and Taxation
Kiran Kothare
Syllabus
1 Basic Concepts of Law (Definition of Law, Classification, Writs
U/Article 226 & 32), Jurisdiction of Courts (Civil & Criminal
prevailing within Mumbai)
Basics of Evidence (Oral, documentary, burden of proof,
Examination in Chief, Cross Examination, re examination)
Principles of Natural Justice (Audi Alterem Partem, Rule
Against Bias, Speaking Order) --1 Session
2 Indian Contract Act 1872 Principles of Contract, sections 2
30, 56, quasi contracts, damages s/73 74. Special
contracts (Indemnity, Guarantee, bailment, pledge, agency)
--2 Sessions
3 Indian Companies Act 2013 Salient Features of the New Act
--3 Sessions
4 Competition Act 2002 Definition & S/3. S/4 and S/5 --1
Session
Syllabus
5 Negotiable Instruments Act 1881, Concept of N.I
(Promissory Note, Bill of Exchange & Cheque),
Negotiation & dishonor of cheque U/S 138 -- 1 Session
6 Income Tax Act 1961 Income, Residence, Heads of
Income --2 Sessions
7 Central Excise Act 1944, Principles of Liability for
payment of Excise duty / CENVAT --1 Session
8 Service Tax General Review of Service Tax Liability -1 Session
9 Central Sales Tax and Maharashtra VAT Act -- 1 Session
10 Case Studies and Presentations --2 Sessions
Reference Text
Bare Acts Legal Aspects of Business David Albquerque
(Oxford University Press)
Business Law N.D.Kapoor
Business Law Bulchandani
Company Law Avtar Singh
Income Tax Dr. Singhania
Indirect Taxes V.S.Datey S. S. Gulshan:
Mercantile Law (Excel Books) A. K. Majumdar & G.K.
Kapoor:
Students guide to Company Law(Taxmann) S. K. Tuteja:
Business Law for Managers (Sultan Chand)
Introduction
What is law?
Lawis a system of rules that are enforced through social
institutionsto govern behaviour.
The rules that govern and guide actions and relations among
and between persons, organizations, and governments is the
short and easily understandable definition of law.
The law has crept and clawed its way into our daily lives.
Law, in one form or another, permeates modern society,
including the business environment, which is subject to
numerous laws and regulations at all levels of government.
The law serves many purposes and functions in society and
shapespolitics, economics andsocietyin various ways and
serves as a mediator of relations betweenpeople.
Therefore businesspersons benefit themselves and their
organizations by developing a basic, working knowledge of
the law.
Differentiating Features
1. Concerns - Civil law is concerned with private rights
and remedies, i.e. the duties that exist among and
between persons, organizations, and governments
Conversely, criminal law is concerned with public
rights and remedies, i.e. with wrongs committed
against the public or whole community.
2. Party bringing the case.In a civil case, the party
bringing the case (i.e., suing) is the plaintiff. The
plaintiff is a party who claims to have been injured by
the wrongful conduct of the defendant. The plaintiff
can be a person, a business or government entity or
agency. In a criminal case, the party bringing the
case (i.e., prosecuting), is the government
Differentiating Features
3. Burdens of proof - A burden of proof is a partys duty to
prove a claim or defense to a certain standard.
In a typical civil case, the burden of proof is on the plaintiff.
If the plaintiff does not satisfy its burden during trial, the factfinder ( judge ) will decide the case in favor of the defendant.
In a criminal case, the burden of proof that the prosecution
must satisfy is beyond a reasonable doubt.
The defendant is presumed to be not guilty unless the
prosecution proves the defendants guilt to the reasonable
doubt standard.
This standard is impossible to quantify in mathematical
terms (unlike in civil law). The judge would find the
defendant guilty only if firmly persuaded of the defendants
guilt based on a fair and full consideration of the evidence
presented.
This difference can best be explained by scales of justice.
Differentiating Features
In a civil case, the plaintiff will satisfy the
preponderance of the evidence burden by
placing just enough weightthat is, evidence or
proofon an arm of the scale to tip the scale
slightly in the plaintiffs favor;
that is all the weight needed to obtain
a civil judgment against a defendant.
In a criminal case, however, the
government will need to place enough
weight on the arm of the scale to make that
arm almost touch bottomthat is, enough to
satisfy beyond a reasonable doubt. Therefore,
much more evidentiary weight is needed to
obtain a criminal conviction against a defendant.
Differentiating Features
4. Goals -In civil law, the primary goal is to make an
injured party compensate him for the damage done to
him.
This is accomplished by awarding compensatory
damages, which is money.
Most plaintiffs bring civil cases seeking money to
compensate them for the injury and damage caused
by a defendant.
The primary goal of criminal law is to punish the
wrongdoer i.e. the defendant.
Depending on the level and severity of the crime,
this may be accomplished by the death penalty,
imprisonment, probation or fines.
Writs
Awritis a formal written order issued by a body
with administrative or judicialjurisdiction i.e.
generally acourt.
Article 32(3) of our constitution confers the power to
parliament to make law empowering any court to
issue the writs. But this power has not been used
and only Supreme Court by Article 32 (2) and High
Courts (Article 226) can issue writs to enforce the
fundamental rights of Indian citizens, guaranteed by
the constitution.
They issue 5 types of writs. They are Latin words
with English meaning given in bracket .
1. Writ of Habeas Corpus(meaning - you may have
the body)
. It is issued against authorities of states or
Writs
By Habeas corpus writ the Supreme Court or High
Court can cause any person who has been detained
or imprisoned in violation of his fundamental right to
liberty to be physically brought before the court.
The court then examines the reason of his detention
and if there is no legal justification of his detention,
he can be set free.
The writ of Habeas corpus is issued when the person
is
- detained and not produced before the magistrate
within 24 hours
- arrested without any violation of a law.
- arrested under a law which is unconstitutional
- detained to cause harm to him or is malafide.
Writs
2. Writ of Mandamus(meaning we order or
command) - The Supreme Court or High Court orders to
a person, corporation, lower court, public authority or
state authority to do something which they fail to do on
their own
Its a command or directive to perform something or
some ministerial acts or public duty.
It is also called a wakening call which awakes the
sleeping authority to perform their duty.
It demands an activity and sets the authority in action
to secure the performance of public duties by a lower
court, tribunal or public authority,
Writs
3. Writ of Certiorari (meaning - to be certified)
Certiorari means a writ that orders to move a suit from a
inferior court to superior court or to quash an order
already passed by a lower court, tribunal or quasi-judicial
authority.
4. Writ of Prohibition - To prohibit an inferior court from
continuing the proceedings in a case when it is outside
their jurisdiction .
The writ of prohibition means that the supreme court and
High Courts may prohibit the lower courts such as special
tribunals, magistrates, commissions, and other judiciary
officers who are doing something which exceeds to their
jurisdiction or acting contrary to the rule of natural justice.
This implies that if a judicial officer has personal interest
in a case, it may hamper the decision and the course of
natural justice.
Writ
5. Quo Warranto (meaning - what is your authority) To
restrain a person from holding a public office to which he
is not entitled.
Quo warranto means by what warrant? This means
that Supreme Court and High Court may issue the writ
which restrains the person or authority to act in an office
which he / she is not entitled to.
This writ is applicable to the public offices only.
Thus the power of higher courts to issue writs is a
provision under "Right to Constitutional Remedies".
Legal System
India maintains a common Lawlegal system inherited from
the colonial era and various legislations first introduced by
the British are still in effect in modified forms today.
Indianpersonal lawis fairly complex, with each religion
adhering to its own specific laws. Separate laws govern
Hindus, Muslims, Christians and followers of other religions.
Our constitution came into effect on the 26th of January,
1950 and is the lengthiest written constitution in the world.
It provides details of the administration of both the Union
and the States, and codifies the relations between the
Central Governmentand the State Governments.
Laws passed by our parliament on subjects classified as
central subjects are binding on all citizens.
