CA Foundation PAPER 2: BUSINESS LAWS Syllabus

State the rule in Hadley v. Baxendale on damages, as adopted in Section 73.

Damages recoverable are those that naturally arose in the usual course from the breach (ordinary/general damages), or those the parties knew at the time of contract were likely to result (special damages). Remote and indirect losses are not recoverable.

Distinguish liquidated damages from a penalty, and how Section 74 treats them.

Liquidated damages are a genuine pre-estimate of loss; a penalty is a sum fixed to compel performance. Under Section 74 (Indian law), the court awards reasonable compensation not exceeding the named amount, whether the sum is liquidated damages or a penalty.

Define a 'contract of indemnity' under Section 124 of the Indian Contract Act.

A contract by which one party (indemnifier) promises to save the other (indemnity-holder) from loss caused to him by the conduct of the promisor himself or of any other person.

Define a 'contract of guarantee' and name the three parties involved (Section 126).

A contract to perform the promise or discharge the liability of a third person in case of his default. The three parties are: the surety (gives guarantee), the principal debtor (whose default is guaranteed), and the creditor.

State three key differences between a contract of indemnity and a contract of guarantee.

(1) Indemnity has 2 parties; guarantee has 3. (2) Indemnity has one contract; guarantee has three contracts. (3) In indemnity, liability is primary; in guarantee, surety's liability is secondary/collateral to the principal debtor's primary liability.

What is the nature and extent of a surety's liability under Section 128?

The liability of the surety is co-extensive with that of the principal debtor, unless otherwise provided by the contract — i.e., the surety is liable to the same extent as the principal debtor.

Define 'bailment' under Section 148 and name the parties.

The delivery of goods by one person to another for some purpose, upon a contract that the goods shall, when the purpose is accomplished, be returned or disposed of according to the directions of the person delivering them. Parties: bailor (delivers) and bailee (receives).

Define 'pledge' under Section 172 and identify the two parties.

Pledge (pawn) is the bailment of goods as security for payment of a debt or performance of a promise. The bailor is the pawnor; the bailee is the pawnee.

State two key differences between bailment and pledge.

(1) Purpose: bailment can be for any purpose (safe custody, repair, etc.); pledge is only as security for a debt/promise. (2) Right of sale: a pawnee may sell the goods on default after notice; an ordinary bailee has no general right to sell.

What is a 'particular lien' versus a 'general lien' in the context of bailment?

Particular lien (Sec 170): right to retain the specific goods on which labour/skill was bestowed until charges are paid. General lien (Sec 171): right to retain any goods for any amount due — available to bankers, factors, wharfingers, attorneys, and policy brokers.

Define 'agency' and an 'agent' and 'principal' under Sections 182.

An agent is a person employed to do any act for another or to represent another in dealings with third persons; the person for whom such act is done or who is so represented is the principal. Agency is the relationship between them.

What are the modes of creation of agency?

By express agreement, by implied agreement (including agency by estoppel and by holding out), by necessity, by ratification, and by operation of law.

What is 'agency by ratification' and the conditions for valid ratification?

When an act is done by a person on behalf of another without authority and the latter subsequently adopts it. Conditions: the act must have been done on behalf of an identifiable principal, the principal must have been in existence and competent at the time, ratification must be of the whole act, within reasonable time, and the act must be lawful.

Distinguish a 'sale' from an 'agreement to sell' under the Sale of Goods Act, 1930.

In a sale, property in goods transfers immediately to the buyer (executed contract). In an agreement to sell, transfer takes place at a future time or subject to conditions (executory). Sale creates jus in rem; agreement to sell creates jus in personam.

State the essentials of a contract of sale under Section 4 of the Sale of Goods Act.

Two parties (buyer and seller), goods as subject matter, transfer or agreement to transfer ownership, price in money consideration, and all essentials of a valid contract. Goods may be existing, future, or contingent.

How is 'price' fixed under the Sale of Goods Act when not agreed?

