Mock Test Paper - Series III: June, 2024

Date of Paper: 7th June, 2024

Time of Paper: 2 P.M. to 5 P.M.

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions should be made and disclosed
by way of note forming part of the answer.
(Time allowed: 3 Hours) (100 Marks)

1. (a) (i) Rahul found a smart watch in a restaurant. He enquired about all
the customers present there but the true owner could not be found.
He handed over the same to the manager of the restaurant to keep
till the true owner is found. After a week he went back to the
restaurant to enquire about the smart watch. The manager refused
to return it to Rahul, saying that it did not belong to Rahul. In the
light of the Indian Contract Act, 1872, can Rahul recover it from the
Manager? (4 Marks)
(ii) Mr. Vikas a businessman has been fighting a long-drawn litigation
with Mr. Neeraj an industrialist. To support his legal campaign, he
enlists the services of Mr. Manoj a Judicial officer stating that the
amount of `10 lakhs would be paid to him if he does not take up
the brief of Mr. Neeraj.
Mr. Manoj agrees but, at the end of the litigation Mr. Vikas refuses
to pay to Mr. Manoj. Decide whether Mr. Manoj can recover the
amount promised by Mr. Vikas under the provisions of the Indian
Contract Act, 1872? (3 Marks)
(b) (i) Mr. Samyak was appointed as an employee of Moonlight Timber
Private Limited on the condition that if he was to leave his
employment, he will not solicit customers of the company. After
some time, he was fired from the company. He set up his own
business under proprietorship and undercut Moonlight Timber
Private Limited’s prices. On the legal advice from his legal
consultant and to refrain from the provisions of breach of contract,
he formed a new company under the name Nine Stars Timbers
Private Limited. In this company, his wife and a friend of
Mr. Samyak were the sole shareholders and directors. They took
over Samyak’s business and continued it. Moonlight Timber Private
Limited files a suit against Nine Stars Timbers Private Limited for
violation of contract. Nine Stars Timbers Private Limited argued
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 that the contract was entered into between Mr. Samyak and
Moonlight Timber Private Limited and as the company has separate
legal entity, Nine Stars Timbers Private Limited has not violated the
terms of agreement. Explain with reasons, whether separate legal
entity between Mr. Samyak and Nine Stars Timbers Private Limited
will be disregarded? (4 Marks)
(ii) Pacific Motors Limited is a government company. Rama Auto
Private Limited is a private company having share capital of ten
crores in the form of ten lacs shares of ` 100 each. Pacific Motors
Limited is holding five lacs five thousand shares in Rama Auto
Private Limited. Rama Auto Private Limited claimed the status of
Government Company. Advise as legal advisor, whether Rama
Auto Private Limited is government company under the provisions
of Companies Act, 2013? (3 Marks)
(c) (i) When the continuing guarantee can be revoked under the Indian
Partnership Act, 1932? (2 Marks)
(ii) With reference to the provisions of Indian partnership Act, 1932
explain the various effects of insolvency of a partner. (4 Marks)
2. (a) Mrs. Seema went to the local rice and wheat wholesale shop and asked
for 100 kgs of Basmati rice. The Shopkeeper quoted the price of the
same as ` 125 per kg to which she agreed. Mrs. Seema insisted that
she would like to see the sample of what would be provided to her by the
shopkeeper before she agreed upon such a purchase.
The shopkeeper showed her a bowl of rice as a sample. The sample
exactly corresponded to the entire lot.
The buyer examined the sample casually without noticing the fact that
even though the sample was that of Basmati Rice, it contained a mix of
long and short grains.
The cook on opening the bags complained that the dish, if prepared with
the rice would not taste the same as the quality of rice was not as per
requirement of the dish.
Now Mrs. Seema wants to file a suit of fraud against the seller alleging
him of selling a mix of good and cheap quality rice. Will she be
successful?
Explain the basic law on sale by sample under Sale of Goods Act, 1930?
What would be your answer in case Mrs. Seema specified her exact
requirement as to length of rice? (7 Marks)
(b) (i) Explain listed company and unlisted company as per the provisions
of the Companies Act, 2013. (2 Marks)

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 (ii) Explain the classification of the companies on the basis of control
as per the Companies Act, 2013. (5 Marks)
(c) (i) Who are the individuals which shall not be capable of becoming a
partner of a Limited Liability Partnership? (3 Marks)
(ii) What are the effects of registration of Limited Liability Partnership?
(3 Marks)
3. (a) (i) Mr. Ram and Mr. Raheem are working as teachers in Ishwarchand
Vidhyasagar Higher Secondary School and also are very good
friends. They jointly purchased a flat which was given on rent to Mr.
John. It was decided between landlords and tenant that the rent
would be ` 10,000 per month inclusive of electricity bill. It means
electricity bill will be paid by landlords. The landlords, by mistake,
did not pay the electricity bill for the month of March 2023. Due to
this, the electricity department cut the connection. Mr. John has to
pay the electricity bill of ` 2800 and ` 200 as penalty to resume the
electricity connection. Mr. John claimed ` 3000 from Mr. Ram but
Mr. Ram replied that he is liable only for ` 1500.
Mr. John said that Mr. Ram and Mr. Raheem are partners therefore
he can claim the full amount from any of the partners. Explain,
whether under the provision of Indian Partnership Act, 1932,
Mr. Ram is liable to pay whole amount of ` 3000 to Mr. John?
(4 Marks)
(ii) Explain in detail the circumstances which lead to liability of firm for
misapplication by partners as per provisions of the Indian
Partnership Act, 1932. (3 Marks)
(b) Mr. R, a manufacturer of toys approached MNO Private Limited for
supply of raw material worth ` 1,50,000/-. Mr. R was offered a credit
period of one month. Mr. R went to the company prior to the due date
and met Mr. C, an employee at the billing counter, who convinced the
former that the payment can be made to him as the billing-cashier is on
leave.
Mr. R paid the money and was issued a signed and sealed receipt by
Mr. C. After the lapse of due date, Mr. R received a recovery notice from
the company for the payment of ` 1,50,000/-.
Mr. R informed the company that he had already paid the above amount
and being an outsider had genuine reasons to trust Mr. C who claimed
to be an employee and had issued him a receipt.

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 The Company filed a suit against Mr. R for non-payment of dues. Discuss
the fate of the suit and the liability of Mr. R towards company as on
current date in consonance with the provision of the Companies Act,
2013? Would your answer be different if a receipt under the company
seal was not issued by Mr. C after receiving payment? (7 Marks)
(c) Define consideration. What are the legal rules regarding consideration
under the Indian Contract Act, 1872? (6 Marks)
4. (a) (i) Mr. A, the employer induced his employee Mr. B to sell his one
room flat to him at less than the market value to secure promotion.
Mr. B sold the flat to Mr. A. Later on, Mr. B changed his mind and
decided to sue Mr. A. Examine the validity of the contract as per
the provisions of the Indian Contract Act, 1872. (3 Marks)
(ii) Mr. S promises Mr. M to paint a family picture for ` 20,000 and
assures to complete his assignment by 15th March, 2023.
Unfortunately, Mr. S died in a road accident on 1st March, 2023 and
his assignment remains undone. Can Mr. M bind the legal
representative of Mr. S for the promise made by Mr. S? Suppose
Mr. S had promised to deliver some photographs to Mr. M on
15th March, 2023 against a payment of ` 10,000 but he dies before
that day. Will his representative be bound to deliver the
photographs in this situation?
Decide as per the provisions of the Indian Contract Act, 1872.
(4 Marks)
(b) Explain the Rules as to compensation payable in case of dishonour of
promissory note, bill of exchange or cheque, by any party liable to the
holder or any endorsee covered under the Negotiable Instruments Act,
1881. (7 Marks)
(c) Write a short note on the following:
(i) Ministry of Corporate Affairs (MCA)
(ii) Ministry of Home Affairs (6 Marks)
5. (a) (i) Rachit arranges an auction to sale an antic wall clock. Deepa, being
one of the bidders, gives the highest bid. For announcing the
completion of sale, the auctioneer falls the hammer on table but
suddenly hammer brakes and damages the watch. Deepa wants to
avoid the contract. Can she do so under the provisions of the Sale
of Goods Act, 1930? (4 Marks)
(ii) X contracted to sell his car to Y. They did not discuss the price of
the car at all. X later refused to sell his car to Y on the ground that
the agreement was void being uncertain about price. Can Y
demand the car under the Sale of Goods Act, 1930? (3 Marks)

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 (b) “Partner indeed virtually embraces the character of both a principal and
an agent”. Describe the said statement keeping in view of the provisions
of the Indian Partnership Act, 1932. (7 Marks)
(c) State the essential elements of a contract of bailment. (6 Marks)
6. (a) Shankar drew a cheque in favour of Surendar. After having issued the
cheque, Shankar requested Surendar not to present the cheque for
payment and gave a stop payment request to the bank in respect of the
cheque issued to Surendar. Decide, under the provisions of the
Negotiable Instruments Act, 1881 whether the said acts of Shankar
constitute an offence? (7 Marks)
(b) Define contract of indemnity and contract of guarantee and state the
conditions when guarantee is considered invalid? (6 Marks)
(c) (i) State the various essential elements involved in the sale of
unascertained goods and their appropriation as per the Sale of
Goods Act, 1930. (4 Marks)
(ii) What are the consequences of the destruction of specified goods,
before making of contract and after the agreement to sell under the
Sale of Goods Act, 1930. (3 Marks)

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 Mock Test Paper - Series III: June, 2024
Date of Paper: 7th June, 2024
Time of Paper: 2 P.M. to 5 P.M.