Each State Government has the freedom to draft it own
laws on subjects classified as state subjects.
Legal System
The Indian Contract Act popularly known as
mercantile law of India came into effect on
1 September 1872.
It governs entrance into contract, and
effects of breach of contract.
It is the main andmost used act of legal
agreements in India.
The currentIndian Company Lawwas
updated and recodified in theCompanies
Act 2013.
Taxation System
The Constitution of India allocates the power to levy
various taxes between the Centre and the State.
An important restriction on this power is Article 265 of
the Constitution which states that "No tax shall be levied
or collected except by the authority of law.
Therefore each tax levied or collected has to be backed
by an accompanying law, passed either by
theParliament or theState Legislature. Indian tax law
involves several different taxes levied by different
governments.
Income Tax is levied by the Central Government under
theIncome Tax Act 1961. However, this Act may soon be
repealed and be replaced with a new Act consolidating
the law relating to Income Tax and Wealth Tax, which is
called the Direct Tax Code.
Taxation System
Customs and excise duties are also levied by the
Central government.
Sales tax is levied under VAT legislation at the state
level.
TheCentral Board of Direct Taxes(CBDT) is a part of
the Department of Revenue in the Ministry of Finance,
Government of India. It provides essential inputs for
policy and planning of Direct Taxes and is responsible
for administration of the direct tax laws.
However, when the administration of taxes became too
unwieldy for one Board to handle, the Board was split
up into two, namely the Central Board of Direct Taxes (
CBDT )and Central Board of Excise and Customs
( CBES) with effect from 1 January 1964.
Service Tax
Jurisdiction
The term jurisdiction is really synonymous with the word
"power".
One of the most fundamental questions of law is whether
a given court has jurisdiction to preside over a given case.
Jurisdictionin a wide sense means the extent of the power
of the court to entertain suits, appeals and applications, to
adjudicate casesand issue orders.
In its technical sense jurisdiction means the extent of the
authority of a court to administer Justice with reference to
the - subject-matter of the suit
- local territory
- pecuniary limits
within which a court or government agency may properly
exercise its power.
Jurisdiction
Thus a jurisdictional question may be broken down
into three components or classified into three
categories, , viz.,
(1) jurisdiction over the subject-matter;
(2) territorial jurisdiction; and
(3) pecuniary jurisdiction
Any court possesses jurisdiction over matters only to
the extent granted to it by the Constitution, or
legislation on behalf of which it functions.
The question of whether a given court has the power
to determine a jurisdictional question is itself a
jurisdictional question.
2.Territorial Jurisdiction
3.Pecuniary Jurisdiction
Throughout India there are a large number of civil courts of
different grades having jurisdiction to try suits or hear
appeals of different amounts or value.
Some of these courts have unlimited pecuniary jurisdiction.
Thus the High Court, the District Judge and the Civil Judge
have unlimited pecuniary jurisdiction.
Other courts have only a limited pecuniary jurisdiction.
The jurisdiction of the Munsifs in Uttar Pradesh is limited.
Further, on the small cause courts side the Civil Judges
jurisdiction is limited.
A small Cause Court Judge also exercises a limited
pecuniary jurisdiction.
Basics of Evidence
(Oral, documentary, burden of
proof, Examination in
Chief, Cross Examination, re
examination)
Introduction
All judicial systems have two fundamental principles
of trial.
1. It must ensure that parties to the case are given full
opportunity to prove their case.
2. Every dispute must come to an end.
. These two rules which are contra to each other
must be balanced and this is done by the blending
of procedural law and rules of evidence.
. Indian Evidence Act (IEA) makes provisions about
rules regarding evidence and applies to all judicial
proceedings in or before any court.
. The enactment and adoption of the Indian Evidence
Act was a path-breaking judicial measure
introduced in India, which changed the entire
Basics of Evidence
All the Provisions of the Evidence Act can be divided
in to two Categories
(1) Taking the Evidence (By Court)
(2) Evaluation
() In taking the evidence, court takes the Evidence for
the Facts
() The Facts means the things which are said before
the court in connection with the matter.
() Main Issues in the case are known as "Issue of
Facts", and the other facts which are relevant to it
are called "Relevant Facts
() During trial parties are allowed to prove either facts
in issue or relevant facts but they are not allowed
to prove anything which is neither.
Basics of Evidence
For those Facts ("Issue of Facts" or "Relevant Facts), evidence
is given to the court by two ways.
1. Orally - Oral evidence means and includes all statements
which the Court requires, or permits, to be made before it, by
witnesses in relation to matters of fact under inquiry.
Oral evidence is essentially a statement of witnesses who is
said to be a living proof. It must be direct and not hearsay.
It mostly suggests the Verbal deposition before the Court
which includes oral statement regarding materials too.
2. Documentary - Documentary evidence means and includes
all documents including records produced for the inspection of
the Court. Documents are denominated as dead proof.
Documentary evidence is superior to oral evidence in many
respects viz. in permanence and in trustworthiness.
In many cases, the existence of documentary evidence
excludes the production of oral evidence.
Burden of Proof
Burden of Proof
Evidence
Intrials, each party calls witnesses.
Each party may also question the others witness(es).
The presentation of evidence begins when the attorney
for the plaintiff (the person suing) begins calling
witnesses.
The plaintiff's attorney does the initial questioning of
the witness, which is called direct examination.
Hence direct examination involves primary questioning
of a witness during a trial that is conducted by the side
for which thatpersonisactingasawitness.
The purpose of direct examination is to get the witness
to testify about facts that support the plaintiff's case.
There are rules of evidence, which govern the
admissibility of testimony.
Direct Examination
Direct examination or Examination in Chief
is questioning of a witness by the party who called
him or her, in a trial.
It is performed to elicit evidence in support of facts
which will satisfy a required element of a party's
claim or defense.
Duringthecourseofadirectexamination,theattor
neywhoisconductingthe interrogation generally
asks specific
questionsthatprovidethefoundationofthe case.
In direct examination, one is generally prohibited
from askingleading questions. An attorney may not
ask his/her own witness a leading question which
implies, suggests or prompts the witness to give a
Examination in Chief
The judge has some control over an attorney's
examination of witnesses and can dictate the
form of the questions presented to the witness.
The judge has discretion to stop repetitive or
annoying questioning.
A witness can be asked to identify demonstrative
evidence such as documents and photographs.
Generally, a witness cannot give an opinion or
draw a conclusion from the evidence unless
he/she has been qualified as an expert witness.
The attorney for the defendant (the person being
sued) can make objections to the witness's
testimony.
The judge either sustains (grants) the objection or
Examination in Chief
Each direct examination is integrated with the overall
case strategy through either a theme and theory
The same procedure is followed as in the plaintiff's
presentation of witnesses. Once the plaintiff's
attorney has called all of the witness's on behalf of
the plaintiff, the defendant's attorney begins calling
his/her witnesses.
When you ask questions of the other partys
witness(es), it is called a "cross-examination". After
the plaintiff's attorney has finished questioning the
witness, the defendant's attorney gets to crossexamine the witness, i.e. i.e. After
awitnessisdirectlyexamined,theopposingsidecon
ductsacross examination, the purpose of which is
Cross Examination
The defendant's attorney conducts direct
examination of the witnesses, and the plaintiff's
attorney cross-examines the witnesses. Cross
examination is the interrogation of a witness by the
party opposed to the one who called the witness
upon a subject raised during direct examination.
It involves
questioningofawitnessorpartyduringatrial,
hearing or depositionbytheparty opposing the one
who asked the person totestify
inordertoevaluatethetruthofhis testimony.
Thescopeofcross - examination is generally
restricted to matters coveredduring
directexamination of witness. But the
attorneymayaskleadingquestions in which he is
Cross Examination
The attorney attempts to show that the witness is not
reliable or is biased or prejudiced toward a party in the
case.
Another way to undermine the witness's credibility is to
show that the witness has a stake in the outcome of the
case, which might influence his/her testimony.
