a director not liable for a misstatement in a prospectus? Ans.: When a director is not liable [Section 62(2)]: A person who is held liable for the issue of a

prospectus containing an untrue statement as a director will be exonerated from such a liability if he can show: (a) In a suit under Section 62:

1. That he (having consented to become a director) had withdrawn his consent to become a





director before the issue of the prospectus and that it was issued without his authority or consent;

2. That the prospectus was issued without his authority or consent; and that on becoming aware of its issue, he forthwith gave reasonable public notice of the issue having been made without his knowledge or consent; or

3. That after the issue of the prospectus and before allotment thereunder he, on becoming aware of any untrue statement therein, had withdrawn his consent and given a reasonable public notice of the withdrawal and of the reasons therefore; or

4. That he had reasonable ground to believe and, until allotment, did believe that the statement was true. This provision pertains to the untrue statement not purporting to have been made on the authority of an expert or of a public official document or statement.

5. That the untrue statement, purporting to be a statement by an expert or contained in a report or valuation of an expert was a correct and fair representation of the expert‟s statement and he had reasonable ground to believe and, until issue of prospectus, did believe that the expert was competent to make it and the expert had given and had not withdrawn his consent to the issue of the prospectus and had not withdrawn it before delivery of a copy of the prospectus for registration; and

6. That the untrue statement, arising from the statement made by an official person or from the public official documents was a correct and fair representation or correct copy or correct and fair extract of the document.

(b) In a suit under Section 56: A director or other person sued for non-compliance of Section 56 may defined himself by proving: 1. That he had no knowledge of the matter not disclosed; 2. That the contravention was an honest mistake of fact; 3. That in the opinion of the court, the matter not disclosed was immaterial or was otherwise

such as ought to be excused.

Q. 6: What is the effect of irregular allotment? Ans.: Effect of Irregular Allotment: When the shares are not allotted in pursuance of Sections 69 and 70

such an allotment is known as irregular allotment. In spite of the stringent provisions of Sections 69 and 70, one may find that allotment has been made in utter contravention thereof. The directors may choose to take a chance and proceed to allot shares although minimum subscription has not reached or a prospectus or statement in lieu of prospectus has not been filed. Such an allotment is treated by the Act not as void ab initio but as irregular. The applicant for the shares may avoid the allotment. If he does so within the time specified by Section 71, namely, (a) Where the allotment was made before the statutory meeting, within 2 months after the holding

of statutory meeting of the company and not later; or (b) Where no statutory meeting is required to be held by the company, within 2 months after the

date of allotment and not later; or (c) Where the allotment was made after the statutory meeting within 2 months of allotment [and

not later] the allotment shall be voidable despite the fact that the company is in the course of being wound up.

Within the above-mentioned period, the allottee must intimate to the company that he wants to avoid the allotment. If legal proceedings are required to be taken, these need not be within the period of two months provided the notice of avoidance was served on the company within the aforesaid time, but they should be reasonably prompt thereafter if they are required to be brought [Re. National Motor Mail Coach Co. (1908) 2 Ch. 228]. Furthermore, Section 71(3) makes every director of a company, who knowingly contravenes or authorises the contravention of any of the provisions of Section 69 or Section 70 with respect to allotment, liable to compensate the company and the allottee for any loss, damages or costs which they may have sustained or incurred thereby. But the proceedings for such compensation can only be taken within two years from the date of allotment. As the allotment is only voidable at the option of the shareholder, the shareholder may keep the shares and yet sue the





directors who have knowingly contravened either of the two Sections (69 and 70) to compel them to make good the loss to him as a result of the irregular allotment.

Q. 7: Examine the different aspects of the voting rights of a member. Ans.: Voting rights of a member: Section 87 governs the voting rights of members. Every holder of an

equity share has the right to vote, by virtue of his share in the capital, on every resolution placed before the company. And his voting right on a poll shall be in proportion to the amount paid upon his share. A member‟s right to vote may be exercised by him personally or through a proxy. Every holder of preference shares has a right to vote only on a resolution which directly affects the rights attached to the preference share capital. A resolution for the winding up of the company or repayment or reduction of its share capital is deemed to directly affect the rights of holders of preference shares. Where preference shares are cumulative as to dividend and the dividend thereon has remained unpaid for an aggregate period of not less than 2 years preceding the date of any meeting of the company, the preference shareholders shall have the right to vote on every resolution placed before the meeting. On the other hand, if the preference shares are not cumulative as regards dividend, then the holders thereof will be able to exercise the above-mentioned extended right of voting only if dividend due on shares has remained unpaid for not less than 2 years ending with the expiry of the financial year immediately preceding the commencement of the meeting or for an aggregate period of not less than 3 years out of 6 years ending with the expiry of the financial year aforesaid. In all the above cases, the right of preference shareholders to vote on a poll shall be in the same proportion as the capital paid up on such shares bears to the total paid-up equity capital of the company. Dividend on preference shares, whether declared or not, shall be deemed to be due on the last date of the period specified for payment in the articles or other instrument executed by the company in that behalf. Alternatively, if no such date is specified, the dividend shall be deemed to be due on the day immediately following such period. The provisions stated above are, however, subject to the provisions of Sections 89 and Section 92(2) which we shall discuss here under: A company may, be making a provision in the articles, restrain a shareholder from exercising his voting rights in respect of any shares registered in his name on which any call or other amount due has not been paid or on which the company has a lien or exercised a lien. But a public company or a private company which is a subsidiary of the public company cannot prohibit a member from voting on the ground that he has not held his share or other interest for a specified period before the time of voting or on any other ground except as mentioned above. A company may, if so authorised by its articles, accept from any member the whole or any part of the uncalled amount on shares, but the member will not be entitled to voting rights in respect of the sum paid by him until it becomes payable [Section 92]. It is in an exception to the rule that the voting rights of equity and preference shareholders on a poll will be in the same proportion as the capital paid up on those shares bears to the total paid-up equity capital.

Q. 8: Discuss the reduction and the diminution of share capital and distinguish the two Ans.: Section 100 of the Companies Act provides for the reduction of capital. For this, the articles must

give the authority; it is not enough to provide for it in the memorandum. If the articles do not so authorise, then these must be altered by a special resolution first and thereafter a second special resolution will have to be passed to reduce the capital in the manner proposed. Reduction of capital may be a reduction in the nominal capital, reduction at the same time in issued capital, a reduction in the paid-up capital or in the capital that has been issued but not paid up (e.g. where an uncalled liability is cancelled). The term “diminution” denotes a cancellation of that portion of the issued capital which has not been subscribed for Section 94(1)(e) of the Act states it, the cancellation of “shares which at the date of the passing of the resolution in that behalf have not been taken or agreed to be taken by any person”. Section 94(3) specifically states that diminution does not constitute a reduction within the meaning of the Companies Act. The expression “diminution of share capital” and “reduction of share capital” differ from each other in the following respects. 1. Reduction may involve reduction inter alia of issued capital, whereas diminution may be in

respect of authorised capital but not of issued capital. 2. If the articles authorise the procedure, diminution can be effected by an ordinary resolution,

while reduction (which also need authorisation by articles), can be effected only by a special





resolution. 3. Diminution needs no confirmation by the Court [Section 94(2)], but reduction needs such

confirmation [Section 101]. 4. Where a company is ordered to add to its name the words “and reduced” these words shall until

the expiry of the period specified in the order, be deemed to be part of the company‟s name [Section 102(3)], but such a provision does not exist in the case of diminution of the share capital as envisaged in Section 94(1)(e).

5. In the case of diminution, notice is to be given to the Registrar within 30 days from the date of cancellation whereupon the Registrar shall record the notice and make the necessary alteration in the memorandum or articles or both [Section 95(1)(f) & (2)]; whereas in the case of reduction more detailed procedure regarding notice to the Registrar has been prescribed by Section 103, though there is no such time limit as aforesaid (i.e. 30 days).

Q. 9: Enumerate the particulars to be included in the Statutory Report. Ans.: Statutory Report: The eight particulars to be set out in the statutory report are contained in of

Section 165(3). These are: (a) The number of shares allotted, distinguishing fully or partly paid up, otherwise than for cash

and stating the extent to which the partly paid up shares have been paid and the consideration for which they have been allotted;

(b) The total amount of cash received on account of shares allotted; (c) An abstract of receipts and payments up to the date within 7 days of the date of report,

exhibiting under distinctive headings the receipts of the company from shares and debentures and other sources, the payment made there out and particulars concerning the balance remaining in hand and an account or estimate of the preliminary expenses of the company, showing separately any commission or discount paid or to be paid on the issue or sale of shares or debentures;

(d) The names addresses and occupations of the directors and auditors, manager and secretary, if any, and any changes therein, if occurred, since the date of the company‟s incorporation;

(e) The particulars of any contract or modifications thereof to be submitted to the meeting for its approval;

(f) The extent of non-carrying of each underwriting contract together with the reason therefore; (g) The arrears due on calls from every director and manager; and (h) Particulars of commission or brokerage paid or to be paid to any director for manager in

connection with the issue or sale of shares or debentures. The report aforesaid must be certified as correct by at least two directors, one of whom should be the managing director, if there be any. The auditors should also certify it to be correct insofar as the report relates to shares allotted by the company, cash received in respect thereof and receipts and payments on revenue as well as on capital account of the company.

Q. 10: Outline some eight matters for which an ordinary resolution would suffice. Ans.: Subject to the articles, an ordinary resolution is sufficient, for inter alia any of the following matters:

1. To authorise an issue of shares at a discount (Section 79); 2. To increase the share capital if authorised by the articles, or otherwise alter the share capital

apart from its reduction (Section 94,100); 3. To appoint auditors [Section 224(1)]; but in the case of a company in which not less than 25

percent of the subscribed share capital is held, whether singly or in any combination, by a public financial institution or a Government company or Central or any State Government, or a nationalised bank or an insurance company carrying a general insurance business, the appointment of auditors requires a special resolution (Section 224A);

4. To appoint directors; 5. To adopt annual accounts; 6. To declare dividends; 7. To wind up voluntarily when the period, if any, fixed for the duration of the company by the

articles has expired, or the event, if any , has occurred, on the occurrence of which the articles provided that the company is to be dissolved [Section 484(1)];





8. To appoint liquidators in a members voluntary winding-up and to fix their remuneration (Section 490);

9. To register an unlimited company as a limited company (Section 32); and generally to do all things for which a special resolution is not specifically required either by the Act or the company’s articles.

Q. 11: What are the rules relating to issue of shares at a discount? Ans.: The rule relating to issues of shares at a discount is given as under: A company cannot issue

shares in disregard of Section 79. It may issue at a discount, share of a class already issued, only if all the following conditions are fulfilled: (a) The issue must have been authorised by a resolution passed by the company in general

meeting, and sanctioned by the Company Law Board (CLB). (b) The said resolution must specify the maximum rate of discount, at which the shares are to be

issued. By virtue of the proviso added to Section 79 by the Amendment Act, 1974 no such resolution shall be sanctioned by the Company Law Board if the maximum rate of discount specified in the resolution exceeds 10 per cent unless the CLB is of the opinion that a higher percentage of discount may be allowed in the special circumstances of the case.

(c) At the date of issue, not less than one year ought to have elapsed since the date on which the company was entitled to commence business.

(d) Lastly, the shares to be issued at a discount have been issued within 2 months after the date of the CLB‟s sanction or within the time extended by it. On passing the resolution authorising the said issue, the company may apply to the CLB for its sanction thereon. Thereupon, if the CLB thinks it proper to sanction, it may do so on such terms and conditions as it thinks fit.

Every prospectus relating to issue of the shares must contain particulars of the discount allowed on the issue of the shares or so much of that discount as has been written off at the date of the issue of the prospectus. A default in compliance with this requirement will render the company, and every officer thereof who is at fault punishable with fine extending to ` 500.

Q. 12: Briefly examine as to what is meant by the object clause. Ans.: Object clause: The powers of the company are limited to: (a) power expressly given by the

memorandum (termed “express” powers) or conferred by statute, (b) powers reasonably incidental or necessary to the company’s main purpose (termed “implied” powers). It may be noted that acts beyond the company’s powers are ultra vires and void, and cannot be ratified even though every member of the company may give his consent [Ashbury Railway Carriage Co. vs. Riche [1875] L.R. 7 H.L. 653]. The test to be applied whether a power is implied or not, is not the benefit the transaction is expected to confer on the company, but whether it can reasonably be regarded as arising from the main object of the company. It is customary to exclude the general rule of construction for the interpretation of the intention contained in different clauses of the memorandum of association, by including a statement that the objects specified in each paragraph of the memorandum shall be in no way limited or restricted by reference to or inference from the terms of any other paragraph or the name of the company. The subscribers to the memorandum may choose any “object” or “objects” for the purposes of their company. There are two restrictions, however, on the selection of “object” for a company: 1. The objects should not include anything which is illegal or contrary to law or public policy, e.g.,

floating a company for dealing in lotteries [Ex. Parte More [1931] 2 K.B. 197]; or trading with alien enemies [Daimler & Co. vs. Continental Tyre Co. [1916] 2 A.C. 307]. Objects, which are in restraint of trade [Mac. Ellis vs. Ballymacalligot etc. Company [1919] A.C. 459] or are blasphemous (but not denying Christianity) have also been held to be bad [Bowen vs. Secular Society [1917] A.C. 406];

2. The objects should not also contemplate doing anything which is prohibited by the Companies Act. Apart from those two restrictions, the object of a company may be anything that the proposed company desires to achieve [Lal Gopal Dutt vs. Khorotriah Mego Zlite Zamindary Co. 16 C.W.N. 297].

The object clause enables shareholders, creditors and all those who deal with the company to know what its powers are and what is the range of its activities and enterprise, it is therefore true





that the object clause of the memorandum of association of a company is of fundamental importance to its members as well as to its non-members. In the first place, it gives protection to subscribers (members) who learn from it the purpose to which their money can be applied. In the second place, it protects persons dealing with the company, who can infer from it the extent of the company’s powers. The narrower the objects appended in the memorandum, the lesser are the subscriber’s risk; the wider this object, the greater is the security of those who transact business with the company.

Q. 13: “A forged transfer of shares is a nullity.” Comment Ans.: A forged transfer is a nullity. It does not give the transferee concerned any title to the shares. If the

company acts on a forged transfer and removes the name of the real owner from the register of Members then the company is bound to restore the name of the real owner on the register as the holder of the shares and to pay him any dividends which he ought to have received [Barton vs. North Strafford shire Railway Co. 38 Ch. D. 456. People Insurance Co. Ltd. vs. Wood & Co. Ltd. (1961) 31 Comp. Case 63]. Thus, if by forgery, a person obtains a certificate of transfer of shares from a company and transfers the shares to a purchaser for value acting in good faith i.e. without the knowledge of the forgery, such purchaser does not get a good title to the shares so transferred, because a forged transfer is a nullity and cannot be a source of a valid transfer of title. But the company shall be liable to compensate the purchaser in so far as the company had issued a certificate to transfer and was therefore estopped from denying the liability accruing from its own act. The innocent purchaser for value acting upon the faith of the certificate issued by the company could validly and reasonably assume that the person named in the certificate as the owner of shares was really the owner of the shares represented by the certificate [Balkis Consolidated Co. vs. Tamkinson (1982) A.C. 1961]. If as a result of the forged transfer, the name of the true owner of shares is taken off the Register of Members he can compel the company to restore his name to the register. He can also claim any dividend which may not have been paid to him during the intervening period [Barton vs. North Staffordshire Supra]. Likewise the transferee must take care that he is not getting a certificate from the company on a forged transfer, because in that case the transferee shall be liable to indemnify the company against the consequences of the damages which may have to be paid by the company to the true owner of the shares [Sheffield Corporation vs. Barclay (1905) B.C. 393]. The person who even without any negligence brings about a transfer is liable to indemnify the company against its liability to the owner of shares whose name was taken off from the register as a result of the forged transfer [Sheffield Corporation vs. Barclay (supra); Starkey vs. Bank of England (1903) A.C. 104].

Q. 14: How can a person acquire membership of a public company? Explain in brief, whether shareholders and members are similar?

Ans.: Modes of Acquiring Membership: A person may become a member of the company in any one of the following ways: 1. By subscribing to the memorandum of association [Section 41]: The persons who

subscribe (i.e. sign) to the memorandum of association are deemed to have agreed to become the members of the company. And on the registration of the company, their names are entered as members on the register of member.

2. By application and allotment of shares [Section 41(2)]: A person, who agrees in writing to become a member of the company and whose name is entered in the register of member is also a member of the company. The person intending to become a member has to make an application to the company for the purchase of its shares. On valid allotment, the name of the shareholder is entered in the register of member.

3. By agreeing to take qualification shares [Section 266(2)]: A director of a public company is appointed when he takes or signs an undertaking to take and pay for his qualification shares. When a director signs and files with the Registrar an undertaking to take and pay for his qualification shares, he is in the same position as subscriber of the memorandum of association.

4. By transfer of shares: The Companies Act provides that the shares of a public company are freely transferable. Thus, one person may transfer his shares to any other person. On the registration of transfer of shares, the transferee becomes the member of the company.

5. By succession: The legal heirs of the deceased member/shareholder get a right to be a member





of the company and be registered as a member of the company on the basis of the succession certificate. The company on the basis of the Succession Certificate enters their name in the Register of Members.

A member and a shareholder: In the parlance of Company Law, the two words “member” and “shareholder”, are similarly used by common people, thereby giving an impression that they are synonymous but in fact they can be differentiated on the following grounds: (a) A registered member may not be a shareholder, since a company may not be having Share

Capital. For example, a company limited by guarantee and not having a share capital, does have members but not shareholders. But a registered shareholder is a member, since his name appears in the Register of Members maintained by the company.

(b) A person who owns a share warrant (bearer), is not a member since his name does not appear in the Register of Members maintained by the company. He is a shareholder only [Section 115(1)].

(c) A legal representative of a deceased member is a shareholder but not a member, till he applies for registration and his name is entered in the Register of members.

Q. 15: Illustrate, whether a limited company can become partner in a partnership firm? Ans.: One of the important features of a company is an artificial juristic person. Being a juristic person,

company is capable of entering contract in its own name. According to Section 4 of the Partnership Act, 1932, partnership is a contractual relationship between persons; therefore, there should not be any objection to a company in becoming partner. Further, the limited liability element of a limited company is also do not restrict a company in becoming a partner in a unlimited liability of a partnership firm, because, it is limited liability of members of a limited company and not the company itself. However, the Department of Company Affairs (now Ministry …) is in the opinion that, a company may become a partner if the Memorandum of Association specifically allows it.

Q. 16: Briefly explain the privileges and exemptions for a private company as provided under the Companies Act, 1956.

Ans.: A private company can have a greater degree of secrecy as regards its affairs and enjoys greater freedom on its operation. It enjoys some privileges and exemptions which a public company is deprived of. Briefly these are as follows: 1. Two or more persons may form a private company [Section 12(1)]. 2. It need not hold a Statutory Meeting or file a statutory report [Section 165]. 3. The consent of directors to act as such, and to take up qualification shares need not be filed with

the Registrar [Section 266]. 4. There is no restriction on the amount of overall managerial remuneration that it may pay

[Section 198]. 5. The directorship of a private company is not includible in the maximum number of

directorships that a person may hold [Section 310]. 6. The consent of the Central Government for advancing loans to directors is not required [Section

295]. 7. There are no restrictions on the powers of the Board of Directors [Section 293]. 8. The Central Government is not empowered to prevent a change in the Board of Directors of a

company which is likely to affect management prejudicially [Section 409]. 9. It can advance loans for the purchase of its own shares [Section 77(2)].

Q. 17: What do you mean by Proxy? Explain the provisions relating appointment of Proxy under the Companies Act, 1956

Ans.: A proxy is an instrument in writing executed by a shareholder authorizing another person to attend a meeting and to vote thereat on his behalf and in his absence. The term is also applied to the person so appointed. According to Section 176, the appointment of proxy must be in written instrument signed by the appointer or his duly authorized attorney. The instrument of proxy must be deposited with the company 48 hours before the meeting. Further, unless articles otherwise provide: 1. A member of a company having no share capital cannot appoint a proxy; 2. A member of a private company cannot appoint more than one proxy to attend on the same





occasion; 3. A proxy shall not be entitled to vote except on a poll.

Q. 18: Explain the procedure for payment of Interim Dividend. Ans.: A company desirous of declaring interim dividend should follow the procedure given below:

1. Verify that the Board of Directors has declared the interim dividend. 2. Ascertain whether profits for the part of the financial year up to the time of proposed

declaration are sufficient to justify payment of interim dividend. Availability of profits should be ascertained after taking into account depreciation and compulsory transfer to reserves. Auditor’s opinion should also be obtained.

3. Intimate the stock exchange(s) about the Board meeting to consider the payment of interim dividend

4. Resolution of the Board of directors should state the rate of dividend, deposit of interim dividend in a separate account within five days from the date of its declaration, the date in reference to which shareholders registered in the Register of Members are to receive interim dividend, record date or the period of closure of the Register of Members and transfer books, date of posting of dividend warrants, etc. The Secretary may be authorized to take necessary action in this regard.

5. Inform the Stock Exchange of the date of the closure of Register of Members. 6. At least seven days before the closure of the Register of Members or the record date fixed,

publish a notice in this regard in a newspaper circulating in the district in which the registered office of the company is situate.

7. Open a separate “Interim Dividend Account” with a Bank and issue necessary instructions to the Bank.

8. Post “Dividend Warrants” within 30 days from the declaration of interim dividend. 9. Dividend warrants to non-resident shareholders should be posted after securing necessary

permission of the Reserve Bank as per the provisions of FEMA, 1999. However, if dividend balancing rule is applicable to the company paying dividend, no foreign exchange will be released.

Q. 19: Briefly explain the effects of Irregular allotment under the Companies Act 1956. Ans.: Effect of Irregular allotment: When the shares are not allotted in pursuance of Section 69 and 70

(i.e. without receiving the minimum subscription and without filing a prospectus or statement in lieu of prospectus to the registrar before the allotment) such an allotment is an irregular allotment. In spite of the stringent provision of Section 69 and 70 one may find that allotment has been made in utter contravention thereof. The directors may choose to take a chance and proceed to allot shares although minimum subscription has not reached or a prospectus or statement in lieu of prospectus has not been filed. Such an allotment is not void initio but as irregular. The applicant for the shares may avoid the allotment, if he does so within the time specified by Section 71, namely: (a) Where the allotment was made before the statutory meeting within 2 months after the holding

of statutory meeting of the company and not later; or (b) Where no statutory meeting is required to be held by the company, within 2 months after the

date of allotment and not later; or (c) Where the allotment was made after the statutory meeting, within 2 months of allotment (and

not later) the allotment shall be voidable despite the fact that the company is in the course of being wound up.

Within the aforesaid period, the allottee must intimate to the company that he wants to avoid the allotment. If legal proceedings are required to be taken, these need not be within the period of two months provided the notice of avoidance was served on the company within the aforesaid time but they should be reasonably prompt thereafter if they are required to be brought. Furthermore, Section 71(3) makes every director of a company, who knowingly contravenes or authorizes the contravention of any of the provisions of Section 69 or Section 70 with respect to allotment, liable to compensate the company and the allottee for any loss, damages or costs which they have sustained or incurred thereby. But the proceedings for such compensation can only be taken within 2 years from the date of allotment. As the allotment is voidable at the option of the shareholder, the shareholder may keep the shares and yet sue the directors who have knowingly contravene either





of the two sections i.e. 69 and 70 to compel them to make good the loss to him as a result of the irregular allotment.

Q. 20: State the types of charges to be registered with the Registrar of Companies and explain the consequences of non-registration of such charges.

Ans.: Types of Charges to be registered and Consequences of Non-Registration: Section 125 and 127 of the Companies Act, 1956 require the companies to get registered the following charges with the Registrar of Companies within 30 days of their creation: 1. A charge for the purpose of securing any issue of debentures. 2. A charge on uncalled share capital of the company 3. A charge on any immovable property, wherever situate or any interest therein. 4. A charge on any book debt of the company. 5. A charge not being a pledge, on any movable property of the company. 6. A floating charge on the undertaking or any propertuy of the company including stock in trade. 7. A charge on calls made but not paid. 8. A charge on a ship or any share in a ship. 9. A charge on goodwill, on a patent or licence under a patent, on a trade mark or on a copy right

or a license under a copy right. 10. A charge created out of india comprising solely property situate outside india with particulars

and the instrument creating or evidencing the charge or a copy thereof. 11. A charge created in india comprising property outside india will the instrument creating or

purporting to create the charge or a verified copy thereof (section 125). 12. A charge on a property acquired subject to charge (section 127).

Q. 21: What is red-herring prospectus? Briefly explain the information memorandum. Ans.: “Red-herring prospectus” means a prospectus which does into have complete particular on the

price of the securities offered and the quantum of securities offered. 1. A public company making an issue of securities may circulate information memorandum to the

public prior to filing of a prospectus. 2. A Company inviting subscription by an information memorandum shall be bound to file a

prospectus prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days before the opening of the offer.

3. The information memorandum and re-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.

4. Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuing company.

5. Every variation as made and highlighted in accordance with Sub-section (4) above shall be individually intimated to the persons invited to subscribe to the issue of securities.

6. The applicant or proposed subscriber shall exercise his right to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters.

Q. 22: What is meant by 'Pre-Incorporation Contracts'? Can these contracts be enforced by the prospective company after its incorporation against the third parties with whom the promoters had entered into certain contracts? Explain.

Ans.: Pre-incorporation Contracts and its Enforcement: Pre-incorporation contracts are those contracts which are entered into, by the promoters on behalf of a prospective company, before it has come into existence e.g. with the proprietor of business to sell it to the prospective company. Since a company comes into existence from the date of its incorporation, it follows that any act purporting to be performed by it prior to that date is of no effect so far as the company is concerned. Hence the vendor cannot sue or be sued by the company thereof, after its incorporation. After incorporation, the company may adopt the preliminary agreement. But this must be, by novation. However, in order to facilitate companies to adopt pre-incorporation contracts, special provisions are made in Sections 15 and 19 of specific Relief Act, 1963. Accordingly, pre-incorporation contracts can be enforced by the company, if the contract is for the purposes of the company, the contract is warranted by the terms of its incorporation is within the scope of the





company's objects as given in the Memorandum of Association and the company has accepted the contract and has communicated such acceptance to the other party.

Q. 23: Board of Directors of a private company decided to convert it into a public company. State the steps to be taken for such conversion in order to comply with the requirements under the Companies Act, 1956.

Ans.: Conversion of a Private Company into a Public Company: The conversion of the private company into a public company is by choice under Section 44 of the Companies Act, 1956. The following steps are required to be taken for such conversion: (a) Board must fix the date for general meeting for the purpose of making necessary alternation in

the Articles of Association and Memorandum of Association. (b) Hold the general meeting and pass a special resolution altering the articles in such a manner

that they no longer include the provisions of section 3(i) (iii) which are required to be included in the articles of a company in order to constitute it a private company. The company ceases to be a private company on the date of Alteration Company. The articles are required to be altered so as to bring there in line with the provisions of the Act as applicable to public company.

(c) Special resolution to change the name of the company, so as to delete the word 'private' from the name of the company and to alter the Memorandum of Association for that purpose

(d) File copies of the special resolution and prospectus or statement in lieu of prospectus within 30 days from the date of general meeting and obtain a fresh certificate of incorporation (deleting word 'private' in the name of the company) from Registrar of Companies.

(e) The company must ensure the minimum number of members is 7, of directors is 3 and the paid up capital is not less than ` 5 lakhs.

Q. 24: The quorum for a General meeting of a public company is 15 members personally present according to the provisions of the articles of association of the company. Examine with reference to the provisions of the companies Act, 1956 whether there is proper quorum at a General meeting of the company which was attended by the following persons: (i) 13 members personally present (ii) 2 members represented by proxies who are not members of the company (iii) One person representing tow member companies.

Ans.: Quorum: According to section 174 of the Companies Act, 1956 unless the articles of the company provide for a larger number, 5 members personally present in the case of a public company shall be the quorum for a meeting of the company. In this case articles of the company provide for a larger number of 15, hence the quorum is 15. The words „personally present‟ exclude proxies. Hence two members represented by proxies cannot be counted for the purpose of quorum. However, the representative of a body corporate appointed under section 187 is a member 'personally present' for the purpose of counting a quorum. In case two or more corporate bodies who are members of the company are represented by single individual each of the bodies corporate will be treated as personally present by the individual representing it. In this case one person represents two members companies and his presence will be counted as two members being present in person for the purpose of quorum. Hence 15 members are personally present (13+2) and as such there is proper quorum.

Q. 25: ADJ Company Limited decides to buy-back its own shares. Advise the company's Board of Directors about the sources out of which the company can buy-back its own shares. What conditions are attached to the buy-back scheme of the company in accordance with the provisions of the Companies Act, 1956? Explain.

Ans.: Buy-back of shares sources and conditions (Sec. 77 A of the Companies Act, 1956): In accordance with the provisions of the Companies Act, 1956, as contained in sec. 77-A, a company desirous of buy back of its own shares, can be advised to buy-back out of the following sources: 1. Company's free reserves; or 2. Company's securities premium A/c; or 3. Out of the proceeds of any shared or other specified securities. {S.77-A-(1)}. However, no buy-

back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.





Conditions 1. Buy-back is authorised by the Company’s Articles. 2. A special resolution has been passed in general meeting of the company authorizing buy-back. 3. The buy-back is less than 25% of the total paid-up capital and free reserves of the company. The

buy-back, however, cannot exceed 25% of company’s paid up equity share capital in a financial year. Further the companies (Amendment) Act 2001 (w.e.f. 23-10-2001) has authorised the buy back by passing a resolution of a meeting of the Board of Directors provided the buy-back does not exceed 10% of the total paid up equity share capital and free reserves. However, there cannot be more than one such buy-back in any period of 365 days

4. The ratio of debt owed by the company is not more than two times the equity capital and free reserve after such buy back. However, the Central Government may prescribe a higher ratio of the debt for a class or classes of companies.

5. All shares or other specified securities are fully-paid-up, 6. The buy back with respect to listed securities is in accordance with the regulations made by the

SEBI in this behalf.

Q. 26: XYZ Limited called its Annual General meeting on 28th September, 2007. The notice of the meeting was posted on 6th September, 2007. With reference to the provisions of the Companies Act, 1956 examine whether the notice given by the company was valid.

