PRINCIPLES OF

BUSINESS LAW[For BBM Bangalore and Similar Courses]

PRINCIPLES OF

BUSINESS LAW[For BBM Bangalore and Similar Courses]

DR. S.N. MAHESHWARIPROFESSOR EMERITUS & ACADEMIC ADVISOR

DELHI INSTITUTE OF ADVANCED STUDIES, DELHI-110 085

Formerly : Principal, Hindu College, Delhi UniversityProfessor & Dean, Faculty of Commerce and Business Management, Goa University

DR. SUNEEL K. MAHESHWARIPROFESSOR

EBERLY COLLEGE OF BUSINESS AND INFORMATION TECHNOLOGYINDIANA UNIVERSITY OF PENNSYLVANIA, U.S.A.

Formerly : Professor, Division of Accountancy & Legal EnvironmentMarshall University, U.S.A.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

© S.N. Maheshwari & S.K. MaheshwariNo part of this book shall be stored in a retrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors.

First Edition : 2004Second Revised Edition : 2015

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.com

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Printed at : M/S Sri Sai Art Printer Hyderabad. On behalf of HPH.

Preface

TO THE SECOND EDITION

We are pleased to place before the esteemed readers the Second Revised and Enlarged Edit ion of our book on“Principles of Business Law” for Bachelor of Business Management (BBM) students of Bangalore University.

The Second Edition, besides maintaining the PLUS features of the First Edit ion of the book, viz., lucid presentation,tailor-made approach, comprehensive text with plenty of illustrative material including case laws, questions andproblems for recapitulation etc., has several addit ional welcome features. These include the following:

The book meets all the more comprehensively the course content requirement of the students appearingin the paper Business Laws for BBM Bangalore and those having similar course contents.

Since the publication of the First Edit ion, two important developments have taken place in respect ofcorporate laws:

(i) Replacement of the Companies Act 1956, by a new Act t it led as The Companies Act, 2013.

(ii) Enactment of The Companies (Amendment) Act 2015, providing for certain changes in The CompaniesAct 2013.

All these developments have been incorporated at appropriate places in the book.

In view of the Companies Act, 1956 not being completely repealed and enforcement of the Companies Act,2013 in stages; an Appendix has been added in Section IV: ‘Elements of Company Law’, giving details ofsections of New Act which have been enforced.

The text matter in several chapters has been strengthened, wherever necessary.

The latest questions and problems from recent University and professional examinations have been incorporatedin the relevant chapters of the book.

The book continues to follow an examination-oriented approach.

We are confident that with all these changes, addit ions, adaptations and updating, the readers will find therevised and enlarged edit ion of the book all the more useful and rewarding for them.

Constructive and helpful suggestions for improvement of the book will be gratefully acknowledged.

A-2/ 156, Paschim Vihar DR. S.N. MAHESHWARINew Delhi-110 063. DR. SUNEEL K. MAHESHWARI

Contents

Introductory ............................................................................................................................ 1.1–1.2Learning Objectives .......................................................................................................................... 1.1Meaning of Law ............................................................................................................................... 1.1Meaning of Mercantit le Law .............................................................................................................. 1.1Sources of Indian Mercantile Law....................................................................................................... 1.1Key Terms ....................................................................................................................................... 1.2Test Questions.................................................................................................................................. 1.2

Section 1THE INDIAN CONTRACT ACT, 1872

1. General Principles................................................................................................................. 1.5–1.14Learning Objectives .......................................................................................................................... 1.5Scope and Application ...................................................................................................................... 1.5Types of Rights................................................................................................................................ 1.6Meaning of Contract ......................................................................................................................... 1.6Essential Elements of a Valid Contract ................................................................................................ 1.7Classification of Contracts ................................................................................................................. 1.8Key Terms ..................................................................................................................................... 1.12Test Questions................................................................................................................................ 1.12Practical Problems .......................................................................................................................... 1.14