Thus cross examination is the examination of a witness
who has already testified, in order to check or discredit
his testimony, knowledge, or credibility and involves
questioning of an accusedorwitnessin acourt to
(1)test his knowledgeor memory,
(2) Extract information favourable to one party and
damaging to the other,
(3) Demonstrate bias, or
(4) prove his previous statements as contradictory.
Cross Examination
Astrong cross-examinationcanforce contradictions,
expressionsofdoubts,orevencompleteobliterationofa
witness'prior carefully-rehearsedtestimony.
Ontheotherhand,repetitionofawitness'story,
vehementlydefended,canstrengthenhis/hercredibility.
A litigant (or theirlawyer) is allowed considerably more
latitude in cross-examination then when you question
your own witnesses in an examination in - chief"
For example, you are not allowed to ask leading
questions to your own witness whereas you can in crossexamination.
Just as on direct examination, the opposing party's
attorney can raise objections to the questions posed to
the witness. The judge then rules on the objection.
Re - Examination
Re- examinationis thetrialprocess by which the party
who offered the witness has a chance to explain or
otherwise qualify any damaging or accusing testimony
brought out by the opponent during cross examination.
Re- examination may question only those areas brought
out on cross-examination and may not stray beyond that
boundary.
When a witness is presented for testimony, the order is
"direct" testimony, then the opposing attorney does
"cross" and then "re" from the attorney first offering the
witness.
"Re-cross" may be allowed, but usually the opposing
attorney must ask for permission from the judge before
proceeding with this additional round of questioning.
Speaking Order
Aspeaking orderis an order that speaks for itself.
It is an order given, generally by a court, that gives an
explanation or a reason or a basis upon which a
conclusion or a verdict is arrived.
It mentions the fact, reason, finding of the case and also
reasons on basis of which such final order is passed. It is
are written after applying one's mind to the issues
involved and setting out the reasons for arriving at the
decision/order based on the principles of law.
Mostly court orders are speaking orders, except perhaps
when the appeal is dismissed as the court agrees with
the lower court.
The order should stand the test of legality, fairness and
reason at all the higher appellate forums.
It should contain all the details of the issue, clear
findings and a reasoned order.
Introduction
All of us enter into a number of contracts
everyday knowingly or unknowingly. Each
contract creates some rights and duties on the
contracting parties.
A contract is essential for any business
transaction, ensuring that both parties to the
contract abide by the commonly established
terms and conditions.
Entering into an agreement or transaction
without a formal contract can be disastrous
because it could result in one or both parties
escaping their obligations.
To protect the interests of both parties, the Indian
Contract Act was established in 1872. Its purpose
Introduction
Indian Contract Act of 1872, passed in British India
determines the circumstances in which promises
made by the parties to a contract shall be legally
binding on them.
It establishes the general principles for forming,
executing and enforcing contracts.
This legislation which is of skeletal nature deals
with the enforcement of these rights and duties on
the parties in India.
Various subsections of section 2 cover definitions.
1. Contract - Section 2(h) of the act defines the
term contract as an agreement legally enforceable
by law.
Therefore for the formation of a contract, there
Basic Principles
An "agreement" is basically a promise or a set of
promises that consists of the following components:
An offer: This is the starting point of an agreement;
wherein one party (offeror) communicates his
intentions to sell something or provide a service to
the other.
An acceptance: This is the act of manifestation by
the other party (offeree) of his consent to the terms
and conditions of the offer.
Thus for an agreement to result, there must be a
"lawful offer" and a "lawful acceptance" of the offer.
Offer must be given with an intention to create a
legal relationship , it must be definite and it must be
communicated.
Basic Principles
A contract comes into existence only when all the
terms and conditions have been finalised.
Also, a contract is considered valid if it is made
with the free consent of both parties, for a lawful
consideration and with a lawful object.
The parties must also be competent and have the
legal capacity to make a contract.
According to the Indian contract law, a person is
competent to contact if s/he has attained majority
and is of a sound mind.
2. Offer ( 2a) - when a person made a proposal,
when he signifies to another his willingness to do
or to abstain from doing something.
Agreement
Legal Obligation
Contract
Essential Conditions
Following are the conditions for a person to enter into
contract
i. He must be major
ii. He must be of sound mind
iii. He must not be disqualified by any other law.
. Therefore a minor , Persons of unsound mind ( i.e. Lunatic
Idiot , Drunken or intoxicated person ) , an insolvent
person or a convict are disqualified from entering into
contract.
. Two or more persons are said to consent when they agree
upon the same thing in the same sense.
. Consent is said to be free when it is not caused by coercion
or undue influence or fraud or misrepresentation or mistake.
Free Consent is one of the essentials of a valid contract.
Wager Contract
As per Sec 30, a wager contract is a contract in which
one person promises to another to pay money or
moneys worth by the happening of an uncertain future
event in consideration for other persons promise to pay
if the event does not happen.
Essential Elements of Wagering are
i. There are two persons.
ii. There must be an uncertain future event.
iii. No control over the event by both the parties.
iv. There must be a reciprocal promise.
v. Others are not interested in the contract.
.
Example - In a wrestling bout, A tells B that wrestler
no.1 will win. B challenges the statement of A. They bet
with each other over the result of the bout. This is a
wagering agreement.
Wager Contract
Agreements by way of wager are void;
and no suit shall be brought for recovering
anything alleged to be won on any wager.
The law treats an agreement by way of
wager as void, because it discourages
people to enter into games of chance and
make earning by trying their luck instead
of spending their time, energy and labour
for more fruitful and useful work for
themselves, their family and the society.
Agreement to do Impossible
Act
Section 56 deals with agreements to do Impossible Act.
An agreement to do an act impossible in itself is void.
A contract to do an act which, after the contract is made,
becomes impossible or unlawful, by reason of some event
which the promisor could not prevent, becomes void.
Hence if A agrees with B to discover treasure by magic.
The agreement is void.
Similarly A and B contract to marry each other. Before the
time fixed for the marriage, A goes mad. The contract
becomes void.
A contracts to take delivery of cargo for B at a foreign
port. As Government afterwards declares war against the
country in which the port is situated. The contract
becomes void when war is declared.
Breach of Contract
Sections 73and 74deal with the consequences of breach
of a contract.
When a contract is broken, the party who suffers by such
breach is entitled to receive compensation for any loss or
damage caused to him from the party who has broken
the contract ( Section 73)
In estimating the loss or damage arising from a breach of
contract, the means which existed of remedying the
inconvenience caused by non-performance of the
contract must be taken into account.
A contracts to buy Bs car for Rs. 60,000, but breaks his
promise. A must pay to B, by way of compensation, the
excess, if any, of the contract price over the price which
B can obtain for the car at the time of the breach of
promise.
Breach of Contract
Section 74 deals with Compensation of breach of
contract where penalty is stipulated.
When a contract is broken, if a sum is named in the
contract as the amount to be paid in case of such
breach, or if the contract contains any other
stipulation by way of penalty, the party complaining
of the breach is entitled, whether or not actual
damage or loss is proved to have been caused
thereby, to receive from the party who has broken
the contract reasonable compensation not
exceeding the amount so named or, as the case
may be, the penalty stipulated for.
A contracts with B to pay B Rs. 1,000 if he fails to
pay B Rs. 500 on a given day. A fails to pay B Rs.
Breach of Contract
A remedy is a means given by law for the
enforcement of a right
When a contract is breached, the injured or
aggrieved party is entitled to one or more of
the following remedies from the other party.
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum merit
4. Suit for specific performance of the contract
5. Suit for injunction
Quasi Contracts
There are certain situations wherein certain persons are
required to perform an obligation despite the fact that he
hasnt broken any contract nor committed any
tort(wrongful act, whether intentional or accidental, from
which injury occurs to another)
For instance, a person is obligated to restore the goods
left at his home, by mistake, and keep it in good condition.
Such obligations are called quasi-contracts.
Under special circumstances, obligations resembling those
created by a contract are imposed by law although there is
no contract between the parties.