Ans.: Length of notice for Annual General Meeting According to section 171 (1) of Companies Act 1956, a general meeting of a company may be called by giving not less than 21 days notice in writing not less than 21 days means 21 clear days i.e. excluding both the dates on which the notice was served and the date of the meeting. In case the notice of the meeting was sent by past, service of the notice of the meeting shall be deemed to have been effected at the expiry of 48 hours after it was posted [Section 53 (2) (b) (i)]. In the instant case, the notice was short by one day as shown below: 6th September to 28th September 2007 23 days Less: Date of service and date of meeting 2 days 21 days Less: 48 hours of posting but 24 hours are common between date of service and 48

hours of posting 1 day Less: Length of notice required 21 days Short notice 1 day

Hence, notice was not valid.

Q. 27: Developers Ltd. hold a General Meeting of shareholders for passing a special resolution regarding alteration of Articles of Association. Out of the members present in the meeting 20 voted in favour, 4 against and 8 members did not vote and remained absent from voting. The Chairman of the meeting declared the resolution as passed. Is it a valid resolution as per the provisions of the Indian Companies Act, 1956?

Ans.: In accordance with Section 189 (2) of the Companies Act, 1956 the votes cast in favour of a resolution (whether by show of hands or in a poll as the case may be) by members who, being entitled so to do, vote in person or where proxies are allowed, by proxy, are not less than three times the number of votes if any, cast against the resolution by members so entitled and voting is called special resolution. Hence in accordance with the above mentioned provisions, the resolution passed in the general meeting of the Developers Ltd is a valid resolution since the vote cast in favour of the resolution are more than 3 times the number of votes cast against the resolution.

Q. 28: The Articles of a Public Company clearly stated that Mr. A will be the solicitor of the company. The Company in its general meeting of the shareholders resolved unanimously to appoint B in place of A as the solicitor of the company by altering the articles of association. Examine, whether the company can do so ? State the reasons clearly.

Ans.: According to Section 36(1) of the Indian Companies Act,1956, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and combined covenants on its and his part to observe all the provisions of the memorandum and articles. Section 36 creates an





obligation binding on the company in its dealings with the members but the word “members” in this Section means members in their capacity as members, that is, excluding any relationship which does not flow from the membership itself. Therefore even a member cannot enforce the provisions of articles for his benefit in some other capacity than that of a member. Section 31 also provides that the company may by special resolution alter its articles. In the given problem the company has changed its articles by passing resolution unanimously and therefore the company can change its articles. The provision of memorandum and articles will bind the members but in the capacity of a member only and even a member may be treated as an outsider. Therefore a member cannot enforce the provisions of articles for his benefit in some other capacity than that of a member. In the given case A will not succeed and the company is empowered to appoint B as a solicitor of the company and may change the articles accordingly. The problem is based upon the decision held in Eley vs. Positive Govt. Security Life Assurance Co. (1876).

Q. 29: The Articles of Association of MSW Ltd. contained a provision that upto 4% of issue price of the shares may be paid as underwriting commission to the underwriters. The Board of directors decided to pay 5% underwriting commission. Can the Board of directors do so ? State the provisions of law in this regard as stated under the Indian Companies Act, 1956.

Ans.: According to the provisions of Section 76 (1) of the Companies Act, 1956 a company may pay a commission to any person who agrees to subscribe or procure subscription for an agreed number of shares or debentures of the company. Such commission may be paid to the underwriters who offer guarantee to procure applications for certain number of shares and guarantee to purchase the balance quantity of shares. For this, the underwriter gets underwriting commission. Maximum total commission payable cannot exceed 5% of the price of shares or the underwriter may be paid a lower rate if so prescribed by articles. In case of debentures it is 2½% or a lower rate if so prescribed in the articles. In the given problem the articles of MSW Ltd has prescribed 4% underwriting commission but the directors decided to pay 5% underwriting commission. The directors cannot do so because under Section 76 (1) as aforesaid, such commission cannot be more than that prescribed in the articles. Therefore the directors are not empowered to do so. Further, such amount of commission payable must be authorized by articles. The agreed commission should be disclosed in the prospectus or the statement in lieu of prospectus. Copy of the contract for payment of commission must be filed with Registrar of companies at the time of the delivery of the prospectus or letter of offer. [Section 76 (1)]. An underwriter must be also registered with SEBI.

Q. 30: What is meant by “Shelf prospectus”? Who can file a “Shelf prospectus” with the Registrar of Companies? Stating the provisions of Companies Act, 1956 point out the circumstances under which such prospectus is required to be filed with the Registrar of Companies.

Ans.: Section 60A of the Companies Act, 1956 lays down the provisions as regards shelf prospectus. According to it, the shelf prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. Therefore, any public financial institution, public sector bank or schedule bank whose main object is financing shall file a shelf prospectus. A company filing a shelf prospectus with the registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within the period of validity of such self prospectus. A company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to charges created, and changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by Central Government prior to making of a second or subsequent offer of securities under the shelf prospectus. An information memorandum shall be filed along with such prospectus, which will remain valid for one year from the date of opening of the first issue of securities under that prospectus. Updated information memoranda filed with the shelf prospectus shall constitute the prospectus. Here financing means making loans or subscribing in the capital of a private industrial enterprise engaged in infrastructural financing or such other company which the Central Government may so notify in this behalf.





5 STAR PRACTICAL QUESTIONS

Q. 1: MN Limited held its Annual General Meeting on 27th March, 2011. Mr. M, the Chairman of the said meeting died on 1st April, 2011, when minutes of the annual general meeting were not yet recorded and signed. How would you deal with the situation? Would your answer be different in case the meeting held on 27th March, 2011 was a Board meeting?

Ans.: Minutes of Meetings [Section 193 (1A) of the Companies Act, 1956]: The problem is based on the provisions of Section 193 (1A) of the Companies Act, 1956. In the case of General Meetings minutes are to be recorded and signed by the Chairman of the meeting within a period of 30 days from the conclusion of the General Meeting or in the event of death or inability of the Chairman, by the director duly authorized for the purpose. As the Chairman of the meeting (Mr. M.) died on 1st April 2011, a Board Meeting has to be convened immediately and one of the directors present at the meeting must be authorized to sign the minutes of AGM held on 27th March, 2011 within a period of 30 days from the conclusion of the said meeting. In the case of Board Meetings the minutes are to be recorded within a period of 30 days from the conclusion of the meeting, but it can be signed either by the Chairman of the said meeting or the Chairman of the next succeeding meeting [Section 193 (1) and Section 193 (1A) (a)] . So it is enough if the minutes are recorded within 30 days from 27th March 2011, but it can be signed by the Chairman of the next Board Meeting.

Q. 2: State whether the following statements are True or False and give reasons. (a) A certificate of incorporation issued by the Registrar of Companies is not valid if all the signatures of

the subscribers to memorandum of association have been forged. (b) A Public Company can issue either redeemable or irredeemable preference shares.

Ans.: (a) False (incorrect): Because according to Section 35 of the Companies Act, 1956 a certificate of incorporation is conclusive evidence that all the requirements of the Companies Act, 1956 in respect of registration have been complied with.

(b) False (Incorrect): Because according to Section 80 (5A) of the Companies Act, 1956 a company cannot issue irredeemable preference shares or redeemable after a period of 20 years.

Q. 3: A charge requiring registration with Registrar of Companies was created on 1st February, 2008 by XYZ Limited. The Secretary of the Company realised on 15th March, 2008 that the charge was not filed with the Registrar. State the steps to be taken by the Secretary to get the charge registered with the Registrar.

Ans.: Registration of Charge: Steps for belated registration (Section 125 of the Companies Act, 1956): A charge should be registered within 30 days after the date of its creation. In this case the charge was created on 1st Feb, 2008. Hence the particulars of charge are required to be filed with the Registrar on or before 2nd March, 2008 [Section 125 (11)]. The Secretary of the company realised only on 15th March, 2008 that the charge was not filed with the Registrar. It is, however, open to the Registrar to allow the particulars of the charge to be filed within 30 days next following the expiry of the period of 30 days if the company satisfies the Registrar that it had sufficient cause for not filling the particulars within 30 days. [Proviso to Section 125(1)]. The Secretary may take advantage of this provision and immediately file the particulars of charge with the Registrar giving adequate reasons for the delay. If the Registrar is satisfied, he may allow registration on payment of additional fee.

Q. 4: Pick-up the correct answer from the following and give reasons: (a) A Public Company need not offer further shares to existing shareholders, if:

(i) Ordinary resolution is passed to that effect by the company in General meeting. (ii) Special resolution is passed to that effect by the company in General meeting. (iii) Resolution is passed by Board of Directors and approved by Company Law Board. (iv) Special resolution is passed by the Company in General meeting and approved by Registrar of

Companies. (b) Resolution requiring special notice is required

(i) For appointment of a person other than the retiring auditor as auditor at the Annual General Meeting

(ii) For removing a Director before the expiry of the period of his office (iii) For both (i) and (ii) (iv) For None of the above.

(c) Quorum for a General meeting of a Public Company is (i) 5 members present in person or by proxy (ii) 3 members personally present as required by the Articles of Association of the Company (iii) 5 members personally present (iv) 2 members personally present.

Ans.: (a) The correct answer is (ii). According to Section 81 (1) of the Companies Act, 1956 further shares can be offered to persons other than existing shareholders if special resolution to that effect is passed by the





company in general meeting. (b) The correct answer is (iii), because it has been so provided in Section 190, Section 225 and Section 284 (2)

of the Companies Act, 1956. (c) The correct answer is (ii). because according to Section 174, five members personally present will

constitute quorum unless the Articles provide for a larger number.

Q. 5: VD Company Ltd. is registered in Tamil Nadu within the jurisdiction of the Registrar of Companies, Chennai. The company proposes to shift its registered office to a place within the jurisdiction of Registrar of Companies, Coimbatore. State the steps to be taken by the company to give effect to the proposed shifting of its registered office.

Ans.: Change of registered office from the jurisdiction of one ROC to another within same State (Section 17-A of the Companies Act, 1956): In this case the company has to comply with the provisions of Section 17-A of the Companies Act, 1956. The proposed change of registered office from the jurisdiction of ROC, Chennai to ROC, Coimbatore will be effective only after such change is confirmed by the Regional Director who shall communicate the confirmation within 4 weeks from the date of receipt of application. Certified copy of the confirmation along with the attested copy of the Memorandum of Association must be filed with ROC under whose jurisdiction the Registered Office is being shifted within 2 months from the date of confirmation. The Registrar will issue Registration certificate within one month of filing the documents. The certificate shall be conclusive evidence that all the requirements of the Companies Act, 1956 have been complied with.

Q. 6: DJA Company Ltd., desirous of buying back of all its equity shares from the existing shareholders of the company, seeks your advice. Examining the provisions of the Companies Act, 1956 advise whether the above buy back of equity shares by the company is possible. Also state the sources out of which buy-back of shares can be financed.

Ans.: Buy-back Shares by Company (Section 77A of the Companies Act, 1956): The Company cannot buy back its entire equity shares from the existing shareholders. According to Section 77A of the Companies Act, 1956, buy back is restricted to 10% of its paid-up equity capital and free reserves authorized by the Board by means of a resolution passed at its meeting and upto 25% by way of a special resolution in a financial year. The sources out of which buy-back of shares can be finalised are: (a) Free reserves or (b) Security Premium account or (c) Proceeds of any shares or other specified securities.

Q. 7: Noble Meters Limited was incorporated with the equity share capital of ` 50 lakh. The company received the certificate of incorporation on 20th May, 2009. The company issued the prospectus inviting the public to subscribe for its equity shares. Meanwhile, the company intended to commence its business. Whether Noble Meters Ltd. is entitled to commence its business without obtaining the certificate to commencement of Business? Advise the company stating the conditions to be fulfilled for obtaining the certificate to commencement of Business from the Registrar of Companies under Companies Act, 1956.

Ans.: A private company or a company having no share capital may commence business immediately after its incorporation. The public company having share capital must obtain certificate to commence business from the Registrar of Companies before it commences its business or exercises its borrowing powers. Therefore in the given problem Noble Meters Limited is not entitled to commence business without obtaining the certificate to commence the business from the Registrar of Companies. In order to obtain this certificate the company has to fulfil the following conditions in compliance with the provisions of Section 149 of the Companies Act, 1956: (a) the minimum number of shares which has to be paid for in cash has been subscribed and allotted; (b) every director of the company has paid to the company, on each of the shares taken or contracted to be

taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription;

(c) no money is or may become liable to be paid to applicants of any shares or debentures offered for public subscription by reason of any failure to apply for or to obtain permission for the shares or debentures to be dealt in on any recognized Stock Exchange; and

(d) A statutory declaration by the secretary or one of the directors that the aforesaid requirements have been complied with, is filed with the Registrar of Companies. If a public company commences business or borrows money without obtaining the certificate, every officer in default shall be punishable with a fine of `5,000/-.

Q. 8: The United Traders Association was constituted by two joint Hindu Families consisting of 21 major and 5 minor members. The Association was carrying on the business of trading as retailers with the object for acquisition of gains. The Association was not registered as a company under the Companies Act, 1956 or any other law. State whether United Traders Association is having any legal status? Will there





be any change in the status of this Association if the members of the United Traders Association subsequently were reduced to 15?

Ans.: Section 11 of the Companies Act, 1956 provides that no company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on any other business can be formed unless it is registered under the Companies Act or is formed in pursuance of some other Indian Law. Thus if such an association violates the provisions of Section 11 it is an “Illegal Association“ although none of the objects for which it may have been formed is illegal. This Section does not apply to a joint Hindu family but where the business is being carried on by two or more joint Hindu families the provisions of Section 11 shall be applicable. For computing the number of members for this purpose, minor members of such families shall be excluded. Hence, the United Traders Association constituted by two joint Hindu Families is an Illegal Association according to the provisions of Section 11 as stated above. Further such Association of more than 20 persons, if unregistered is invalid at its inception and cannot be validated by subsequent reduction in the number of members to below 20 (Madan Lal vs. Janki Prasad 4 All 319).

Q. 9: Mr. 'Y', the transferee, acquired 250 equity shares of BRS Limited from Mr. 'X', the transferor. But the signature of Mr. 'X', the transferor, on the transfer deed was forged. Mr. 'Y' after getting the shares registered by the company in his name, sold 150 equity shares to Mr. 'Z' on the basis of the share certificate issued by BRS Limited. Mr. „Y' and 'Z' were not aware of the forgery. State the rights of Mr. 'X', 'Y' and 'Z' against the company with reference to the aforesaid shares.

Ans.: According to Section 84(1) of the Companies Act, 1956, a share certificate once issued amounts to a declaration by the company to all the world that the person in whose name the certificate is made out and to whom it is given is a share-holder in the company; in other words the company is estopped from denying his title to the shares. However, a forged transfer is a nullity. It does not give the transferee (Y) any title to the shares. If the company acts on a forged transfer and removes the name of the real owner (X) from the Register of Members, then the company is bound to restore the name of X as the holder of the shares and to pay him any dividends which he ought to have received (Barton v. North Staffordshire Railway Co. 38 Ch D 456). In the above case, ‘Z’ being the bona fide purchaser must be compensated by the company. ‘Z’ shall have therefore a right to claim the market price of those shares at that time. However ‘Z’ cannot insist on being placed on the register of members to which ‘X’ alone is eligible as he cannot be said to have consented to the transfer. ‘Y’ shall of course be liable to the company to indemnify the loss on account of payment to ‘Z’. A similar decision was given in Dixon v. Kennaway.

Q. 10: M. H. Company Limited served a notice of general meeting upon its shareholders. The notice stated that the issue of sweat equity shares would be considered at such meeting. Mr. 'A', a shareholder of the M. H. Company Limited complains that the issue of sweat equity shares was not specified fully in the notice. Is the notice issued by M. H. Company Limited regarding issue of sweat equity shares valid according to the provisions of the Companies Act, 1956? Explain in detail.

Ans.: Section 173 of the Companies Act, 1956 requires a company to annex an explanatory statement to every notice for a meeting of the company at which some special business is to be transacted. This explanatory statement is to bring to the notice of members all material facts relating to each item of special business. Section 173 further specifies that all business in case of any meeting other than (i) Consideration and approval of the annual accounts of the company (ii) Declaration of dividend (iii) Appointment of directors in place of those retiring and

(iv) Appointment of auditors including the fixing of their remuneration is regarded as special business. Therefore, the complaint of Mr. A, the shareholder is valid, since the details on the item regarding issue of sweat equity shares to be considered is lacking. The information about the issue of sweat equity shares is a material fact. The notice given by M. H. Ltd. of the General Meeting of the shareholders is not a valid notice under Section 173 of the Companies Act, 1956.

Q. 11: (a) The articles of ABC Limited provided that only those shareholders would be entitled to vote whose names have been there on the Register of Members for two months before the date of the meeting. X, a member, of the ABC Limited was holding 200 equity shares of the company. X transferred his shares to Y one month before the date on which the meeting was due. The name of Y could not be entered in the Register of Members as the application for transfer of shares was pending. X attended the meeting but he was prohibited by the company from exercising his voting right on the ground that he has not held his shares for the specified period as provided in the articles before the date of the meeting. State whether X can exercise his voting right in the meeting. State also the grounds upon which X may be excluded from exercising his voting rights in the meeting of the shareholders.

(b) State whether the following statements are true or false and give reasons:





(i) A share warrant is a bearer instrument and the bearer is entitled to the shares specified in the share warrant.

(ii) Every Company which is registered under the Companies Act, 1956, need not have their own Articles of Association.

(c) Pick out the correct answer from the following and give reasons:

(i) Statutory meeting is to be called by: (1) Government Company (2) Private Company having share capital (3) Public Company having share capital (4) Foreign Company.

(ii) The Securities Premium Account cannot be utilized: (1) In writing off the preliminary expenses of the company (2) In writing off the expenses of commission paid on issue of share of the company (3) For redemption of redeemable preference shares (4) In providing for the premium payable on the redemption of redeemable preference shares.

(iii) A “Statement in lieu of Prospectus” must be filed before the allotment of the shares with the Registrar of Companies by: (1) A Private Company (2) A Guarantee Company (3) A Public Company which issues the prospectus to the public (4) A Public Company which does not issue the prospectus to the public.

Ans.: (a) Entitlement to voting rights of shares holders” 1. Section 182 of the Companies Act, 1956 states that a public company, or a private company which is a

subsidiary of a public company, shall not prohibit any member from exercising his voting right on the ground that he has not held his share or other interest in the company for any specified period preceding the date on which the vote is taken, or any other ground except the grounds stated under Section 181 of the Companies Act, 1956. Examining the provisions of Section 182 it is clear that X can exercise his voting right in the shareholders‟ meeting of ABC Ltd though the articles of the company prohibits the same on the ground that he has not held his shares for the specified period before the meeting or on any other ground. The decision of Anathalakshmi vs. H.I & F Trust AIR 1951 Mad 927, is relevant to this point.

2. According to Section 181 of the Companies Act, 1956, the only grounds on which the right of an equity shareholder to vote may be excluded are (i) non-payment of calls by a member, (ii) non-payment of other sums due against a member, and (iii) where the company has exercised the right of lien on his shares.

(b) (i) Correct: According to Section 114 (1) of the Companies Act,1956 a public company limited by shares, if so authorized by its articles, may issue, with the prior approval of the Central Government, for fully paid up shares, under its common seal, a warrant stating that the bearer of the warrant is entitled to the shares therein specified. Section 114(3) states that a share warrant shall entitle the bearer thereof of the shares therein specified and the shares so specified may be transferred by delivery of the warrant. Thus it is clear that a share warrant is a bearer document of title to shares specified therein. On conversion of shares into share warrant, the name of the shareholder is struck off from the register of members.

(ii) Incorrect: Every company limited by guarantee or an unlimited or a private limited company is required to register its own articles along with the Memorandum of Association. If a public company limited by shares does not register its articles, the regulations contained in Table A would be applicable as if these were the articles of the company. In the case of a public company limited by shares and registered after the commencement of the Act, Table A shall apply in so far as it has not been excluded or modified by special articles. A guarantee company, an unlimited and a private company may adopt some of the provisions stated in Tables C,D and E but they must have their own Articles which should not be inconsistent with the provisions of the Companies Act, 1956.

(c) (i) Statutory meeting: Answer No. (3): Public Company having share capital: In accordance with the provisions of Section 165 every company limited by shares and every company limited by guarantee having share capital may call the statutory meeting. Other companies need not call the statutory meeting.

(ii) Securities Premium Account: Answer No. (3): For redemption of redeemable preference shares: Securities Premium account cannot be utilized for redemption of redeemable preference shares as it has not been covered under Section 78(2). However, if the articles so permit it may also be utilized for other purposes (in Re Hyderabad Industries Ltd, 2004).





(iii) Statement in lieu of Prospectus: Answer No. (4): A public company which does not issue prospectus to the public: According to the provisions of Section 70 of the Companies Act,1956, a public company, which does not issue a prospectus to the public, has to file a statement in lieu of prospectus before the allotment of the shares with the Registrar of companies.

Q. 12: F, an assessee, was a wealthy man earning huge income by way of dividend and interest. He formed three Private Companies and agreed with each to hold a bloc of investment as an agent for them. The dividend and interest income received by the companies was handed back to F as a pretended loan. This way, F divided his income into three parts in a bid to reduce his tax liability. Decide, for what purpose the three companies were established? Whether the legal personality of all the three companies may be disregarded?

Ans.: The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a person distinct and separate from its members, and therefore, has an independent separate legal existence from its members who have constituted the company. But under certain circumstances the corporate veil may be lifted by the courts. It means looking behind the corporate façade and disregarding the corporate entity. Where a company is incorporated and formed by certain persons only for the purpose of evading taxes, by taking shelter of the corporate nature, the courts have discretion to disregard the corporate entity in the matter of tax evasion. (1) The problem asked in the question is based upon the aforesaid facts. The three companies were formed by

the assessee purely and simply as a means of avoiding tax and the companies were nothing more than the assessee himself. Therefore the whole idea of Mr. F was simply to split his income into three parts with a view to evade tax.

(2) The legal personality of the three private companies may be disregarded because the companies were formed only to avoid tax liability and the company was nothing more than the assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividend and interest and to handover, them over to the assesse as pretended loans. The same was upheld in Re Sir Dinshaw Maneckji Petit AIR 1927 Bom.371 and Juggilal vs. Commissioner of Income Tax AIR (1969) SC (932).

Q. 13: Annual General Meeting of MGR Limited is convened on 28th December, 2008. Mr. J, who is a member of the company, approaches the company on 28th December, 2008 and demands inspection of proxies lodged with the company. Explain the legal position as stated under the Companies Act, 1956 in this regard.

Ans.: Every member entitled to vote at a meeting of the company or on any resolution to be moved thereat, shall be entitled during the period beginning 24 hours before the time fixed for the commencement of the meeting and ending with the conclusion of the meeting, to inspect the proxies lodged, at anytime during the business hours of the company. Provided not less than 3 days’ notice in writing of the intention to inspect is given to the company [Section 176(7) of the Companies Act, 1956]. In the given case, Mr. J who is a member approaches the company on 28th December and demands inspection of proxies lodged with the company. Based on the above provisions since prior notice had not been given by Mr. J to the company for inspecting the proxies, the company may refuse inspection of proxy forms.

Q. 14: India Cosmetics Limited was a registered company under Indian Companies Act, 1956. Later on, another company, India Cosmetics and Accessories Limited was formed and registered. There being similarity in the names of both the Companies, India Cosmetics Limited lodged a complaint against India Cosmetics and Accessories Limited, with the Registrar of Companies, stating that there is sufficient similarity between these two names which may mislead or defraud the public. India Cosmetics and Accessories Limited is intending to alter its name. Advise India Cosmetics and Accessories Limited to alter the name of the Company according to the provisions of the Companies Act, 1956.

Ans.: Similarity in the names of Companies: In accordance with Section 22(1) of the Companies Act, 1956, if through inadvertence or otherwise, a company on its first registration or on its registration by a new name, is registered by a name which in the opinion of the Central Government, is identical with, or too nearly resembles, the name by which a company in existence has been previously registered or resembles a registered trademark, whether under this Act or any previous company law, the first mentioned company, may by ordinary resolution and with the previous approval of the Central Government, signified in writing, change its name or new name. The problem asked in the question is based upon the provision of Section 22(1) of the Companies Act, 1956. The new company registered under the name India Cosmetics Accessories Ltd. is identical in name with the existing India Cosmetics Limited. According to the aforesaid provisions of Section 22(1) the newly setup company should change its name. In such a case, the company can, on its own, change the name by obtaining previous approval of Central Government (new power delegated to Regional Director) and then by passing an ordinary resolution [Section 22(1)(a)] within 12 months of the registration. Such a change should be made within 3 months of the date of the direction of the Central Government being received or such longer period as





the Central Government may deem fit to allow. The application for changing the name is required to be made to the Registrar of companies in Form 1A with a fee of ` 500. Where the name of a company has been changed the Registrar shall issue fresh certificate of incorporation with the changed name. Such change of name shall not affect any of the company‟s rights or obligations or affect any legal proceedings by or against it. Any legal proceedings which might have been continued or commenced by or against the company by its former name, may be continued by its name under Section 23 of the Companies Act, 1956.

Q. 15: While sanctioning working limit, the rate of interest had been fixed at a specified percentage above the bank rate as notified by the Reserve Bank of India. There was a change in the interest rate due to Reserve Bank of India notification issued later. The Bank insisted on filing a return of modification of charges. Is the stand of the bank correct? Discuss in the light of the provisions of the Companies Act, 1956.

Ans.: Section 135 of the Companies Act, 1956 provides that “whenever the terms or conditions or the extent or operation of any charge registered under this part are or is modified, it shall be the duty of the company to send to the Registrar the particulars of such modifications and the provisions of this part as to registration of a charge shall apply to modification of the charge.” Here the term modification includes variation of any terms of the agreement including variation of rate of interest (other than bank rate), which may be by mutual agreement or by operation of law. In the light of the above, the change

Q. 16: Promoters of Ahuja & sons Co. Ltd signed an agreement during incorporation process of the company , for the purchase of certain raw material for the company and the payment to be made to the supplier after the incorporation of the company. The company was incorporated and the material was also consumed. Soon, the company became insolvent and the debt became due. As a result supplier sued the promoters of the company for the recovery of money. Examine the position of the promoters under the following situations: 1. When the company has already adopted the contract after incorporation? 2. When the company makes a fresh contract with the suppliers in terms of pre incorporation

contract? Ans.: Problem on the Promoters: The promoters remain personally liable on a contract made on behalf of a

company which is not yet in existence. Such a contract is deemed to have been entered into personally by the promoters and they are liable to pay damages for failure to perform the promises made in the company‟s name (Scot v. Lord Ebury), even though the contract expressly provided that only the company shall be answerable for performance. In Kelner v. Baxter also it was held that the persons signing the contracts viz. Promoters were personally liable for the contract. Further, a company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence as ratification by the company when formed is legally impossible. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by the agent. The company can, if it desires, enter into a new contract, after its incorporation with the other party. The contract may be on the same basis and terms as given in the pre incorporation contract made by the promoters. The adoption of the pre-incorporation contract by the company will not create a contract between the company and the other parties even though the option of the contract is made as one of the objects of the company in its Memorandum of Association. It is, therefore, safer for the promoters acting on behalf of the company about to be formed to provide in the contract that: (a) if the company makes a fresh contract in terms of the pre-incorporation contract, the liability of the promoters shall come to an end; and (b) if the company does not make a fresh contract within a limited time, either of the parties may rescind the contract. Thus applying the above principles, the answers to the questions as asked in the paper can be answered as under: 1. The promoters in the first case will be liable to the suppliers of furniture. There was no fresh contract

entered into with the suppliers by the company. Therefore, promoters continue to be held liable in this case for the reasons given above.

2. In the second case obviously the liability of promoters comes to an end provided the fresh contract was entered into on the same terms as that of pre-incorporation contract.

Q. 17: X purchased 100 equity shares of ABC Ltd. from Y. Though the amount of transaction was paid to the seller, the transferee name is not appearing in the list of members. Subsequently, the company declared dividend. Referring to the provisions of the Companies Act, 1956 state to whom the company will be paying the dividend.

Ans.: According to Section 206 of the Companies Act, 1956 dividend shall be paid only to the registered holder of shares or to his order or to his bankers or to the bearer of a share warrant. Where shares have been sold but not yet registered, the dividend shall be paid to the transferee only in case the transferor gives a mandate in writing to that effect. Otherwise, the dividend in respect of such shares shall be transferred to the “Unpaid dividend





account”.

Q. 18: The Articles of Associations of X Ltd. require the personal presence of six members to constitute quorum of General Meeting. The following persons were present at the time of commencement of an Extraordinary General Meeting to consider the appointment of Managing Director: (i) Mr. G. the representative of Governor of Gujarat (iii) Mr. A and Mr. B, shareholders of Preference Shares. (iv) Mr. L. representing M Ltd., N Ltd. and X Ltd. (v) Mr. P, Mr. Q, Mr. R and Mr. S who were proxies of Shareholders. Can it be said that quorum was present? Discuss.

Ans.: Quorum means the minimum number of members that must be personally present in order to constitute a meeting and transact business thereat. Thus, quorum represents the number of members on whose presence the meeting of a company can commence its deliberations. According to Section 174, of the Companies Act, 1956, unless the Articles provide for larger number, five members, personally present in the case of a public company and two in the case of any other company form the quorum for a general meeting. In this case, the Articles provide for six. The word „personally present‟ excludes proxies. However, the representative of a body corporate appointed under Section 187 or the representative of the President or a Governor of State under Section 187A is a member „personally present‟ for purpose of counting a quorum. In case two or more corporate bodies who are members of a company are represented by a single individual, each of the bodies corporate will be treated as personally present by the individual representing it. If, for instance, he represents three corporate bodies, his presence will be counted as three members being present in person for purposes of quorum. The quorum of members, personally present means the presence of the members who are called to vote in the meeting. Preference shareholders can vote only in relation to the matters affecting the rights of preference shares. In the extra ordinary general meeting in question, only the appointment of the managing director has to be considered. It is not a matter affecting the right of preference shares and the preference shareholders are not entitled to vote and hence, they cannot be considered as “members personally present” for the purpose of quorum. Thus, the number of persons being personally present would be as follows: Present personally Number: It can therefore be said that quorum was not present. Mr. G 1 Mr. A and Mr. B NIL Mr. L 3 Proxies NIL Total 4

It can therefore be said that quorum was not present.

