LAB Notes 2023

ESSENTIALS OF A VALID CONTRACT
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Object of the Act
1.3 Definition of Contract
1.4 Classification of Contract
1.5 Essential Elements of a Valid Contract
1.6 Summary
1.7 Keywords
1.8 Self Assessment Questions
1.9 Suggested Readings
1.0 OBJECTIVE
After reading this lesson, you should be able to:
(a) Define the contract and explain the various types of contract
(b) Describe the essentials of a valid contract
1.1 INTRODUCTION
We enter into contracts day after day. Taking a seat in a bus amounts to entering
into a contract. When you put a coin in the slot of a weighing machine, you have entered
into a contract. You go to a restaurant and take meals, you have entered into a contract. In
such cases, we do not even realize that we are making a contract. In the case of people
engaged in trade, commerce and industry, they carry on business by entering into
contracts. The law relating to contracts is to be found in the Indian Contract Act, 1872.
The law of contracts differs from other branches of law in a very important
respect. It does not lay down so many precise rights and duties which the law will protect
and enforce; it contains rather a number of limiting principles, subject to which the
parties may create rights and duties for themselves, and the law will uphold those rights
and duties. Thus, we can say that the parties to a contract, in a sense make the law for
themselves. So long as they do not transgress some legal prohibition, they can frame any
rule they like in regard to the subject matter of their contract and the law will give effect
to their contract.
1.2 OBJECT OF THE ACT
The main objective of the Contract Act is to ensure that the rights and obligations
arising out of a contract are honoured and that legal remedies are made available to an
aggrieved party against the party failing to honour his part of agreement. The Act is of
great importance to businessmen as it enables them to plan ahead with the knowledge that
what has been promised to them will be performed by the promisors failing which they
will be liable for the loss suffered.
1.3 DEFINITION OF CONTRACT
A contract is a legally binding agreement, that is, an agreement which will be

enforced by the courts. Salmond defines contract as, “an agreement creating and defining
obligation between the parties.” Halsbury defines a contract to be, “an agreement
between two or more persons which is intended to be enforceable at law and is
constituted by the acceptance by one party of an offer made to him by the other party to
do or abstain from doing some act.”
The definition of the term ‘contract’ given in the Act is based on the definition
given by Halsbury. Section 2(h) of the Indian Contract Act defines a contract as, “An
agreement which is enforceable by law.” This definition has two important components
which constitute the basis for a contract. They are :
1. Agreement : An agreement gives birth to a contract. An agreement is defined as,

“every promise and every set of promises forming consideration for each other.” (Section
2(e)). A proposal when accepted becomes a promise. Thus an agreement is an accepted
proposal. An agreement comes into existence only when one party makes a proposal or
offer to the other party and the other party signifies his assent thereto. In short, an
agreement is the sum total of offer and acceptance. The following are the characteristics
of the definition of agreement as given above :
(a) Plurality of persons : There must be two or more persons to make an
agreement because one person cannot enter into an agreement with himself.
(b) Consensus ad idem : An agreement is necessarily the outcome of consenting
minds or consensus ad idem, i.e., the two contracting parties must agree as
regards the subject-matter of the contract at the same time and in the same
sense.
2. Legal Obligation : Although every contract is an agreement, there are many kinds
of agreements which are not contracts. An agreement to become a contract must give rise
to a legal obligation. Obligation is an undertaking to do or to abstain from doing some
definite act. The obligation must be such as is enforceable by law. In other words, it must
be a legal obligation and not merely moral, social or religious. To take an example,
“Please, come to my house”, says P to D, “and we shall go out for a walk together”. D
came to the house of P but P could not leave the house because of some important
engagement. D cannot sue P in damages for his not fulfilling the promise, the reason
being that there had been no intention between D and P to create any legal obligation by
the engagement as made between them. In the circumstances, there was, in the eye of law
no contract between P and D. Contracts must not be the sports of an idle hour, or mere
matters of pleasantry, never intended by the parties to have any serious effect whatever.
Another kind of obligation which does not constitute a contract is the arrangement
made between husband and wife. Such agreements are purely domestic and are not
intended to create legal relationship.
The Leading case on this point is Balfour V. Balfour. The points decided were :
(a) Agreements which do not create legal relations are not contracts.
(b) Agreement between husband and wife in domestic affairs is not a contract.
Facts of the case are :
Mr. Balfour was employed in Ceylon. Mrs. Balfour owing to ill health, had to stay
in England and could not accompany him to Ceylon. On the occasion of leaving her in
England for medical treatment Mr. Balfour promised to send her £30 per month while he
was abroad. But Mr. Balfour failed to pay that amount. So Mrs. Balfour filed a suit
against her husband for recovering the said amount. The court held that it was a mere
domestic agreement and that the promise made by the husband in this case was not
intended to be a legal obligation. Hence the suit filed by Mrs. Balfour was dismissed
since there was no contract enforceable in a court of law.
In Balfour v. Balfour, the intention not to create a legal obligation was clear from
the conduct of the parties. On the other hand the parties may make this intention clear by
an express statement in the contract.
The main distinction between a legal obligation and a social or religious obligation
is that the former involves money value but the latter does not. In order to constitute a
contract an agreement must create legal obligation. It is this theme which has given rise
to the popular saying : “All contracts are agreements but all agreements need not be
contracts.”
It may be noted that the law of contract deals only with such obligations which
spring from agreements. Obligations which are not contractual in nature are outside the
scope of the law of contract. For example, obligation to maintain wife and children,
obligation to comply with the orders of a court and obligation arising from a trust do not
fall within the scope of the Contract Act.
1.4 CLASSIFICATION OF CONTRACT
Before dealing with the various essentials of a valid contract one by one in detail,
it is desirable to discuss the “various types of contract,” because we shall be using terms
like ‘voidable contract’, ‘void contract’, ‘void agreement’, ‘unenforceable contract’, etc.,
very often in the course of our discussion. The classification of contracts from the various
points of view may be discussed as follows :
(a) From the point of view of enforceability
Contracts may be classified according to their enforceability as (i) valid (ii) void
contracts or agreements (iii) voidable (iv) illegal and (v) unenforceable.
Valid Contract : A valid contract is one which satisfies all the requirements prescribed
by law for the validity of a contract, i.e. the essential elements laid down in Sec.10. A
valid contract creates in favour of one party a legal obligation binding upon the other.
Void Contract : A contract which was legal and enforceable when it was entered into
may subsequently become void due to impossibility of performance, change of law or
other reasons. When it becomes void the contract ceases to have legal effect. In other
words, a void contract is not valid from its inception but subsequent to its formation, it
becomes invalid and destitute of legal effect because of certain reasons. [Sec. 2(j)]
Void Agreement : “An agreement not enforceable by law is said to be void.”— Sec.
2(g). A void agreement has no legal effect. It confers no rights on any person and creates
no obligations.
An agreement made by a minor; agreements made without consideration (except

the cases coming under Sec.25); certain agreements against public policy; agreements in
restraint of trade or in restraint of marriage or in restraint of legal proceedings, etc. are
examples of void agreements.
Voidable Contract [Section 2(i)] : A voidable contract is a contract which can be
avoided or set aside at the option of one of the parties to the contract. It can be set aside at
the option of the party defrauded. Until it is avoided or rescinded by the party entitled to
do so by exercising his option in that behalf, it remains valid. But the aggrieved party
must exercise his option of rejecting the contract (i) within a reasonable time and (ii)
before the rights of third parties intervene, otherwise the contract cannot be repudiated.
Examples
1. X threatens to kill Y if he does not sell his new Ambassador car to X for
Rs.12,000. Y agrees. The contract has been brought about by coercion and is
voidable at the option of Y, i.e. the aggrieved party.
2. A, with the intention to deceive B, falsely represents that fifty lakh bulbs are
made annually at A’s factory, and thereby induces B to buy the factory. The
contract has been caused by fraud and as such is voidable at the option of B.
The Indian Contract Act has laid down certain other situations also under which a
contract becomes voidable. They are :
1. When a contract contains reciprocal promises, and one party to the contract
prevents the other from performing his promise, then the contract becomes
voidable at the option of the party so prevented (Sec.53).
Example : A, contracts with B that A shall repair B’s house for Rs.1000. A is
ready and willing to execute the work accordingly, but B does not supply him
material and thus prevents him from doing so. The contract is voidable at the
option of A.
2. When a party to the contract promises to do a certain thing within a specified time,
but fails to do it, then the contract becomes voidable at the option of the promises,
provided at the time of entering into contract, the intention of the parties was that
the time would be the essence of the contract (Sec.55).
Example: A contracts with B that A shall whitewash B’s house for Rs.1000
within fifteen day. But A does not turn up within the specified time. The contract
is voidable at the option of B.
Consequences of Recession of Voidable Contract : Section 64 lays down the rights

and obligations of the parties to a voidable contract after it has been rescinded. The
section states that when a person at whose option a contract is voidable rescinds it, the
other party thereto need not perform any promise therein contained in which he is a
promisor. If the party rescinding a voidable contract has received any benefit under the
contract, he must restore such benefit to the person from whom it was received. For
example, when a contract for the sale of a car is avoided on the ground of coercion, any
advance received on account of the price must be refunded. The object of this refund of
money is to ensure that the parties are placed on the same footing in which they would
have been without the contract. However, it must be remembered that the benefit which is
to be restored must have been received under the contact. If a certain amount has been
received as a security or as an earnest money for the due performance of the contract,
such deposit is not to be returned if the promisor fails to fulfill the promise because it is
not a benefit received under the contract.
Illegal or Unlawful Contract : The word illegal means ‘contrary to law’ and the term
contract refers to an agreement enforceable by law. Therefore to speak of an ‘illegal
contract’ involves a contradiction in terms as it amounts to saying that an agreement
contrary to law is enforceable by law. Thus it will be appropriate to use the term illegal
agreement in place of illegal contract. An illegal agreement is one which is against the
law enforceable in India. The term ‘illegal agreement’ has a wider conception than ‘void
agreement.’ All illegal agreements are void but all void agreements are not necessarily
illegal, e.g., an agreement with a minors is void but not illegal.
Unenforceable Contract : A contract may be valid, but it may not, at the same time, be
given effect to in a court of law. The statement is paradoxical; but it is nonetheless true.
The contract is valid, because judged by the canons of law which are applied to test the
validity of a contract, the contract is flawless; but it cannot be enforced because of certain
technical defects such as absence of writing, registration, requisite stamp, etc., or time
barred by the law of limitation. Suppose A gives a loan of Rs.1000 to B. The contract of
loan, let us assume, is valid in this case; but if A does not sue on the contract within the
period prescribed by law and allows his claim to be barred by time, he cannot afterwards
recover it from B. He cannot recover it, not because the contract was invalid, but because
the Statute of Limitation bars the suit. Similarly, an oral arbitration agreement is
unenforceable, because the law requires an arbitration agreement to be in writing. It is
important to remember here that some of the contracts can be enforced if the technical
defect is removed. For example, if a document embodying a contract is under stamped,
the contract is unenforceable, but if the requisite stamp is affixed (if allowed), the
contract becomes enforceable.
Difference between void and voidable contracts : A void contract is one which is
unenforceable by law. It has no legal existence and, therefore, is destitute of legal effect,
whereas a voidable contract is that agreement which is enforceable by law at the option
of aggrieved party thereto, but not at the option of the other or others. It is valid so long
as it is not rescinded or impeached by the party entitled to do so, i.e. the aggrieved party.
If the party fails to use his right of avoidance within a reasonable time, the agreement
would be binding.
Difference between void and illegal contracts : In all contracts there must be legality,
otherwise they are void and hence destitute of legal effect. Some contracts are illegal in
themselves, e.g., contracts of immoral nature, contracts against public policy, contracts in
restraint of trade. All illegal contracts are void but all void contracts are not illegal. An
illegal contract or agreement is destitute of legal effect ab-initio. The difference between
void and illegal contracts is significant in cases of collateral transactions, e.g. A, a person,
who lent money to another to pay bets already made or lost is not precluded from
recovering it; but money advanced for illegal transactions cannot be recovered. Thus the
term ‘illegal’ is narrower in meaning than ‘void’ or ‘voidable’. All illegal contracts are
void, but all contracts which are void are not necessarily illegal.
(b) From the point of view of creation : From the point of view of creation,
contracts may be two types : (i) express contracts, and (ii) implied contracts.
Express Contract : Contracts entered into between the parties by words spoken or
written, are termed as express contracts. For example, if X tells Y on telephone that he
offers to sell his house for Rs.20,000 and Y in reply informs X that he accepts the offer,
there is an express contract.
Implied Contract : Where the offer or acceptance is made not by words, written or
spoken, but by acts and conduct of parties, it is termed as an implied contract. Thus,
where X, a coolie, in uniform takes up the luggage of Y to be carried out of a railway
station without being asked by Y, and Y allows the coolie to do so, the law implied here
that Y agreed to pay for the services of X, and there is an implied contract between X and
Y. Similarly, when A takes a seat in a bus, an implied contract comes into being—a
contract according to which A will pay the prescribed fare to the conductor (i.e., the agent
of the bus company) for taking him to his destination.
(c) From the point of view of extent of execution or classification according to

performance : On the basis of extent to which the contracts have been performed, we
may classify them as (i) executed contract, and (ii) executory contracts.
Executed Contract : An executed contract refers to that contract in which both the
parties have fulfilled their respective obligations. In other words, an executed contract is
one where nothing remains to be done by either party.
Example: X agrees to paint a picture for Y for Rs.20. When X paints the picture and Y
pays the price, it becomes an executed contract.
Sometimes though the contract may appear to be completed at once yet the effects
of it may continue, e.g., when a person buys a bun for a penny and subsequently breaks
his tooth due to a stone in it, he has a right to recover damages from the seller.
Executory Contract : An executory contract refers to that contract in which both the
parties to the contract have yet to perform their respective obligations. In the example
referred to above, the contract is executory, if X has not yet painted the picture and Y has
not paid the price. Similarly, if A agrees to engage M as his servant from the next month,
the contract is executory.
A contract may sometimes be partly executed and partly executory. Thus if Y has
paid the price to X and X has not yet painted the picture, the contract is executed as to Y
and executory as to X.
On the basis of execution, the contracts may also be classified as (i) unilateral
contracts, and (ii) bilateral contracts.
Unilateral Contract : A contract is said to be unilateral where one party to a contract

has performed his share of obligation either before or at the time when the contract comes
into existence. It is only the obligation of the other party which remains outstanding at the
time of formation of the contract. Such contracts are also termed as contract with
executed consideration. Thus, a contract of loan, where money has been advanced by the
creditor is an example of unilateral contract, because the creditor has done what he was to
do under the contract, it remains for the debtor to repay the debt.
Bilateral Contract : In a bilateral contract obligations of both the parties are outstanding
at the time of the formation of the contract. They are, executory contracts or contracts
with executory consideration. In other words, in a bilateral contract, there is only a
promise for a promise. For example, where X promises to sell his car to Y after 15 days
and Y promises to pay the price on the delivery of the car, the contract is bilateral as
obligations of both the parties are outstanding at the time of formation on the contract.
It is to be remembered that a contract comes into being on the date on which it is

entered into between the parties. The date of its execution is immaterial for determining
the validity of the contract. In other words, a contract is a contract from the time it is
made and not from the time its performance is due.
(d) From the point of view of form or mode of the contract : There are four kinds
of contracts : formal contracts, contracts under seal or specialty contracts, simple
contracts and quasi-contracts.
Formal Contracts : These are in vogue in England. These have not received recognition
by the Indian Contract Act. Their validity depends upon their form alone. Consideration
is not essential in such contracts. They are required to satisfy certain legal formalities.
Contract under seal or speciality contracts : These contracts are those contracts, the
terms of which have been written down on a paper and are signed, sealed and delivered.
The following contracts must be made under seal, otherwise they will not be valid :
1. Contracts made without consideration.
2. Contracts of lease relating to land for more than three years.
3. Contracts entered into by corporations or companies.
4. Contracts relating to transfer of a British ship or any share therein.
Simple Contracts : Contracts which are not formal are known as simple contracts. They
are also known as ‘parole contracts’. They are made by words, spoken or written. They
are to be valid only when they are supported by consideration.
Quasi-Contracts : Contractual obligations are generally created voluntarily; but there

are some obligations which are not contractual, but which are treated as such by law, that
is to say, there is no contract in fact, but there is one in the contemplation of law. Such
contracts are called quasi-contracts. Thus, if X pays a sum of money to Y believing him
to be his creditor, while as a matter of fact he was not, he is bound to return the money to
X on the assumption that the above sum was given to him by way of loan. The Contract
Act has rightly named such contracts as “certain relations resembling those created by
contract.”
1.5 ESSENTIAL ELEMENTS OF A VALID CONTRACT
We know that there are two elements of a contract : (1) an agreement; (2) legal
obligation. Section 10 of the Act provides for some more elements which are essential in
order to constitute a valid contract. It reads as follows :
“All agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful object and are not
hereby expressly declared to be void.” Thus the essential elements of a valid contract can
be explained as follows :
1. Agreement : As already mentioned, to constitute a contract there must be an

agreement. An agreement is composed of two elements – offer and acceptance. The party
making the offer is known as the offeror, the party to whom the offer is made is known as
the offeree. Thus, there are essentially to be two parties to an agreement. They both must
be thinking of the same thing in the same sense. In other words, there must be consensus-
ad-idem.
An offer to be valid must fulfill certain conditions, such as it must intend to create
legal relations, its terms must be certain and unambiguous, it must be communicated to
the person to whom it made, etc. An acceptance to be valid must fulfill certain conditions,
such as it must be absolute and unqualified, it must be made in the prescribed manner, it
must be communicated by an authorised person before the offer lapses.
Thus, where ‘A’ who owns 2 cars ‘X’ and ‘Y’ wishes to sell car ‘X’ for Rs.30,000.
‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘X’ also. He thinks that ‘A’
owns only car ‘Y’ and is offering to sell the same for the stated price. He gives his
acceptance to buy the same. There is no contract because the contracting parties have not
agreed on the same thing at the same time, ‘A’ offering to sell his car ‘X’ and ‘B’
agreeing to buy car ‘Y’. There is no consensus-ad-idem.
2. Intention to create legal relationship : As already mentioned there should be an
intention on the part of the parties to the agreement to create a legal relationship. An
agreement of a purely social or domestic nature is not a contract.
However, even in the case of agreements of purely social or domestic nature, there
may be intention of the parties to create legal obligations. In that case, the social
agreement is intended to have legal consequences and, therefore, becomes a contract.
Whether or not such an agreement is intended to have legal consequences will be
determined with reference to the facts of the case. In commercial and business
agreements the law will presume that the parties entering into agreement intend those
agreements to have legal consequences. However, this presumption may be negatived by
express terms to the contrary. Similarly, in the case of agreements of purely domestic and
social nature, the presumption is that they do not give rise to legal consequences.
However, this presumption is rebuttable by giving evidence to the contrary, i.e., by
showing that the intention of the parties was to create legal obligations.
Example: There was an agreement between Rose Company and Crompton Company,
whereof the former were appointed selling agents in North America for the latter. One of
the clauses included in the agreement was : ‘This arrangement is not…. a formal or legal
agreement and shall not be subject to legal jurisdiction in the law courts.”
Held that : This agreement was not a legally binding contract as the parties intended not
to have legal consequences (Rose and Frank Co. v. J.R. Crompton and Bros. Ltd. (1925)
A.C. 445).
3. Competency of parties : The parties to the agreement must be competent to

contract. If either of the parties to the contract is not competent to contract, the contract is
not valid. According to Section 11 following are the persons who are competent to
contract –
(a) who are of the age of majority according to the law to which they are subject;
(b) who are of sound mind;
(c) who are not disqualified from contracting by any law to which they are
subject.
Examples
1. A patient in a lunatic asylum who is at intervals of sound mind may make a

contract during those intervals.
2. A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its effect on
his interests, cannot contract whilst such delirium or drunkenness lasts.
4. Free Consent : An agreement must have been made by free consent of the
parties. A consent may not be free either on account of mistake in the minds of the parties
or on account of the consent being obtained by some unfair means like coercion, fraud,
misrepresentation or undue influence. In case of mutual mistakes, the contract would be
void, while in case the consent is obtained by unfair means, the contract would be
voidable.
Examples
1. X has two scooters, one is blue and the other green. He wants to sell his blue
scooter. Y who knows of only X’s green scooter offers to purchase X’s scooter for
Rs. 5,000. X accepts the offer thinking it to be an offer for his blue scooter. Held,
consent is not free since both the parties are not understaning the same thing in the
same sense.
2. An old man executed a sale deed thinking it to be a power of attorney and the deed
before execution was not ready over to him. Held, there was no free consent of the
man and the contract is not binding on him.
5. Lawful consideration : All contracts must by supported by consideration.