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
ANSWERS
1. (a) (i) Responsibility of finder of goods (Section 71 of the Indian
Contract Act, 1872): A person who finds goods belonging to
another and takes them into his custody is subject to same
responsibility as if he were a bailee.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary
prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
In the light of the above provisions, the manager must return the
smart watch to Rahul, since Rahul is entitled to retain the smart
watch found against everybody except the true owner.
(ii) The problem as asked in the question is based on Section 10 of the
Indian Contract Act, 1872. This Section says that all agreements
are contracts if they are made by the free consent of the parties
competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void. Further, Section
23 also states that every agreement of which the object is unlawful
is void.
Accordingly, one of the essential elements of a valid contract in the
light of the said provision is that the agreement entered into must
not be which the law declares to be either illegal or void. An illegal
agreement is an agreement expressly or impliedly prohibited by
law. A void agreement is one without any legal effects.
The given instance is a case of interference with the course of
justice and results as opposed to public policy. This can also be
called an agreement in restraint of legal proceedings. This
agreement restricts one’s right to enforce his legal rights. Such an
agreement has been expressly declared to be void under section
28 of the Indian Contract Act, 1872. Hence, Mr. Manoj in the given
case cannot recover the amount of ` 10 lakh promised by Mr. Vikas
because it is a void agreement and cannot be enforced by law.
(b) (i) It was decided by the court in the case of Gilford Motor Co. Vs.
Horne, that if the company is formed simply as a mere device to
evade legal obligations, though this is only in limited and discrete
circumstances, courts can pierce the corporate veil. In other words,
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 if the company is a mere sham or cloak, the separate legal entity
can be disregarded.
On considering the decision taken in Gilford Motor Co. Vs. Horne
and facts of the problem given, it is very much clear that Nine Stars
Timbers Private Limited was formed just to evade legal obligations
of the agreement between Mr. Samyak and Moonlight Timber
Private Limited. Hence, Nine Stars Timbers Private Limited is just
a sham or cloak and the separate legal entity between Mr. Samyak
and Nine Stars Timbers Private Limited should be disregarded.
(ii) According to the provisions of Section 2(45) of Companies Act,
2013, Government Company means any company in which not less
than 51% of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more
State Governments, and the section includes a company
which is a subsidiary company of such a Government
company.
According to Section 2(87), “subsidiary company” in relation to any
other company (that is to say the holding company), means a
company in which the holding exercises or controls more than one-
half of the total voting power either at its own or together with one
or more of its subsidiary companies.
By virtue of provisions of Section 2(87) of Companies Act, 2013,
Rama Auto Private Limited is a subsidiary company of Pacific
Motors Limited because Pacific Motors Limited is holding more than
one-half of the total voting power in Rama Auto Private Limited.
Further as per Section 2(45), a subsidiary company of Government
Company is also termed as Government Company. Hence, Rama
Auto Private Limited, being a subsidiary of Pacific Motors Limited
will also be considered as Government Company.
(c) (i) Revocation of continuing guarantee (Section 38 of the Indian
Partnership Act, 1932)
According to section 38, a continuing guarantee given to a firm or
to third party in respect of the transaction of a firm is, in the absence
of an agreement to the contrary, revoked as to future transactions
from the date of any change in the constitution of the firm. Such
change may occur by the death, or retirement of a partner, or by
introduction of a new partner.
(ii) Effects of insolvency of a partner (Section 34 of the Indian
Partnership Act, 1932):
(i) The insolvent partner cannot be continued as a partner.

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 (ii) He will be ceased to be a partner from the very date on which
the order of adjudication is made.
(iii) The estate of the insolvent partner is not liable for the acts of
the firm done after the date of order of adjudication.
(iv) The firm is also not liable for any act of the insolvent partner
after the date of the order of adjudication,
(v) Ordinarily, the insolvency of a partner results in dissolution of
a firm; but the partners are competent to agree among
themselves that the adjudication of a partner as an insolvent
will not give rise to dissolution of the firm.
2. (a) (i) As per the provisions of Sub-Section (2) of Section 17 of the Sale
of Goods Act, 1930, in a contract of sale by sample, there is an
implied condition that:
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing
the bulk with the sample.
In the instant case, in the light of the provisions of Sub-Clause (b)
of Sub-Section (2) of Section 17 of the Act, Mrs. Seema will not be
successful as she casually examined the sample of rice (which
exactly corresponded to the entire lot) without noticing the fact that
even though the sample was that of Basmati Rice but it contained
a mix of long and short grains.
(ii) Sale by Sample (Section 17 of the Sale of Goods Act, 1930): As
per the provisions of Sub-Section (1) of section 17 of the Sale of
Goods Act, 1930, a contract of sale is a contract for sale by sample
where there is a term in the contract, express or implied, to that
effect.
As per the provisions of Sub-Section (2) of section 17 of the Sale
of Goods Act, 1930, in a contract of sale by sample, there is an
implied condition that:
(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of
comparing the bulk with the sample.
(c) that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable
examination of the sample.
(iii) In case Mrs. Seema specified her exact requirement as to length of
rice, then there is an implied condition that the goods shall
correspond with the description. If it is not so, the seller will be held
liable.

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(b) (i) Listed company: As per the definition given in the section 2(52) of
the Companies Act, 2013, it is a company which has any of its
securities listed on any recognised stock exchange.
Provided that such class of companies, which have listed or intend
to list such class of securities, as may be prescribed in consultation
with the Securities and Exchange Board, shall not be considered
as listed companies.
Whereas the word securities as per section 2(81) of the Companies
Act, 2013 has been assigned the same meaning as defined in
clause (h) of section 2 of the Securities Contracts (Regulation) Act,
1956.
Unlisted company means company other than listed company.
(ii) In line with the Companies Act, 2013, following are the
classification of the Companies on the basis of control:
(a) Holding and subsidiary companies: ‘Holding and
subsidiary’ companies are relative terms.
A company is a holding company in relation to one or more
other companies, means a company of which such companies
are subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company"
includes any body corporate.
Whereas section 2(87) defines “subsidiary company” in
relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total
voting power either at its own or together with one or
more of its subsidiary companies:
Provided that such class or classes of holding
companies as may be prescribed shall not have layers
of subsidiaries beyond such numbers as may be
prescribed.
(b) Associate company [Section 2(6)]: In relation to another
company, means a company in which that other company has
a significant influence, but which is not a subsidiary company
of the company having such influence and includes a joint
venture company.
Explanation. — For the purpose of this clause —
(i) the expression “significant influence” means control of at
least twenty per cent of total voting power, or control of
or participation in business decisions under an
agreement;

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 (ii) the expression “joint venture’’ means a joint
arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the
arrangement.
(c) (i) Partners (Section 5 of Limited Liability Partnership Act, 2008):
Any individual or body corporate may be a partner in a LLP.
However, an individual shall not be capable of becoming a partner
of a LLP, if—
(a) he has been found to be of unsound mind by a Court of
competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his
application is pending.
(ii) Effect of registration (Section 14 of Limited Liability
Partnership Act, 2008):
On registration, a LLP shall, by its name, be capable of—
(a) suing and being sued;
(b) acquiring, owning, holding and developing or disposing of
property, whether movable or immovable, tangible or
intangible;
(c) having a common seal, if it decides to have one; and
(d) doing and suffering such other acts and things as bodies
corporate may lawfully do and suffer.
3. (a) (i) According to Section 4 of the Indian Partnership Act, 1932,
"Partnership" is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them
acting for all. Therefore, for determining the existence of
partnership, it must be proved that:
1. There must be an agreement between all the persons
concerned;
2. The agreement must be to carry on some business;
3. The agreement must be to share the profits of a business and
4. The business was carried on by all or any of them acting for
all.
On the basis of above provisions and facts provided in the question,
Mr. Ram and Mr. Raheem cannot be said under partnership as they
are teachers in a school and just purchased a flat jointly.
By merely giving the flat on rent, they are not doing business. They
are just earning the income from the property under their
co-ownership. Hence, there is no partnership between them.

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 Therefore, Mr. Ram is liable to pay his share only i.e. ` 1500.
Mr. John has to claim the rest of ` 1500 from Mr. Raheem.
(ii) Liability of Firm for Misapplication by Partners (Section 27 of
Indian Partnership Act, 1932):
The two clauses of Section 27 bring out an important point of
distinction between the two categories of cases of misapplication
of money by partners.
Clause (a) covers the case where a partner acts within his authority
and due to his authority as a partner, he receives money or property
belonging to a third party and misapplies that money or property.
For this provision to be attracted, it is not necessary that the money
should have actually come into the custody of the firm.
On the other hand, the provision of clause (b) would be attracted
when such money or property has come into the custody of the firm,
and it is misapplied by any of the partners.
The firm would be liable in both cases.
(b) (i) Fate of the suit and the liability of Mr. R towards the company:
Doctrine of the Indoor Management
According to the Doctrine of Indoor Management, the outsiders are
not deemed to have notice of the internal affairs of the company.
They are entitled to assume that the acts of the directors or other
officers of the company are validly performed, if they are within the
scope of their apparent authority. So long as an act is valid under
the articles, if done in a particular manner, an outsider dealing with
the company is entitled to assume that it has been done in the
manner required. This is the indoor management rule, that the
company’s indoor affairs are the company’s problem. This rule has
been laid down in the landmark case-the Royal British Bank vs.
Turquand. (Known as “Turquand Rule”)
In the instant case, Mr. R is not liable to pay the amount of
` 1,50,000 to MNO Private Limited as he had genuine reasons to
trust Mr. C, an employee of the company who had issued him a
signed and sealed receipt.
(ii) Liability of Mr. R in case no receipt is issued by Mr. C:
Exceptions to doctrine of indoor management: Suspicion of
irregularity is an exception to the doctrine of indoor management.
The doctrine of indoor management in no way rewards those who
behave negligently. It is the duty of the outsider to make the
necessary enquiry, if the transaction is not in the ordinary course
of business.
If a receipt under the company seal was not issued by Mr. C after
receiving payment, Mr. R is liable to pay the said amount as this
will be deemed to be a negligence on the part of Mr. R and it is his
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 duty to make the necessary enquiry to check that whether Mr. C is
eligible to take the payment or not.
(c) Consideration [Section 2(d) of the Indian Contract Act, 1872]: When
at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing or promises to
do or abstain from doing something, such an act or abstinence or
promise is called consideration for the promise.
Legal Rules Regarding Consideration
(i) Consideration must move at the desire of the promisor:
Consideration must be offered by the promisee or the third party at
the desire or request of the promisor. This implies “return” element
of consideration.
(ii) Consideration may move from promisee or any other person:
In India, consideration may proceed from the promisee or any other
person who is not a party to the contract. In other words, there can
be a stranger to a consideration but not stranger to a contract.
(iii) Executed and executory consideration: A consideration which
consists in the performance of an act is said to be executed. When
it consists in a promise, it is said to be executory. The promise by
one party may be the consideration for an act by some other party,
and vice versa.
(iv) Consideration may be past, present or future: It is a general
principle that consideration is given and accepted in exchange for
the promise. The consideration, if past, may be the motive but
cannot be the real consideration of a subsequent promise. But in
the event of the services being rendered in the past at the request
or the desire of the promisor, the subsequent promise is regarded
as an admission that the past consideration was not gratuitous.
(v) Consideration need not be adequate: Consideration need not to
be of any particular value. It need not be approximately of equal
value with the promise for which it is exchanged but it must be
something which the law would regard as having some value.
(vi) Performance of what one is legally bound to perform: The
performance of an act by a person who is legally bound to perform
the same cannot be consideration for a contract. Hence, a promise
to pay money to a witness is void, for it is without consideration.
Hence, such a contract is void for want of consideration.
(vii) Consideration must be real and not illusory: Consideration must
be real and must not be illusory. It must be something to which the
law attaches some value. If it is legally or physically impossible it is
not considered valid consideration.
(viii) Consideration must not be unlawful, immoral, or opposed to
public policy: Only presence of consideration is not sufficient it