Q. 19: P transfers his share to Q and applies to a company to register transfer of share by P to Q. The company refuses to register such transfer of shares and even not sends notice of refusal to P or Q within the prescribed period. What are the rights available to the aggrieved party against the company for such refusal?

Ans.: The problem as asked in the question is based upon Section 111 of the Companies Act dealing with the refusal to register transfer and appeal against refusal. On refusal to register a transfer or transmission by operation of law, of the right to any shares in, or debentures thereof, the company has to send notice of refusal giving reasons to the transferee or the transferor or to the person giving intimation of such transmission, or on delivery of transfer deed to the company, as the case may be within a period of 2 months from the date of the intimation or delivery of the transfer deed to the company. In the given case the company has failed to give such notice of refusal to the aggrieved parties within the stipulated time of 2 months. Failure to give notice of refusal gives rights/remedies to the aggrieved parties. Rights/remedies to aggrieved parties: The aggrieved parties may apply to the Company Law Board (Tribunal) under subsection (2) or (4) of Section 111 against refusal or for rectification of the register of members, if his name is entered in the register without sufficient cause, or for omission of his name from the register or default in making an entry of his name in the register. The time of filing such appeal is 4 months from the date of lodgement of transfer application. There is no limitation period provided for making an application for rectification of register of members, under subsection (4). The company is also punishable under sub-section (12) with a fine upto ` 500 per day.

Q. 20: (a) ‘S’, a shareholder, after duly appointing ‘P’ as his proxy for a meeting, himself attended the meeting and voted on a resolution. ‘P’ thereafter claimed to exercise his vote. Examine his claim.

(b) The Articles of Association of a public company require the instrument appointing a proxy to be received by the company 75 hours before the meeting. Is it a valid requirement? If not, what are its effect?

(c) ‘S’, a shareholder, gives a notice for inspecting proxies, five days before the meeting is scheduled





and approaches the company two days before the scheduled meeting for inspecting the same. What is the legal position relating to his actions?

Ans.: (a) As per law, a shareholder has a right to revoke the proxy’s authority by voting himself before the proxy has voted - but once the proxy has voted he cannot retract his authority. Therefore P’s claim in the given case is invalid. This point was reiterated in Cousins v. International Brick Co. Ltd also.

(b) According to Section 176 of the Companies Act, 1956, any provision in the Articles of a public company or of a private company which is a subsidiary of a public company which requires a longer period than 48 hours before a meeting of the company for depositing a proxy, shall have effect as if a period of 48 hours had been specified for such deposit. Therefore in the given case, the answer is a ‘No’.

(c) ‘S’ has given proper notice under Section 176(7) of the Companies Act 1956 which stipulates that not less than three days in writing of the intention to inspect has to be given to the company. But, such inspection can be undertaken only during the period beginning 24 hours before the time fixed for the commencement of the meeting and ending with the conclusion of the meeting. So ‘S’ can undertake the inspection only during the above mentioned period and not two days prior to the meeting.

Q. 21: (i) An annual general meeting of a company was convened in November, 2006. It was adjourned and the adjourned meeting was held in March, 2007. The next general meeting was held in March, 2008. The company was held liable for an irregularity in holding the AGMs. Decide.

(ii) Reliance Industries Ltd. has its registered office at Mumbai. The company desires to hold an extraordinary general meeting in New Delhi. Examine the validity of the company‟s desire with reference to the relevant provisions of the Companies Act, 1956

Ans.: (i) The company is guilty of violation of Section 166. There must be a meeting in each calendar year which did not happen in this case.

(ii) The company may hold the EGM at any place. Sec.166 mentions the place for an AGM but Section172 (1), dealing with EGMs, contains no reference to any particular place for meeting.

Q. 22: State whether the following statements are true or false and give reasons there for: (a) The approval of the Central Government is required to change the name of a company. (b) Companies registered under Section 25 are also known as “licensed companies” (c) Television advertisements and visual clips giving all required details can be treated as a prospectus. (d) Deferred shares also called founders’ shares. (e) To authorise the issue of shares at a discount, a special resolution is required.

Ans.: (a) True. As per Section 21 of Companies Act, 1956, the Central Government’s approval is required for name change.

(b) True. The permission of the Central Government for registering a company under Section 25 is in the form of a license and hence they are also called licensed companies.

(c) False. A prospectus must be in writing. (d) True. Since deferred shares are often held by the promoters of the company, they are called so. (e) False. Under Section 79, subject to the articles, an ordinary resolution is sufficient to authorize an issue of

shares at discount.

Q. 23: A Managing Director of a Company borrowed a sum of money by executing a document in which he forged the signature of two other directors who are required to sign as per requirements of the articles. Can the Company deny liability to creditors?

Ans.: In Ruben vs. Great Fingall Consolidated, it was held that Doctrine of Indoor Management could not be extended to case of forgery. Transaction effected by forgery is void ab initio. However, in Sri Kishan v. Mondal Bros. & Co. it was held that a Company may be held liable for any fraudulent acts of its officers acting under ostensible authority. Therefore, in the instant case, Company will not be allowed to deny liability in order to defeat bona fide claims of the creditor.

Q. 24: M/s Arya Engineering Ltd. was incorporated on 1.4.2010. No General Meeting of the company has been held so far. Explain the provisions of the Companies Act, 1956 regarding the time limit for holding the first annual general meeting of the Company and the power of the registrar to grant extension of time for the first annual general meeting.

Ans.: A company shall hold its first Annual General Meeting (AGM) within 18 months from the date of its incorporation. It shall not be necessary for a company to hold any AGM in the year of its incorporation or in the following year if it holds AGM within 18 months from the date of its incorporation. In the given case the company M/s Arya Engineering Ltd. was incorporated on 1.4.2010. It should have conducted its first AGM within a period of 18 months i.e. 30th September 2011. However the company has not held the meeting till date, thus violating the provisions of Section 166 of the Companies Act. It is to be further noted that the Registrar does not have power to grant extension of time to hold the first AGM.

Q. 25: The management of Kamna Real Estate Ltd. has decided to take up the business of food processing





activity because of the downward trend in real estate business. There is no provision in the object clauses of the memorandum of association to enable the company to carry on such business. State with reasons whether its object clause can be amended. State briefly the procedure to be adopted for change in object clause.

Ans.: Since the present objects clause of the company does not contain any enabling provision to carry on the proposed business, the objects clause will have to be altered. According to Section 17, objects clause can be amended only for 7 special reasons. Loss cannot be considered as one of the reason to enable the company to amend the object clause.

Q. 26: T, a share broker at Bombay Stock Exchange, is also the Secretary of XYZ Ltd. He applied for the allotment of 1000 equity shares being issued by the Company and paid the full amount. M, one of the clerks of T, owning no shares executed a transfer deed in favour of T without enclosing the share certificate. The Company without asking for the share certificate from M (the clerk) registered the transfer and issued a new share certificate. On declaration of dividend by the Company T was denied the right to get dividend on the grounds that the share certificate issued to T had no validity. T moves the Court praying the Court to declare the share certificate as valid and also claims for damages. Examine the case and decide whether T’s claim is valid. What would be your answer in case M is an officer of the Company, having no authority to issue share certificate, issues a forged certificate?

Ans.: If a Company authorises the issue of a share certificate stating that the person named therein is the registered holder of certain shares, it cannot afterwards allege that that 96person is not entitled to those shares (Praga Tools Corporation v. MRT Patny). Thus a share certificate is a declaration by the Company to the whole world that the person in whose name the certificate is made out, and to whom it is given, is a shareholder in the Company. Further in the case Dixon v. Kennaway & Co., the Company was estopped from denying the validity of the certificate and was held liable to damages. The facts of the case were similar to that of what has been asked in the question. Furthermore, if an officer of the Company, who has no authority to issue certificates, issues a forged certificate, there is no estoppel. Thus based on the above explanation and the case ruling, T‟s claim is valid and the Company would be estopped from denying the validity of the share certificate. The answer would be different in the second case since the officer concerned has no authority to issue the certificate and issues a forged certificate.

Q. 27: Mars Ltd. was in the process of incorporation. Promoters of the company signed an agreement for the purchase of certain furniture for the company and payment was to be made to the suppliers of furniture by the company after incorporation. The company was incorporated and the furniture was used by it. Shortly after incorporation, the company went into liquidation and the debt could not he paid by the company for the purchase of above furniture. As a result suppliers sued the promoters of the company for the recovery of money. Examine whether promoters can he held liable for payment under the following situations: (i) When the company has already adopted the contract after incorporation? (ii) When the company makes a fresh contract with the suppliers in terms of pre incorporation

contract? Ans.: The promoters remain personally liable on a contract made on behalf of a company which is not yet

in existence. Such a contract is deemed to have been entered into personally by the promoters and they are liable to pay damagers for failure to perform the promises made in the company‟s name (Scot v. Lord Ebury), even though the contract expressly provided that only the company shall be answerable for performance. In Kelner v. Baxter also it was held that the persons signing the contracts viz. Promoters were personally liable for the contract. Further, a company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence as ratification by the company when formed is legally impossible. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by the agent. The company can, if it desires, enter into a new contract, after its incorporation with the other party. The contract may be on the same basis and terms as given in the pre incorporation contract made by the promoters. The adoption of the pre-incorporation contract by the company will not create a contract between the company and the other parties even though the option of the contract is made as one of the objects of the company in its Memorandum of Association. It is, therefore, safer for the promoters acting on behalf of the company about to be formed to provide in





the contract that: (a) if the company makes a fresh contract in terms of the pre-incorporation contract, the liability of the promoters shall come to an end; and (b) if the company does not make a fresh contract within a limited time, either of the parties may rescind the contract. Thus applying the above principles, the answers to the questions as asked in the paper can be answered as under: (i) The promoters in the first case will be liable to the suppliers of furniture. There was no fresh

contract entered into with the suppliers by the company. Therefore, promoters continue to be held liable in this case for the reasons given above.

(ii) In the second case obviously the liability of promoters comes to an end provided the fresh contract was entered into on the same terms as that of pre-incorporation contract.

Q. 28: Under the Articles, the Directors of a Company had power to borrow upto ` 1,00,000 without the consent of the General Meeting. The Directors themselves lent ` 2,00,000 to the Company without such consent and took Debentures. Is the Company liable for ` 2,00,000? If not, for what amount, if any, is the Company liable?

Ans.: The company is not to be held wholly liable but it is liable only to the extent of ` 1,00,000 which is permitted under the Articles of the company. (Howard Vs. Patent Ivory Co.,)

Q. 29: Six of the seven signatures on the Memorandum of Association of a Company were forged. The Memorandum was duly presented, registered and a certificate of incorporation was issued. The existence of the Company was subsequently questioned on the ground that the registration was void. Decide.

Ans.: Section 35 of the Companies Act 1956 declares that certificate of incorporation given by the Registrar in respect of any company shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent and incidental thereto. Therefore the Registration cannot be challenged in the given case, even though six of the seven signatures of the Memorandum of Association of a company were forged as the Memorandum was duly presented, registered and a certificate of incorporation was issued.

Q. 30: A company wants to provide financial assistance to its employees to enable them to subscribe for fully paid shares of the Company. Does it amount to purchase of its own shares. If in the instant case, the Company is itself purchasing to redeem its preference shares, does it amount to again acquisition of its own shares?

Ans.: As per Section 77 of the Companies Act, a company cannot purchase directly its own shares and also financing any person directly or indirectly whether by way of loan/guarantee or surety or otherwise for or in connection with purchase or subscription made or to be made of any shares of its own or of its holding Company is prohibited. But this rule has two exceptions under Section 80 of the Act. The first of those exceptions extends to a case where a company makes a purchase to redeem its preference shares and the second exception comes into operation where a company may legitimately provide financial assistance in the form of a loan to bona fide employees of the company, other than its Directors or manager, to enable them to purchase fully paid-up shares to be “held by themselves by way of beneficial ownership, where such loans shall not exceed in amount six months‟ salary or wages of such employees.

Q. 31: ABC Ltd. issued a notice for holding of its AGM on 7th November, 2010. The notice was posted to the members on 16th October, 2010. Some of the members alleged that the company had not complied with the provisions of the Act with regard to the period of notice and as such the meeting was not validly called. Decide. (i) Whether the meeting has been validly called? (ii) If there is a shortfall in the number of days by which the notice falls short of the statutory

requirement. State and explain by how many days the notice fall short of the statutory requirement? (iii) Can the shortfall, if any, be condoned?

Ans.: (i) 21 days’ clear notice of an AGM must be given [Section 171]. In case notice is sent by post, then section 53(2) provides that the notice shall be deemed to have been received on expiry of 48 hours from the time of its posting. For working out clear 21 days, the day of the notice and the day of the meeting shall be excluded. Accordingly, 21 clear days’ notice has not been served and the meeting is, therefore, not validly convened.

(ii) Worked as per (i) above, notice falls short by 2 days (i.e. Notice should have been posted on 14.10.10). In other words, notice of the general meeting must have been sent at least 25 days before the date of the meeting i.e. 7th November, 2010 (where the notice is sent by post)





(iii) According to Section 171(2), an AGM called at a notice shorter than 21 clear days shall be valid if consent is accorded thereto by all the members entitled to vote thereat. Thus, if all the members of the company approve to the shorter notice, shortfall may be condoned.

Q. 32: STD Ltd. convened its Board of Directors meeting on 1st August, 2010. During the course of the meeting the date for calling annual general meeting was discussed but no decision could be taken on it in the meeting. However, the Secretary of the company issued the notice for calling the annual general meeting of the shareholders without taking any authorization from the Board of Directors. State who is the proper authority to issue the notice for calling the annual general meeting and to whom such notice is to be given.

Ans.: The Annual General Meeting of a company can be called by a proper authority. Obviously the only proper authority is the Board of Directors. It may be called by passing necessary resolution in the Board meeting or by circular resolution. The notice for it must be given by the proper authority i.e. Board of Directors. It cannot be called by any individual director or some of the directors or by Secretary. Therefore, in this case the secretary of the STD Ltd. is not authorised to call Annual General Meeting of the company. The proper authority to call and to issue the notice of such meeting is the Board of Directors. If however a notice has been issued without authority such a notice may be ratified by the Board of Directors before the meeting. Whom, to send notice of AGM? Notice of AGM must be in writing and should be given to:

(i) every member of the company

(ii) In case of insolvent member, to his assignee

(iii) In case of deceased member to his representative.

(iv) Auditors [Section 172 (2)].

(v) A legally entitled representative

(vi) In case of joint holders, that joint holder whose name is first in the register of members or in record of depository [Section 53 (4)].

(vii) Stock exchange, in case the company is a listed company. In addition to the above the copy of notice is to be sent to Financial Institutions, foreign collaborators, trustees for holders of debentures, if company has entered into any agreement with them, which may provide for sending of notices of general meeting to them.

Q. 33: Developers Ltd. hold a General Meeting of shareholders for passing a special resolution regarding alteration of Articles of Association. Out of the members present in the meeting 20 voted in favour, 4 against and 8 members did not vote and remained absent from voting. The Chairman of the meeting declared the resolution as passed. Is it a valid resolution as per the provisions of the Indian Companies Act, 1956?

Ans.: In accordance with Section 189 (2) of the Companies Act, 1956 the votes cast in favour of a resolution (whether by show of hands or in a poll as the case may be) by members who, being entitled so to do, vote in person or where proxies are allowed, by proxy, are not less than three times the number of votes if any, cast against the resolution by members so entitled and voting is called special resolution. Hence in accordance with the above mentioned provisions, the resolution passed in the general meeting of the Developers Ltd is a valid resolution since the vote cast in favour of the resolution, are more than 3 times the number of votes cast against the resolution.

Q. 34: The Articles of a Public Company clearly stated that Mr. A will be the solicitor of the company. The Company in its general meeting of the shareholders resolved unanimously to appoint B in place of A as the solicitor of the company by altering the articles of association. Examine, whether the company can do so? State the reasons clearly.

Ans.: According to Section 36(1) of the Indian Companies Act, 1956, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and combined covenants on its and his part to observe all the provisions of the memorandum and articles. Section 36 creates an obligation binding on the company in its dealings with the members but the word “members” in this Section means members in their capacity as members, that is, excluding any relationship which does not flow from the membership itself. Therefore even a member cannot enforce the provisions of articles for his benefit in some other capacity than that of a member. Section 31 also provides that the company may by special resolution alter its articles. In the given problem the company has changed its articles by passing resolution unanimously and therefore the company can change its articles. The provision of memorandum and articles will bind the members but in the capacity of a member only and even a member may be treated as an outsider. Therefore a member cannot enforce the provisions of articles for his benefit in some other capacity than that of a member. In the given case A will not succeed and the company is empowered to appoint B as a solicitor of the company and may change the articles accordingly. The problem is based upon the decision held in Eley vs. Positive Govt. Security Life Assurance Co.





(1876).

Q. 35: The Articles of Association of MSW Ltd. contained a provision that upto 4% of issue price of the shares may be paid as underwriting commission to the underwriters. The Board of directors decided to pay 5% underwriting commission. Can the Board of directors do so? State the provisions of law in this regard as stated under the Indian Companies Act, 1956.

Ans.: According to the provisions of Section 76 (1) of the Companies Act, 1956 a company may pay a commission to any person who agrees to subscribe or procure subscription for an agreed number of shares or debentures of the company. Such commission may be paid to the underwriters who offer guarantee to procure applications for certain number of shares and guarantee to purchase the balance quantity of shares. For this, the underwriter gets underwriting commission. Maximum total commission payable cannot exceed 5% of the price of shares or the underwriter may be paid a lower rate if so prescribed by articles. In case of debentures it is 2½% or a lower rate if so prescribed in the articles. In the given problem the articles of MSW Ltd has prescribed 4% underwriting commission but the directors decided to pay 5% underwriting commission. The directors cannot do so because under Section 76 (1) as aforesaid, such commission cannot be more than that prescribed in the articles. Therefore the directors are not empowered to do so. Further, such amount of commission payable must be authorized by articles. The agreed commission should be disclosed in the prospectus or the statement in lieu of prospectus. Copy of the contract for payment of commission must be filed with Registrar of companies at the time of the delivery of the prospectus or letter of offer. [Section 76 (1)]. An underwriter must be also registered with SEBI.

BUSINESS LAWS

UNIT 2: THE INDIAN CONTRACT ACT, 1872

Q. 1: (a) Examine with reference to relevant case-law as to when acceptance need not be communicated.

(b) State whether the following contracts can be enforced. (i) Where there is a family settlement in writing and a family member who is not a party

to the settlement wishes to enforce his claim. (ii) Where an orphanage wishes to enforce a promise made by a philanthropist to donate

a specified sum. (iii) An agreement to create an agency, in which consideration is absent.

Ans.: (a) In general, acceptance of the offer must be communicated to the offeror. Even when performance of an act constitutes acceptance of an offer, the performance of that act must be communicated, which will be equivalent to communication of acceptance. But in cases, where the offer includes a term that a mere performance will constitute acceptance, the performance suffices as communication of acceptance. The position was clearly explained in the famous case of Carlill Vs Carbolic & Smokeball Co. In this case, the defendant, a sole proprietary concern manufacturing a medicine which was a carbolic ball whose smoke could be inhaled through the nose to cure influenza, cold and other connected ailments issued an advertisement for sale of this medicine. The advertisement also included a reward of £100 to any person who contracted influenza, after using the medicine (which was described as “carbolic smoke ball”). Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. It was held that Mrs. Carlill was entitled to a reward of £100 as she had performed the condition for acceptance. Further as the advertisement did not require any communication of compliance of the condition, it was not necessary to communicate the same. The court thus in the process laid down the following three important principles: (i) An offer, to be capable of acceptance, must contain a definite promise by the offeror that

he would be bound provided the terms specified by him are accepted; (ii) An offer may be made either to a particular person or to the public at large and; (iii) If an offer is made in the form of a promise in return for an act, the performance of that

act, even without any communication thereof, is to be treated as an acceptance of the offer.

(b) (i) As per the judgment in Shuppu Vs Subramanian 33 Mad. 238, a family settlement in writing may be enforced by a member of the family who was not a party to the





settlement. (ii) A gratuitous promise such as a promise to donate money lacks consideration and cannot

be enforced. (iii) According to Section 185, of the Indian Contract Act, 1872 an agreement creating an

agency though devoid of consideration, is valid and can be enforced.

Q. 2: (a) Examine the difference between succession and assignment. (b) (i) In what kind of contracts, time is of essence? (ii) Briefly explain the positions of sub-agent and substituted agent under the law of

agency. Ans.: (a) When succession occurs by a process of law, both the burden and the benefit would

sometimes devolve on the legal heir. For example, ‘B’ is the son of ‘A’ the father. Upon A’s death ‘B’ will inherit all the assets and liabilities of ‘A’ [These assets and liabilities are also referred to as debts and estates]. Thus ‘B’ will be liable to all the debts of ‘B’, but if the liabilities inherited are more than the value of the estate [Assets] inherited it will be possible to pay only to the extent of assets inherited. In the concept of “assignment”, unlike succession, the assignor can assign only the assets to the assignee and not the liabilities. Because when a liability is assigned, a third party gets involved in it. The debtor cannot through assignment relieve himself of his liability to his creditor. There cannot be any assignment of benefit of a contract coupled with a liability, unless the assignees consent has been sought or when a personal consideration has entered into making of the contract then the contract cannot be assigned. In Zaffer Mehar Ali Vs Budge Budge Jute Mills Company Ltd. 33 Cal. ‘A’ agreed to sell certain gunny bags to ‘B’ which were to be delivered in monthly installments for a period of 6 months and the contract contained certain options for the buyer as regards quality and packing. It was held that the clause relating to the buyer’s option did not preclude the assignment of the contract.

(b) (i) Ordinarily from a plain examination of a contract it would be difficult to ascertain from the terms of the contract whether time is of essence of the contract. A promisee may have failed to perform his contract within the specified time. Yet the time may not be treated as essence of the contract in that case. Whether time is of essence of a contract has to be decided from the terms of the contract. In mercantile contracts, as business world is ruled by ‘time and money’ any stipulation as to ‘time and money’ are essential conditions. The general principles that are followed can be enunciated as under. (i) In transactions relating to sale of gold, silver, blue chip shares, time of delivery is of

essence. Here time will be treated as essence of contract. (ii) In transactions involving sale of land, redemption of mortgages, though certain

time frame is fixed, any delay is not considered seriously provided justice can be done to parties. Of course even in sale of land, time can be made essence of contract by express words.

(ii) Sub-Agent: Sub agency occurs when an agent appoints another agent. The appointment of sub-agent is not lawful, because the agent is a delegate and a elegate cannot further delegate. This is based on the Latin principle “delegata potestas non potest delegari”. The appointment of a sub-agent would be valid, if the terms of appointment originally contemplated it. Sometimes customs of trade may provide for appointment of sub agents. In both these cases the sub-agent would be treated as the agent of the principal. Position of sub-agent vis a vis third parties where the subagent is properly appointed: (a) Where the sub-agent is property appointed: Where a sub agent is properly

appointed, the principal is bound by his acts and is therefore responsible to third parties as if he were an agent originally appointed by the principal.

(b) In the case of appointment without authority: In case where the appointment of sub-agent takes place without authority, the principal is not bound by the acts of sub-agent and sub-agent is not bound to the principal. It is the agent who is the principal of sub agent. Where the subagent purportedly acts in the name of first principal, the first principal may ratify the act of sub-agent. However if the sub-





agent acts in his own name or in the name of the agent who has without authority delegated to the sub-agent the business which is in fact that of the principal, the principal cannot ratify such acts of sub-agent.

Substituted Agent: Substituted agents are not sub-agents. They are agents of the principal. Where the principal appoints an agent and if that agent identifies another person to carry out the acts ordered by principal, than the second person is not to be treated as a sub-agent but only as an agent of the original principal. For example, ‘A’ directs ‘B’ his solicitor to sell his property by auction and ‘B’ appoints ‘C’ an auctioneer. In this regard, ‘C’ is an agent of ‘A’ and not a subagent. While selecting a “substituted agent” the agent is bound to exercise same amount of diligence as a man of ordinary prudence would and if he does so he will not be responsible for acts or negligence of the substituted agent. Example: ‘X’ consigns goods to ‘Y’ a merchant for sale. ‘Y’ in due course employs an auctioneer in goods to sell goods of ‘X’ and also allows him to receive the proceeds of sale. The auctioneer becomes insolvent afterwards without handing over the proceeds. Here ‘Y’ will not be responsible to ‘Y’ as he has discharged his duties as a man of ordinary prudence and diligence.

Q. 3: (a) Vijay gifted the whole of his property to his daughter on the condition that she should pay ` 200 per month to her uncle (father’s brother). Later, she refused to pay her uncle on the ground that she did not receive any consideration from her uncle. Is she justified?

(b) Mr. Vipin is a professional dancer. Mr. Pandey engages him to dance at a party he is giving for his business associates. But a day prior to the party Mr. Vipin’s son passes away and he could not perform the dance recital. In case Mr. Pandey sues Mr. Vipin, do the latter have any protection under the law?

Ans.: (a) That consideration can legitimately move from a third party is an accepted principle of law in India though not in England. In Chinaya vs. Ramaya (1881) A.Mad. 13.7., a mother, ‘A’ had made over certain property to her daughter with condition that the former’s brother should be paid annuity by the latter. The latter (i.e. the daughter) the same day executed the document agreeing to pay annuity accordingly but declined to pay after sometime. A’s brother sued A’s daughter. It was contended on behalf of A’s daughter, that there was no consideration from A’s brother and hence there was no valid contract. This plea was rejected on the ground that the consideration did flow from mother to daughter and such consideration from third party is sufficient to enforce the promise of daughter of A to pay annuity to A’s brother. In the given case if Vijay’s daughter had made a promise to her uncle then she would be bound by the promise.

(b) When performance of a promise becomes impossible on account of subsequent developments of events or changes in circumstances, which are beyond the contemplation of parties, the contract becomes void. Such supervening impossibility can arise due to variety of circumstances as stated below: (a) Accidental destruction of the subject matter of the contract. (b) Non-existence or non occurrence of a particular state of things. (c) Changes in law. (d) Incapacity to perform a contract of personal services. As can be seen above in point (d), in cases of contract of personal service, disability or incapacity to perform, caused by an act of God e.g. illness, constitutes lawful excuse for non-performance of the contract (Robinson vs. Davison L.R. 6 Ex. 269). Hence, Mr. Vipin has a valid excuse.

Q. 4: Ajit sees a book displayed in a shelf of a book shop with a price tag of ` 95. Ajit tenders ` 95 at the counter and asks for the book. The bookseller refuses to sell saying that the book has already been sold to someone else and he does not have another copy of that book in the stock. Is the bookseller bound to sell the book to Ajit?

Ans.: No. a display of goods with prices marked thereon is only an invitation for offer, and not an offer itself.





Q. 5: X offered to sell his house to Y for Rs.50,000. Y accepted the offer by E-mail. On the next day Y sent a fax revoking the acceptance which reached X before the Email. Is the revocation of acceptance valid? Would it make any difference if both the E-mail of acceptance and the fax of revocation of acceptance reach X at the same time?

Ans.: Yes, the revocation of acceptance is valid because the acceptor may revoke his acceptance at any time before the letter of acceptance reaches the offeror. If the letter of acceptance (E-mail) and the Fax of revocation of acceptance reach X at the same time, the formation of contract will depend on the fact that which of the two is opened first by Y. If X reads the Fax letter first, revocation is valid but if he reads the E-mail first, revocation is not possible.

Q. 6: Mr. Mohan an industrialist has been fighting a long drawn litigation with Mr. Kamal, another industrialist. To support his legal campaign Mr. Mohan enlists the services of Mr. Anil a legal expert stating that an amount of ` 5 lakhs would be paid, if Mr. Anil does not take up the brief of Mr. Kamal. Mr. Anil agrees, but at the end of the litigation Mr. Mohan refuses to pay. Decided whether Mr. Anil can recover the amount promised by Mr. Mohan under the provisions of the Indian Contract Act, 1872.

Ans.: Agreement in restraint of trade is one wherein a person is restrained from exercising his lawful profession, trade or business of any kind and is to that extent void. However one of the exceptions to agreement in restraint of trade is in respect of “SERVICE AGREEMENTS” i.e. an agreement by which a person agrees not to carry on any service within the term of his agreement. Such a restriction will not amount to an agreement in restraint of trade. This case of Mr. Anil and Mohan falls in the category of an exception to an agreement in restraint of trade. Conclusion: Mr. Anil can recover the amount from Mr. Mohan.

Q. 7: Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After covering half the distance, Suresh found that the apples will perish before reaching Mumbai. He sold the same at half the market price. Ramesh sued Suresh. Will he succeed?

Ans.: An agent has the authority in an emergency to do all such acts as a man of ordinary prudence would do for protecting his principal from losses which the principal would have done under similar circumstances. A typical case is where the “agent” handling perishable goods like “apples” can decide the time, date and place of sale, not necessarily as per instructions of the principal, with the intention of protecting the principal from losses. Here the agent acts in an emergency and acts as a man of ordinary prudence. In the given case Suresh had acted in an emergency situation and Ramesh will not succeed against him.

Q. 8: X offered to sell his land to N for ` 28,000/-. N replied purporting to accept the offer and enclosed a cheque for ` 8,000/-. He also promised to pay the balance of ` 20,000/- in monthly installments of ` 5,000/- each. Examine the legal position.

Ans.: To conclude a contract between the parties, the acceptance must be communicated in some perceptible form. Any conditional acceptance or acceptance with varying or too deviant conditions is no acceptance. Such conditional acceptance is a counter proposal and has to be accepted by the proposer, if the original proposal has to materialize into a contract. Further when a proposal is accepted, the offeree must have the knowledge of the offer made to him. If he does not have the knowledge, there can be no acceptance. The acceptance must relate specifically to the offer made. Then only it can materialize into a contract. With the above rules in mind, we may note that the following is the solution to the given problems: (i) It is not a valid acceptance and no contract can come into being. In fact this problem is similar to

the facts of Neale vs. Merret [1930] W.N 189, where M offered to sell his land to N for £ 280. N replied purporting to accept the offer but enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly installments of £ 50. It was held that N could not enforce his acceptance because it was not an unqualified one.