Gratuitous promises are not enforceable at law. An agreement made for an unlawful
consideration is void. Lawful consideration requires both the presence of consideration
and the lawfulness of consideration.
Example : A promises to obtain for B an employment in public service and B promises
to pay Rs. 1,000 to A. The agreement is void as the consideration for it is unlawful.
6. Lawful object : The object of an agreement must be lawful. Object has nothing to
do with consideration. It means the purpose or design of the contract. Thus, when one
hires a house for use as a gambling house, the object of the contract is to run a gambling
house. According to Section 23, the object is said to be unlawful if –
(a) it is forbidden by law;
(b) it is of such nature that if permitted it would defeat the provisions of any
law;
(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it is immoral or opposed to public policy.
Examples
1. A, B and C enter into an agreement for a division among them of gains acquired,
or to be acquired, by them by fraud. The agreement is void, as its object is
unlawful (Illustration (e) to Sec. 23).
2. A promises to obtain for B an employment in the public service, and B promises to

pay Rs. 1,000 to A. The agreement is void as the consideration for it is unlawful
(Illustration (f) to Sec. 23).
3. A promises B to drop a prosecution which he has instituted against B for robbery,

and B promises to restore the value of the things taken. The agreement is void, as
its object is unlawful (Illustration (h) to Sec. 23).
7. Agreements not expressly declared void : The agreement must not have been
declared to be expressly void. Agreements mentioned in sections 24 to 30 have been
expressly declared to be void.
Under these provisions, agreement in restraint of marriage, agreement in restraint
of legal proceedings, agreement in restraint of trade and agreement by way of wager have
been expressly declared void.
Examples
1. A makes a contract with B that he will marry nobody except B, and if he marries
somebody else, he will pay a certain sum of money to B, the contract is void;
because there is no promise of marriage on either side and the agreement is purely
restrictive (Lowe v. Peers).
2. An agreement made by a married man that after the death of his wife, he will
marry the plaintiff is void ; because it interferes with the security of marriage.
3. Where X and Y enter into an agreement which provides that if England’s cricket
team wins the test match, X will pay Y Rs.200, and if it loses, Y will pay Rs.200
to X. Nothing can be recovered by the winning party under the agreement as it is
by the winning party under the agreement as it is a wagering contract.
4. Where A and B enter into a wagering agreement and each deposits Rs.200 with C
instructing him to pay or give the total sum to the winner, no suit can be brought
by the winner for recovering the bet amount from C, the stake-holder. Further, if C
had paid the sum to the winner, the loser can not bring a suit, for recovering his
Rs.200, either against the winner or against C, the stake-holder, even if C had paid
after the loser’s definite instructions not to pay.
8. Certainty and possibility of performance : The terms of the contract must be

precise and certain. It cannot be left vague. A contract may be void on the ground of
uncertainty. Thus a purported acceptance of an offer to buy a lorry ‘on-hire-purchase
terms’ does not constitute a contract if the hire-purchase terms are never agreed.
(Scammell (G) and Nephew Ltd. v. Ouston (1941) A.C. 251). Similarly an agreement
‘subject to war clause’ is too vague to be enforceable. (Bishop and Barber Ltd. v. Anglo-
Eastern Trading and Industrial Co. Ltd. (1944) K.B. 12). The terms of the agreement
must also be capable of performance. An agreement to do an impossible act cannot be
enforced.
9. Legal formalities : An oral contract is a perfectly valid contract, except in those

case where writing, registration etc. is required by some statute. In India writing is
required in cases of sale, mortgage, lease and gift of immovable property, negotiable
instrument; memorandum and articles of association of a company, etc. Registration is
required in cases of documents coming within the scope of Section 17 of the Registration
Act.
All the elements mentioned above must be present in order to make a valid
contract. If any one of them is absent the agreement does not become a contract.
1.6 SUMMARY
The Indian Contract Act is the most important part of business legislation. A
contract is an understanding, promise or agreement made between two or more parties,
whereby legal rights and obligation are created which the law shall enforce. Section 2(h)
of the Indian Contract Act provides that “an agreement enforceable by law is a contract”.
Thus a contract results from a combination of two ideas : agreement and enforceability or
obligation. The classification of contracts from the various points of view is (a) from the
point of view of enforceability – valid contract, void contract, voidable contract, illegal or
unlawful contract and unenforceable contract (b) from the point of view of creation –
express contracts and implied contracts (c) from the point of view of extent of execution
or classification according to performance – executed contract and executing contract and
(d) from the point of view of form or mode of the contract – formal contracts, contracts
under seal or specialty contracts, simple contracts and quasi-contracts. The essential
elements that characterize a valid contract are agreement, intention to create legal
relationship, competency of parties, free consent, lawful consideration, lawful object,
agreements not expressly declared void, certainty and possibility of performance, and
legal formalities.
1.7 KEYWORDS
Contract: A contract is an agreement creating and defining obligations between the

parties.
Agreement: An agreement is the sum total of offer and acceptance.
Valid Contract: A valid contract is one, which satisfied all the requirements prescribed
by the law for the validity of a contract.
Void Contract: It is one which was legal and enforceable which it was entered into but
has subsequently become void because of certain reasons.
Voidable Contract: A voidable contract is a contract which can be avoided or set aside
at the option of one of the parties to the contract.
1.8 SELF ASSESSMENT QUESTIONS
1. “All contracts are agreements but all agreements are not contracts”. Discuss.
2. Define the term ‘contract’. What are the essentials of a valid contract.
3. Distinguish between :
(a) Void and illegal contracts
(b) Executed and executory contracts
4. “As regards the legal effects, there is no difference between a contract in writing
and a contract made by word of mouth”. Discuss.
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STRUCTURE
2.0 Objective
2.1 Introduction
2.2 Agreement made by Incompetent Parties
2.3 Agreement made under a Mutual Mistake of Fact
2.4 Agreement, the Consideration or Object of which is Unlawful
2.5 Agreements for which Object or Consideration is Unlawful in Parts
2.6 Agreements made without Consideration
2.7 Agreement is Restraint of Marriage
2.8 Agreements in Restraint of Trade
2.9 Agreement in Restraint of Legal Preceding
2.10 Uncertain Agreements
2.11 Wagering Agreements
2.12 Agreements Contingent on Impossible Events
2.13 Agreements to do Impossible Acts
2.14 Summary
2.15 Keywords
2.0 OBJECTIVE
The objective of this lesson is to explain the agreements which have been expressly
declared as void agreements by Indian Contract Act.
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2.1 INTRODUCTION
All agreements may not be enforceable at law. Only those agreements which fulfil
the essentials laid down in Section 10 can be enforced. The Indian Contract Act
specifically declares certain agreements to be void. According to Section 2(g), an
agreement not enforceable by law is void. Such an agreement does not give rise to any
legal consequences and is void ab initio.
It will be useful to distinguish between illegal and void agreement. An unlawful or

illegal agreement is one which is actually forbidden by law. A void agreement, on the
other hand, is not forbidden by law as in the case of a contract with a minor. But both
illegal and void agreements are not enforceable. Thus, an illegal agreement is both
unenforceable and forbidden but a void agreement is only unenforceable but not illegal.
Another material difference between an illegal and void agreement relates to their
effect upon the collateral transactions. A collateral transaction means a transaction
subsidiary to the main transaction. Thus, where money is lent to a loser to enable him to
pay a wagering debt, the wager is the main transaction and the loan is subsidiary to it. If
the main transaction is forbidden by law, for example, smuggling, a collateral transaction
like money given to enable a person to smuggle, will also be tainted with the same
illegality and the money will be irrecoverable. But if the main transaction is void only (as
in the case of wagering), its collateral transaction will remain enforceable.
The following agreements have been expressly declared as void by the Indian
Contract Act.
1. Agreement made by incompetent parties (Sec. 10&11).
2. Agreement made under a mutual mistake of fact (Sec. 20).
3. Agreement, the consideration or object of which is unlawful (Sec. 23).
4. Agreements, the consideration or object of which is unlawful in part (Sec.
24).
5. Agreements made without consideration (Sec. 25).
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6. Agreements in restraint of marriage (Sec. 26).

7. Agreements in restraint of trade (Sec. 27).
8. Agreements in restraint of legal proceedings (Sec. 28).
9. Agreements the meaning of which is uncertain (Sec. 29).
10. Agreements by way of wager (Sec. 30).
11. Agreements contingent on impossible events (Sec. 36).
12. Agreements to do impossible acts (Sec. 56).
2.2 AGREEMENT MADE BY INCOMPETENT PARTIES
2.2.1 Minor
An infant or a minor is a person who is not a major. According to the Indian

Majority Act, 1875, a minor is one who has not completed his or her 18th year of age. A
person attains majority on completing his 18th year in India. In the following two cases, a
person continues to be a minor until he completes the age of 21 years.
(a) Where a guardian of minor’ person or property has been appointed under the
Guardians and Wards Act, 1890; or
(b) Where the superintendence of a minor’s property is assumed by a Court of
Wards.
Why should minors be protected ? A minor has an immature mind and cannot think
what is good or bad for him. Minors are often exploited and their properties stolen. As
such he must be protected by law from any exploitation or ill design. But at the same
time, law should not cause unnecessary hardship to persons who deal with minors.
Effects of minor’s agreement
A minor’s agreement being void is wholly devoid of all effects. When there is no
contract there should be no contractual obligation either side. The various rules regarding
minor’s agreement are discussed below :
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1. An agreement with or by a minor is void
Section 10 of the Contract Act requires that the parties to a contract must be
competent and Section 11 says that a minor is not competent. But neither Section makes
it clear whether the contract entered into by a minor is void or voidable. Till 1903, courts
in India were not unanimous on this point. The Privy Council made it perfectly clear that
a minor is not competent to contract and that a contract by a minor is void ab initio.
2. No ratification
An agreement with minor is completely void. A minor cannot ratify the agreement
even on attaining majority, because a void agreement cannot be ratified. A person who is
not competent to authorise an act cannot give it validity by ratifying it. Thus, where a
minor borrowed a sum of money by executing a simple pronote for it and after attaining
majority executed a second pronote in respect of the original loan plus interest thereon, a
suit upon the second pronote was not maintainable.
If on coming of age, a minor makes a new promise and not merely an affirmation
of the old promise, for a fresh consideration, the new promise will be binding.
3. Minor can be a promisee or beneficiary
If a contract is beneficial to a minor it can be enforced by him. There is no

restriction on a minor from being a beneficiary, for example, being a payee or a promisee
in a contract. Thus a minor is capable of purchasing immovable property and he may sue
to recover the possession of the property upon tender of the purchase money. Similarly a
minor in whose favour a promissory note has been executed can enforce it.
Example: X, a minor, insured his goods with an insurance company. The goods were
damaged. X filed a suit for claim. The insurance company took the plea that the person
on whose behalf the goods were insured was a minor. The court rejected the plea and
allowed the minor to recover the insurance money. (The General American Insurance
Company Ltd. v. Madan Lal Sonu Lal (1935) 59 Bom. 656).
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The infancy of one party to a contract does not affect the other party’s liability, the
plea of infancy being a privilege personal to the infant, so that although an infant may
avoid a contract, he can, nevertheless, hold liable and, if necessary, sue the other party to
the contract.
Contracts of apprenticeship : Contracts of apprenticeship are also for the benefit of

minors. Such contracts, according to the Apprenticeship Act, are binding on minors. But
the Act requires that the contracts be made by guardians on behalf of minors. In English
Law, contracts of service and apprenticeship are treated as similar to contracts for
necessaries.
4. No estoppel against a minor
Where a minor by misrepresenting his age has induced the other party to enter into
a contract with him, he cannot be made liable on the contract. There can be estoppel
against a minor. In other words, a minor is not estopped from pleading his infancy in
order to avoid a contract. It has been held by a Full Bench of the Bombay High Court in
the case of Gadigeppa v. Balangowala that where an infant represents fraudulently that he
is of age and thereby induces another to enter into a contract with him, then in an action
founded on the contract, the infant is not estopped from setting up infancy. The court
may, however, require the minor to compensate the other party on the ground of equity.
This is based on the rule that a minor can have no privilege to cheat men.
Fraudulent misrepresentation as to age by an infant will operate against him in

certain cases. If a minor obtains property or goods by misrepresenting his age, he can be
compelled to restore it but only so long as the same is traceable in his possession.
If by misrepresenting himself to be of full age, a minor has obtained money from a

trustee and given release, the release is good and he cannot compel the trustee to make
payment a second time.
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5. No Specific performance
A minor’s contract being absolutely void, there can be no question of the specific
performance of such a contract. A guardian of a minor cannot bind the minor by an
agreement for the purchase of immovable property; so the minor cannot ask for the
specific performance of the contract which the guardian had no power to enter into.
6. Liability for torts
A minor is liable in tort. Thus, where a minor borrowed a horse for riding only he
was held liable when he lent the horse to one of his friends who jumped and killed the
horse. Similarly, minor was held liable for his failure to return certain instruments which
he had hired and then passed on to a friend. But a minor cannot be made liable for a
breach of contract by framing the action on tort. You cannot convert a contract into a tort
to enable you to sue an infant.
7. No insolvency
A minor cannot be declared insolvent even though there are dues payable from the
properties of the minor.
8. Partnership
A minor being incompetent to contract cannot be a partner in a partnership firm,

but under Section 30 of the Indian Partnership Act, he can be admitted to the benefits of
partnership.
9. Minor can be an agent
A minor can act as an agent. But he will not be liable to his principal for his acts.
A minor can draw, deliver and endorse negotiable instruments without himself being
liable.
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10. Minor cannot bind parent or guardian
In the absence of authority, express or implied, an infant is not capable of binding

his parent or guardian, even for necessaries.
11. Joint contract by minor and adult
In such a case, the adult will be liable on the contract but not the minor.
12. Liability for necessaries
The case of necessaries supplied to a minor or to any person whom such minor is
legally bound to support is governed by Section 68 of the Indian Contract Act. A claim
for necessaries supplied to a minor is enforceable at law. But a minor is not liable for any
price that he may promise and never for more than the value of the necessaries. There is
no personal liability of the minor, but only his property is liable. A minor is also liable for
the value of necessaries supplied to his wife.
Necessaries mean those things that are essentially needed by a minor. They cannot
include luxuries or costly or unnecessary articles. Necessaries extend to all such things as
reasonable persons would supply to an infant in that class of society to which the infant
belongs. Expenses on minor's education, on funeral ceremonies of the wife, husband or
children of the minor come within the scope of the word 'necessaries'.
Not only must the goods supplied by such as are suitable to the minor's status, they
must also be actually necessary. Ten suits of clothes are necessaries for a minor whereas
even three suits may not be deemed necessary for another. The whole question turns upon
the minor's status in life. Utility rather than ornament is the criterion.
Example : Inman an infant undergraduate in Cambridge bought eleven fancy waistcoats

from Nash. He was at that time adequately provided with clothing. Held the waistcoats
were not necessary and the price could not be recovered. (Nash v. Inman. (1908) 2.
K.B.I.).
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Certain services rendered to a minor have been held to be 'necessaries'. These

include education, medical advice, a house given to a minor on rent for the purpose of
living and continuing his studies , etc.
Goods necessary when ordered might have ceased to be necessary by the time they
are delivered. e.g., where a minor orders a suit from a tailor but buys other suits before
that ordered is actually delivered. Here the minor could not be made to pay the tailor. The
following have been held to be necessaries :
(i) Livery for an officer's servant.
(ii) Horse, when doctor ordered riding exercise.
(iii) Goods supplied to a minors wife for her support.
(iv) Rings purchased as gifts to the minor's fiancee
(v) A racing bicycle.
On the other hand, following have been held not to be necessaries :

(i) Goods supplied for the purpose of trading.
(ii) A silver-gift goblet.
(iii) Cigars and tobacoo.
(iv) Refreshment to an undergraduate for entertaining.
2.2.2 Persons of unsound mind
Section 11 disqualifies a person who is not of sound mind from entering into a
contract. Contracts made by persons of unsound mind like a minor's contract are void.
The reason is that a contract requires assent of two minds but a person of unsound mind
has nothing which the law recognizes as a mind.
Section 12 deals with the question as to what is a sound mind for the purpose of
entering into a contract. It lays down that, "A person is said to be of sound mind for the
purpose of making a contract if, at the time when he makes it he is capable of
understanding it and of forming a rational judgement as to its effect upon his interests."
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A person who is usually of unsound mind but occasionally of sound mind may
make a contract when he is of sound mind. Thus a patient in a lunatic asylum, who is at
intervals of sound mind may make a contract during those intervals. A person who is
usually of sound mind but occasionally of unsound mind is not considered competent to
make a contract when he is of unsound mind. Thus a sane man who is so drunk that he
cannot understand the terms of a contract or form a rational judgement as to its effect on
his interests is incompetent to make a contract, whilst such drunkenness lasts.
Unsoundness of mind does not mean weakness of mind or loss of memory. It

means not only lack of capacity to understand the terms of the contract but also lack of
understanding to realize the effect of the terms of the contract. There is always a
presumption in favour of sanity. The person who relies on the unsoundness of mind must
prove it. Persons who are idiots, drunk or lunatic cannot enter into contracts. All these
persons stand on the same footing as minors and their contracts are void. A person of
unsound mind to whom necessaries are supplied is liable to pay a reasonable price.
Example : A property worth about Rs.25,000 was agreed to be sold by a person for
Rs.7,000 only. His mother proved that he was a congenital idiot, incaptable of
understanding the transaction. The sale was held to be void. (Inder Singh v.
Parmeshwardhari Singh AIR 1957 Pat. 491).
2.3 AGREEMENT MADE UNDER A MUTUAL MISTAKE OF FACT
A mistake of fact in the minds of both parties negatives consent and the contract
becomes void. Section 20 provides that, "Where both the parties to an agreement are
under a mistake as to a matter of fact, essential to the agreement, the agreement is void."
Four conditions must be fulfilled before a contract can be avoided on the ground of
mistake which are as follows :
(a) There must be mistake as to the formation of contract;
(b) The mistake must be of both the parties i.e., bilateral and not unilateral;
(c) It must be mistake of fact and not of law;
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(d) It must be about a fact essential to the agreement.
Example : A man and a woman made a separation deed under which the man agreed to
pay a weekly allowance to the woman under a mistaken assumption that they were
lawfully married. It was held that the agreement was void as there was common mistake
on a point of fact which was material to the existence of the agreement. (Galloway v.
Galloway (1914) 30 T.L.R. 531)
However, an erroneous opinion as to the value of the thing which forms the
subject matter of the agreement is not deemed to be a mistake as to a matter of fact.
Example : X buys a painting believing it to be worth Rs.2,000 while actually it is worth

Rs.200 only. The agreement cannot be avoided on the ground of mistake.
The cases falling under bilateral mistakes are as follows :
1. Mistake as to the subject matter
Mistake as to subject matter falls into six heads, namely
(a) existence, (b) identity, (c) title, (d) price, (e) quantity, (f) quality.
(a) Mistake as to the existence of the subject matter. The parties may be mistaken
as to the existence of the subject matter of the contract, at the date of the contract.
The contract is void if without the knowledge of the parties, the subject matter
does not exist at the date of the contract.
Examples : There is an agreement between A and B for the purchase of a certain

horse. But the horse is dead at the time of the contract. The agreement is void.
(b) Mistake as to the identity of the subject matter. A mistake of both parties in
relation to the identity of the subject matter (as where one party had one subject in
mind and the other party another) prevents a consens us ad idem and invalidates
the agreement.
Example : A agreed to buy from B 125 bales of cotton "to arrive ex pearless from
Bombay". There were two ships of that name sailing from Bombay, one of which
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was in the mind of A and the other in the mind of B. It was held that there was a
bilateral mistake and there was no contract.
The result would be the same even if the mistake is caused by the
negligence of a third party.
(c) Mistake as to the title of the subject matter. Where unknown to the parties the
buyer is already the owner of the flat which the seller wants to sell him, the
contract is void.
Example : There was a contract for lease between X and Y. The rent was
inadvertently mentioned as Rs.10 though the agreement was to pay rent of Rs.
230. The contract was held to be void. (Garrad v. Frankel. (1862) 54 ER. 961).
(d) Mistake as to the quantity of the subject matter. There is no contract between
the parties if there is a difference between the quantity sold and purchased. Thus,
where a broker gave two invoices under a contract to a seller and buyer, and if the
two invoices differed as to quantity sold and purchased, there was no enforceable
contract.
(e) Mistake as to the quality of the subject matter. Mistake as to the quality of the
thing does not affect consent unless it is the mistake of both parties and it is as to
the existence of some quality which makes the thing without the quality essentially
different from the thing as it was believed to be. But if the mistake is fundamental
it is void. A contract for the sale of a horse believed to be a race horse would be
void if it turned out to be a cart horse.
2. Mistake as to the possibility of performing the contract
(a) Physical impossibility. A contract for the hiring of a room for witnessing the
coronation procession was held to be void because unknown to the parties the
procession had already cancelled. (Griffith v. Brymer (1903) 19 TLR 534).
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(b) Legal impossibility. A agreement is void if it provides that something should be

done which cannot legally be done. Thus a person cannot take lease of his own
land.
2.4 AGREEMENT, THE CONSIDERATION OR OBJECT OF WHICH IS

UNLAWFUL
According to Section 23 of the Indian Contract Act, an agreement of which the

object or consideration is unlawful is void. The word ‘object’ in Section 23 is not used in
the same sense as consideration. Object means purpose or design of the contract. It
implies the manifestation of intention. Thus, if a person while in insolvent circumstances
transfers to another for consideration some property with the object of defrauding his
creditors, the consideration of the contract is lawful but the object is unlawful. Both the
object and the consideration of agreement must be lawful, otherwise the agreement would
be void. The word ‘lawful means ‘permitted by law’. Section 23 of the Contract Act
speaks of three thing :
(i) consideration for the agreement;
(ii) object for the agreement; and
(iii) agreement
The consideration or the object of an agreement is unlawful in the following cases:
1. If it is forbidden by law
If the consideration or object for a promise is such as is forbidden by law, the

agreement is void. The agreement is forbidden by law, if the legislature penalizes it or
prohibits it. It is illegal and cannot become valid even if the parties act according to such
agreement. Sections 26, 27, 28 and 30 of the Contract Act deal with cases where the
consideration or object of an agreement is considered unlawful. Thus, where the lawful
wife was alive, any agreement by the husband to marry another is unenforceable as being
forbidden by law. Similarly, an agreement to sublet a telephone, in contravention of
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conditions is void because it is forbidden by law. Such agreements are illegal not because
their consideration or objects is unlawful but because they are forbidden by law.
Example: A promises to obtain for B an employment in the public service and B

promises to pay Rs. 1000 to A. The agreement is void as the consideration for it is
unlawful.
2. If it is of such a nature that if permitted it would defeat the provisions of any

law
If the object or consideration of an agreement is of such a nature that if permitted

it would defeat the provisions of any law, the agreement is void. A contract which seeks
to exclude the application of a statutory provision to the parties is not valid. An
agreement to give an annual allowance to the parents of an adopted Hindu boy in order to
induce them to consent to the adoption is void.
3. If it is fraudulent
Agreements which are entered into to promote fraud are void. Thus, an agreement
for the sale of goods for the purpose of smuggling them out of the country is void and the
price of the goods so sold, cannot be recovered.
4. If it involves or implies injury to the person or property of another
The object or consideration of an agreement will be unlawful if it tends to injure

the person or property of another. Thus, an agreement to pull down another’s house is
unlawful. The word ‘injury’ means criminal or wrongful harm. Loss which ensues to a
trader as a result of competition by a rival trader is not injury within the meaning of this
clause.
5. If the court regards it as immoral
Where the consideration or object of an agreement is such that the court regards it
as immoral, the consideration is void. The word immoral means inconsistent with what is
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right. Rent due in respect of a flat let to a prostitute for the purpose of her trade cannot be
recovered. Similarly money lent for the purpose of assisting the borrower to visit brothels
and bring in prostitutes cannot be recorded in a court of law.
6. If the court regards it as being opposed to public policy
An agreement is unlawful if the court regards it as opposed to public policy. A

contract which is opposed to public policy cannot be enforced by either of the parties to
it. Any agreement which tends to promote corruption or injustice or is against the
interests of the public is considered to be opposed to public policy. Public policy is that
principle of law which holds that no citizen can lawfully do that which has a tendency to
be injurious to the public. A contract having tendency to injure public interest or public
welfare is opposed to public policy. Public policy is not capable of exact definition and,
therefore, courts do not generally go beyond the decided cases on the subject. The courts
do not invent a new head of public policy. The courts in India have declared certain
agreements as opposed to public policy and hence unenforceable or void.
2.5 AGREEMENTS FOR WHICH OBJECT OR CONSIDERATION IS