2. Of fer and Acceptance........................................................................................................... 1.15–1.30Learning Objectives ........................................................................................................................ 1.15Proposal or Offer ............................................................................................................................ 1.15Types of Offer ................................................................................................................................ 1.18Acceptance .................................................................................................................................... 1.19Essentials of Valid Acceptance.......................................................................................................... 1.20Communication of Offer and Acceptance .......................................................................................... 1.22Revocation of Offer and Acceptance ................................................................................................. 1.23Contracts by Post ........................................................................................................................... 1.25Contracts over Telephone ................................................................................................................ 1.25Agreement to Make Contract ........................................................................................................... 1.26Key Terms ..................................................................................................................................... 1.26Test Questions................................................................................................................................ 1.26Practical Problems .......................................................................................................................... 1.28

3. Competence of Contracting Parties ....................................................................................... 1.31–1.39Learning Objectives ........................................................................................................................ 1.31Minor ........................................................................................................................................... 1.31

Persons of Unsound Mind................................................................................................................ 1.36Persons Disqualified by Other Laws................................................................................................... 1.36Key Terms ..................................................................................................................................... 1.37Test Questions................................................................................................................................ 1.37Practical Problems .......................................................................................................................... 1.38

4. Consent : Nature and Requisi tes .......................................................................................... 1.40–1.56Learning Objectives ........................................................................................................................ 1.40Consent ......................................................................................................................................... 1.40Free Consent .................................................................................................................................. 1.40Coercion ........................................................................................................................................ 1.41Undue Influence............................................................................................................................ 1.42Fraud ............................................................................................................................................ 1.44Misrepresentation ........................................................................................................................... 1.47Mistake ......................................................................................................................................... 1.49Key Terms ..................................................................................................................................... 1.53Test Questions................................................................................................................................ 1.54Practical Problems .......................................................................................................................... 1.55

5. Consideration ...................................................................................................................... 1.57–1.65Learning Objectives ........................................................................................................................ 1.57Meaning of Consideration................................................................................................................ 1.57Essential Elements of Consideration .................................................................................................. 1.58Adequacy of Consideration .............................................................................................................. 1.60Exceptions : No Consideration, No Contract ....................................................................................... 1.60Key Terms ..................................................................................................................................... 1.62Test Questions................................................................................................................................ 1.62Practical Problems .......................................................................................................................... 1.64

6. Legali ty of the Object and Consideration .............................................................................. 1.66–1.71Learning Objectives ........................................................................................................................ 1.66Consideration and Object ................................................................................................................ 1.66Unlawful Consideration and Object ................................................................................................... 1.66Public Policy .................................................................................................................................. 1.67Key Terms ..................................................................................................................................... 1.70Test Questions................................................................................................................................ 1.70Practical Problems .......................................................................................................................... 1.71

7. Void Agreements ................................................................................................................. 1.72–1.81Learning Objectives ........................................................................................................................ 1.72Agreements in Restraint of Marriage ................................................................................................ 1.72Agreements in Restraint of Trade..................................................................................................... 1.73Agreements by Way of Wager .......................................................................................................... 1.77Agreements to do an Impossible Act ................................................................................................ 1.79Key Terms ..................................................................................................................................... 1.79Test Questions................................................................................................................................ 1.80Practical Problems .......................................................................................................................... 1.80

8. Contingent Contracts............................................................................................................ 1.82–1.85Learning Objectives ........................................................................................................................ 1.82Meaning of Contingent Contract ...................................................................................................... 1.82

Essential Characterist ics .................................................................................................................. 1.83Rules Regarding Performance........................................................................................................... 1.83Contingent Contract and Wagering Agreement ................................................................................... 1.84Key Terms ..................................................................................................................................... 1.85Test Questions................................................................................................................................ 1.85Practical Problems .......................................................................................................................... 1.85