(ii) This problem is similar to the facts of Union of India v. Bahulal (AIR 1968 Bombay 294) case, wherein A offered to sell his house to B for ` 1000/-, to which B replied that, “I can pay ` 800 for it”. Consequently, the offer of A is rejected by B as the aceptance is not unqualified. But when B later changes his mind and is prepared to pay ` 1000/-, it becomes a counter offer and it is up to A whether to accept it or not.





Q. 9: A offered to sell his house to B for ` 10000/-. B replied that he can accept the house for only `8,000/-. A rejected B’s counter offer to buy the house for ` 8,000/-. B later changed his mind and is now willing to buy the house for ` 10,000/-.

Ans.: To conclude a contract between the parties, the acceptance must be communicated in some perceptible form. Any conditional acceptance or acceptance with varying or too deviant conditions is no acceptance. Such conditional acceptance is a counter proposal and has to be accepted by the proposer, if the original proposal has to materialize into a contract. Further when a proposal is accepted, the offeree must have the knowledge of the offer made to him. If he does not have the knowledge, there can be no acceptance. The acceptance must relate specifically to the offer made. Then only it can materialize into a contract. With the above rules in mind, we may note that the following is the solution to the given problem This problem is similar to the facts of Union of India v. Bahulal (AIR 1968 Bombay 294) case, wherein A offered to sell his house to B for ` 1000/-, to which B replied that, “I can pay ` 800 for it”. Consequently, the offer of A is rejected by B as the aceptance is not unqualified. But when B later changes his mind and is prepared to pay ` 1000/-, it becomes a counter offer and it is up to A whether to accept it or not.

Q. 10: Do the following statements amount to involvement of fraud? Where the vendor of a piece of land told a prospective purchaser that, in his opinion, the land can support 2000 heads of sheep whereas, in truth, the land could support only 1500 sheep.

Ans.: The problem is based on the facts of the case Bisset vs. Wilkinson (1927). In the given problem the vendor says that in his opinion the land could support 2000 heads of sheep. This statement is only an opinion and not a representation and hence cannot amount to fraud.

Q. 11: Do the following statements amount to involvement of fraud? X bought shares in a company on the faith of a prospectus which contained an untrue statement that one Z was a director of the company. X had never heard of Z and the untrue statement of Z being a director was immaterial from his point of view. Can X claim damages on grounds of fraud?

Ans.: The problem is based on the facts of the case Smith vs. Chadwick (1884). In the problem though the prospectus contains an untrue statement that untrue statement was not the one that induced X to purchase the shares. Hence X cannot claim damages.

Q. 12: Does the right of lien exist in the following cases? A company agreed to garage the motor-car of H for three years, for an annual charge. H was entitled to take the car out of the company’s garage as and when she liked. The annual payment being in arrear the company detained the car at the garage and claimed a lien.

Ans.: In the given problem H was entitled to take the car away as and when she pleased. The possession by the garage was not continuous, and nor can we say that the possession at all vested in the company. Hence no right of lien exists [It was so held in a similar case of Hatton vs. Car Maintenance Ltd (1915)].

Q. 13: Does the right of lien exist in the following cases? A, a watch-repairer, repaired B’s watch for a total charge of ` 20. Before B took delivery of the watch, the shop caught fire through no fault of A, and B’s watch was destroyed.

Ans.: In the given case, the issue relates not to existence of lien but a rule relating to particular lien. As a rule, if through no fault of the bailee, the goods are destroyed or stolen then the bailee is entitled to be paid for services performed on the goods before they were destroyed or stolen. In the given instance A is entitled to get his repair charges for the work he performed prior to fire.

Q. 14: Mr. X, is employed as a cashier on a monthly salary of ` 2,000 by ABC bank for a period of three years. Y gave surety for X’s good conduct. After nine months, the financial position of the bank deteriorates. Then X agrees to accept a lower salary of ` 1,500/- per month from Bank. Two months later, it was found that X has misappropriated cash since the time of his appointment. What is the liability of Y?

Ans.: If the creditor makes any variance (i.e. change in terms) without the consent of the surety, then surety is discharged as to the transactions subsequent to the change. In the instant case Y is liable as a surety for the loss suffered by the bank due to misappropriation of cash by X during the first nine





months but not for misappropriations committed after the reduction in salary. [Section 133, Indian Contract Act, 1872].

Q. 15: Miss.Chitra, a singer, enters in to a contract with the manager of Bangalore Gate Club, to sing in the Club for two concerts every week during the next two months and the club agrees to pay her at the rate of ` 2000 for each concert. On the seventh concert Miss. Chitra wilfully absents herself. With the assent of the manager of the club, Miss. Chitra sings for the eighth concert. But on the following day, the club puts an end to the contract. Can Miss. Chitra claim damages for breach of contract? Advice.

Ans.: On the seventh Concert when Miss. Chitra wilfully absents herself, the club is at liberty to put an end to the contract. If Miss.Chitra sings on the eighth Concert with the consent of the club. The club has signified its acquiescence in the continuance of the contract and cannot now put an end to it. The club is entitled to compensation for the damage sustained because of Miss. Chitra’s failure to sing on the seventh concert. If the club puts an end to the contract, Miss. Chitra can claim damages for breach of contract [Section 39 of The Indian Contract Act, 1872)].

Q. 16: Ram, Rahim and Robert are partners of software business and jointly promises to pay `30,000 to Raheja. Over a period of time Rahim became insolvent, but his assets are sufficient to pay one-forth of his debts. Robert is compelled to pay the whole. Decide whether Robert is required to pay whole amount himself to Raheja in discharging joint promise.

Ans.: According Section 43 of Indian Contract Act, 1872 when two or more persons make a joint promise, the promisee may, in absence of express agreement to the contrary, compel any one or more of such joint promisers or perform the whole of the promise. Further, if any one of two or more joint promisers makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Therefore, in this case, Robert is entitled to receive `2,500 from Rahim’s assets and ` 13,750 from Ram.

Q. 17: A promised to pay B for his services at his (A) sole discretion which found to be fair and reasonable. However, B dissatisfied with the payment made by A and wanted to sue him. Decide whether B can sue A under the provisions of Indian Contract Act, 1872?

Ans.: B’s suit will not be valid because the performance of a promise is contingent upon the mere will and pleasure of the promisor; hence, there is no contract. As per section 29 of the Indian contract Act, 1872 – agreements, the meaning of which is not certain, or capable of being made certain, are void”.

Q. 18: Ajay induced Anil to buy his car saying that it was in a very good condition. After taking the car, Anil complained that there were many defects in the car. Ajay proposed to get it repaired and promised to pay 50% cost of repairs. After a few days, the car did not work at all. Now Anil wants to rescind the contract. Decide giving reasons.

Ans.: According to Section 18 of the Indian Contract Act, 1872, misrepresentation is there: 1. When a person positively asserts that a fact is true when his information does not warrant it to

be so, though he believes it to be true. 2. When there is any breach of duty by a person, which brings an advantage to the person

committing it by misleading another to his prejudice.3. When a party causes, however, innocently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Problem: The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the right to rescind the contract if he, after becoming aware of the misrepresentation, takes a benefit under the contract or in some way affirms it. Accordingly in the given case Anil could not rescind the contract, as his acceptance to the offer of Ajay to bear 50% of the cost of repairs impliedly amount to final acceptance of the sale [Long v. Lloyd, (1958)].

Q. 19: X advances to Y ` 10,000 on the guarantee of Z. The loan carries interest at ten percent per annum. Subsequently, Y becomes financially embarrassed. On Y’s request, X reduces the interest to six per cent per annum and does not sue Y for one year after the loan becomes due. Y becomes insolvent. Can X sue Z?





Ans.: X cannot sue Z, because a surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor, no matter whether the variation is beneficial to the surety or does not materially affect the position of the surety (Sec.133, Indian Contract Act, 1872).

Q. 20: State whether the following contracts can be enforced. (i) Where there is a family settlement in writing and a family member who is not a party to

the settlement wishes to enforce his claim (ii) Where an orphanage wishes to enforce a promise made by a philanthropist to donate a

specified sum. (iii) An agreement to create an agency, in which consideration is absent.

Ans.: (i) As per the judgment in Shuppu Vs Subramanian 33 Mad. 238, a family settlement in writing, may be enforced by a member of the family who was not a party to the settlement.

(ii) A gratuitous promise such as a promise to donate money lacks consideration and cannot be enforced.

(iii) According to Section 185, of the Indian Contract Act,1872 an agreement creating an agency though devoid of consideration, is valid and can be enforced.

Q. 21: A entered into an agreement with S to deliver five dozen bottles of a particular brand of

champagne to be manufactured in his factory. The champagne could not be manufactured because of strike by the workers and A failed to supply the said dozen of champagne to S. Decide whether A can be exempted from liability under the provisions of the Indian Contract Act, 1872.

Ans.: According to Section 56 (Para 2) of Indian Contract Act, 1872 when the performance of a contract becomes impossible or unlawful subsequent to its formation, the contract becomes void, this is termed as ‘supervening impossibility’ (i.e. impossibility which does not exist at the time of making the contract, but which arises subsequently). But impossibility of performance is, as a rule, not an excuse from performance. It means that when a person has promised to do something, he must perform his promise unless the performance becomes absolutely impossible. Whether a promise becomes absolutely impossible depends upon the facts of each case. The performance does not become absolutely impossible on account of strikes, lockout and civil disturbances and the contract in such a case is not discharged unless otherwise agreed by the parties to the contract (Budget V Bennington; Jacobs V Credit Lyonnais). In this case Mr. A could not deliver the 5 dozen bottles of champagne as promised because of strike by the workers. This difficulty in performance cannot be considered as impossible of performance attracting Section 56 (Para 2) and hence Mr. A is liable to Mr. S for non-performance of contract.

Q. 22: X buys from Y a painting which both believes to be the work of an old master and for which X pays a high price. The painting turns out to be only a modern copy .Discuss the validity of the contract?

Ans.: The contract is absolutely void as there is a mutual mistake of both the parties as to the substance or quality of the subject-matter going to be the very root of the contract. In case of bilateral mistake of essential fact, the agreement is void ab initio, as per Section 20.

Q. 23: R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R’s house to return the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss and why?

Ans.: M shall have to bear the loss since he failed to return the umbrella within the stipulated time and Section 161 clearly says that where a bailee fails to return the goods within the agreed time, he shall be responsible to the bailor for any loss, destruction or deterioration of the goods from that time notwithstanding the exercise of reasonable care on his part.

Q. 24: Mr. Aman of Kolkata engaged Mr. Singh as his agent to buy a house in East Extension area. Mr. Singh bought a house for ` 20 lakhs in the name of a nominee and then purchased it himself for ` 24 lakhs. He then sold the same house to Mr. Aman for ` 26 lakhs. Mr. Aman later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain.





Ans.: The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained in Section 215 read with Section 216. The two sections provide, that where an agent without the knowledge of the principal, deals in the business of agency on his own account, the principal may: (1) Repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any

material fact from him, or that the dealings of the agent have been disadvantageous to him. (2) Claim from the agent any benefit, which may have resulted to him from the transaction. Therefore, based on the above provisions, Mr. Aman is entitled to recover ` 6 lakhs from Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.

Q. 25: M owes money to N under a contract. It is agreed between M, N and O that N shall henceforth accept O as his debtor instead of A. Referring to the provisions of the Indian Contract Act, 1872, state whether N can claim payment from O?

Ans.: Yes, a contract need not be performed when the parties to it agree to substitute a new contract for it or to rescind or alter it. (Section 62, Indian Contract Act, 1872).

Q. 26: Sohan induced Suraj to buy his motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan proposed to get it repaired and promised to pay 40% cost of repairs After a few days, the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving reasons.

Ans.: According to Section 18 of the Indian Contract Act, 1872, misrepresentation is there: 1. When a person positively asserts that a fact is true when his information does not warrant it to

be so, though he believes it to be true. 2. When there is any breach of duty by a person, which brings an advantage to the person

committing it by misleading another to his prejudice.3. When a party causes, however, innocently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Problem: The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the right to rescind the contract if he, after becoming aware of the misrepresentation, takes a benefit under the contract or in some way affirms it. Accordingly in the given case Suraj could not rescind the contract, as his acceptance to the offer of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the sale [Long v. Lloyd, (1958)].

Q. 27: Father promised to pay his son a sum of ` 1 lakh if the son passed C.A. examination in the first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as promised. Son files a suit for recovery of the amount. State along with reasons whether son can recover the amount under the Indian Contract Act, 1872.

Ans.: Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in Section 10. According to the provisions there should be an intention to create legal relationship between the parties. Agreements of a social nature or domestic nature do not contemplate legal relationship and as such are not contracts, which can be enforced. This principle has been laid down in the case of Balfour vs. Balfour (1912 2 KB. 571). Accordingly, applying the above provisions and the case decision, in this case son cannot recover the amount of ` 1 lakh from father for the reasons explained above.

Q. 28: M advances to N ` 5,000 on the guarantee of P. The loan carries interest at ten percent per annum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the interest to six per cent per annum and does not sue N for one year after the loan becomes due. N becomes insolvent. Can M sue P?

Ans.: M cannot sue P, because a surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor, no matter whether the variation is beneficial to the surety or does not materially affect the position of the surety (Sec.133, Indian Contract Act, 1872).

Q. 29: M Ltd., contracts with Shanti Traders to make and deliver certain machinery to them by





30.6.2004 for ` 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver the machinery to Shanti Traders. Later, Shanti Traders procured the machinery from another manufacturer for ` 12.75 lakhs. Shanti Traders was also prevented from performing a contract which it had made with Zenith Traders at the time of their contract with M Ltd. and were compelled to pay compensation for breach of contract. Advise Shanti Traders the amount of compensation which it can claim from M Ltd., referring to the legal provisions of the Indian Contract Act.

Ans.: Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract. According to it, when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract, to be likely to result from the breach of it. Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. It is further provided in the explanation to the section that in estimating the loss or damage from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. Applying the above principle of law to the given case, M Ltd is obliged to compensate for the loss of ` 1.25 lakhs (i.e. ` 12.75 Less ` 11.50 = ` 1.25 lakhs) which had naturally arisen due to default in performing the contract by the specified date. Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith Traders, it depends upon the fact whether M Ltd knew about the contract of Shanti Traders for supply of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach of contract. Otherwise M Ltd is not liable.

Q. 30: Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay ` 60,000 to Kartik. Over a period of time Vijay became insolvent, but his assets are sufficient to pay one-forth of his debts. Sanjay is compelled to pay the whole. Decide whether Sanjay is required to pay whole amount himself to Kartik in discharging joint promise.

Ans.: According to Section 43 of Indian Contract Act, 1872 when two or more persons make a joint promise, the promisee may, in absence of express agreement to the contrary, compel any one or more of such joint promisers or perform the whole of the promise. Further, if any one of two or more joint promisers makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Therefore, in this case, Sanjay is entitled to receive ` 5,000 from Vijay’s assets and ` 27,500 from Ajay.

Q. 31: Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following: (i) The telegram of revocation of acceptance was received by Ramaswami before the letter

of acceptance. (ii) The telegram of revocation and letter of acceptance both reached together.

Ans.: The problem is related with the communication and time of acceptance and its revocation. As per Section 4 of the Indian Contract Act, 1872, the communication of an acceptance is a complete as against the acceptor when it comes to the knowledge of the proposer. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Referring to the above provisions (i) Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid. (ii) If Ramaswami opens the telegram first (and this would be normally so in case of a rational

person) and reads it, the acceptance stands revoked. If he opens the letter first and reads it, revocation of acceptance is not possible as the contract has already been concluded.

Q. 32: Explaining the provisions of the Indian Contract Act, 1872, answer the following: (i) A contracts with B for a fixed price to construct a house for B within a stipulated time. B

would supply the necessary material to be used in the construction. C guarantees A’s





performance of the contract. B does not supply the material as per the agreement. Is C discharged from his liability?

(ii) C, the holder of an over-due bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time to B. Is A discharged from his liability?

Ans.: (i) According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission for the creditor, the legal consequence of which is the discharge of the principal debtor. In the given case the B omits to supply the timber. Hence C is discharged from his liability.

(ii) According to Section 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged. In the given question the contract to give time to the principal debtor is made by the creditor with X who is a third person. X is not the principal debtor. Hence A is not discharged.

Q. 33: Mr. Dubious textile enters into a contract with Retail Garments Show Room for supply of 1,000 pieces of Cotton Shirts at ` 300 per shirt to be supplied on or before 31st December, 2007. However, on 1st November, 2007 Dubious Textiles informs the Retail Garments Show Room that he is not willing to supply the goods as the price of Cotton shirts in the meantime has gone upto ` 350 per shirt. Examine the rights of the Retail Garments Show Room in this regard.

Ans.: Anticipatory breach of contract: Anticipatory breach of contract occurs when the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived. In such a situation the promise can claim compensation by way of loss or damage caused to him by the refusal of the promisor. For this, the promisee need not wait till the time stipulated in the contract for fulfillment of the promise by the promisor is over. In the given problem Dubious Textiles has indicated its unwillingness to supply the cotton shirts on 1st November 2007 itself when it has time up to 31st December 2004 for performance of the contract of supply of goods. It is therefore called anticipatory breach of contract. Thus Retail Garments show room can claim damages from Dubious Textiles immediately after 1st November, 2007, without waiting up to 31st December 2007. The damages will be calculated at the rate of ` 50 per shirt i.e. the difference between ` 350/- (the price prevailing on 1st November) and ` 300/- the contracted price.

Q. 34: A stands surety for B for any amount which C may lend to B from time to time during the next three months subject to a maximum of ` 50,000. One month later A revokes the guarantee, when C had lent to B ` 5,000. Referring to the provisions of the Indian Contract Act, 1872 decide whether A is discharged from all the liabilities to C for any subsequent loan. What would be your answer in case B makes a default in paying back to C the money already borrowed i.e. ` 5,000?

Ans.: The problem as asked in the question is based on the provisions of the Indian Contract Act 1872,as contained in Section 130 relating to the revocation of a continuing guarantee as to future transactions which can be done mainly in the following two ways: 1. By Notice: A continuing guarantee may at any time be revoked by the surety as to future

transactions, by notice to the creditor. 2. By death of surety: The death of the surety operates, in the absence of any contract to the

contrary, as a revocation of a continuing guarantee, so far as regards future transactions. (Section 131). The liability of the surety for previous transactions however remains.

Thus applying the above provisions in the given case, A is discharged from all the liabilities to C for any subsequent loan. Answer in the second case would differ i.e. A Is liable to C for ` 5,000 on default of B since the loan was taken before the notice of revocation was given to C.

Q. 35: Shambhu Dayal started “self-service” system in his shop. Smt. Prakash entered the shop, took a basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell





the said articles to Smt. Prakash? Decide. Ans.: The offer should be distinguished from an invitation to offer. An offer is the final expression of

willingness by the offeror to be bound by his offer should the party chooses to accept it. Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer, but invites only the other party to make an offer on those terms. This is the basic distinction between offer and invitation to offer. The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. Prakash in selecting some articles and approaching the cashier for payment simply made an offer to buy the articles selected by her. If the cashier does not accept the price, the interested buyer cannot compel him to sell. [Fisher V. Bell (1961) Q.B. 394 Pharmaceutical society of Great Britain V. Boots Cash Chemists].

UNIT 3: NEGOTIABLE INSTRUMENT ACT, 1881

Q. 1: ‘A’ draws a bill of exchange payable to himself on ‘X’. Who accepts the bill without consideration just to accommodate ‘A’. ‘A’ transfers the bill to ‘P’ for good consideration. State the rights of ‘A’ and ‘P’. Would your answer be different if ‘A’ transferred the bill to ‘P’ after maturity?

Ans.: The problem is based on the provisions of Sections 43 and 59 of the Negotiable Instruments Act, 1881. ‘A’ cannot recover from ‘X’ because it is an accommodation bill drawn by ‘A’ and accepted by ‘X’ without consideration. According to Section 43, an instrument without consideration creates no obligation between the parties to the transaction i.e. ‘A’ and ‘X’ in this case. Section 43 also provides that if such a bill is transferred to a holder for consideration, such holder may recover the amount due on such instrument from the transferor for consideration or any prior party thereto. Hence „P‟ in this case can recover the amount from ‘X’ and ‘A’. According to Section 59, in the case of accommodation bills, a defect in the title of the transferor does not affect the title of holder acquiring after maturity. Hence the answer will be the same even if ‘P’ has acquired the bill for consideration after maturity.

Q. 2: B issued a cheque for `1,25,000 in favour of S. B had sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank in the meantime, became insolvent. Decide, under the provisions of the Negotiable Instrument Act, 1881 whether S can recover the money from B.

Ans.: The problem as asked in the question is based on Sections 72 and 74 of the Negotiable Instrument Act, 1881. As per Section 72, it is the duty of the holder of a cheque to present the same to the bank for payment before the relationship between the bank and drawer is spoilt. It is only if he does so that he can hold the drawer liable in case of non-payment and not otherwise. As per Section 74, if the cheque is not presented by the holder for payment within reasonable time and meanwhile the relation between drawer/customer of the bank is spoilt and if the bank refuses to make payment or is incapable of making such payment, then the drawer cannot be held liable for such dishonour. Hence applying the above provisions, S cannot recover the money from B.

Q. 3: Mr. Wise obtains fraudulently from R a crossed cheque Not Negotiable. He transfers the cheque to V, who gets the cheque encashed from ANS Bank Limited which is not the drawee bank. R on coming to know about the fraudulent act of Mr. Wise sues ANS Bank for the recovery of the money. Examine with reference to the relevant provisions of The Negotiable Instruments Act, 1881, whether R will succeed in his claim. Would your answer be still the same in case Mr. Wise does not transfer the cheque and gets the cheque encashed from ANS Bank himself?

Ans.: According to Section 130 of the Negotiable Instruments Act 1881, a person taking a cheque crossed generally or specially bearing in either case the words not negotiable shall not have or shall not be able to give a better title to the cheque than the title the person from whom he took had. In consequence, if the title of the transferor is defective, the title of the transferee would be vitiated by the defect. Thus, based on the above provisions, it can be concluded that if the holder has a good





title, he can still transfer it with a good title; but if the transferor has a defective title, the transferee is affected by such defects and he cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith and for value. As Mr. Wise in the given case had obtained the cheque fraudulently, he had no title to it and could not give to the bank any title to the cheque or money and the bank would be liable for the amount of the cheque for encashment (Great Western Railway Co. Ltd. vs. London and County Banking Co). The answer in the second case would not change and shall remain the same for the reasons given above. Thus R in both the cases shall succeed is his claim from ANS Bank.

Q. 4: A issues an open ‘bearer’ cheque for ` 10,000 in favour of B who strikes out the word ‘bearer’ and crosses the cheque. The cheque is thereafter negotiated to C and D. When it is finally presented by D’s banker, it is returned with remarks “payment countermanded” by drawer. In response to a legal notice from D, A pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable Instruments Act, 1881 decide, whether A‟s argument is valid or not?

Ans.: The cheque bears two alterations when it is presented to the paying banker. One, the word bearer has been struck off and two; the cheque has been crossed. Both of these alterations do not amount to material alteration under the provisions of the Act and hence the liability of any including the drawer is not at all affected. A is liable to pay the amount of the cheque to the holder.

Q. 5: PQR Limited received a cheque for ` 50,000 from its customer Mr. LML After a week company came to know that the proceeds were not credited to the account of PQR Limited due to some ‘defects’, as informed by the Banker. What according to you are the possible effects?

Ans.: A Cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form. Possible defects are; 1. Cheque undated. 2. Cheque becomes stale 3. Instrument inchoate 4. Cheque may be post dated 5. inadequate funds position of the customer 6. Customer might have credit in one branch and cheque drawn on another branch. 7. Bank might have received insolvency/lunacy of customer. 8. Counter-manding / stop payment instruction of customer. 9. Bank receiving attachment order by a court 10. Bank receiving notice of customer‟s death 11. Closure of account by customer. 12. Material alterations like irregular signature, difference of amount in words and figure etc.

Q. 6: State the circumstances under which the drawer of a cheque will be liable for an offence relating to dishonour of the cheque under the Negotiable Instrument Act, 1881. Examine, whether there is an offence under the Negotiable Instrument Act, 1881, if a Drawer of a cheque after having issued the cheque, informs the Drawee not to present the cheque as well as informs the Bank to stop the payment.

Ans.: Dishonour of cheque: On dishonour of a cheque the drawer is punishable with imprisonment for a term not exceeding two years or with a fine not exceeding twice the amount of a cheque or with both of the following conditions is fulfilled: (i) If the cheque is returned by the bank unpaid due to insufficiency of funds in the account of

drawer (ii) If the cheque was drawn to discharge a legally enforceable debt or other liability. (iii) If the cheque has been presented to the bank within a period of six months from the date on

which it is drawn on or within the period of its validity, whichever is earlier. (iv) If the payee or the holder in due course of the cheque has given a written notice demanding

payment within 30 days from the drawer on receipt of information of dishonour of cheque from the bank.





(v) If the drawer has failed to make payment within 15 days of the receipt of the said notice. (Section 138)

(vi) If the payee or a holder in due course has made a complaint within one month of cause of action arising under Section 138 (Section 142)

Problem: The Supreme Court held in Modi Cements ltd. Vs. Kuchil Kumar Nandi held that once a cheque is issued by the drawer, a presumption under Section 139 follows (i.e. the cheque has been issued for the discharge of any debt or other liability) and merely because the drawer issued a notice thereafter to the drawee as to the bank for stoppage of payment, it will not preclude an action under Section 138. Hence, the drawer of the cheque will be liable for the offence under Section 138 for dishonour of cheque.

Q. 7: What is meant by maturity of a Bill of Exchange or Promissory Note? Calculate the date of

maturity of the following bills of exchange explaining the relevant rules relating to determination of the date of maturity as provided in the Negotiable Instruments Act, 1881: (i) A bill of exchange dated 31st August, 2007 is made payable three months after date. (ii) A bill of Exchange drawn on 15th October, 2007 is payable twenty days after sight and

the bill is presented for acceptance on 31st October, 2007. Ans.: The maturity of a promissory note or bill of exchange is the date on which it falls due for payment

(Sec 22). Sec 22 of the Negotiable Instruments Act, 1881 further adds that for payment in calculating the maturity of a promissory note or a bill of exchange which is not payable on demand, at sight or on presentment, three days, called the days of grace, must be added to the date on which the instrument is expressed to be payable. Bill of exchange dated 31st August, 2007: if the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month (Sec 23). In this case the bill of exchange is dated 31st August, 2007 and it is made payable 3 months this after date. Hence it falls due on 3rd day after November, 2007 (the last day of the month) i.e. on 3rd December, 2007. Bill of exchange payable 20 days after sight: The bill is presented for acceptance on 31st October, 2007. The date of presentment for acceptance is to be excluded. Hence the instrument is at maturity on the 3rd day after 20th November, 2007 i.e. 23rd November, 2007.

Q. 8: 'N' is the holder of a bill of exchange made payable to the order of 'P'. The bill of exchange contains the following endorsements in blank: First endorsement ‘P’ Second endorsement 'Q' Third endorsement 'R' Fourth endorsement 'S' 'N' strikes out, without S's consent, the endorsements by 'Q' and 'R'. Decide with reasons whether 'N' is entitled to recover anything from 'S' under the provisions of Negotiable Instruments Act, 1881.

Ans.: According to Section 40 of the Negotiable Instruments Act, 1881, where the holder of a Negotiable Instrument without the consent of the endorser destroys or impairs the endorser’s remedy against a prior party the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity. Therefore if the endorsements of R and Q are struck out without the consent of S, N will not be entitled to recover anything from S, the reason being that as between R and S, R is the principal debtor and S is the surety. If R is released by the holder under Section 39 of the Act, S being surety will be discharged. In this given problem, the rule may be stated thus that when the holder without the consent of the endorser impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder.

Q. 9: Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881: (i) X who obtains a cheque drawn by Y by way of gift. (ii) A, the payee of the cheque, who is prohibited by a court order from receiving the

amount of the cheque.





(iii) M, who finds a cheque payable to bearer, on the road and retains it. (iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the

payee. (v) B, who steals a blank cheque of A and forges A’s signature.

Ans.: As per Section 8 of the Negotiable Instruments Act, 1881 holder of a Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the amount due thereon from the parties thereto. On applying the above provision in the given cases- (i) Yes, X can be termed as a holder because he has a right to possession and to receive the amount

due in his own name. (ii) No, he is not a „holder‟ because to be called as a „holder‟ he must be entitled not only to the

possession of the instrument but also to receive the amount mentioned therein. (iii) No, M is not a holder of the Instrument though he is in possession of the cheque, so is not

entitled to the possession of it in his own name. (iv) No, B is not a holder. While the agent may receive payment of the amount mentioned in the

cheque, yet he cannot be called the holder thereof because he has no right to sue on the instrument in his own name.

(v) No, B is not a holder because he is in wrongful possession of the instrument.

Q. 10: X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881.

Ans.: Bill drawn in fictitious name: The problem is based on the provision of Section 42 of the Negotiable Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer‟s order in a fictitious name and is endorsed by the same hand as the drawer’s signature, it is not permissible for the acceptor to allege as against the holder in due course that such name is fictitious. Accordingly, in the instant case, Y cannot avoid payment by raising the plea that the drawer (Z) is fictitious. The only condition is that the signature of Z as drawer and as endorser must be in the same handwriting.

Q. 11: Whether the following notes may be considered as valid Promissory notes: (i) I promise to pay ` 5,000 or ` 7,000 to Mr. Ram. (ii) I promise to pay to Mohan ` 500, if he secures 60% marks in the examination. (iii) I promise to pay ` 3,000 to Ravi after 15 days of the death of A.

Ans.: A promissory note is an instrument (not being a bank note or currency note) in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or the holder of, a certain person or to the bearer of the instrument, (Section 4 of the Negotiable Instruments Act, 1881). In view of the above provision of the said Act, following are the essential elements of a promissory note- 1. It must be in writing. 2. The promise to pay must be unconditional. 3. The amount promised must be a certain and a definite sum of money. 4. The instrument must be signed by the maker. 5. The person to whom the promise is made must be a definite person. Thus: (i) In this case, it is not a valid promissory note because the amount is not certain. (ii) In this case, it is not a valid promissory note because it is conditional. . (iii) In this case, it is a valid promissory note because death of A is a certainty even if time of death

is not certain.