UNLAWFUL IN PARTS (SECTION 24).
Where consideration and object of an agreement is unlawful in part, the whole

agreement is void. A promises to work on behalf of B, a legal manufacturer of indigo and
an illegal traffic in other articles. B promises to pay to A a salary of Rs. 10,000 a year.
The agreement is void. This rule is applicable where legal and illegal transactions cannot
be separated and the whole transaction is void. But if a contract consists of a number of
distinct promises, a few of which are legal and others illegal, the legal ones can be
enforced.
2.6 AGREEMENTS MADE WITHOUT CONSIDERATION
Every agreement to be enforceable at law must be supported by valid

consideration. An agreement made without consideration is void and unenforceable
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except in certain cases. Section 25 specifies the cases where an agreement though made
without consideration will be valid. These are as follows :
1. Natural love and affection (Sec. 25(1))
An agreement though made without consideration will be valid if it is in writing

and registered and is made on account of natural love and affection between parties
standing in a near relation to each other. An agreement without consideration will be
valid provided :
(i) it is expressed in writing;
(ii) it is registered under the law for the time being a force;
(iii) it is made on account of natural love and affection; and
(iv) it is between parties standing in a near relation to each other.
All these essentials must be present to enforce an agreement made without

consideration. The presence of only one or some of them will not suffice. Thus, the mere
registration of document in the absence of nearness of relationship or natural love and
affection will not suffice.
Example : A for natural love and affection, promises to give his son B, Rs. 1,000. A
puts his promise to B into writing and registers it. This is a contract.
2. Compensation for services rendered (Sec. 25(2))
An agreement made without consideration may be valid if it is a promise to

compensate wholly or in part a person who has already voluntarily done something for
the promisor or something which the promisor was legally compellable to do. To apply
this rule the following essentials must exist :
(a) the act must have been done voluntarily;
(b) the promisor must be in existence at the time when the act was done;
(c) the promisor must agree now to compensate the promisee.
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Example : A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is
a contract.
3. Time-barred debt (Sec. 25(3))
A promise to pay a time-barred debt is also enforceable. But the promise must be
in writing and be signed by the promisor or his agent authorized in that behalf. The
promise may be to pay the whole or part of the debt. An oral promise to pay a time-
barred debt is unenforceable.
The clause does not apply to promises to pay time-barred debts of third persons. It
is restricted to the promisor who is himself liable for the debt. So, where a Hindu son
agrees to pay his deceased father’s time-barred debt, there is no personal liability for the
son, for it is only the joint-family property in his hands that will answerable for the debt.
The debt must be such which the creditor might have enforced in law for recovery
of the payment. A person under no obligation cannot, therefore, promise to pay. An
insolvent finally discharged is under no obligation to pay any debt. So any promise to pay
by him is not a debt as there is no consideration for such a promise.
Example : D owes P Rs.1,000 but the debt is barred by the Limitation Act. D signs a
written promise to pay Rs.500 on account of the debt. This is a contract.
The promise to pay referred to in Section 25(3) must be an express one. Thus, a
debtor’s letter to his creditor ‘to come and receive’ what was due to him, was held to
disclose no express promise. But where a tenant in a letter to the landlord referred to the
arrears of time-barred rent and said, “I shall send by the end of December”, it was held
that the document contained an express promise as required by Section 25(3).
4. Completed gifts
Explanation 1 to Section 25 provides that the rule ‘no consideration, no contract’

shall not affect validity of any gifts actually made between the donor and the donee. Thus
if a person gives certain properties to another according to the provisions of the Transfer
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of Property Act, he cannot subsequently demand the property back on the ground that
there was no consideration.
5. Agency
There is one more exception to the general rule. It is given in Section 185 which
says that no consideration is needed to create an agency.
2.7 AGREEMENT IN RESTRAINT OF MARRIAGE
Every individual enjoys the freedom to marry and so according to Section 26 of

the Contract Act “every agreement in restraint of the marriage of any person, other than a
minor, is void.” The restraint may be general or partial but the agreement is void, and
therefore, an agreement agreeing not to marry at all, or a certain person, or a class of
persons, or for a fixed period, is void. However, an agreement restraining the marriage of
a minor is valid under the Section.
It is interesting to note that a promise to marry a particular person does not imply
any restraint of marriage, and is, therefore, a valid contract.
Illustration : A agrees with B for good consideration that she will not marry C. It is a
void agreement.
It may be noted that an agreement which provides for a penalty upon remarriage
may not be considered as a restraint of marriage.
2.8 AGREEMENTS IN RESTRAINT OF TRADE
The Constitution of India guarantees the freedom of trade and commerce to every
citizen and therefore Section 27 declares “every agreement by which any one is
restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void.” Thus no person is at liberty to deprive himself of the fruit of his labour, skill
or talent, by any contracts that he enters into.
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It is to be noted that whether restraint is reasonable or not, if it is in the nature of

restraint of trade, the agreement is void always, subject to certain exceptions provided for
statutorily.
Example: An agreement whereby one of the parties agrees to close his business in
consideration of the promise by the other party to pay a certain sum of money, is void,
being an agreement is restraint of trade, and the amount is not recoverable, if the other
party fails to pay the promised sum of money (Madhub Chander vs. Raj Kumar).
But agreements merely restraining freedom of action necessary for the carrying on
of business are not void, for the law does not intend to take away the right of a trader to
regulate his business according to his own discretion and choice.
Exception. An agreement is restraint of trade is valid in the following cases :
1. Sale of goodwill. The seller of the ‘goodwill’ of a business can be restrained from
carrying on a similar business, within specified local limits, so long as the buyer, or any
person deriving title to the goodwill from him, carries on a like business therein,
provided the restraint is reasonable in point of time and space (Exception to Sec. 27).
Example: A, after selling the goodwill of his business to B promises not to carry on
similar business “anywhere in the world.” As the restraint is unreasonable the agreement
is void.
2. Partners’ agreement. An agreement in restraint of trade amount the partners or

between any partner and the buyer of firm’s goodwill is valid if the restraint comes
within any of the following cases :
(a) An agreement among the partners that a partner shall not carry on any
business other than that of the firm while he is a partner (Section 11(2) of the
Partnership Act).
(b) An agreement by a partner with his other partners that on retiring from the
partnership he will not carry on any business similar to that of the firm within
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a specified period or within specified local limits provided the restrictions

imposed are reasonable (Section 36(2) of the Partnership Act).
(c) An agreement among the partners, upon or in anticipation of the dissolution
of the firm, that some or all of them will not carry on a business similar to
that of the firm within a specified period or within specified local limits,
provided the restrictions imposed are reasonable (Section 54 of the
Partnership Act).
(d) An agreement between any partner and the buyer of the firm’s goodwill that
such partner will not carry on any business similar to that of the firm within a
specified period or within specified local limits, provided the restrictions
imposed are reasonable (Section 55(3) of the Partnership Act).
3. Trade combinations. As pointed out, an agreement, the primary object of which

is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a
business combination between traders or manufacturers e.g. not to sell their goods below
a certain price, to pool profits or output and to divide the same in an agreed proportion,
does not amount to a restraint of trade and is perfectly valid (Fraser & Co. vs. Bombay
Ice Company). Similarly an agreement amongst the traders of a particular locality with
the object of keeping the trade in their own hands is not void merely because it hurts a
rival in trade (Bhola Nath vs. Lachmi Narain). But if an agreement attempts to create a
monopoly, it would be void (Kameshwar Singh vs. Yasin Khan).
4. Negative stipulations in service agreements. An agreement of service by which

a person binds himself during the term of the agreement, not to take service with anyone
else, is not in restraint of lawful profession and is valid. Thus a chartered accountant
employed in a company may be debarred from private practice or from serving elsewhere
during the continuance of service (Maganlal vs. Ambica Mills Ltd.). But an agreement of
service which seeks to restrict the freedom of occupation for some period, after the
termination of service, is void. Thus, where S, who was an employee of Brahmputra Tea
Co. Assam, agreed not to employ himself or to engage himself in any similar business
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within 40 miles from Assam, for a period of five years from the date of the termination of
his service, it was held that the agreement is in restraint of lawful profession and hence
void (Brahamputra Tea Co. vs. Scarth).
2.9 AGREEMENT IN RESTRAINT OF LEGAL PRECEDING (SECTION 28)
Agreements entered into by private persons with the purpose of purporting to oust
the jurisdiction of the court so as to enable them to alter their personal law or the statute
law are void. Section 28 provides that every agreement by which any party thereto is
restricted absolutely from enforcing his legal rights under or in respect of any contract, by
the usual legal proceedings in the ordinary tribunals or which limits the time within
which he may thus enforce his rights, is void to that extent. Thus where a servant agrees
not to sue for wrongful dismissal is void under this section. The exceptions to this rule
are :
(a) This Section shall not render illegal a contract, by which two or more persons
agree that any dispute which may arise between them in respect of any subject or
class of subjects shall be referred to arbitration, and that only the amount awarded
in such arbitration shall be recoverable in respect of the dispute so referred. In
other words, an agreement to refer all future disputes in connection with a contract
to arbitration shall be valid.
(b) This Section shall not render illegal any contract in writing, by which two or more
persons agree to refer to arbitration any question between them which has already
arisen, or affect any provision of any law in force for the time being as to
references to arbitration.
2.10 UNCERTAIN AGREEMENTS
Section 29 provides that an agreement the meaning of which is not certain or

capable of being made certain is void. If there is ambiguity in the wording of the contract,
it is not possible to read the exact intention of the parties to the contract. Where the term
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in an agreement is vague in the extreme and might be interpreted in as many ways as

there are interpretations thereof, the agreement is certainly one which is void because of
uncertainty. Thus an agreement to sell at a concessional rate is void for uncertainty.
Similarly an agreement to pay rent in cash without the rate being definitely fixed is void
for uncertainty.
Example : A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to

show what kind of oil was intended. The agreement is void for uncertainty.
Agreements in which price is to be based on luck or an certain event are void for
uncertainty. Similarly an agreement to agree in future is also void for there is no certainty
whether the parties will be able to agree.
2.11 WAGERING AGREEMENTS
An agreement by way of wager is void. No suit will lie for recovering anything
alleged to be won on any wager or entrusted to any person to abide by the results of any
game or other uncertain even on which any wager is made. (Section 30).
Wager means a bet. A wager may be defined as an agreement to pay money or

money’s worth on the happening of a specified uncertain event. It is a game of chance in
which the change of either winning or losing is wholly dependent on an certain event.
The parties to a wagering contract must agree that upon the determination of the said
uncertain even, one should win from the other. Each party stands equally to win or lose
the bet. The chance of gain or the risk of loss is not one sided. If either of the parties may
win but not lose, or may lose but cannot win, it is not a wagering contract. The essence of
a wagering contract is that neither of the parties should have any interest in the contract
other than the sum which he will win or lose.
Essentials
The following are the essentials of wagering agreement :

1. There must be a promise to pay money or money’s worth.
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2. Promise must be conditional on an event happening or not happening.

3. There must be uncertainty of even. The certain event may be past, present or
future.
5. There must be two parties. Each party must stand to win or lose. In other
words loss of one must be the gain of other.
5. There must be a common intention to bet at the time of making such
agreement.
6. Neither party should have control over the happening of the event. If one of
the parties has the event in his own hands, the transaction lacks an essential
ingredient of a wager.
7. Parties should have no interest in the event except for stake. If either of the
parties has any proprietary interest in the subject matter of the agreement, the
same ceases to be a wagering agreement. It is on this basis that a wagering
agreement is distinguished from a contract of insurance.
Effect of Wagering Transactions
Agreement by way of wager are void. Hence, such agreements cannot be enforced
in any court of law. Any amount won on a wager cannot be recovered. For example, two
persons entered into wagering transactions in shares and one became indebted to another.
A promissory note was executed for the payment of debt. The note was held to be
unenforceable.
Effect of transactions collateral to wager
All agreements by way of wager are void. A wagering contract being only void
and not illegal, a collateral contract can well be enforced at law. Thus, it P lends money
to D, to pay off a gambling debt, P can recover the money from D.
Example : A lost Rs.8,500 to B on horse races. Subsequently A executed a hundi for

same amount in favour of A to prevent B being declared as a defaulter in his club. B filed
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a suit on the Hundi. A pleaded that it was a wagering transaction and the consideration
was unlawful. It was held that a wagering agreement is void but does not affect the
collateral transactions. (Leicester & Co. v. S.P. Mullick (1923) Cal.445).
Exceptions
The following agreements are not held to be wagers :
(i) Horse race : Section 30 makes an exception in favour of certain prizes for horses
races. It provides that an agreement to subscribe or contribute for or towards a
plate, prize or a sum of money of the value of Rs.500 or above to be awarded to
the winner of a horse race is valid.
(ii) Commercial Transactions : An agreement for actual purchase and sale of any
commodity is not a wagering agreement. But sometimes it becomes difficult to
determine whether a particular transaction was in fact a contract of purchase and
sale or a wagering contract for the payment of differences. Thus, for example, if
two traders A and B, contract for the sale and purchase of one hundred bags of
sugar to be delivered three months after at rupees four hundred per bag, it may be
difficult to say whether it is a perfectly good commercial contract entered into
with the intention of delivering the goods or whether the two traders are really
speculating and wagering upon the prices of sugar. To bring a case within the
provisions of Section 30, a common intention to wager, e.g. to pay and receive
differences in necessary. The intention to wager must be on the part of both the
contracting parties. If only one of the parties to the agreement had the intention
that the agreement should be for the mere payment of differences and the other
party was not aware of the fact, the agreement is enforceable.
(iii) Crossword Puzzles : The literary competitions involving applications of skill are
not wagers as here an effort is made to find out the best and skillful competitor.
(iv) Chit funds : A chit fund is not a wager. No doubt, some gain does come to some
members, but none of them stands to lose his money.
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Wager and insurance contracts
A contract of insurance, be it life, accident, fire, marine, etc. is not a wager though
it is performable upon an uncertain event. It is so because therein the parties have an
interest in the contract. A person has an insurable interest in his own life and he can make
a valid contract to insure for the benefit of a third person. But an insurance on the life of a
person in which the insurer has no interest whatever is void as being a wager. Thus, a
person effecting insurance on his younger brother’s life has no insurable interest and the
contract is void.
2.12 AGREEMENTS CONTINGENT ON IMPOSSIBLE EVENTS
“Contingent agreements to do or not do to anything, if an impossible event

happens, are void, whether the impossibility of the event is known or not to the parties to
the agreement at the time when it is made.” (Sec. 36)
Illustrations (to Sec. 36) : A agrees to pay B Rs.1,000 (as a loan) if two straight lines
should enclose a space. The agreement is void.
2.13 AGREEMENTS TO DO IMPOSSIBLE ACTS
“An agreement to do an act impossible in itself is void.” (Sec. 56 Para 1).
Illustrations : (a) A agrees with B to discover treasure by magic. The

agreement is void.
(b) A agrees with B to run with a speed of 100 Kilometres per hour. The
agreement is void.
2.14 SUMMARY
An agreement not enforceable by law is said to be void. It includes : (a)

Agreement made by Incompetent Parties (b) Agreement made under a Mutual Mistake
of Fact (c) Agreement, the Consideration or Object of which is Unlawful (d)
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Agreements for which Object or Consideration is Unlawful in Parts (Section 24) (e)
Agreements made without Consideration (f) Agreement in Restraint of Marriage (g)
Agreements in Restraint of Trade (h) Agreement in Restraint of Legal Preceding
(Section 28) (i) Uncertain Agreements (j) Wagering Agreements (k) Agreements
Contingent on Impossible Events, and (l) Agreements to do Impossible Acts
2.15 KEYWORDS
Void Agreement: An agreement not enforceable by law is said to be void.
Minor: A minor is a person who has not completed eighteen years of age.
Uncertain Agreement: Agreements, the meaning of which is not certain or capable of

being made certain are void.
1. In what cases the consideration and object of an agreement are said to be

unlawful? Illustrate.
2. What is an agreement by way of wager? In such an agreement void or illegal?
Is a contract of insurance a wagering contract?
3.. Discuss the contractual liability of a minor under the Indian Contract Act.
4. In what cases the consideration and object of an agreement are said to be
unlawful? Illustrate with examples.
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PERFORMANCE OF CONTRACTS
3.0 CONTRACTS WHICH NEED NOT BE PERFORMED
Sections 62 to 67 of the Contract Act deals with contracts which need not be
performed. The relevant provisions are as under:
(1) If the parties to a contract agree to novation, rescission or alternation, the
original contract need not be performed (Section 62).
(2) The promisee may dispense with or remit performance by the promisor in
whole or in part or may extend the time for the performance or may accept
any satisfaction in lieu thereof (Section 63)
(3) When a voidable contract is rescinded, the other party need not perform his
promise (Section 64)
(4) Where the failure of performance has been caused by the promisee’s neglect
or refusal, the promisor will be excused. (Section 67)
3.1 BY WHOM CONTRACTS MUST BE PERFORMED
1. By the promisor. As a general rule, a contract may be performed by the promisor,

either personally or through any other competent person. But where personal
consideration are the foundation of the contract, it has to be performed by the
promisor himself and in case of his death or disablement a contract will be
discharged and the other party would be freed from liablity.
Example : A promises to paint a picture for B, the promise must be performed by A

himself.
2. By the agent. Where personal skill is not necessary and the work could be done
by any one, the promisor or his representative may employ a competent person to
perform it. Thus a contract to sell goods can be assigned by the seller to his agent.
3. By the legal representative. In the event of the death of the promisor before
performance, their representatives are bound by the promises, unless personal
considerations are the foundation of the contract. The legal representatives of the
deceased promisor cannot be required to perform contract involving personal skill
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and action. On the death of a person, the benefits and burdens of his contracts pass
to the legal representatives as part of his estate.
Example: A promises to deliver goods to B on a certain day on payment of

Rs.1000. A dies before that day. A's representatives are bound to deliver the goods to B,
and B is bound to pay Rs. 1000 to A’s representatives.
4. By third person. If the promisee accepts performance of the promise from a third
party, there is a discharge of the contract. Once the third party performs the
contract, and that is accepted by the promisee there is an end of the matter and the
promisor is thereby discharged. (Section 41). Thus, where a person has accepted
apart payment from a third person in full satisfaction of his claim, he Cannot later
on sue the debtor for the balance.
3.2 WHO CAN DEMAND PERFORMANCE?
It is only the promisee or his agent who can demand performance of the promise
under a contract. It is immaterial whether the promisee is for the benefit of the promisee
or for the benefit of some other person. In the case death of the promisee, his legal
representatives can demand performance. In certain cases a third person who is not a
party to the contract can also demand performance.
Example : A promisee B to sell his house to C for Rs. 20000. A does not perform the
contract. C cannot sue A. It is only B who can enforce the promise against A.
3.3 TIME AND PLACE OF PERFORMANCE
It is for the parties to contract to decide the time and place for the performance of
the contract. Sections 46 to 50 of the Indian Contract Act lay down certain rules in this
regard which are as follows :
1. Where a contract does not specify any time for performance, the promisor must
perform it within a reasonable time.
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What is a reasonable time is a question of the fact. (Section 46). Failure to perform
the contract within a reasonable time entitles the other party to put an end to the contract.
Thus, where ornaments were borrowed for a wedding ceremony, detaining them after the
wedding did not amount to performance within a reasonable time.
2. When a contract is to be performed on a particular day, without any application of

the promisee being required, the promisor may perform contract on that particular day
during the usual hours of the business on such day and at the place at which promise
ought to be performed. (Section 47).
Example : A promises to deliver goods at B's warehouse on the First January. On that
day A brings the goods to B's warehouse, but after the usual hour for closing it, and they
are not received. A has not performed his promise.
3. In the above two cases, the promisor undertakes to perform the promise without
application by the promisee. But where the promise has to be performed on a certain day
but the promisor had not undertaken to perform it without application by the promisee,
the promisee is bound to apply for performance at a proper place and within the usual
hours of business. What is a proper time and place is a question of fact. (Section 48). For
example, in case of a deposit it is the duty of the depositor to go to the banker and make a
demand for money. It is not the duty of the banker to seek out his creditor.
4. When a promise is to be performed without application by the promisee, and no
place is fixed for the performance of it, it is duty of the promisor to apply to the promisee
to appoint a reasonable place for the performance of the promise, and perform it at such
place (Section 49).
Example : A undertakes to deliver a thousand maunds of jute to B on a fixed day. A
must apply to B to appoint a reasonable place for the purpose of receiving it and must
deliver to him at such place.
This section incorporates the rule that the debtor must find the creditor but where
the creditor has left the country the debtor need not follow him.
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5. A contract should be performed in the manner and at the time prescribed in the
contract. (Section 50). A promisor is discharged from liability if he performs the promise
in a manner or at a time prescribed or sanctioned by the promisee.
Example : A desires B who owes him Rs. 100 to send him a note for Rs. 100 by post.
The debt is discharged as soon as B puts into the post a letter containing the note duly
addressed to A.
BREACH OF CONTRACT AND ITS REMEDIES
STRUCTURE
4.0 Objective
4.1 Breach of Contract
4.2 Remedies for Breach of Contract
4.2.1 Rescission of the Contract
4.2.2 Restitution
4.2.3. Specific Performance
4.2.4. Injuction
4.2.5 Suit for Damages
4.2.6 Suit upon Quantum Meruit
4.0 OBJECTIVE
The objective of the present lesson is to discuss
(a) the ways of breach of contract and
(b)remedies to an injured party in case of breach of contract.

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4.1 BREACH OF CONTRACT

A breach of contract occurs if any party refuses or fails to perform his part of the
contract or by his act makes it impossible to perform his obligation under the contract. In
case of breach, the aggrieved party (i.e., the party not at fault) is relieved from
performing his obligation and gets a right to proceed against the party at fault.
A contract terminates by breach of contract. Breach of contract may arise in two
ways (a) Anticipatory Breach, and (b) Actual Breach.
Anticipatory Breach of Contract (Sec. 39)

Anticipatory breach of contract occurs, when a party repudiates it before the time
fixed for performance has arrived or when a party by his own act disables himself from
performing the contract.
Examples
(1) A contracts to marry B. Before the agreed date of marriage he married C. B is
entitled to sue A for breach of promise.
(2) A promised to marry B as soon as his (A’s) father would die. During the
father’s life time. A absolutely refused to marry B. Although the time for
performance had not arrived, B was held entitled to sue for breach of promise.
(3) A contract to supply B with certain articles on 1st of August. On 20th July, he
informs B that he will not be able to supply the goods. B is entitled to sue A for
breach of promise.
Consequences of Anticipatory Breach
Where a party to a contract refuses to perform his part of the contract before the
actual time arrives the promisee may either: (a) rescind the contract and treat the contract
as at an end, and at once sue for damages, or (b) he may elect not to rescind but to treat
the contract operative and wait for the time of performance and then hold the other party
liable for the consequences of non-performance. In the latter case, the party who has
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repudiated may still perform if he can.
Thus, from the above discussion it follows that 'anticipatory breach' of contract
does not by itself discharge the contract. The contract is discharged only when the
aggrieved party accepts the repudiation of the contract, i.e., elects to rescind the contract.
Notice that if the repudiation is nor accepted and subsequently an event happens,
discharging the contract legally, the aggrieved party shall lose his right to sue for
damages.
Example : A agreed 10 load a cargo of wheal on B' s ship at Odessa by a particular date
but when the ship arrived A refused to load the cargo. B did not accept the refusal and
continued to demand the cargo. Before the last date of loading had expired the Crimean
War broke out, rendering the performance of the contract illegal. Held, the contract was
discharged and B could not sue for damages [Avery v. Bowen (1856) 6 E. & B. 965].
Section 39 of the Contract Act deals with anticipatory breach of contract and
provides as “when a party to contract has refused to perform, or disabled himself from
performing his promise in its entirety, the promisee may put an end to the contract, unless
he has signified, by works or conduct, his acquiescence in its continuance”.
Actual Breach of Contract
The actual breach may take place (a) at the time when performance is due, or (b)
during the performance of the contract.
Actual breach of Contract, at the time when performance is due. If a person does not
perform his part of the contract at the stipulated time, he will be liable for its breach.
Example : A seller offers to execute a deed of sale only on payment by the buyer of a
sum higher than is payable under the contract for sale, the vendor shall be liable for the
breach. [Jaggo Bai v. Hari Har Prasad Singh, A.I.R. 1947, P.C 173]
Time as Essence of Contract
But if the promisor offers to perform his promise subsequently, the question arises
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whether it should be accepted, or whether the promisee can refuse such acceptance and
hold the promisor liable for the breach. The answer depends upon whether time was
considered by the parties to be of the essence of the contract or not. Section 55, in this
respect, lays down as follows:
"When a party to a contract promises to do a certain thing at or before a specified

time, or certain things at or before specified times and fails to do any such thing at or
before the specified time, the contract, or so much of it as has not been performed
becomes voidable at the option of the promisee, if the intention of the parties was that
time should be of the essence of the contract”.
If it was not the intention of the parties that time should be of the essence of the
contract, the contract does not become voidable by the failure to do such thing at or
before the specified time but the promisee is entitled to compensation from the promisor
for any loss occasioned to him by such failure. If in case of a contract voidable on
account of the promisor's failure to perform his promise at the time agreed, the promisee
accepts performance of such promise at any time other than agreed, the promisee cannot
claim compensation for any loss occasioned by the non-performance of the promise at the
time agreed unless, at the time of such acceptance he gives notice to the promisor of his
intention to do so.
According to the above provisions, if performance beyond the stipulated time is

accepted, the promisee must give notice of his intention to claim compensation. If he fails
to give such notice, he will be deemed to have waived that right. In England, however, no
such notice is necessary, and the promisee, can even after accepting the belated
performance, claim compensation.
Breach during the Performance of the Contract. Actual breach of contract also occurs
when during the performance of the contract one party fails or refuses to perform his
obligation under the contract.
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Example : A contracted with a Railway Company to supply it certain quantity of

railway chairs at a certain price. The delivery was to be made in installments. After a few
instaments had been supplied, the Railway Company asked A to deliver no more. Held, A
could sue for breach of contract. [Cort v. Ambergate, etc Rly. Co. (1851) 17 Q.B. 1271.]
4.2 REMEDIES FOR BREACH OF CONTRACT
A remedy is the course of action available to an aggrieved party (i.e. the party not
at default) for the enforcement of a right under a contract. Whenever there is breach of a
contract, the injured party becomes entitled to any one or more of the following remedies
against the guilty party :
1. Rescission of the contract
2. Suit for specified performance of the contract.
3. Suit for an injuction
4. Suit for damages.
5. Suit upon quantum meruit
As regard the last two remedies stated above, the law is regulated by the Specific
Relief Act.
4.2.1 Rescission of the Contract
When there is a breach of contract by one party, the other party may rescind the
contract and need not perform his party of obligations under the contract and may sit
quietly at home if he decides not to take any legal action against the guilty party. But in
case the aggrieved party intends to sue the guilty party for damages for breach of
contract, he has to file a suit for rescission of the contract. When the court grants
rescission, the aggrieved party is freed from all his obligations under the contract; and
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becomes entitled to compensation for any damage which he has sustained through the
nonfulfilment of the contract (Sec. 75).
Example : A contacts to supply 100 kg of tea leaves for Rs. 8000 to B on 15 April. If A
does not supply the tea leaves on the appointed day, B need not pay the price, B may treat
the contract as rescind and may sit quietly at home. B may also file a suit for ‘rescission’
and claim damages.
When is rescission granted?
Under Section 39 of Indian Contract Act, the court may grant rescission in the
following two cases :
(1) Where the contract is voidable at the option of the plaintiff, the court grants
rescission to the plaintiff.
(2) Where the contract is unlawful for causes not apparent on its face and
defendant is more to blame than the plaintiff, the court may grant rescission.
When may rescission be refused?
That court may, however, refuse to rescind the contract