7
 must be lawful. Anything which is immoral or opposed to public
policy also cannot be valued as valid consideration.
4. (a) (i) According to section 16 of the Indian Contract Act, 1872, a contract
is said to be induced by ‘undue influence’ where the relations
subsisting between the parties are such that one of the parties is in
a position to dominate the will of the other and he uses that position
to obtain an unfair advantage over the other.
When consent to an agreement is caused by undue influence, the
contract is voidable at the option of the party, whose consent was
so caused.
Hence, the contract between Mr. A and Mr. B is voidable at the
option of Mr. B as it was induced by undue influence by Mr. A and
therefore Mr. B can sue Mr. A.
(ii) The parties to a contract must either perform, or offer to perform,
their respective promises, unless such performance is dispensed
with or excused under the provisions of this Act, or of any other law.
Promises to bind the representatives of the promisors in case of the
death of such promisors before performance, unless a contrary intention
appears from the contract. (Section 37 of the Indian Contract Act, 1872).
As per the provisions of Section 40 of the Indian Contract Act, 1872, if it
appears from the nature of the case that it was the intention of the parties
to any contract that any promise contained in it should be performed by
the promisor himself, such promise must be performed by the promisor.
In other cases, the promisor or his representative may employ a
competent person to perform it.
In terms of the provisions of Section 40 stated above, in case where
Mr. S has to paint a family picture for Mr. M, Mr. M cannot ask the legal
representative of Mr. S to complete the painting work on Mr. S’s death,
since painting involves the use of personal skill.
In terms of the provisions of Section 37 stated above, in case where
Mr. S had promised to deliver some photographs to Mr. M, the legal
representatives of Mr. S shall be bound to deliver the photographs in this
situation.
(b) As per section 117 of the Negotiable Instruments Act, 1881, the
compensation payable in case of dishonour of promissory note, bill of
exchange or cheque, by any party liable to the holder or any endorsee,
shall be determined by the following rules:
(i) the holder is entitled to the amount due upon the instrument,
together with the expenses properly incurred in presenting, noting
and protesting it;
(ii) when the person charged resides at a place different from that at
which the instrument was payable, the holder is entitled to receive
such sum at the current rate of exchange between the two places;

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 (iii) an endorser who, being liable, has paid the amount due on the
same is entitled to the amount so paid with interest at 18% per
annum from the date of payment until tender or realisation thereof,
together with all expenses caused by the dishonour and payment;
(iv) when the person charged and such endorser reside at different
places, the endorser is entitled to receive such sum at the current
rate of exchange between the two places;
(v) the party entitled to compensation may draw a bill upon the party
liable to compensate him, payable at sight or on demand, for the
amount due to him, together with all expenses properly incurred by
him. Such bill must be accompanied by the instrument dishonoured
and the protest thereof (if any). If such bill is dishonoured, the party
dishonouring the same is liable to make compensation thereof in
the same manner as in the case of the original bill.
(c) (i) Ministry of Corporate Affairs (MCA): MCA is an Indian
Government Ministry which primarily concerned with administration
of the Companies Act, 2013, the Companies Act, 1956, the Limited
Liability Partnership Act, 2008, and the Insolvency and Bankruptcy
Code, 2016. It is responsible mainly for the regulation of Indian
enterprises in the industrial and services sector.
The Ministry is mostly run by civil servants of the ICLS cadre.
These officers are elected through the Civil Services Examination
conducted by Union Public Service Commission.
The highest post, Director General of Corporate Affairs (DGCoA),
is fixed at Apex Scale for the ICLS.
(ii) Ministry of Home Affairs: It is a ministry of the Government of
India. As an interior ministry of India, it is mainly responsible for the
maintenance of internal security and domestic policy. The Home
Ministry is headed by Union Minister of Home Affairs.
5. (a) (i) By virtue of provisions of Section 64 of the Sale of Goods Act, 1930,
in case of auction sale, the sale is complete when the auctioneer
announces its completion by the fall of the hammer or in some other
customary manner.
In the instant case, Deepa gives the highest bid in the auction for
the sale of an antic wall clock arranged by Rachit. While
announcing the completion of sale by fall of hammer on the table,
hammer brakes and damages the clock.
On the basis of the above provisions, it can be concluded that the
sale by auction cannot be completed until hammer comes in its
normal position after falling on table. Hence, in the given problem,
sale is not completed. Deepa will not be liable for loss and can
avoid the contract.
(ii) Payment of the price by the buyer is an important ingredient of a
contract of sale. If the parties totally ignore the question of price
9
 while making the contract, it will not become an uncertain and
invalid agreement. It will rather be a valid contract and the buyer
shall pay a reasonable price. (Section 9 and section 10 of the Sale
of Goods Act, 1930)
In the given case, X and Y have entered into a contract for sale of
car but they did not fix the price of the car. X refused to sell the car
to Y on this ground. Y can legally demand the car from X and X can
recover a reasonable price of the car from Y.
(b) “Partner indeed virtually embraces the character of both a principal
and an agent”: Subject to the provisions of section 18 of the Indian
Partnership Act, 1932, a partner is the agent of the firm for the purposes
of the business of the firm.
A partnership is the relationship between the partners who have agreed
to share the profits of the business carried on by all or any of them acting
for all (Section 4). This definition suggests that any of the partners can
be the agent of the others.
Section 18 clarifies this position by providing that, subject to the
provisions of the Act, a partner is the agent of the firm for the purpose of
the business of the firm. The partner indeed virtually embraces the
character of both a principal and an agent. So far as he acts for himself
and in his own interest in the common concern of the partnership, he
may properly be deemed as a principal and so far as he acts for his
partners, he may properly be deemed as an agent.
The principal distinction between him and a mere agent is that he has a
community of interest with other partners in the whole property and
business and liabilities of partnership, whereas an agent as such has no
interest in either.
The rule that a partner is the agent of the firm for the purpose of the
business of the firm cannot be applied to all transactions and dealings
between the partners themselves. It is applicable only to the act done by
partners for the purpose of the business of the firm.
(c) Essential elements of a contract of bailment: Section 148 of the
Indian Contract Act, 1872 defines the term ‘Bailment’. A ‘bailment’ is the
delivery of goods by one person to another for some purpose upon a
contract that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person
delivering them. The essential elements of the contract of the bailment
are:
(i) Contract: Bailment is based upon a contract. The contract may be
express or implied. No consideration is necessary to create a valid
contract of bailment.
(ii) Delivery of goods: It involves the delivery of goods from one person
to another for some purposes. Bailment is only for moveable goods
and never for immovable goods or money.

10
 (iii) Purpose: The goods are delivered for some purpose. The purpose
may be express or implied.
(iv) Possession: In bailment, possession of goods changes. Change of
possession can happen by physical delivery or by any action which
has the effect of placing the goods in the possession of bailee. The
change of possession does not lead to change of ownership. In
bailment, bailor continues to be the owner of goods.
(v) Return of goods: Bailee is obliged to return the goods physically to
the bailor. The goods should be returned in the same form as given
or may be altered as per bailor’s direction.
6. (a) As per the facts stated in the question, Shankar (drawer) after having
issued the cheque, informs Surendar (drawee) not to present the cheque
for payment and also gave a stop payment request to the bank in respect
of the cheque issued to Surendar.
Section 138 of the Negotiable Instruments Act, 1881, 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 out of that account for the discharge in whole or in part
of any debt or liability, is informed by the bank unpaid either because of
insufficiency of funds 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.
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.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies
absolute liability of the drawer of the cheque for commission of an
offence under section 138 of the Act. Section 140 states that it shall not
be a defence in a prosecution for an offence under section 138 that the
drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in
that section.
Accordingly, the act of Shankar, i.e., his request to stop payment
constitutes an offence under the provisions of the Negotiable
Instruments Act, 1881.
(b) Section 124 of the Indian Contract Act, 1872 states that “A contract by
which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or the conduct of any person”, is
called a “contract of indemnity”.
Section 126 of the Indian Contract Act, 1872 states that “A contract to
perform the promise made or discharge liability incurred by a third
person in case of his default” is called a “contract of guarantee”.

11
 The conditions under which the guarantee is invalid, or void is provided
in section 142, 143 and 144 of the Indian Contract Act, 1872. These
include:
(i) Guarantee obtained by means of misrepresentation.
(ii) Guarantee obtained by means of keeping silence as to material
circumstances.
(iii) When a contract of guarantee is entered into on the condition that
the creditor shall not act upon it until another person has joined in
it as co-surety and that other party fails to join as such.
(c) (i) Sale of unascertained goods and Appropriation (Section 23 of
the Sale of Goods Act, 1930): Appropriation of goods involves
selection of goods with the intention of using them in performance of
the contract and with the mutual consent of the seller and the buyer.
The essentials are:
(a) There is a contract for the sale of unascertained or future
goods.
(b) The goods should conform to the description and quality
stated in the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally appropriated to the
contract either by delivery to the buyer or his agent or the
carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.
(ii) (A) Goods perishing before making of Contract (Section 7 of
the Sale of Goods Act, 1930): In accordance with the
provisions of the Sale of Goods Act, 1930 as contained in
Section 7, a contract for the sale of specific goods is void, if at
the time when the contract was made; the goods without the
knowledge of the seller, perished or become so damaged as
no longer to answer to their description in the contract, then the
contract is void ab initio.
(B) Goods perishing before sale but after agreement to sell
(Section 8 of the Sale of Goods Act, 1930): Where there is
an agreement to sell specific goods, and subsequently the
goods without any fault on the part of the seller or buyer perish
or become so damaged as no longer to answer to their
description in the agreement before the risk passes to the
buyer, the agreement is thereby avoided or becomes void.
12
 Mock Test Paper - Series II: May, 2024
Date of Paper: 24th May, 2024
Time of Paper: 2 P.M. to 5 P.M.

MOCK TEST PAPER II

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions should be made and disclosed
by way of note forming part of the answer.

(Time allowed: 3 Hours) (100 Marks)

1. (a) In light of provisions of the Indian Contract Act, 1872 answer the following:
(i) Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper
cup manufacture machine to Mr. R and to receive payment on delivery.
On the delivery date, Mr. R did not pay the agreed price. Decide
whether Mr. S is bound to fulfil his promise at the time of delivery?
(ii) Mr. Y has given loan to Mr. G of ` 30,00,000. Mr. G defaulted the loan
on due date and debt became time barred. After the time barred debt,
Mr. G agreed to settle the full amount to Mr. Y. Whether acceptance of
time barred debt Contract is enforceable as per the Indian Contract Act,
1872?
(iii) A & B entered into a contract to supply unique item, alternate of which
is not available in the market. A refused to supply the agreed unique
item to B. What directions could be given by the court for breach of
such contract? (7 Marks)
(b) (i) Nolimit Private Company is incorporated as unlimited company having
share capital of ` 10,00,000. One of its creditors, Mr. Samuel filed a suit
against a shareholder Mr. Innocent for recovery of his debt against Nolimit
Private Company. Mr. Innocent has given his plea in the court that he is
not liable as he is just a shareholder. Explain whether Mr. Samuel will be
successful in recovering his dues from Mr. Innocent? (4 Marks)
(ii) A Company registered under Section 8 of the Companies Act, 2013,
has been consistently making profits for the past 5 years after a major
change in the management structure. Few members contented that
they are entitled to receive dividends. Can the company distribute
dividend? If yes, what is the maximum percentage of dividend that can
be distributed as per provisions of the Companies Act, 2013? Also, to