Price may be fixed by the contract, in an agreed manner, or determined by the course of dealing. Where it cannot be so fixed, the buyer must pay a reasonable price (a question of fact in each case).

Differentiate a 'condition' from a 'warranty' under Section 12 of the Sale of Goods Act.

A condition is a stipulation essential to the main purpose of the contract; its breach gives the right to repudiate the contract and claim damages. A warranty is collateral/subsidiary; its breach gives only the right to claim damages, not to reject the goods.

When may a breach of condition be treated only as a breach of warranty?

(1) When the buyer voluntarily waives the condition or elects to treat it as a warranty; or (2) when the contract is non-severable and the buyer has accepted the goods (or part), the breach of condition can only be treated as a breach of warranty (no rejection).

Explain the maxim 'Caveat Emptor' and a key exception under the Sale of Goods Act.

'Let the buyer beware' — the buyer must satisfy himself about quality/fitness; the seller is not bound to disclose defects. Exception: where the buyer makes known the particular purpose and relies on the seller's skill/judgment, there is an implied condition of fitness for purpose (Sec 16).

State the primary rule for transfer of ownership in specific/ascertained goods (Section 19).

Property passes when the parties intend it to pass; the intention is ascertained from the contract terms, conduct of parties, and circumstances. (Sections 20-24 lay down rules for ascertaining intention where it is not expressed.)

State the rule 'nemo dat quod non habet' and one exception under the Sale of Goods Act.

'No one can give a better title than he himself has' — generally a seller cannot pass a better title than he owns. Exceptions include: sale by mercantile agent, sale by joint owner, sale by person in possession under voidable contract, sale by seller/buyer in possession after sale, and estoppel.

Define 'delivery' of goods and name the three types of delivery under the Sale of Goods Act.

Delivery is the voluntary transfer of possession from one person to another. Types: (1) actual (physical) delivery, (2) symbolic delivery (e.g., handing over keys/documents of title), and (3) constructive delivery (delivery by attornment/acknowledgement).

Who is an 'unpaid seller' under Section 45 of the Sale of Goods Act?

A seller is unpaid when (a) the whole price has not been paid or tendered, or (b) a bill of exchange or other negotiable instrument was received as conditional payment and the condition has not been fulfilled by reason of dishonour.

List the rights of an unpaid seller against the goods.

(1) Right of lien (retain possession until paid), (2) right of stoppage of goods in transit (when buyer becomes insolvent), and (3) right of resale. The unpaid seller also has a right of withholding delivery where property has not passed.

Define 'partnership', 'partner', 'firm' and 'firm name' under the Indian Partnership Act, 1932.

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons are individually 'partners', collectively a 'firm', and the name under which they carry on business is the 'firm name'.

What is the 'true test' of the existence of a partnership under Section 6?

The existence of mutual agency — i.e., whether each partner is the agent of the firm and the other partners. Sharing of profits is prima facie evidence but not conclusive proof of partnership.

List the implied rights of partners under the Indian Partnership Act.

Right to take part in business, to be consulted, to access books, to share profits equally, to interest on capital/advances, to be indemnified, to act in emergencies, and not to be expelled without good faith (no new partner without consent).

What is meant by 'reconstitution of a firm', and name its modes?

A change in the relations among partners while the firm continues. Modes: admission of a new partner (Sec 31), retirement of a partner (Sec 32), expulsion of a partner (Sec 33), insolvency of a partner (Sec 34), and death of a partner (Sec 35).

State two important effects of non-registration of a partnership firm under Section 69.

(1) An unregistered firm/partner cannot sue the firm or other partners to enforce rights arising from the contract or the Act; (2) the firm cannot file a suit against third parties to enforce a contractual right. (Third parties can still sue the unregistered firm.)

Differentiate 'dissolution of partnership' from 'dissolution of a firm' (Section 39).

Dissolution of partnership is a change in relations of partners while the firm continues (reconstitution). Dissolution of a firm is the dissolution of partnership among ALL partners — the firm itself comes to an end and business is wound up.

