MOCK TEST- 2 ANSWERS

CA-FOUNDATION
ANSWER OF QUESTION 1 (A)
(i) The given agreement is void.
Reason: As per Section 28 of the Indian Contract Act, 1872, this clause is in restraint of
legal proceedings because it restricts both the parties from enforcing their legal rights.
Note: Alternatively, as per Section 23 of the Indian Contract Act, 1872, this clause in
the agreement defeats the provision of law and therefore, being unlawful, is treated
as void.
(ii) The given agreement is valid.
Reason: An agreement in restraint of legal proceeding is the one by which any party
thereto is restricted absolutely from enforcing his rights under a contract through a
Court. A contract of this nature is void. However, in the given statement, no absolute
restriction is marked on parties on filing of suit. As per the agreement suit may be filed in
one of the courts having jurisdiction.
(iii) The said agreement is void.
Reason: This agreement is void as the two parties are thinking about different subject
matters so that there is no real consent and the agreement may be treated as void
because of mistake of fact as well as absence of consensus.
(iv) The said agreement is valid.
Reason: 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, as an exception,
agreement of service by which an employee binds himself, during the term of his
agreement, not to compete with his employer is not in restraint of trade.
ANSWER OF QUESTION 1(B)
Doctrine of Indoor Management says, persons dealing with the company need not
inquire whether internal proceedings relating to the contract are followed correctly,
once they are satisfied that the transaction is in accordance with the memorandum and
articles of association.
Stakeholders need not enquire whether the necessary meeting was convened and held
properly or whether necessary resolution was passed properly. They are entitled to
take it for granted that the company had gone through all these proceedings in a
regular manner.
The doctrine helps to protect the external members from the company and states that
the people are entitled to presume that internal proceedings are as per documents
submitted with the Registrar of Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An
outsider can only presume the intentions of a company, but do not know the
information he/she is not privy to.

2. If not for the doctrine, the company could escape creditors by denying the
authority of officials to act on its behalf.
In the given question, Quick Finance Limited being external to the company, need not
enquire whether the necessary resolution was passed properly. Even if Aarna Limited
claims that no resolution authorizing the loan was passed, Aarna Limited is bound to
repay the loan to Quick Finance Limited.
2. If not for the doctrine, the company could escape creditors by denying the
authority of officials to act on its behalf.
In the given question, Quick Finance Limited being external to the company, need not
enquire whether the necessary resolution was passed properly. Even if Aarna Limited
claims that no resolution authorizing the loan was passed, Aarna Limited is bound to
repay the loan to Quick Finance Limited.
QUESTION 1(C) (i)
PARTNERSHIP FOR FIXED PERIOD- It is a Partnership entered into for a fixed term,
after the expiry of which it comes to an end. When the Partners carry on the business
even after the expiry of the said period, it is not unlawful, but the Partnership is said
to be at will.
(C) (ii)
Yes, a minor can be made a partner with the consent of another partner for the profits
only.
This partner is not regarded as competent to enter into contract so he can't become the
partner of the firm having unlimited liability. This partner has an agreement with the
other partners that he will be the partner for profit only. This partner does not take
part in the working of the firm. The minor is not personally liable for liabilities of the
firm but his share in the partnership, property and profits of the firm will be liable for
debts of the firms.
A minor has the following status in partnership firm:
(a) A minor has a right to such share of property and of profits of the firms as may be
agreed upon by all partners.
(b) He may inspect the accounts of the firm or take note of account.
(c) The personal property of minor is not liable for the debts of the firm. But his share
in the property of the profits is liable for the debts and obligation of the firm.
(d) So long as a minor remains a partner, he cannot file a suit against other partners
for an account.
(e) In the case, a minor decides to become a partner he will personally be liable to
third parties for all acts of the firm since he was admitted to benefits of the firm.
(C) (iii) He is a Partner only by name and only his name is used. He is not entitled to
share profits or bear losses, but he is liable for all the debts of the firm like active
partner. He shall give public notice of his retirement.
RIGHTS-
A partner who allows the partnership firm to use his/her name but does not
contribute any capital or take part in the management and affairs of the business.
He does not share the profits and losses of the firm but he is liable to the creditors for
the repayment of the firm's debts.
QUESTION 2(a) (i)
As per Section 24 of the Sale of Goods Act, 1930, when goods are delivered to the
buyer on sale or return terms, the property passes to the buyer:
(a) When buyer signifies his approval or acceptance to the seller; or
(b) Buyer does any act adopting the transaction; or
(c) If the buyer does not signify his approval or acceptance to the seller but retains the
goods without giving notice of rejection, beyond a specified time and if not, time has
been specified, beyond a reasonable time.
In case of 'sale or return basis, if goods get lost before property passes to the buyer
without the fault of either party, the loss has to be borne by the seller.
In the given case horse died on the 3rd day whereas the buyer has the time of 10 days to
signify his assent and he has not yet given his approval adopting the transaction.
Thus, property in the horse has not been passed to the buyer and hence seller will
bear the loss.
(ii) DELIVERY- Section 2(2) states delivery as delivery is the voluntary transfer of
possession from one person to another.
Delivery of goods is of three types:
1. Actual Delivery: It is known as physical delivery and occurs when the seller or his or
her authorized agency physically hands over the goods to the buyer or his or her
agent, who is allowed to take possession of them.

