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CA Inter Other Laws Important Revision Questions

 Important Revision Questions with Answers for CA Inter Exams

Mixed Important Questions from Contract Act, Negotiable Instruments Act, General Clauses Act and Interpretation of Statutes for CA Intermediate May & Nov 2021 Exams.

Question 1

What are the rights of the indemnity-holder when sued?

Answer

Rights of Indemnity- holder when sued (Section 125): The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to  recover from the promisor—

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as  it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if  the promisor authorised him to compromise the suit.

It may be understood that the rights contemplated under section 125 are not exhaustive. The indemnity holder/ indemnified has other rights besides those mentioned above. If he has incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to save him from the liability and to pay it off.


Question 2

Komal Ltd. declares a dividend for its shareholders in its AGM held on 27th September, 2019. Referring to provisions of the General Clauses Act, 1897 and Companies Act, 2013, advice:

(i) The dates during which Komal Ltd. is required to pay the dividend?

(ii) The dates during which Komal Ltd. is required to transfer the unpaid or unclaimed dividend to unpaid dividend account?

Answer

As per section 9 of the General Clauses Act, 1897, for computation of time, the section states that in any legislation or regulation, it shall be sufficient, for the purpose of excluding the first in a  series of days or  any  other period of time to  use the word “from” and for the purpose of including the last in a series of days    or any other period of time, to use the word “to”.

(i) Payment of dividend: In the given instance,  Komal Ltd.  declares dividend for its shareholder in its Annual General Meeting held on 27/09/2019. Under the provisions of Section 127 of the Companies Act, 2013, a company is required to pay declared dividend within 30 days from the date  of declaration, i.e. from 28/09/2019 to 27/10/2019. In this series of 30 days, 27/09/2019 will be excluded and last 30th day, i.e. 27/10/2019 will  be  included. Accordingly, Komal Ltd. will be required to pay dividend within 28/09/2019 and 27/10/2019 (both days inclusive).

(ii) Transfer of unpaid or unclaimed divided: As per the provisions of Section 124 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of the declaration, to any shareholder entitled to the payment of the dividend, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the “Unpaid Dividend Account” (UDA). Therefore, Komal Ltd. shall transfer the unpaid/unclaimed dividend to UDA within the period of 28th October, 2019 to 3rd November, 2019 (both days inclusive).


Question 3

P draws a bill on Q for ₹ 10,000. Q accepts the bill. On maturity, the bill was dishonored by non-payment. P files a suit against Q for payment of ₹ 10,000. Q proved that the bill was accepted for value of ₹ 7,000 and as an accommodation to the plaintiff for the balance amount i.e. ₹ 3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill?

Answer

As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.

Explanation— the drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.

On the basis of above provision, P would succeed to recover ₹ 7,000 only from Q and not the whole amount of the bill because it was accepted for value as to ₹ 7,000 only and an accommodation to P for ₹ 3,000.


Question 4

Explain the meaning of ‘Holder’ and ‘Holder in due course’ of a negotiable instrument. The drawer, ‘D’ is induced by ‘A’ favor a cheque in favor of P, who is an existing person. ‘A’ instead of sending the cheque to ‘P’, forgoes his name and pays the cheque into his own bank. Whether ‘D’ can recover the amount of the cheque from ‘A’s banker. Decide.

Answer

Meaning of ‘Holder’ and the ‘Holder in due course’ of a negotiable instrument: ‘Holder’: Holder of negotiable instrument means as regards all parties prior to himself, a holder of an instrument for which value has at any time been given.

Holder in due course’:

  • In the case of an instrument payable to bearer means any person who, for consideration became its possessor before the amount of an instrument payable.
  • In the case of an instrument payable to order, ‘holder in due course’ means any person who became the payee or indorsee of the  instrument before the amount mentioned in it became payable.
  • He had come to possess the instrument without having sufficient cause to believe  that  any defect existed in the title of transferor from whom he derived his title.

The problem is based upon  the privileges of a ‘holder in  due course’. Section 42   of the Negotiable Instrument Act, 1881, states that an acceptor of a bill of  exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due cause claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer. In this problem, P is not a fictitious payee and D, the drawer can recover the amount of the cheque from A’s bankers.


Question 5

A appoints M, a minor, as his agent to sell his watch for cash at a price not less than ₹ 700. M sells it to D for ₹ 350. Is the sale valid? Explain the legal position of M and D, referring to the provisions of the Indian Contract Act, 1872.

Answer

According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the principal and a third person, any  person, even a  minor may become an agent. But no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal. Thus, if a person who is not competent to contract is appointed as an agent, the principal is liable to the third party for the acts of the agent. Thus, in the given case, D gets a good title to the watch. M is not liable to A for his negligence in the performance of his duties.


Question 6

State the essential elements of a contract of bailment.

Answer

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:

  1. Delivery of goods—The essence of bailment is delivery of goods by one person to another.
  2. 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.
  3. Return of goods in specific—The goods are delivered for some purpose and it is agreed that the specific goods shall be returned.
  4. 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.
  5. Property must be movable—Bailment is only for movable goods and never for immovable goods or money.

Question 7

Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881:

(i) X who obtains a cheque drawn by Y by way of gift.

(ii) A, the payee of the cheque, who is prohibited by a court order from receiving  the amount of the cheque.

(iii) M, who finds a cheque payable to bearer, on the road and retains it.

(iv) B, the agent of C, is entrusted with an instrument without indorsement by C, who is the payee.

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

Answer

Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881  ‘holder’ of a Negotiable Instrument means any  person entitled in his own name to the possession of it and to receive or recover the amount  due thereon from the parties thereto.

On applying the above provision in the given cases—

(i) Yes, X can be termed as  a holder because he  has a right to possession and  to receive the amount due in his own name.

(ii) No, he is not a ‘holder’ because to be called as a  ‘holder’  he  must  be entitled not only to the possession of the instrument but also to receive the amount mentioned therein.

(iii) No, M is not a holder of the Instrument though he is in possession of the cheque, so is not entitled to the possession of it in his own name.