(a) Where the plaintiff has expressly or impliedly ratified the contract; or
(b) Where owing to the change of circumstances, the parties cannot be restored
to their original positions; or
(c) Where third parties have, during the subsistence of the contract acquired
rights in good faith and for value; or
(d) Where only a part of the contract is sought to be rescinded and such part is
not servable from the rest of the contract.
4.2.2 Restitution
It means return of the benefit received by one party to the contract from the other
under a void contract. When a contract becomes void it need not be performed by either
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party. Section 65 provides that when an agreement is discovered to be void or when a

contract becomes void any person who has received any advantage under such agreement
or contract is bound to restore it or to make compensation for it to the person from whom
he received it.
This section applies to contracts ‘discovered to be void’ and contracts which

become void. It does not apply to contracts which are known to be void. Thus, if A pays
Rs 200 to B to beat C, the money is not recoverable.
Example:A pays B Rs. 1000 in consideration of B’s promising to marry C, A’s daughter.
C is dead at the time of promise. The agreement is void but B must repay A Rs. 1000.
4.2.3 Specific Performance
Under certain circumstances a person aggrieved by the breach of the contract can
file a suit for specific performance i.e. for an order by the court upon the party guilty of
breach of contract directing him to perform what he promised to do. Specific
performance is a discretionary remedy which is allowed only in a limited number of
cases. Rules regarding the granting of this relief are contained in the Specific Relief Act.
Example : A agrees to sell two rare China vases to B. B may compel A to perform the
contract specifically, because there is no standard for ascertaining the actual damage
which would be caused by the non-performance of the promise.
A is looking for a house. For his residence he finds one. He make a contract with
the owner of that house ’B’ to buy the house. Later, ‘B’ refuses to sell the house to ‘A’.
In this case, damages from ‘B’ for such breach of contract are not adequate remedy for
‘A’ because he does not get that type of house which he want in the locality. In this
situation, A can appeal to the court for the specific performance of the contract.
Some of the case in which specific performance of the contract may be enforced
are as follows:
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(a) Where monetary consideration is not an adequate remedy for the breach of a
contract.
(b) When there exist no standard for ascertaining the actual damage caused by
the non-performance of the act.
(c) When it is probable that compensation in money on non-performance of the
contract cannot be obtained.
In the following cases however specific performance shall not be granted:-

1. Where the contract is of a personal nature.
2. Where damages are an adequate remedy.
3. Where the court cannot supervise the execution of the contract.
4. Where the contract is made by the trustee in breach of their trust.
5. Where the contract is inequitable to either party.
It is discretionary remedy which is allowed only in a limited number of cases.
4.2.4 Injuction
An aggrieved party can sue for an injuction i.e. an order, of the court restraining
the wrong does from doing or continuing the wrongful act complained of. Injuctions are
usually granted to enforce negative stipulations in cases where damages are not adequate
relief. Injuctions is a preventive relief. It is particularly appropriate in cases of
anticipatory breach of contract.
Example: G agreed to buy the whole of the electric energy required for his house from a
certain company. This was interpreted as a promise not to buy electricity from any other
company. He was therefore restrained by an injuction from any other
company.[Metropolitan Electric’s Supply Company v. Ginder (1901) 2 Ch.799]
4.2.5 Suit for Damages

Damages are a monetary compensation allowed to the injured party for the loss or
injury suffered by him as a result of the breach of contract. The fundamental principle
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underlying damages is not punishment but compensation. By awarding damages the

court aims to put the injured party into the position in which he would have been, had
there been performance and not breach, and not to punish the defaulter party. As a
general rule, “compensation must be commensurate with the injury or loss sustained,
arising naturally from the breach.” “If actual loss is not proved, no damages will be
awarded.”
Assessment of damages. We will now consider the extent to which a plaintiff is entitled
to demand damages for breach of contract. The rules in this regard have been laid down
by Section 73 and 74 of Indian Contract Act, 1872. Accordingly, an injured party is
entitled to receive from the defaulter party:
(a) Such damages which naturally arose in the usual course of things from such
breach. No compensation is to be given generally for any remote or indirect
loss sustained by reason of the breach (Ordinary Damages).
(b) Such damages which the parties knew, when the entered into the contract, as
likely to result from the breach (Special Damages).
(c) In estimating the loss or damage caused to a party by breach, the means
which existed of remedying the inconvenience caused by the breach must
also be taken into account (Explanation Sec. 73). (Duty to mitigate damage
suffered).
(d) If the terms of contract defines the amount of damages to be paid in case of
breach of contract the aggrieved party is entitled only to a reasonable amount
of damages which does not exceeds the amount mentioned in the contract.
The amount of reasonable damages is decided by the court.
Different kinds of damages. Damages may be of four kinds :

1. Ordinary or General or Compensatory damages (i.e. damages arising
naturally from the breach).
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2. Special damages (i.e., damages in contemplation of the parties at the time of

contract).
3. Exemplary, Punitive or Vindictive damages.
4. Nominal damages.
1. Ordinary Damages
When a contract has been broken, the injured party can, as a rule always recover
from the guilty party ordinary or general damages. These are such damages as may fairly
and reasonably be considered as arising naturally and directly in the usual course of
things from the breach of contract itself. In other words, ordinary damages are restricted
to the "direct or proximate consequences" of the breach of contract and remote of indirect
losses, which are not the natural and probable consequence of the breach of contract, are
generally not regarded.
Example : The leading case of (Hodley vs Baxendale) which is said to be the foundation
of modem law of damages in England and India (as Sec. 73 is almost based on the rules
laid down ill this case); is an authority on the point In that case:
H's mill was stopped by a breakage of the crankshaft. H delivered the shaft to B, a
common carrier, to take it to the manufacturers at Greenwich as a pattern for a new one.
The only information given to B was that the article to be carried was the broken shaft of
the mill. It was not made known to B that delay would result in loss of profits. By some
neglect on the part of B the delivery of the shaft was delayed beyond a reasonable time.
In consequence the mill remained idle for a longer period than should have been
necessary. H brought an action against B claiming damages for loss of profits which
would have been made during the period of delay. Held that B was not liable for loss of
profits caused by the delay because it was a remote consequence, and only nominal
damages were awarded. The Court pointed out that B, the defendant, was never told that
the delay in the delivery of the shaft would entail loss of profits of the mill; the plaintiffs
might have had another shaft, or there might have been some other defect in the
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machinery to cause the stoppage, or for any other reason there might have been loss
actually. Accordingly it was not a direct consequence of the breach and hence not
recoverable.
In the case of a contract for ‘sale and purchase’ the general rule as regards
measure of damages is that the damages would be assessed on the difference between the
contract price and the market price at the date of breach and any subsequent increase or
decrease in the market price would not be taken note of. If there is no market price for the
subject matter of the contract, the rule is to take the market price of the nearest substitute.
If there is no nearest substitute, the market price is to be ascertained by adding to the
price at the place of purchase, the conveyance charge to the place of delivery plus the
usual profit of the importer (Hajee Ismail & Sons vs Wilson & Co. ). If the delivery is to
be made in instalments, then the due date of each instalment is taken as the date of breach
and the measure of damages is the sum of the difference of the market value at the
several dates of delivery.
Example : A agrees to sell to B 5 bags of rice at Rs. 500 per bag, delivery to be given
after two months. On the date of delivery the price of rice goes up and the rate is Rs. 550
per bag. A refuses to deliver the bags to B. B can claim from A Rs. 250, as ordinary
damages arising directly from the breach, being the difference between the contract price
(i.e. Rs. 500 per bag) and the market price (i.e. Rs. 550 per bag) on the date of delivery of
5 bags . Notice that if Rs. 250 are paid to B by way of damages, then he will be in the
same position as if the contract has been performed.
Under a contract of ‘sale of goods’ if there is as breach of ‘warranty’ the seller is

liable to pay all damages which the purchaser has to pay to the person to whom the goods
are sold by him, whether the seller is aware of such a sale or not. In order that the
purchaser should be able to claim such damages and costs it is an overriding requirement
that the sub-contracts should have been made on the same terms and conditions as the
first contract.
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Example : A sells certain merchandise to B, warranting it to be of a particular quality,

and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods
prove to be not according to the warranty and B becomes liable to pay C a sum of money
by way of compensation. B is entitled to be reimbursed this sum by A..
2. Special Damages
Special damages are those which arise on account of the special or unusual
circumstances affecting the plaintiff. In other words, they are such remote losses which
are not the natural and probable consequence of the breach of contract. Unlike ordinary
damages, special damages cannot be claimed as a matter of right. These can be claimed
only if the special circumstances which would result in a special loss in case of breach of
contract are brought to the notice of the other party. It is important that such damages
must be in contemplation of the parties at the time when the contract is entered into.
Subsequent knowledge of the special circumstances will not create any special liability
on the guilty party.
Example : A, having contracted with B to supply 1,000 tons of iron at Rs.100 a ton, to be
delivered at a stated time, B contracts with C for the purchase of 1,000 tons of iron at Rs.
80 a ton, telling C that he does so for the purpose of performing his contract with B.C
fails to perform his contract with A, and A could not procure other iron, and B, in
consequence rescinds the contract. C must pay to A Rs.20,000 being the profit which A
would have made by the performance of his contract with B. (Illustration (i) to Section
73). (If C was not told of B’s contract then only the difference in contract price and
market price, if any, could be claimed).
3. Exemplary or Vindictive or Punitive Damages

These are such damages which are awarded with a view to punishing the guilty
party for the breach and not by way of compensation for the loss suffered by the
aggrieved party. The cardinal principle of law of damages for a breach of contract is to
compensate the injured party for the loss suffered and not to punish the guilty party.
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Hence, obviously, exemplary damages have not place in the law of contract and are not
recoverable for a breach of contract. There are, however, two exceptions to this rule :
(a) Breach of a contract to marry. In this case the amount of the damages will
depend upon the extent of injury to the party’s feelings. One may be ruined, other
may not mind so much.
(b) Dishonour of a cheque by a banker when there are sufficient funds to the
credit of the customer. In this case the rule of ascertaining damages is, “the
smaller the cheque, the greater the damages.” Of course, the actual amount of
damages will differ according to the status of the party.
4. Nominal Damages
Nominal damages are those which are awarded only for the name sake. These are
neither awarded by way of compensation to the aggrieved party nor by way of
punishment to the guilty party. These are awarded to establish the right to decree for
breach of contract when the injured party has not actually suffered any real damage and
consist of a very small sum of money, say, a rupee or two. For example, where in a
contract of sale of goods, if the contract price and the market price is almost the same at
the date of breach of the contract, then the aggrieved party is entitled only to nominal
damages.
Duty to Mitigate Damage Suffered
It is the duty of the injured party to mitigate damage suffered as a result of the
breach of contract by the other party. He must use all reasonable means of mitigating the
damage, just as a prudent man would, under similar circumstances in his own case. He
cannot recover any part of the damage, traceable to his own neglect to mitigate. The onus
of proof, however, is on the defendant to show that the plaintiff has failed in his duty of
mitigation and the plaintiff is free from the burden of proving that he tried his best to
mitigate the loss (Pauzu Ltd. vs Saunders).
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The rule in regard to mitigation must be applied with discretion and a man who
has already put himself in the wrong by breaking his contract has no right to impose new
and extraordinary duties on the aggrieved party. Courts should take care to see that they
have put the plaintiff in the same position as if the contract had been performed, and have
not been overgenerous to the contract-breaker by too severe an application of the rule that
the plaintiff must take reasonable steps to mitigate damages.
Example : Where a servant is dismissed, even though wrongfully, it is his duty to

mitigate the damages by seeking other employment. He can recover only nominal
damages if he refuses a reasonable offer of fresh employment. But if it cannot be proved
that he has failed in his duty of mitigation, he will be entitled to the full salary for the
whole of the unexpired period of service, if the contract of employment was for a fixed
period. If the contract of employment was not for a fixed term, then the principle of
awarding damages for a reasonable period of notice comes into play (S.S. Shetty vs.
Bharat Nidhi Ltd.).
Liquidated Damages and Penalty
‘Liquidated damages’ means a sum fixed up in advance, which is a fair and

genuine pre-estimate of the probable loss that is likely to result from the breach. ‘Penalty’
means a sum fixed up in advance, which is extravagant and unconscionable in amount in
comparison with the greatest loss that could conceivably be proved to have followed
from the breach. Thus the essence of a penalty is a payment of money stipulated as in
terroem of the offending party.
Sometimes the parties fix up at the time of the contract the sum payable as
damages in case of breach. In such a case, a distinction is made in English Law as to
whether the provision amounts to ‘liquidated damages’ or a ‘penalty’. Courts in England
usually allow ‘liquidated damages’ as stipulated in the contract, without any regard to the
actual loss sustained. ‘Penalty’ clauses, however, are treated as invalid and the courts in
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that case calculate damages according to the ordinary principles and allow only
reasonable compensation.
Under the Indian Law Section 74 does away with the distinction between
‘liquidated damages’ and ‘penalty’. This Section lays down that the Courts are not bound
to treat the sum mentioned in the contract, either by way of liquidated damages or
penalty, as the sum payable as damages for the breach. Instead the courts are required to
allow reasonable compensation so as to cover the actual loss sustained, not exceeding the
amount so named in the contract. Thus, according to the Section, the named sum,
regardless whether it is a penalty or not, determines only the maximum limit of liability
in case of breach of contract. The Section does not confer a special benefit upon any
party; it merely declares the law that notwithstanding any term in the contract pre-
determining damages or providing for forfeiture of any property by way of penalty, the
Court will award to the party aggrieved only reasonable compensation not exceeding the
amount named or penalty stipulated.
Exception : There is, however, one exception provided for by Section 74 to the above
rule. When any person enters into any bailbond, recognizance or other instrument of the
same nature, or under the provisions of any law or under the orders of the Government,
gives any bond for the performance of any public duty or act in which the public are
interested, he shall be liable to pay the whole sum mentioned therein upon breach of the
condition of any such instrument.
Examples : (a) A contracts with B to pay Rs.1,000 if he fails to pay B Rs.500 on a given
day. A fails to pay B Rs.500 on that day. B is entitled to recover from A such
compensation, not exceeding Rs.1,000 as the court considers reasonable. (Illustration (a)
to Section 74).
(b) A undertakes to repay B a loan of Rs.1,000 by five equal monthly instalments with
a stipulation that, in default of payment of any instalment, the whole shall become due.
This stipulation is not by way of penalty and the contract may be enforced according to
its terms. (Illustration (f) to Section 74).
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(c) A borrows Rs.100 from B, and gives him a bond for Rs.200 payable by five yearly
instalments of Rs.40, with a stipulation that, in default of payment of any instalment, the
whole shall become due. This is a stipulation by way of penalty. (Illustration (g) to
Section 74).
Stipulation regarding payment of interest. The explanation added to Section 74 states,

“a stipulation for increased interest from the date of default may be a stipulation by way
of penalty.” It implies that such a stipulation may be considered a penalty clause and
disallowed by the courts, if the enhanced rate is exorbitant.
Example : A gives B a bond for the repayment of Rs.1,000 with interest at 12 per cent
per annum at the end of six months, with a stipulation that in case of default interest shall
be payable at the rate of 75 per cent p.a. from the date of default. This is a stipulation by
way of penalty and B is only entitled to recover from A such compensation as the court
considers reasonable.
The following rules must also be noted in connection with payment of interest :
(a) Unless the parties have made a stipulation for the payment of interest, or there is a
usage to that effect, interest cannot be recovered legally as damages, generally
speaking (Mahabir Prasad vs. Durga Datta).
(b) Where a contract provides that the amount should be paid without interest by a
particular date and on default it will be payable with interest, such a stipulation
may be allowed if the interest is reasonable. If the interest is exorbitant, the courts
will give relief.
(c) Payment of compound interest on default, is allowed, only if it is not at an

enhanced rate (Bhushan Rao vs. Subayya).
Earnest Money : Money deposited as security for the due performance of a contract is
known as earnest money. Forfeiture of earnest money is allowed if the amount is
reasonable. But where it is in the nature of penalty, the court has jurisdiction to award
such sum only as it considers reasonable but not exceeding the amount so agreed (Fateh
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Chand vs Balkishen Dass). The proportion the amount bears to the total sale price, the
nature of the contract and other circumstances have to be taken into account in
ascertaining the reasonableness of the amount.
Cost of Suit
The aggrieved party is entitled, in addition to the damages, to get the costs of
getting the decree for damages from the defaulter party. The cost of suit for damages is in
the discretion of the court.
Summary of the Rules Regarding the Measure of Damages
The principles governing the measure may be summarized as under :

1. The damages are awarded by way of compensation for the loss suffered by
the aggrieved party and not for the purpose of punishing the guilty party for
the breach.
2. The injured party is to be placed in the same position, so far as money can
do, as if the contract had been performed.
3. The aggrieved party can recover by way of compensation only the actual loss
suffered by him, arising naturally in the usual course of things from the
breach itself.
4. Special or remote damages, i.e. damages which are not the natural and
probable consequence of the breach are usually not allowed until they are in
the knowledge of both the parties at the time of entering into the contract.
5. The fact that damages are difficult to assess does not prevent the injured
party from recovering them.
6. When no real loss arises from the breach of contract, only nominal damages
are awarded.
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7. If the parties fix up in advance the sum payable as damages in case of breach
of contract, the court will allow only reasonable compensation so as to cover
the actual loss sustained, not exceeding the amount so named in the contract.
8. Exemplary damages cannot be awarded for breach of contract except in case
of breach of contract of marriage or wrongful refusal by the bank to honour
the customer’s cheque.
9. It is the duty of the injured party to minimize the damage suffered.
10. The injured party is entitled to get the costs of getting the decree for damages
from the defaulter party.
4.2.6 Suit upon Quantum Meruit (Sections 65 and 70)