Q. 12: C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time to B. Is A discharged from his liability?

Ans.: According to Section 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged. In the given question the contract to give time to the principal debtor is





made by the creditor with X who is a third person. X is not the principal debtor. Hence A is not discharged.

Q. 13: B obtains A’s acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course. C endorses the bill to D who knows of the fraud. Referring to the provisions of the Negotiable Instruments Act, 1882, decide whether D can recover the money from A in the given case.

Ans.: Section 53 of the Negotiable Instrument Act, 1881 provides that a holder of negotiable instrument who derives title from a holder in due course has the right thereon of that holder in due course. Such holder of the bill who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards to the acceptor and all parties to the bill prior to that holder. In this case, it is clear that though D was aware of the fraud, he was himself not a party to it. He obtained the instrument from C who was a holder in due course. So D gets a good title and can recover from A.

Q. 14: A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with reference to the provisions of the negotiable Instruments Act, 1881 the validity of the Promissory Note and state whether it is binding on A and B.

Ans.: Minor being a party to Negotiable Instrument: Every person competent to enter into contract has capacity to incur liability by making, drawing, accepting, endorsing, delivering and negotiating a Promissory Note, Bill of Exchange or clearance (Section 26, Para 1, Negotiable Instrument Act, 1881). As a Minor‟s agreement is void, he cannot bind himself by becoming a party to a Negotiable Instrument. But he may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself (Section 26, para 2). In view of the provisions of Section 26 explained above, the promissory note executed by A and B is valid even though a minor is a party to it. B, being a minor is not liable; but his immunity from liability does not absolve the other joint promissory, viz., A from liability [Sulochona v. Pondiyan Bank Ltd.,].

Q. 15: In what way does the Negotiable Instruments Act, 1881 regulate the determination of the ‘Date of maturity’ of a Bill of Exchange. Ascertain the ‘Date of maturity’ of a bill payable 120 days after the date. The Bill of exchange was drawn on 1st June, 2005.

Ans.: Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on demand, at sight or on presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed in the case of a bill payable on demand, at sight, or presentment. When a bill is made payable as stated number of months after date, the period stated terminates on the day of the month, which corresponds with the day on which the instrument is dated. When it is made payable after a stated number of months after sight the period terminates on the day of the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance on protested for Non-acceptance when it is payable a stated number of months after a certain event, the period terminates on the day of the month which corresponds with the day on which the event happens. (Section 23). When a bill is made payable a stated number of months after sight and has been accepted for honour, the period terminates which the day of the month which corresponds with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period terminates on the last day of such month (Section 23). In calculating the date a bill made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or the day of protest for non-accordance, or the day on which the event happens shall be excluded (Section 24). Three days of grace are allowed to these instruments after the day on which they are expressed to be payable. (Section 22). When the last day of grace falls on a day, which is public holiday, the instrument is due and payable on the preceding business day (Section 25). Answer to Problem: In this case the day of presentment for sight is to be excluded i.e. 1st June, 2005. The period of 120





days ends on 21st September, 2005 (June 29 days + July 31 days + August 31 Days +September 29 days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2005, which happens to be a public holiday. As such it will fall due on 1st October, 2005 i.e., the preceding Business Day.

Q. 16: V makes a gift of ` 10,000 to W through a cheque issued in favour of W. Later he (V) informs W not to present the cheque for payment and informs the bank also to stop payment. Examining the provisions of the Negotiable Instruments Act, 1881, decide whether V’s above acts constitute an offence.

Ans.: Dishonoured cheque to be treated as an offence: As per the provisions of the Negotiable Instruments (Amendment Miscellaneous and Provisions) Act, 2002, a person issuing a cheque will be committing an offence if the cheque is dishonoured for insufficiency of funds. The offence will be punishable with imprisonment for a term up to two years or with a fine twice the amount of the cheque or both. The cheque in question should be issued in discharge of a liability and therefore a cheque given as gift will not fall in this category. The Supreme Court in Modi Cements Ltd. Vs. Kuchil Kumar[1998] held that once a cheque is issued by the drawer, a presumption under Section 139 follows and merely because the drawer issues a notice thereafter to the drawee or to the bank for stoppage of payment ,it will not preclude an action under Section 138. Section 138 is a penal provision in the sense that once a cheque is drawn on an account maintained by the drawer with his banker for payment of any amount of money to another person from out of that account for the discharge in whole or in part of any other liability, is informed by the bank unpaid either because of insufficiency of amount to honour the cheque or the amount exceeding the arrangement made with the bank, such a person shall be deemed to have committed an offence. But in the present problem V shall not be deemed to have committed an offence because V gifts the cheque to W. The Section 138 of the Act does not apply to the cheques given as gift.

Q. 17: Referring to the provisions of the Negotiable Instruments Act,1881, examine whether acceptance of a bill of exchange in the following situation shall be treated as Qualified acceptance where the acceptor: (i) Undertakes to pay only ` 2,000 for a bill drawn for ` 5,000; (ii) Declares the payment to be independent of any other event; (iii) Writes: “Accepted, payable at ABC Bank”.

Ans.: Acceptance of the Bill of Exchange: Acceptance of a Bill of Exchange can be either “general” or “qualified”. It is qualified when the drawee does not accept the bill according to the apparent terms of the bill but attaches some conditions or qualification which have the effect of either reducing his (acceptor’s) liability or acceptance of the liability subject to certain conditions. The holder of the bill is entitled to require an absolute and unconditional acceptance as well as to treat it as dishonoured, if it is not so accepted. However, he may agree to „qualified acceptance‟. But such an act will discharge all parties prior to himself, unless he has obtained the consent of prior parties Thus, applying the above in the given case answers to the sub-parts are as under: (i) The acceptance shall be treated as ‘qualified’. (ii) Acceptance shall not be treated as ‘qualified’. (iii) It is not qualified acceptance.

Q. 18: Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said amount was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day ?

Ans.: Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is payable after or after sight or after happening of a specified event, the time of payment is determined by excluding the day from which the time begins to run. Therefore, in the given case, Bharat will succeed in objecting to Bhushan’s claim. Bharat paid rightly “three days after sight”. Since the bill was presented on 1st January, Bharat was required to pay only on the 4th and not on 3rd April, as contended by Bharat.





Q. 19: X draws a cheque in favour of Y. After having issued the cheque he informs Y not to present the cheque for payment. He also informs the bank to stop payment. Decide, under provisions of the Negotiable Instruments Act, 1881, whether the said acts of X constitute an offence against him?

Ans.: Problem based on Offence under the Negotiable Instruments Act, 1881: This problem is based on the case of Modi Cements ltd. Vs. Kuchil Kumar Nandi, 1998. In this case the Supreme Court held that once a cheque is issued by the drawer, a presumption under Section 139 of the Negotiable Instruments Act, 1881 follows and merely because the drawer issues a notice thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action under Section 138. The object of Section 138 to 142 of the Act is to promote the efficacy of the banking operations and to ensure credibility in transacting business through cheques. Section 138 is a penal provision in the sense that once a cheque is drawn on an account maintained by the drawn with his banker for payment of any amount of money to another person from out of that account for the discharge in whole or in part of any debt or the liability, is informed by the bank unpaid either because of insufficient of amount to honour the cheques or the amount exceeding the arrangement made with the bank, such a person shall be deemed to have committed an offence.

Q. 20: M, the holder of a bill, endorses it “without recourse” to N. N endorses it to P, P to Q, Q to R and R endorses it again to M. Can M recover the amount of the bill from N, P, Q and R, or any of them? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881.

Ans.: Problem based on the Negotiable Instruments Act, 1881 relating to endorser’s liability (Sec. 52): As per Section 52 of the Negotiable Instruments Act, 1881 the endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon, as M does in the present case, by using the words “without Recourse”. Where an endorser excludes or limits his liability in this manner and afterwards becomes the holder of the same instrument, all intermediate endorsers continue to be liable to him. M can therefore enforce payment against all intermediate parties, i.e., N, P, Q and R because he was not liable to them as a prior party.

Q. 21: A Cheque is drawn “payable to N or order”. It is stolen and N’s endorsement is forged. The banker pays the cheque in due course. Is the banker discharged from liability? Would it make any difference if the drawers’ signature were forged? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881.

Ans.: Problem based on Section 85(1) of the Negotiable Instruments Act, 1881 relating to the protection to a collecting banker: Section 85(1) of the Negotiable Instruments Act, 1881 provides that where a cheque payable to order, purports to be endorsed by or on behalf of the payee, the drawee, who always is a banker, is discharged by payment in due course. A cheque is said to have been paid in due course, when it has been paid in good faith, after proper care had been taken to ascertain the genuineness of the endorsement. Even if the payment is made to a wrong person or even if the endorsement of the payee is forged, the banker is discharged from the payment in good faith and without negligence. But if the drawer’s signature is forged, the banker can, under no circumstances, claim discharge on payment, for, the banker is presumed to know the signature of his customer i.e., the drawer.

Q. 22: B obtains A’s acceptance to a bill by fraud. B endorses it to C who takes it as a holder in due course. C endorses the bill to D who knows of the fraud. Can D recover from A?

Ans.: Yes, D can recover the amount from A as he derived his title from C who is a holder in due course. Moreover, D is not a party to the fraud. Once the title has been cleansed of the defect, notwithstanding notice of the fraud, D gets a good title [Guildford Trust v. Gloss, (1926) 43 T.L.R. 167; Sec. 53).]

Q. 23: What will be the effect of the following alterations on the validity of a bill? (i) A bill payable with ‘lawful interest’ is altered into one payable with 12%interest. (ii) A bill is accepted payable at the Indian Bank, Sarita Vihar, New Delhi. The holder without

the consent of the acceptor scores out Sarita Vihar and inserts Chandni Chowk instead. Ans.: (i) The following alterations are material, i.e., the alteration of –

(1) The date, (2) The sum payable,





(3) The time of payment, (4) The place of payment, (5) Inclusion of place of payment, (6) The rate of interest. These alterations vitiate the instrument. So, in the given case alteration in the interest rate vitiates the validity of the bill, since lawful interest is 18% under the Banking, Public Financial Institutions & Negotiable Instruments (Amendment) Act, 1988.

(ii) In this case, the alteration is material. It renders the instrument void against persons who were parties thereto before such alteration, unless they have consented to the alteration (Sec. 87).]

Q. 24: Calculate the date of maturity in the following cases: (i) A bill of exchange dated 15th February, 2008 payable two months after date. (ii) A promissory note dated 29th January, 2008 made payable one moth afterdate. (iii) A bill of exchange dated 2nd March, 2008 was made payable one month after date. It

falls due on 5th April, 2008, which happens to be a public holiday. If in the instant case, it is a cheque what shall be the date of maturity?

Ans.: (i) The maturity date is on third day after April 15th, 2008 i.e., 18 April, 2008. (ii) The date of maturity is 3rd March, 2008. (iii) The maturity date will be 4th April, 2008 i.e., the previous working day which is not a public

holiday. However, if the instrument is a cheque there is no question of calculation of date of maturity as it is always payable on demand.

Q. 25: A Bill is drawn payable at No. 19J, Pkt-2, Mayur Vihar, New Delhi, but does not contain the drawee’s name. Mr. Mehta who resides at the above address accepts the bill. Is it a valid Bill?

Ans.: Yes, it is a valid Bill and Mr. Mehta is liable thereon. The drawee may be named or otherwise indicated in the Bill with reasonable certainty. In the present case, the description of the place of residence indicates the name of the drawee and Mr. Mehta, by his acceptance, acknowledges that he is the person to whom the bill is directed (Gray vs. Milner 1819, 2 Taunt 739).

Q. 26: A cheque was dishonoured at the first instance and the payee did not initiate action. The cheque was presented for payment for the second time and again it was dishonoured. State in this connection whether the payee can subsequently initiate prosecution for dishonour of cheque.

Ans.: The holder/payee of a cheque cannot initiate prosecution for an offence under section 138 of the Negotiable Instruments Act, 1881 for its dishonour for the second time, if he had not initiated such prosecution on the earlier cause of action.

Q. 27: Examine the validity of the following instruments. (i) W drew a cheque crossed not negotiable in blank and handed it to his clerk to fill in the

amount and the name of the payee. The clerk inserted a sum in excess of her authority and delivered the cheque to P in payment of a debt of her own.

(ii) An instrument that reads: “I of my own free will and accord approached B and borrowed from him the sum of ` 100 bearing interest at the rate of 2 per cent per mensem. I have therefore executed these few presents by way of a promissory note so that it may serve as evidence and be of use when needed.”

(iii) An instrument that reads: “I promise to pay ` 1,000 to B, 30 days after his marriage with C.”

Ans.: (i) The given problem is based on the facts of Wilson & Meeson vs. Pickering case. In that case, it was held that the clerk had no title to the cheque and as such P had no better title and therefore W was not liable.

(ii) The given problem is based on Bal Mukand Vs Lal Ramji Lal case. The position of law is that the instant instrument is not a promissory note as it does not contain an express undertaking to pay the amount mentioned in it.

(iii) This is not a promissory note as it is probable that B may marry somebody other than C or may not marry at all.

Q. 28: (i) A bill of exchange purport to be drawn by A on B and is accepted by B. The bill is payable





to C or order. C negotiates it to D who takes it as a holder in due course. In a suit by D on the bill, can B disclaim liability on the ground that A’s signature is forged?

(ii) B obtains A’s acceptance to a bill by fraud. B indorses it to C who takes it as a holder in due course. C indorses the bill to D who knows of the fraud. Can D recover from A?

(iii) A draws on B a bill payable three months after sight. It passes through several hands before X becomes its holder. On presentation by X, B refuses to pay. Discuss the rights of X on the bill.

Ans.: (i) Section 120 of the Negotiable Instruments Act, 1881 states that no maker of a promissory note, and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honour of the drawer, is in a suit thereon by a holder in due course permitted to deny the validity of the instrument as originally made or drawn. Therefore in the given problem B being an acceptor of the bill for the honour of the drawn cannot deny the validity of the bill and is therefore liable to D.

(ii) Yes D can recover the amount from A as he derived his title from C who is a holder in due course. Moreover D is not a party to the fraud. Once the title has been cleansed of the defect notwithstanding notice of the fraud D gets a good title. It was also so held in Guildford Trust Vs Gloss.

(iii) X is entitled to recover money on the bill from all the prior parties. A, the drawer of the bill and B the acceptor of the bill are liable to X as principal debtors whereas the intervening indorsers are liable as sureties.

Q. 29: M a broker draws a cheque in favour of N, a minor. N endorses the cheque in favour of O, who in turn endorses it in favour of P. Subsequently, the bank dishonoured the cheque. State the rights of O and P and whether N, can be made liable?

Ans.: According to Section 26 of the Negotiable Instruments Act, 1881 a minor may draw, endorse, deliver and negotiate a negotiable instrument to bind all parties except himself. Therefore, O and P cannot claim from B, who being a minor does not incur any liability on the cheque. O can claim payment from M, the Drawer, only and P can claim against O, the endorser and M, the drawer.

Q. 30: On a Bill of Exchange for ` 1 lakh, X’s acceptance to the Bill is forged. A takes the Bill from his customer for value and in good faith before the Bill becomes payable. State with reasons whether A can be considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from X.

Ans.: According to Section 9 of the Negotiable Instruments Act, 1881 holder in due course means any person who for consideration because the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before the amount 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. As A in this case prima facie became a possessor of the bill for value and in good faith before the bill became payable, he can be considered as a holder in due course. But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the money. The true owner may sue on tort the person who had received. This principle is universal in character; by reason where of even a holder in due course is not exempt from it. A holder in due course is protected when there is defect in the title. But he derives no title when there is entire absence of title as in the case of forgery. Hence, A cannot receive the amount on the bill.

UNIT 4: THE PAYMENT OF BONUS ACT, 1965

Q. 1: State whether the following statements are true or false and give reasons therefor with reference to the Payment of Bonus Act, 1965. (i) The maximum bonus payable to employees is limited to the available surplus. (ii) “Salary or wage” does not include dearness allowance. (iii) Accounting year in relation to a corporation means the year commencing on 1st of April.





(iv) A part-time employee engaged on regular basis is eligible for bonus. (v) If any interim bonus has been paid it may be adjusted against the statutory bonus that is

payable under the Payment of Bonus Act, 1965. Ans.: (i) The statement is false as the maximum bonus payable to employees under Section 11 is 20%

of salary, irrespective of the available surplus being more. (ii) The statement is false as under Section 2(21), “salary or wage” includes dearness allowance. (iii) The statement is false as under Section 2(1), the accounting year in relation to a corporation

does not mean the year commencing on 1st of April. (iv) The statement is true and a part-time employee engaged on regular basis is eligible for bonus

as per decision in Automobile Karmchari Sangh Vs. Industrial Tribunal (1970) 38 FJR 268. (v) The statement is true as per Section 17.

Q. 2: A Company in a particular accounting year suffered losses and hence was not able to pay even the minimum bonus to its workmen. State in this connection, whether the minimum bonus is payable irrespective of losses and whether under any circumstances, the Company may get exemption under the Payment of Bonus Act, 1965.

Ans.: Power of Exemption (Section 36): Though the Act creates liability on the part of employer to pay the minimum, bonus the obligation is subject to exemption under Section 36. If the appropriate Government having regard to the financial position and other relevant circumstances of any establishment or class of establishment is of opinion that it will not be in public interest to apply all or any of the provisions of this Act thereto, it may by notification in the Official Gazettee, exempt for such period as may be specified therein and subject to such conditions as it may think fit to impose, such establishment or class of establishment from all or any of the provisions of this Act. The expression “financial position” includes loss suffered by the establishment during the accounting year. The expression “other relevant circumstances” will include every consideration as to whether the workmen had principally contributed to the financial loss of the Company during that accounting year. If the bonus liability is negligible compared to loss suffered, Company should not be relieved of liability to pay minimum bonus. If the loss sustained by the employer is not due to any misconduct on the part of employees, the employer is liable to pay statutory minimum bonus. [J.K. Chemicals Ltd. vs. Govt. of Maharashtra (1996) Bombay H.C.].

Q. 3: Raj, an employee of Troy Ltd. has been suspended for insubordination. During his suspension he is paid a subsistence allowance. Would this subsistence allowance be treated as wages for payment of bonus? Explain with relevant case-laws.

Ans.: Subsistence allowance paid when employee is under suspension would not amount to ‘wages’ within meaning of 2(21) of the Act, as it is not paid for work done. It was so held in Motor Industries Co v. Popat Murlidhar 1997 ILLN 749 = 1997 (2) LLJ 1206 (Bom HC). Contrary view was expressed in Project Manager Oil and Natural Gas Commission V. Sham Kumar 1995 LLR 619 (Guj HC) where it was held that suspended employee will be entitled to bonus on suspension allowance. But since the former judgment is later in date, we may safely conclude that subsistence allowance does not amount to wages and therefore Mr. Raj would not be paid bonus.

Q. 4: Will the following employees be entitled to bonus under the Payment of Bonus Act, 1965? (i) An employee who has worked for only 20 days and had been laid off for 45 days under a

standing order. (ii) A dismissed employee reinstated with back wages. (iii) A part time employee employed as a sweeper & engaged on a regular basis. (iv) A retrenched employee who had worked only 45 days in an accounting year.

Ans.: (i) Under Section 2(13) read with Section 8 every employee who has worked for 30 days in an accounting year on a salary of less than Rs. 10,000/- per month is eligible for bonus and under Section 14 the days when an employee who has been laid off under a standing order shall be treated as working days.

(ii) Therefore the employee in the given problem is entitled to get bonus. (iii) As per the decision in Gannon India Ltd Vs Niranjan Das (1984) a dismissed employee

reinstated with back wages is entitled to bonus.





(iv) A part time employee employed as a sweeper and engaged on a regular basis is entitled to bonus as per the decision in Automobile Karmchari Sangh vs. Industrial Tribunal (1970) 38 FJR 268.

(v) A retrenched employee is eligible to get bonus provided he has worked for the minimum qualifying period as per the decision in East Asiatic Co. (P) Ltd. Vs Industrial Tribunal (1961) 1 LLJ 720.

Q. 5: State whether the following statements are true or false and give reasons with reference to the Payment of Bonus Act, 1965. (a) The minimum bonus payable to an employee who has not completed 15 years of age is

either 8.33% or ` 100, whichever is higher. (b) In a non-banking company, allocable surplus is equal to 66% of the available surplus. (c) Attendance bonus is not customary bonus and need not be adjusted against the bonus

payable under the Payment of Bonus Act, 1965. (d) Since bonus is payable on the basis of gross profit, there is a general presumption under

the Payment of Bonus Act, 1965 that the balance sheet & profit & loss A/c of a company are accurate.

Ans.: (a) False: The minimum bonus payable to an employee who has not completed 15 years of age is either 8.33% or ` 60/-.

(b) True: Allocable surplus is 67% of available surplus. (c) True: As per the decision in Baidyanath Ayurveda Bhavan Mazdoor Sangh Vs. Management

(1984) attendance bonus is not a customary bonus. (d) True: There is such a presumption in law and evidence need not be adduced unless the

documents are disputed.

Q. 6: On 1st January, 2007, Aryan Textiles Ltd. agreed with the employees for payment of an annual bonus linked with production or productivity instead of bonus based on profits subject to the limit of 30% of their salary wages during the relevant accounting year. It was also agreed by the employees that they will not claim minimum bonus stated under Section 10 of the Payment of Bonus Act, 1965. As per the agreement the employees of Aryan Textiles Ltd claimed annual bonus linked with production or productivity in the relevant accounting year. On refusal of the company the employees of the company moved to the court for relief. Decide in reference to the provisions of the payment of Bonus Act, 1965 whether the employees will get the relief? In spite of the aforesaid agreement whether the employees are still entitled to receive minimum bonus.

Ans.: As per Section 31(A) of the Payment of Bonus Act, 1965, there may be an agreement or settlement by the employees with their employer for payment of an annual bonus linked with production or productivity in lieu of bonus based on profits, as is payable under the Act. Accordingly, when such an agreement has been entered into the employees are entitled to receive bonus as per terms of the agreement/settlement, subject to the following restriction imposed by Section 31A: (a) Any such agreement/settlement whereby the employees relinquish their right to receive

minimum bonus under Section 10, shall be null and void in so far as it purports to deprive the employees of the right of receiving minimum bonus.

(b) If the bonus payable under such agreement exceed 20% of the salary/wages earned by the employees during the relevant accounting year, such employees are not entitled to the excess over 20% of salary/wages.

In the given case Aryan Textile Ltd. agreed with the employees for payment of an annual bonus linked with production or productivity instead of based on profits subject to the limit of 30% of their salary/ wages during the relevant accounting year. According to Section 31A the maximum bonus under this provision can be given which should not exceed 20% of the salary/wages earned by the employee during the relevant accounting year. Hence, the maximum bonus may be paid upto 20% of the salary/wages. If the company agrees to pay more than 20% then it will be against the provisions of the Payment of Bonus Act, 1965. The employees of Aryan Textiles also agreed not to claim minimum bonus stated in Section 10 of the Payment of Bonus Act, 1965 such an agreement shall be null and void as it purports to





deprive the employees of their right of receiving minimum bonus. Hence, the relief may be given by the court, as regards to the payment of bonus to the employees, based on the production or productivity, if it is agreed, subject to a maximum of 20%. The employees will also be entitled legally to claim bonus which is minimum prescribed under Section 10 of the Act, even though they have relinquished such right as per the agreement.

Q. 7: In an accounting year, a company to which the payment of Bonus Act, 1965 applies, suffered

heavy losses. The Board of Directors of the said company decided not to give bonus to the employees. The employees of the company move to the Court for relief. Decide in the light of the provisions of the said Act whether the employees will get relief?

Ans.: Section 10 of the Payment of Bonus Act, 1965 provides that subject to the other provisions of the Act, every employer shall be bound to pay to employee in respect of the accounting year commencing on any day in 1979 and in respect of any subsequent year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or `100 (` 60 in case of employees below 15 years of age), whichever is higher. The minimum bonus is payable whether or not employer has any allocable surplus in the accounting year. Therefore based on the above provision (Section 10) the question asked in the problem can be answered as under: Yes, applying the provisions as contained in Section 10 the employees shall succeed and they are entitled to be paid minimum bonus at rate 8.33% of the salary or wage earn during the accounting year or ` 100 (` 60 in case of employees below 15 Years of age), whichever is higher.

Q. 10: Star Ltd. suffered heavy losses during the current accounting year and hence was not able to pay minimum bonus to its workmen. Referring to the provisions of the Payment of Bonus Act, 1965 state whether the company is required to give the minimum bonus irrespective of losses and it can be exempted by from payment of Bonus.

Ans.: Payment of minimum bonus (Section 10): Subject to the other provisions of the Payment of Bonus Act, every employer shall be bound to pay to every employee in respect of every accounting year, minimum bonus which shall be 8.33% of the salary or wage earned by the employee during the accounting year or ` 100, whichever is higher, whether or not the employer has any allocable surplus in the accounting year. But if the employee has not completed 15 years of age at the beginning of the accounting year he will be entitled to a minimum bonus which shall be 8.33% of the salary or wage during the accounting year ` 60/- whichever is higher. Even if the employer suffers losses during the accounting year he is bound to pay minimum bonus as prescribed by Section 10 [State vs. Sardar Dalip Singh Majilhia, 1979, Lab. I.C. (913)(AII)]. Power of Exemption (Section 36): Though the Act creates liability on the part of employer to pay the minimum bonus and confers a right to the workmen, as mentioned in Section 10, the obligation and right is subject to exemption under Section 36. If the appropriate Government having regard to the financial position and other relevant circumstances of any establishment or class of establishment is of opinion that it will not be a public interest to apply all or any of the provisions of this Act thereto, it may by notification in the Official Gazette, exempt for such period as may be specified therein and subject to such conditions as it may think fit to impose, such establishment or class of establishments from all or any of the provisions of this Act. There are two stages in Section 36: 1. The Government shall consider the financial position and other relevant circumstances of an

establishment or class of establishment. 2. It should be of the opinion that it would not be in the public interest to apply all or any of the

provisions of the Act. The expression financial position includes loss suffered by the establishment during the accounting year. The expression other relevant circumstances will include every consideration as to whether the workmen had principally contributed to the financial loss of the company during that accounting year. If the bonus liability is negligible compared to loss suffered, company should not be relieved of liability to pay minimum bonus. If the loss sustained by the employer is not due to any misconduct on the part of employees, the employer is liable to pay statutory minimum bonus. [J.K.





Chemicals Ltd vs. Govt. of Maharashtra (1996) Bombay H.C.].

Q. 9: Explain the provisions relating to time limit for payment of bonus and maximum amount of bonus to be given to an employee under the Payment of Bonus Act, 1965.

Ans.: Time limit: All amounts payable to an employee by way of bonus shall be as per Section 19 of the Payment of Bonus Act, 1965.

Maximum bonus: According to Section 11 where, in respect of any accounting year referred to in Section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, The employer shall, in lieu of such minimum bonus, he bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary of wage earned by the employee during the accounting year subject to a maximum 20% of such salary or wage.

Q. 10: Can an employer be exempt from paying minimum bonus? What does the law say of such exemption?

Ans.: Though the Act creates liability on the part of employer to pay the minimum bonus and confers a right to the workmen, as mentioned in Section 10, the obligation and right is subject to exemption under Section 36. If the appropriate Government having regard to the financial position and other relevant circumstances of any establishment or class of establishment is of opinion that it will not be a public interest to apply all or any of the provisions of this Act thereto, it may by notification in the Official Gazette, exempt for such period as may be specified therein and subject to such conditions as it may think fit to impose, such establishment or class of establishments from all or any of the provisions of this Act. There are two stages in Section 36: 1. The Government shall consider the financial position and other relevant circumstances of an

establishment or class of establishment. 2. It should be of the opinion that it would not be in the public interest to apply all or any of the

provisions of the Act. The expression financial position includes loss suffered by the establishment during the accounting year. The expression other relevant circumstances will include every consideration as to whether the workmen had principally contributed to the financial loss of the company during that accounting year. If the bonus liability is negligible compared to loss suffered, company should not be relieved of liability to pay minimum bonus. If the loss sustained by the employer is not due to any misconduct on the part of employees, the employer is liable to pay statutory minimum bonus. [J.K. Chemicals Ltd vs. Govt. of Maharashtra (1996) Bombay H.C.].

Q. 11: The employer is a banking company. Point out as to what items are required to be added to the “Net Profit” by the employer for calculating the “Gross Profit” in accordance with the first Schedule of the Payment of Bonus Act, 1965.

Ans.: As per first Schedule to the payment of Bonus Act,1965,items to be added back to the net profit for calculating the gross profit of a banking company are: (1) Provision for Bonus to employees (2) Depreciation. (3) Development Rebate Reserve. (4) Any other reserves (5) Bonus paid to employees in respect of previous accounting year. (6) The amount debited in respect of gratuity paid or payable to employees in excess of the

aggregate of:- (i) The amount, if any, paid or provided for payment, to an approv ed gratuity fund; and (ii) The amount actually paid to employees on their retirement or on termination of their

employment. (7) Donation in excess of the amount admissible for income tax. (8) Capital expenditure (other than capital expenditure on scientific research) and capital losses

(other than losses on sale of capital assets on which depreciation has been allowed for income-





tax). (9) Any amount certified by the Reserve bank in terms of Section 34A(2) of the Banking

Regulation Act, 1949. (10) Losses of, or expenditure relating to, any business situated outside India. (11) Income, profits or gains (if any) credited directly to published or disclosed reserves other than:

(i) Capital receipts and capital profits (including profits on the sale of capital assets on which depreciation has not been allowed for income-tax).

(ii) Profits of, and receipts relating to any business situated outside India; (iii) Income of foreign banking companies from investments outside India.

UNIT 5: THE PAYMENT OF GRATUITY ACT, 1972

Q. 1: Examining the provisions of the Payment of Gratuity Act, 1972, state whether gratuity is payable to an employee for the periods when he does not actually work in the organisation. Explain the manner in which gratuity is calculated for regular employees.

Ans.: Periods for which Gratuity Payable: Manner of Calculation (The Payment of Gratuity Act, 1972): Yes, the periods for which gratuity is payable to an employee even if he does not actually work in the organization are the following: 1. Lay off under the Industrial Disputes Act, 1947. 2. Leave with full wages. 3. Maternity leave for female employees. 4. Absence due to temporary disablement caused during employment. Quantum of gratuity payable is 15 days’ wages on the last drawn wages/ every completed year of service subject to a maximum of 15 months’ wages.