(iv) No, B is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet he cannot be called the  holder  thereof  because he has no right to sue on the instrument in his own name.

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


Question 8

Define contract of indemnity and contract of guarantee and state the conditions when guarantee is considered invalid?

Answer

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”.

The conditions under which the guarantee is invalid or void is provided in section 142, 143 and 144 of the Indian Contract Act. These include:

(i) Guarantee obtained by means of misrepresentation.

(ii) Guarantee obtained by means of keeping silence as to material circumstances.

(iii) When 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.


Question 9

‘Repeal’ of provision is different from ‘deletion’ of provision. Explain as per  the General Clauses Act, 1897.

Answer

In Navrangpura Gam Dharmada Milkat Trust Vs. Rmtuji Ramaji, AIR 1994 Guj 75 case, it was decided that ‘Repeal’ of provision is in distinction from ‘deletion’ of provision. ‘Repeal’ ordinarily brings about complete obliteration (abolition) of the provision as if it never existed, thereby affecting all incoherent rights  and  all causes of action related to the ‘repealed’ provision  while  ‘deletion’  ordinarily  takes effect from the date of legislature affecting the said deletion, never to effect total effecting or wiping out of the provision as if it never existed.


Question 10

State with reason whether the following statement is correct or incorrect:

Ratification of agency is valid even if knowledge of the principal is materially defective.

Answer

Incorrect: Section 198 of the Indian Contract Act, 1872 provides that for a valid ratification, the person who ratifies the already performed act must be without defect and have clear knowledge of the facts of the case. If the principal’s knowledge is materially defective, the ratification is not valid and hence no agency.


Question 11

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

Answer

M cannot sue P, because a surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor (Section 133, Indian Contract Act, 1872).


Question 12

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?

Answer

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.


Question 13

Bhupendra borrowed a sum of ₹ 3 lacs from Atul. Bhupendra appointed Atul as his agent to sell his land and authorized him to appropriate the amount of loan out of  the sale proceeds. Afterward, Bhupendra revoked the agency.

Decide under the provisions of the Indian Contract Act,  1872  whether  the  revocation of the said agency by Bhupendra is lawful.

Answer

According to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent has himself an interest in the property which forms the subject-matter of the agency, and such an agency cannot, in the absence of an express provision in the contract, be terminated to the prejudice of such interest.

In the instant case, the rule of agency coupled with interest applies and does not come to an end even on death, insanity or the insolvency of the principal.

Thus, when Bhupendra appointed Atul as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds, interest was created in favor of Atul and the said agency is not revocable. The revocation of agency by Bhupendra is not lawful.


Question 14

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

Answer

If the creditor makes any variance (i.e.  change in terms) without the consent of  the surety, then surety is discharged as to the transactions subsequent to the change. In the instant case, Y is liable as a surety for the loss suffered by the bank due to misappropriation of cash by X during the first nine months but not for misappropriations committed after the reduction in salary. [Section 133, Indian Contract Act, 1872].


Question 15

A contracts with B for a fixed price to construct a house for B within a stipulated  time. B would supply the necessary material to be used in the construction. C guarantees A’s performance of the contract. B does  not supply the  material as per the agreement. Is C discharged from his liability.

Answer

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


Question 16

M drew a cheque amounting to ₹ 2 lakh payable to N and subsequently delivered to him. After receipt of cheque N indorsed the same to C but kept it in his safe locker. After sometime, N died, and P found the cheque in N’s safe locker.  Does this amount to Indorsement under the Negotiable Instruments Act, 1881?

Answer

No, P does not become the holder of the cheque as the negotiation was not completed by delivery of the cheque to him. (Section 48, the Negotiable Instruments Act, 1881)


Question 17

Give differences between Bailment and Pledge.

Answer

Distinction between bailment and pledge: The following are the distinction between bailment and pledge:

(a) As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security for a loan or a performance of a promise. In regular bailment the goods are bailed for other purpose than the two  referred  above. The bailee takes them for repairs, safe custody etc.

(b) As to right of sale: The pledgee enjoys the right to sell only on  default by the pledgor to repay the debt or perform his promise, that too only after giving due notice.  In bailment the bailee, generally, cannot sell the goods.  He can either retain or sue for non-payment of dues.

(c) As to right of using  goods:  Pledgee has no right to use goods.  A bailee can, if the terms so provide, use the goods.

(d) Consideration: In pledge there is always a consideration whereas in a bailment there may or may not be consideration.

(e) Discharge of contract: Pledge is discharged on the payment of debt or performance of promise whereas bailment is discharged as the purpose is accomplished or after specified time.


Question 18

(i) What is the effect of proviso? Does it qualify the main provisions of an Enactment?

(ii) Does an explanation added to a section widen the ambit of a section?

Answer

(i) Normally a Proviso is added to a section of an Act to except something or qualify something stated in that particular section to which it is added. A proviso should not be, ordinarily, interpreted as  a general rule. A  proviso to  a particular section carves out an exception to the main provision to which    it has been enacted as a Proviso and to no  other provision. [Ram  Narian Sons Ltd. Vs. Commissioner of Sales Tax AIR (1955) S.C. 765]

(ii) Sometimes an explanation is added to a section of an Act for the purpose of explaining the main provisions contained in that section. If there is some ambiguity in the provisions of the main section, the explanation is inserted    to harmonise and clear up and  ambiguity in the main section. Something may added be to or something may be excluded from the main provision by insertion of an explanation. But the explanation should not be construed to widen the ambit of the section.


Question 19

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

Answer

The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained in Section 215 read with Section 216. The two sections provide that where an agent without the knowledge of the principal, deals in the business of agency on his own account, the principal may:

(1) repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material fact from him, or that the dealings of the agent have been disadvantageous to him.

(2) claim from the agent any benefit, which may have resulted to him from the transaction.

Therefore, based on the above provisions, Mr. Ahuja is  entitled to recover ₹6  lakhs from Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.


Question 20

Mr. D was in urgent need of money amounting to ₹ 5,00,000. He asked Mr. K for the money. Mr. K lent the money on the sureties of A, B and N without any contract between them in case of default in repayment of money by  D to K. D makes default  in payment. B refused to contribute, examine whether B can escape liability?