Define a Limited Liability Partnership (LLP) and state its key distinguishing feature.

An LLP (under the LLP Act, 2008) is a body corporate with perpetual succession that combines the flexibility of a partnership with the limited liability of a company; partners' liability is limited and one partner is not liable for another partner's independent wrongful acts.

List the essential characteristics of an LLP.

Separate legal entity, perpetual succession, limited liability of partners, mutual agency limited to the firm (no liability for other partners' misconduct), minimum two designated partners (at least one resident in India), no maximum limit on partners, and governance by an LLP agreement.

State three differences between an LLP and a traditional partnership firm.

(1) Legal status: LLP is a separate body corporate; a partnership is not. (2) Liability: limited in LLP, unlimited in partnership. (3) Registration: LLP registration is compulsory with the Registrar; partnership registration is optional.

Define a 'company' and list its essential features under the Companies Act, 2013.

A company is an artificial legal person incorporated under the Companies Act. Features: separate legal entity, limited liability, perpetual succession, common seal (optional now), transferability of shares, separate property, capacity to sue and be sued, and separation of ownership from management.

Explain the 'corporate veil' theory and name two circumstances in which it is lifted.

The corporate veil separates the company's legal personality from its members (Salomon v. Salomon). It may be lifted to look at the persons behind the company: e.g., for fraud/improper conduct, evasion of tax, formation to avoid legal obligations, enemy character of a company, or where statute requires.

Classify companies on the basis of liability under the Companies Act, 2013.

(1) Company limited by shares — liability limited to unpaid amount on shares; (2) company limited by guarantee — liability limited to amount members agree to contribute; (3) unlimited company — members have unlimited liability.

Distinguish a private company from a public company under the Companies Act, 2013.

Private company: minimum 2 members, maximum 200, restricts share transfer, prohibits invitation to public for securities, minimum 2 directors. Public company: minimum 7 members, no maximum, freely transferable shares, may invite public, minimum 3 directors.

What is a One Person Company (OPC) and its key restriction?

An OPC is a private company with only one member (introduced by the Companies Act, 2013). It must nominate a nominee who becomes the member on the sole member's death/incapacity; it has relaxed compliance but certain restrictions (e.g., on conversion thresholds and NBFC activities).

Describe the main types of share capital of a company.

Authorised (nominal/registered) capital — maximum a company can issue per MOA; Issued capital — part offered to public; Subscribed capital — part of issued capital taken up; Called-up capital — amount called on subscribed shares; Paid-up capital — amount actually paid by members.

Distinguish equity shares from preference shares.

Equity shares carry voting rights and dividends vary with profits (no fixed rate, paid after preference). Preference shares carry a fixed/preferential rate of dividend and priority in repayment of capital on winding up, but usually limited voting rights.

What documents must be filed for incorporation of a company under Section 7?

Memorandum and Articles of Association, declaration by professional and subscribers, address for correspondence, particulars of subscribers and first directors (with DIN), and the SPICe+ form, filed with the Registrar of Companies along with prescribed fees.

What is the legal effect of a 'certificate of incorporation'?

It is conclusive evidence that the company is duly registered and the company comes into existence as a body corporate from the date mentioned; the company acquires a separate legal personality and perpetual succession.

Define the Memorandum of Association (MOA) and list its clauses.

The MOA is the charter/constitution defining the company's powers and scope of activities. Clauses: Name clause, Registered Office (situation) clause, Object clause, Liability clause, Capital clause, and Subscription/Association clause (plus Nominee clause for OPC).

What is the 'doctrine of ultra vires' in relation to the MOA?

Any act done by a company beyond the powers/objects stated in its MOA is ultra vires (beyond powers) and void; it cannot be ratified even by all shareholders. It protects shareholders and creditors by confining the company to its stated objects.

Define the Articles of Association (AOA) and state their relationship with the MOA.