Q. 2: E was an employee of Tea Estate Ltd. The whole of the undertaking of Tea Estate Ltd. was taken over by a new company - Asia Tea Estate Ltd. The services of E remained continuous in new company. After serving for one year E met with an accident and became permanently disabled. E applied to the new company for the payment of gratuity. The company refused to pay gratuity on the ground that E has served only for a year in the company. Examine the validity of the refusal of the directors in the light of the provisions of the Payment of Gratuity Act, 1972.

Ans.: According to Section 4 (1) of the Payment of Gratuity Act, 1972, gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years on his super annuation, or, on his retirement or resignation or on his death or disablement due to accident or disease. The condition of the completion of five years of continuous service is not essential in case of the termination of the employment of any employee due to death or disablement for the purpose of this section. Disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement. The given problem fulfils all the above requirements as stated. Therefore, E is entitled to recover gratuity after becoming permanently disabled, and continuous service of five years is not required in this case. Hence, the company cannot refuse to pay gratuity on the ground that he has served only for a year.

Q. 3: National Steels Limited decided to forfeit the amount of gratuity of its employees A, B and C on account of disorderly conduct and other acts which caused loss to the property belonging to the company. A, B and C, committed the following acts: (i) A refused to surrender the occupied land belonging to the company. (ii) B committed theft under law involving offence of moral turpitude. (iii) C after superannuation continued to occupy the quarter of the company for six months. Against the decision of the company, A,B and C applied to the appropriate authorities for relief. The company contented that the right to gratuity is not a statutory right and the forfeiture of the amount of gratuity was within the law. Examine the contention of the





company and the decision taken by the company to forfeit the amount of gratuity in the light of the Payment of Gratuity Act, 1972.

Ans.: Forfeiture of Gratuity: In accordance with the provisions of Section 4(6) of the Payment of Gratuity Act, 1972, if the services of any employee have been terminated for any act, willful omission, or negligence causing any damage or loss to or destruction of, property belonging to the employer, the gratuity shall be forfeited to the extent of the damage or loss so caused; and if the services of such an employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment, the gratuity payable to the employee may be wholly or partially forfeited. (1) The problem asked in the question is based on the above provisions and the provisions of

Section 4(1) of the Payment of Gratuity Act, 1972. Accordingly, gratuity shall be paid to the employee when he completes five years of continuous service on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease. The condition of the completion of five years‟ continuous service is not essential in case of the termination of the employment of any employee due to death or disablement. Looking to the provisions of Section 4(1), it is clear that withholding of gratuity is not permissible under any circumstances, except under those circumstances covered by Section 4(6). In K. C. Mathew vs. Plantation Corporation of Kerala Ltd. 2001 LLR (2) (Ker), it was held that withholding of gratuity is not permissible except under those circumstances enumerated in Section 4(6) and that the right to gratuity is a statutory right and none can be deprived of it except as provided by the law. Therefore, the contention of National Steels Ltd. is wrong.

(2) The correctness of the decision taken by National Steels Ltd. regarding forfeiture of the gratuity amount of its employees A, B and C may be tested in the light of Section 4(6) of the Payment of Gratuity Act, 1972 as referred above. (i) Accordingly, the refusal of an employee to surrender the occupied land belonging to the

company is not sufficient ground to withhold gratuity under Section 4(6) of the Payment of Gratuity Act, 1972 (Travancore Plywood Industries Ltd. vs. Regional Joint Labour Commissioner [1966] II LLJ 85 Ker.). Hence, A‟s gratuity cannot be withheld.

(ii) The offence of theft committed by B, under law involves moral turpitude and his gratuity stands wholly forfeited in view of Section 4(6) of the Act (relevant case is Bharat Gold Mines Ltd vs. Regional Labour Commissioner, 1987, 70 FJR 11 (Karnataka ).

(iii) If the employer has to be paid any amount regarding any type of charge by the employee and if he has not paid for the same during the course of his service, then the employer can adjust the amount from the gratuity of the employee. In the instant case, C after superannuation continued to occupy the quarter of the company for six months. Therefore the company is entitled to charge the rent from him and after adjusting other dues the remaining amount of gratuity may be paid [relevant case is Wazir Chand vs. Union of India 2001, LLR172 (SC)].

Q. 4: Explain the manner in which the gratuity payable to employees in a seasonal as well as other establishment is calculated under the Payment of Gratuity Act, 1972. State also the maximum amount of gratuity payable under the Act.

Ans.: Computation of gratuity amount: Section 4 of the Payment of Gratuity Act, 1972 stipulates the manner in which the amount of gratuity payable to an employee will be calculated. In the case of establishments other than seasonal establishments, the employer shall pay the gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of 6 months. In the case of piece rated employees, daily wages, shall be computed on the average of the total wages received by him for a period of 3 months immediately preceding the termination of his employment and for this purpose the wages paid for any overtime work shall not be taken into account. In the case of a monthly rated employee 15 days wages shall be calculated by dividing the monthly rate of wages last drawn by 26 and by multiplying the quotient by 15. In the case of seasonal establishment the employees can be classified into 2 groups. (i) Those who work throughout the year and





(ii) Those who work only during the season. The former are entitled to get the gratuity at the rate of 15 days wages for every completed year of service or part thereof in excess of 6 months. The later are entitled to receive gratuity at the rate of 7 days for each season. The amount of gratuity payable shall not exceed ` 10,00,000.

Q. 5: Mr. X was an employee of Mutual Developers Limited. He retired from the company after completing 30 years of continuous service. He applied to the company for the payment of gratuity within the prescribed time. The company refused to pay the gratuity and contended that due to stringent financial condition the company is unable to pay the gratuity. Mr. X applied to the appropriate authority for the recovery of the amount of gratuity. Examine the validity of the contention of the company and also state the provisions of law to recover the gratuity under the Payment of Gratuity Act, 1972.

Ans.: (i) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years on his superannuation or on his retirement or resignation or on his death or disablement due to accident or disease under Section 4(1) of the Payment of Gratuity Act,1972. Further, as soon as gratuity becomes payable, the employer shall whether the application for the payment of gratuity has been given or not by the employee, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable under intimation to the controlling officer [Section 7(2)]. The employer shall arrange to pay the amount of gratuity within 30 days for the date of its becoming due/payable to the person to whom it is payable [Section 7(3)], along with simple interest if it is not paid within the period specified except where the delay in the payment is due to the fault of the employee and the employer has obtained permission thereon from the Controlling Authority[Section 7(3A)].

(ii) If the gratuity payable under the Act is not paid by the employer within the prescribed time to the person entitled thereto, the Controlling Authority shall issue a certificate for the amount to the Collector to recover the same along with compound interest at such rate as prescribed by the Central Government from the date of expiry of the prescribed time as land revenue arrears, to enable the person entitled to get the amount, after receiving the application from the aggrieved person (Section 8).

Before issuing the certificate for such recovery the Controlling Authority shall give the employer a reasonable opportunity of showing cause against the issue of such certificate. The amount of interest payable under the Section shall not exceed the amount of gratuity payable under this Act in no case (Section 8). In the given case the facts are commensurate with provisions of law as stated above under Sections 7 and 8 of the Payment of Gratuity Act, 1972. Therefore, Mr. X is entitled to recover gratuity as he has completed the service of 30 years. The company cannot take the plea of stringent financial conditions for not paying the gratuity to Mr. X. On the refusal by the company, Mr. X can apply to the appropriate authority and the company will be liable to pay the gratuity along with interest as decided by such authority.

Q. 6: State whether the following statements are true or false and give reasons there for with

reference to the Payment of Gratuity Act, 1972. (i) The Payment of Gratuity Act, 1972 is largely based on Kerala Industrial Employees

Payment of Gratuity Act, 1972. (ii) A retrenched employee is also eligible for gratuity. (iii) Where an employee’s resignation has not been accepted, then that employee is not

eligible to claim gratuity. (iv) Where the negligence of employee causes loss to the employer, then the gratuity shall

be wholly forfeited. (v) An appeal against the Controlling Authority‟s order must generally be made within 60

days. Ans.: (i) This statement is false because the Payment of Gratuity Act, 1972 is largely based on West

Bengal Employees Payment of Gratuity Act, 1971. (ii) This statement is true because in the case of State of Punjab Vs. Labour Court (1986), it was





held that a retrenched employee is also eligible for gratuity. (iii) This statement is false as it was held in Mathur Spinning Mills Vs. Deputy Commissioner of

Labour, (1983) II LLJ 188), that non acceptance of the resignation is no hurdle in the way of an employee to claim gratuity.

(iv) This statement is false because when loss is caused by the negligence of employee gratuity shall be forfeited to the extent of the damage or loss so caused.

(v) This statement is true as an appeal against the Controlling Authority‟s order must generally be made within 60 days (Section 7 of Payment of Gratuity Act, 1972).

Q. 7: Discuss the rules relating to penalties under the Payment of Gratuity Act, 1972. Ans.: Making false

statement or false representation: [Section 9(1)]

Whosoever makes or causes to be made false statement or false representation for purpose of avoiding payment to be made under Payment of Gratuity Act or enables another person to avoid such payment, shall be punishable with imprisonment upto six months and fine upto Rs.10,000 or with both.

Contravening provisions of Gratuity Act or rules: [Section 9(2)]

An employer who contravenes provisions of Payment of Gratuity Act or Rules made there under shall be punishable for a term which will not be less than three months but can extend upto one year. In addition, a minimum fine of `10,000 (maximum ` 20,000) will be imposed.

Offence relating to non-payment of gratuity: [proviso to Section 9(2)]

If the contravention relates to non-payment of any gratuity payable under Payment of Gratuity Act, the term of imprisonment shall be minimum six months and maximum two years. The Court can impose a lesser term of imprisonment, if the Court is of the opinion that a lesser term of imprisonment would meet the ends of justice. In addition, a minimum fine of ` 10,000 (maximum ` 20,000) will be imposed.

Employer can charge another person as the actual offender: [Section 10]

Though the employer is liable under Payment of Gratuity Act, he can charge another person as actual offender. After commission of offence is proved, the employer has to prove that he used due diligence in execution of the Act and the other person committed the offence without the knowledge, consent or connivance of the employer. If actual offender cannot be brought before the Court within three months, the employer will be convicted of the offence.

Cognizance of offence:

Section 11(1) Cognizance of offence can be taken only on complaint made by authority appointed by Appropriate Government. Complaint can also be filed by controlling authority if employer did not pay gratuity within six months from prescribed time.

Section 11(2) Metropolitan Magistrate or Judicial Magistrate of First Class can try the offences punishable under Payment of Gratuity Act.

Q. 8: Examine how disputes are resolved under the Payment of Gratuity Act, 1972. Ans.: If there is any dispute regarding the amount of gratuity payable to an employee or

admissibility of any claim of or in relation to, an employee for payment of gratuity or the person entitled to receive the gratuity, the employer shall deposit, such amount as he admits to be payable by him as gratuity, to the controlling authority and for these (one or all) other person raising dispute may make an application to the controlling authority for deciding the dispute. The controlling authority shall, after due inquiry and after giving the reasonable opportunity of being heard to the parties to the dispute, determine the matter or matters in dispute. After such inquiry if any amount is found to be payable to the employee, the controlling authority shall direct the employer to pay such amount or the difference of amount so determined and the amount already deposited by the employer to the controlling authority. The controlling authority shall pay the amount deposited by the employer including the excess amount, if any, to the person entitled thereto. As soon as the employer made the said deposit, the controlling authority shall pay the





amount to the applicant where he is the employee or where the applicant is not the employee, to the nominee or as the case may be, the guardian of such nominee or legal heir of the employee, if he is satisfied that there is no dispute as to the right of the applicant to receive the amount of gratuity. For the purpose of conducting inquiry, the controlling authority shall have the same powers as are vested in a court, while trying a suit, under the Code of Civil Procedure, 1908. The proceedings made by him will be the judicial proceedings within the meaning of Sections 193 & 228 & for the purposes of Section 196, Indian Penal Code the controlling authority will avail all the powers like enforcing the attendance, production of documents, receiving evidences on affidavits and issuing commission for the examination of witnesses. [Section 7(4)]

Q. 9: What are the procedures for nominations under the Payment of Gratuity Act, 1972 in establishments for which the Central Government is the appropriate government?

Ans.: In case of employees in establishment where Central Government is Appropriate Government, nomination shall be made in form „F‟ in duplicate. Nomination shall be given to employer or sent by registered post. Employee should get proper receipt or acknowledgement from employer [rule 6(1) of Payment of Gratuity Rules]. Employer should fill details in the form and return one copy to the employee. Nomination shall be normally submitted within 30 days after completion of service of one year. However, it can be submitted later also. An employee who did not have family but acquired family later should submit nomination form in duplicate in form G within 90 days after acquiring family. Notice of change in nomination shall be filed in form H.

Q. 10: XYZ Ltd. was amalgamated with ABC Corporation in the year 2007. Mr. ST who had rendered continuous service from the year 1990, first in XYZ and later in the amalgamated company retired in 2008. ABC Corporation ( the amalgamated Company ) declined to pay gratuity claiming that Mr. ST has worked for only one year in their company. Examine their contention with reference to the Payment of Gratuity Act, 1972.

Ans.: The payability of gratuity to the employee is his right as well as the obligation of the employer. Even on the change of ownership, the relationship of employer and employees subsists and the new employer cannot escape from the liability of payment of gratuity to the employees; it was so held in the case of Pattathurila K. Damodaran Vs M. Kassim Kanju (1993) ILLJ (1211 (Ker). Hence, Mr. ST is eligible to receive gratuity from ABC Corporation.

Q. 11: Mr. Kumar, an employee of Costa Nostra Corporation had his services terminated for negligence leading to losses for the Company. Is he eligible for payment of any gratuity under the Payment of Gratuity Act, 1972?

Ans.: According to Section 4(6) of the Payment of Gratuity Act, 1972, “If the services of an employee have been terminated for any act, willful omission, or negligence causing any damage or loss to or destruction of property belonging to the employer the gratuity shall be forfeited to the extent of the damage or loss so caused”. Therefore, the amount of loss Mr. Kumar caused to his employer will be deducted from his gratuity.

Q. 12: State whether the following statements are true or false and give reasons therefore, with reference to the Payment of Gratuity Act, 1972. (i) Where an employee becomes disabled due to an accident or disease and is not in a

position to do the same work and is reemployed on reduced wages on some other work, the gratuity will be calculated in two parts.

(ii) The power to exempt any establishment from the operation of the Payment of Gratuity Act, 1972 rests with the Controlling Authority.

(iii) Under the Payment of Gratuity Act, 1972, “retirement” means termination of the service of an employee otherwise than on superannuation.

(iv) Where an employee dies without making a nomination, his legal heir shall apply on form “F”.

Ans.: (i) True: The reason being Section 4(4)) of the Payment of Gratuity Act, 1972 which stipulates when an employee becomes disabled due to any accident or disease and is not in a position to





do the same work and is re-employed on reduced wages on some other job, the gratuity will be calculated in two parts- For the period preceding the disablement: On the basis of wages last drawn by the employee at the time of his disablement. For the period subsequent to the disablement – On the basis of the reduced wages as drawn by him at the time of the termination of services.

(ii) False: because the power to exempt rests with the the Appropriate Government. (iii) True: because retirement means termination of the service of an employee otherwise than on

Superannuation, according to Section 2 (q) of the Payment of Gratuity Act, 1972. (iv) False: because, if an employee dies without making a nomination his legal heir, who is eligible

for the payment of gratuity shall apply ordinarily within one year from the date of gratuity became payable to him on form „K‟ to the employer.

Q. 13: An employee who is governed by the Payment of Gratuity Act, 1972 committed a theft in the course of his employment. And consequently his service was terminated. State in this connection, whether the gratuity payable to him shall be wholly or partly forfeited.

Ans.: Reduction and forfeiture of gratuity: Under Section 4 of the Payment of Gratuity Act, 1972, in the case of damage, loss or destruction of property of employer, due to the willful omission or negligence of the employee, the amount of gratuity to the extent of loss or damage shall stand forfeited. The gratuity payable to an employee may be wholly or partially forfeited, where the services of an employee are terminated on the ground of: (1) Riotous or disorderly conduct or act of violence; or (2) Committing an offence involving moral turpitude in the course of his employment. Theft is an offence involving moral turpitude and consequently, if the services of an employee had been terminated for committing theft in the course of his employment, the gratuity payable to him under the provisions of the Act shall be wholly forfeited in view of Section 4(60)(b)(ii). [Bharat Gold Mines Ltd. vs. Regional Labour Commissioner 1986 Lab. I.C. 1976 (Kar.)]

Q. 14: State the procedure for nomination of persons under the Payment of Gratuity Act, 1972? Ans.: Nomination under the Payment of Gratuity Act (Section 6): Each employee who has completed

one year of the service shall make, within such time, in such form, and in such manner, as may be prescribed, nomination for the purpose of payment of gratuity in case of his death. Following are the provisions regarding nomination: (1) An employee, may, in his nomination, distribute the amount of gratuity payable to him under

this Act amongst more than nominee. (2) If an employee has a family at the time of making nomination, then the nomination shall be

made in favour of one or more members of his family. Any nomination made by such an employee in favour of a person who is not the member of his family, shall be void. If at the time of making a nomination, the employee has no family then the nomination may be made in favour of any person or persons. But if the employee subsequently acquires a family, then such nomination shall forthwith became invalid and the employee shall make within such time as may be prescribed, a fresh nomination in favour of one or more members of his family.

(3) Subject to the abovesaid provisions, a nomination may be modified by an employee at any time, after giving to his employer a written notice in such form and in such manner, as may be prescribed, of his intention to do so.

(4) If the nominee dies before the employee, the interest of the nominee shall revert to the employee who will have to make a fresh nomination, in the prescribed form in respect of such interest. Every nomination, a fresh nomination or alteration of nomination, as the case may be, shall be sent by the employee to his employer who shall keep the same in his custody.

Q. 15: Explain the provisions of the Payment of Gratuity Act, 1972 relating to forfeiture of the amount of Gratuity payable to an employee.

Ans.: Forfeiture of Gratuity: Section 4(6) of Gratuity Act, 1972 deals with cases in which gratuity payable to an employee may be forfeited. According to it, the gratuity of an employee whose service have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused. The gratuity payable to an employee may be wholly or partially forfeited if the





services of such employee have been terminated for- (1) His riotous or disorderly conduct or any other act of violence on his part or (2) Any act which constitutes an offence involving moral turpitude, provided that such offence is

committed by him in the course of his employment.

UNIT 6: EMPLOYEES’ PROVIDENT FUND & MISCELLANEOUS PROVISIONS ACT, 1952

Q. 1: State whether the following statements are true or false and give reasons there for with reference to the Employees Provident Funds and Miscellaneous Provisions Act, 1952. (i) Basic wages include the cash value of food concessions. (ii) The chairman of the executive committee is appointed by the Central Board (iii) Default in payment of contribution by employer is a cognizable offence. (iv) Employee Provident Fund Appellate Tribunal shall consist of three judges (v) An employer generally has to deposit 50% of the money due from him so as to go on

appeal Ans.: (i) This statement is false because the expression basic wages does not include the cash value of

food concessions. Basic wages means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him.

(ii) This statement is false because the Chairman of the executive committee is appointed by the Central Government and not the Central Board.

(iii) This statement is true because according to Section 14AB of the Employees‟ Provident Funds

and Miscellaneous Provisions Act, 1952, offences relating to default in payment of contribution by the employer are a cognisable offence. A cognizable offence is one where the police can arrest a person without warrant.

(iv) This statement is false as the Employee Provident Fund Appellate Tribunal shall consist of one judge.

(v) This statement is false as an employer under Section 7-O of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 has to deposit 75% of the money due from him so as to go on appeal.

Q. 2: An establishment consists of different factories situated in two different states & the Union Territory of Pondicherry. Shall the different factories be treated as part of one establishment under the EPF & MP Act, 1952?

Ans.: Section 2(A) of the EPF &MP Act, 1952 provides that ”where an establishment consists of different departments or has branches whether situate in the same place or in different places, all such departments or branches shall be treated as parts of the same establishment”. An establishment which consists of different departments or has branches in different places shall be treated as part of the same establishment even if the factories are situated in different states or Union Territory was the judgment in Eddy Current Controls (India) Ltd. V.RPFC (1993) 83 FJR 161=1993(2) KLT 573 and this is applicable in the given problem also. Therefore, the different departments spread over two States and a Union Territory comprises a single entity under the EPF & MP Act.

Q. 3: A company XYZ Ltd. had mortgaged its property to a Bank. The company went into liquidation. Shall the dues to the Bank have priority over PF dues payable in respect of the employees?

Ans.: If the employer is adjudged insolvent or in the case of company, an order of winding up is made, the amount due towards PF dues, insurance fund administration charges etc., will be deemed to be included among the debts which under Section 49 of Presidency Towns Insolvency Act or Section 61 of Provincial Insolvency Act or Section 530 of Companies Act are to be paid in priority to all other debts in the distribution of property of insolvent or assets of the company being wound up. [Section 11(1)]. The amount due from employer in respect of PF contribution deducted from salary of employees and also employer’s contribution toward PF will be first charged over assets of the establishment and will be paid in priority to all debts. (Section 11(2).





In Union Bank of India v. Assistant PF Commissioner 2005 LLR 1018 (Kar HC), it was held that PF dues have priority over dues to Banks even if property has been mortgaged to Bank. Therefore in the given problem also, the PF dues shall priority over any dues to the Bank.

Q. 4: Company ABC Ltd. and company JKF Ltd., had delayed payments of contributions under the EPF & MP Act, 1952 for periods of 3 months & 8 months respectively. Will penalty be imposed at the same rate in both the cases? Can such penalty be waived and if so, under what circumstances?

Ans.: Under Para 32A of the EPF Scheme, rate of damages for delays in payment are – (a) Delay of less than two months: 17% p.a. (b) Two months and above but less than four months: 22% p.a. (c) Four months and above but less than six months: 27% p.a. (d) six months and above: 37% p.a. Therefore ABC Ltd must pay damages at the rate of 22% p.a. for its delay of three months and JKF Ltd must pay at the rate of 37% p.a. for its delay of 8 months. The damages can be also reduced by the Central Board in the following manner (a) Full waiver may be granted in case of merger/ amalgamation of sick company or change in management to Worker’s Cooperative (b) Full waiver if BIFR recommends in a rehabilitation scheme (c) In other cases depending on merit reduction upto 5% may be allowed. (Para 32B of EPF Scheme). The damages can be reduced or waived by Central Board in case of sick company for which a scheme for rehabilitation has been sanctioned by the BIFR.

Q. 5: Manorama Group of Industries sold its textile unit to Giant Group of Industries. Manorama Group contributed 25% of total contribution in Pension Scheme, which was due before sale under the provisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952. The transferee company (Giant Group of Industries) refused to hear the remaining 75% contribution in the Pension Scheme. Decide, in the light of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, who will be liable to pay for the remaining contribution in case of transfer of establishment and upto what extent?

Ans.: Problem relating to liability in case of transfer of establishment: The problem as asked in the question is based on the provisions of Section 17(B) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952. Accordingly where an employer in relation to an establishment, transfers that establishment in whole or in part by sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall be jointly or severally liable to pay the contribution and other sums due from the employer under the provisions of this Act of the scheme or pension scheme, as the case may be, in respect of the period upto the date of such transfer. It is provided that the liability of the transferee shall be limited to the value of the assets obtained by him by such transfer. It would be thus evident from the aforesaid provisions that 17-B deals with the liability of transferor and transferee in regard to the money due under (a) the Act or (b) the scheme (c) and pension scheme. In the case of the transfer of the establishment brought in by sale, gift, lease etc. The liability of the transferor and transferee is joint and several, but it is limited to the periodupto the date of transfer. Therefore applying the above provisions in the given case the transferor Manorama Group of Industries, the transferor has paid only 25% of the total liability as contribution in pension scheme before sale of the establishment. With regards to remaining 75% liability both the transferor and transferee companies are jointly and severally liable to contribute. In case, the transferor refuses to contribute, the transferee will be liable. The liability is limited upto the date of transfer and upto remaining amount. Further, the liability of the transferee i.e. Giant Group of Industries, is limited to the extent of assets obtained by it from the transfer of the establishment.

Q. 6: An employee leaves the establishments in which he was employed and gets employment in another establishment wherein he has been employed. Explain the procedure laid down in the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 in this relation.

Ans.: Transfer of accumulated amount to the credit of Employees Provident Fund on change of employment: Section 17-A of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 provides for the transfer of accounts of an employee in case of his leaving the employment and taking up employment and to deal with the case of an establishment to which the Act applies and





also to which it does not apply. The option to get the amount transferred is that of the employee. Where an employee of an establishment to which the Act applies leaves his employment and obtains re-employment in another establishment to which the Act does not apply, the amount of accumulations to the credit of such employees in the Fund or, as the case may be, in the provident Fund in the establishment left by him shall be transferred to the credit of his account in the provident fund of the establishment in which he is re-employed, if the employee so desires and the rules in relation to that provident fund permit such transfer. The transfer has to be made with in such time as may be specified by the Central Govt. in this behalf. [Sub-Section (1)]. Conversely, when an employee of an establishment to which the Act does not apply leaves his employment and obtains re-employment in another establishment to which this Act applies, the amount of accumulations to the credit of such employee in the provident fund of the establishment left by him, if the employee so desires and the rules in relation to such provident fund permit, may be transferred to the credit of his account in the fund or as the case may be, in the provident fund of the establishment in which he is re-employed. [Sub-Section (2)].

Q. 7: What are the establishments to which E.P.F. & M.P. Act do not apply? How the amount standing to the credit of P.F. etc. shall, shall be dealt if the person desires to leave the establishment?

Ans.: Transfer of account of an employee under E.P.F: Section 17A of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 provides for the transfer of accounts of an employee in case of his leaving the employment and taking up employment in another establishment and to deal with the case of an establishment to which the Act applies and also to which it does not apply. The option to get the amount transferred is that of the employee. Where an employee of an establishment to which the Act applies leaves his employment and obtains re-employment in another establishment to which the Act does not apply, the amount of accumulations to the credit of such employee in the Fund or, as the case may be, in the provident fund in the establishment left by him shall be transferred to the credit of his account in the provident fund of the establishment in which he is re-employed, if the employee so desire and the rules in relation to that provident fund permit such transfer. This transfer has to be made within such time as may be specified by the Central Government in this behalf. (Sub-section 1)

Q. 8: X, an employee in ABC Ltd (covered by the EPF and MP Act, 1952) died in an accident. State to whom the amount standing in his account to be payable under the provisions of the Act.

Ans.: The amount standing to the credit of the person at the time of his death is payable to his nominees under the scheme or the rules vest in nominees. And the amount shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee and shall also not be liable to attachment under any decree or order of any Court. (Section 10).

Q. 9: An employee working in an establishment covered by the E.P.F. and M.P. Act, 1952, leaves his employment and takes up employment in another establishment. State in this connection: (i) How shall the amount accumulated to his P.F. account be transferred? (ii) What steps shall be taken if the establishment in which he has joined is not covered by

the Act? (iii) What would be your answer if the establishment in which he was previously working is

not covered by the Act? Ans.: (i) Section 17-A provides for the transfer of accounts of an employee in case of his leaving the

employment and taking up employment in another establishment and to deal with the case of an establishment to which the Act applies and also to which it does not apply. The option to get the amount transferred is that of the employee.

(ii) Where an employee of an establishment to which the Act applies leaves his employment and obtains re-employment in another establishment to which the Act does not apply, the amount of accumulations to the credit of such employee in establishment left by him shall be transferred, within such time as may be specified by the Central Government in this behalf, to the credit of his account in the provident fund of the establishment in which he is reemployed, if the employee so desires and the rules in relation to that provident fund permit such transfer





[Sub-Section (1)]. (iii) Conversely, when an employee of an establishment to which the Act does not apply leaves his

employment and obtains re-employment in another establishment to which the Act applies, the amount of accumulations to the credit of such employee in the provident fund permit, may be transferred to the credit of his account in the fund or as the case may be, in the provident fund of the establishment in which he is employed [Sub-Section (2)].

Q. 10: A company which is covered by the EPF and MP Act, 1952 was adjudged insolvent and an order of winding up was made. State in this connection, whether the provident fund is attachable and whether the payment of PF contribution is considered as a priority over other debts of the company.

Ans.: Protection against attachment (Section 10): The amount standing to the credit of any member in the fund or credit of any exempted employee in provident fund shall not in any way be capable of, being assigned or charged and shall not be liable to attachment under any decree or order of any Court in respect of any debt or liability incurred by the member or the exempted employee. Neither the Official Assignee appointed under the Presidency-Town Insolvency Act, 1909 nor any Receiver appointed under the Provincial Insolvency Act, 1920, shall be entitled to or have any claim on any such amount. The amount standing to the credit of the aforesaid categories of persons at the time of their death and payable to their nominees under the Scheme or the rules vest in nominees. And the amount shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee and shall also not be liable to attachment under any decree or order of any Court. Priority of payment of contribution over other debts (Section 11): If the employer is adjudged an insolvent or if the employer is a company and an order for winding thereof has been made, the amount due from the employer whether in respect of the employee’s contribution or the employer‟s contribution must be included among the debts which are to be paid in priority to all other debts under Section 49 of the Presidency-Towns Insolvency Act, Section 61 of the Provincial Insolvency Act, Section 530 of the Companies Act, 1956, in the distribution of the property of the insolvent or the assets of the company. In other words, this payment will be a preferential payment provided the liability therefore has accrued before this order of adjudication or winding up is made.

Q. 11: (a) An Inspector appointed under the Employees‟ Provident Fund and Miscellaneous Provisions Act, 1952 makes an inspection at 10 p.m. (five hours after factory timings) and seeks to take copies of the “Shareholders‟ Register”. How far under the Act is his action reasonable?

(b) When an employee of an establishment is re-employed in another establishment, what are the rules applicable to the transfer of his PF account under the Employees‟ Provident Fund and Miscellaneous Provisions Act, 1952?