Answer

Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality of burden is the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties for the same  debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or without the knowledge of each other, the co- sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it  which remains unpaid by the principal debtor”.

Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are liable to pay equally, in absence of any contract between them.


Question 21

M owes money to N. Therefore, he makes a promissory note for the amount in favor of N, for safety of transmission he cuts the note in half and posts one half to N. He then changes his mind and calls upon N to return the half of the note which he had sent. N requires M to send the other half of the promissory note. Decide how rights    of the parties are to be adjusted.

Answer

The question arising in this problem is whether the making of promissory note is complete when one half of the note was delivered to N. Under Section 46 of the

N.I. Act, 1881, the making of a P/N is completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not merely a part of it. Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the claim of N to have the other half of the P/N sent to him is not maintainable. M is justified in demanding the return of the first half sent by him.   He can change his mind and refuse to send the other half of the P/N.


Question 22

State briefly the rules laid down under the Negotiable Instruments Act for  determining the date of maturity of a bill of exchange. Ascertain  the  date  of maturity of a bill payable hundred days after sight and which is presented for sight  on 4th May, 2020.

Answer

Calculation of maturity of a bill of exchange: The maturity of a bill, not payable on demand, at sight, or on presentment, is at maturity on the third day after the  day on which it is expressed to be payable (Section 22, of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed   in the case of bill payable on demand, at sight, or presentment.

When a bill is made payable at stated number of months after date, the period stated terminates on the day of the month which corresponds with the day on which the instrument is dated. When it is made payable after a stated number of months after sight the period terminates on the day of the month which corresponds with the day on which it is presented for  acceptance  or  sight  or noted for non-acceptance or protested for non-acceptance. When it is payable a stated number of months after a certain event, the period terminates on the day   of the month which corresponds with the day on which the event  happens (Section 23).

When a bill is made payable a stated number of months after sight and has been accepted for honour, the period terminates with the day of the month which corresponds with the day on which it was so accepted.

If the month in which the period would terminate has no corresponding day, the period terminates on the last day of such month (Section 23).

In calculating the date a bill made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or the day of presentment for acceptance or sight or the day of protest for non-accordance, or the day on which the event happens shall be excluded (Section 24).

Three days of grace are allowed to these instruments after the day on which they are expressed to be payable (Section 22).

When the last day of grace falls on a day which is public holiday, the instrument is due and payable on the next preceding business day (Section 25).

Answer to Problem: In this case the day of presentment for sight is to be excluded

i.e. 4th May, 2020. The period of 100 days ends on 12th August, 2020 (May 27 days + June 30 days + July 31 days + August 12 days). Three days of grace are to be added. It falls due on 15th August, 2020 which happens to be a public holiday. As such it will fall due on 14th August, 2020 i.e. the next preceding business day.


Question 23

Gaurav Textile Company Limited has entered into a contract with a Company. You are invited to read and interpret the document of contract. What rules of interpretation of deeds and documents would you apply while doing so?

Answer

The rules regarding interpretation of deeds and documents are as follows:

First and the foremost point that has to be borne in mind is that one has to find  out what reasonable man, who has taken care to inform himself of  the  surrounding circumstances of a deed or a document, and of its scope and intendments, would understand by the words used in that deed or document.

It is inexpedient to construe the terms of one deed by reference to the terms of another. Further, it is well established that the same word cannot have two  different meanings in the same documents, unless the context compels the adoption of such a rule.

The Golden Rule is to ascertain the intention of the parties of the instrument after considering all the words in the documents/deed concerned in their ordinary, natural sense. For this purpose, the relevant portions of the document have to be considered as a whole. The circumstances in which the particular words have been used have also to be taken into account. Very often, the status and training of the parties using the words have also to be taken into account as the same words maybe used by an ordinary person in one sense and by a trained person or a specialist in quite another sense and a special sense. It has also to be considered that very many words are used in more than one sense. It may happen that the same word understood in one sense will give effect to all the clauses in the deed while taken in another sense might render one or  more of  the clauses ineffective. In such a case the word should be understood in the former and not in the latter sense.

It may also happen that there is a conflict between two or more clauses of  the  same documents. An effect must be made to resolve the conflict by interpreting  the clauses so that all the clauses are given effect. If, however, it is not possible to give effect of all of them, then it is the earlier clause that will override the latter  one.


Question 24

The Companies Act, 2013 provides that the amount of dividend remained unpaid/unclaimed on expiry of 30  days from the date of declaration of dividend  shall be transferred to unpaid dividend account within 7 days from  the  date  of expiry of such period of 30 days. If the expiry date of such 30 days is 30.10.2019, decide the last date on or before which the  unpaid/unclaimed  dividend  amount shall be required to be transferred to a separate bank account in the light of the relevant provisions of the General Clauses Act, 1897?

Answer

Section 9 of the General Clauses Act, 1897 provides that, for computation of time,  in any legislation or regulation, it shall be sufficient, for the purpose of excluding the first in a series of days or any other period of time to use the word “from” and for the purpose of including the last in a series of days or  any  other period of  time, to use the word “to”.

As per the facts of the question the company shall transfer the unpaid/unclaimed dividend to unpaid dividend account within the period of 7 days. 30th October 2019 will be excluded and 6th November 2019 shall be included, i.e. 31st October, 2019 to 6th November, 2019 (both days inclusive).


Question 25

A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value. Decide-.

(i) Whether D can sue the prior parties of the bill, and

(ii) Whether the prior parties other than D have any right of action inter se?

Give your answer in reference to the Provisions of Negotiable Instruments Act,  1881.

Answer

Problem on Negotiable Instrument made without consideration: Section 43 of the Negotiable Instruments Act, 1881 provides that  a  negotiable  instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no  obligation  of  payment between the  parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.

(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill without consideration and transferred it to C without consideration. Later on in the next transfer by C to D is for value. According to provisions of the aforesaid section 43, the bill ultimately has been transferred to D with consideration. Therefore, D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with consideration.