2. Symbolic Delivery: When the items are too large and heavy to physically hand
over to the customer, they might be delivered by signifying or delivering a symbol
instead. The things themselves are not supplied in this case, but rather the means of
acquiring control of them.

3. Constructive Delivery: In this scenario, no physical or symbolic delivery is done. In

constructive delivery, the party who is in possession of the items acknowledges that
he/she retains the goods for the benefit and disposal of the purchaser. Constructive
delivery is also known as attornment.
QUESTION 2(b)
Steps in the Incorporation of a Company
1. An application for registration of a company shall be filed, with the Registrar within
whose jurisdiction the registered office of the company is proposed to be situated, in
Form-INC- 32 (SPICe) along with the prescribed fees and the following documents
and information are required to be attached with the application:

a) The memorandum and articles of the company signed by all the subscribers to the
memorandum.
b) Declaration in the prescribed form that all the requirements of the Act for
incorporation of a company have been fulfilled. This declaration shall be signed by an
advocate, a chartered accountant, cost accountant or company secretary in practice,
who is engaged in the formation of the company, and by a person named in the
articles as a director, manager or secretary of the company.

c) Affidavit by the director, if any mentioned in the articles that he is not convicted of
any offence in connection with the promotion, formation or management of any
company, or that he has not been found guilty of any fraud or misfeasance or of any
breach of duty to any company under this Act or any previous company law during
the preceding five years; and that all the documents filed with the Registrar for
registration of the company contain information that is correct and complete and true
to the best of his knowledge and belief.
d) Address for correspondence till its registered office is established;
e) Subscriber’s Details-Particulars of name, including surnames or family names,
residential address, nationality and such other particulars of every subscriber to the
memorandum along with proof of identity.
f) Director’s Details-Particulars of first directors of the company, their names, including
surnames or family names, the Director Identification Number (DIN), residential
address, nationality and such other particulars including proof of identity.

g) Director’s Consent Letter and Interest in other Companies-Particulars of the

interests of the persons mentioned in the articles as the first directors of the company in
other firms or bodies corporate along with their consent to act as directors.

2. The Registrar on the basis of documents and information filed above shall register
all the documents and information and issue a certificate of incorporation to the effect
that the proposed company is incorporated under the Act.
3. Registrar shall also allot to the company a Corporate Identity Number (CIN),
which shall be a distinct identity for the company and which shall also be included in
the certificate.