9. Performance of Contracts ..................................................................................................... 1.86–1.95Learning Objectives ........................................................................................................................ 1.86Meaning and Types of Performance .................................................................................................. 1.86Responsibility for Performance......................................................................................................... 1.88Demand for Performance ................................................................................................................. 1.89Reciprocal Promises ........................................................................................................................ 1.90Time and Place for Performance ....................................................................................................... 1.92Appropriation of Payments.............................................................................................................. 1.93Key Terms ..................................................................................................................................... 1.94Test Questions................................................................................................................................ 1.94Practical Problems .......................................................................................................................... 1.95

10. Discharge of Contracts ....................................................................................................... 1.96–1.105Learning Objectives ........................................................................................................................ 1.96Meaning and Modes of Discharge ..................................................................................................... 1.96Agreement ..................................................................................................................................... 1.96Performance of Contract .................................................................................................................. 1.98Lapse of Time ................................................................................................................................ 1.98Operation of Law............................................................................................................................ 1.98Material Alteration ......................................................................................................................... 1.99Supervening Impossibility of Performance......................................................................................... 1.99Breach ........................................................................................................................................ 1.102Key Terms ................................................................................................................................... 1.103Test Questions.............................................................................................................................. 1.104Practical Problems ........................................................................................................................ 1.104

11. Quasi-Contracts................................................................................................................ 1.106–1.110Learning Objectives ...................................................................................................................... 1.106Concept of Quasi-Contracts............................................................................................................ 1.106Types of Quasi-Contracts ............................................................................................................... 1.106Key Terms ................................................................................................................................... 1.109Test Questions.............................................................................................................................. 1.109Practical Problems ........................................................................................................................ 1.110

12. Remedies for Breach of Contract ...................................................................................... 1.111–1.124Learning Objectives ...................................................................................................................... 1.111Types of Remedies........................................................................................................................ 1.111Rescission .................................................................................................................................... 1.111Damages...................................................................................................................................... 1.112Liquidated Damages and Penalty .................................................................................................... 1.116Quantum Meruit .......................................................................................................................... 1.118Specific Performance..................................................................................................................... 1.119

Injuct ion .....................................................................................................................................1.119Restitution ...................................................................................................................................1.120Key Terms ....................................................................................................................................1.120Test Questions...............................................................................................................................1.121Practical Problems .........................................................................................................................1.122

13. Contracts of Agency ......................................................................................................... 1.125–1.144Learning Objectives .......................................................................................................................1.125Meaning and Nature of Agency .......................................................................................................1.125Agent and Servant ........................................................................................................................1.126Agent and Bailee...........................................................................................................................1.126Kinds of Agents ............................................................................................................................1.126Creation of Agency .......................................................................................................................1.127Extent of Agent’s Authority ...........................................................................................................1.130Delegation of Agent’s Authority .....................................................................................................1.131Agency and Contracts with Third Persons ........................................................................................1.132Personal Liability of Agent .............................................................................................................1.134Rights of an Agent .......................................................................................................................1.135Duties of an Agent ........................................................................................................................1.137Termination of Agency ..................................................................................................................1.138Key Terms ....................................................................................................................................1.141Test Questions...............................................................................................................................1.141Practical Problems .........................................................................................................................1.142

Section 2THE SALE OF GOODS ACT, 1930

1. General Principles................................................................................................................. 2.3–2.12Learning Objectives .......................................................................................................................... 2.3Meaning of Contract of Sale .............................................................................................................. 2.3Essentials of Contract of Sale ............................................................................................................ 2.3Distinction between Sale and Agreement to Sell .................................................................................. 2.4Sale Distinguished from Other Contracts............................................................................................. 2.5Formation of Contract of Sale............................................................................................................ 2.7Goods ............................................................................................................................................. 2.7Perishing of Goods ........................................................................................................................... 2.8Price............................................................................................................................................... 2.9Some Important Legal Terms ........................................................................................................... 2.10Key Terms ..................................................................................................................................... 2.10Test Questions................................................................................................................................ 2.11Practical Problems .......................................................................................................................... 2.12