The AOA are the internal rules and regulations for the management of the company and the rights of members. They are subordinate to the MOA — if they conflict, the MOA prevails; AOA cannot exceed the powers in the MOA.

Explain the 'doctrine of constructive notice'.

Every person dealing with a company is deemed to have notice of the contents of its public documents (MOA and AOA) registered with the Registrar, whether or not they have actually read them, and is presumed to understand them.

Explain the 'doctrine of indoor management' (Turquand Rule) and its exceptions.

Outsiders dealing with a company in good faith may assume that internal procedures/formalities have been duly complied with (Royal British Bank v. Turquand). Exceptions: knowledge of irregularity, suspicion of irregularity, forgery, negligence, and acts void/ultra vires.

Define a 'negotiable instrument' under Section 13 of the Negotiable Instruments Act, 1881.

A negotiable instrument means a promissory note, bill of exchange, or cheque, payable either to order or to bearer. ('Negotiable' = transferable by delivery or endorsement and delivery, passing a good title to a bona fide holder for value.)

List the essential characteristics of a negotiable instrument.

Free transferability, transferee gets good title (holder in due course), title free of defects, holder can sue in his own name, payable to order or bearer, must be in writing and signed, contains an unconditional promise/order to pay a certain sum of money, and presumptions under Sec 118 apply.

Distinguish a promissory note from a bill of exchange.

A promissory note is an unconditional written promise by the maker to pay (2 parties: maker and payee). A bill of exchange is an unconditional written order by the drawer directing the drawee to pay (3 parties: drawer, drawee/acceptor, payee). A note requires no acceptance; a bill usually does.

Define a 'cheque' under Section 6 of the Negotiable Instruments Act.

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand; it includes the electronic image of a truncated cheque and a cheque in electronic form.

Classify negotiable instruments as 'bearer' and 'order' instruments.

A bearer instrument is payable to whoever holds it and is transferable by mere delivery. An order instrument is payable to a specified person or his order and is transferable by endorsement followed by delivery.

What is the difference between an 'inland instrument' and a 'foreign instrument'?

An inland instrument (Sec 11) is drawn or made in India and payable in, or drawn upon a person resident in, India. A foreign instrument (Sec 12) is any instrument that is not an inland instrument (e.g., drawn outside India or payable outside India).

Define 'negotiation' under Section 14 and state how bearer and order instruments are negotiated.

Negotiation is the transfer of an instrument to another so as to constitute the transferee the holder. A bearer instrument is negotiated by delivery; an order instrument is negotiated by endorsement and delivery.

What is an 'endorsement', and name its main types?

Endorsement is signing on the back (or face/allonge) of an instrument for the purpose of negotiation. Types: blank (general) endorsement, full (special) endorsement, restrictive endorsement, partial endorsement (invalid), conditional/qualified endorsement, and sans recourse endorsement.

Who is a 'holder in due course' under Section 9?

A person who, for valuable consideration, becomes the possessor (or payee/endorsee) of a negotiable instrument before its maturity, in good faith and without notice of any defect in the title of the transferor. He gets a better title than the transferor.

What is 'presentment for acceptance' and which instrument requires it?

Presentment for acceptance is showing a bill of exchange to the drawee to obtain his acceptance. Only bills of exchange payable after sight (or where expressly required) must be presented for acceptance; promissory notes and cheques do not require acceptance.

What is 'presentment for payment' and the consequence of non-presentment?

Presentment for payment is demanding payment of the instrument from the maker/acceptor/drawee on or after maturity. If an instrument is not presented for payment when required, the other parties (e.g., endorsers) are generally discharged from liability.

State the rules of compensation (damages) for dishonour under Sections 117 of the Negotiable Instruments Act.

The holder is entitled to the amount due plus interest at the rate specified (or 18% p.a. if none specified) from the date of dishonour/notice, plus expenses of noting and protest; for instruments dishonoured outside India, compensation is calculated as per usual rate of exchange and re-exchange.