1
 discuss this along with other regular matters, the company held a
general meeting by giving only 14 days’ notice. Is this valid?
(3 Marks)
(c) (i) "Whether a group of persons is or is not a firm, or whether a person is or
is not a partner in a firm." Explain the mode of determining existence of
partnership as per the Indian Partnership Act, 1932? (4 Marks)
(ii) Discuss the provisions regarding personal profits earned by a partner
under the Indian Partnership Act, 1932? (2 Marks)
2. (a) Mr. G sold some goods to Mr. H for a certain price by issue of an invoice, but
payment in respect of the same was not received on that day. The goods were
packed and lying in the godown of Mr. G. The goods were inspected by H's
agent and were found to be in order. Later on, the dues of the goods were
settled in cash. Just after receiving cash, Mr. G asked Mr. H that goods should
be taken away from his godown to enable him to store other goods purchased
by him. After one day, since Mr. H did not take delivery of the goods, Mr. G
kept the goods out of the godown in an open space. Due to rain, some goods
were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the
above situation and decide who will be held responsible for the above
damage. Will your answer be different if the dues were not settled in cash
and are still pending? (7 Marks)
(b) Define OPC (One Person Company) and state the rules regarding its
membership. Can it be converted into a non-profit company under Section
8 or a private company? (7 Marks)
(c) List the differences between the Limited Liability Partnership (LLP) and the
Limited Liability Company. (6 Marks)
3. (a) P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which
deals in trading of Washing Machines of various brands.
Due to the conflict of views between partners, P & Q decided to leave the
partnership firm and started competitive business on 31st July, 2023, in the
name of M/S PQ & Co. Meanwhile, R & S have continued using the property
in the name of M/S PQRS & Co. in which P & Q also has a share.
Based on the above facts, explain in detail the rights of outgoing partners
as per the Indian Partnership Act, 1932 and comment on the following:
(i) Rights of P & Q to start a competitive business.
(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co.
(7 Marks)
(b) MNP Private Ltd. is a company registered under the Companies Act, 2013
with Paid Up Share Capital of ` 5 crores and turnover of ` 35 crores. Explain
the meaning of the "Small Company" and examine the following in
accordance with the provisions of the Companies Act, 2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?

2
 (ii) What will be your answer if the turnover of the company is ` 45 crores?
(7 Marks)
(c) Define Misrepresentation and Fraud. Explain the difference between Fraud
and Misrepresentation as per the Indian Contract Act, 1872. (6 Marks)
4. (a) M Ltd. contract with Shanti Traders to make and deliver certain machinery
to them by 30th June 2023 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. Due to this, 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, 1872. (7 Marks)
(b) What are Inchoate and Ambiguous Instruments under the Negotiable
Instruments Act, 1881? (7 Marks)
(c) What is the significance of the Supreme Court and High Court in the Indian
judiciary? (6 Marks)
5. (a) (i) Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and
100 bales by Railway. Shyam receives delivery of 100 bales sent by lorry,
but before he receives the delivery of the bales sent by railway, he
becomes bankrupt. Ram being still unpaid, stops the goods in transit. The
official receiver, on Shyam’s insolvency claims the goods. Decide the
case with reference to the provisions of the Sale of Goods Act, 1930.
(4 Marks)
(ii) Classify the following transactions according to the types of goods they
are:
(A) A wholesaler of cotton has 100 bales in his godown. He agrees to sell
50 bales and these bales were selected and set aside.
(B) A agrees to sell to B one packet of sugar out of the lot of one hundred
packets lying in his shop.
(C) T agrees to sell to S all the apples which will be produced in his garden
this year. (3 Marks)
(b) State the grounds on which a firm may be dissolved by the Court under the
Indian Partnership Act, 1932? (7 Marks)
(c) Explain whether the agency shall be terminated in the following cases
under the provisions of the Indian Contract Act, 1872:
(i) A gives authority to B to sell A's land, and to pay himself, out of the
proceeds, the debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A's agent to sell A's land. B, under the authority of A,
appoints C as agent of B. Afterwards, A revokes the authority of B but
not of C. What is the status of agency of C? (6 Marks)

3
6. (a) (i) Advik purchased a mobile from Bhanu. He issued a promissory note to
Bhanu which was payable on demand but no specific place for payment
was mentioned on it. On maturity, Bhanu did not present the promissory
note for payment. As the promissory note was not duly presented for
payment, whether Advik would be discharged from liability under the
provisions of the Negotiable Instruments Act, 1881? (4 Marks)
(ii) Shiva gave a gift of ` 21,000 to his sister through a cheque issued in
her favour on the occasion of Raksha Bandhan. Afterwards, Shiva
informed his sister not to present the cheque for payment and also
informed the bank to stop the payment. Examining the provisions of the
Negotiable Instruments Act, 1881, decide whether Shiva’s acts
constitute an offence under section 138 of the Act? (3 Marks)
(b) What do you mean by Quantum Meruit and state the cases where the claim
for Quantum Meruit arises? (6 Marks)
(c) Write the exceptions to the doctrine of Caveat Emptor as per the Sale of
Goods Act, 1930. (7 Marks)

4
 Mock Test Paper - Series II: May, 2024
Date of Paper: 24th May, 2024
Time of Paper: 2 P.M. to 5 P.M.

MOCK TEST PAPER II

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
ANSWERS
1. (a) (i) As per Section 51 of the Indian Contract Act, 1872, when a contract
consists of reciprocal promises to be simultaneously performed, no
promisor needs to perform his promise unless the promisee is ready and
willing to perform his reciprocal promise. Such promises constitute
concurrent conditions and the performance of one of the promise is
conditional on the performance of the other. If one of the promises is not
performed, the other too need not be performed.
Referring to the above provisions, in the given case, Mr. S is not bound
to deliver goods to Mr. R since payment was not made by him at the
time of delivery of goods.
(ii) Promise to pay time-barred debts - Section 25 (3): Where a promise
in writing signed by the person making it or by his authorised agent, is
made to pay a debt barred by limitation it is valid without consideration
[Section 25(3)].
In the given case, the loan given by Mr. Y to Mr. G has become time
barred. Thereafter, Mr. G agreed to make payment of full amount to
Mr. Y.
Referring to above provisions of the Indian Contract Act, 1872 contract
entered between parties post time barred debt is valid so, Mr. G is
bound to pay the agreed amount to Mr. Y provided the above
mentioned conditions of section 25 (3) are fulfilled.
(iii) Where there is a breach of contract for supply of a unique item, mere
monetary damages may not be an adequate remedy for the other party.
In such a case, the court may give order for specific performance and
direct the party in breach to carry out his promise according to the terms
of contract. Here, in this case, the court may direct A to supply the item
to B because the refusal to supply the agreed unique item cannot be
compensated through money.
(b) (i) Section 2(92) of Companies Act, 2013, provides that an unlimited
company means a company not having any limit on the liability of its
members. The liability of each member extends to the whole amount of
the company’s debts and liabilities, but he will be entitled to claim
contribution from other members. In case the company has share capital,
the Articles of Association must state the amount of share capital and the
amount of each share. So long as the company is a going concern the

1
 liability on the shares is the only liability which can be enforced by the
company. The creditors can institute proceedings for winding up of the
company for their claims. The official liquidator may call the members for
their contribution towards the liabilities and debts of the company, which
can be unlimited.
On the basis of above, it can be said that Mr. Samuel cannot directly
claim his dues against the company from Mr. Innocent, the shareholder
of the company even the company is an unlimited company.
Mr. Innocent is liable upto his share capital. His unlimited liability will
arise when official liquidator calls the members for their contribution
towards the liabilities and debts of the company at the time of winding
up of company.
(ii) A company registered under Section 8 of the Companies Act, 2013 is
prohibited from the payment of any dividends to its members.
Hence in the given case, the contention of the members to distribute
dividend from the profits earned is wrong.
Also, Section 8 company is allowed to call a general meeting by giving
14 days instead of 21 days.
(c) (i) Mode of determining existence of partnership (Section 6 of the
Indian Partnership Act, 1932): In determining whether a group of
persons is or is not a firm, or whether a person is or not a partner in a firm,
regard shall be had to the real relation between the parties, as shown by
all relevant facts taken together.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and
3. the business was carried on by all or any of them acting for all.
1. Agreement: Partnership is created by agreement and not by status
(Section 5). The relation of partnership arises from contract and not
from status; and in particular, the members of a Hindu Undivided
family carrying on a family business as such are not partners in such
business.
2. Sharing of Profit: Sharing of profit is an essential element to
constitute a partnership. But, it is only a prima facie evidence and not
conclusive evidence, in that regard. The sharing of profits or of gross
returns accruing from property by persons holding joint or common
interest in the property would not by itself make such persons
partners. Although the right to participate in profits is a strong test of
partnership, and there may be cases where, upon a simple
participation in profits, there is a partnership, yet whether the relation
does or does not exist must depend upon the whole contract between
the parties.
3. Agency: Existence of Mutual Agency which is the cardinal principle
of partnership law, is very much helpful in reaching a conclusion in
this regard. Each partner carrying on the business is the principal as
2
 well as an agent of other partners. So, the act of one partner done on
behalf of firm, binds all the partners. If the elements of mutual agency
relationship exist between the parties constituting a group formed with
a view to earn profits by running a business, a partnership may be
deemed to exist.
(ii) Personal Profit earned by Partners (Section 16 of the Indian
Partnership Act, 1932)
According to section 16, subject to contract between the partners:
(a) If a partner derives any profit for himself from any transaction of the
firm, or from the use of the property or business connection of the firm
or the firm name, he shall account for that profit and pay it to the firm;
(b) If a partner carries on any business of the same nature and competing
with that of the firm, he shall account for and pay to the firm all profits
made by him in that business.
2. (a) 1. According to section 44 of the Sale of Goods Act, 1930, when the seller
is ready and willing to deliver the goods and requests the buyer to take
delivery, and the buyer does not within a reasonable time after such
request take delivery of the goods, he is liable to the seller for any loss
occasioned by his neglect or refusal to take delivery and also for a
reasonable charge for the care and custody of the goods.
Risk of loss of goods prima facie follows the passing of property in
goods. Goods remain at the seller's risk unless the property there in is
transferred to the buyer, but after transfer of property therein to the
buyer, the goods are at the buyer's risk whether delivery has been
made or not.
In the given case, since Mr. G has already intimated Mr. H, that he
wanted to store some other goods and thus Mr. H should take the
delivery of goods kept in the godown of Mr. G, the loss of goods
damaged should be borne by Mr. H.
2. If the price of the goods would not have settled in cash and some
amount would have been pending then Mr. G will be treated as an
unpaid seller and he can enforce the following rights against the goods
as well as against the buyer personally:
(a) Where under a contract of sale, the property in the goods has passed
to the buyer and the buyer wrongfully neglects or refuses to pay for
the goods according to the terms of the contract, the seller may sue
him for the price of the goods. [Section 55(1) of the Sales of Goods
Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain
irrespective of delivery and the buyer wrongfully neglects or refuses
to pay such price, the seller may sue him for the price although the
property in the goods has not passed and the goods have not been
appropriated to the contract. [Section 55(2) of the Sales of Goods Act,
1930].