(ii) As regards to the second part of the problem, the prior parties before D i.e.,  A, B, and C have no right of action inter se because first part of Section 43   has clearly lays down that a negotiable instrument, made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties  to  the transaction prior to the parties who receive it on consideration.


Question 26

Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian Contract Act, 1872:

(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.

(ii) Seizure of goods by customs authorities.

Answer

(i) No. Mere custody of goods does not mean possession. For a  bailment to  exist the bailor must give possession of the bailed property and the bailee must accept it. There must be a transfer in ownership of the goods. In the given case, since the keys of the car are with V, Section 148, of the Indian Contract Act, 1872 shall not applicable.

(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore, bailment exists and section 148 is applicable.


Question 27

How will you interpret the definitions in a statute, if the following words are used in   a statute?

(i) Means, (ii) Includes

Give one illustration for each of the above from statutes you are familiar with.

Answer

Interpretation of the words “Means” and “Includes” in the definitions- The definition of a word or expression in the definition section may either  be  restricting of its ordinary meaning or may be extensive of the same.

When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive and exhaustive, we must restrict the meaning of the word to that given   in the definition section.

But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive, here the word defined is  not restricted to  the meaning assigned  to it but has extensive meaning which also includes the meaning assigned to it in the definition section.

Example—

Definition of Director [section 2(34) of the Companies Act, 2013] – Director means a director appointed to the board of a company. The word “means”  suggests exhaustive definition.

Definition of Whole time director [Section 2(94) of the Companies Act, 2013] – Whole time director includes a director in the whole time employment of the company. The word “includes” suggests extensive definition. Other directors may be included in the category of the whole time director.


Question 28

Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two years contract at a monthly salary of ₹ 50,000. Mr. Pawan gave a surety in respect of Mr. Chetan’s conduct. After six months the company was not in position    to pay ₹ 50,000 to Mr. Chetan because of financial constraints. Chetan agreed for a lower salary of ₹ 30,000 from the company. This was not communicated to Mr. Pawan. Three months afterwards it was discovered that Chetan had been doing fraud since the time of his appointment. What is the liability of Mr. Pawan during   the whole duration of Chetan’s appointment?

Answer

As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor makes any variance (i.e. change in terms) without the consent of the surety, then surety is discharged as to the transactions subsequent to the change.

In the instant case, Mr. Pawan is liable as a surety for the loss suffered by ABC Constructions company due to misappropriation of cash by Mr. Chetan during the first six months but not for misappropriations committed after the reduction in salary.

Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the change in the terms of the contract i.e., during the first six months.  Variation in the terms of the contract (as to the reduction of salary) without consent of Mr. Pawan, will discharge Mr. Pawan from all the liabilities towards the act of the Mr. Chetan after such variation.


Question 29

C issues a cheque for ₹ 55,00,00/- in favour of D. C has sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank, in the meantime, C  became  bankrupt.  Decide under the provisions of  Negotiable Instruments Act, 1881, whether D can recover the money from C?

Answer

Section 84(1) of the Act, provides that cheque should be presented to Bank within reasonable time. If cheque is not presented  within reasonable  time, meanwhile  the drawer suffers actual damage, the drawer is discharged to the extent of such actual damage. This would be so if the cheque would have been passed if it was presented within reasonable time. As per section 84(2), in determining what is a reasonable time, regard shall be had to (a) the nature of the instrument (b) the usage of trade and of bankers, and (c) facts of the particular case. The drawer will get discharge, but the holder of the  cheque will be  treated as  creditor of the  bank, in place of drawer. He “Will be entitled to recover the amount from Bank [section 84(3)]. In the above case drawer i.e.  C  has suffered damage as  cheque was not presented by D within reasonable time. Hence, C will be discharged but D will be the creditor of bank for the amount of cheque and can recover the amount from the bank.


Question 30

Referring to the provisions of the General Clauses Act, 1897, find out the day/ date   on which the following Act/Regulation comes into force. Give reasons also,

(1) An Act of Parliament which has not specifically mentioned a particular date.

(2) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2015 was issued by SEBI vide Notification dated 14th August, 2015 with effect from 1st January, 2016.

Answer

(1) According to section 5 of the General Clauses Act, 1897, where any  Central Act has not specifically mentioned a particular date to come into force, it shall be implemented on the day on which it receives the assent of the President in case of an Act of Parliament.

(2) If any specific date of enforcement is prescribed in the Official Gazette, the  Act shall come into enforcement from such date.

Thus, in the given question, the SEBI (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2015 shall come into enforcement on 1st January, 2016 rather than the date of its  notification in  the gazette.


Question 31

A hires a carriage from B and agrees to pay ₹ 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss the liability of B.

Answer

Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in Section 150. The section provides that if the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed. Accordingly, applying the above provisions in the given case, B is responsible to compensate A for the injuries sustained even if he was not aware of the defect in the carriage.


Question 32

A agrees to sell goods to B on the guarantee of C for the payment of the price of goods in default of B. Is the agreement of guarantee valid in each of the following alternate cases:

Case 1. If A is a Minor

Case 2: If B is a Minor

Case 3: If C is a minor.

Answer

Case 1: The agreement of guarantee is void because the creditor is  incompetent   to contract.

Case 2: The agreement of guarantee is valid because  the  capability  of  the principal debtor does not affect the validity of the agreement of the guarantee.

Case 3: The agreement of guarantee is void because the surety is incompetent to contract.


Question 33

Differentiate Mandatory Provision from a Directory Provision. What factors decide whether a provision is directory or mandatory?

Answer

Practically speaking, the distinction between a provision which is ‘mandatory’ and one which is ‘directory’ is that when it is mandatory, it must be strictly observed; when it is ‘directory’ it would be sufficient that it is substantially complied with. However, we have to look to the substance and not merely the form, an enactment in mandatory form might substantially be directory and, conversely, a statute in directory form may in substance be mandatory. Hence, it is the substance that counts and must take precedence over mere form. If a provision gives a power coupled with a duty, it is mandatory: whether it is or is not so would depend on such consideration as:

  • the nature of the thing empowered to be done,
  • the object for which it is done, and
  • the person for whose benefit the power is to be exercised.