4. The company shall maintain and preserve copies of all documents and information
as originally filed at its registered office, till its dissolution under the Act.
5. If any person furnishes any false or incorrect particulars of any information or
suppresses any material information, of which he is aware in any of the documents
filed with the Registrar in relation to the registration of a company, he shall be liable
for action Punishment for Fraud under section 447.
QUESTION 2(C)
LLP- A LLP is a new form of legal business entity with limited liability. LLP as a separate
legal entity and business organisation is an alternative corporate business form that gives
the benefits of limited liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.
SMALL LLP- Small limited liability partnership [Section 2(ta)]: Small LLP means an LLP in
which-
1. the contribution of which, does not exceed twenty-five lakh rupees or such
higher amount, not exceeding five crore rupees, as may be prescribed; &
2. the turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed Rs. forty lakhs or such
higher amount, not exceeding Rs. 50 crores, as may be prescribed; or
3. which meets such other requirements as may be prescribed, and fulfils such terms
and conditions as may be prescribed
QUESTION 3(a) (i)

BASIS PARTNERSHIP CO-OWNERSHIP

MEANING Partnership is the relation When two or more persons hold
between two or more persons, a property and share the income
who have agreed to share profits
derived out of it, their
of a business carried on by all or
relationship is called Co-
any of them acting for all. ownership. It means Joint
Ownership.
BUSINESS Agreement must be to carry on There is no necessity for
business. any separate business.
NUMBER Maximum limit 50 No limit on the number of
OF persons being Co-owners.
MEMBERS
CREATION It is contractual, i.e., arises from a It may arise by contract and also
contract. by status, e.g., X and Y inherit a
house from their father.
TRANSFER Partner cannot transfer his Co-owner may transfer his
OF interest/share without consent of interest/share to a
INTEREST all third party
other Partners. without consent of other co-
owners
MUTUAL Each Partner is the agent of A Co-owner is not the agent of
AGENCY other Partners. other co-owners.
QUESTION 3(a) (ii)
As per Section 28 of the Partnership Act, 1932, if a person represents himself or
knowingly permits himself to be represented as a partner of a particular firm when
actually he is not, such person is liable as a partner of the firm.
Thus, a stranger, who represents himself to be a partner in a firm and induces others
to give credit to the partnership firm is called a partner by holding out.
Hence, Rohit is liable as a partner by holding out.
QUESTION 3(b) (i)
1. Holding Company [Sec.2(46)]: in relation to one or more other Companies, means
a Company of which such Companies are Subsidiary Companies.
2. Subsidiary Company or Subsidiary [Sec.2(87)]: in relation to any other Company
(that is to say the Holding Company), means a Company in which the Holding
Company –
(a) controls the composition of the Board of Directors, or
(b) 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.

3. Associate Company [Sec.2(6)]: "Associate Company" 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.
QUESTION 3(b) (ii)
The main difference between a company limited by guarantee and company limited
by shares is that the liability of shareholders is limited to the amount unpaid on
shares, whereas the liability of guarantors (the members of a company limited by
guarantee) is limited to the amount that they guaranteed.
QUESTION 3(b) (iii)
Under the Companies Act, 2013, a Government company is defined in Section 2(45)
as a company in which not less than 51% of the paid-up share capital is held by:
The Central Government, or Any State Government or Governments, or Partly by the
Central Government and partly by one or more State Governments, and includes a
company which is a subsidiary company of such a government company.
In the instant case, total Government Shareholding is 40% [i.e. 20% (Government of
India) + 10% (Government of Tamil Nadu) + 10% (Government of Rajasthan)] =
40%
The holding of the Life Insurance Corporation of India i.e. 8% and ABC Limited i.e.
15%, total amounting to 23% cannot be taken into account while counting the
prescribed limit of 51%.
Since the total shareholding held by the Central Government and State Governments
combined is 40%, which is less than 51%, XYZ Limited does not qualify to be a
government company under the provisions of the Companies Act, 2013
QUESTION 3(C) (i)
The agreement which involves interfering with marital duties is opposed to public
policy and unlawful, hence void. Hence, it is not enforceable.
3(C)(ii) Agreement in restraint of trade, void [Section 27]: Every agreement, by which,
anyone is restrained from exercising a lawful profession, trade' or business of any kind, is
to that extent void.
However, there is an exception to this rule:
If the goodwill of a business is sold, the seller can agree with the buyer to not carry on
a similar business within certain local limits.
The agreement is valid if:

• The buyer or anyone who inherits the goodwill from the seller continues to
carry on a similar business in the specified area.
• The seller's limits appear reasonable to the court.
QUESTION 4(a)
Under certain circumstances, a person may receive a benefit to which the law regards
another person as better entitled, or for which the law considers he should pay to the
other person, even though there is no contract between the parties. Such relationships
are termed as “Quasi Contracts” or Implied Contracts.
A quasi-contract rests on the ground of equity that a person shall not be allowed to
enrich himself unjustly at the expense of another.
Sections 68 to 72 of the Indian Contract Act, 1872 have prescribed the following
relationships creating quasi contractual relationship:
1. Supply of necessaries: Under Section 68, if a person, incapable of entering into a
contract, or anyone whom he is legally bound to support, is supplied by another person
with necessaries suited to his conditions in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.
2. Payment by an interested person: It has been laid down in Section 69 of the Indian
Contract Act that a person who is interested in the payment of money which another
is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the
other.
3. Obligation to pay for non-gratuitous Act: Section 70 of the Indian Contract Act states
that where a person lawfully does anything for another person or delivers anything to
him not intending to do so gratuitously, and such other person enjoys the benefit
thereof, the latter is bound to make compensation in respect of or to restore, the things
so done or delivered.
4. Responsibility of finder of goods: Under Section 71 of the Act, a person who finds
goods belonging to another, and takes them into his custody, is subject to the same
responsibility as a bailee.

5. Case where money is paid by mistake or under coercion: Finally, Section 72 of the
Indian Contract Act provides that a person to whom money has been paid, or anything
delivered, by mistake or under coercion, must repay or return it.
Thus, quasi contractual right is always a right to money and generally, though not
always to a liquidated sum of money. It does not arise from any agreement between
the parties concerned, but is imposed by the law.
It is a right which is not available against whole world but against a particular person
or persons only. There is no contract between the parties in cases of quasi contracts, yet
they are put in the same position as if there were a contract between them.
QUESTION 4(b)
The main difference between an order instrument and a bearer instrument is who is
considered the owner of the instrument:

BASIS BEARER INSTRUMENT ORDER INSTRUMENT

MEANING The holder of a bearer An order instrument is a

instrument is negotiable
considered the owner of the Instrument that is payable
asset, and can claim to a specified person or its
ownership and use it as they assignee. To transfer the
see fit. Bearer instruments are property in an order
not registered to the holder, instrument, endorsement
and can be transferred by and delivery are required.
delivery.

OWNERSHIP The holder of a bearer An order instrument must

instrument is presumed to be designate an individual's
the owner name to be paid out
NEGOTIATION A bearer instrument is An order instrument
negotiable by mere delivery requires an indorsement
from the payee or holder
before it may
be validly negotiated
QUESTION 4(c)
The functions of IBBI include:
• Regulating the insolvency and bankruptcy process: IBBI regulates the insolvency and
bankruptcy process in India, which includes overseeing the activities of insolvency
professionals, insolvency resolution professionals, and other stakeholders in the
insolvency process.

• Protecting the interests of creditors and debtors: IBBI protects the interests of
creditors and debtors in the insolvency process, which includes ensuring that creditors
are treated fairly and that debtors are given a fair chance to repay their debts.