3
(b) One Person Company (OPC) [Section 2(62) of the Companies Act,
2013]: The Act defines one person company (OPC) as a company which
has only one person as a member.
Rules regarding its membership:
 Only one person as member.
 The memorandum of OPC shall indicate the name of the other person,
who shall, in the event of the subscriber’s death or his incapacity to
contract, become the member of the company.
 The other person whose name is given in the memorandum shall give
his prior written consent in prescribed form and the same shall be filed
with Registrar of companies at the time of incorporation of the
company along with its e-memorandum and e-articles.
 Such other person may be given the right to withdraw his consent.
 The member of OPC may at any time change the name of such other
person by giving notice to the company and the company shall intimate
the same to the Registrar.
 Any such change in the name of the person shall not be deemed to be
an alteration of the memorandum.
 Only a natural person who is an Indian citizen whether resident in India
or otherwise and has stayed in India for a period of not less than 120
days during the immediately preceding financial year-
➢ shall be eligible to incorporate a OPC;
➢ shall be a nominee for the sole member of a OPC.
 No person shall be eligible to incorporate more than one OPC or
become nominee in more than one such company.
 No minor shall become member or nominee of the OPC or can hold
share with beneficial interest.
OPC cannot be incorporated or converted into a company under section 8
of the Act. Though it may be converted to private or public companies in
certain cases.
(c) Distinction between LLP and Limited Liability Company: The points of
distinction between a LLP and Limited Liability Company are tabulated as
follows:
Basis LLP Limited Liability
Company
1. Regulating Act The LLP Act, 2008. The Companies Act,
2013.
2. Members/Partners The persons who The persons who invest
contribute to LLP the money in the shares
are known as are known as members
partners of the LLP. of the company.

4
 3. Internal The internal The internal governance
governance governance structure of a company
structure structure of a LLP is is regulated by statute
governed by (i.e., Companies Act,
contract agreement 2013).
between the
partners.
4. Name Name of the LLP to Name of the public
contain the word company to contain the
“Limited Liability word “limited” and Pvt.
partnership” or Co. to contain the word
“LLP” as suffix. “Private limited” as
suffix.
5. No. of members/ Minimum – 2 Private company:
partners members Minimum – 2 members
Maximum – No such Maximum 200 members
limit on the Public company:
members in the Act. Minimum – 7 members
The members of the
LLP can be Maximum – No such
individuals/or body limit on the members.
corporate through Members can be
the nominees. organizations, trusts,
another business form
or individuals.
6. Liability of Liability of the Liability of a member is
members/partners partners is limited to limited to the amount
the extent of agreed unpaid on the shares
contribution except held by them.
in case of willful
fraud.
7. Management The business of the The affairs of the
company is company are managed
managed by the by board of directors
partners including elected by the
the designated shareholders.
partners authorized
in the agreement.
8. Minimum number Minimum 2 Pvt. Co. – 2 directors
of directors/ designated Public co. – 3 directors
designated partners.
partners
3. (a) (i) Rights of outgoing partner to carry on competing business (Section
36 of the Indian Partnership Act, 1932)
(1) An outgoing partner may carry on business competing with that of
the firm and he may advertise such business, but subject to
contract to the contrary, he may not,-
5
 (a) use the firm name,
(b) represent himself as carrying on the business of the firm or
(c) solicit the custom of persons who were dealing with the firm
before he ceased to be a partner.
(2) Although this provision has imposed some restrictions on an
outgoing partner, it effectively permits him to carry on a business
competing with that of the firm. However, the partner may agree
with his partners that on his ceasing to be so, he will not carry on a
business similar to that of the firm within a specified period or within
specified local limits. Such an agreement will not be in restraint of
trade if the restraint is reasonable [Section 36 (2)]
From the above, we can infer that P & Q can start competitive
business in the name of M/S PQ & Co. after following above
conditions in the absence of any agreement.
(ii) Right of outgoing partner in certain cases to share subsequent
profits (Section 37 of the Indian Partnership Act, 1932)
According to Section 37, where any member of a firm has died or
otherwise ceased to be partner, and the surviving or continuing
partners carry on the business of the firm with the property of the firm
without any final settlement of accounts as between them and the
outgoing partner or his estate, then, in the absence of a contract to the
contrary, the outgoing partner or his estate is entitled at the option of
himself or his representatives to such share of the profits made since
he ceased to be a partner as may be attributable to the use of his share
of the property of the firm or to interest at the rate of six per cent per
annum on the amount of his share in the property of the firm.
In the instant case, P & Q can share in property of M/s PQRS & Co.
keeping in view of the above provisions.
(b) Small Company: According to Section 2(85) of the Companies Act, 2013,
Small Company means a company, other than a public company,—
(1) paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than four
crore rupees; and
(2) turnover of which as per its last profit and loss account does not exceed
two crore rupees or such higher amount as may be prescribed which
shall not be more than forty crore rupees.
Nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
(i) In the present case, MNP Private Ltd., a company registered under
the Companies Act, 2013 with a paid up share capital of ` 5 crores
and having turnover of ` 35 crore. Since only one criteria of
6
 turnover of ` 35 crores is met, but the paid up share capital exceeds
` 4 crores and the provisions require both the criteria to be met in
order to avail the status of a small company, MNP Ltd. cannot avail
the status of small company.
(ii) If the turnover of the company is ` 45 crore, then both the criteria
are not fulfilled and MNP Ltd. cannot avail the status of small
company in this case also.
(c) Definition of Fraud under Section 17 of the Indian Contract Act, 1872:
'Fraud' means and includes any of the following acts committed by a party
to a contract, or with his connivance, or by his agent, with an intent to
deceive another party thereto or his agent, or to induce him to enter into
the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not
believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of
the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
According to Section 18, there is misrepresentation:
(1) Statement of fact, which of false, would constitute misrepresentation if
the maker believes it to be true but which is not justified by the
information he possesses;
(2) When there is a breach of duty by a person without any intention to
deceive which brings an advantage to him;
(3) When a party causes, even though done innocently, the other party to
the agreement to make a mistake as to the subject matter.
Distinction between fraud and misrepresentation:
Basis of Fraud Misrepresentation
difference
Intention To deceive the other There is no such intention
party by hiding the to deceive the other party.
truth.
Knowledge of The person making the The person making the
truth suggestion believes statement believes it to be
that the statement as true, although it is not true.
untrue.
Rescission of the The injured party can The injured party is entitled
contract and repudiate the contract to repudiate the contract or
claim for and claim damages. sue for restitution but
damages cannot claim the damages.

7
 Means to The party using the Party can always plead
discover the truth fraudulent act cannot that the injured party had
secure or protect the means to discover the
himself by saying that truth.
the injured party had
means to discover the
truth.

4. (a) 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 there by 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 lakh (i.e. ` 12.75 minus ` 11.50 =
` 1.25 lakh) 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.
(b) Inchoate Instrument: It means an instrument that is incomplete in certain
respects. The drawer/ maker/ acceptor/ indorser of a negotiable instrument
may sign and deliver the instrument to another person in his capacity
leaving the instrument, either wholly blank or having written on it the word
incomplete. Such an instrument is called an inchoate instrument and this
gives the power to its holder to make it complete by writing any amount
either within limits specified therein or within the limits specified by the
stamp’s affixed on it. The principle of this rule of an inchoate instrument is
based on the principle of estoppel.
Ambiguous Instrument: According to Section 17 of the Negotiable
Instruments Act, 1881, where an instrument may be construed either as a
promissory note or bill of exchange, the holder may at his election treat it
as either, and the instrument shall be thenceforward treated accordingly.
Thus, an instrument which is vague and cannot be clearly identified either
as a bill of exchange, or as a promissory note, is an ambiguous instrument.
In other words, such an instrument may be construed either as a
8
 promissory note, or as a bill of exchange. Section 17 provides that the
holder may, at his discretion, treat it as either and the instrument shall
thereafter be treated accordingly.
(c) (i) Supreme Court
The Supreme Court is the apex body of the judiciary. It was established
on 26th January 1950. The Chief Justice of India is the highest authority
appointed under Article 126. The principal bench of the Supreme Court
consists of seven members including the Chief Justice of India.
Presently, the number has increased to 34 including the Chief Justice
of India due to the rise in the number of cases and workload. An
individual can seek relief in the Supreme Court by filing a writ petition
under Article 32.
(ii) High Court
The highest court of appeal in each state and union territory is the High
Court. Article 214 of the Indian Constitution states that there must be a
High Court in each state. The High Court has appellant, original
jurisdiction, and Supervisory jurisdiction. However, Article 227 of the
Indian Constitution limits a High Court’s supervisory power. In India,
there are twenty-five High Courts, one for each state and union
territory, and one for each state and union territory. Six states share a
single High Court. An individual can seek remedies against violation of
fundamental rights in High Court by filing a writ under Article 226.
5. (a) (i) Right of stoppage of goods in transit: The problem is based on section
50 of the Sale of Goods Act,1930 dealing with the right of stoppage of the
goods in transit available to an unpaid seller. The section states that the
right is exercisable by the seller only if the following conditions are fulfilled.
(A) The seller must be unpaid
(B) He must have parted with the possession of goods
(C) The goods must be in transit
(D) The buyer must have become insolvent
(E) The right is subject to the provisions of the Act.
Applying the provisions to the given case, Ram being still unpaid, can
stop the 100 bales of cloth sent by railway as these goods are still in
transit.
(ii) (A) A wholesaler of cotton has 100 bales in his godown. So, the goods
are existing goods. He agrees to sell 50 bales and these bales were
selected and set aside. On selection, the goods become ascertained.
In this case, the contract is for the sale of ascertained goods, as the
cotton bales to be sold are identified and agreed after the formation
of the contract.
(B) If A agrees to sell to B one packet of sugar out of the lot of one
hundred packets lying in his shop, it is a sale of existing but
unascertained goods because it is not known which packet is to be
delivered.