Question 34

R is the wife of P. She purchased sarees on credit from Nalli. Nalli demanded the amount from P. P refused. Nalli filed a suit against P for the said amount. Decide in the light of provisions of the Indian Contract Act, 1872, whether  Nalli  would  succeed.

Answer

The position of husband and wife is special and significant case of implied  authority. According to the Indian Contract Act 1872, where the husband and wife are living together in a domestic establishment of their  own,  the  wife shall have  an implied authority to pledge the credit of  her  husband  for  necessaries. However, the implied authority can be challenged by the husband only in the following circumstances.

(1) The husband has expressly forbidden the wife from borrowing money or buying goods on credit

(2) The articles purchased did not constitute necessities.

(3) Husband had given sufficient funds to the wife for purchasing the  articles  she needed to the knowledge of the seller

(4) The creditor had been expressly told not to give credit to the wife

Further, where the wife lives  apart from husband without any  of her fault, she  shall have an implied authority to bind the husband for necessaries, if he does not provide for her maintenance.

Since, none of the above criteria is being fulfilled; Nalli would be successful in recovering its money.


Question 35

A bails his jewellery with B on the condition to safeguard it in a bank’s safe locker. However, B kept it in safe locker at his residence, where he usually keeps his own jewellery. After a month all jewellery was lost in a religious riot.  A filed a suit against B for recovery. Referring to provisions of the Indian Contract Act, 1872,  state whether A will succeed.

Answer

Referring to the Section 152 of the Indian Contract Act, 1872, B is liable to compensate A for his negligence to keep jewellery at his resident. Here, A and B agreed to keep the jewellery at the Bank’s safe locker and not at the latter’s residence.


Question 36

Define Grammatical Interpretation. What are the exceptions to grammatical interpretation?

Answer

Grammatical Interpretation and its exceptions: ‘Grammatical interpretation’ concerns itself exclusively with the verbal expression of the law, it does not go beyond the letter of the law. In all ordinary cases, ‘grammatical interpretation’ is the sole form allowable. The Court cannot take from or add to modify the letter of the law.

This rule, however, is subject to some exceptions:

(i) Where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness. As regard the defect to ambiguity, the  Court is under a duty to travel beyond the letter of the law so as  to  determine from the other sources the true intention of the legislature. In the case of the statutory expression being defective on  account  of  inconsistency, the court must ascertain the spirit of the law.

(ii) If the text leads to a result which is so unreasonable that it  is  self-evident  that the legislature could not mean what it says, the court may resolve such impasse by inferring logically the intention of the legislature.


Question 37

S asks R to beat T and promises to indemnify R against the consequences. R beats T and is fined ₹ 50,000. Can R claim ₹ 50,000 from S.

Answer

R cannot claim ₹ 50,000 from S because the object of the agreement was unlawful. A contract of indemnity to be valid must fulfil all the essentials of a valid contract which includes:

a.    Offer and acceptance

b.    Intention to create legal obligation

c.    Consideration

d.    Competency to contract

e.    Free consent

f.    Lawful object

g.    The agreement must not be expressly declared to be void – eg:  an agreement in restraint of trade/ marriage etc.

h.    The terms of the agreement must not be vague or uncertain

i.      The agreement must be capable of performance- An agreement to do an impossible act is void.

j.     Legal formalities


Question 38

Mr. V draws a cheque of ₹ 11,000 and gives to Mr. B by  way of  gift. State  with reason whether –

(1) Mr. B is a holder in due course as per the Negotiable Instrument Act, 1881?

(2) Mr. B is entitled to receive the amount of ₹ 11,000 from the bank?

Answer

According to section 9 of the Negotiable Instrument Act, 1881, “Holder in due course” means-

  • any person
  • who for consideration
  • becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or indorsee thereof, (if payable to order),
  • before the amount mentioned in it became payable, and
  • without having sufficient cause to believe that any defect existed in the title  of the person from whom he derived his title.

In the instant case, Mr. V draws a cheque of ₹ 11,000 and gives to Mr. B by way of gift.

(i) Mr. B is holder but not a  holder in due course since he did not get the  cheque for value and consideration.

(ii) Mr. B’s title is good and bonafide. As a holder he is entitled to receive ₹ 11,000 from the bank on whom the cheque is drawn.


Question 39

Explain the principles of “Grammatical Interpretation” and “Logical Interpretation” of a Statute. What are the duties of a court in this regard?

Answer

Principles of Grammatical Interpretation and Logical Interpretation: In order to ascertain the meaning of any law/ statute the principles of Grammatical and Logical Interpretation is applied to conclude the real meaning of the law and the intention of the legislature behind enacting it.

Meaning: Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law, whereas Logical interpretation on the other hand, seeks more satisfactory evidence of the true intention of the legislature.

Application of the principles in the court: In all ordinary cases, the grammatical interpretation is the sole form allowable. The court cannot delete  or  add  to  modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine the true intentions of the legislature. So that a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands rather it is just or unreasonable.

However, if there are two possible constructions of a clause, the courts may prefer the logical construction which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein.


Question 40

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

Answer

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


Question 41

What is “Financial Year” under the General Clauses Act, 1897?

Answer

According to Section 3(21) of the General Clauses Act, 1897, ‘Financial Year’ shall mean the year commencing on the first day of April.

The term year has been defined under Section 3(66) as a year reckoned according to the British calendar. Thus as per General Clauses Act, Year means calendar year which starts from January to December.

Hence, in view of the both above definitions, it can be concluded that Financial Year is a year which starts from first day of April to the end of March.


Question 42

Explain the rule in ‘Heydon’s Case’ while interpreting the statutes quoting an example.

Answer

Where the language used in a statute is capable of more than one interpretation, the most firmly established rule for construction is the principle laid down in the Heydon’s case. This rule enables, consideration of four matters in constituting an act:

(1) what was the law before making of the Act,

(2) what was the mischief or defect for which the law did not provide,

(3) what is the remedy that the Act has provided, and

(4) what is the reason for the remedy.