• Promoting the orderly liquidation of assets: IBBI promotes the orderly liquidation
of assets in the insolvency process, which includes ensuring that assets are sold at fair
market value and that the proceeds are distributed to creditors in a fair manner.
• Fostering the development of the insolvency and bankruptcy sector: IBBI fosters the
development of the insolvency and bankruptcy sector in India, which includes
promoting innovation and ensuring that the sector is accessible to all stakeholders.
QUESTION 5(a)(i)
As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract of sale, the
property in the goods is transferred from the seller to the buyer, the contract is called a
sale, but where the transfer of the property in the goods is to take place at a future
time or subject to some condition thereafter to be fulfilled, the contract is called an
agreement to sell and as per Section 4(4), an agreement to sell becomes a sale when
the time elapses or the conditions are fulfilled subject to which the property in the
goods is to be transferred.
On the basis of above provisions and facts given in the question, it can be said that
there is an agreement to sell between Sonal and Jeweller and not a sale. Even though
the payment was made by Sonal, the property in goods can be transferred only after
the fulfilment of conditions fixed between the buyer and the seller. As due to Ruby
Stones, the original design is disturbed, bangles are not in original position. Hence, Sonal
has right to avoid the agreement to sell and can recover the price paid.
If Jeweller offers to bring the bangles in original position by repairing, he cannot charge
extra cost from Sonal. Even though he has to bear some expenses for repair; he cannot
charge it from Sonal.
(a)(ii) These are the type of Goods, the acquisition of the same depends upon
happening or non-happening of an uncertain event (i.e. a contingency)
Example: "A", a fisher agrees to sell "B", a certain type of fish, provided there is no
cyclonic storm.
QUESTION 5(b) (i)
As per Section 28 of the Partnership Act, 1932, if a person represents himself or
knowingly permits himself to be represented as a partner of a particular firm when
actually he is not, such person is liable as a partner of the firm.
Thus, a stranger, who represents himself to be a partner in a firm and induces others to
give credit to the partnership firm is called a partner by holding out. Hence, Rohit is
liable as a partner by holding out.
(b) (ii) Sleeping/Dormant partner
He is the partner who contributes to the capital and has a share in Profits, but does not
actively participate in the business. He is liable like any other Partner, but where
specifically excluded, he is not so. He is not required to give notice after he ceases to
be a Partner, nor does his insanity dissolve the Firm.
QUESTION 5(c)
Ex Nudo pacto non oritur actio, i.e., an agreement without consideration is void. The
general rule is: An agreement without consideration is VOID.
1. COMPLETED GIFTS – As per Section 25 No Consideration No Contract' does
not apply to completed gifts, i.e. gifts given and accepted. However, a mere
promise to gift is not a valid contract.
2. PROMISE TO COMPENSATE FOR PAST VOLUNTARY SERVICES – As
per
Section 25(2) A promise made without consideration is valid if it is a promise to
compensate wholly or in part, a person who has already voluntarily done
something for the Promisor.
QUESTION 6(a)

BASIS CHEQUE BILLS OF EXCHANGE

DRAWEE Only a banker can be a Any one can be a drawee

drawee including a banker
ACCEPTANCE A cheque is required no Drawee is liable only after the
acceptance acceptance
PAYMENT 3 months from the date of 3days of grace after maturity,
issue unless payable on demand
NOTICE In case of dishonour notice Notice of dishonour is to be
doesn’t require given to all the parties liable
to pay
CROSSING A cheque may be crossed Bill of exchange can never be
crossed
STAMP It doesn’t require stamp It must be properly stamped.
(b) Section 2(b) says that when the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted and a proposal when accepted
becomes a promise. In a broad sense, therefore, a contract is an exchange of promises by
two or more persons, resulting in an obligation to do or abstain from doing a
particular act, where such obligation is recognized and enforced by law.
An agreement between two persons to go together to the cinema, or for a j walk, does
not create a legal obligation on their part to abide by it. Similarly, if I promise to buy
you a dinner and break that promise, I do not expect to be liable to legal penalties.
There cannot be any offer and acceptance to hospitality.
Keeping in view of the above discussion, it can be concluded that there is no contract
if Mr. A invites Mr. B to stay with him during winter vacation f at his residence as it is
a social contract, and offer and acceptance to hospitality do not create a contract.
(c) Condition as to title [Section 14]: In a contract of sale there is an implied condition
on the part of the seller that:
(a) In the case of a sale, he has a right to sell the goods and
(b) In the case of an agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.
In other words, in 'contract of sale', a seller should have a good and valid title, so that
he can transfer good and valid title to the buyer. If it turns out that the seller's title is
defective, then the buyer can repudiate the contract.
Example: X brought a bike from Y. Y had no title to the bike. He had stolen the bike
from Z. X had to hand over it true owner, Z. There is a breach of implied condition as
to title from Y, and X can recover the price of a bike as well as can claim damages from
Y.
Sale by sample [Section 17]: In the case of a contract for sale by sample there is an
implied condition that:
(a) The bulk shall correspond with the sample.
(b) Buyer shall have a reasonable opportunity of comparing the bulk with the sample.

(c) The goods shall be free from any defect, rendering them un- merchantable, which
would not be apparent on a reasonable examination of the sample.