Such contracts are calledQuasi-Contracts. Hence
aquasi-contractis not an actualcontract, but is a legal
substitute formed to impose equity between two parties.
Quasi Contract
Insomecasesapartywhohassufferedalossinabusiness
relationship may not be able to recover the loss without
evidence of a contract or some legally recognized agreement.
Toavoidthisunjust result , courts create a fictitious
agreement where no legally enforceableagreementexists.
Aquasicontract is createdonlytotheextentnecessaryto
prevent unjustenrichment.
Unjust enrichment occurs when a person retains money or
benefits thatinallfairnessbelongtoanother,
withoutjudicialrelief.
Suppose a pizza delivery person wrongly delivers pizza
ordered by some one else to you. By accepting a free pizza
that is not intended for you, you have been what the court
callsunjustly enriched, meaning you profited at the
expense of another without making an effort to make
restitution.
Quasi Contract
Quasi contract
Suppose a builder builds a house for A on As
property after signing a contract with B who claimed
to be As agent but in fact he was not.
AlthoughthereisnobindingcontractbetweenA
andthe builder, the court would allow the builder
to recover the cost of the services and materials
from A to avoid an unjust result.
The courtwouldaccomplish this by creating a
fictitious agreement betweenthe builder and A and
holding A responsible
forthecostofthebuilder'sservices andmaterial.
It is merely a remedy granted by the court to
enforce an equitable or moral obligations inspite of
the lack of assent of the partyto becharged.
Quasi Contract
Quasi-contract is an obligation of one party to
another imposed by law independently of an
agreement between the parties.
Strictly speaking, a quasi-contract is not a
contract at all.
While a contract is intentionally entered into, a
quasi -contract ,on the other hand , is created by
law.
A quasicontract is based on the principle of
unjust enrichment which does not allow a person
to draw benefit at the cost of someone else.
Hence , the principle of unjust enrichment
requires:
1. the defendant has been 'enriched' by the receipt
Quasi Contracts
Sections 68 to 72 deal with different types of QuasiContractual Obligations. They cover cases where the
obligation to pay arises neither on the basis of a
contract nor a tort, but a person has obtained an
unjust benefit at the cost of another.
1. Claim for Necessaries supplied to a person
incapable of contracting or on his account (Sec 68)
2. Reimbursement of person paying money due by
another, in payment of which he is interested (Sec
69)
3. Obligation of person enjoying benefit of nongratuitous act (Sec 70)
4. Responsibility of finder of goods (Sec 71)
5. Liability of person to whom money is paid, or thing
delivered by mistake or under coercion. (Sec 72)
Special Contracts
Special contracts include
1. Indemnity,
2. Guarantee,
3. Bailment,
4. Pledge,
5. Agency
Contract of Indemnity
Contract of Indemnity
Contract of Indemnity
The interpretation of these elements means 1. The promisee in a contract of indemnity, acting
within the scope of his authority, is entitled to
recover from the promisor .
2. It is clear that this contract is contingent in nature
and is enforceable only when the loss occurs.
3. Indemnifiers liability commences when the event
causing the loss occurs or when the event saving
the indemnified from the loss becomes impossible
Contract of Guarantee
A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case
of his default.
A guarantee may be either oral or written.
The person who gives the guarantee is known as the
surety, the person in respect of whom the guarantee is
given is known as the principal debtor, and the person to
whom the guarantee is given is called the creditor.
For example, when A promises to a shopkeeper C that A will
pay for the items being bought by B if B does not pay, this is
a contract of guarantee.
In this case, if B (principal debtor) fails to pay, C (creditor)
can sue A (surety) to recover the balance
A contract of guarantee is a tripartite agreement between
the creditor, the principal debtor, and the surety.
Its essential elements are given in the next slide -
Contract of Guarantee
1. Existence of Creditor, Surety, andPrincipal
Debtor- The economic function of a guarantee is
to enable a credit-less person to get a loan or
employment or something else from a creditor.
There must exist a principal debtor for a
recoverable debt for which the surety is liable in
case of default of the principal debtor
2. Distinct promise of surety- There must be a
distinct promise by the surety to be answerable for
the liability of Principal Debtor
3. Liability must be legally enforceable- Only if
the liability of the principal debtor is legally
enforceable, the surety can be made liable.
4. Consideration- As with any valid contract, the
contract of guarantee also must have a
Differences
Contract of
Indemnity
It is a bipartite
agreement between the
indemnifier and
indemnity-holder
Liability of the
indemnifier is
contingent upon the
loss.
Liability of the
indemnifier is primary
to the contract.
Contract of Guarantee
It is a tripartite agreement
between the Creditor, Principal
Debtor, and Surety.
Liability of the surety is not
contingent upon any loss.
Differences
Contract of Indemnity
The undertaking in
indemnity is original.
Contract of Guarantee
The undertaking in a
guarantee is collateral to the
original contract between the
creditor and the principal
debtor.
There is only one
There are three contracts in
contract in a contract of a contract of guarantee - an
indemnity - between the original contract between
indemnifier and the
Creditor and Principal Debtor,
indemnity holder.
a contract of guarantee
between creditor and surety,
and an implied contract of
indemnity between the
Differences
Contract of Indemnity
Contract of Guarantee
Bailment
Bailment means delivery of goods by one person to
another for some purpose ,upon a contract ,that
they shall ,when the purpose is accomplished ,be
returned or otherwise disposed of according to the
instructions of the person delivering them.
The person delivering the goods is called the
bailor and the person to whom they are
delivered is called the bailee.
Bailmentdescribes a legal relationship in
common law where physical possession
ofpersonal property is transferred from one
person, the 'bailor to another person the 'bailee
Abailmentinvolvesonlyatransferofpossessionor
custody, not ofownership and arises when a
Bailment
Bailment contracts are acommonoccurrence in
everyday life: giving clothes to a launderer, leaving
car with an auto mechanic, handing over cashor
other valuable to abank, etc.
Bailment is distinguished from acontract of sale or a
gift of property, as it only involves the transfer of
possession and not itsownership. Such transfer is
made under an express orimplied contract called
the contract of bailment that theproperty will be
redelivered to the bailor oncompletion of that
purpose, provided the bailee has nolien on
thegoods (such as for non-payment of itscharges).
Their must be purpose for which bailor parts with the
possession of goods and goods must be returned or
disposed off by bailee after the purpose is
Bailment
In addition, unlike a lease or rental, where ownership
remains with the lessor but the lessee is allowed to
use the property, the bailee is generally not entitled
to the use of the property while it is in his possession.
The bailee is under an obligation to take reasonable
care of the property placed under its possession.
A bailee is responsible only when the goods entrusted
to him are lost or damaged due to his fault or
negligence.
Bailor should disclose known faults in goods to bailee
and should receive back the goods after
accomplishment of purpose.
Pledge
The bailment of goods as security for payment of a
debt or performance of a promise is called
Pledge.
Pledgesareaformofsecuritytoassurethatapers
onwillrepayadebtor perform
anactundercontract and are typically
usedinsecuringloans,pawningproperty for cash
and guaranteeing
thatcontractedworkwillbedone.
Ina pledge , one person temporarily gives
possession of property to another party.
The bailor in this case is called the pledger or
pawnor and the bailee is called the pledgee or
pawnee
It involves the transfer or delivery of property to
Pledge
Everypledgehasthreeparts:
I. twoseparateparties,
II. adebtorobligation,and
III. a contractofpledge.
. Acontractofpledgespecifieswhatisowed,thep
ropertythatshallbeusedasapledge,andcondit
ionsforsatisfyingthedebtorobligation
. Deposit of personal property to a creditor is also
called a pawn. The pawnor has a right to redeem
debt and get back goods. The pawnee has right of
retainer for subsequent advances.
. He may retain the goods pledged, not only for
payment of the debt or the performance of the
promise, but for the interests of the debt, and all
Pledge
Inpledgesbothpartieshavecertainrightsandliabili
ties.