Another remedy for a breach of contract available to an injured party against the
guilty party is to file a suit upon quantum meruit. The phrase quantum meruit literally
means “as much as is earned” or “in proportion to the work done.” A right to sue upon
quantum meruit arises where a contract, partly performed by one party, has been
discharged by breach of contract by the other party or, is discovered void or becomes
void. This remedy may be availed of either without claiming damages (i.e., claiming
reasonable compensation only for the work done) or in addition to claiming damages for
breach (i.e., claiming reasonable compensation for part performance and damages for the
remaining unperformed part).
The aggrieved party may file a suit upon quantum meruit and may claim payment
in proportion to work done or goods supplied in the following cases :
1. Where work has been done in pursuance of a contract, which has been discharged
by the default of the defendant.
Example : P agreed to write a volume on ancient armour to be published in a magazine
owned by C. For this he was to receive $ 100 on completion. When he had completed
part, but not the whole, of his volume, C abandoned the magazine. P was held entitled to
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get damages for breach of contract and payment quantum meruit for the part already
completed (Planche vs. Calburn).
Notice that in the above case the contract was wrongfully terminated by the
defendant, and both damages as well as payment quantum meruit have been allowed. It is
important that in the case of a wrongful breach of contract the injured party can always
claim payment quantum meruit, whether the contract is divisible or indivisible.
2. Where work has been done in pursuance of a contract which is discovered void’ or
becomes void,’ provided the contract is divisible.
Example : C was appointed as managing director of a company by the board of directors
under a written contract which provided for his remuneration. The contract was found
void because the directors who constituted the ‘Board’ were not qualified to make the
appointment. C nevertheless, purporting to act under the agreement, rendered services to
the company and sued for the sums specified in the agreement, or alternatively, for a
reasonable remuneration on a quantum meruit. Held, C could recover on a quantum
meruit. (Craven-Ellis vs. Canons Ltd).
3. When a person enjoys benefit of non-gratuitous act although there exists no

express agreement between the parties. One of such cases is provided in Section 70.
Section 70 lays down that when services are rendered or goods are supplied by a person,
(i) without any intention of doing so gratuitously, and (ii) the benefit of the same is
enjoyed by the other party, the latter must compensate the former or restore the thing so
delivered.
Example : A, a trader, leaves certain goods at B’s house by mistake. B treats the goods
as his own. He is bound to pay A for them. (Illustration (a) to Section 70).
4. A party who is guilty of breach of contract may also sue on a quantum meruit
provided both the following conditions are fulfilled
(a) the contract must be divisible, and
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(b) the other party must have enjoyed the benefit of the part which has been
performed, although he had an option of declining it.
Example : Where a common carrier fails to take a complete consignment to the agreed
destination, he may recover pro-rata freight. (He will, of course, be liable for breach of
the contract).
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1. What are the various remedies available to a party in case of breach of

contract.
2. “If a contract is broken, the law will endeavour so far as money can do it, to
place the injured party in the same position as if the contract has been
performed”. Discuss.
3. “Damages for breach of contract are granted by way of compensation and not
by way of punishment”. Comment.
4. Is a clause in a deed for payment of interest at an enhanced rate one of
penalty ? Explain.
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QUASI-CONTRACTS
STRUCTURE
5.0 Objective
5.1 Introduction
5.2 Meaning of Quasi-Contract
5.3 Cases deemed as Quasi-Contracts
5.4 Quantum Meruit
5.5 Specific Performance
5.6 Summary
5.7 Keywords
5.0 OBJECTIVE
(a) Define quasi-contract and explain the causes deemed as quasi-contracts
(b) Explain about the quantum merit.
5.1 INTRODUCTION
A contract is the result of an agreement enforceable by law. It comes into
existence from the action of the parties. The parties make actual promises knowing fully
well that legal relationship will come into existence. But sometimes there is no intention
on the part of the parties to enter into a contract but obligations resembling those created
by a contract are imposed by law. Such obligations imposed by law constitute what is
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known as quasi-contracts under the English law, and certain relations resembling those
created by contracts under the Indian law. A quasi-contract is not in fact a contract at all,
but merely resembles one and produces similar effect.
Example : If A pays sum of money to B believing him to be his creditor, when as a

matter of fact he was not, B is bound to return the money to A on the assumption that the
above sum given to him was by way of loan.
5.2 MEANING OF QUASI-CONTRACT
A quasi-contract is a kind of contract by which one party is bound to pay money in

consideration of something done or suffered by the other party. Though no contractual
relation exists between the parties, law makes out a contract for them and such a contract
is called a quasi-contract. The basis of quasi-contract is to prevent unjust enrichment or
unjust benefit, i.e., no one should grow rich out of another person’s loss.
5.3 CASES DEEMED AS QUASI-CONTRACTS
The Indian Contract Act recognises such types of contracts and section 68-72 deal
with such contracts. They are as follows :
1. Claims for necessaries supplied (Section 68)
If a person incapable of entering into a contract or any one whom he is legally

bound to support, is supplied by another person with necessaries suited to his condition in
life, the supplier is entitled to recover the price from the property of the incapable person.
Example : A supplies to B, a lunatic, with necessaries suitable to his condition in life. A

is entitled to be reimbursed from B’s property.
A contract by a minor is wholly void and unenforceable. He cannot even ratify it

on attaining majority. But section 68 of the Act provides an exception to this rule and
makes the estate of the minor liable for necessaries supplied to him. In order to make an
infant liable for necessaries supplied, the plaintiff must prove, (1) that the goods supplied
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were reasonable necessary for supporting a person in his position, and (2) that the infant
had not already a sufficient supply of these necessaries.
The things supplied must come within the category of necessaries. Facts of
individual cases will help in deciding as to what are necessaries. Necessaries are those
things without which an individual cannot reasonably exist. The same thing may be
necessary to one person under certain circumstances and unnecessary to another person
under other circumstances. The standard varies according to the class of society to which
the infant belongs. The term necessaries is not confined to goods. It can include other
things such as good teaching and instruction. House given to a minor for the purpose of
living and continuing his studies is a necessity and the person so giving is entitled to
recover the price.
It may, however, be noted that the remedy is not personal but against the estate
only. The minor cannot even be made personally liable where necessaries supplied
exceed the value of the estate itself. The obligation under section 68 is to pay a
reasonable and not the agreed price for the goods. The creditor is entitled to the value of
the necessaries but not the interest thereon.
2. Payment by an interested person (Section 69)
This section provides that a person who is interested in the payment of money
which another is bound by law to pay and who, therefore, pays it, is entitled to be
reimbursed by the other.
Example : B holds land in Bengal on a lease granted by A, the Zamindar. The revenue
payable by A to the Government being in arrear, his land is advertised for sale by the
Government. Under the revenue law, the consequence of such sale will be the annulment
of B’s lease. B to prevent the sale and the consequent annulment of his own lease pays to
the Government the sum due from A. A is bound to make good to B the amount so paid.
In order that section 69 may apply, the following conditions must be satisfied.
1. A person must by law be bound to pay some money.
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2. Another person must be interested in the payment of that money.

3. The other person must have paid the money because of such interest.
A person who is interested in the payment of money which another is bound by

law to pay, pays it, he is entitled to be reimbursed by the other. If he has no interest in
paying, he cannot claim protection. An action is not maintainable under this section,
unless the person from whom it is sought to be recovered was bound by law to pay it.
Thus, where a seller had to pay all encumbrances, on the property and the purchaser pays
such encumbrances, the purchaser is entitled to be reimbursed by the seller.
Examples : (a) A’s goods were wrongfully attached to realise the arrears of
Government revenue due by B. A pays the dues to save his property. He is entitled to
recover the amount from B. (Tulsa Kunwar v. Jageshar Prasad (1906) 28 All. 5631.
(b) The consignee suffered loss due to fire in the wagon during transit. The insurer
made good the loss. The insurer claimed the money from the railway. The claim was
allowed under section 69. (Union of India v. Kalinga Textile AIR, 1969 Bom. 401).
(c) In a case E left his carriage at P’s house. P’s landlord seized the carriage as
distress for rent. E paid the rent to obtain the release of his carriage. It was held that E
could recover the amount from P (Exall v. Partidge (1799) 8. T.R. 308).
3. Obligation of a person enjoying benefit of non-gratuitous act (Section 70)
Where a person lawfully does anything for another person or delivers, anything to
him, not intending to do so gratuitously, and such other person enjoys the benefit thereof
the latter is bound to make compensation to the former in respect of, or to restore the
thing so done or delivered.
Examples : (a) A, a tradesman leaves goods at B’s house by mistake. B treats the goods
as his own. He is bound to pay A for them.
(b) A saves B’s property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
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Where irrespective of any agreement or contract, a person lawfully does

something for another person which was never intended to be gratuitous, and the other
person enjoys the benefit of the thing done the latter is bound to pay compensation to the
former in respect of the thing done. For the application of this section, the following
conditions must be fulfilled.
(1) The thing must have been done lawfully.
(2) It must have been done by a person not intending to act gratuitously.
(3) The person for whom the act is done must have enjoyed the benefit of it.
If these conditions are satisfied the person enjoying the benefit of the act is put
under an obligation to make compensation to the person doing the act or to restore the
thing so done or delivered.
The leading case on the point is Damadar Mudaliar V. Secretary for State for
India.
The facts of the case are :
The Government carried out repairs to an irrigation tank, owned by the

Government jointly with a zamindar and sued the zamindar for contribution in respect of
expenses incurred for the repairs, it was held that Government in carrying out the repairs
had acted lawfully and had not intended to carry them out gratuitously and that the
zamindar who enjoyed the benefit of the repairs was liable to pay compensation.
Examples : (a) The provincial Government in the wrongful exercise of their

authority asked the railway company to widen the culvert for the benefit of private owner
of property in the neighbourhood. The railway company agreed to widen the culvert of its
own cost. On completion of the work a suit was filed by the railway company against the
municipality. It was held that although the railway company did not intend to do the work
gratuitously, the municipality did not benefit from it and therefore section 70 could not be
applied. (Governor General in Council v. Madura Municipality AIR, 1949 PC. 39).
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(b) A contractor on the request of an officer of the state of West Bengal constructed a
katcha road, office, kitchen, storage sheds for the use of the civil supplies department of
the Government. The State accepted the works but tried to evade liability because no
contract had been concluded according to the formalities of the Government of India Act.
Since the State had enjoyed the benefit of the works, the Supreme Court held the State
Government liable. (State of West Bengal v. Mondal & Sons, AIR 1962 Sc. 779).
Section 70 is not based on contract but embodies the equitable principles of

restitution and prevention of unjust enrichment. It has no application to persons
incompetent to contract (such as minor) and as such they are under no obligation to
compensate the other person for any benefit received by them. But the position of the
State cannot be compared with that of a minor. Section 70 applies as much to
Corporations and Government as to individuals.
Example : X supplied spare motor parts to the Poona Municipal Corporation. The
Corporation tried to escape liability on the ground that the contract was not made in
accordance with the Bombay Municipal Corporation Act. It was held that the Corporation
was liable under Section 70. (Pillo Dhunfishaw v. Municipal Corporation of the city of
Poona AIR 1970 SC. 1201).
4. Responsibility of finder of goods (Section 71)
A person who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a bailee.
A finder of goods is bound to take as much care of the goods found as a man of
ordinary prudence would take of his own goods under similar circumstances. He cannot
appropriate the goods without taking proper steps to find out the owner and should keep
them for a reasonable time so that the owner may turn up and take them. The finder of the
goods is entitled to retain the goods against the owner until he receives compensation
from him. He is also entitled to the possession of the goods as against the whole world
except the true owner.
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The finder, however, can retain the goods in the following cases :
(i) Where the thing found is in danger;
(ii) Where the owner cannot with reasonable diligence by found out;
(iii) Where the owner is found out, but refuses to pay lawful charges of the finder;
(iv) Where the lawful charges of the finder, in respect of the thing found, amount
to two-thirds of the value of thing found.
Example : H picked up a diamond from the floor of F’s shop and handed over to F to
keep it till the owner is found. Inspite of best efforts the true owner could not be reached.
After some time H tendered to F the lawful expenses incurred by him for finding the true
owner and asked him (F) to hand over the diamond to him (H). F refused. It was held that
F must return the diamond to H as H was entitled to retain it against the whole world
except the true owner. (Hollins v. Fowler L.R. 7 HL. 757).
5. Money paid by mistake or under coercion (Section72)
A person to whom money has been paid or anything delivered by mistake or under
coercion, must repay or return it.
Examples : (a) A and B jointly owe 100 rupees to C. A alone pays the amount to C and
B not knowing of this fact, pay 100 rupees over again to C. C is bound to repay the
amount to B.
(b) A railway company refuses to deliver certain goods to the consignee,

except upon the payment of illegal charge for carriage. The consignee pays
the sum charged in order to obtain the goods. He is entitled to recover so
much of the charges as was illegally excessive.
Payment by mistake under this section must refer to a payment which was not
legally due. The mistake is thinking that the money paid was due when in fact it was not
due. Thus, if money is sent to a wrong person by money order due to bonafide mistake of
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fact, the sender can recover it. Similarly a debtor can recover the amount of over payment
to a creditor paid under a mistake.
Examples: (a) A lessee in a mining lease paid higher rates though he was bound to
pay royalties at a lower rate. The money was paid under the belief that it was legally due.
The Privy Council held that money paid under mistake of law can be recovered under
Section 72. (Sir Shiba Prasad v. Maharajah Srish Chandra. AIR 1949 PC. 297).
(b) A person purchased a car at a price which it was represented by the seller to be
controlled price, but afterwards the vendee came to know that he paid more than the
controlled price, upon the false representation of the seller. It was held that the excess
payment was a payment made by mistake and the vendee could recover it. (Lakshman
Prasad & Sons v. S.V. Kamalba AIR 1960 Mad. 335).
Mistake must as to the existence of the obligation and not merely as to some
collateral matter which may form a motive for the payment. Mistake may be either of a
fact or law. But it must be of fundamental importance.
In the case of Sales Tax Officer, Banares v. Kanhaiya Lal Mukand Lal Saraf, the
point decided is :
If a person pays money to another by mistake, then money must be repaid to him.
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5.4 QUANTUM MERUIT
In addition to the above types of quasi-contracts a claim can also be made on the
basis of Quantum Meruit. Where one person has rendered service to another in
circumstances which indicate an understanding between them that it is to be paid for
although no particular remuneration has been fixed the law will infer a promise to pay
Quantum Meruit i.e., as much as the party doing the service has deserved. It covers a case
where the party injured by the breach had at time of breach done part but not all of the
work which he is bound to do under the contract and seeks to be compensated for the
value of the work done. For the application of this doctrine two conditions must be
fulfilled :
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The claim for quantum meruit arises in the following cases :
1. Where work has been done in pursuance of a contract, which has been discharged
by the default of the defendant.
Examples
(a) P agreed to write a volume on ancient armour to be published in a magazine
owned by C. For this he was to receive $ 100 on completion. When he had
completed part, but not the whole, of his volume, C abandoned the magazine.
P was held entitled to get damages for breach of contract and payment
quantum meruit for the part already completed (Planche vs. Colburn).
(b) A, engages B, a contractor, to build a three storied house. After a part is
constructed A prevents B from working any more. B, the contractor, is
entitled to get reasonable compensation for work done under the doctrine of
quantum meruit in addition to the damages for breach of contract.
Notice that in both the above cases the contract was wrongfully terminated by the
defendant, and both damages as well as payment quantum meruit have been allowed. It is
important that in the case of a wrongful breach of contract the injured party can always
claim payment quantum meruit, whether the contract is divisible or indivisible.
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2. Where work has been done in pursuance of a contract which is ‘discovered void’
or ‘becomes void’, provided the contract is divisible.
Examples
(a) C was appointed as managing director of a company by the board of directors

under a written contract which provided for his remuneration. The contract was
found void because the directors who constituted the Board were not qualified to
make the appointment. C nevertheless, purporting to act under the agreement,
rendered services to the company and sued for the sums specified in the
agreement, or, alternatively, for a reasonable remuneration on a quantum meruit. Held, C could
recover on a quantum meruit. (Craven-Ellis vs. Canons Ltd.)
(b) A contracts with B to repair his house at a piece rate. After a part of the repairs
were carried out, the house is destroyed by lightning. Although the contract
becomes void and stands discharged because of destruction of the house, A can
claim payment for the work done on quantum meruit. Note that if under the
contract a lump sum is to be paid for the repair job as a whole, them A cannot
claim quantum meruit because no money due till the whole job is done.
3. When a person enjoys benefit of non gratuitous act although there exists no
express agreement between the parties. One of such cases is provided in Section 70.
Section 70 lays down that when service are rendered or goods are supplied by a person,
(i) without any intention of doing so gratuitously, and (ii) the benefit of the same is
enjoyed by the other party, the latter must compensate the former or restore the thing so
delivered.
Examples
(a) A, a trader, leaves certain goods at B’s house by mistake. B treats the goods as his
own. He is bound to pay A for them. (illustration (a) to Section 70)
(b) Where A ploughed the field of B with a tractor to the satisfaction of B in B’s
presence, it was held that A was entitled to payment as the work was not intended
to be gratuitous and the other party has enjoyed the benefit of the same. (Ram
Krishna vs Rangoobet).
4. A party who is guilty of breach of contract may also sue on a quantum meruit
provided both the following conditions are fulfilled :
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(a) the contract must be divisible, and
(b) the other party must have enjoyed the benefit of the part which has
been performed, although he had an option of declining it.
Examples
(a) Where a common carrier fails to take a complete consignment to the agreed
destination, he may recover pro-rata freight. (He will, of course, be liable for
breach of the contract).
(b) S had agreed to erect upon H’s land two houses and stables for $ 565. S did part of
the work and then abandoned the contract. H himself completed the buildings
using some materials left on his land by S. In an action by S for the value of work
done and of the materials used by H, it was held that S could recover the value of
the materials (for H had the option to accept or to reject these) but he could not
recover the value of the work done (for H had no option with regard to the partly
erected building, but to accept that). The court observed, “ The mere fact that a
defendant is in possession of what he cannot held keeping or even has done work
upon it, affords no ground for such an inference. He is not bound to keep
unfinished a building which in an incomplete state would be a nuisance on his
land. “ (Sumpter vs. Hedges).
5. When an indivisible contract for a lump sum is completely performed but badly,
the person who has performed the contract can claim the lump sum; but the other party
can make a deduction for bad work.
DIFFERENCE BETWEEN QUANTUM MERUIT AND DAMAGES
The points of distinction between quantum meruit and damages are as under :
1. Original Contract
The claim for quantum meruit is not a claim upon the original contract, while the
claim for damages rests on the original contract. The claim for quantum meruit is based
upon a new implied contract created by the offer of what the plaintiff has done and its
acceptance by the defendant, while the remedy for claiming damages is to sue on the
original contract.
2. Purpose
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The purpose of damages is to place the injured party in a position where he would
have been, if the other party had not broken the original contract, whereas the purpose of
quantum meruit is to restore him to the position he would have been, if this new implied
contract had not been made.
3. Principle of Assessment
The law in quantum meruit is proceeding on a principle of assessment which

differs from that which is applied in assessing damages for breach of contract.
5.5 SPECIFIC PERFORMANCE
When damage is not an adequate remedy, the court may at its discretion grant the
specific performance of the contract i.e. compel a party to do what he promised to do. In
other words, it is an order by the court upon the party guilty of breach of contract
directing him to perform what he promised to do. But unlike damages, specific
performance cannot be claimed as a matter of right.
It is a discretionary remedy which is allowed in a limited number of cases.
Generally speaking, specific performance is directed only in those cases where

there exists no standard for ascertaining the actual damage caused by the non –
performance of the act agreed to have been done. In other words, specific performance is
granted in cases where monetary compensation is found to be an inadequate remedy. For
example A agrees to sell two rare China vases to B. B may compel A to perform the
contract specifically, because there is no standard for ascertaining the actual damage
which would be caused by the non –performance of the promise. But the following
contracts cannot be specifically enforced :
(a) A contract for the non –performance of which money is an adequate relief. The
courts refuse specific performance of a contract to lend or to borrow money or
where the contract is for the sale of goods easily procurable elsewhere.
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(b) Where the execution of the contract requires supervision, e.g. a building
construction contract, order for specific performance is not issued.
(c) Where the contract is for personal services, e.g., a contract to sing or to paint a
picture. In such contracts injunction (i.e. an order which forbids the defendant to perform
a like personal service for other persons) is granted in place of specific performance.
5.6 SUMMARY
A quasi contract rests upon the equitable “doctrine of unjust enrichment” which
declares that a person shall not be allowed to enrich himself unjustly at the expense of
another. Duty, and not a promise or agreement, is the basis of such contracts. Contract
Act describes cases which are to be deemed quasi-contracts under the Indian law which
are (a) when necessaries are supplied to a person incompetent to contract or anyone to
whom he is legally bound to support (b) when a person who is interested in the payment
of money which another is bound by law to pay (c) where a person lawfully does
anything to him, not intending to do so gratuitously, and such other person enjoys the
benefit thereof (d) when a person who finds goods belonging to another and takes them
into his custody and (e) a person to whom money has been paid, or anything delivered by
mistake or under coercion.
5.7 KEYWORDS
Quasi Contract: A quasi contract is a kind of contract by which one party is bound to
pay money is consideration of something done or suffered by the other party.
Quantum Meruit: Where one person has rendered service to another in circumstances
which indicate an understanding between them that it is to be paid for although no
particular remuneration has been fixed the law will infer a promise to pay Quantum
Meruit.
Specific Performance: It is an order by the court upon the party guilty of breach of
contract directing him to perform what be promised to do.
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1. “Under the Indian Contract Act, there are certain relations resembling those
created by a contract.” Explain.
2. What are quasi-contracts? Explain briefly the quasi-contracts provided for by
the Indian Contract Act.
3. Explain the term ‘Quasi Contracts’ and state their characteristics. Illustrate
your answers by giving examples.
4. “A quasi-contracts is not a contract at all. It is an obligation which the law
creates.” Amplify and state the quasi-contracts recognised under the Indian
Contract Act.
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NATURE AND TYPES OF COMPANIES
STRUCTURE
10.0 Objective
10.1 Introduction
10.2 Meaning of a Company
10.3 Characteristics of Company
10.4 Lifting of the Corporate Veil
10.5 Types of Companies
10.6 Difference between Public and Private Company
10.7 Privileges of a Private Company
10.8 Conversion of Private Company into Public Company
10.9 Conversion of Public Company into Private Company
10.10 Summary
10.11 Keywords
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(a) Explain the procedure for conversion of private company into public company and
vice-versa.
10.0 INTRODUCTION
The word company is the most widely used word in the whole of commercedom
these days. This word has been derived from the combination of two Latin words,
namely, ‘com’ and ‘panis’. The word ‘com’ means together and ‘panis’ means bread.
Thus initially the word company referred to an association of persons who took their
meals together. The people took advantage of these festive gatherings to discuss their
business matters. So generally speaking, a company means a voluntary association of
individuals formed for some common purpose. It has no strictly technical and legal
meaning. It is a legal device for the attainment of common social or economic objectives.
It is the outcome of the deficiencies of other forms of organisations like sole trade and
partnership and gives a perfect solution to the problems being confronted by these forms
of organisation.
10.1 MEANING OF A COMPANY
The word “company” is the most widely used word in the whole of commercedom
these days. This word has been derived from the combination of two Latin words,
namely, ‘com’ and ‘panis’. The word ‘com’ means together and ‘panis means bread.
Thus initially the word company referred to an association of persons who took their
meals together. The people took advantage of these festive gatherings to discuss their
business matters. So generally speaking, a company means a voluntary association of
individuals formed for some common purpose. It has no strictly technical and legal
meaning. It is a legal device for the attainment of common social or economic objectives.
It is the outcome of the deficiencies of other forms of organizations like sole trade and
partnership and gives a perfect solution to the problems being confronted by these forms
of organization. Sometimes, partnership firms may also use the word company with their
name as ‘Maninder Chand Devinder Singh and Company.’ But as far as this discussion is
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concerned, it shall mean by it a company formed and registered under the Companies
Act. A company may be formed for trading as well as non-trading purposes. Thus
company is the only choice where an enterprise requires a rather greater mobilization of
capital which the resources of a few persons cannot provide. The following are some of
the definitions of company given by legal luminaries and scholars of law :
“Company means a company formed and registered under this Act or an existing
company. Existing company means a company formed and registered under the previous
company laws.”
Companies Act, 1956 Sec. 3 (i & ii)
“A company is a association of persons united for a common object.”
Justice James
“A joint stock company is a voluntary association of individuals for profit, having

a capital divided into transferable shares, the ownership of which is the condition of
membership.”
L. H. Haney
“A joint stock company is an artificial person-invisible, intangible and existing

only in the eyes of law.”
Justice Marshal
“Company means an association of persons united for a common object.”
Justice James
“A joint stock company means a company having permanent paid up or nominal

share capital of fixed amount divided into shares, also of fixed amount, or held and
transferable as stock, or divided and held partly in one way and partly in the other, and
formed on the principle of having for its members the holders of those shares or that
stock and no other persons. Such a company when registered with limited liability under
this Act, shall be deemed to be a company limited by shares.”
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Section 566 of the Companies Act, 1956
Thus a company is a means of co-operation in the conduct of an enterprise. It is

legally an entity apart from its members, is capable of rights and duties of its own and
endowed with the potential of perpetual succession. Finally, it can be said that a company
is an incorporated association, which is an artificial legal person having an independent
legal entity with a perpetual succession, a common seal, a common capital comprising
transferable shares and having limited liability. At present, the companies in India are
incorporated under the Companies Act, 1956.
10.2 CHARACTERISTICS OF COMPANY
Company is an artificial person created by law for some common purpose of

which the capital is divisible into parts, known as shares and with a limited liability. It
enjoys the following special characteristics for advantages in comparison with other
forms of organization :
1. Artificial Person
A company is an artificial person existing in the eyes of law only. It is invisible,

intangible, immortal and lacks the physical attribute possessed by natural persons which
means that a company does not eat food, cannot marry and can not be sent to prison. The
law treats it as a legal person as it can conduct lawful business and enter into contracts
with other persons in its own name. It can sell or purchase property. It can sue and be
sued in its name. It cannot be regarded as an imaginary person because it has a legal
existence. Thus company is an artificial person created by law.
In the case of Bath V. Standard Land Co. 1910, 2 ch. 408, it was held that the
boards are the brains and the only brains of the company which is the body and the
company can and does act only through them.
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2. Independent Corporate Existence
A company has a separate independent corporate existence. Its entity is always