9
 (C) T agrees to sell to S all the apples which will be produced in his garden
this year. It is a contract of sale of future goods, amounting to 'an
agreement to sell.'
(b) DISSOLUTION BY THE COURT (SECTION 44): Court may, at the suit of
the partner, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has
become of unsound mind, the court may dissolve the firm on a suit of
the other partners or by the next friend of the insane partner. Temporary
sickness is no ground for dissolution of firm.
(b) Permanent incapacity: When a partner, other than the partner suing,
has become in any way permanently incapable of performing his duties
as partner, then the court may dissolve the firm. Such permanent
incapacity may result from physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty of
conduct which is likely to affect prejudicially the carrying on of business,
the court may order for dissolution of the firm, by giving regard to the
nature of business. It is not necessary that misconduct must relate to
the conduct of the business. The important point is the adverse effect
of misconduct on the business. In each case nature of business will
decide whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the
partner suing, wilfully or persistently commits breach of agreements
relating to the management of the affairs of the firm or the conduct of
its business, or otherwise so conduct himself in matters relating to the
business that it is not reasonably practicable for other partners to carry
on the business in partnership with him, then the court may dissolve
the firm at the instance of any of the partners. Following comes in to
category of breach of contract:
• Embezzlement,
• Keeping erroneous accounts
• Holding more cash than allowed
• Refusal to show accounts despite repeated request etc.
(e) Transfer of interest: Where a partner other than the partner suing, has
transferred the whole of his interest in the firm to a third party or has
allowed his share to be charged or sold by the court, in the recovery of
arrears of land revenue, the court may dissolve the firm at the instance
of any other partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot
be carried on except at a loss in future also, the court may order for its
dissolution.
(g) Just and equitable grounds: Where the court considers any other
ground to be just and equitable for the dissolution of the firm, it may
dissolve a firm. The following are the cases for the just and equitable
grounds-

10
 (i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.
(c) (i) According to section 202 of the Indian Contract Act, 1872, where the agent
has himself an interest in the property which forms the subject matter of
the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.
In other words, when the agent is personally interested in the subject
matter of agency, the agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay
himself, out of the proceeds, the debts due to him from A.
As per the facts of the question and provision of law, A cannot revoke
this authority, nor it can be terminated by his insanity.
(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub-
agent” is a person employed by, and acting under the control of, the
original agent in the business of the agency.
Section 210 provides that, the termination of the authority of an agent
causes the termination (subject to the rules regarding the termination
of an agent’s authority) of the authority of all sub-agents appointed by
him.
In the given question, B is the agent of A, and C is the agent of B.
Hence, C becomes a sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination
of authority of sub-agent appointed by B i.e. C (sub-agent).
6. (a) (i) Section 64 of the Negotiable Instruments Act, 1881 provides, Promissory
notes, bill of exchange and cheques must be presented for payment to
the maker, acceptor or drawee thereof respectively, by or on behalf of the
holder as hereinafter provided. In default of such presentment, the other
parties thereto are not liable thereon to such holder. However, where a
promissory note is payable on demand and is not payable at a specified
place, no presentment is necessary in order to charge the maker thereof.
In the instant case, Advik issued a promissory note to Bhanu payable
on demand without mentioning any specific place for payment. On
maturity, the promissory note was not presented by Bhanu for payment.
On the basis of the above provisions and facts of the case, although
non-presentment of promissory note for payment results in discharge
of maker from liability but the given case is covered under the exception
to section 64. Hence, Advik would not be discharged from liability even
the non-presentment by Bhanu as the promissory note was payable on
demand and no specific place for payment was mentioned.
(ii) Section 138 of the Negotiable Instruments Act, 1881 provides where
any cheque drawn by a person for the discharge, in whole or in part, of
any debt or other liability, is returned by the bank unpaid due to
11
 insufficiency of fund, the drawer is punishable with imprisonment upto
2 years or fine upto 2 times the amount of cheque or Both. In other
words, the liability under section 138 arises only if the drawer had
issued the cheque to discharge a legally enforceable debt or other
liability. Thus, where the drawer issues a cheque as a gift or charity, he
is not liable under section 138 even if cheque is dishonoured.
In the instant case, Shiva gifted a cheque of Rs. 21,000 to his sister.
Afterwards, Shiva informed his sister not to present the cheque for
payment and also informed the bank to stop the payment.
On the basis of above, as the cheque was given as gift, provisions of
section 138 will not be applicable on Shiva.
(b) Quantum Meruit: Where one person has rendered service to another in
circumstances which indicate an understanding between them that it is to
be paid for although no particular remuneration has been fixed, the law will
infer a promise to pay. Quantum Meruit i.e. as much as the party doing the
service has deserved. It covers a case where the party injured by the
breach had at the time of breach done part but not all of the work which he
is bound to do under the contract and seeks to be compensated for the
value of the work done. For the application of this doctrine, two conditions
must be fulfilled:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the
party or person for value of work which he has done. Damages are
compensatory in nature while quantum meruit is restitutory. It is but
reasonable compensation awarded on implication of a contract to
remunerate.
The claim for quantum meruit arises in the following cases:
(a) When an agreement is discovered to be void or when a contract
becomes void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but
there is no agreement as to remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed
the benefit of part performance.
(f) When an indivisible contract for a lump sum is completely performed
but badly the person who has performed the contract can claim the
lump sum, but the other party can make a deduction for bad work.
(c) The doctrine of Caveat Emptor given under the Sale of Goods Act, 1930 is
subject to the following exceptions:
1. Fitness as to quality or use: Where the buyer makes known to the
seller the particular purpose for which the goods are required, it is the

12
 duty of the seller to supply such goods as are reasonably fit for that
purpose [Section 16 (1)].
2. Goods purchased under patent or brand name: In case where the
goods are purchased under its patent name or brand name, there is
no implied condition that the goods shall be fit for any particular purpose
[Section 16(1)].
3. Goods sold by description: Where the goods are sold by description
there is an implied condition that the goods shall correspond with the
description [Section 15]. If it is not so, then seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by
description from a seller who deals in goods of that description there
is an implied condition that the goods shall be of merchantable quality.
The rule of Caveat Emptor is not applicable. [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of
Caveat Emptor does not apply if the bulk does not correspond with the
sample [Section 17].
6. Goods by sample as well as description: Where the goods are
bought by sample as well as description, the rule of Caveat Emptor is
not applicable in case the goods do not correspond with both the
sample and description or either of the condition [Section 15].
7. Trade Usage: An implied warranty or condition as to quality or fitness
for a particular purpose may be annexed by the usage of trade and if the
seller deviates from that, this rule of Caveat Emptor is not applicable
[Section 16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the
seller sells the goods by making some misrepresentation or fraud and
the buyer relies on it or when the seller actively conceals some defect
in the goods so that the same could not be discovered by the buyer on
a reasonable examination, then the rule of Caveat Emptor will not apply.

13
 Mock Test Paper - Series I: April, 2024
Date of Paper: 30th April, 2024
Time of Paper: 2 P.M. to 5 P.M.

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions should be made and disclosed
by way of note forming part of the answer.
Working Notes should form part of the answer.
(Time allowed: 3 Hours) (100 Marks)

1. (a) Kashish was running a business of artificial jewellery since long. He sold
his business to Naman and promises, not to carry on the business of
artificial jewellery and real diamond jewellery in that area for a period of
next one year. After two months, Kashish opened a show room for real
diamond jewellery. Naman filed a suit against Kashish for closing the
business of real diamond jewellery business as it was against the
agreement. Whether Kashish is liable to close his business of real diamond
jewellery following the provisions of Indian Contract Act, 1872? (7 Marks)
(b) The paid-up capital of Darshan Photographs Private Limited is ` 1 Crores
in the form of 50,000 Equity Shares of ` 100 each and 50,000 Preference
Shares (not carrying any voting rights) of ` 100 each. Shadow Evening
Private Limited is holding 25,000 Equity Shares in Darshan Photographs
Private Limited. State with reason,
(a) Whether Darshan Photographs Private Limited is subsidiary of
Shadow Evening Private Limited?
(b) Whether your answer would be different in case Shadow Evening
Private Limited is holding 25,000 Equity Shares and 5,000
Preference Shares in Darshan Photographs Private Limited?
(7 Marks)
(c) Define partnership and name the essential elements for the existence of
a partnership as per the Indian Partnership Act, 1932. (3+3 = 6 Marks)
2. (a) Kapil entered in a contract with Rahul to purchase 1000 litres of mustard oil
at the price which should be fixed by Akhilesh. Rahul already delivered 600
litres out of 1000 litres to Kapil but when remaining 400 litres was ready to
deliver, Akhilesh denied fixing the price of mustard oil. Rahul asked Kapil
to return the oil already delivered and avoid the delivery of 400 litres. Kapil
sued Rahul for non-delivery of remaining 400 litres mustard oil. Advise in
the light of the Sale of Goods Act, 1930. (7 Marks)

1
 (b) Explain the 'Doctrine of ultra vires’ under the Companies Act, 2013. What
are the consequences of 'ultra vires' acts of the company? (7 Marks)
(c) “LLP is an alternative corporate business form that gives the benefits of
limited liability of a company and the flexibility of a partnership”. Explain.
(6 Marks)
3. (a) A and B are partners in M/s Aee Bee & Company. Firm is doing business
of trading of plastic bottles. A is authorised to sell the stock of plastic bottles.
It was decided between them that A should sell the plastic bottles at the
minimum price which they have decided and if A sells at a price less than
minimum price, he should first take the permission of B. Due to sudden
change in government policy, the price of plastic bottles were continuously
declining. To save the loss of firm, A sold the stock at lower price.
Meanwhile, A tried to contact B but could not do so as B was on foreign
trip. Afterwards when B came, he filed the suit to recover the difference of
sale price and minimum price to the firm. Whether B can do so under the
provisions of Indian Partnership Act, 1932? (7 Marks)
(b) (i) Tycoon Private Limited is the holding company of Glassware Private
Limited. As per the last profit and loss account for the year ending
31st March, 2023 of Glassware Private Limited, its turnover was ` 1.80
crore and paid up share capital was ` 80 lakh. The Board of Directors
wants to avail the status of a small company. The Company Secretary
of the company advised the directors that Glassware Private Limited
cannot be categorized as a small company. In the light of the above
facts and in accordance with the provisions of the Companies Act,
2013, you are required to examine whether the contention of
Company Secretary is correct, explaining the relevant provisions of
the Act. (4 Marks)
(ii) In the Flower Fans Private Limited, there are only 5 members. All
of them go in a boat on a pleasure trip into an open sea. The boat
capsizes and all of them died being drowned. Explain with
reference to the provisions of Companies Act, 2013:
(A) Is Flower Fans Private Limited no longer in existence?
(B) Further is it correct to say that a company being an artificial
person cannot own property and cannot sue or be sued?
(3 Marks)
(c) “An anticipatory breach of contract is a breach of contract occurring
before the time fixed for performance has arrived”. Discuss stating also
the effect of anticipatory breach on contracts. (6 Marks)
4. (a) (i) Nitesh Gupta is constructing his house. For this purpose, he entered
in a contract with M/s Baba Brick House to supply of 10,000 bricks on
12th August 2023. M/s Baba Brick House has two Lorries of 5,000
2
 brick capacity. On 12th August 2023, one of the Lorries was not in
working condition so M/s Baba Brick House supplied only 5,000 bricks
and promised Nitesh Gupta to supply rest 5,000 bricks on next day.
Nitesh Gupta wants to cancel the contract, as M/s Baba Brick House
did not supply the bricks as per the contract. M/s Baba Brick House
gave the plea that no fault has been made from its part, hence
contract should not be cancelled. In this situation, whether Nitesh
Gupta can avoid the contract under Indian Contract Act, 1872?
(4 Marks)
(ii) Rahul, a transporter was entrusted with the duty of transporting
tomatoes from a rural farm to a city by Aswin. Due to heavy rains,
Rahul was stranded for more than two days. Rahul sold the
tomatoes below the market rate in the nearby market where he was
stranded fearing that the tomatoes may perish. Can Aswin recover
the loss from Rahul on the ground that Rahul had acted beyond his
authority taking into account the provisions of the Indian Contract
Act, 1872? (3 Marks)
(b) What are Negotiable Instruments? Explain its essential characteristics
under the Negotiable Instruments Act, 1881. (7 Marks)
(c) Explain in brief the various types of laws in the Indian Legal System.
(6 Marks)
5. (a) (i) A agrees to sell certain goods to B on a certain date on 10 days credit.
The period of 10 days expired and goods were still in the possession
of A. B has also not paid the price of the goods. B becomes insolvent.
A refuses to deliver the goods to exercise his right of lien on the
goods. Can he do so under the Sale of Goods Act, 1930? (4 Marks)
(ii) AB sold 500 bags of wheat to CD. Each bag contains 50 Kilograms
of wheat. AB sent 450 bags by road transport and CD himself took
remaining 50 bags. Before CD receives delivery of 450 bags sent
by road transport, he becomes bankrupt. AB being still unpaid,
stops the bags in transit. The official receiver, on CD's insolvency
claims the bags. Decide the case with reference to the provisions
of the Sale of Goods Act, 1930. (3 Marks)
(b) (i) When the continuing guarantee can be revoked under the Indian
Partnership Act, 1932? (4 Marks)
(ii) What do you mean by Goodwill as per the provisions of Indian
Partnership Act, 1932? (3 Marks)
(c) Explain any five circumstances under which contracts need not be
performed with the consent of both the parties. (6 Marks)