Thecontractofpledgerepresentsonlyonesetofth
ese:thetermsunderwhichthe
obligationwillbefulfilledandthepledged
propertyreturned.
Ononehand,thepledgor'srightsextendtothesaf
ekeepingand
protectionofhispropertywhileitisinpossessionof
thepledgee.
Thepropertycannotbeusedwithoutpermission.
Unauthorizeduseofthepropertyiscalledconversio
nandmaymakethepledgeeliable fordamages;.
Forthepledgee,ontheotherhand,thereismoreth
antheduty tocareforthepledgor'sproperty.
Agency
Sec 182 defines an agent as a person employed to do any
act for another, or to represent another in dealings with
third persons.
The person for whom such act is done is called the
principal.
It refers to the relationship that exists when one person or
party (the principal) engages another (the agent) to act for
him, e.g. to do his work, to sell his goods, to manage his
business.
Anagency agreementis a legal contractcreating a
fiduciary relationship ( i.e. relationship of trust and
confidence to manage and protect property or money )
whereby the first party ("the principal ") agrees that the
actions of a second party ("the agent") binds the principal
to later agreements made by the agent as if the principal
had himself personally made the later agreements.
Agency
The power of the agent to bind the principal is
usually legally referred to as authority. The
competent agent is legally capable of acting for this
principal vis--vis the third party.
Manufacturers and suppliers of goods frequently
appoint agents to act on their behalf in promoting
sales, both in the home country of the manufacturer
as well as overseas.
A formal agreement is usually signed setting out
the commission agent will receive, the territory,
duration and other terms on which the principal and
agent will do business together.
Hence, the process of concluding a contract through
an agent involves a twofold relationship.
On one hand, the law of agency is concerned with
Agency
On the other hand, it rules the internal relationship
between principal and agent as well, thereby
imposing certain duties on the representative
(diligence, accounting, good faith, etc.).
The law of agency thus governs the legal
relationship in which the agent deals with a third
party on behalf of the principal.
Essentials of relationship of Agency are
i. Agreement between principal & agent
ii. Intention of agent to act on behalf of the principal
iii. Anyone can be an agent
iv. Anyone can employ an agent.
. A sub agent is a person employed and acting
under the control of the agent in the business of
Basics
Once a company is formed and registered as per law, it is a
separate legal entity from its members.
A company is a quite distinct legal personality from the
persons who have formed it. This is the fundamental principle
of separate corporate personality
A company is not a citizen but it can have nationality and
residence. The birth place of the company, that is to say, the
country where it is incorporated is its nationality.
An important step in the formation of a company is to prepare
a document called the Memorandum of Association. It is a
document of great importance in relation to the proposed
company.
A Memorandum of Association is the primary document which
sets out the constitution of a company and as such, it is really
the foundation on which the structure of the company is
based.
Memorandum of Association
It is also called the charter of the company which defines its
relation with the outside world and the scope of its activities.
It is a life giving document of a company and must contain
following fundamental clauses
1. Name Clause
2. Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association/Subscription Clause
. The object clause is the most important clause of the company.
It specifies the activities which a company can carry on and
which activities it cannot carry on.
. The company cannot carry on any activity which is not
authorised by its Memorandum. The memorandum must state
the objects for which the proposed company is to be
established.
Articles of Association
An Article of association is the second document which
has, to be registered along with the memorandum.
This document contains rules, regulations and bye-laws for
the general administration of the company and includes
1. Powers, duties, rights and liabilities of members and
directors.
2. Rules for meetings of the company.
3. Dividends.
4. Borrowing powers of the company.
5. Calls on shares.
6. Transfer and transmission of shares.
7. Forfeiture of shares and
8. Voting powers of the members, etc.
Schedule I of the Companies Act, 1956, contains various
model forms of memorandum and articles.
Features Of Company
Private Company
Indian Companies Act, 1956, differentiates between
a private company and a public company.
A " private company " means a company which has
a minimum paid-up capital of one lakh rupees or
such higher paid-up capital as may be prescribed,
and by its articles,
(a) restricts the right to transfer its shares, if any ;
(b) limits the number of its members to fifty not
including
(i) persons who are in the employment of the
company ; and
(ii) persons who, having been formerly in the
employment of the company, were members of the
company while in that employment and have
Government Company
Government company means any company in which not
less than 51% of the paid up share capital is held by the
central government or any state government or partly by
the central government and partly by one or more state
governments and includes a company which is a subsidiary
of a government company.
Government companies are also governed by the
provisions of the Companies Act.
However, the central government may direct that certain
provisions of the Companies Act shall not apply or shall
apply only with such exceptions, modifications or adoptions
as may be specified to such government companies.
130
Small Company
New Requirements /
Concepts
3. Minimum members for private company
and Minimum Paid-up Share Capital: The new act has increased the limit of the
number of members in a private company from
50 to 200.
Also the minimum paid-up share capital
requirement of INR 100,000 (in case of a private
company) and INR 500,000 (in case of a public
company) under CA 2013 has been done away
with.
Consequently, the definitions of private and
public companies stand amended.
Accordingly, no minimum paid-up capital
requirements will now apply for incorporating
New Requirements /
Concepts
7. Eligibility age to become Managing Director or
whole time Director -The eligibility criteria for the age
limit has been revised to 21 years as against the existing
requirement of 25 years.
8. Number of directorships held by an individual Section 165 provides that a person cannot have
directorships (including alternate directorships) in more than
20 (twenty)companies, including ten (ten) public companies.
It provides a transition period of one year from 1 April
2014 to comply with this requirement.
9. Board of Directors and Disqualifications for
appointment of director - The 2013 Act requires that the
company shall have a maximum of 15 (fifteen) directors
(earlier it was 12) and appointing more than 15 (fifteen)
directors will require special resolution by shareholders
New Requirements /
Concepts
New Requirements /
Concepts
10. Independent Directors - The 2013 Act
defines the term "Independent Director".
In case of listed companies, one third of the board
of directors should be independent directors.
There is a transition period of 1 (one) year form
01 April 2014 to comply with this requirement.
The 2013 Act also provides additional
qualifications/ restrictions for independent
directors as compared to the 1956 Act.
Section 150 enables manner of selection of
independent directors and maintenance of
databank of independent directors and enables
their selection out of data bank maintained by a
prescribed body.
New Requirements /
Concepts
11. Appointment of managing director, whole
time director or manager [section 196 of
2013 Act] - The re-appointment of a managerial
person cannot be made earlier than one year
before the expiry of the term instead of two years
as per the existing provision of section 317 of the
1956 Act.
However, the term for which managerial personnel
can be appointed remains as five years.
Further, the 2013 Act lifts the upper bar for age
limit and thus an individual above the age of 70
years can be appointed as Key Managerial
Personnel (KMP) by passing a special resolution.
New Requirements /
Concepts
New Requirements /
Concepts
13. Loans to director No Company shall
directly or indirectly make any loan including
book debt or give any guarantee or provide any
security to its directors or to any persons in whom
the director is interested.
However, this provision shall not be applicable to
managing director / whole time director subject to
conditions, etc.
The Company cannot advance any kind of loan /
guarantee / security to any director, Director of
holding company, his / her partner/s, his/ her
relative/s, firm in which he or his relative is
partner, private limited in which he is director or
member or any bodies corporate whose 25% or
New Requirements /
Concepts
13a Inter-Corporate loans / investment
Rate of interest on inter corporate loans will be the
prevailing rate of interest on dated Government
Securities.
Further, exemption to Private companies from
restrictions /conditions contained under section 372A of
the exiting Companies Act, 1956 is now done away
with.
Hence, private companies shall be required to be
bound by the above restrictions (i.e., private companies
may not be able to grant interest free loans).
New Requirements /
Concepts
14. Corporate Social Responsibility ( CSR) - The concept
of CSR rests on the ideology of give and take. Companies
take resources in the form of raw materials, human
resources etc from the society. By performing the task of
CSR activities, the companies are giving something back to
the society.