2. Condi t ions and Warranties .................................................................................................. 2.13–2.24Learning Objectives ........................................................................................................................ 2.13Meaning of Condit ions and Warranties.............................................................................................. 2.13Difference Between Condit ion and Warranty ...................................................................................... 2.14Express and Implied Condit ions and Warranties ................................................................................. 2.15

Doctrine of Caveat Emptor .............................................................................................................. 2.20Key Terms ..................................................................................................................................... 2.21Test Questions................................................................................................................................ 2.21Practical Problems .......................................................................................................................... 2.22

3. Transfer of Ownership ......................................................................................................... 2.25–2.35Learning Objectives ........................................................................................................................ 2.25Importance of Transfer of Ownership ............................................................................................... 2.25Rules Regarding Transfer of Ownership ............................................................................................. 2.25Transfer of Tit le by Non-owners....................................................................................................... 2.28Key Terms ..................................................................................................................................... 2.31Test Questions................................................................................................................................ 2.31Practical Problems .......................................................................................................................... 2.32

4. Performance of a Contract of Sale ........................................................................................ 2.36–2.42Learning Objectives ........................................................................................................................ 2.36Duties of Seller and Buyer .............................................................................................................. 2.36Delivery ........................................................................................................................................ 2.36C.I.F. Contract ................................................................................................................................ 2.40Key Terms ..................................................................................................................................... 2.41Test Questions................................................................................................................................ 2.41Practical Problems .......................................................................................................................... 2.42

5. Remedial Measures ............................................................................................................. 2.43–2.51Learning Objectives ........................................................................................................................ 2.43Meaning of Unpaid Seller ................................................................................................................ 2.43Rights of Unpaid Seller ................................................................................................................... 2.43Key Terms ..................................................................................................................................... 2.48Test Questions................................................................................................................................ 2.49Practical Problems .......................................................................................................................... 2.50

Section 3

THE INDIAN PARTNERSHIP ACT, 1932

1. General Principles................................................................................................................. 3.3–3.13Learning Objectives .......................................................................................................................... 3.3Meaning of Partnership ..................................................................................................................... 3.3Essential Characterist ics of Partnership................................................................................................ 3.3Partnership and Joint Hindu Family Firms........................................................................................... 3.5Partnership and Co-ownership ............................................................................................................ 3.6Partnership and Club ........................................................................................................................ 3.6Tests of Partnership .......................................................................................................................... 3.7Registration of Partnership Firms ....................................................................................................... 3.8Key Terms ..................................................................................................................................... 3.11Test Questions................................................................................................................................ 3.11Practical Problems .......................................................................................................................... 3.13

2. Formation of Partnership .................................................................................................... 3.14–3.25Learning Objectives ........................................................................................................................ 3.14

Partnership Deed ............................................................................................................................ 3.14Posit ion of Minor ........................................................................................................................... 3.15Duration of Partnership .................................................................................................................. 3.16Classes of Partners .......................................................................................................................... 3.16Reconstitution of a Firm................................................................................................................. 3.18Rights of Outgoing Partner ............................................................................................................. 3.20Partnership Property ....................................................................................................................... 3.21Key Terms ..................................................................................................................................... 3.22Test Questions................................................................................................................................ 3.22Practical Problems .......................................................................................................................... 3.24

3. Rights and Liabi li t ies of Partners........................................................................................ 3.26–3.34Learning Objectives ........................................................................................................................ 3.26Relations of Partners with One Another ............................................................................................ 3.26Rights of Partners .......................................................................................................................... 3.26Duties of Partners........................................................................................................................... 3.28Relations of Partners with Third Parties ............................................................................................ 3.29Key Terms ..................................................................................................................................... 3.32Test Questions................................................................................................................................ 3.32Practical Problems .......................................................................................................................... 3.33