separate from its members. The property of the company belongs to it and not to the
shareholders. It must be utilized for the benefit of the company and not for the personal
benefits of the shareholders. The company cannot be held liable for the acts of the
members and the members can not be held liable for the acts or wrongs or misdeeds of
the company. The members of the company can enter into contracts with the company in
the same manner as any other individual. The company’s debts are the debts of the
company and the shareholders can not be compelled to pay them. Thus, once a company
is incorporated, it must be treated like any other independent person.
The principle of separate legal entity was explained in the famous case of Salomon
V. Salomon & Company Ltd. (1897) A.C.22. In this case, a person named Salomon was a
shoe manufacturer. He incorporated a company named Salomon & Company Ltd. for the
purpose of taking over and carrying on of his business. The company consisted of him,
his wife, one daughter and four sons. Salomon and his two sons constituted the board of
directors of the company. Salomon sold his boot business to the newly formed company
for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each.
Salomon took 20,000 shares of £ 1 each and debentures worth £ 10,000. These
debentures certified that the company owed Salomon £ 10,000 and created a charge on
the company’s assets. The company went into liquidation within a year because of the
general trade depression.
At the time of winding up, its statement of affairs showed total assets of £ 6,000;
liabilities included Salomon as secured debenture holder £ 10,000 and unsecured
creditors of £ 7,000. The unsecured creditors claimed priority in payment over Salmon’s
claim as a debenture holder on the ground that Salomon and his company were one and
the same person. The company was merely an agent for Salomon since the business
belonged solely to him and was conducted by him and for him. The company was,
therefore, a mere sham and fraud.
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But the House of Lords held that the company was a real company fulfilling all the
requirements. The company in the eyes of the law is a separate person, independent of
Salomon. Salomon, though virtually the holder of all the shares in the company, was also
a secured creditor and was entitled to repayment in priority to the unsecured creditors.
Lord Macnaghten emphasisted in this case that the company is, in law, a different
person altogether from the subscribers to the memorandum and though it may be that
after incorporation, the business is precisely the same as before and the same persons are
the managers, and the same persons receive the profits, the company is not, in law, their
agent or trustee. There is nothing in law to indicate the extent of interest a person may
possess nor does the law require that the subscribers to the memorandum should be
independent or unconnected.
3. Perpetual Succession
A company is created by law and it can be brought to an end by law. The life of
the company does not depend upon the life of its members. Describing the continuity of a
steam, the great English poet Lord Tennyson says in his famous poem ‘The Brook’ :
“Men may come and men may go
But I go on for ever.”
We may say the same about the continuity of the company. Members may come
and members may go but the company goes on for ever until dissolved. Its continuance is
not affected by the various incapacities from which its individual members may suffer
such as death, illness, mental or physical disability etc. It continues to exist even if all its
human members are dead. Prof. Gower, in his Modern Company Law cities an example :
“During the war, all the members of a private company were killed by a bomb while they
were in a general meeting, but the company survived. Even a hyderogen bomb could not
destroy it.” It is created by law and the law alone can dissolve it.
In Gapalpur Tea Co. Ltd. V. Penhok Tea Co. Ltd. (1982), the High Court of
Calcutta observed that though the whole undertaking of a company was taken over under
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the Act which purported to extinguish all rights of action against the company, neither the
company was thereby extinguished nor anybody’s claim against it.
4. Common Seal
A company is an artificial person and is competent to enter into contracts. But it

does not have any physical existence and it can not sign any documents personally. It has
to act through a human agency known as directors. Therefore, every company must have
a seal with its name engraved on it. The seal of the company is affixed on the documents
which require the approval of the company. The two directors must witness the affixation
of the seal. Thus, the common seal is the official signature of the company.
5. Limited Liability
The liability of the members of the company is limited up to the unpaid value of
their shares. In any case a shareholder can not be called upon to pay more than the
amount of his holdings. For example, if a person is having 50 shares of Rs.10/- each and
he has already paid Rs.5/- per share at the time of application and allotment, his unpaid
liability comes to Rs.250/- which he has to pay at any time the company calls for that
payment. He is not required to pay more than Rs.250/- in any case. In case the company
is limited by guarantee also, the members undertaking the guarantee have to pay the
guarantee money at the time of winding up of the company. Thus, on account of the
principle of limited liability, the share holders do not incur the risk of losing their
personal property in the event of the company’s inability to pay its debts.
In London and Globe Finance Corporation (1903) case, Justice Buckley

highlighted the importance of limited liability when he said, “The statutes relating to
limited liability have probably done more than any legislation of the last fifty years to
further the commercial prosperity of the country. They have, to the advantage of the
investor as well as of the public, allowed and encouraged aggregation of small sums into
large capitals which have been employed in undertakings of great public utility largely
increasing the wealth of the country.”
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6. Transferability of Shares
The shares of a public company are freely transferable. Section 82 of the

Companies Act declares that the shares or other interests of any member in a company
shall be movable property transferable in the manner provided by the Articles of the
company. The right to transfer shares is a statutory right and it can not be taken away by
making a provision to the effect in the Articles. Thus a member is free to sell his shares in
the open market and to get back his investment without having to withdraw the money
from the company. This provides liquidity to the investor and stability to the company. A
private company, however, restricts the right to transfer its shares under section 3(1) (iii)
of the Companies Act, 1956.
7. Separate Property
A company can own, manage, control and dispose of property in its own name.
The company becomes the owner of its capital and assets. The shareholders are not the
private or joint owners of the company’s property. A shareholder does not even have an
insurable interest in the property of the company. In the case of Macaura V. Northern
Assurance Co. Ltd. (1925), Macaura was the holder of nearly all the shares (except one)
of a timber company. He was also a substantial creditor of the company. He insured the
company’s timber in his own name. The timber was destroyed by fire and he claimed the
loss from the insurance company. It was held that the insurance company was not liable
to him.
In R.T. Perumal V. John Deavin, AIR 1960, it has been observed that a company
is a real person in which all its property is vested, and by which it is controlled, managed
and disposed of. Their Lordship observed that no member can claim himself to be the
owner of the company’s property during its existence or in its winding up.
Thus the property of the company is not the property of the shareholders; it is the
property of the company. The shareholders do not have any legal or equitable interest in
the property of the company.
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8. Right to Sue
A company, being a legal person, can enforce its rights through suits and by the
same token, it can be sued for breach of its legal duties e.g. a company was engaged in
the manufacturing of television sets. It purchased certain electronic components from
another company, named Gupta Company and paid the price for the same. But Gupta
Company supplied the components of poor quality. In this case the company which
purchased the electronic components may file a suit against Gupta Company for the
recovery of the damages. Similarly, if Gupta Company supplies the components of good
quality but the purchasing company fails to pay the price, then the Gupta Company can
file a suit against it for the recovery of the price of the electronic components.
9. Professional Management
Management is divorced from ownership in the case of the company form of

organization. Due to this factor, the corporate sector is capable of attracting the growing
cadre of professional managers. The managers are experts in the field of management
because of their specialised knowledge of the subject and they function independently
and without any interference. Such an atmosphere of independence gives them an
opportunity to develop extraordinary managerial capacities. Thus, the company form of
organization attracts young professional managing personnel to conduct its affairs
effectively and efficiently.
10.3 LIFTING OF THE CORPORATE VEIL
The concept of separate entity is the chief advantage of the company form of
organization. A company becomes a legal person after its incorporation and it has a
separate entity from its members. This principle of separate entity is known as the veil of
incorporation. Once a company gets incorporated, all the dealings of the company would
be in its own name without looking into the identity of the persons behind its formation.
This principle was established in the famous case of Salomon Vs Salomon Company Ltd.
The effect of this principle is that there is a fictional veil between the company and its
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members. Normally, the separate entity of the company is respected. But sometimes, the
persons behind the veil start using the company for some fraudulent purposes. In these
circumstances, the courts are compelled to disregard this veil and to determine the real
beneficiaries hiding behind the veil. This phenomenon is called the lifting of the
corporate veil. The corporate veil is said to by lifted when the court ignores the company
and concerns itself directly with the members or managers. The cases in which such
lifting is done may be discussed under two broad headings namely : under statutory
provisions and under judicial provisions.
i) Statutory Exceptions
The Companies Act, 1956 contains certain provisions under which the directors or
members of a company may be held personally liable. These statutory provisions are
discussed as under :-
1. Reduction of Membership
It is provided in section 45 of the Companies Act that if the number of members of

a company is reduced, in the case of a public company below seven or in the case of a
private company below two and the company carries on business for more than six
months after the membership is so reduced, every person who is a member of the
company and who is aware of this fact shall be personally and severally liable for the
payment of all the debts contracted during that time. However, the members shall be
liable only if they are aware of the fact of the number falling below the statutory
minimum.
2. Misstatement in the Prospectus
According to section 62 (1), every director, promoter and every person who has
authorized himself to be named in the prospectus as director or every person who has
authorized the issue of the prospectus, shall be liable for misstatement in the prospectus
to pay compensation to every person who subscribes to any shares or debentures showing
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faith in the prospectus for any loss or damage he may have sustained by reason of the
untrue statement.
3. Failure to Refund Application Money
Section 69(5) provides that if the company fails to refund the application money of
those applicants who have not been allotted shares, within 130 days of the date of the
issue of the prospectus, the directors of the company shall be jointly and severally liable
to repay that money with interest at the rate of 6% per annum from the expiry of the 130th
day.
4. Mis-description of the Company’s Name
Section 147 of the Company Act provides that every company shall indicate its
name and address on every document or act or contract of the company. If any officer or
agent of the company does any act or enters into a contract without fully or properly
mentioning its name and the address of its registered office, he shall be personally liable.
In the case of Hendon Vs Adelman (1973), the directors were held personally liable on a
cheque signed by them in the name of the company stating the company’s name as “LR
Agencies Ltd.,” the real name being “L&R Agencies Ltd.”
5. Investigation of Ownership
Under section 247(1) where it appears to the Central Government that there is
good reason to do so, it may appoint one or more inspectors to investigate and report on
the membership of any company or other matters relating to the company for the purpose
of determining the true persons who are financially interested in the success or failure of
the company and who control and materially influence the policy of the company.
6. Directors with unlimited liability
Section 322 of the Companies Act provides that the liability of the directors or any
of the directors if so provided by the memorandum may be made unlimited. However, if
there is no such clause originally in the memorandum, it may be added by alteration in
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the memorandum by means of a special resolution provided the company is authorized to

do so by its Articles. In case of unlimited liability of directors, they shall be personally
liable for the debts of the company.
7. Fraudulent Trading
Section 542(1) provides for the liability for fraudulent conduct of business. If in
the course of the winding up of a company, it appears that any business of the company
has been carried on with an intent to defraud the creditors of the company or any other
persons or for any fraudulent purpose, the court may, on the application of the official
liquidator or any creditor or contributor of the company declare that any persons who
were knowingly parties to the carrying on of the business in this way are personally liable
without any limitation of liability for all or any of the debts or other liabilities of the
company as the court may direct.
II. Judicial Exceptions
The courts may lift the corporate veil whenever it is necessary to secure justice or
it is in public interest or for the benefit of revenue. The power is however discretionary.
The following are the important cases in which the courts disregarded the corporate
personality of the company and lifted the corporate veil :
1. Determination of the Character of the Company
Sometimes it becomes necessary to determine the character of a company. The

court may examine the company to ascertain whether it has assumed enemy character or
whether there exists interlocking of directorates. For this purpose, the membership of the
company is examined to find out who is really in control of the corporate affairs.
If the persons who are the controlling hands, are the citizens of an enemy country,
the company assumes the position of an enemy company. In this case, the court may lift
the corporate veil and declare the company as an enemy company.
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In Daimler Co. Ltd. V. Continental Tyre & Rubber Co. Ltd. (1916), a company
was incorporated in England for the purpose of selling tyres made in Germany by a
German Company. The majority of its shareholders and all the directors were German
residents in Germany. During the first World War, the company commenced an action to
recover a trade debt. Held, that the company had become an enemy company as it was
controlled by the residents of an enemy country. The suit was dismissed on the ground
that such a permission would be against the public policy.
2. Protection of Revenue
The court may disregard the separate entity if it is used for tax evasion or to
prevent tax obligations. Where it is desired to determine for tax purposes the residence of
a company, the court will lift the veil and find out where its central management is and
that place will determine the residence of the company. The following case make the
point very clear :
In the case of Sir Dinshaw Maneckjee Petit Re A.I.R. (1927) Bom. 371, the
assessee was a millionaire enjoying a huge dividend and interest income. He floated four
private companies and transferred his interest to them in exchange for shares. The income
was received by the companies and thereafter handed down to the assessee as a pretended
loan. Held, the company is not carrying on any business. It was nothing more than the
assessee himself created ostensibly to reduce tax liability.
3. Fraud or Improper Conduct
The corporate entity of a company may be ignored and disregarded if it is found

acting with fraudulent ulterior objectives. The courts will refuse to respect the separate
existence of the company where it is formed to defeat or prevent law, to defraud creditors
or to avoid legal obligations. Professor Grower says in this regard that the veil of a
corporate body will be lifted where the corporate personality is being blatantly used as a
cloak for fraud or improper conduct. The following case illustrates this point :
: 14 :
In Gilford Motor Co. Ltd. V. Horne, Horne was appointed a managing director of
the plaintiff company on the condition that “he shall not at any time while he shall hold
the office of a managing director or afterwards, solicit or entice away the customers of
the company,” His employment was determined under an agreement. Shortly afterwards
he opened a business in the name of a company which solicited the plaintiff’s customers.
It was held that “the company was a mere cloak or sham for the purpose of enabling the
defendant to commit a breach of his covenant (mutual agreement) against solicitation.
4. Company acting as an agent or trustee of the shareholders
A company may sometimes act as an agent or trustee for its own shareholders or
the shareholders of another company. In such cases, the shareholders would be liable as
principal for the acts of the company. The relationship of agency may be inferred from
the agreement or from the circumstances of a particular case. The following case is worth
nothing in this regard :
In F.G. Films Ltd. (1953) 1 E.R. 615, an American Company financed the
production of a film in India in the name of British company. The president of the
American company held 90% of the capital of the British company. The Board of Trade
of Great Britain refused to register the film as a British film. Held, the decision was valid
in view of the fact that the British company acted merely as the nominee of the American
company.
5. Protecting Public Policy
If the company works against the law of the land or the public policy, the courts
may lift the corporate veil to protect the public policy and prevent transactions contrary to
the public policy.
6. Avoidance of legal obligations
Where the company is avoiding legal obligations, the court may disregard the
separate entity of the company and proceed on the assumption as if no company exists
: 15 :
e.g. if a partnership firm sells its business to somebody on the undertaking that it will not
start a similar business in a certain number of years but converts itself into a private
limited company and starts similar business, the court may restrain the company from
doing that business.
In Workmen of Associated Rubber Industry Ltd. Vs. The Associated Rubber

Industry Ltd., Bhavnagar AIR 1986, a new principal company was created wholly owned
by the principal company, with no business or income of its own except receiving
dividend from shares transferred to it by the principal company and serving no purpose
whatsoever except to reduce the gross profit of the principal company. The Supreme
Court found that the creation of new company was intended as a device to reduce the
amount of bonus payable to workmen of the principal company and therefore separate
existence of the two companies had to be ignored while computing the bonus.
10.4 TYPES OF COMPANIES
Company is a legal device for the achievement of some common social and
economic objectives. It can be defined as an association of persons established by law,
having a separate entity from its members and aiming at a common objective. It has a
perpetual succession and the liability of its members is limited. The company form of
organization is the strongest pillar of the grand edifice of modern business and industrial
world. It has eliminated the limitations of sole trade and partnership forms of
organization. These companies may be classified on different bases which are described
below :
(a) According to Incorporation
The act of forming a corporation or company is called incorporation. It is the

process of uniting a group of persons into a legal body by following the prescribed
procedure. According to the mode of incorporation, companies may be divided into the
following three categories :
: 16 :
1. Chartered Companies
These companies are incorporated under the Royal or a special charter granted by
the British King or Queen. The powers and nature of business of the companies of this
type are defined in the charter. The sovereign has the power to put an end to the charter if
the company fails to follow its terms. The objective of these companies was generally to
rule over certain territories, perpetuate army control or to hold trade. The East India
Company, which was incorporated by a charter of Queen Elizabeth on 31st December,
1600 with the objective of holding trade with India and which established the British rule
in India, is an example of this type of companies. Bank of England, Standard Chartered
Bank, the British Broadcasting Corporation and Dutch East India Company of Holland
are other examples of chartered companies.
2. Statutory Companies
These companies are incorporated by a special act passed by central or state

legislature. The objective or objectives, scope, rights and responsibilities of these
companies are clearly mentioned in the Act under which these are incorporated. These
companies are formed to undertake business of public welfare and national importance.
The Reserve Bank of India, The State Bank of India, The Life Insurance Corporation of
India and the Food Corporation of India are governed by their respective acts and need
not have either the Memorandum of Association or Articles of Association. They also
need not use the word ‘Limited’ with their names. These companies are in many ways
like the companies formed and registered under the Companies Act, 1956. The provisions
of this act are also applicable to these companies provided they are not inconsistent with
the provisions of the special act under which they are formed. It should be kept in mind
that though a statutory company is owned by the Government yet it has a separate legal
entity and we can not consider it a department of the Government.
: 17 :
3. Registered Companies
Companies formed by registration under the Companies Act 1956 are known as
registered companies. Most of the companies in India belong to this type. Any existing
company which had been formed and registered under any of the earlier Companies Acts,
is also included in this category. It must be noted that such companies come into
existence only when they are registered under the Act and a certificate of incorporation is
granted to them by the Registrar of Companies. The registered companies are governed
by the provisions of the Companies Act, 1956 and by the rules and regulations laid down
in ‘memorandum’ and ‘articles’ of association of the companies. The liability of the
members of this type of company is limited up to the unpaid value of their shares or the
amount of guarantee undertaken by them.
(b) According to Liability
The liability of members of a company is the second basis on which the companies
can be divided into different kinds. Liability here means, the unpaid amount of money a
member of the company has to pay for the shares held by him and the amount of
guarantee undertaken by him which he has to pay at the time of winding up of the
company. The members are liable only upto a limit and beyond that limit they can not be
asked to contribute anything towards the payment of company’s liabilities. Thus, if in the
event of winding up of a company, the assets of the company are not sufficient to pay its
liabilities, then the private property of the members cannot be utilized for making
payment for the company’s liabilities. It is appropriate to note here that a limited
company is required to ‘add’ the word ‘limited’ after its name. On this basis, there are the
following three types of companies :
1. Companies limited by shares
When the liability of the members of a company is limited up to the unpaid value
of their shares, it is called a limited liability company or a company limited by shares.
This liability or unpaid amount may be called up at any time during the life time of the
: 18 :
company or at the time of its winding up. For example, if a person holds 100 shares of the
value of Rs.10 each and has paid Rs.5 per share with the application and allotment of
shares, his total liability will be Rs.500 only which can be called up at any time. In no
case can he be required to pay more than this amount. If the shares are fully paid up, the
liability of the person holding such shares is nil. Such a company must have share capital
since the extent of liability is determined on the basis of the face value of shares. This
company may be a public company or a private company. (Sec.12(2)(a)).
2. Companies limited by Guarantee
The liability of a member in these companies is limited to the amount undertaken

to be contributed by him at the time of winding up of the company. The amount of
guarantee is mentioned in the memorandum of association. As per section 13(3), the
memorandum of a company limited by guarantee shall also state that each member
undertakes to contribute to the assets of the company in the event of its being wound up
while he is a member or within one year after he ceases to be a member, for payment of
debts and liabilities of the company or of such debts and liabilities of the company as
may have been contracted before he ceases to be a member, as the case may be, and of
the costs, charges and expenses of winding up, and for adjustment of the rights of the
contributors among themselves, such amount as may be required, not exceeding a
specified amount. The articles of such companies must state the number of members with
which these are to be registered (Sec.27(2)). Such companies are formed for non trading
purposes such as charity, promotion of sports, science, art, culture etc. These companies
may or may not have any share capital. If these companies do not have any share capital,
the members can be required to pay the amount of guarantee undertaken by them and that
too in the event of their liquidation. But if these companies have any share capital, the
members are liable to pay the amount which remains unpaid on their shares together
with the amount payable under the guarantee. Thus the amount of guarantee is like
reserve capital of the company. A company limited by guarantee and having a share
capital may be a public company or a private company. (Sec.12(2)(b)).
: 19 :
3. Unlimited Companies
An unlimited companies is that company which has no limit on the liability of its
members. It means that its members are liable to contribute to the debts of the company
in proportion to their respective interests. In case a member is unable to contribute his
share, his deficiency is shared by the rest of the members in proportion to their capital in
the company. If the assets of such a company are not sufficient to pay off its liabilities,
the private assets of the members can be utilized for this purpose. In this respect, a
company with unlimited liability resembles partnership. Such as company may or may
not have share capital. In case, it has a share capital, it can be either a public company or
a private company. It is essential for this type of company to have its articles of
association which must state the number of members with which the company is to be
registered (Sec.12(2)(c). However under section 32 of the Act, it is provided that an
unlimited company can be converted into a limited company by passing a special
resolution for this purpose.
The resolution must state the manner in which the liability of members is to be
limited. The unlimited companies are rarely found in these days.
(c) According to number of members
There are two types of companies according to the number of the persons who
form the company : private company and public company.
1. Private Company
Private company means a company which by its articles –

a) restricts the right of members to transfer its shares, if any
b) limits the number of its members to 50. This number excludes the past or
present employees of the company who are its members.
(c) prohibits any invitation to the public to subscribe for any shares or debentures
of the company.
: 20 :
The words ‘if any’ in clause (a) indicate that share capital is not a must for this
company.
Regarding clause (b), it is worth remembering that the director or directors of the
company will not be considered employees of the company and joint holders shall be
treated as single members. The minimum number of members of a private company is
two and it must have the words Pvt. Ltd. as the last part of its name.
It may also be mentioned here that the number of debenture holders can exceed
fifty because the provisions dealing with private company are silent in this regard.
(Sec.3(1)(iii)).
If a private company is not having share capital, the articles need not contain
provisions for restricting the right of members to transfer shares. (Sec.27(3)).
2. Public Company
According to the Companies Act, a public company is a company which is not a

private company. Thus, it is a company which by its articles does not :-
a) restricts the right of members to transfer its shares, if any
b) limits the number of its members to 50.
c) prohibits any invitation to the public to subscribe for any shares or
debentures of the company.
The minimum number of members of a public company is seven but there is no

upper limit on its membership. Its shares are freely transferable. The word ‘Ltd.’ may be
appended to its name. It can invite the general public to subscribe for its shares.
(Sec.3(1)(iv).
(d) According to control and management
Control and management of a company refers to the composition of its board of

directors or holding of majority of shares. On this basis, companies can be divided into
two classes - Holding Company and Subsidiary Company.
: 21 :
1. Holding Company
The Company Law defines a holding company as a company which controls

another company. A company is deemed to be a holding company of another
company, if :
a) it controls the composition of the board of directors of another company which

means that it has the power to appoint or remove all or majority of its directors.
A company shall be considered to have the power to appoint the directors of