As per Clause (135), every Indian company havingi.
net worth of Rs. five hundred crore or more, or
ii. turnover of Rs. one thousand crore or more or
iii. a net profit of Rs. five crore or more during any financial
year
shall constitute a Corporate Social Responsibility
Committee of the Board and 2% of the average net profits
of the last three financial years are to be mandatorily
spent on CSR activities.
New Requirements /
Concepts
New Requirements /
Concepts
Those companies who have reappointed their
statutory auditors for more than 5 / 10 years, have
to appoint another auditor in their Annual General
Meeting for year 2014 and it is necessary to ratify
such appointment at each annual general meeting
The Statutory Auditor of the Company cannot give
following specialized services directly or indirectly to
the company
i. Accounting and book keeping services, Rendering
of outsourced financial services
ii. Design and implementation of any financial
information system
iii. Actuarial services, Internal audit
iv. Investment advisory services, Investment banking
New Requirements /
Concepts
17. Registered Valuers - Valuation by registered
valuers. Clause (247) (1) Where a valuation is
required to be made in respect of any property,
stocks, shares, debentures, securities or goodwill or
any other assets (herein referred to as the assets)
or net worth of a company or its liabilities under the
provision of this Act, it shall be valued by a person
having such qualifications and experience and
registered as a valuer in such manner, on such
terms and conditions as may be prescribed and
appointed by the audit committee or in its absence
by the Board of Directors of that company
Dormant Company
Introduction
19. Dormant Company The 2013 act for the
first time has introduced a concept of a dormant
company within its ambit, i.e. company which is
not active.
Dormant company can be a company formed for
a future project or to hold an asset or intellectual
property without there being any significant
accounting transaction OR an inactive company.
Any company which has not been doing any
business for the last two years OR they have not
filed any financial statements and annual returns
for the last two years is an inactive company..
Dormant Company
So it means any active company doing regular
business and regular accounting transactions, but
has failed to file its mandatory annual documents,
then it can also be construed to become a dormant
company!!
Many a times, promoters incorporate companies
but either there is dispute between the promoters
or a major project fails through or it is formed for
holding an intellectual property title or an asset,
then this concept of dormant company comes into
use
New Requirements /
Concepts
New Requirements /
Concepts
22. Public offer of securities to be in
dematerialised form - Any company, other than a
public company may convert its securities into
dematerialised form or issue its securities in physical
form in accordance with the provisions of this Act or in
dematerialised form in accordance with the provisions
of the Depositories Act, 1996 and the regulations
made thereunder.
23. Issue of differential equity shares -Issue of
equity shares with differential rights would have to be
in accordance with such rules as may be prescribed.
This has been made applicable to even private
companies now.
New Requirements /
Concepts
24. Preferential issue of shares - Pricing of a
Preferential Issue of shares by a company to be
determined by a registered valuer.
Conditions may be prescribed in rules for
preferential issue by companies.
25. Further issue of Capital Provisions relating
to further issue of capital applicable to all
companies.
Accordingly, any shares have to be offered to all
shareholders on pro-rata basis (except in case of
preferential issue through special resolution )
New Requirements /
Concepts
26. Financial Statements and consolidation Cash flow statement and statement showing
changes in equity if any of the company also forms
part of the financial statements.
In case the Company has a subsidiary company, the
consolidated financial statements of all subsidiaries
and the company shall be prepared and laid before
the AGM.
Consolidation of financial statements is mandatory
in case a Company has one or more subsidiaries
Business Responsibility
Reporting
Business Responsibility
Reporting
Earlier Scenario
The Competition law in India is in vogue since June
01, 1970. At that time it was known as the
Monopolise and Restrictive Trade Practices Act, 1969
(MRTP Act) which was administered by the MRTP
Commission.
MRTP Commission used to pass the final orders by
directing the delinquent party(s) to refrain from the
prohibited trade practices (cease) and not to indulge
in such prohibited practices in future (desist). Thus,
it was lacking teeth as it had only limited power of
passing Cease and Desist orders which are in the
nature of Reformative punishment.
However to ensure that the provisions of the law
are rigorously followed by the all citizens it became
necessary to prescribe more Deterrent
Background
In the wake of LPG, especially liberalization and
privatization, that was triggered in India in early
nineties, a realization gathered momentum that the
existing "MRTP Act" was not equipped adequately
enough to tackle the competition aspect of the
Indian economy.
With starting of the globalization process, Indian
enterprises started facing the heat of competition
from domestic players as well as from global giants,
which called for level playing field and investorfriendly environment.
Hence, need arose with regard to competition laws
to shift the focus from curbing monopolies to
encouraging companies to invest and grow, thereby
Background
Today with the spread of globalization, the whole
world is facing the cut throat competition and to
survive and prosper every nation is trying to pull its
economy up.
To have a fair and healthy competition and to
prevent activities that have an adverse effect on
competition in India, our nation has set up a judicial
body known as Competition Commission of India
[CCI].
A new act named The Competition Act was enacted
in 2002 which replaced the archaic Monopoly and
Restrictive Trade Practices Act, 1969. This act was
repealed and the MRTP Commission was dissolved
w.e.f. September 01, 2009.
The new act is a tool to implement and enforce
Salient Features
The Act is comprehensive enough and
meticulously carved out to meet the requirements
of the new era of market economy.
It is designed as an omnibus code to deal with all
matters relating to the existence and regulation of
competition and monopolies.
Competition Commission of India is the statutory
body to approach for unfair competition practices.
CCI has power to act suo-moto or on the reference
from Government. Consumers (individuals/ HUF /
NGOS) can also directly approach the CCI .
Salient Features
If any case is made out then, on receipt of such
application, the CCI refers it to Director General for
opinion.
Director General shall submit its report/finding to CCI for
proper hearing and trial for the case.
Competition advocacy is one of the most significant
feature in the Act. It is the obligation of CCI to create
the awareness about the competition laws through nonenforcement measures. It also includes training
programs, seminar, educational workshops.
The competition laws lays down heavy penalty of 10% of
total turn over of preceding three years if any enterprises
act or infringe the provision of competition act.
Salient Features
It prohibits
1. anti-competitive agreements,
2. deliberate exploitation or abuse of a dominant
market position
3. Unlawful monopolization through possession of
market power( market power is the power to control
prices and / or restrict /exclude competition and is
measured in terms of market share)
4. Wilful acquisition or maintenance of market power
for limiting access, as distinguished, from the
normal growth and development.
5. Bid rigging and lays down provisions for penalty for
such practices. Any agreement or consent among
the prospective bidder which affect the bidding
process and causes or likely to cause losses to the
i.
Anti-competitive
Agreement
1. Anti-competitive Agreements
3. Combinations
3. Combinations
2. For Mergers:
Assets of the merged/amalgamated entity more
than Rs 1,000 crore or turnover more than Rs
3,000 crore
These limits are more than Rs 4,000 crore or Rs
12,000 crore in case merged/amalgamated
entity belongs to a group in India or outside
India respectively.
Further, such combination, which causes or is
likely to cause "appreciable adverse impact" on
competition, would be treated as void.
3. Combinations
A systemis provided under the Act wherein at the option
of the person or enterprise proposing to enter into a
combination may givenotice to the Competition
Commission of Indiaof such intention providing details of
the combination.
The Commission after due deliberation, would give its
opinion on the proposed combination to approach the
Commission for this purpose.
However, public financial institutions, foreign institutional
investors, banks or venture capital funds which are
contemplating share subscription financing or acquisition
pursuant to any specific stipulation in a loan agreement or
investor agreement are not required to approach the CCI for
this purpose.
Competition Compliance
Programme
When the enterprise takes certain necessary and
concrete steps to ensure that knowingly or
unknowingly it does not infringe the provisions of
the Competition Act, it can be stated to maintain
a Competition Compliance Programme (CCP).
The main objectives of CCP are
(i) Prevent violation of competition law;
(ii) Promote a culture of compliance; and
(iii) Ensure good corporate citizenship.