The rule then directs that the courts must adopt that construction which ‘shall suppress the mischief and advance the remedy’. Therefore, even in a case where  the usual meaning of the language used falls short of the whole object of the legislature, a more extended meaning may be attributed to the words, provided they are fairly susceptible of it. If the object of  any  enactment is  public safety,  then its  working must be interpreted widely to give effect to that object. Thus in  the case of Workmen’s Compensation Act,  1923 the  main  object being provision of compensation to workmen, it was held that the Act ought to be so construed, as far as possible, so as to give effect to its primary provisions.

However, it has been emphasized by the Supreme Court that the rule in Heydon’s case is applicable only when the words used are ambiguous and are reasonably capable of more than one meaning [CIT v. Sodra Devi (1957) 32 ITR 615 (SC)].


Question 43

Comment on the statement ‘Principal is not always bound by the acts of a sub-agent’.

Answer

The statement is correct. Normally, a sub-agent is not appointed, since it is a delegation of power by an agent given to him by his principal. The governing principle is, a delegate cannot delegate’. (Latin version of this principle is, “delegates non potest delegare”). However, there are certain circumstances where an agent can appoint sub-agent.

In case of proper appointment of a sub-agent, by virtue of Section 192 of the  Indian Contract Act, 1872 the principal is bound by and is held responsible for the acts of the sub-agent. Their relationship is treated to be as if the sub-agent is appointed by the principal himself.

However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts of the sub-agent. Under the circumstances the agent appointing the sub-agent shall be bound by these acts and he (the agent) shall be bound to the principal for the acts of the sub-agent.


Question 44

When can the Preamble be used as an aid to interpretation of a statute?

Answer

While the Preamble can be used to know the aims and objects of the legislation it cannot be used to control or qualify the precise and unambiguous language of an enactment. The preamble is the key to the mind of the maker of the law, but it cannot override in order to enlarge or restrict the enacting provision of the Act. A provision contained in the Act cannot be considered as invalid because they do not accord with the preamble, which is only a brief summary of legislative objectives behind the Act, and if there is any conflict between the preamble and any provision of an Act, the provision prevails.

The preamble merely affords help in the matter of construction if there is any ambiguity. Where the language of the Act is clear, the court is bound to give it effect.

When will courts refer to the preamble as an aid to construction?

Situation 1: Where there is any ambiguity in the words of an enactment the assistance of the preamble may be taken to resolve the conflict.

Situation 2: Where the words of an enactment appear to be too general in scope or application then courts may resort to the preamble to determine the scope or limited application for which the words are meant.


Question 45

Bholenath drew a cheque in favour of Surendar. After having issued the cheque; Bholenath 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 Bholenath constitute an offence?

Answer

As per the facts stated in the question, Bholenath (drawer) after having issued the cheque, informs Surendar (drawee) not to present the cheque for payment and as well 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 the 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 Bholenath, i.e., his request of stop payment constitutes an offence under the provisions of the Negotiable Instruments Act, 1881.


Question 46

Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ₹ 1,00,000, for which Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the next 3 months.

After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for ₹ 40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply. What would be your answer in case Ranjan makes default in paying back Sharma for the goods already supplied on credit i.e. ₹ 40,000?

Answer

Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act, 1872, a continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by notice to the creditor, but the surety remains liable for transactions already entered into.

As per the above provisions, liability of Manoj is discharged with relation to all subsequent credit supplies made by Sharma after revocation of guarantee,  because it is a case of continuing guarantee.

However, liability of Manoj for previous transactions (before revocation) i.e. for ₹ 40,000 remains. He is liable for payment of ₹ 40,000 to Sharma because the transaction was already entered into before revocation of guarantee.


Question 47

Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising to give ₹ 200 at the time of taking back the bailed goods. Srijith’s  employee, unaware of this, mixed the 50 kg of sugar belonging to Amar with the   sugar in the shop and packaged it for sale when Srijith was away. This came to light only when Amar came asking for the sugar he had bailed with Srijith, as the price of the specific quality of sugar had trebled. What is the remedy available to Amar?

Answer

According to section 157 of the Contract Act, 1872, if the bailee, without  the  consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the    loss of the goods.

In the given question, Srijith’s employee mixed high quality sugar bailed by Amar  and then packaged it for sale. The sugars when mixed cannot be separated. As Srijith’s employee has mixed the two kinds of sugar, he (Srijith) must compensate Amar for the loss of his sugar.


Question 48

ABC Ltd. sells its products through some agents and it is not the custom in their business to sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale. ABC Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of products to M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim?

Answer

To conduct the business of agency according to the principal’s directions (Section 211 of the Indian Contract Act, 1872): An agent is bound to conduct the business of his principal according to the direction given by the principal, or, in the absence of any such directions, according to the  custom which prevails in  doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.

In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale. Also, it is    not the custom in ABC Ltd. to sell the products on credit.

Hence, Mr. Pintu must make good the loss to ABC Ltd.


Question 49

‘C’ advances to ‘B’, ₹ 2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further security for the same borrowing by mortgage of B’s furniture worth ₹ 2,00,000 without knowledge of ‘A’. C’ cancels the mortgage. After 6 months ‘B’ becomes insolvent and ‘C’ ‘sues ‘A’ his guarantee. Decide the liability of ‘A’ if  the market  value of furniture is worth ₹ 80,000, under the Indian Contract Act, 1872.

Answer

Surety’s right to benefit of  creditor’s  securities: According to  section 141  of the Indian Contract Act, 1872, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the  surety,  parts with such security, the surety is discharged to the extent of the value of the security.

In the instant case, C advances to B, ₹ 2,00,000 rupees on the guarantee of A.  C has also taken a further security for ₹ 2,00,000 by mortgage of B’s furniture  without knowledge of A. C  cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A  is discharged from liability to the amount of the value  of the furniture i.e. ₹ 80,000 and will remain liable for balance ₹ 1,20,000.