4. Dissolution of Partnership Fi rms ......................................................................................... 3.35–3.42Learning Objectives ........................................................................................................................ 3.35Dissolution of Partnership and Dissolution of Firm ............................................................................ 3.35Modes of Dissolution of Firm........................................................................................................... 3.35Consequences of Dissolution ............................................................................................................ 3.37Rules for the Sett lement of Accounts after Dissolution ...................................................................... 3.38Public Notice ................................................................................................................................. 3.39Key Terms ..................................................................................................................................... 3.40Test Questions................................................................................................................................ 3.40Practical Problems .......................................................................................................................... 3.41

Section 4ELEMENTS OF COMPANY LAW

1. Company and Its Forms ......................................................................................................... 4.3–4.28Learning Objectives .......................................................................................................................... 4.3Int roduct ion .................................................................................................................................... 4.3Scope And Aplication ............................................................................................................................ 4.4Administration of Companies Act ...........................................................................................................4.4Definition ............................................................................................................................................4.5Essential Characterist ics of Company ................................................................................................... 4.6Illegal Association ............................................................................................................................ 4.8Lift ing Up of the Corporate Veil ...................................................................................................... 4.10Kinds of Companies ........................................................................................................................ 4.13Difference Between Company and Partnership .................................................................................... 4.17Distinction Between Private Company and Public Company ................................................................. 4.19

Privileges of Private Company .......................................................................................................... 4.20Advantages of Company .................................................................................................................. 4.22Disadvantges of Company ................................................................................................................ 4.22Conversion of a Private Company into a Public Company .................................................................... 4.23Conversion of a Public Company into a Private Company .................................................................... 4.23Conversion of One Person Company (OPC) into Public or Private Company............................................ 4.24The Securit ies and Exchange Board of India(SEBI) ............................................................................. 4.24Service of Documents ..................................................................................................................... 4.25Key Terms ..................................................................................................................................... 4.26Test Questions................................................................................................................................ 4.26Practical Problem ........................................................................................................................... 4.28

2. Formation of a Company ...................................................................................................... 4.29–4.38Learning Objectives ........................................................................................................................ 4.29Promotion ..................................................................................................................................... 4.29Incorporation ................................................................................................................................ 4.33Commencement of Business ............................................................................................................ 4.35Key Terms ..................................................................................................................................... 4.35Test Questions................................................................................................................................ 4.36Practical Problems .......................................................................................................................... 4.37

3. Memorandum of Association ................................................................................................ 4.39–4.50Learning Objectives ........................................................................................................................ 4.39Meaning of Memorandum................................................................................................................ 4.39Clauses of Memorandum.................................................................................................................. 4.39Form of Memorandum ..........................................................................................................................4.41Alteration of Memorandum of Association ........................................................................................ 4.41Doctrine of Ultra-Vires.................................................................................................................... 4.46Key Terms ..................................................................................................................................... 4.48Test Questions................................................................................................................................ 4.48Practical Problems .......................................................................................................................... 4.49

4. Arti cles of Association ......................................................................................................... 4.51–4.59Learning Objectives ........................................................................................................................ 4.51Meaning of Art icles ........................................................................................................................ 4.51Form of Model Articles .........................................................................................................................4.51Contents of the Articles................................................................................................................. .4.52Binding Effects of Memorandum and Articles.................................................................................... 4.52Alteration of Art icles...................................................................................................................... 4.55Distinction Between Memorandum of Association and Articles of Association ....................................... 4.55Constructive Notice of the Memorandum and Articles ........................................................................ 4.56Doctrine of Indoor Management ...................................................................................................... 4.56Key Terms ..................................................................................................................................... 4.57Test Questions................................................................................................................................ 4.57Practical Problems .......................................................................................................................... 4.59

5. Prospectus........................................................................................................................... 4.60–4.73Learning Objectives ........................................................................................................................ 4.60Need and Meaning .......................................................................................................................... 4.60Requirements as to Prospectus......................................................................................................... 4.60Contents of Prospectus ................................................................................................................... 4.62