Therefore, in order to avoid violations of the
provisions of the Competition law it is high time
for the enterprises in India to consider having a
compulsory "Competition Compliance
Introduction
Negotiable Instruments Act, 1881 is an act in India
dating from the British colonial rule, that is still in
force largely unchanged.
The term negotiable means transferable by
delivery and the word Instrument means in
writing or a written document by which a right is
created in favour of some person.
Therefore, negotiable instrument literally
means a written document transferable by delivery
or a written promise or order to pay money which
may be transferred from one person to another.
Anegotiable instrumentis a financial document
or contract which shows the debt of one party to
another. It specifies the amount ( payment),
specifies / describes the payee, who can be changed
Background
Goods are generally traded (sold or bought) for cash
or on credit
In cash transaction, payment is received
immediately whereas in credit deals, the payment is
delayed to a future date.
In such cases the firm relies on the party to make
payment on due date.
Sometimes, to avoid any delay or default by the
buyer, an instrument of credit is used through which
the buyer assures the seller that the payment shall
be made according to the agreed conditions.
In India, the instruments of credit have been in use
from times immemorial and have been popularly
known as Hundies.
Negotiable Instruments
A negotiable instrument is a transferable, signed
document consisting of a contract or an
unconditional order that promises payment of
money to a specified person or to his assignee or
bearer at a future date or on demand.
The BoE contains an unconditional order to pay a
certain amount on an agreed date.
The Promissory Note contains an unconditional
promise to pay a certain sum of money on a
certain date.
These instruments are governed in India by
Negotiable Instruments Act, 1881 .
The third instrument covered by this act is the
cheque.
What is Negotiable
Instrument
It indicates a title, orevidence of indebtedness
which is freely / readily / unconditionally
transferable to another in trading as a substitute
for money.
In other words if any condition is attached, then it
can not be called a negotiable instrument.
The instrument may be transferred from one
person to another or to a third party. Once the
instrument is transferred, the holder obtains full
legal title to the instrument i.e. it is the holder of
the instrument who will ultimately get paid by the
payer of the instrument.
The payee(the person who receives the payment)
Features of N. I.
1. Writing and Signature:
Negotiable Instruments must be written and signed
by the parties according to the rules relating to
Promissory Notes, Bills of Exchange and Cheques.
It is the basic condition of the negotiable instrument
that it is always in writing. It can not be verbal.
2. Money:
The amount of N. I. must be specific /definite and
must be written on the instrument. It is always
payable by legal tender money of India.
The possessor of the negotiable instrument is
presumed to be the owner of the property contained
therein, i.e. any person who possesses a N.I.
becomes its owner and entitled to the sum of
money, mentioned on the face of the instrument.
Features of N. I.
Amount written on the instrument is payable to
the bearer or to a specified person on demand or
at any predetermination future time. ( person who
presents a bearer cheque to the bank and desires
to have cash payment has to sign or endorse it on
the backside in front of cashier)
A negotiable instrument does not merely give
possession of the instrument but right to property
also.
The liabilities of the parties of Negotiable
Instruments are fixed and determined in terms of
legal tender money.
3. Negotiability:
Negotiation is the transfer of an instrument by one
party to another so as to constitute the transferee
Features of N. I.
An asset or property that is the subject matter of
the Negotiable Instrument can be transferred from
one person ( transferor) to another (transferee) by a
simple process without any formality.
It can be transferred any number of times till it is at
maturity and the right of ownershippasses either by
delivery or by endorsement.
A bearer instrument is transferable by simple
delivery. It means in the case of bearer instruments,
the property in it is passed from one holder to
another by mere delivery to the transferee.
An instrument payable to order can be transferred
by endorsement and delivery. It means in the case of
order instruments payable to order, two things are
Features of N. I.
For the purpose of negotiation, when the maker or
holder of a N.I. signs the same on the back or face
thereof or on a slip of paper annexed thereto, or so
signs for the same purpose a stamp paper intended
to be completed as a negotiable instrument, he is
said to endorse the same, and is called the
endorser.
An endorsement is completed by the delivery of the
instrument to the endorsee.
Any instrument may be made non-transferable by
using suitable words, e.g., pay to X only.
4.Title:
A negotiable instrument can be conveyed /
transferred as holding value by the holder because it
is a promise of payment in future.
When N.I. is transferred to a third party who fulfills
Features of N. I.
Because money is promised to be paid, the
instrument itself can be used by theholder in due
course as astore of value.
The value that it holds may be less than the face
value because its present valueis adjusted for
interest rates. Therefore, itcan be transferred for a
price less than itsface value (future value)
The holder in due course may hold a better title than
that of the original holder, i.e. the rights ofthe holder
in due course or bonafide transferee are
qualitatively superior to those of the original holder
of the instrument.
Hence the transferee of a N.I. accepting the
instrument in good faith and forvalue, (and who has
Features of N. I.
Even in cases where the title of the transferor or
of any of the previous holders of the instrument is
defective, transferees title will not be affected, by
any defect in the title of the transferor.
In case of transfer of property the general concept
of law is that "No body can transfer a better title
than that of his own.
However this law does not apply in case of
instrument. Therefore a N.I. got in good faith
from a transferor who might have obtained it
through fraud to which transferee is not a party,
or previous holder might have stolen it, gives
better title to transferee .
The cheque and the note can be very easily used
Features of N. I.
It gives the right to the creditor to recover the written
amount from the debtor. He can recover this amount
by himself or he can transfer this right to another.
In case of dishonour, the transferee can sue on the
instrument that is in his own name.
Suppose party A is required to make payments to party
B for services.
If party B transfers the rights to these payments to
party C, then party A is obligated to make payments to
party C (the transferee in this case) even if party B
does not perform the services as shown in the contract.
In such a scenario Party A would have to file a civil suit
against party B to recoup any losses.
Features of N. I.
5. Notice:
It is not necessary to give notice of transfer of a
negotiable instrument to the party liable to pay the
money.
6.Presumptions:
Certain presumptions apply to all negotiable
instruments. Example: It is presumed that there is
consideration which has been paid under it.
It is not necessary to write in a promissory note the
words for value received or similar expressions
because the payment of consideration is presumed. The
words are usually included to create additional evidence
of consideration.
Features of N. I.
7.Special Procedure:
A special procedure is provided for suits on
promissory notes and bills of exchange (The
procedure is prescribed in the Civil Procedure
Code). A decree can be obtained much more
quickly than it can be in ordinary suits.
8.Popularity:
Negotiable instruments are popular in commercial
transactions because of their easy negotiability and
quick remedies, i.e. N.I. enables the holder to
expect prompt payment because a dishonour
means the ruin of the credit of all persons who are
parties to the instrument.
9.Evidence:
Earlier Scenario
Before 1988 there was no provision to restrain the person
issuing the Cheque without having sufficient funds in his
account.
Parliament enacted the Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002 which is intended to
plug the loopholes.
As a remedy against the defaulters of the Negotiable
Instrument, a criminal remedy of penalty was inserted in the
act.
With the insertion of these provisions in the Act the situation
certainly improved and the instances of dishonour have
relatively come down.
Therefore today business person prefers to carry a small piece
of paper known as Cheque for business transactions rather
than carrying the currency worth the value of the cheque
Payable to Order
A promissory note, bill of exchange or cheque payable
to order means it is payable to a particular person or
his order. Various forms in which an instrument may be
made payable to order can be :
(i) Pay A,
(ii) Pay A or order,
(iii) Pay to the order of A,
(iv) Pay A and B, and
(v) Pay A or B
() But it should not contain any words prohibiting transfer,
e.g., Pay to A only or Pay to A and none else Such
conditions can not be treated as payable to order
because its negotiability has been restricted and
therefore such a document shall not be treated as N.I.
() Such a document containing express words prohibiting
negotiability remains valid as a document (i.e., as an
Payable to Bearer
Payable to bearer means payable to any person
whosoever bears it or holds it or has its possession.