Question 50

Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the cheque and was not aware of the loss of the cheque. The person who found the  cheque forged the signature of Mr. Vyas and indorsed it to Mr. Parshwanath as the consideration for goods bought by him from Mr. Parshwanath. Mr. Parshwanath encashed the cheque, on the very same day from the drawee bank. Mr. Vyas intimated the drawee bank about the theft of the cheque after three days. Examine  the liability of the drawee bank.

Answer

Cheque payable to order [Section 85 of the Negotiable Instruments Act, 1881]

  • Where a cheque payable to order purports to be indorsed by  or on  behalf  of the payee, the drawee is discharged by payment in due course.
  • Where a cheque is originally expressed to be payable to bearer,  the  drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.

As per the given facts, cheque is drawn payable to “Mr. Vyas or order”. It was lost and Mr. Vyas was not aware of the same. The person found  the  cheque  and forged and indorsed it to Mr. Parshwanath, who encashed the cheque from the drawee bank. After few days, Mr. Vyas intimated about the theft of the cheque, to the drawee bank, by which time, the drawee bank had already made the payment.

According to above stated section 85, the drawee banker is discharged when it has made a payment against the cheque payable to order when it is purported to be indorsed by or on behalf of the payee. Even though the signature of Mr. Vyas    is forged, the banker is protected and is discharged. The true owner, Mr. Vyas, cannot recover the money from the drawee bank in this situation.


Question 51

As per the provisions of the Companies Act, 2013, a whole time Key Managerial Personnel (KMP) shall not hold office in more than one company  except  its subsidiary company at the same time. Referring to the Section 13 of the General Clauses Act, 1897, examine whether a whole time KMP can be appointed in more than one subsidiary company?

Answer

Section 203(3) of the Companies Act, 2013 provides that whole time key managerial personnel shall not hold office in more than  one  company except in  its subsidiary company at the same time. With respect to the issue that whether a whole time KMP of holding company be appointed in more than one subsidiary companies or can be appointed in only one subsidiary company.

It can be noted that Section 13 of General Clauses Act, 1897 provides that  the  word ‘singular’ shall include the ‘plural’, unless there is anything repugnant to the subject or the context. Thus, a whole time key managerial personnel may hold  office in more than one subsidiary company as per the present law.


Question 52

Explain how ‘Dictionary Definitions’ can be of great help in interpreting /constructing an Act when the statute is ambiguous.

Answer

Dictionary Definitions: First we refer the Act in question to find out if any particular word or expression is defined in it. Where we find that a word is not defined in the Act itself, we may refer to dictionaries to find out the general sense in which that word is commonly understood. However, in selecting one out of the several meanings of a word, we must always take into consideration the context in which it is used in the Act. It is the fundamental rule that the meanings of words and expressions used in an Act must take their colour from the context in which they appear. Further, judicial decisions laying down the meaning of words in construing statutes in pari materia will have greater weight than the meaning furnished by dictionaries. However, for technical terms, reference may be made to technical dictionaries.


Question 53

A notice when required under the Statutory rules to be sent by “registered post acknowledgment due” is instead sent by “registered post” only. Whether the protection of presumption regarding serving of notice by “registered post” under the General Clauses Act is tenable? Referring to the provisions of the General Clauses  Act, 1897, examine the validity of such notice in this case.

Answer

As per the provisions of Section 27 of the General Clauses Act, 1897, where any legislation  or regulation requires any document to be  served by post, then unless  a different intention appears, the service shall be deemed to be effected by:

(i) Properly addressing,

(ii) Pre-paying, and

(iii) Posting by registered post.

A letter containing the document to have been effected at the time at which the letter would be delivered in the ordinary course of post.

Therefore, in view of the above provision, since, the statutory rules itself provides about the service of notice that a notice when required under said statutory rules  to be sent by ‘registered post acknowledgement due’, then, if notice was sent by ‘registered post’ only it will not be the compliance of said rules. However, if such provision was not provided by such statutory rules, then service of notice if by registered post only shall be deemed to be effected.

Furthermore, in similar case of In United Commercial Bank v. Bhim Sain Makhija, AIR 1994 Del 181, A notice when required under the statutory rules to be sent by ‘registered post acknowledgement due’ is instead sent by ‘registered post’ only, the protection of presumption regarding serving of notice under  ‘registered  post’  under this section of the Act is neither tenable nor based upon sound exposition of law.


Question 54

Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making new a silver bowl out of it. Every evening she used to receive the unfinished good (silver bowl) to put it into box kept at Mr. Y’s Shop. She kept the key of that box with herself. One night, the silver bowl was stolen from that box. Was there a contract of bailment? Whether the possession of the goods (actual or constructive) delivered, constitute contract of bailment or not?

Answer

Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as 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 direction of the person delivering them.

According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf. Thus, delivery is necessary to constitute bailment.

Thus, the mere keeping of the box at Y’s shop, when A herself took away the key cannot amount to delivery as per the meaning of delivery given in the provision in section 149. Therefore, in this case there is no contract of bailment as Mrs. A did    not deliver the complete possession of the good by keeping the keys with herself.


Question 55

At the time of interpreting a statutes what will be the effect of ‘Usage’ or ‘customs and Practices’?

Answer

Effect of usage: Usage or practice developed under the statute is  indicative  of  the meaning recognized to its words by contemporary opinion. A  uniform notorious practice continued under an old statute and inaction of the Legislature  to amend the same are important factors to show that the practice so followed  was based on correct understanding of the law. When the usage or practice  receives judicial or legislative approval it gains additional weight.

In this connection, we have to bear in mind two Latin maxims:

(i) ‘Optima Legum interpres est consuetude’ (the custom is the best interpreter  of the law); and

(ii) ‘Contemporanea exposito est optima et fortissinia in lege’ (the best way to interpret a document is to read it as it would have been read when made).

Therefore, the best interpretation/construction of a statute or  any  other  document is that which has been made by the contemporary authority. Simply stated, old statutes and documents should be interpreted as  they  would have  been at the time when they were enacted/written.

Contemporary official statements throwing light on the construction of a statute and statutory instruments made under it have been used as contemporanea exposition to interpret not only ancient but even recent statutes in India.