Effect of Omissions and Mis-statements in a Prospectus...................................................................... 4.63Deposits from Members or Public ..................................................................................................... 4.64Public Offer of Scurit ies of be in Dementerialized Form...................................................................... 4.65Advertisement of the Prospectus...................................................................................................... 4.66Shelf Prospectus............................................................................................................................. 4.66Red Herring Prospectus................................................................................................................... 4.66Listing of Securit ies ....................................................................................................................... 4.66Book Building ............................................................................................................................... 4.68Credit Rating .......................................................................................................................................4.69Insider Trading ....................................................................................................................................4.71Key Terms .................................................................................................................................. ...4.71Test Questions................................................................................................................................ 4.72Practical Problems .......................................................................................................................... 4.73

6. Allotment of Shares............................................................................................................. 4.74–4.78Learning Objectives ........................................................................................................................ 4.74General Principles of Allotment ....................................................................................................... 4.74Statutory Restrict ions on Allotment of Securit ies .............................................................................. 4.85Return of Allotment ...................................................................................................................... 4.76Key Terms ..................................................................................................................................... 4.76Test Questions................................................................................................................................ 4.77Practical Problems .......................................................................................................................... 4.77

7. Shares and Share Capi tal ................................................................................................... 4.79–4.100Learning Objectives ........................................................................................................................ 4.79Meaning of Share........................................................................................................................... 4.79Nature of Share ............................................................................................................................. 4.79Kinds of Shares.............................................................................................................................. 4.80Share Capital ................................................................................................................................. 4.81Shareholders’ Voting Rights............................................................................................................. 4.81Commission on Issue of Shares and Debentures ................................................................................. 4.81Purchase by Company of its Own Shares ........................................................................................... 4.82Loans by Company for Purchase of Own Shares ................................................................................. 4.82Power of Company to Purchase (Buy-Back) Own Securit ies.................................................................. 4.83Transfer to Capital Redemption Reserve ............................................................................................ 4.83Issue of Sweat Equity Shares ........................................................................................................... 4.84Issue of Shares at Premium ............................................................................................................. 4.84Prohibit ion on Issue of Shares at Discount ....................................................................................... 4.85Issue and Redemption of Preference Shares....................................................................................... 4.85Further Issue of Capital .................................................................................................................. 4.86Conversion of Loans into Capital ..................................................................................................... 4.87Share Certificate............................................................................................................................. 4.87Stocks........................................................................................................................................... 4.88Transfer of Shares .......................................................................................................................... 4.88Transfer of Security in case of Listed Company ................................................................................. 4.93Transfer when Company is under Winding Up ................................................................................... 4.93Transmision of Shares..................................................................................................................... 4.94Nomination of Shares ..................................................................................................................... 4.94Lien on Shares............................................................................................................................... 4.95Dematerialization ........................................................................................................................... 4.95Key Terms ..................................................................................................................................... 4.96Test Questions................................................................................................................................ 4.97Practical Problems .......................................................................................................................... 4.99

8. Membership of Company ................................................................................................. 4.101–4.113Learning Objectives ...................................................................................................................... 4.101Members without being Shareholders ............................................................................................. 4.101Shareholders without being Members ............................................................................................. 4.102Modes of Acquiring Membership .................................................................................................... 4.102Termination of Membership ........................................................................................................... 4.103Persons who can be Members ......................................................................................................... 4.104Joint Shareholders ....................................................................................................................... 4.106Rights of Members ....................................................................................................................... 4.106Liability of Members..................................................................................................................... 4.104Calls on Shares ............................................................................................................................ 4.107Advance Payment of Calls ............................................................................................................. 4.108Forfeiture of Shares ...................................................................................................................... 4.108Surrender of Shares...................................................................................................................... 4.110Test Questions.............................................................................................................................. 4.111Practical Problems ........................................................................................................................ 4.112