A N.I. is payable to bearer which is either
expressed to be so payable or on which the only or
last endorsement is an endorsement in blank. Thus,
a note, bill orcheque in the form Pay to A or
bearer, or Pay A, B or bearer, or Pay bearer is
payable to bearer.
Where an instrument is originally payable to order,
it may become payable to bearer if endorsed in
blank by the payee, e.g.
1. A cheque is payable to A.
2. A endorses it merely by putting his signature on the
back and delivers to B with the intention of
Qualifying Clauses
It is important to note that the above definitions are
subject to the provisions of Section 31 of the Reserve
Bank of India Act, 1934, which as amended by the
Amendment Act of 1946, provides as under:
1. No person in India other than the Reserve Bank or
the Central Government can make or issue a
promissory note payable to bearer.
Hence A promissory note cannot be originally made
payable to bearer, no matter whether it is payable
on demand or after a certain time.
It must be made payable to order initially. However,
on being endorsed in blank it can become payable
to bearer or payable to bearer on demand
subsequently and it shall be valid in that case.
Qualifying Clauses
2. No person in India other than the Reserve Bank or,
the Central Government can draw or accept a bill of
exchange payable to bearer on demand.
A bill of exchange may be originally made payable
to bearer but in that case it must be payable
otherwise than on demand (say, payable three
months after date)
If its payable on demand then it must be made
payable to order
However, on being endorsed in blank subsequently,
it can become payable to bearer on demand.
3. A cheque payable to bearer on demand can be
drawn on a persons account with a banker.
A cheque drawn on a bank can be originally made
Qualifying Clauses
Examples of N. I.
While the Act recognizes only three instruments , there are
other N.I. which are recognized by usage or custom like i) Hundis
ii) Share and dividend warrants
iii) Bankers drafts (DD)
iv) Bearer debentures.
v) Railway / Lorry Receipts.
vi) Delivery orders.
) This list is neither exhaustive nor a closed chapter. With the
growth of commerce, new kinds of securities may claim
recognition as negotiable instruments.
) Examples of Non-negotiable instruments
i) Money orders and Postal orders.
ii) Deposit receipts.
iii) Share certificates
Promissory note
A "promissory note " is an instrument in writing (not
being a bank-note or a currency-note) containing an
unconditional undertaking, signed by the maker, to
pay a certain sum of money only to, or to the order of,
a certain person, or to the bearer of the instrument.
An instrument is a promissory note if the essential
elements of a N.I. are present.
1. Writing : The first essential is that all negotiable
instruments must be in writing. An oral engagement to
pay a sum of money is not an instrument, much less
negotiable.
2. Unconditional Promise to pay : Secondly, it must
contain an unconditional promise to pay. A mere
acknowledgement of debt is not a promissory note.
I.O.U. is not a promissory note. A mere receipt for
money does not amount to a promissory note, even
though it might contain the terms of repayment.
Promissory Note
There are two parties to the promissory note.
1. The maker or drawer is the person who makes the
note. He is also called the promisor.
2. The drawee or the payee in whose favour the note
is drawn. He is also called the promisee.
. A pro. note does not require any acceptance
because the maker of the note himself promises to
make the payment.
. Suppose if Rohan has to pay Rs. 10,000 to Ram on
January 31 (after three months from today), then
Rohan is the drawer or maker of the note who
promises to make this payment to Ram who is the
payee or drawee.
. If Ram gets this note discounted from bank, then
Promissory note
When a person gives a promise in writing to pay
certain sum of money unconditionally to a certain
person or according to his order, the document is a
promissory note. In short , to consider whether or
not a document is a pro. note following are the
tests
(i) Is the sum to be paid a sum of money and is that
sum certain ?
(ii) Is the payment to be made to or to order of a
person who is certain or to the bearer of the
instrument
(iii) Has the maker signed the document ?
(iv) Is the promise to pay made in the instrument the
substance of the instrument ?
(v) Did the parties intend that the document should
Bill of Exchange
Bill of Exchange
There are three parties to the BoE
A. Drawer is the maker of BoE. A seller /creditor who is
entitled to receive money from the debtor, can
draw a BoE on buyer /debtor . The drawer after
writing the BoE has to sign it as a maker of the BoE.
B. Drawee is the person upon whom the Bill is drawn.
He is the purchaser or debtor.
C. Payee is the person to whom the payment is to be
made. The drawer of the bill himself will be the
payee if he keeps the bill with him till the date of its
payment.
. Normally the drawer and the payee is the same
person , similarly drawee and aceptor is the same
person.
Bill of Exchange
The payee may change in the following situations
1. In case the drawer has got the bill discounted, the
person who has discounted the bill will become
payee.
2. In case the bill is endorsed in the favour of creditor
of the drawer, the creditor will become the payee.
Following example will bring home these terms.
- Ram sold goods to Rohan on credit of Rs. 10000 for
three months
- To ensure payment on due date Ram draws a BoE
upon Rohan for Rs 10,000 to be payable after thee
months.
- Here Ram is the drawer and Rohan is drawee.
- Before it is accepted by Rohan it will be called a
Bill of Exchange
Advantages
BoE as an instrument of credit is widely used in
business transactions due to following advantages
1. Framework for relationship It is a device
which provides a framework for enabling a credit
transaction between a creditor and debtor on an
agreed basis.
2. Certainty of terms and conditions The
creditor and debtor are fully aware of the date on
which they have to receive / pay the money,
amount involved, place of payment, interest to be
paid etc.
3. Convenient means of credit It enables buyer
to b uy goods on credit and pay after the period of
credit. The seller of goods , even after extension of
Advantages
4. Conclusive Proof BoE is a legal evidence of credit
transaction implying thereby that the buyer has
obtained credit from the seller of the goods and hence
is liable to pay to the seller. In the event of refusal of
making payment, the law requires the creditor to obtain
a certificate from a notary to make it a conclusive
evidence of happening.
5. Easy transferability A debt can be settled by
transferring the BoE through endorsement and delivery.
If the Bill ( & Pro. Note also) is not payable on demand ,
the payment is deferred to the date of maturity of the
instrument.
It is the date on which the credit period expires and the
instrument becomes due for payment
Distinguishing Features
Basis
Drawer
Order /
Promise
Parties
Bill of Exchange
Drawn by Creditor
Contains an order to
make payment to it
There can be three
parties to it- Drawer,
Drawee and Payee.
Drawer and payee can be
the same party
Accepta Requires acceptance by
nce
drawee or some one else
on his behalf
Dishono Due notice of dishonour
ur
to be given by the holder
to the drawer
Pro. note
Drawn by Debtor
Contains a promise
to make payment
Only two parties
involved Drawer and
payee. Drawer can
not be the payee
Does not require
any acceptance
No notice needs to
be given in case of
dishonour
Cheque
A cheque being a bill of exchange must possess all
the essentials of a bill but it has some peculiarities
which distinguish it from a normal or general bill of
exchange.
i. A cheque does not require acceptance and is not
intended for circulation
ii. A cheque is given and presented for immediate
payment and is not entitled for days of grace
whereas a bill in the first instance is presented for
acceptance unless it is a bill on demand.
iii. A cheque is always to be made payable on
demand, whereas an ordinary bill of exchange can
be made payable after a fixed period. Future dated
cheque, being not payable on demand, may not be
regarded as a cheque in the real sense of the word
Cheque
iv. If the drawer/ issuer has sufficient funds or credit
available with the bank, the bank is bound either to
pay a cheque or dishonour it at once. In case of an
ordinary bill; the drawee is under no liability on the
instrument until he accepts; his liability on the bill
depends on the acceptance of it. Thus while a bill is
dishonoured by non-acceptance, this is not so in
case of a cheque.
v. A cheque is exempted from stamp duty, but a
promissory note as well a bill of exchange attracts
stamp duty.
vi. A pay order is not a cheque. It is issued by one
branch of a bank to another branch of the same
bank or under arrangement, to another bank with a
direction to credit the amount to the account of the