Question 56

Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim a reputed auctioneer to sell the goods consigned to him through auction. Aziz authorized Rahim to receive the proceeds and transfer those proceeds once in 45 days. Rahim sold goods on auction for ₹ 2,00,000 but before transferring the proceeds of the auction, became insolvent. Assess the liability of Aziz according to the provisions of the Indian Contract Act, 1872.

Answer

According to section 195 of the Contract Act, 1872, in selecting an agent (substituted) for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.

Thus, while selecting a “substituted agent” the agent is bound to exercise same amount of diligence as a man of ordinary prudence and if he does so he will not be responsible for acts or negligence of the substituted agent.

Hence, if Aziz has exercised same amount of diligence as a man of ordinary prudence would, he shall not be responsible to Azar for the proceeds of the auction.


Question 57

Preamble does not over-ride the plain provision of the Act.’ Comment. Also give suitable example.

Answer

Preamble: The Preamble expresses the scope, object and purpose of the Act more comprehensively. The Preamble of a Statute is a part of the enactment and can legitimately be used as an internal aid for construing it. However, the Preamble   does not over-ride the plain provision of the Act. But if the wording of the statute gives rise to doubts as to its proper construction, for example, where the words or phrase has more than one meaning and a doubt arises as to which of the two meanings is intended in the Act, the Preamble can and ought to be referred to in order to arrive at the proper construction.

In short, the Preamble to an Act discloses the primary intention of the legislature but can only be brought in as an aid to construction if the language of the statute  is not clear. However, it cannot override the provisions of the enactment.

Example: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955 provides that “a marriage may be solemnized between two Hindus…..” has been construed to be mandatory in the sense that both parties to the marriage must be Hindus as defined in section 2 of the Act. It was held that a marriage between a Christian male and a Hindu female solemnized under the Hindu Marriage Act was void. This result was reached also having regard to the preamble of the Act which reads: ‘An Act to amend and codify the law relating to marriage among Hindus” [GullipoliSowria Raj V. BandaruPavani, (2009)1 SCC714].


Question 58

X owned a land with fifty tamarind trees. He sold his land and the timber (obtained after cutting the fifty trees) to Y. X wants to know whether the sale of timber tantamount to sale of immovable property. Advise him with reference to provisions  of “General Clauses Act, 1897”.

Answer

“Immovable Property” [Section 3(26) of the General Clauses Act, 1897]:

‘Immovable Property’ shall include:

(i) Land,

(ii) Benefits to arise out of land, and

(iii) Things attached to the earth, or

(iv) Permanently fastened to anything attached to the earth.

It is an inclusive definition. It contains four elements: land, benefits to arise out of land, things attached to the earth and things permanently fastened to anything attached to the earth. Where, in any enactment, the definition of immovable property is in the negative and not exhaustive, the definition as given in  the General Clauses Act will apply to the expression given in that enactment.

In the instant case, X sold Land along with timber (obtained after cutting trees) of fifty tamarind trees of his land. According to the above definition, Land is immovable property; however, timber cannot be immovable property since the same are not attached to the earth.


Question 59

Mr. S Venkatesh drew a cheque in favor of M who was sixteen years old. M settled   his rental due by indorsing the cheque in favor of Mrs. A the owner of the house in which he stayed. The cheque was dishonored when Mrs. A presented it for payment  on grounds of inadequacy of funds. Advise Mrs. A how  she can proceed to collect   her dues.

Answer

Capacity to make, etc., promissory notes, etc. (Section 26 of the Negotiable Instruments Act, 1881): Every person capable of contracting, according to the law  to which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

However, a minor may draw, indorse, deliver and negotiate such instruments so   as to bind all parties except himself.

As per the facts given in the question, Mr. S Venkatesh draws a cheque in  favour   of M, a minor. M indorses the same in favour of Mrs. A to settle his rental dues.

The cheque was dishonoured when it was presented by Mrs. A to the bank on the ground of inadequacy of funds. Here in this case, M being a minor may draw, indorse, deliver and negotiate the instrument so as to bind all parties except himself. Therefore, M is not liable. Mrs. A can, thus, proceed against Mr. S Venkatesh to collect her dues.


Question 60

Srushti acquired valuable diamond at a very low price by a voidable contract under the provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded. Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the Indian Contract Act, 1872?

Answer

Pledge by person in possession under voidable contract [Section 178A of the Indian Contract Act, 1872]: When the pawnor has obtained possession of  the  goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

Therefore, the pledge of diamond by Srushti with Mr. VK is valid.


Question 61

What is the meaning of service by post as per provisions of the General Clauses Act, 1897?

Answer

“Meaning of Service by post” [Section 27 of the General Clauses Act, 1897]: Where any legislation or regulation requires any document to be served by post, then unless a different intention appears, the service shall be deemed to be  effected by:

(i) properly addressing

(ii) pre-paying, and

(iii) posting by registered post.

A letter containing the document to have been effected at the time at which the letter would be delivered in the ordinary course of post.


Question 12

What are the circumstances under which a bill of exchange can be dishonored by non-acceptance? Also, explain the consequences if a cheque gets dishonored for insufficiency of funds in the account.

Answer

As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured either by non-acceptance or by non-payment.

Dishonour by non-acceptance may take place in any one of the following circumstances:

(a) When a bill is duly presented for acceptance, and the drawee, or one of  several drawees not being partners, refuse acceptance within forty  eight hours from the time of presentment, the bill is dishonoured. In other words, when the drawee makes default in acceptance upon being duly required to accept the bill.

(b) Where presentment is excused and the bill is not accepted.

(c) Where the drawee is incompetent to contract, the bill may be treated as dishonoured.

(d) Where the drawee is a fictitious person.

(e) Where the drawee could not be found even after reasonable search

(f) When a drawee gives a qualified acceptance, the holder may treat the instrument dishonoured.

Dishonour of Cheque for insufficiency, etc. of funds in the account: As per section 138 of the  Negotiable Instruments Act, 1881, where any cheque drawn by  a person on an account maintained by him with a banker for payment is dishonoured due to insufficiency of funds, he shall  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.


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