3
6. (a) Priyansh purchased some goods from Sumit. He issued a cheque to Sumit
for the sale price on 14th June, 2023. Sumit presented the cheque in his
bank and his bank informed him on 19 th June, 2023 that cheque was
returned unpaid due to insufficiency of funds in the account of Priyansh.
Sumit sued against Priyansh under section 138 of the Negotiable
Instruments Act, 1881. State with reasons, whether this suit is
maintainable? (7 Marks)
(b) State the essential elements of a contract of bailment. (6 Marks)
(c) State the various essential elements involved in the sale of
unascertained goods and its appropriation as per the Sale of Goods Act,
1930. (7 Marks)

4
 Mock Test Paper - Series I: April, 2024
Date of Paper: 30th April, 2024
Time of Paper: 2 P.M. to 5 P.M.

FOUNDATION COURSE
PAPER 2: BUSINESS LAWS
ANSWERS
1. (a) According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade
or business of any kind, is to that extent void. But this rule is subject to
the following exceptions, namely, where a person sells the goodwill of a
business and agrees with the buyer to refrain from carrying on a similar
business, within specified local limits, so long as the buyer or his
successor in interest carries on a like business therein, such an
agreement is valid. The local limits within which the seller of the goodwill
agrees not to carry on similar business must be reasonable.
In the instant case, Kashish sold his running business of artificial
jewellery to Naman and promises, not to carry on the business of artificial
jewellery and real diamond jewellery in that area and for a period of next
one year but just after two months, Kashish opened a show room of real
diamond jewellery. Naman sued Kashish for closing the business of real
diamond business as it was against the agreement.
As exceptions to section 27 is applicable to similar business only,
agreement between Naman and Kashish will not be applicable on
business of real diamond jewellery. Hence, Kashish can continue his
business of real diamond jewellery.
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section —
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
1
 In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
(a) On the basis of provisions of Section 2(87) and facts of the
given problem, Shadow Evening Private Limited is holding
one – half of total equity paid up share capital of Darshan
Photographs Private Limited. Therefore, Darshan
Photographs Private Limited cannot be considered as
subsidiary company of Shadow Evening Private Limited as for
being subsidiary company other company should control more
than one – half of the total voting power.
(b) Answer would remain same even if Shadow Evening Private
Limited is also holding 5,000 preference shares as they do not
have voting rights.
(c) Definition of Partnership: 'Partnership' is the relation between persons
who have agreed to share the profits of a business carried on by all or
any of them acting for all. (Section 4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Profits
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons: Partnership is an
association of 2 or more persons. Again, only persons recognized
by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot
be a partner. Again, a minor cannot be a partner in a firm, but with
the consent of all the partners, may be admitted to the benefits of
partnership.
2. Agreement: It may be observed that partnership must be the result
of an agreement between two or more persons. There must be an
agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the
nature of the partnership is voluntary and contractual. An
agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and
2
 from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose,
the term 'business' includes every trade, occupation and
profession. The existence of business is essential. Secondly, the
motive of the business is the "acquisition of gains" which leads to
the formation of partnership. Therefore, there can be no partnership
where there is no intention to carry on the business and to share
the profit thereof.
4. Agreement to share profits: The sharing of profits is an essential
feature of partnership. There can be no partnership where only one
of the partners is entitled to the whole of the profits of the business.
Partners must agree to share the profits in any manner they
choose. But an agreement to share losses is not an essential
element. It is open to one or more partners to agree to share all the
losses. However, in the event of losses, unless agreed otherwise,
these must be borne in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The
business must be carried on by all the partners or by anyone or
more of the partners acting for all. This is the cardinal principle of
the partnership Law. In other words, there should be a binding
contract of mutual agency between the partners. An act of one
partner in the course of the business of the firm is in fact an act of
all partners. Each partner carrying on the business is the principal
as well as the agent for all the other partners. He is an agent in so
far as he can bind the other partners by his acts and he is a principal
to the extent that he is bound by the act of other partners. It may
be noted that the true test of partnership is mutual agency rather
than sharing of profits. If the element of mutual agency is absent,
then there will be no partnership.
2. (a) By virtue of Section 9 of the Sale of Goods Act, 1930, the price in the
contract of sale may be fixed by the contract, or agreed to be fixed in a
manner provided by the contract, e.g., by a valuer, or determined by the
course of dealings between the parties.
Further, section 10 provides for the determination of price by a third party
in the following manner:
(a) Where there is an agreement to sell goods on the terms that price
has to be fixed by the third party and he either does not or cannot
make such valuation, the agreement will be void.
(b) In case the third party is prevented by the default of either party
from fixing the price, the party at fault will be liable to the damages
to the other party who is not at fault.
(c) However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.

3
 In the instant case, Kapil contracted Rahul to purchase 1000 litres of
mustard oil at the price fixed by Akhilesh. After, Rahul delivered 600 litres
Akhilesh denied fixing the price of mustard oil. Rahul demanded back
the oil already delivered and cancel the delivery of 400 litres. Kapil sued
Rahul for non-delivery of remaining 400 litres mustard oil.
On the basis of above provisions and facts, Kapil is liable to pay a
reasonable price of 600 litres while for remaining 400 litres, contract may
be avoided.
(b) Doctrine of ultra vires:
The meaning of the term ultra vires is simply “beyond (their) powers”.
The legal phrase “ultra vires” is applicable only to acts done in excess of
the legal powers of the doers. This presupposes that the powers in their
nature are limited. To an ordinary citizen, the law permits whatever does
the law not expressly forbid. It is a fundamental rule of Company Law
that the objects of a company as stated in its memorandum can be
departed from only to the extent permitted by the Act, thus far and no
further [Ashbury Railway Company Ltd. vs. Riche].
In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the
company is wholly void and inoperative in law and is therefore not
binding on the company. On this account, a company can be restrained
from employing its fund for purposes other than those sanctioned by the
memorandum. Likewise, it can be restrained from carrying on a trade
different from the one it is authorised to carry on.
Consequences of ‘ultra vires’ acts of the company:
The impact of the doctrine of ultra vires is that a company can neither be
sued on an ultra vires transaction, nor can it sue on it. Since the
memorandum is a “public document”, it is open to public inspection.
Therefore, when one deals with a company one is deemed to know about
the powers of the company. If in spite of this one enters into a transaction
which is ultra vires the company, he/she cannot enforce it against the
company.
An act which is ultra vires the company being void, cannot be ratified by
the shareholders of the company.
However, some ultra vires act can be regularised by ratifying them
subsequently. For instance, if the act is ultra vires the power of the
directors, the shareholders can ratify it; if it is ultra vires the articles of
the company, the company can alter the articles; if the act is within the
power of the company but is done irregularly, shareholders can validate
such acts.

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 (c) LLP is an alternative corporate business form that gives the
benefits of limited liability of a company and the flexibility of a
partnership
Limited Liability: Every partner of a LLP is, for the purpose of the
business of LLP, the agent of the LLP, but not of other partners. The
liability of the partners will be limited to their agreed contribution in the
LLP, while the LLP itself will be liable for the full extent of its assets.
Flexibility of a partnership: The LLP allows its members the flexibility
of organizing their internal structure as a partnership based on a mutually
arrived agreement. The LLP form enables entrepreneurs, professionals
and enterprises providing services of any kind or engaged in scientific
and technical disciplines, to form commercially efficient vehicles suited
to their requirements. Owing to flexibility in its structure and operation,
the LLP is a suitable vehicle for small enterprises and for investment by
venture capital.
3. (a) According to Section 13(e) of Indian Partnership Act, 1932, every partner
has the right to be indemnified by the firm in respect of payments made
and liabilities incurred by him in the ordinary and proper conduct of the
business of the firm as well as in the performance of an act in an
emergency for protecting the firm from any loss, if the payments, liability
and act are such as a prudent man would make, incur or perform in his
own case, under similar circumstances.
In the instant case, M/s Aee Bee & Company is doing business of trading
of plastic bottles. A and B, partners of the firm, authorised A to sell the
stock of plastic bottles on the condition to sale at the minimum price. In
case A has to sell at a price less than minimum price, he should first take
the permission of B. Due to some emergency, A sold the stock at lower
price to save the firm from loss.
On the basis of above provisions and facts of the problem given, selling
by A at a lower price was to save the firm from loss. As the act of A was
in favour of firm, he was not liable to bear the loss.
(b) (i) As per section 2(85) of the Companies Act, 2013, Small Company
means a company, other than a public company:
(i) paid-up share capital of which does not exceed four crore
rupees, and
(ii) turnover of which as per profit and loss account for the
immediately preceding financial year does not exceed forty
crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.