9. Meetings and Proceedings ............................................................................................... 4.114–4.135Learning Objectives ...................................................................................................................... 4.114Kinds of Meetings ........................................................................................................................ 4.114Statutory Meeting ........................................................................................................................ 4.114Annual General Meeting................................................................................................................ 4.115Extraordinary General Meeting ....................................................................................................... 4.116Meetings Convened by National Company Law Tribunal .................................................................... 4.117Class Meetings.............................................................................................................................. 4.118Other Meetings ............................................................................................................................ 4.118Procedures and Requisites of Valid General Meeting.......................................................................... 4.119Resolutions.................................................................................................................................. 4.125Passing of Resolutions by Postal Ballot ........................................................................................... 4.127Minutes of the Proceedings ........................................................................................................... 4.128Key Terms ................................................................................................................................... 4.129Test Questions.............................................................................................................................. 4.129Practical Problems ........................................................................................................................ 4.131

10. Borrowing Powers............................................................................................................ 4.136–4.146Learning Objectives ...................................................................................................................... 4.136Extent of Borrowing Powers .......................................................................................................... 4.136Powers to Give Security ................................................................................................................ 4.136Charge on Uncalled Capital ............................................................................................................ 4.136Consequences of Ultra Vires Borrowings.......................................................................................... 4.137Remedies available to the Lender of Money ..................................................................................... 4.137Debentures .................................................................................................................................. 4.138Difference between Debentures and Shares ...................................................................................... 4.141SEBI Guidelines for Issue of Debt Instruments ................................................................................ 4.142Charge ........................................................................................................................................ 4.143Key Terms ................................................................................................................................... 4.145Test Questions.............................................................................................................................. 4.146

11. Managerial Personnel and Thei r Remuneration ................................................................ 4.147–4.154Learning Objectives ...................................................................................................................... 4.147Meaning of Managerial Personnel ................................................................................................... 4.147

Key Managerial Personnel ...............................................................................................................4.147Choice of the Managerial Personnel .................................................................................................4.148Overall Limit Managerial Remuneration ...........................................................................................4.149Schedule (V) Part (II) Remuneration ...............................................................................................4.150Key Terms ....................................................................................................................................4.153Test Questions...............................................................................................................................4.154

12. Accounts, Audi t and Investigation ................................................................................... 4.155–4.177Learning Objectives .......................................................................................................................4.155Books of Account .........................................................................................................................4.155Statutory Books of Account and Statutory Registers.........................................................................4.156Financial Statements .....................................................................................................................4.161National Financial Reporting Authority ...........................................................................................4.164Corporate Social Responsibility .......................................................................................................4.165Internal Audit ..............................................................................................................................4.166Audit and Auditors .......................................................................................................................4.166Cost Records & Cost Audit ..............................................................................................................4.171Investigation ................................................................................................................................4.172Key Terms ....................................................................................................................................4.175Test Questions...............................................................................................................................4.176Practical Problems .........................................................................................................................4.177

13. Compromises, Arrangements and Amalgamation .............................................................. 4.178–4.185Learning Objectives .......................................................................................................................4.178Compromises and Arrangements......................................................................................................4.178Reconstruction & Amalgamation .....................................................................................................4.181Amalgamation of Companies in Public Interest ................................................................................4.183Preservation of Books and Papers of the Amalgamated Company .........................................................4.184Key Terms ....................................................................................................................................4.184Test Questions...............................................................................................................................4.184Practical Problems .........................................................................................................................4.184

Section 5BBM BANGALORE QUESTION PAPERS 5.1–5.17

INTRODUCTORY

LEARNING OBJECTIVES A careful study of this chapter wi ll enable you to : understand the concept of law; differentiate between Law and Mercantile Law; identify the different sources of Indian Mercantile Law; and explain the meaning of certain key terms.

MEANING OF LAWThe term law refers to rules of conduct enforced by the State to maintain peace and order in the society. Their objectiveis to provide security and uniformity by regulating human actions. In the absence of law, life and business will becomea matter of survival not only of the fit test but also of the most ruthless. Since laws are backed by the authority and thepower of the State, they are enforceable against all individuals irrespective of their social status.