another company in the following cases :
i) If a person can not be appointed as a director without the consent of that
company.
ii If his appointment as a director is possible only because he is the director of
that other company.
iii) If the person, holding the office of a director, is the person nominated by the
other company or by its subsidiary company.
b) it holds more than half the nominal value of the equity share capital of another
company.
c) any company becomes a subsidiary of another company which itself is a

subsidiary of the controlling company. (Sec.4(4)).
To illustrate this point, if company A is a subsidiary of company B and the

company B is subsidiary of another company C, the company A will also become the
subsidiary of Company C. So it means that the subsidiary of your subsidiary is also your
subsidiary.
2. Subsidiary Company
A subsidiary company is a company which is controlled by another company. It is

deemed to be controlled by another company, if
: 22 :
a) the composition of its board of directors is controlled by another company

which means that another company has the power to appoint or remove all or
majority of its directors.
b) another company holds more than half the nominal value of its equity share
capital.
c) it becomes a subsidiary company of another company which itself is a
subsidiary of the controlling company. (Sec.4(1))
A holding company and its subsidiary companies are separate legal entities and
each has a separate corporate veil. The holding and subsidiary companies can not be
treated as one company.
It is important to note that under section (3) the following types of controls do not
make the company a holding company :
i) Where the shares are held or the power is exercisable by the company in a
fiduciary capacity.
ii) Where the shares are held or the power is exercisable by any person by virtue
of any debentures or by a trust deed for securing any issue of such
debentures.
iii) Where the shares are held or the power is exercisable by a lending company
by way of security, and only for the purpose of a transaction entered into in
the ordinary course of business.
(e) According to ownership
Companies can be distinguished from one another on the basis of their ownership
also. The word ownership here implies the proportion of capital held. The following are
the two types of companies on this basis :
: 23 :
1. Government Company
The Companies Act defines a government company as a company in which not

less than 51 per cent of the paid up share capital is held by :
a) The Central Government or
b) Any State Government or
c) Partly by the Central Government and partly by one or more State
Governments.
It should be noted carefully that a company which is a subsidiary of a government

company shall be considered a government company. (Sec.617).
2. Non-Government Companies
All those companies which are registered and incorporated under the Companies
Act but which are not government companies are known as non-government companies.
It implies that if 51 per cent or more of the paid up share capital is held by the private
sector, it is called a non government or private sector company. Tata Iron and Steel
Company Ltd. (TISCO), Reliance Industries Ltd. (RIL) and Hindustan Lever Ltd. (HLL)
are a few examples of private sector companies.
(f) According to Nationality
The company also has a nationality like a citizen although it can not be called a
citizen. The nationality of a company is determined by the place of its incorporation. On
this basis, there can be two types of companies – Foreign Companies and Indian
Companies.
1. Foreign Companies
Foreign companies are those companies which are incorporated outside India but
which have a place of business within India. (Sec.591(1)). Place of business here means
: 24 :
an identifiable place where it carries on business such as office, store house, godown etc.
Share transfer or share registration office shall also be considered a place of business.
If 50 per cent or more of the paid up share capital of a foreign company is held by
Indian Citizens and or by companies incorporated in India whether singly or jointly, it
shall be treated as an Indian Company in respect of its business in India. It means that
such a company has to comply with the provisions of the Companies Act as if it were an
Indian company. (Sec.591(2))
2. Native or Indian Companies
All the companies which are not foreign companies according to the provisions of
the Act as mentioned above are native or Indian Companies.
Some other kinds of companies
1. Licensed companies or association not for profit
The Companies Act permits the registration, under a licence granted by the
Central Government, of an association not for profit with limited liability. However, such
a company can not use the word “Ltd.” or the words “Pvt. Ltd.” with its name. This type
of association or company is formed for the promotion of charity, science, commerce,
sports, art or culture etc. Naturally, such associations are not of a commercial nature and
do not aim at earning profits. Given below are the conditions for the grant of licence to
such companies :
a) The object of the association must be the promotion of charity, science,
commerce, sports, art, religion, culture or some other socially useful activity.
b) It must utilize its income or profits, if any, for the promotion of its objects as
stated above. It can not distribute its profits as dividend to its members.
On the fulfillment of these conditions, it may be granted a licence by the Central

Government. On registration, it enjoys all the privileges, and is subject to all the
obligations of a limited company. It is exempted from certain provisions of the Act and is
: 25 :
registered without paying any stamp duty. These exemptions are intended to encourage
the incorporation of such associations for the above mentioned objects. It can not alter its
object without the prior approval of the Central Government. The Central Government
may, however, revoke the licence at any time. But before taking such a step, the Central
Government shall give a notice in writing of its intention to do so and shall also give it an
opportunity of being heard in opposition to the revocation. (Sec.25)
2. One man company
One man company is usually a private company though legally speaking, there can
be no one man company. It is a company in which one man holds practically the whole of
its share capital. In order to meet the statutory requirement of minimum number of
members, some dummy members comprising mostly friends or relatives are included.
Such members hold just one or two shares each. The member holding the bulk of the
share capital exercises absolute control over the company. It is nothing more than a
family company.
A one man company is a legal entity and is perfectly valid, like any other
company. The law does not prohibit friends or relatives from being the members of a
company. Nor does it bother about the motives of a promoter so long as the objects stated
by him in the memorandum are legal. This enables a man to control the company as well
as to enjoy its profits and also gives him the advantage of limited liability. In the famous
case of Saloman V. Saloman Company Ltd., the company was virtually a one man
company in which Saloman was all powerful.
10.5 DIFFERENCE BETWEEN PUBLIC AND PRIVATE COMPANY
The companies incorporated in India under the Companies Act are divided into
two kinds of the basis of organization and the number of members. The following are the
differences between these two types of companies :
: 26 :
Public Company Private Company
1. The minimum number of its members The minimum number of members is 2 and
is 7. But there is no upper limit on its the maximum number is 50. It excludes past
membership. and present employees of the company.
2. It must have at least three directors. The minimum number of directors is two.
3. It quorum for meetings is 5 members Its quorum for general meetings is 2

unless articles provide a larger members.
quorum.
4. It invites general public to subscribe to It can not invite the general public to
its shares or debentures. subscribe to its shares or debentures.
5. Its shares are fully and freely Its shares are not transferable.
transferable.
6. It must issue the prospectus or It can not issue prospectus or statement in
statement in lieu of prospectus. lieu of prospectus.
7. It can issue the share warrant. It can not issue the share warrant.
8. It can not commence business before It can commerce business immediately after
obtaining a certificate to commence obtaining the certificate of incorporation.
business.
It can allot shares at any time after its
9. It can not allot its shares unless the
registration. The condition of minimum
minimum subscription is received.
subscription does not apply to it.
The words ‘private limited’ must be added

10. The word ‘limited’ is added at the end
at the end of its name.
of its name.
It need not hold any statutory meeting nor
11. It must not hold a statutory meeting
file any statutory report.
either before one month or after six
months of getting the certificate to
commence business. It has also to file
a statutory report with the Registrar.
: 27 :
12. The total managerial remuneration in it There is no restriction on the managerial

can not exceed 11 per cent of the net remuneration.
profit in a year.
10.6 PRIVILEGES OF A PRIVATE COMPANY
A private company enjoys a number of privileges. There are some privileges

which are available to all private companies. But there are some others which are
available only to independent private companies. The privileges enjoyed by a private
company are as under :
1. The formation of a private company is very easy. It can be started with only
two members.
2. It can start its business immediately on incorporation and does not have to
wait for the receipt of the certificate of commencement of
business.(Sec.149(7)).
3. A private company has no need to issue a prospectus or a statement in lieu of
prospectus.(Sec.70(3)).
4. It can allot shares before the minimum subscription is subscribed for or paid.
5. There is no obligation on a private company to offer a new issue of shares to
the existing share holders on pro-rata basis as right shares.
6. It need not hold a statutory meeting or file a statutory report with the
Registrar.(Sec.165).
7. The minimum number of directors of a private company is only two and they
are exempted from filing their consent with the Registrar or from holding
qualification shares (Sec.252(2), 264(3), 266(5)).
8. It need not keep an index of members.
9. The quorum for the meetings of the shares holders of a private company is
fixed at two members.
: 28 :
10. The rules regarding maximum managerial remuneration are not applicable to
a private company. (Sec.198(1)).
All the private companies avail themselves of the privileges mentioned above but
the independent private companies by which we mean those companies which are not
subsidiaries of any public company enjoy some additional privileges which are detailed
below :
1. There is no restriction on the remuneration of directors. So unlike public
companies, it can pay more than 11 per cent of its profits in a year to its
directors. (Sec.309(9)).
2. There is no need to file a statement with regard to the consent of directors to
act as directors and to buy the qualification shares. (Sec.260(5)).
3. A director can participate in the discussion relating to any contract and can
exercise his vote if he so desires.
4. A person can become the director of any number of companies at a time.
(Sec.275-79).
5. The provisions regarding the appointment, reappointment and retirement of
directors are not applicable to independent private companies. (Sec.266).
6. The number of directors can be increased or decreased without taking the
consent of the Central Government. Also there is age limit for the
appointment of directors. (Sec.259).
7. It may issue deferred shares without any restriction.
8. The restrictions regarding the loans to other companies do not apply to it.
(Sec.370(2)).
9. If may purchase or subscribe to the shares or debentures of other companies
in the same group.(Sec.372(4)).
: 29 :
10. It can keep its affairs secret and accordingly a non-member has no right to
inspect or take copies of the profit or loss amount of the company filed with
the Registrar.
10.7 CONVERSION OF PRIVATE COMPANY INTO PUBLIC COMPANY
Section 43, 43-A and 44 of the Companies Act deal with the provisions under
which a private company can become a public company. These provisions are discussed
as under:
1. Conversion by default (Sec.43)

If a private company makes a default in complying with the essential requirements
of a private company, it becomes a public company and loses the privileges of a private
: 30 :
company. In this case the provisions of the Companies Act apply to it as if it were a
public company. However the relief in the following cases may be grant :
(a) If non-compliance was accidental or unknowing or
(b) If it is just and equitable to grant the relief.
But the grant of the above relief is discretionary and it can be given on an
application made by the company or any interested person.
2. Conversion by operation of law (Sec.43-A)

Private companies enjoy certain privileges and get certain exemptions under the
Act on the basis that they are family concerns in which the public is not directly
interested. This section is applicable to those private companies which have employed
public funds to a considerable extent and yet escaped the restrictions and limitations
applicable to public companies. This section provides that a private company shall be
deemed to be a public company :
i) if twenty five per cent or more of its paid up share capital is held by one or more
bodies corporate. However, the shares held by a banking company as a trustee,
executor or administrator of a deceased person shall not be taken into account. The
term body corporate here means a public company or a private company which
has becomes a public company by virtue of Sec.43-A.
ii) if it holds twenty five per cent or more of the paid up share capital of a public
company having a share capital.
In the above cases the private company shall become a public company on and
from the date on which the prescribed percentage is first held.
iii) if the average annual turn over of the private company for three consecutive
financial years is rupees ten crore or more. It will become a public company on
and from the expiry of three months from the last day of the period during which
the prescribed turnover was achieved.
: 31 :
iv) if the private company invites, accepts or renews deposits from the public it shall
become a public company on and from the date when such deposits were first
accepted or renewed. However acceptance of deposits from the members of the
company, directors and their relatives is excluded from the purview of this
provision.
A private company which becomes a deemed public company has to observe the
following rules :
a) Information to Registrar
Section 43A(2) provides that within three months of becoming a deemed public
company, it must inform the Registrar so that he may delete the word ‘private’
before the word ‘limited’ from its name and also make necessary alternations in
the certificate of incorporation as well as the Memorandum of Association. If the
company makes default in complying with this provision, the company and every
officer of the company who is in default is punishable with fine which may extend
to Rs.500/- for every day during which the default continues.
b) Filling of certain certificates with the Registrar

The following certificates along with the annual return under section 161 are filed
by a private company having share capital :
i) A certificate that since the date of the last annual return, no body corporate
has held twenty five per cent or more of its paid up share capital, nor has it
attained an average turnover of rupees ten crore during the relevant period
and also that it has not accepted or renewed deposits from the public.
ii) A certificate that since the last general meeting, it has not held twenty five
per cent or more of the paid share capital of one or more public companies.
Even after becoming a deemed public company, it may retain the features of a
private company. It becomes a special type of public company. For example it may retain
the three basic restrictions envisaged in the case of a private company.
: 32 :
On having become a deemed public company, it would continue to be so until it

has again become a private company with the approval of the Central Government and in
accordance with the provisions of the Act.
3. Conversion by choice (Sec.44)
A private company may voluntarily become a public company-

a) by passing a special resolution deleting the three restrictions of section 3(i),
(i) and
b) by filing with the Registrar a copy of the resolution along with a copy of the
altered articles and a copy of prospectus or statement in lieu of prospectus
and
c) by increasing the number of its members to seven and that of the directors to
three.
If the company makes default in complying with the provisions of this section, the
company and every defaulting officer of the company is liable to fine which may extend
to Rs.500/- for every day during which the default countries.
10.8 CONVERSION OF PUBLIC COMPANY INTO PRIVATE COMPANY
Just as a private company can be converted into a public company, in the same
way a public company can also be converted into a private company. The following
procedure prescribed under Section 31 of the Act has to be adopted for this purpose :
i) The articles have to be altered by passing a special resolution to include the
statutory restrictions imposed by the Act on private companies. Any
provisions in the Articles which are inconsistent with the requirements of a
private company like the power to issue share warrant to the bearer shall also
be deleted.
ii) The approval of the Central Government shall be obtained for the purpose.
: 33 :
iii) A copy of the approval along with a printed copy of the altered Articles are to
be filed with the Registrar within one month of the receipt of the Government
approval.
The company becomes a private company on and from the date on which the
approval of the Central Government is obtained. The words ‘Private Limited’ are
appended to its name and it starts availing itself of all the privileges of a private
company.
10.9 SUMMARY
A company, in its ordinary, non-technical sense, means a body of individuals

associated together for a common objective, which may be business for profit or for some
charitable purposes. From the juristic point of view, a company is a separate legal person
distinct from its members. This principle of separate entity is known as the veil of
incorporation. The effect of this principle is that there is a fictional veil between the
company and its members. Sometimes, it may become necessary to break through the
corporate veil and look at the persons behind the company. This is known as lifting of the
corporate veil. Companies may be classified into various categories : according to
incorporation – chartered companies, statutory companies and registered companies,
according to liability – companies limited by shares, guarantee and unlimited companies,
according to number of members – private and public company, according to control and
management – holding and subsidiary company, according to ownership – government
and non-government company and according to nationality – foreign and Indian
company.
10.10 KEYWORDS
Company: A company, in its ordinary, non-technical sense, means a body of individuals

associated together for a common objective, which may be business for profit or for some
charitable purposes.
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Registered Company: A registered company is one which is formed and registered

under the Indian Companies Act, 1956 or under any earlier Companies Act in force in
India.
Public Company: A public company means a company which is not a private company.
Any seven or more persons can join hands to form a public company.
Holding Company: A company shall be deemed to be the holding company to another if

that other is its subsidiary.
One Man Company: A one-man company is one of which almost the whole share
capital is held by a single man who takes a few dummy members simply to meet the
statute’s requirement regarding the minimum number of members – may be giving only
one share to each of the dummy members.
1. What is a company? Discuss its main characteristics.
2. What is the corporate veil? Under what circumstances can this veil be lifted?
3. Explain the different types of companies which may be incorporated under

the Companies Act?
4. Define a private company? What privileges and exemptions are enjoyed by a

private company.
5. When does a private company become a public company?

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FORMATION OF A COMPANY
STRUCTURE
11.0 Objective
11.1 Introduction
11.2 Promotion
11.3 Incorporation
11.4 Capital Subscription
11.5 Commencement of Business
11.6 Summary
11.7 Keywords
11.0 OBJECTIVE
This lesson discusses the process of formation of a company.
11.1 INTRODUCTION
A company is an association of persons formed for some common purpose. It is a
complex, centralized, economic, administrative structure run by professional managers
who hire capital from the investors. It is the most dominant form of business organization
and it offers the privilege of limited personal liability for business debts. A company has
neither a body, nor a soul, nor a conscience, nor is it subject to the limitations of the
body; even then, it exists in the eyes of the law. It is a legal person just as much as a
human being but with no physical existence. It is the only choice where the enterprise
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requires a greater mobilization of capital which the resources of a few persons can not
provide. Thus, the modern industrialized society is the outcome of the company form of
organization. Companies in India are incorporated under the Companies Act, 1956. The
process of formation of a company can be divided and discussed under the following four
stages :
i) Promotion
ii) Incorporation
iii) Capital subscription
iv) Commencement of business
11.2 PROMOTION
Promotion is the first stage in formation of a company. This stage covers all the
preliminary steps incidental to the formation of the company. It covers the questions like
whether it should be a private company or a public company, what business is to be done
by the company, when it is to be done, what its capital should be and whether it would be
worth while to form a new company or take over the business of an already established
concern. Promotion begins with the conception of an idea and it goes on to include
preliminary investigations into the feasibility and preparation of necessary documents,
making preliminary contracts, arrangement of finance etc. So promotion implies all the
initial steps taken in the formation of a company.
“Promotion is the process of creating of specific business enterprise. The

aggregate of activities contributed by all those who participate in the building of the
business constitute promotion.”
Dr. Henry E. Hoagland
Thus, the promotion stage starts with the conception of an idea and it continues till
the company is formally incorporated. All the preliminaries done for the formation of a
company are included in the process of promotion. The persons who do the necessary
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preliminary work incidental to the formation of a company are termed the promoters of
the company. The necessary investigation regarding the business to be started and the
assembling of the various factors like the selection of the site of business, deciding about
the size of business, decision regarding the purchase of plant and machinery etc. form a
part of the promotion stage. The efforts for the arrangement of finance are made and all
the preliminary contracts are also entered into in the promoting stage. The promoters also
prepare the necessary documents for the formation of the company. These documents
generally include the memorandum of association and articles of association. The
approval regarding the proposed name of the company is also sought from the Registrar
of Companies before the preparation of the above documents.
Promoters of a company
The term promoter is not a legal term and neither has it been defined in the
Companies Act anywhere. Still it is frequently used in the commerce literature and the
Companies Act itself uses the word at some places in the Act for the purpose of imposing
liability upon the promoters. However, inspite of its frequent use, there is no statutory
definition of the term promoter. Simply stated, a promoter is a person who undertakes to
form a company with reference to a given object and brings it into actual existence.
Chronologically, the first persons who control the affairs of a company are its promoters.
It is the promoters who take the necessary steps to get the company incorporated, provide
it with a capital and acquire the business or property which it is to manage. A promoter is
a person who brings about the incorporation and organization of a corporation. He brings
together the persons who become interested in the enterprise, aids in procuring
subscriptions and sets in motion the machinery which leads to the formation itself. The
following are some of the interpretations of the term ‘promoter’ derived from the various
case decisions :
A promoter is one who “plans to form a company, prepares memorandum of

association and articles of association, gets them registered, looks for directors, enters
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into preliminary contracts and makes arrangements for advertising and circulating the
prospectus and placing the capital.”
Palmer
“A promoter is one who undertakes to form a company with reference to a given

project and to set it going and who takes the necessary steps to accomplish that purpose.”
Justice Cockburn
Thus a promoter is a person who procures or aids in procuring the incorporation of

a company. The promoter may be an individual, firm, association of persons or even a
company. But everybody connected with the formation of a company is not a promoter.
A person who acts in a professional capacity is not a promoter. Thus, solicitor, who
prepares on behalf of the promoters the primary documents of the proposed company, is
not a promoter. Similarly, an accountant, valuer, a surveyor or an engineer who helps in
his professional capacity is not a promoter. Section 62(6) of the Companies Act also
excludes such persons to act in a professional capacity for the formation of a company.
But if any such person acts beyond the scope of his professional duty and helps in any
way in the formation of the company, he will become a promoter. A person may, for
example help in acquiring a patent for the company or in getting personnel for the
company. Any such role may make him a promoter. Thus, whether a person is or is not a
promoter of a company, is a question of fact depending upon the role performed by him
in the formation of the company. It is pertinent to note that the functions of promoters
come to an end as soon as they hand over the company to a governing body like the
Board of Directors.
Functions of promoters
Promoters are the persons who undertake, do and go through all the necessary and
incidental preliminaries for the formation of a company. They conceive the idea of
forming the company with reference to a given object and then get it going. All the
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functions before the registration of the company are performed by the promoters. More
specifically, the following are included in the purview of their functions :
1. Planning
It is the fundamental function of the promoters to make plans regarding the nature
of business to be started. They decide what business should be done, when it
should be done, where it should be done and how it should be done. They also
decide the amount of capital required and the sources from which the capital will
be acquired. In this way, the promoters determine the scope of the company.
2. Nomenclature
The second major function of the promoters is to decide the name of the proposed
company. They also decide the location of the registered office of the company
and the objective of the company.
3. Arrangement of necessary infrastructure