5
 In the instant case, as per the last profit and loss account for the
year ending 31st March, 2023 of Glassware Private Limited, its
turnover was to the extent of ` 1.80 crore, and paid-up share capital
was ` 80 lakh. Though Glassware Private Limited, as per the
turnover and paid-up share capital norms, qualifies for the status of
a ‘small company’ but it cannot be categorized as a ‘small company’
because it is the subsidiary of another company (Tycoon Private
Limited).
Hence, the contention of the Company Secretary is correct.
(ii) (A) Perpetual Succession – A company on incorporation
becomes a separate legal entity. It is an artificial legal person
and have perpetual succession which means even if all the
members of a company die, the company still continues to
exist. It has permanent existence.
The existence of a company is independent of the lives of its
members. It has a perpetual succession. In this problem, the
company will continue as a legal entity. The company's
existence is in no way affected by the death of all its members.
(B) The statement given is incorrect. A company is an artificial
person as it is created by a process other than natural birth. It
is legal or judicial as it is created by law. It is a person since it
is clothed with all the rights of an individual. Further, the
company being a separate legal entity can own property, have
banking account, raise loans, incur liabilities and enter into
contracts. Even members can contract with company, acquire
right against it or incur liability to it. It can sue and be sued in
its own name. It can do everything which any natural person
can do except be sent to jail, take an oath, marry or practice a
learned profession. Hence, it is a legal person in its own
sense.
(c) An anticipatory breach of contract is a breach of contract occurring
before the time fixed for performance has arrived. When the promisor
refuses altogether to perform his promise and signifies his unwillingness
even before the time for performance has arrived, it is called Anticipatory
Breach. The law in this regard has very well summed up in Frost v.
Knight and Hochster v. DelaTour.
Section 39 of the Indian Contract Act, 1872 deals with anticipatory
breach of contract and provides as follows: “When a party to a contract
has refused to perform or disable himself from performing, his promise
in its entirety, the promisee may put an end to the contract, unless he
has signified, but words or conduct, his acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from
performance or from further performance. Further he gets an option:

6
 (1) To either treat the contract as “rescinded and sue the other party
for damages from breach of contract immediately without waiting
until the due date of performance; or
(2) He may elect not to rescind but to treat the contract as still
operative, and wait for the time of performance and then hold the
other party responsible for the consequences of non-performance.
But in this case, he will keep the contract alive for the benefit of the
other party as well as his own, and the guilty party, if he so decides
on re-consideration, may still perform his part of the contract and
can also take advantage of any supervening impossibility which
may have the effect of discharging the contract.
4. (a) (i) “Performance of Contract” means fulfilment of obligations to the
contract. According to Section 37 of Indian Contract Act, 1872, the
parties to a contract must either perform, or offer to perform, their
respective promises unless such performance is dispensed with or
excused under the provisions of the Contract Act or of any other
law. Further, the performance should be for whole obligations. Part
delivery cannot be considered as valid performance.
In the instant case, Nitesh Gupta contracted with M/s Baba Brick
House to supply of 10,000 bricks on 12th August 2023. M/s Baba
Brick House had only two Lorries of 5,000 brick capacity. But on
the agreed date one lorry was not in working condition so only
5,000 bricks were supplied on 12 th August 2023 and promised to
supply rest 5,000 bricks on next day.
After taking into account the above provisions and facts, Plea of
M/s Baba Brick House cannot be considered. Performance should
be for whole obligation. Hence, part performance by M/s Baba Brick
House cannot be taken as valid performance. Nitesh Gupta is right
in avoiding the contract.
(ii) Agent's authority in an emergency (Section 189 of the Indian
Contract Act, 1872): An agent has authority, in an emergency, to
do all such acts for the purpose of protecting his principal from loss
as would be done by a person of ordinary prudence, in his own
case, under similar circumstances.
In the instant case, Rahul, the agent, was handling perishable
goods like ‘tomatoes’ and can decide the time, date and place of
sale, not necessarily as per instructions of the Aswin, the principal,
with the intention of protecting Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence,
so Aswin will not succeed against him for recovering the loss.
(b) Meaning of Negotiable Instruments: Negotiable Instruments is an
instrument (the word instrument means a document) which is freely
transferable (by customs of trade) from one person to another by mere
delivery or by indorsement and delivery. The property in such an
instrument passes to a bonafide transferee for value.
7
 The Act does not define the term ‘Negotiable Instruments’. However,
Section 13 of the Act provides for only three kinds of negotiable
instruments namely bills of exchange, promissory notes and cheques,
payable either to order or bearer.
Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise
or order to pay money. The promise or order to pay must consist of
money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument
does not create liability.
(c) The laws in the Indian legal system could be broadly classified as
follows:
Criminal Law: Criminal law is concerned with laws pertaining to
violations of the rule of law or public wrongs and punishment of the same.
Criminal Law is governed under the Indian Penal Code, 1860, and the
Code of Criminal Procedure, 1973 (Crpc). The Indian Penal Code, 1860,
defines the crime, its nature, and punishments whereas the Criminal
Procedure Code, 1973, defines exhaustive procedure for executing the
punishments of the crimes. Murder, rape, theft, fraud, cheating and
assault are some examples of criminal offences under the law.
Civil Law: Matters of disputes between individuals or organisations are
dealt with under Civil Law. Civil courts enforce the violation of certain
rights and obligations through the institution of a civil suit. Civil law
primarily focuses on dispute resolution rather than punishment. The act
of process and the administration of civil law are governed by the Code
of Civil Procedure, 1908 (CPC). Civil law can be further classified into
Law of Contract, Family Law, Property Law, and Law of Tort. Some
examples of civil offences are breach of contract, non-delivery of goods,
non-payment of dues to lender or seller defamation, breach of contract,
and disputes between landlord and tenant.
Common Law: A judicial precedent or a case law is common law. A
judgment delivered by the Supreme Court will be binding upon the courts
within the territory of India under Article 141 of the Indian Constitution.
The doctrine of Stare Decisis is the principle supporting common law. It
is a Latin phrase that means “to stand by that which is decided.” The
doctrine of Stare Decisis reinforces the obligation of courts to follow the
same principle or judgement established by previous decisions while
8
 ruling a case where the facts are similar or “on all four legs” with the
earlier decision.
Principles of Natural Justice: Natural justice, often known as Jus
Natural deals with certain fundamental principles of justice going beyond
written law. Nemo judex in causa sua (Literally meaning “No one should
be made a judge in his own cause, and it’s a Rule against Prejudice),
audi alteram partem (Literally meaning “hear the other party or give the
other party a fair hearing), and reasoned decision are the rules of Natural
Justice. A judgement can override or alter a common law, but it cannot
override or change the statute.
5. (a) (i) Lien is the right of a person to retain possession of the goods
belonging to another until claim of the person in possession is
satisfied. The unpaid seller has also right of lien over the goods for
the price of the goods sold.
Section 47(1) of the Sale of Goods Act, 1930 provides that the
unpaid seller who is in the possession of the goods is entitled to
exercise right of lien in the following cases:-
1. Where the goods have been sold without any stipulation as to
credit
2. Where the goods have been sold on credit but the term of
credit has expired
3. Where the buyer has become insolvent even though the
period of credit has not yet expired.
In the given case, A has agreed to sell certain goods to B on a
credit of 10 days. The period of 10 days has expired. B has neither
paid the price of goods nor taken the possession of the goods. That
means the goods are still physically in the possession of A, the
seller. In the meantime, B, the buyer has become insolvent.
In this case, A is entitled to exercise the right of lien on the goods
because the buyer has become insolvent and the term of credit has
expired without any payment of price by the buyer.
(ii) Right of stoppage in transit (Section 50 of the Sale of Goods
Act, 1930): Subject to the provisions of this Act, when the buyer of
goods becomes insolvent, the unpaid seller who has parted with
the possession of the goods has the right of stopping them in
transit, that is to say, he may resume possession of the goods as
long as they are in the course of transit, and may retain them until
paid or tendered price of the goods.
When the unpaid seller has parted with the goods to a carrier and
the buyer has become insolvent, he can exercise this right of asking
the carrier to return the goods back, or not to deliver the goods to
the buyer.
In the instant case, CD, the buyer becomes insolvent and 450 bags
are in transit. AB, the seller, can stop the goods in transit by giving
9
 a notice of it to CD. The official receiver, on CD’s insolvency cannot
claim the bags.
(b) (i) Revocation of continuing guarantee (Section 38 of the Indian
Partnership Act, 1932): According to section 38, a continuing
guarantee given to a firm or to third party in respect of the
transaction of a firm is, in the absence of an agreement to the
contrary, revoked as to future transactions from the date of any
change in the constitution of the firm. Such change may occur by
the death, or retirement of a partner, or by introduction of a new
partner.
(ii) Goodwill: The term “Goodwill” has not been defined under the
Indian Partnership Act, 1932. Section 14 of the Act lays down that
goodwill of a business is to be regarded as a property of the firm.
Goodwill may be defined as the value of the reputation of a
business house in respect of profits expected in future over and
above the normal level of profits earned by undertaking belonging
to the same class of business.
(c) Under following circumstances, the contracts need not be performed
with the consent of both the parties:
(i) Novation: Where the parties to a contract substitute a new contract
for the old it is called novation. A contract in existence may be
substituted by a new contract either between the same parties or
between different parties the consideration mutually being the
discharge of old contract. Novation can take place only by mutual
agreement between the parties. On novation, the old contract is
discharged and consequently it need not be performed. (Section 62
of the Indian Contract Act, 1872)
(ii) Rescission: A contract is also discharged by recission. When the
parties to a contract agree to rescind it, the contract need not be
performed. (Section 62)
(iii) Alteration: Where the parties to a contract agree to alter it, the
original contract is rescinded, with the result that it need not be
performed. In other words, a contract is also discharged by
alteration. (Section 62)
(iv) Remission: Every promisee may dispense with or remit, wholly or
in part, the performance of the promise made to him, or may extend
the time for such performance or may accept instead of it any
satisfaction which he thinks fit. In other words, a contract is
discharged by remission. (Section 63)
(v) Rescinds voidable contract: When a person at whose option a
contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is the promisor.
(vi) Neglect of promisee: If any promisee neglects or refuses to afford
the promisor reasonable facilities for the performance of his
10
 promise, the promisor is excused by such neglect or refusal as to
any non-performance caused thereby. (Section 67)
6. (a) By virtue of provisions of Section 138 of the Negotiable Instruments Act,
1881, where cheque was issued by a person to discharge a legally
enforceable debt was dishonoured by bank due to insufficiency of funds,
such person shall be deemed to have committed an offence and shall,
without prejudice to any other provision of this Act, be punished with
imprisonment for a term which may extend to two years or with fine which
may extend to twice the amount of the cheque, or with both.
However,
(a) the cheque has been presented to the bank within three months or
validity period of the cheque, whichever is earlier;
(b) the holder makes a demand for the payment of the said amount of
money by giving a notice in writing, to the drawer of the cheque
within 30 days of the receipt of information from the bank regarding
the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said
amount of money within fifteen days of the receipt of the said
notice.
In the instant case, Priyansh issued a cheque to Sumit for payment of
the price of goods purchased from him. When Sumit presented the
cheque in bank, it was returned unpaid due to insufficiency of funds in
the account of Priyansh. Sumit sued against Priyansh under section 138
of the Negotiable Instruments Act, 1881.
For filing the suit under section 138, Sumit should have to make a
demand of payment by giving a notice in writing to Priyansh upto 18 th
July, 2023. In case, Priyansh failed in making the payment within fifteen
days of the receipt of the said notice, Sumit could sue under section 138.
(b) Essential elements of a contract of bailment: Section 148 of the
Indian Contract Act, 1872 defines the term ‘Bailment’. A ‘bailment’ is the
delivery of goods by one person to another for some purpose upon a
contract that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person
delivering them. The essential elements of the contract of the bailment
are:
(i) Delivery of goods—The essence of bailment is delivery of goods by
one person to another.
(ii) Bailment is a contract—In bailment, the delivery of goods is upon a
contract that when the purpose is accomplished, the goods shall be
returned to the bailor.
(iii) Return of goods in specific—The goods are delivered for some
purpose and it is agreed that the specific goods shall be returned.

11
 (iv) Ownership of goods—In a bailment, it is only the possession of
goods which is transferred, and the bailor continues to be the owner
of the goods.
(v) Property must be movable—Bailment is only for movable goods
and never for immovable goods or money.
(c) Sale of unascertained goods and Appropriation (Section 23 of the
Sale of Goods Act, 1930): Appropriation of goods involves selection of
goods with the intention of using them in performance of the contract and
with the mutual consent of the seller and the buyer.
The essentials are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in
the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally appropriated to the contract
either by delivery to the buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.

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