Ans.: (a) Under Section 13(2) of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952, an Inspector can inspect and make copies of, or take extract from any book, register or other document maintained in relation to the establishment and, where he has reason to believe that any offence under this Act has been committed by an employer, seize with such assistance as he may think fit, such book, register or other document or portions thereof as he may consider relevant in respect of that offence. In the present case the Inspector had sought to take copies of the “Shareholders‟ Register” which is irrelevant document for the purpose of EPF and MP Act, 1952. Moreover, he has visited the office after the working hours (10.00 pm) which is not reasonable.

(b) Section 17-A provides for the transfer of accounts of an employee in case of his leaving the employment and taking up employment in another establishment and to deal with the case of an establishment to which this Act applies and also to which it does not apply. The option to get the amount transferred is that of the employee.

Where an employee of an establishment to which this Act applies leaves his employment and obtains re-employment in another establishment to which this Act does not apply, the amount of accumulations to the credit of such employee in the Fund or, as the case may be, in the provident





fund in the establishment left by him shall be transferred to the credit of his account in the provident fund of the establishment in which he is re-employed, if the employee so desires and the rules in relation to the provident fund permit such transfer. This transfer has to be made within such time as may be specified by the Central Government in this behalf [Subsection (1)]. Conversely, when an employee of an establishment to which this Act does not apply leaves his employment and obtains re-employment in another establishment to which this Act applies, the amount of accumulations to the credit of such employee in the provident fund of the establishment left by him, if the employee so desires and the rules in relation to such provident fund permit, may be transferred to the credit of his account in the fund or as the case may be, in the provident fund of the establishment in which he is re-employed [Sub-section (2)].

Q. 11: ABC Ltd. which is covered by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, was adjudged insolvent and an order of winding up was made. State whether in this connection the provident fund is attachable and whether the payment of PF contribution under the provisions of the Act is to be considered a priority over other debts of the company.

Ans.: If the employer is adjudged insolvent or in the case of company an order of winding up is made, the amount due towards PF dues, insurance fund, administration charges etc. will be deemed to be included among the debts which u/s 49 of Presidency Towns Insolvency Act or section 61 of Provincial Insolvency Act or section 530 of Companies Act, which are to be paid in priority to all other debts in the distribution of property of insolvent or assets of the company being wound up [Section 11(1)]. The amount due from employer in respect of PF contribution deducted from salary of employees and also employer‟s contribution toward PF will be first charged over assets of the establishment and will be paid in priority to all other debts [Section 11 (2)]. In the case of ABC Ltd. Falling under EPF & MP Act, 1952, PF is attachable and PF contribution under the provision of the Act is to be considered a priority over other debts of the company. (In Union Bank of India v. Assistant PF Commissioner 2005 LLR 1018 (Kar HC), it was held that PF dues have priority over dues of Banks, even if property was mortgaged to Bank).

Q. 12: Explain briefly the mode of recovery that may be followed by the recovery officer under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 for recovering the amount due from an employer.

Ans.: Recovery of money due from employers: Where any amount is an arrear under section 8, of EPF & MP Act, 1952 the authorised officer may issue to the Recovery Officer a certificate under his signature specifying the amount of arrears. The Recovery Officer, on receipt of such certificate shall proceed to recover the amount specified therein from the establishment or as the case may be, the employer by one or more of the modes mentioned below: (a) Attachment and sale of the movable or immovable property of the establishment or, as the case

may be, the employer; (b) Arrest of the employer and his detention in prison; (c) Appointing a receiver for the management of the movable or immovable properties of the

establishment or, as the case may be, the employer (Section 8B); The attachment and sale of any property under section 8B shall first be effected against the properties of the establishment. Where such attachment and sale is insufficient for recovery the whole of the amount of arrears specified in the certificate, the Recovery Officer may then take proceedings against the property of the employer for recovery of the whole or any part of such arrears. The authorised officer may issue a certificate under Section 8B(1) not withstanding that proceedings for recovery of the arrears by any other mode have been taken [Section 8B(2)]. Notwithstanding that a certificate has been issued to the Recovery Officer for the recovery of the amount, the authorised officer may grant time for the payment of the amount, and thereupon the recovery officer shall stay the proceedings until the expiry of the time so granted [Section 8E].

Q. 13: Describe the provisions of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 in relation to the protection against attachment of provident fund of an employee. When the contribution made by an employee to provident fund is treated as preferential





payment in case of insolvency of an employer? Ans.: Section 10 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 provides that

the amount standing to the credit of any member in the Fund or credit of any exempted employee in a provident fund shall not in any way be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any court in respect of any debt or liability incurred by the member or the exempted employee. Neither the Official Assignee appointed under the Presidency Town Insolvency Act, 1909 nor any Receiver appointed under the Provincial Insolvency Act, 1920, shall be entitled to or have any claim on, any such amount. The amount standing to the credit of the aforesaid categories of persons at the time of their death and payable to their nominees under the scheme or the rules of the Provident Fund shall, subject, to any deduction authorized by the said scheme or rules, vest in the nominees. And the amount shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee. Contribution to P.F. being treated as Preferential Payment (Section 11): If the employer is adjudged an insolvent or if the employer is a company and an order for winding thereof has been made, the amount due from the employer mentioned in Section 11(a) and (b) must be included among the debts which are to be paid in priority to all other debts under Section 49 of the Presidency Towns Insolvency Act, Section 61 of the Provincial Insolvency Act, and Section 530 of the Companies Act, 1956 in the distribution of the propriety of the insolvent or the assets of the company. In other words, this payment will be a professional payment provided the liability therefore has accrued before the order of the adjudication or winding up is made.

Q. 14: Mark true or false with reason: (i) The liability for employer to contribute under the Employees’ Provident Fund etc Act,

1952 is 10% of the employees’ emoluments. (ii) Employer of any establishment to which any scheme applies may reduce directly or

indirectly the wages of any employee or the benefits as old age pension, gratuity fund to which an employee is entitled.

(iii) Basic wages means all the emoluments, dearness allowance, bonus, house rent allowance, and any other similar allowance payable to the employee.

(iv) Generally the Employees Provident Funds and Miscellaneous Provisions Act, 1952 applies to entities employing more than 10 persons.

(v) The Central Government may apply the provisions of this Act even if it employs less than required number of persons.

Ans.: (i) True. As per Section 6 of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952, the contribution paid to the fund by the employer shall be 10% of the employees’ emoluments.

(ii) False. As per Section 12, no employer in relation to any establishment to which scheme applies shall by reason only of his liability for the payment of any contribution to the funds or any charge under this act or the scheme, reduce directly or indirectly the wages of any employee or the benefits in the nature of old age pension, gratuity fund to which the employee is entitled.

(iii) False. As per provision given under Section 2(b) of the Employees‟ Provident Funds and Miscellaneous Provisions Act,1952,basic wages means all emoluments which are earned by an employer while on duty or on leave or on holidays with wages excluding the cash value, D.A, HRA, Bonus, overtime allowance ,any present etc.

(iv) False. As per Section 16 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, This Act is generally applied to the entities employing 20 or more persons.

(v) True. As per section 16 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Central Government may, after giving not less than 2 months’ notice of its intension to do so, apply the provisions of this Act to any establishment with less than 20 persons in the employment.

Q. 15: Discuss under the Employees Provident Funds and Miscellaneous Act, 1952 as whether the Provident fund contribution is a preferential payment in case of the employer being declared insolvent.





Ans.: In accordance with the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, as provided in Section 11 of the said Act, if the employer is declared an insolvent or if the employer is a company and an order for winding-up thereof has been made the amount due from the employer whether in respect of the employees‟ contribution or the employer’s contribution must be included among the debts which are to be paid in priority to all other debts under both the Insolvency Act i.e. Presidency Towns Insolvency Act, 1902 (Section 49) and Provincial Insolvency Act, 1920 (under section 61). Hence, this payment will be preferential payment provided the liability therefor, has accrued before this order of adjudication or winding up is made.

Q. 16: State the provisions of the Employees Provident Funds and Miscellaneous Provisions Act,

1952 relating to the protection of the amount standing to the credit of an employee in the provident fund against attachment.

Ans.: Protection of the amount standing to the credit of an employee in provident fund against attachment: As per Section 10 of the Employees Provident Funds and Miscellaneous Provisions Act,1952, the amount standing to the credit of any member in the fund or of any exempted employee in a provident fund shall not in any way be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any court in respect of any debt or liability incurred by the member or exempted employee, and neither the official assignee appointed under the Presidency Town Insolvency Act, 1909, nor any receiver appointed under the Provincial Insolvency Act, 1920, shall be entitled to or have any claim on, any such amount. This protection also applies to provident fund, pension and insurance amount receivable by employee under the scheme. In case of death of such above person, the money will be payable to nominees and the amount shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee and shall also not be liable to attachment under any decree or order of any court [Section 10(3)].

Q. 17: Define the term ‘Employer’ under the Provident Fund and Miscellaneous Provisions Act, 1952.

Ans.: Section 2(e) read with Section 2(k) of the Employees Provident Fund and Miscellaneous Provisions Act 1952 defines employer means: (i) In relation to an establishment which is a factory, the owner or occupier of the factory,

including the agent of such owner or occupier, the legal representative of a deceased owner or occupier and where a person has been named as a manager of the factory, and

(ii) In relation to any establishment, the person who, or the authority which has ultimate control over the affairs of the establishment, and where the said affairs are entrusted to a manager, Managing Director, managing agent, such manager, MD or Managing agent shall be treated employer.

FUN PAGE: Google. Inc

The original nickname was BackRub due to the backlink technology used to determine site importance but eventually changed the name to Google originating from the misspelling of the word “Googol (the mathematician’s term for the number one followed by one hundred zeros) to signify the large quantities of information for people that it would provide. Google began as a research project in 1996. Google.com domain went online in 1997. The first funding of $100,000 for Google was provided by Andy Bechtolsheim the co-founder of Sun Microsystems. The CEO for ‘Excite’ George Bell rejected to buy Google when it was offered to him for $1 million when Brin and Page were finding the search engine taking up to much time from their research in 1999. The first round of venture capital of $25 million was provided in 1999 by Kleiner Perkins and Sequoia Capital 5 years before it floated. Google incorporated in 1998. 30 million pages indexed in 1998. 1 billion pages indexed in 2000. Eric Schmidt named CEO in 2001. Acquired Blogger in 2003. Adsense launched in 2003. Gmail launched in 2004. Google IPO in 2004. 8 billion pages indexed in 2004. Acquired YouTube in 2006 for $1.65 billion. 1 Trillion pages indexed in in 2008. Android announced in 2007. Chrome launched in 2008. 1.8 million shares given to Stanford University for its PageRank Patent sold by Stanford in 2005 for $336 million. It currently runs over 1 million computer servers in data centers around the world. Google search handles over 1 billion searches per day. 7.2 billion daily page views 87.8 billion monthly worldwide searches conducted on Google sites.





PART 2: BUSINESS ETHICS

QUESTION AND ANSWERS: BUSINESS ETHICS Q. 1: Explain the meaning of the terms 'ethics' and 'business ethics' and also state the

requirements of 'business ethics'. Ans.: Ethics: The term 'Ethics' has a variety of meanings. One of the meanings is 'Ethics' are

the principles of conduct governing an individual or a group. Another definition describes ethics as relating to what is good or bad and having to do with moral duty and obligation.

Business ethics: In a broad sense, ethics in business refers to the application of day today moral and ethical norms to business. Business ethics are the principles and standards that determine acceptable conduct in business organisation.

Requirements: Being ethical in business requires acting with an awareness of - (a) The need for complying with rules (e.g)

(i) Laws of the land, (ii) Customs and expectation of the community (iii) Principles of morality (iv) Policies of the organisation and (v) General concerns such as the needs of others and fairness.

(b) How the products, services and actions of a business enterprise, can affect its stake holders (i.e. employees, customers, suppliers, shareholders and community I society as a whole) either positively or negatively.

Q. 2: Answer the questions. You are required to state whether the statement is correct or incorrect with brief reasons: (a) Company management has responsibility only towards its shareholders (b) Window-dressing of financial statements will not be useful in the long run. (c) Ethics and morals are synonymous. (d) Competition Act, 2002 protects the interest of consumers.

Ans.: (a) Incorrect: Company management is responsible not only to the shareholders, but also to other stakeholders i.e. people who have an interest in the conduct of the business of the company. These include employees, customers, vendors, the local community and even society as a whole. These stakeholders have certain rights with regard to how the business operates.

(b) Correct: In window-dressing, efforts are made to show a 'good balance sheet' by manipulating accounting entries. This can help companies to boost their market image and obtain further capital from the market for some time. Window dressing is on the assumption that next year performance will be better and accounts will be regularized next year. Window dressing can go on for 2 or 3 years but not more. It will lead to the downfall of the company in a few years.

(c) Incorrect: Both 'ethics' and 'morals' deals with right and wrong conduct. But they are not same. Ethics deals with individual character which is a personal attribute. Ethics is the response of individual to a specific situation e.g. whether in this situation, it is ethical to state the truth. Morals deal with customs set by groups or some authority like religion. Morals are general principles e.g. you should speak truth.

(d) Correct: Competition Act, 2002 intends to protect the interests of consumers by establishing a commission to present practices having adverse effect on competition and to promote and sustain competition in markets. The commission is empowered to prohibit certain agreements which are considered as anti-competitive in nature, abuse of dominant position and regulation of combinations likely to cause appreciable adverse effect on competition.

Q. 3: What is meant by ‘Environmental ethics’? How does its non-adoption leads to 3 Ps Viz., Polluter, Pay and Principles? Explain.

Ans.: Pollution indicates dangerous contamination of environment. Out of variety of pollution





contamination of air leads to destruction of natural and botanical resources due to various chemical pollutants like cadmium, vanadium etc. The destruction of forest wealth results in depletion of ozone causing innumerable hazards and incurable diseases like leukaemia. Similarly global warming emanates various oxides and acids which directly affect oceanic species and standing crops. Likewise land and water are polluted by toxic materials, or lead, mercury etc. Industrial toxic chemicals used in production of plastics cause cancer, liver damage, pre-natal and post-natal diseases. Depletion of fossil fuels adds to the cause of extinction of rare species on earth. Unless and until the policy recycle the wastes by improved technological methods is developed, various ecological and environment problems are bound to arise. To overcome all these, a principle to assess the value of these factors and incorporate them in the account which is called green accounting system, by adopting built in environmental consideration measures taken to minimize the waste of natural resources and energy and rescue wastes, environment friendly living is difficult. Unless commitment is made by produces the implementation of 3Ps namely polluter, pay, and principles should be enforced to stop all subsidies.

Q. 4: (a) To pay proper attention to business ethics is certainly beneficial in the interest of business. Describe four such benefits which may be obtained by paying attention to business ethics.

(b) Explain how corporate social responsibility minimises the ecological damage and helps in achieving long-term objectives, so that the business may gain long-term profit maximization.

Ans.: (a) Benefits which may be obtained by paying attention to business ethics: Ethics is the concern for good behaviour – doing the right thing. In business, self interest prevails and there is always inconsistency between ethics and business. But it is a well settled principle that ethical behaviour creates a positive reputation that expands the opportunities for profit. The awareness regarding products and services of an organization, and the actions of its employees can affect its stakeholders and society as a whole. Therefore to pay proper attention to business ethics may be beneficial in the interest of business. These benefits may be enumerated as follows: (1) In the recent past ruthless exploitation of children and workers, trust control over the

market, termination of employees based on personalities and other factors had affected society and a demand arose to place a high value on ethics, fairness and equal rights resulting in framing of anti-trust laws, establishment of governmental agencies and recognition of labour unions.

(2) Easier change management: Attention to business ethics is also critical during times of fundamental change. The apparent dilemma may be whether to be non profit or for profit. In such situations, often there is no clear moral compass to guide leaders about what is right or wrong. Continuing attention to ethics in the workplace sensitises leaders and staff for maintaining consistency in their actions.

(3) Strong team work and greater productivity: Ongoing attention and dialogues regarding ethical values in the workplace builds openness, integrity and a sense of community which leads to, among the employees, a strong alignment between their values and those of the organisation resulting in strong motivation and better performance.

(4) Enhanced employee growth: Attention to ethics in the workplace helps employees face the reality both good and bad in the organisation and gain the confidence of dealing with complex work situations.

(5) Ethical programmes help guarantee that personnel policies are legal: A major objective of personnel policies is to ensure ethical treatment of employees. In matters of hiring, evaluating, disciplining and firing etc, an employer can be sued for breach of contract for failure to comply with any promise. The gaps between corporate culture and actual practice have significant legal and ethical implications. Attention to ethics ensures highly ethical policies and procedures in the work place. Ethics management programmes are useful in managing diversity. Such programmes require the recognition and application of diverse values and perspectives which are the basis of a sound ethics management programme.





Most organisations feel that cost of mechanisms to ensure ethical programme may be more helpful in minimizing the costs of litigations.

(6) Ethical programmes help to detect ethical issues and violations early so that criminal acts “of omission” may be avoided.

(7) Ethical values help to manage values associated with quality management, strategic planning and diversity management.

(b) Corporate social responsibility and ecological damage: The business institution exists and

flourishes only because it performs invaluable services to society. Society gives business its license to exist which may be revoked and amended at any time if they do not fulfil the society’s expectations. Therefore, if a business intends to retain its existing social role and power, it must serve society’s needs constructively. A business organization acts in its own self-interest and uses natural resources also. The effluents of many businesses damage the surrounding environment. By their own socially responsible behaviour, they can prevent government intervention if they are proactive in recognizing their ecological responsibility towards society. Companies must recognize that a strategy for corporate responsibility can play a valuable role not only in meeting the challenges of globalization by mitigating risks domestically and internationally, but also in providing benefits beyond risk management.

Q. 5: A retailer was purchasing goods regularly from XYZ Ltd. for the purpose of resale. There were defects in the goods in one of the purchase lot and as a result the retailer suffered loss of his share in competition. The retailer sued the said company for this reason. The company contended that the goods were purchased for the purpose of resale and therefore, not bound. Is it a valid contention? Explain clearly the provisions of Competition Act, 2002 in this regard.

Ans.: The problem as asked in the question is based on the provisions of Section 2(f) of the Competition Act, 2002. The Section provides that “consumer” means any person who buys any goods for a consideration which has been paid or promised or partly paid or partly promised or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised or under any system of deferred payment when such use is made with the approval of such person whether such purchase of goods is for resale or for any commercial purpose or for personal use. Hence, Section 2(f) of the Competition Act, 2002 provides that whether purchase of goods is for resale or for any commercial purpose or for personal use, the purchaser is a consumer. Thus consumer will also include a person who purchases goods for re-sale. Therefore the contention of XYZ Ltd. is not valid and not tenable.

Q. 6: Answer any two out of four. You are required to state whether the statement is correct or incorrect with brief reasons: (a) The Governance Model positions management as accountable solely to investors. (b) Business does not sub-serve environmental ethics. (c) Consumer for personal use and consumer for commercial use are synonymous. (d) Water pollution is also a kind of resource depletion.

Ans.: (a) Incorrect: The traditional governance model positions management as accountable to investors only but a growing number of corporations in the late part of the 20th century accept that constituents like employees, trade unions, customers, suppliers along with the investors are affected by corporate activity and therefore the corporates must be answerable to them also. Such constituents of an organization are also called the stakeholders.

(b) Incorrect: Previously the business concerns were mainly concerned with only good business in economic sense. The conservation of natural resources was a motive of more economic gains. But now due to awareness of social responsibility and ethical norms the motive of business is not only concerned with business interest of the shareholders but also a general concern for the community. Now the business houses have realized that environmental ethics make good business sense if quality, ethics and environmental standards are maintained.

(c) Incorrect: It seems that the definition of “consumer” under Competition Act, 2002 and under Consumer Protection Act, 1986 is substantially the same. But there is difference between the





two and that difference is that under clause (1) of Section 2(f) in Competition Act, the words used are “whether such purchase of goods is for the resale of for any commercial purpose or for personal use” in place of the words “but does not include a person who obtains such goods for resale of for any commercial purpose” as in the Consumer Protection Act. Likewise in clause (ii) the words used in the Competition Act are “Whether such hiring or availing of services is for any commercial purpose or for personal use” in place of the words “but does not include a person who avails of such services for any commercial purpose” as in the Consumer Protection Act. Thus in case of Competition Act the word consumer includes both consumer for personal use and for commercial use but it is not so in the case of Consumer Protection Act.

(d) Correct: Water pollution is also a kind of resource depletion because contamination of air, water or land diminishes their beneficial qualities. Oceanographers have found traces of plutonium, caesium and other radioactive materials in seawater that have apparently leaked from the sealed drums in which radioactive wastes are disposed. An increase in population and economic activity in urban area has also resulted in increased demands of water. The ground water is also shrinking because of the decreasing rainfall and wasting of water are also goods for certain reasons.

Q. 7: State, how far a sound ethical environment in a company may be created and corporate scandals may be avoided.

Ans.: Creating an ethical environment in company: A sound ethical environment in a company may be created and corporate scandals may be avoided by adopting the following methods: (1) Ensuring that employees are aware of their legal and ethical responsibilities: Some ethical

organisations are having policies to train and motivate employees towards ethical behaviour. To start with, such initiation should be from the top. A number of companies in India and abroad are being known for their quality and soundness of their ethics programmes. Companies like Raytheon, Texas Instruments, Wipro are pioneers in establishing ethical environment among the employees enabling them to take ethical decisions.

(2) Providing a communication system between the management and employees so that anyone in the company can report fraud and mismanagement without the fear of being reprimanded. In India, Wipro has introduced a helpline comprising of senior members of the company, who are available for guidance on any moral, legal or ethical issues that an employee of the company may face.

(3) Ensuring fair treatment to those who act as whistle blowers: This is perhaps the most important and sensitive issue. Fair treatment to whistle blowers is a basic necessity to check fraud. Some acts must be appreciated and that appreciation should be extended from within the company rather than outside.

Q. 8: State whether the following statements are true or false and give reasons there for: (a) Plato discusses the concept of justice in his book ‘Democracy’. (b) According to Gandhiji, knowledge without sacrifice is a sin. (c) The word ethics is derived from the Greek word ‘ethikos’, which means character. (d) Where more than one morally right alternative exists, then we can say an ethical

dilemma exists. (e) The Sarbanes–Oxley Act was a pioneer in the area of Corporate Social Responsibility. (f) The term shareholder is of wider import than the term stakeholder. (g) In India, the corporate governance mechanism is of voluntary nature. (h) Clause 49 was amended in 2004 following the Kumar Mangalam Birla committee report. (i) The Government is not a stakeholder. (j) There is a growing convergence between CSR and Corporate Governance agendas.

Ans.: (a) False, as Plato discusses the concept of justice in his book, „The Republic‟. (b) False, as according to Gandhiji, knowledge without character is a sin. (c) True, as the word ethics is derived from the Greek word „ethikos‟, which means character. (d) True, as an ethical dilemma is said to exist where more than one morally right alternative

exists. (e) False, as the Sarbanes–Oxley Act was a pioneer in the area of Corporate Governance.





(f) False, as the term shareholder is of narrower import than the term stakeholder. (g) False, since in India, the corporate governance mechanism is not of voluntary nature. (h) False, as Clause 49 was amended in 2004 following the Narayan Murthy Committee report. (i) False, as the Government is also a stakeholder. (j) True, since there is a growing convergence between CSR and Corporate Governance agendas.

Q. 9: Examine the compelling reasons for acting ethically in marketing. Ans.: To reverse declining public confidence in marketing. Periodically we hear about misleading

package labels, false claims in ads, phony list prices, and infringements of well established trademarks. Though such practices are limited to only a small proportion of all marketing, the reputations of all marketers are damaged. To reverse this situation, business leaders must demonstrate convincingly that they are aware of their ethical responsibility and will fulfill it. Companies must set high ethical standards and enforce them. Moreover, it is in management’s interest to be concerned with the well-being of consumers, since they are the lifeblood of a business.

To avoid increases in government regulation. Our economic freedoms sometimes have a high price, just as our political freedoms, do. Business apathy, resistance, or token responses to unethical behaviour simply increase the probability of more government regulation. Indeed, most of the governmental limitations on marketing are the result of management‟s failure to live up to its ethical responsibility at one time or other. Moreover, once some form of government control has been introduced, it is rarely removed.

To regain the power granted by society. Marketing executives wield a great deal of social power as they influence markets and speak out on economic issues. However, there is responsibility tied to that power. If marketers do not use their power in a socially acceptable manner, that power will be lost in the long run.

To protect the image of the organization. Buyers often from an impression of an entire organization based on their contact with one person. More often than not, that person represents the marketing function. One may base one‟s opinion of a retail store entirely on the behaviour of a single sales clerk. As Procter & Gamble put it in an annual report: “When a Procter & Gamble sales person walks into a customer‟s place of business that sales person not

only represents Procter & Gamble, but in a very real sense, that person is Proctor & Gamble.” Q. 10: Write short notes on the following:

(a) Global warming (b) The UN Guidelines on consumer protection (c) Some international developments in CSR

Ans.: (a) Global Warming: Greenhouse gases – carbon dioxide, nitrous oxide, methane, and chlorofluorocarbons, occur naturally in the atmosphere to absorb and hold heat from the sun, preventing it from escaping back into space, to keep the earth‟s temperature about 33°C warmer than it would otherwise be, so that life can evolve and flourish. However, industrial, and other human activities during the last 50 years have released substantially more greenhouse gases into the atmosphere, particularly by the burning of fossil fuels such as oil and coal raising the levels of greenhouse gases and resulting in increasing amounts of heat, raising temperatures around the globe. Average global temperatures are now at least 1°C higher than in 1900 and are expected to rise by upto 4.5°C during this century. This rising heat will expand the world‟s deserts; melt the polar ice caps, causing sea levels to rise; make several species of plants and animals extinct; disrupt farming; and increase the distribution and severity of diseases. Bodies of water such as lakes and oceans will warm, and this will dramatically shift the geographical distribution of fish and other marine species and increase the frequency and magnitude of droughts. The increase in levels of greenhouse gases would require reducing current emissions of greenhouse gases by 60 to 70 percent – an amount that would seriously damage the economies of both developed and developing nations.

(b) The UN Guidelines on consumer protection: The UN Guidelines call upon governments to develop, strengthen and maintain a strong consumer policy, and provide for enhanced protection of consumers by enunciating various steps and measures around eight themes





(UNCTAD, 2001). These eight themes are: 1. Physical safety 2. Economic interests 3. Standards 4. Essential Goods and Services

5. Redress 6. Education and information 7. Specific areas concerning health 8. Sustainable consumption

The Guidelines have implicitly recognized eight consumer rights, which were made explicit in the Charter of Consumers International as follows: Right to basic needs Right to safety Right to choice Right to redress

Right to information Right to consumer education Right to representation Right to healthy environment

These eight consumer rights can be used as the touchstones for assessing the consumer welfare implications.

(c) Some International Developments in CSR: Various performance and reporting standards have been introduced globally to improve CSR performance of business houses. A few of those standards are explained below: The Global Reporting Initiative: It is a reporting standard established in 1997 with the

mission of designing globally applicable guidelines for preparing enterprise-level sustainability reports including both social and environmental indicators.

AA1000: Launched in 1999, AA1000, based on John Elkington‟s triple bottom line (3BL) reporting is an accountability standard designed to complement the Global Reporting Initiative‟s (GRI) Reporting Guidelines with the objective to improve accountability and performance by learning through stakeholder engagement.

United Nations Global Compact: The Global Compact is a voluntary international corporate citizenship network initiated to support the participation of both the private sector and other social actors to advance responsible corporate citizenship and universal social and environmental principles to meet the challenges to globalization.

Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises: The guidelines were first published in 1976 and updated most recently in June, 2004. The guidelines are recommendations addressed by governments to multinational enterprises and are voluntary principles and standards, not legally enforceable. Governments adhering to the Guidelines encourage the companies operating within the countries to observe the guidelines wherever they operate.

Q. 11: Examine the concept of stakeholders and enumerate a few examples. Ans.: Stakeholders: The traditional governance model positions management as accountable solely to

investors (shareholders). But a growing number of corporations accept that constituents other than shareholders are affected by corporate activity, and that the corporation must therefore be answerable to them. Coined only in the late part of the 20th century, this word “stakeholders” describes such constituents of an organisation - the individuals, groups or other organizations which are affected by, or can affect the organisation in pursuit of its goals. A typical list of stakeholders of a company would be Employees Trade Unions Customers Shareholders and investors

Suppliers Local communities Government Competitors.

Q. 12: How does a commitment to Corporate Social Responsibilities become an imperative for

Corporations? Give any five reasons. Ans.: (1) The Iron Law of Responsibility:

The institution of business exists only because it performs invaluable services for society. Society gives business its charter to exist and that charter can be amended or revoked at any time if it fails to live up to society‟s expectations. Therefore, if a business intends to retain its

existing social role and social power, it must respond to society‟s needs constructively. This is called the Iron Law of Responsibility. In the long-run those who do not use power in a manner





that society considers responsible, will tend to lose it. And CSR policies help corporations to continue to fulfill the expectations the wider society places on them.

(2) To Fulfil Long term Self-interest: A business organisation, sensitive to community needs would, in its own self interest, like to have a better community in which to conduct its business. To achieve that, it would implement special programmes for social welfare. As a result of this, Crime would decrease and less money required to protect property. Labour recruitment would be easier. Turnover and absenteeism would also be substantially reduced. A better society would produce a better environment in which the business may gain long-term profit maximisation.

(3) To Establish a Better Public Image: Each business organisation must enhance its public image to secure more customers, better employees and higher profit.. According to this line of argument, social goals are now a top priority with members of the public. So, if the firm wants to capture a favourable public image, it will have to show that it also supports these social goals.

(4) To Avoid Government Regulation or Control: Regulation and control are costly to business, both in terms of energy and money and restrict its flexibility of decision-making, as failure of businessmen to assume social responsibilities invites government to intervene and regulate or control their activities.. Businessmen have learnt that once a government control is established, it is seldom removed even though the warranting conditions change. If these are the facts, then the prudent course for business is to understand the limit of its power and to use that power responsibly, giving government no opportunity to intervene. By their own socially responsible behaviour, they can prevent government intervention

(5) To Avoid Misuse of National Resources and Economic Power: Businessmen command considerable power over the productive resources of a community. They are obliged to use those resources for the common good of society. They should not forget that the power to command national resources has been delegated to them by the society to generate more wealth for its betterment. They must honour social obligations while exercising the delegated economic power. Otherwise, society will not indefinitely tolerate their misdeeds in wasting away these resources.