It will be appropriate here to give definit ions of the term law by some eminent scholars :“Law is the body of principles recognised and applied by the State in administrat ion of just ice.” — Salmond“A law is a rule of conduct imposed and enforced by the sovereign.” — Austin“Law in its most general and comprehensive sense signifies a rule of act ion and is applied indiscriminately to all kinds of

act ions whether animate or inanimate, rat ional or irrat ional.” — BlackstoneThus, law may be defined as the system of rights and obligations which the State enforces.

MEANING OF MERCANTILE LAWThe term ‘Mercantile Law’ or ‘Law Merchant’ refers to those legal rules which govern and regulate mercantile or businesstransactions. These rules, regulations, etc. bring a sense of seriousness and definiteness in business dealings. They providefor rules regarding the validity of making contracts and their performance. They deal with various types of contracts suchas those relating to partnership, sale of goods, agency, bailment, indemnity and guarantee. Mercantile Law also includesin its fold the laws relating to the joint stock companies, carriage of goods, insurance, insolvency, etc.

SOURCES OF INDIAN MERCANTILE LAW

The main sources of Indian Mercantile Law are as follows :

(1) English Mercanti le Law : Indian Mercantile Law is largely based on English Mercantile Law. As a matter of fact,even after independence, in the absence of provisions regarding any matter of the Indian law, the provisions ofthe English law are generally accepted in the Indian Courts.

(2) Statutes of Indian Legislatures : Most of the Indian laws are in the form of Acts passed by the Legislatures.Both the Central Legislatures (i.e., the Parliament) and the state Legislatures are empowered to enact lawsrelating to matters which come within their jurisdiction. For example, the Companies Act, 1956 has been enactedby the Parliament while the different State Legislatures have enacted the Sales Tax Acts applicable to theirrespective States.

1.2 The Indian Contract Act, 1872

(3) Judicial Decisions : Past judicial decisionsacquire the force of precedents and aregenerally followed by law courts in decidingsimilar cases. In our country, the courtshave been divided into three groups : (i)the Supreme Court, (ii) the High Courts and(iii) the Sub-ordinate Courts. The SupremeCourt is the final court of appeal. For thecourt of same stature, earlier decisions haveonly a guiding and persuasive value.However, for a court of a lower stature, thedecision given by the court of a higher stature regarding the same subject matter is usually taken as havingbinding effects.

(4) Customs and Usage : Customs and Usage also play a significant role in regulating business transactions. Thisfact has been accepted by many Indian statutes. For example section 1 of the Indian Contract Act states that‘nothing therein contained shall affect any usage or customs of trade’. Similarly Section 1 of the NegotiableInstruments Act also provides that ‘nothing therein contain shall affect any legal usage relating to Instrumentsin an oriental language1.

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Law : Rules of conduct enforced by State to maintain peace and order in the society. Mercanti le Law : Legal rules which govern and regulate mercantile transactions.

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Object ive Type : Test Your Knowledge

1. State whether each of the following statements is True or False

(i) Laws are framed by the State to maintain peace and order in the society.(ii) Mercant ile Law and Law Merchant are synonymous terms.(iii) Customs and usages have no role to play in regulat ing business transact ions.(iv) Past judicial decisions have to be accepted by the law courts while giving decisions in future.(v) Both the Parliament and State Legislatures have the power to make laws.

[Ans. (i) True; (ii) True; (iii) False; (iv) False; (v) True]

2. Fill in the blanks:

(i) The decisions of a High Court are binding on all the ___________ Courts. (CS Foundation, June 2008)(ii) Law means a ___________ of rules. (CS Foundation, June 2008)

[Ans. (i) Subordinate (ii) Set]

Essay Type : For Review, Discussion and Pract ice

1. Explain the meaning of the term ‘law’. Different iate it from Mercant ile Law.

2. State the main sources of Indian Mercant ile Law. (CS Foundation, Dec. 2004, June 2011)

1. These Instruments are popularly termed as ‘Hundis’.