Q. 13: State whether the following statements are true or false and give reasons. (a) The concept of sustainable development was first elaborately dealt with by Brundtland

Report. (b) The Indian Competition Act, 2002 is confined to control of abuse of dominant position. (c) One of Gandhiji’s seven social sins is commerce without character. (d) The Cadbury Report was a seminal development in the field of corporate governance. (e) An employer is not responsible for any sexual harassment that may be perpetrated by

one employee on another. Ans.: (a) True: The report of the Brundtland Commission of 1987 title „Our Common Future‟ was one of

the earliest documents to highlight and bring into international focus the concept of sustainable development.

(b) False: The Indian Competition Act, 2002 in addition to control of abuse of dominant position, deals with regulation of combinations, prohibition of monopolistic agreements and advocacy of fair competition.

(c) False: Two of Gandhiji’s social sins are “commerce without morality” and “knowledge without character”.

(d) True: The Adrian Cadbury Report of 1992 was a pioneering study of corporate governance issues and many other international studies were modeled on this.

(e) False: An employer is invariably held responsible for any sexual harassment that may go on in the workplace. The Supreme Court of India in the Vishaka vs. State of Rajasthan (1997) Case had placed entire onus on the employer to prevent sexual harassment in the workplace and part culpability on the employer in case of occurrences of sexual harassment offences.





Q. 14: Discuss ways to create an ethical environment. Ans.: See answer of Q. 7

Q. 15: What are the United Nations’ guidelines themes on consumer protection? Enumerate also the consumer rights enshrined therein.

Ans.: See answer of Q. 10(b)

Q. 16: Examine how discrimination can creep into employment issues. Ans.: Discrimination in employment involves three basic elements:

First, it is a decision against one or more employees (or prospective employees) that is not based on individual merit, such as the ability to perform a given job, seniority, or other morally legitimate qualifications.

Second, the decision derives solely or in part from racial or sexual prejudice, false stereotypes, or some other kind of morally unjustified attitude against members of the class to which the employee/s belong(s).

Third, the decision (or set of decisions) has a harmful or negative impact on the interestsof the employees, perhaps costing those jobs, promotions, or better pay.

Some important points: Arbitrarily giving some individuals less of an opportunity, to compete for jobs than others is

unjust. Discrimination in employment is wrong because it violates the basic principles of justice by differentiating between people on the basis of characteristics (race or sex) that are not relevant to the tasks they must perform.

It is consequently understandable that the law has gradually been changed to conform to these moral requirements, and that there has been a growing recognition of the various ways in which discrimination in employment occurs. Among the practices now widely recognized as discriminatory are the following:

Recruitment Practices Firms that rely solely on the word-of-mouth referrals of present employees to recruit new workers tend to recruit only from those racial and sexual groups that are already represented in their labour force. Also, when desirable job positions are advertised only in media that are not used by minorities or women or are classified as for men only, recruitment would also tend to be discriminatory.

Screening Practices Job qualifications are discriminatory when they are not relevant to the job to be performed (e.g., requiring a high school diploma or a credential for an essentially manual task). Job interviews are discriminatory if the interviewer routinely disqualifies certain class of people – for example, on the basis of assumptions about occupations “suitable for women” or the propriety of putting women in “male” environments.

Promotion Practices: Promotion, job progression, and transfer practices are discriminatory when employers place males on job tracks separate from those open to women and minorities. When promotions rely on the subjective recommendations of immediate supervisors.

Conditions of Employment: Many times wages and salaries are discriminatory to the extent that equal wages and salaries are not given to people who are doing essentially the same work. Another issue is related to fair wages and treatment of workers. Companies subcontracting manufacturing operations abroad are now aware of the ethical issues associated with supporting facilities like child labour that abuse and/or underpay their work forces. Such facilities have been termed “sweatshops”. Maximizing profits is often the motivation behind a company’s decision to utilize sweatshops.

Dismissal: Firing an employee on the basis of his or her race or sex is a clear form of discrimination. Less blatant but still discriminatory are layoff policies that rely on a seniority system, in which women and minority have the lowest seniority because of past discrimination.

Q. 17: Write a note on corporate governance and its historical development in the Indian context. Ans.: “Corporate governance is about promoting corporate fairness, transparency and

accountability”. It is concerned with structures and processes for decision making, accountability, control and behaviour at the top level of organisations. It influences how the objectives of an organisation are set and achieved, how risk is monitored and assessed and how performance is optimized. The term Corporate Governance is not easy to define. The term governance relates to a





process of decision making and implementing the decisions in the interest of all stakeholders. It basically relates to enhancement of corporate performance and ensures proper accountability for management in the interest of all stakeholders. It is a system through which an organization is guided and directed. On the basis of this definition, the core objectives of Corporate Governance are focus, predictability, transparency, participation, accountability, efficiency & effectiveness and stakeholder satisfaction. Accountability relates to how well the content of workplace decisions is aligned with the

organisation‟s stated strategic direction. Control involves the process of auditing and improving organisational decisions and actions. Corporate governance arrangements are key determinants of an organisation‟s relationship with the world and encompass: 1. The power given to management; 2. Control over management‟s use of power (e.g. through institutions such as Boards of

Directors); 3. Management‟s accountability to stakeholders; 4. The formal and informal processes by which stakeholders influence management decisions. In India, Corporate Governance is ensured by subjecting companies to clause 49 of the listing agreements that listed companies have to signed with stock exchanges. The focus of clause 49 has been on: (i) appointment of independent Directors, (ii) financial disclosures and (iii) stream lining of auditing procedures. The Confederation of Indian Industry (CII) took the lead in framing a desirable code of corporate governance in April, 1998. This was followed by the recommendations of the Kumar Manglam Birla Committee on Corporate Governance. This Committee was appointed by the Securities and Exchange Board of India (SEBI). The recommendations were accepted by SEBI in December 1999, and enshrined in Clause 49 of the Listing Agreement of all Stock Exchanges in India. In August 2002, the Department of Company Affairs, Government of India, constituted a nine-member committee under the chairmanship of Mr. Naresh Chandra. SEBI having analysed disclosures made by many companies under Clause 49 constituted a review committee under the chairmanship of Mr. N.R. Narayana Murthy. The Narayana Murthy Committee report, 2003, suggested further improvements and in alignment with these recommendations, the revised Clause 49 has been made effective.

Q. 18: Examine briefly at least four international initiatives/mechanisms for strengthening CSR. Ans.: See Answer of Q.10(c)

FUN PAGE: Facebook Inc. Facebook is a social networking service and Web site launched in February 2004, operated and privately owned by Facebook, Inc. As of July 2011, Facebook has more than 800 million active users. Additionally, users may join common-interest user groups, organized by workplace, school or college, or other characteristics, and categorize their friends into lists such as "People From Work" or "Really Good Friends". The name of the service stems from the colloquial name for the book given to students at the start of the academic year by some university administrations in the United States to help students get to know each other. Facebook allows any users who declare themselves to be at least 13 years old to become registered users of the site. Facebook was founded by Mark Zuckerberg with his college roommates and fellow computer science students Eduardo Saverin, Dustin Moskovitz and Chris Hughes. The Web site's membership was initially limited by the founders to Harvard students, but was expanded to other colleges in the Boston area, the Ivy League, and Stanford University. It gradually added support for students at various other universities before opening to high school students, and eventually to anyone aged 13 and over. However, based on ConsumersReports.org on May 2011, there are 7.5 million children under 13 with accounts, violating the site's terms of service. A January 2009 Compete.com study ranked Facebook as the most used social networking service by worldwide monthly active users, followed by MySpace. Entertainment Weekly included the site on its end-of-the-decade "best-of" list, saying, "How on earth did we stalk our exes, remember our co-workers' birthdays, bug our friends, and play a rousing game of Scrabulous before Facebook?" Quantcast estimates Facebook has 138.9 million monthly unique U.S. visitors in May 2011. According to Social Media Today, in April 2010 an estimated 41.6% of the U.S. population had a Facebook account. Nevertheless, Facebook's market growth started to stall in some regions, with the site losing 7 million active users in the United States and Canada in May 2011.





PART 3: BUSINESS COMMUNICATION

QUESTIONS & ANSWERS: BUSINESS COMMUNICATION

Q. 1: What is formal communication? Explain in brief its major advantages Ans.: A formal communication flows along prescribed channels which all organizational members

desirous of communicating with one another are obliged to follow. Every organisation has a built-in hierarchical system that can be compared to a pyramid. It can, therefore, be understood that communication normally flows from top- downwards. But it is not always so. Communication in an organisation is multidimensional or multidirectional. Given below are the directions in which communications are sent: (a) Downward (b) Upward (c) Horizontal or Lateral (d) Diagonal or Crosswise Formally, a clerk working in any section cannot directly communicate with a Managing Director but has to follow the reporting hierarchy. It has been called ―the main line of the organisation‘s operational communication‖. In this are included the reports, records and other forms that supply working information to the various parts of the organisation, orders, instructions and messages that flow up and down in the hierarchical system and the letters, sales presentations, advertising and publicity material that go out to the public. These forms of communication just do not happen by themselves. They are carefully thought out and well designed. Great care is taken in their design and movement. Advantages of Formal Communication: (a) The formal channels account for most of the effectiveness of communication. As has been said

earlier, great care has to be taken in sending across any letter or report through the proper formal channel.

(b) Formal channels cover an ever – widening distance as organizations grow. Through them, it is easier to reach out to the branches of an organisation spread far and wide.

(c) The formal channels, because of their tendency to filter information, keep the higher level managers from getting bogged down.

(d) Formal channels of communication consolidate the organisation and satisfy the people in managerial position.

Q. 2: Discuss the qualities of a critical thinker. Ans.: Qualities of a Critical Thinker:

By combining the skills of critical thinking with the appropriate mindset, one can make better decisions and adopt more effective courses of action. To develop as a critical thinker, one must be motivated to develop the following attributes: 1. Open minded: willing to accept and explore alternative approaches and ideas. 2. Well informed: knows the facts and what is happening on all fronts. 3. Experimental: thinks through, what if scenarios to create probable options and then test the

theories to determine what will work and what won‘t. 4. Contextual: keeps in mind the appropriate context. Apply factors of analysis that are relevant or

appropriate. 5. Reserved in Making Conclusions: knows when a conclusion is: Fact and when it is not. Only true

conclusions support decisions.

Q. 3: Explain characteristics of groups. Ans.: Characteristics of Groups:

Group goals: Every group establishes its own group goals, which provide motivation for their existence.

Group structure is based on the roles to be performed and member positions.





Group patterns of communication, is the pattern of message flow in a group. Group norms: are the informed rules of interaction in a group. Group climate is the emotional atmosphere of a group based on: -

(1) Bonding and trust among members. (2) Participative spirit. (3) Openness. (4) High performance goals.

Q. 4: Write short notes on :

(a) Advantages of ethical communication. (b) Elements of culture (c) Guidelines for drafting a press release.

Ans.: (a) Advantages of Ethical Communication: Ethical communication promotes long-term business success and profit. However, improving profits isn't reason enough to be ethical; as soon as the cost of being ethical outweighed the benefits, ethical choices would no longer be possible. Surveys report that all employees want to work for organizations with high ethical standards. Competent people are likely to search for organizations that maintain high ethical standards. When competent people migrate toward ethical firms, everyone benefits because both competence and ethics are perpetuated. Indeed, it is quite easy to make the argument that competence and ethics go hand in hand. Many companies are reassessing their communication budgets, moving away from traditional, functional approaches to public relations and public affairs and pursuing internal and external corporate communication strategies. The theory and practice arising from corporate communications lies at the heart of effective strategic management, planning and control. New digital media technologies are having greater impact on news management and the monitoring and evaluation of corporate identity, corporate advertising, organizational reputation and overall performance.

(b) Elements of Culture

A number of elements that can be used to describe or influence Organizational Culture: The Paradigm: What the organization is about; what it does; its mission and values. Control Systems: The processes in place to monitor what is going on. Organizational Structures: Reporting lines, hierarchies, and the way that work flows

through the business. Power Structures: Who makes the decisions and how power is distributed across the

organization. Symbols: These include the logos and designs, but would extend to symbols of power, such

as car parking spaces and executive washrooms. Rituals and Routines: Management meetings, board reports and so on may become more

habitual than necessary. Stories and Myths: build up about people and events, and convey a message about what is

valued within the organization. (c) Guidelines for drafting a Press Release: The term press release in its narrower sense is used for releases covering news. The press

release contains worthwhile material which has some news value. It is not only unnecessary expenditure but also damages the reputation of the concerned publicity/information department if the release is on a very trivial matter. The press release should be written in a journalistic style. It should provide facts or information of interest to the readers and should attempt to cover all aspects of a specific subject. There should not be any loose ends. It should be on a subject which is recent or in news.

The release should not be generally lengthy. It should be concise and to the point. It has not much place for subsidiary or background material. The release is a piece of clear writing without any ambiguity, without any effort towards colour or ornamentation.

The introduction or lead should be in a summary format as it is a news story. The relative





value of the various ingredients of the subjects in the press release is weighted and evaluated and the most pertinent of them are included in the lead.

The releases should have a consistent format. Generally, the name of the organization from where the release emanates is given on the top. The date and place are indicated on the top right side. The release should have a title and a subtitle also, if necessary. It should have a suitable introductory paragraph. In the case of releases from non-official organization, it is desirable also to mention the designation of the person issuing the release and his telephone number.

Q. 5: Prepare a draft of Power of Attorney to be submitted before the Income –Tax Authorities Ans.: Format of Power of Attorney to be submitted before the Income –Tax Authorities:

I/we, ____________________, residing at _______________hereby authorise, _______________ to represent me/my firm/my family in connection with __________________for the year______. His statement and explanation will be binding on me/us. Place: Date: I, ____________________ hereby declare that I am duly qualified to represent the abovementioned person. Place: Date: (Address of Power of Attorney holder)

Q. 6: Explain Consensus Building. Ans.: Consensus Building: Consensus means overwhelming agreement. Most consensus building efforts

set out to achieve unanimity. The key indicator of whether or not a consensus has been reached is that everyone agrees with the final proposal and it is important that consensus be the product of a good-faith effort to meet the interests of all stakeholders. Thus, consensus requires that someone frame a proposal after listening carefully to everyone's interests. Before the parties in a consensus building process come together, mediators (or facilitators) can play an important part in helping to identify the right participants, assist them in setting an agenda and clarifying the ground rules by which they will operate, and persuading noncompliant parties to participate. Once the process has begun, mediators (and facilitators) try to assist the parties in their efforts to generate a creative resolution of differences. Problem-Solving Orientation: It is important to be constructive and maintain a problem-

solving orientation, even in the face of strong differences and personal antagonism. It is in every participant's best interest to behave in a fashion they would like others to follow. Concerns or disagreement should be expressed in an unconditionally constructive manner.

Engage in Active Listening: Participants in every consensus building process should be encouraged (indeed, instructed, if necessary) to engage in what is known as active listening -- a procedure for checking to be sure that communications are being heard as intended.

Disagree Without Being Disagreeable-Participants in every consensus building process should be instructed to "disagree without being disagreeable." This dictum should probably be included in the group's written ground rules.

Strive for the Greatest Degree of Transparency Possible: To the greatest extent possible, consensus building processes should be transparent. That is, the group's mandate, its agenda and ground rules, the list of participants and the groups or interests they are representing, the proposals they are considering, the decision rules they have adopted, their finances, and their final report should, at an appropriate time, be open to scrutiny by anyone affected by the group's recommendations.

Strive to Invent Options for Mutual Gain: The goal of a consensus building process ought to be to create as much value as possible and to ensure that whatever value is created be divided in ways that take account of all relevant considerations. The key to creating value is to invent options for mutual gain. This is best done by engaging in cooperative behaviours that "make the pie larger" before giving in to competitive pressures ―to get the most for one's self."





Q. 7: Write short notes on: (a) The Press Communiqué (b) Organization Values (c) Corporate Culture

Ans.: (a) The Press Communiqué: The press releases covering news in the case of the government are mainly of four types – press communiqués, press notes, handouts, and unofficial stories or unofficial hand-outs. The press communiqués are issued when some important government decisions or announcements are made such as cabinet appointments, conclusion of the foreign dignitaries‘ visits, international agreement, etc. The press communiqué is formal in character. It carries the name of the ministry or department and the place the date at the bottom left-hand corner of the release. Generally, the press is expected to reproduce the press communiqué without any substantial change. No heading or subheading is given on press communiqués.

(b) Organization Values: A key element in any communication activity is the value of the organization. Values are the principles and ideas that people or organizations strongly believe in and consider important. When people are in doubt about decisions, they frequently rely on deep-seated values to help them make the right choice. In organizations, reliance on shared values makes setting goals easier in the face of the competing ideas, desires, and objectives of individual employees. One can get a good idea about the values of an organization by examining its vision and mission statement. These statements are short descriptions of the purpose of organizations and the directions they try to take to achieve success. Many organizations post their vision and mission statements in several places so that employees know what the organization values are.

(c) Corporate Culture:

Corporate Culture is described as the personality of an organization, or simply as ―how things are done around here. It guides how employees think, act, and feel. Corporate culture is a broad term used to define the unique personality or character of an organization, and includes such elements as core values and beliefs, corporate ethics, and rules of behavioral norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization. These cultural statements become effective when executives are able to communicate the values of their firm, which provide patterns for how employees should behave. Firms with strong cultures achieve higher results because employees maintain focus both on what to do and how to do it. Organizational values are beliefs and ideas about what kinds of goals members of an organization should pursue and ideas about the appropriate principles of behaviour, organizational members should use to achieve these goals. From organizational values develop organizational norms, guidelines or expectations that prescribe appropriate kinds of behaviour by employees in particular towards one another.

Q. 8: Explain Affidavit and its model format. Ans.: An affidavit is a written statement used mainly to support certain applications and in some

circumstances as evidence in court proceedings. A person who makes the affidavit is called the Deponent and must swear or affirm that the contents are true before a person who has the authority to administer oaths in respects of the particular kind of affidavit.

Model form of affidavit: I ................................................ son of .................................... aged ......................... ... years, residing at

......................................................................................................., hereby declare on oath as follows:

“............................................................................................... ...............................................................

................................................................................................................................................................

........................................................................................................................................................... .....

................................................................................................................................................................

................................................................................................................................................................” Sworn on this ..................the day of

Date: .............. Signature: .............. Place: ..............





Q. 9: What is an Indemnity Bond? Supply a format for Indemnity Bond. Ans.: A contract of indemnity as defined under Section 124 of the Indian Contract Act, 1872 is a contract

by which one party promises to save the other from laws cost to him by the contract of the promissory himself or by the contract of any other person. A person who gives the indemnity is called indemnifier and a person for whom protection is given is called the indemnity holder.

Model form of indemnity bond: Name of the Assessee:

P.A.N. No. Assessment Year: I. ................... son/ wife/ daughter of............................ Resident of........... do hereby agree to indemnify the Government of India for any loss that may occur on giving credit for the Certified Photostat copies of the TDS Certificates/ ................................./.............................../ ...................... for a sum of Rs........ being ... % of my share in the total TDS of Rs. ................ of .......................................... I further declare that the credit for consolidated TDS Certificate was not claimed in the hands of the Association of Persons,.............................. Date: Signature: Place:

Q. 10: Elaborate merits and limitations of oral communication. Ans.: Oral Communication: According to a research, an average manager in general spends only 9% of

his/her time in writing, 16% in reading, 30% in speaking and 45% in listening, Oral communication is characterized by 7Cs: Candidness, Clarity, Completeness, Conciseness, Concreteness, Correctness, and Courtesy. These act as principles for choosing the form (style) and content (matter) of oral communication. Oral communication should provide a platform for fair and candid exchange of ideas. Oral communication, which is face-to-face communication with others, has its own benefits. When people communicate orally, they are able to interact; they can ask questions and even test their understanding of the message. In addition, people can also relate and comprehend the non-verbal, which serves far more than words. By observing facial expressions, eye contact, tone of voice, gestures, postures, etc., one can understand the message better. The only shortcoming of oral communication is that more often than not it is spontaneous and if one communicates incorrectly, the message will not get understood. It is primarily due to this reason, one need to develop effective oral communication skills as a message; if not understood at appropriate time, can lead to disaster.

Q. 11: Discuss the competencies that are associated with emotional intelligence. Ans.: Personal Competence

How You Manage Yourself (Self-Awareness)

Social Competence How You Manage Relationships

(Social Awareness) Emotional self-awareness: Reading your own

emotions and recognizing their impact; using gut sense‘ to guide decisions

Accurate self-assessment: Knowing your strengths and weaknesses

Self-confidence: A sound sense of your self-worth and capabilities

Self-Management Emotional self-control: Keeping disruptive

emotions and impulses under control Transparency: Displaying honesty and integrity;

trustworthiness Adaptability: Flexibility in adapting to changing

situations or overcoming obstacles Achievement: The drive to improve performance

to meet inner standards of excellence Initiative: Readiness to act and seize

opportunities Optimism: Seeing the upside in events

Empathy: Sensing other‘s emotions, understanding their perspective and taking active interest in their concerns

Organizational awareness: Reading the currents, decision networks, and politics at the organizational level

Service: Recognizing and meeting follower, client, or customer needs





Q. 12: Describe types of groups in organization. Ans.: Self directed

teams Autonomous and self regulated groups of employees empowered to make decisions.

Quality Circles Quality circle is a recent group dynamics technique representing a significant development in the fields of human relations and organizational behaviour to improve productivity and work life in organizational settings. Quality Circle has been defined ―as a group of workers from the same area who usually meet for an hour each week to discuss their quality problems, investigate causes, recommend solutions and take corrective actions when authority is in their purview. In other words, Quality Circle is a small group to perform voluntarily quality control activities within their work area

Committees Committees are of various types (a) Standing Committee which are permanent in nature and highly empowered. (b) An advisory Committee comprises of experts in particular fields (c) An adhoc committee is setup for a particular purpose and after the goal is

achieved, it is dissolved Task Force Task force is like Committee but it is usually temporary. Task force has wide

power to take action and properly fix responsibility for investigation, results and proper implementation of decisions. Task force groups are very important in govt. organization to tackle specific administrative problems.

Q. 13: Write short notes on: (a) Negotiation (b) Resistance to change (c) Gift deed

Ans.: (a) Negotiation: Negotiation occurs when two or more parties-either individuals or groups discuss specific proposals in order to find a mutually acceptable agreement. Whether it is with an employer, family member or business associate, we all negotiate for things each day like higher salary, better service or solving a dispute with a co worker or family member. Negotiation is a common way of settling conflicts in business. When handled skillfully, negotiation can improve the position of one or even both but when poorly handled; it can leave a problem still unsolved and perhaps worse than before.

(b) Resistance to change: No matter whether a change is of major proportions or is objectively rather small, the change manager must anticipate that people in the organization are going to find reasons to resist changes. It is a basic tenet of human behaviour that any belief or value that has been previously successful in meeting needs will resist change.

(c) Gift deed: The law relating to gifts is provided for in the Transfer OF Property Act, 1882 and Indian Succession Act, 1925. Gift is defined as the transfer of certain movable or immovable property made voluntarily and without consideration by one person called the donor to another called the donee and accepted by or on behalf of the donee. A gift to be valid must be accepted by the donee during the life time of the donor. Registration of a gift often immovable property is must and that of movable property is optional.

Q. 14: Draft a ‘Power of Attorney’ by subscribers of Memorandum of Association of the Company authorizing a Chartered Accountant to appear before the Registrar of Companies for the purpose of incorporation of the company.

Ans.: Power of Attorney Before Registrar of Companies We the subscribers to the Memorandum and Articles of Association of the proposed Company, hereby authorize to present the Memorandum of Articles of Association and other connected documents for the registration of the said company before the Registrar of Companies, Karnataka, Bangalore and to make such corrections / alternations / deletions / additions as may 10 be required to be done by the Registrar in the documents and also to receive the certificate of incorporation.





General Power of Attorney Know we all men by their presents that we—————— do hereby appoint and constitute———— son of————— (hereinafter called ―Chartered Accountant‖ who has subscribed his signature hereunder in token of identification) presently residing at ——— ————————————————— to be my lawful Chartered Accountant in our name and on our behalf to do it any one or all of the following acts, deeds and things, namely: 1. To give all the particulars necessary for incorporation of company. 2. To give affidavit to the registrar of company for the purpose of incorporation. 3. To do needful acts necessary for the incorporation of the company. 4. To authorize include promissory notes, letter of declaration and indemnity for the purpose of

incorporation. 5. To receive documents on behalf of one of the members of the company. 6. To sign forms, documents and papers required for the purpose of incorporation of the

company. Dated……….at this day……….of (Address) Specimen Signature of the Chartered Accountant above named Notary Public.

Q. 15: What is Chronemics? Ans.: Chronemics is the study of how we use time to communicate. The meaning of time differs around

the world. While some are preoccupied with time, others waste it regularly. While some people function better in the morning, others perform better at night. Punctuality is an important factor in time communication. Misunderstandings or disagreements involving time can create communication and relationship problems.

Q. 16: Elaborate the merits and demerits of the grapevine communication. Ans.:

Me

rits

Speedy Transaction:

Under this channel of communication, information flows very fast. A rumour spreads like wild fire. Hence, information spreads in no time.

Valuable Feedback:

The feedback reaches much faster through informal channel than the formal channel. Managers can obtain useful feedback concerning their decisions and actions through the grapevine.

Psychological Satisfaction:

The grapevine provides psychological satisfaction to the employees and strengthens their solidarity. It draws employees close to each other and inculcates in them a sense of belonging.

Supplementary Channel:

The grapevine channel of communication functions as a supplementary channel of communication. The formal channels not only consume more time but also put certain constraints on the process of communication. So, whatever is deemed not suitable for the formal channels can be successfully transmitted through grapevine.

De

me

rits

Less credible: The information spread through the grapevine is less credible than the one given by the formal channel. As the information spreads through the word of mouth, it cannot always be taken seriously.

Distorts image of organizations:

The grapevine communication may distort the true picture of an organization. As its origin lies in the rumours and gossips, so it may spread any kind of stories about responsible people. Thus, it may spoil the image of the management as well as of the organization.

Incomplete information:

The grapevine communication does not always carry the complete information and incomplete information may create misunderstanding.

Q. 17: Explain the main barriers to communication. Ans.: A communication of the message is successful only when both the sender and the receiver perceive

it in the same manner. Quite often, there is miscommunication due to one barrier or the other. Barriers or problems can arise at any stage of the communication process. It is very important to understand the causes of communication breakdown.





Ba

rrie

rs t

o c

om

mu

nic

ati

on

Noise: Noise refers to the distracting element that breaks the concentration of the sender or receiver and prevents him/her from paying attention to the content of the message. Distraction (noise) can be either physical or psychological. Noise can lead to miscommunication and measures must be taken to overcome it.

Distance and Time:

Physical distance between the sender and the receiver becomes a big barrier to the smooth flow of communication. Time is also a major barrier to communication. Delayed message creates confusion and misunderstanding.

Overloaded Information:

If there is excess of information than the receiver cannot be able to comprehend and absorb beyond his/her mental capacity. One must be precise and brief in sending messages.

Semantic Barriers:

Semantic refers to the study of meanings of words and signs. Semantic barrier occurs due to: (i) Sender and receiver interpret same words in different manner. (ii) Words carry different nuances, shades and flavours to the sender and

receiver. (iii) Faulty translation. (iv) Poor expression power or ability.

Cultural Barrier:

We live in a globalised world and may encounter individuals of different races, religions and nationalities. The same category of words, phrases, symbols, actions, colours mean different things to people of different cultural background e.g. in the United States of America, people like to be called by their first name, while in Britain and to a large extent also in India, people like to be addressed by their surname.

Q. 18: What are the principles of inter-personal communication? Ans.: The following principles are key to interpersonal communication:

Interpersonal communication is inescapable: We cannot keep ourselves away from communication. The very attempt not to communicate, communicates something. Not only through words but also through the tone of voice and gestures, postures, facial expressions etc, we constantly communicate to others. Interpersonal communication is irreversible: It is rightly said that a word uttered once cannot be taken back. Interpersonal communication is complicated: No form of communication is simple due to the number of variables involved; even simple requests can be extremely complex. Interpersonal communication is contextual: Communication does not take place in isolation. They are context specific:

Psychological context:

It refers to who the communicators are and what they bring to the interaction? Their needs, desires, values, personality etc all form the psychological context. Relational context: This is concerning the nature of interaction and reactions and the way it all affects the communication process.

Situational context:

Refers to social concept of communication viz. an interaction that takes place in a classroom will be very different from one that takes place in a board room.

Environmental context:

It is all about the surroundings in which communication takes place e.g. Furniture location, noise level, temperature, season, time of day etc. are all examples of elements in the environmental context.

Cultural context:

Includes all the learned behaviours and rules that affect the interaction. If one comes from a culture where it is considered rude to establish long, direct eye contact, one will out of politeness avoid eye contact. If the other person comes from a culture where long direct eye contact signals trustworthiness, then we have a basis for misunderstanding.





Q. 19: Suggest guidelines to handle communication ethics dilemmas. Ans.:

Gu

ide

lin

es

to h

an

dle

co

mm

un

ica

tio

n e

thic

s d

ile

mm

as:

Maintain candour:

Candour refers to truthfulness, honesty, frankness and one should stick to these elements while communicating with others.

Keep message accurate:

At the time of relaying information from one source to another, communicate the original message as accurately as possible.

Secrecy: One has to maintain secrecy and confidence in communication. So one should not divulge such information to others

Ensure timeliness of communication:

The timing of messages can be critical. Delay in sending messages can be assumed unethical.

Avoid deception: Ethical communicators are always vigilant in their quest to avoid deception, fabrication, intentional distortion or withholding of information in their communication.

Confront unethical behaviour:

One must confront an unethical behaviour in order to ensure a consistent ethical view point.

Q. 20: What are the salient characteristics of groups in an organization? Ans.: Following are the salient characteristics of groups in an organization:

1. Group Goal: Every group establishes its own group goals that provide motivation for their existence.

2. Group Structure: It is based on the roles to be performed. 3. Group Patterns of Communication: It is the pattern of message flow in a group. 4. Group Climate: It is the emotional environment of a group based on: 5. Bonding and trust among members 6. Participative spirit 7. Openness and 8. High performance goals

ALL THE BEST

business laws, ethis & communication super compiler

Documents

automobile

bhavin pathak

communication

chitra wilfully

greek word

provincial

annual bonus

corporate