The promoters arrange the necessary infrastructural facilities like land, building,
machinery and other equipments. If a company wants to purchase the business or
assets of any person or persons, the promoters do the needful for this purchase.
4. Preparation of documents
There are certain important documents which must be submitted to the Registrar
for the registration of the company. Important among these are the memorandum
of Association and Articles of Association. The promoters get these documents
prepared with the help of legal experts.
5. Arrangement of capital
The promoters have to make necessary arrangements for acquiring the capital. If
the company to be incorporated is a public company and invitation is to be given
to the public for the purchase of its shares, the promoters also have to prepare the
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prospectus. Besides, they have to arrange the initial capital for meeting the pre-
incorporation expenditure.
6. Consent of directors
The promoters decide the first directors of the company and get their consent to
act as directors. Sometimes, they themselves may become the directors of the
company.
7. Appointments
Promoters appoint the banker, the auditor, the legal adviser and the broker of the
company. They also enter into pre-incorporation or preliminary contracts for the
incorporation of the company.
8. Miscellaneous
The promoters submit the necessary documents along with the required fees to the
Registrar of companies after completing the necessary legal formalities and get the
certificate of incorporation. They also arrange licence, if any required for any
purpose of the company.
Legal position of promoters
A promoter is a person who brings about the incorporation and organization of a

corporation. He occupies an important position and has very wide powers relating to the
formation of the company. However, as far as his legal position is concerned he is neither
an agent nor a trustee of the proposed company. He is not the agent because there is no
principal in existence. And he is not the trustee because there is no trust is existence. But
it does not mean that he does not possess any legal relationship with the proposed
company. He stands in a fiduciary relationship towards the company which he brings into
existence.
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Lord Cairns in Erlanges V. New Sombrero Phosphate Co. (1878) expressed his
views about the legal position of promoters when he said that promoters stand in my
opinion, undoubtedly in a fiduciary position. They have in their hands the creation and
moulding of the company. They have the power of defining how and when in what shape
and under what supervision the company shall start into existence and begin to act as a
trading corporation.
In another case of Lyndey and Wigpool Iron Ore Co. V. Bird, it was observed by
L. J. Lindley that a promoter although not an agent of the company nor a trustee for it
before its formation, the old principles of the law of agency and of trusteeship have been
extended and very properly extended to meet such cases.
The fiduciary position of promoters gives rise to the following legal consequences:
a) A promoter is not allowed to make any secret profits. If it is found that in any
particular transactions of the company, the promoter has obtained a secret
profit for himself, he will be bound to refund the same to the company.
b) He is not allowed to derive a profit from the sale of his own property unless
all the material facts are disclosed. If a promoter contracts to sell the
company a property without making a full disclosure, and the property was
acquired by him at a time when he stood in a fiduciary position towards the
company, the company either rescind the sale or affirm the contract and
recover the profit made from it by the promoters.
Sec. 56 of the Companies Act, 1956 also makes it mandatory that the profits
earned by promoters should be disclosed in the prospectus itself.
Thus promoter stands in a fiduciary relationship and it imposes an obligation on

him to disclose fully all the material facts relating to the formation of the company. His
dealings with the proposed company must be open and fair.
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Remuneration of Promoters
A promoter has no right to get remuneration from the company for the services
rendered to the company unless there is a specific contract to that effect. Since a company
is a non entity before its incorporation, it can not make a valid contract with the promoter
to pay him for his services. In Clinton’s case, (1908) 2 Ch. 515 a syndicate which
promoted a company incurred certain expenses in respect of fees and stamp duty
incidental to the formation of the company. The company was later wound up. Held, the
syndicate was not entitled to recover the expenses incurred by it.
In the absence of a formal contract made by the company after its incorporation, a
promoter has no legal right to sue the company for his remuneration and other
preliminary expenses. However, the normal ways of rewarding the promoters for their
valuable services are as follows :
i) They may be paid a lump sum either in cash or in the form of shares or
debentures of the company.
ii) They may be given commission on the purchase price of the business taken
over by the company.
iii) They may be inducted into the board of directors.
iv) They may sell their own property to the company at an inflated price.
v) They may be given an option to buy the shares of the company at par when
their market price is higher.
Where the remuneration to the promoters has been paid within the preceding two
years from the date of issue of the prospectus, it must be disclosed in the prospectus.
Liabilities of promoters
Although the promoters have a very important role in the formation of a company,
their job is full of risks. They have to perform a number of jobs from the conception of
the idea of floating a company to the registration of company for which they themselves
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are responsible. So they have a very wide area of liabilities and they continue to be liable
even after the creation of the company.
The promoters stand in a fiduciary relation i.e. relation requiring confidence or

trust to the company which they promote. It is well described by Lord Cairns in Erlanger
Vs. New Sombrero Phosphate Co. (1878) in the following words :
They stand, in my opinion, undoubtedly in a fiduciary position. They have in their

hands the creation and moulding of the company. They have the power of defining how
and when, what shape and under what supervision the company shall start into existence
and begin to act as a trading corporation.
Thus the courts have imposed an important responsibility on the promoter to act as
a fiduciary agent. The liabilities of the promoters can be summed up as follows :
1. Liability for secret profit
It is the duty of the promoter not to make any profit at the expense of the company
which is being promoted. If he makes any secret profit without full disclosure to the
company, the company may on discovering it compel him to account for and surrender
such profit. Similarly, if the promoter sells to the company his stock or shares at a price
more than the market price, he may be liable to damages for the excess price received by
him.
2. Liability for non disclosing his profit and interest
It is one of the prime duties of a promoter that if he starts a company for the
purpose of buying his property and wants to draw his payment from the money obtained
from the shareholders, he must faithfully disclose all facts relating to the character or
value of the property, or his personal interest in the proposed sale. The company will be
entitled to set aside the transaction or recover compensation for its loss. He is guilty of
breech of trust if the sells property to the company without informing the company that
the property belongs to him. He may also commit breach of trust by accepting a bonus or
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commission from a person who sells property to the company. In short, the chief duty of
the promoter as a fiduciary agent is to disclose to the company his position, his profit and
his interest in the property which is the subject of purchase or sale by the company.
The above liability becomes clear from the well known decision given by the
House of Lods in the case of Gluckstein V. Barnes (1990) in which a syndicate of
persons was formed to raise a fund, buy a property called “Olympia” and resell it to a
company. They first bought up some of the charges upon the property for sums below the
amount which the charges afterwards realized, and thereby made a profit of £ 20,000.
They bought the property for £ 1,40,000, formed a limited company, of which they were
the first directors. They issued a prospectus inviting applications for shares and disclosing
the two prices of £ 1,40,000 and £ 1,80,000 but not the profit of £ 20,000. Shares were
issued but the company afterwards went into liquidation. It was held that the promoters
ought to have disclosed to the company the profit of £ 20,000.
3. Liability of mis-statement in the prospectus
A promoter under section 62(1) is liable to pay compensation to every person who
subscribes to any shares or debentures on the basis of his faith in the prospectus and
incurs loss or damage due to misstatements contained therein.
Under section 63, he is criminally liable for mis-statement in the prospectus.

Shareholders may hold him liable for omitting to state certain matters or to give report as
specified in section 56. Further, he may be sued for deceit under the general law in case
of fraudulent mis-statements in the prospectus.
4. Liability for misfeasance or breach of trust
Under section 543 of the Act, it is provided that if in the course of winding up of a
company, it appears that the promoter has misapplied or retained any money or property
of the company or has been guilty of any misfeasance or breach of trust in relation to the
company, the court may on the application of the official liquidator or of any creditor
make him liable and compel him to repay or restore the money or property or to
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contribute such sum to the assets of the company by way of compensation in respect of
the misapplication, misfeasance or breach of trust as the court thinks just.
5. Public examination of a promoter
When an order has been made for the winding up of a company by the court, and
the official liquidator has made a report to the court under this Act stating that, in his
opinion, a fraud has been committed by the promoter in the promotion or formation of the
company, the court may under section 478, after considering the report, order a public
examination of his conduct and dealings.
6. Liability for preliminary contracts
The promoters of a company are liable for the preliminary contracts which they
have made before the incorporation of the company. These contracts are considered to be
entered into by them in their personal capacity. In case of any failure to execute these
contracts, they are themselves liable.
11.3 INCORPORATION
It is the second stage in the formation of a company. The act of forming a

corporation or company is called incorporation. It is the process of uniting a group of
persons into a legal body by following the prescribed procedure. According to section 12
(21) of the Companies Act, any seven or more persons, or where the company to be
formed is a private company, any two or more persons associated for any lawful purpose
may, by subscribing their names to a memorandum of association and otherwise
complying with the requirements of this Act in respect of registration, form an
incorporated company, with or without limited liability. Such a company may be either a
company limited by shares or a company limited by guarantee or an unlimited company.
However, the purpose for which a company is proposed to be established must be lawful.
It must not be in contravention of the general laws of the country. Before applying for
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registration and submitting the necessary documents, it must be ascertained from the
Register of companies whether the proposed name has been approved by the Registrar.
The following documents as per section 33 of the Companies Act shall be

presented for registration to the Registrar of the State in which the registered office of the
company is to be situated :
1) The memorandum of association duly signed by the subscribers.
2) The articles of association, if any. It is important to note that a public
company limited by shares need not prepare and file a copy of the articles if
it has adopted table A given in the schedule to the Act.
3) The agreement, if any, which the company proposes to make with an
individual for appointment as its managing or whole time director or
manager.
4) A statutory declaration that all the legal requirements of the Act precedent to
incorporation have been complied with. It must be signed by an advocate of
the Supreme Court or High Court or an attorney or pleader entitled to appear
before a High Court or a company secretary or a chartered accountant in
whole time practice who is engaged in the formation of the company or by a
person named in the Articles as a director, manager or secretary of the
company.
5) A list of persons who have consented to become the directors of the company
and their written consent to act as such and to take up the qualification shares
as per section 266.
6) According to section 146(2), within 30 days of the incorporation of the
company, a notice situation of the registered office of the company shall be
given to the Registrar.
If the Registrar is satisfied that all the aforesaid requirements have been complied
with by the company, he will register the company and issue the certificate of
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registration. On the registration of the memorandum of a company, the Registrar shall

certify under his hand that the company is limited. From the date of incorporation
mentioned in the certificate of incorporation, the subscribers to the memorandum and any
other persons, who may from time to time become members of the company, shall be a
body corporate by the name contained in the memorandum, capable forthwith of
exercising all the functions of an incorporated company, and having perpetual succession
and a common seal, but with such liability on the part of the members to contribute to the
assets of the company in the event of its being wound up as is mentioned in this Act.
Conclusiveness of the certificate of incorporation
Section 35 of the Act provides that a certificate of incorporation given by the

Registrar in respect of any association shall be a conclusive evidence that all the
requirements of this Act have been complied with in respect of registration and matters
precedent and incidental thereto, and that the association is a company authorized to be
registered and duly registered under this Act.
Once the certificate of incorporation has been granted, no one can question the
regularity of the incorporation, in Peel’s case. Lord Cairns remarked that once the
certificate of incorporation is given, nothing is to be enquired into as to the regularity of
the prior proceedings. Similar observations were made in the following cases :
In the case of Moosa Goolam Ariff V. Ebrahim Goolam Ariff LR(1913) 40 I.P.C.
a company was issued the certificate of incorporation by the Registrar on the basis of the
memorandum of association which was signed by two adult persons and by a guardian of
the other members who were minors at the time. The guardian signed separately for all
the 5 minors. The plaintiff contended that the certificate of incorporation should be
declared void. Held, the certificate of incorporation was valid.
In the case of Jubliee Cotton Mills Ltd. V. Lewis (1924) A.C. 958, on 6th January,
the necessary documents were delivered to the Registrar for registration. Two days after,
the Registrar issued the certificate of incorporation but dated it 6th January instead of 8th
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i.e. the day on which the documents were submitted. On 6th January, some shares were
allotted to Lewis before the certificate of incorporation was issued. The question arose
whether the allotment was void. The certificate of incorporation is conclusive evidence of
all that it contains. In law, the company was formed on 6th January and therefore, the
allotment of shares was held valid.
Thus the validity of the certificate can not be disputed on any ground whatsoever.
However, where the company is registered with illegal objects, the certificate would not
validate them. Once the company has been created, the only method to extinguish it is to
resort to the provisions for winding up.
The following are the consequences of the certificate of incorporation :
1) The company becomes a distinct legal entity. Its life begins from the date
mentioned in the certificate of incorporation.
2) It acquires perpetual succession.
3) The memorandum and articles of association become binding on the

members as if they had been signed by the company and by each member.
4) The liability of the members of a limited company becomes limited.
14.4 CAPITAL SUBSCRIPTION
A private company or a public company not having share capital can commence
business immediately on incorporation. Public companies having share capital have to
pass through two more stages before they can commence business or exercise borrowing
powers.
According to section 149(1) of the Companies Act, where a company having a

share capital has issued a prospectus inviting the public to subscribe to its shares, it is
necessary to appoint brokers, underwriters, bankers etc. and to arrange with the stock
exchange for the enlistment of the securities, issue the prospectus etc. Thereafter, the
following documents must be filed with the Registrar :
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(i) A copy of the prospectus.
(ii) A statutory declaration verified by a director or the secretary of the company to the
effect that :
a) The directors have taken up and paid for the qualification shares in cash an
amount equal to the amount payable by other subscribers on application and
allotment;
b) The shares allotted are not less than the amount of minimum subscription,
and
c) No money has become liable to refund by reason of the failure to apply for or
to obtain permission of the stock exchange for dealing in its shares or
debentures.
(iii) Where a company having a share capital has not issued a prospectus inviting the
public to subscribe to its shares, the company shall not commence any business or
exercise borrowing powers as per section 149(2) of the Act unless-
a) a statement in lieu of prospectus has been filed with the Registrar,
b) every director of the company has paid to the company, on each of the shares
taken or contracted to be taken by him and for which he is liable to pay in
cash, a proportion equal to the proportion payable on application and
allotment on the shares payable in cash;
c) a statutory declaration verified by one of the directors or the secretary of the
company that the directors have taken up and paid for their qualification
shares in cash an amount equal to that payable by other subscribers on
application and allotment.
The company can not allot shares unless the amount of minimum subscription
stated in the prospectus has been subscribed. If the company fails to receive the minimum
subscription within 120 days of the issue of prospectus, all the money received shall be
refunded with out interest as per the provisions of section 69(5).
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11.5 COMMENCEMENT OF BUSINESS
It is the last stage in the process of formation of a company. A private company

can commence business immediately after incorporation. But in the case of a public
company, the certificate for the commencement of business has to be obtained as per the
provisions of section 149. This becomes necessary where a company has issued a
prospectus inviting the public to subscribe to its shares. The certificate to commence
business will be granted only after getting the declaration signed by any director of the
company or its secretary that the following requirements have been complied with. This
declaration should be filed with the Registrar. The conditions to be complied with are as
follows :
a) Shares payable in cash must have been allotted up to the amount of the
minimum subscription;
b) The directors must have paid in cash the application and allotment money in
respect of the shares contracted to be taken by them for cash;
c) No money is liable to become refundable to the applicants by reason of
failure to apply for or to obtain permission for shares for debentures to be
dealt in on any recognized stock exchange.
It any company commences business or exercises borrowing powers before getting

the certificate to commence business, every person who is responsible for the
contravention shall, without prejudice to any other liability, be punishable with fine
which may extend to five hundred rupees for every day during which the contravention
continues.
When the Registrar is satisfied about the requirements, he will issue the certificate
to commence business. If the company does not commence business within a year of its
incorporation, it may be wound up by the court.
This is how companies are formed and registered under the Companies Act, 1956.
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Preliminary contracts
Preliminary contracts or pre-incorporation contracts are those contracts which are

made by the promoters on behalf of a company yet to be incorporated. These contracts
normally relate to the acquisition of some property or right for the company. These
contracts are made by the promoters as agents or trustees of the company. However, the
company is not liable for the acts of promoters done before its incorporation because a
company is a non-entity before incorporation. The legal position with regard to the pre-
incorporation contracts can be summed up as follows :
1. These contracts do not bind the company even if the company has derived benefit
out of these contracts. In English and Colonial Produce Co. Ltd. (1962) 2 Ch.435
C.A., on the request of the promoters of a company, a solicitor prepared the
memorandum and articles of the company, paid the registration fee and got the
company registered. Held, the company was not bound to pay for the services and
expenses incurred by the solicitor since it was not in existence at that time.
2. A company can not sue and nor can it be sued for the enforcement of pre
incorporation contracts. In Natal Land and Colonisation Co. Ltd. V. Pauline
Colliery Syndicate (19045) A.C. 120, the company promised C, an agent of a
syndicate yet to be formed to grant to the syndicate a lease of a coal mine after the
syndicate was registered. The lease was refused. Held, the company could not
enforce specific performance against the syndicate as it could not make a binding
contract before incorporation.
3. The pre-incorporation contracts made on behalf of the company can not be ratified
even if these are for its benefit. Ratification is possible only where an agent has
contracted on behalf of a principal who is in existence and competent to contract at
the time of the making of the contract.
4. The promoters remain personally liable on a contract made on behalf a company

not yet in existence, such a contract is deemed to have been entered into
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personally by the promoters and they are liable to pay damages for failure to
perform the promises made in the company’s name.
11.6 SUMMARY
The formation of a company is a lengthy process indeed. The stages in the

formation are (a) promotion (b) incorporation (c) capital subscription and (d)
commencement of business. The promotion stage starts with the conception of an idea
and it continues till the company is formally incorporated. All the preliminaries done for
the formation of a company are included in the process of formation. Incorporation of the
company is the second stage of company formation. An application is made to the
concerned Registrar for the registration of the company. The application for registration
must be accompanied by the required documents along with the necessary filing and
registration fee. A private company or a public company not having share capital can
commence business immediately on incorporation. Public companies having share capital
have to pass through two more stages before they can commence business or exercise
borrowing powers namely capital subscription and commencement of business.
11.7 KEYWORDS
Promotion: Promotion means the discovery of business opportunities and the

subsequent organisation of funds, property and managerial ability into a business concern
for the purpose of making profits therefrom.
Promoter: A promoter is a person who undertakes to form a company with reference to a

given object and brings it into actual existence.
Preliminary Contract: Preliminary contract refers to those agreements or contracts

entered into between different parties on behalf and for the benefit of the company prior
to its incorporation.
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Certificate of commencement of business: A public company, having a share capital

and issuing a prospectus inviting the public to subscribe for shares, will have to file a few
documents with the registrar who shall scrutinise them and if satisfied will issue a
certificate to commence business
1. Who are the promoters? Discuss their liabilities.

2. “A promoter stands in a fiduciary relation towards the company he
promotes”. Explain.
3. Explain the process of the formation of a company.
4. How is a company incorporated? Which documents are filed with the
Registrar in that connection?
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PROSPECTUS
STRUCTURE
12.0 Objective
12.1 Introduction
12.2 Meaning and contents of Prospectus
12.3 Statement in lieu of Prospectus
12.4 Liability for Misstatement in Prospectus
12.5 Minimum Subscription
12.6 Summary
12.7 Keywords
12.0 OBJECTIVE
The present lesson discusses about prospectus, statement in lieu of prospectus and
liability for misstatement in prospectus.
12.1 INTRODUCTION
A private limited company is prohibited by its Articles from extending any
invitation to the public to subscribe to any of its shares or debentures. A public limited
company can invite monetary participation from the general public. It is the prospectus
through which the company invites deposits or offers for shares or debentures from the
public. The prospectus is the document which tells the prospective investors the future
prospectus of the company and the purpose for which the capital is required so as to
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enable them to make up their mind whether to invest in its shares or debentures or not. It
serves the purpose of a window for the prospective investors through which they can gain
a useful view of the salient aspects of a company. However, it is not essential for a public
company to issue a prospectus. If the promoters are confident of raising the required
capital privately from their relatives and friends, they need not issue a prospectus. In such
a case, a statement in lieu of the prospectus must be filed with the Registrar of
Companies.
12.1 MEANING AND CONTENTS OF PROSPECTUS

A private company is prohibited by its articles from extending any invitation to the
public to subscribe to any of its shares or debentures. A public limited company can
invite monetary participation from the general public. It is the prospectus through which
the company invites deposits or offers for shares or debentures from the public. The
prospectus is the document which tells the prospective investors about the future
prospectus of the company and the purpose for which the capital is required so as to
enable them to make up their mind whether to invest in its shares or debentures or not. It
serves the purpose of a window for the prospective investors through which they can gain
a useful view of the salient aspects of a company. However, it is not essential for a public
company to issue a prospectus. If the promoters are confident of raising the required
capital privately from their relatives and friends, they need not issue a prospectus. In such
a case, statement in lieu of the prospectus must be filed with the Registrar of Companies.
Sec.2(36) defines a prospectus as any document described or issued as a

prospectus and includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for subscription to or purchase
of any shares in or debentures of a body corporate. Thus, the prospectus is an invitation
for offers by a company i.e. it invites offers from the public to subscribe to the company’s
shares or debentures. It is not an offer to the public because if any offer is made and the
other party accepts it, it becomes a contract (Agreement which is enforceable by law).
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The prospectus only invites offers from the public regarding subscription to the shares or
debentures of the company and it is for the company to accept the offers or not.
The prospectus is a written document in the form of a notice, circular,

advertisement etc. An oral invitation is not a prospectus. The invitation must be to
subscribe to or purchase the shares or debentures of the company. An advertisement was
given in a newspaper stating, “Some shares are still available for sale according to the
terms of the prospectus of the company which can be obtained on application”. It was
held to be a prospectus as it invited the public to purchase shares. (Parmatha Nath Sanyal
V. Kali Kumar Dutt AIR 1925 Calcutta 714).
Public Issue
By the word “Issue” we mean that the prospectus has been issued to the public.
But whether the prospectus has been issued to the public or not depends upon the
circumstances of each case.
Case I : Some copies of the prospectus marked “for private circulation only” were
circulated among the shareholders of a gas company in which the promoters were
interested. It was not publicly advertised. It contained a statement that its copy had been
filed with the Registrar. It was held that the prospectus was an offer of shares to the
public. (South of England Natural Gas and Petroleum Company Ltd. (1911) I. Ch.513).
Case II : 1000 copies of a prospectus marked “strictly private and confidential” were
printed. The directors distributed 200 copies to their own and the promoters’ friends and
relatives. It was held that, it was not an invitation to the public. (Sherwell V. Combined
Incandescent Mantles Syndicate (1907) W.N.110).
Case III : A document in the form of a prospectus was prepared by the directors and
marked “strictly private and confidential.” It did not contain all the material facts required
to be disclosed by the Companies Act. It was not publicly advertised. One of its copies
was sent by its co-director to the solicitor who gave it to a client. The client sent it to his
relative. Thus, the document passed through a small circle of the friends of the director. It
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was held that the document did not amount to an issue of the prospectus. (Nash V. Lynde,
(1929) A.C. 158).
The prospectus need not necessarily be issued by the company. The agents of the
company like issuing houses may issue the prospectus on its behalf.
Contents of the prospectus
The prospectus is a document from which a prospective investor can have an idea
of the future prospects of the company he is going to invest in. A small untrue statement
can tilt the mind of the prospective investor. The Companies Act has provided for a large
number of regulations to be observed at the time of issue of the prospectus. This has been
done to protect the interests of the investing public from the frauds of the promoters. The
Government has given the format of the prospectus in Schedule II of the Companies Act,
1956. Failure to comply with such provisions is an offence and it is punishable with
imprisonment or fine or both. So, a great care should be taken while drafting the
prospectus.
It is provided in Section 56 of the Act that every prospectus shall contain the
matters specified in Schedule II of the Act. This schedule is divided into three parts. Part
I contains the matters to be disclosed, Part II required the reports to be set out, while Part
III is explanatory of parts I and II. The explanation of these parts is as under :-
Part I
The following matters are to be disclosed in a prospectus :

1. a) The main objects of the company including the details about the signatories
to the Memorandum. This is, however, not necessary when the prospectus is
published as a newspaper advertisement.
b) The number and classes of shares. The interest of the shareholders in the
property and profits of the company.
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c) The number of redeemable preference shares specifying the date or notice

required for redemption
2. Qualification shares of the directors, if any.
3. (a) Names, descriptions and address of the directors, or proposed directors,

managing director, or manager.
b) Contents of the Articles or of any contract relating to their appointment,

remuneration and compensation for loss of office.
4. Where shares are offered to the public, the minimum subscription, which means
the minimum amount which in the opinion of the promoters must be raised to
provide for the purchase price of any property purchased or to be purchased,
preliminary expenses, underwriting commission, repayment of money borrowed
for these purposes and working capital.
5. The time of the opening of the subscription list.
6. The amount payable on application and allotment. If any prospectus was issued
within two years, the details of the shares subscribed for and allotted.
7. The particulars about any option of preferential rights to be given to any person to
subscribe for shares or debentures of the company.
8. The number of shares or debentures which within the two preceding years have
been issued for a consideration other than cash.
9. Particulars about premium received on shares within the two preceding years or to
be received.
10. Where any issue of debentures or shares is underwritten, the names of the
underwriters, and the opinion of the directors that the resources of the underwriters
are sufficient to discharge their obligations.
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11. Particulars about vendors from whom any property has been or is to be acquired
by the company and the price whereof is to be paid out of the proceeds of the
issue.
12. The amount or rate of underwriting commission.

13. Preliminary expenses.
14. The amount paid within the last two years or to be paid to the promoters of the
company. The statement must include any other benefit given.
15. The date of and parties to any material contract unless it is made in the ordinary
course of business or two years before the date of the prospectus.
16. The names and addresses of the auditors, if any, of the company.
17. Full particulars about the interest, if any, of every director or promoter in the
promotion of the company or in any property acquired by the company.
18. Where the shares are of more than one class, the rights of voting and the rights as
to capital and dividend attached to the several classes of shares.
19. The restrictions, if any, imposed by the Articles on the right to attend, speak or
vote at the meetings of the company, on the right to transfer shares and upon the
directors of the company in respect of their powers of management.
20. The length of time for which the company has carried on business. If the company
proposes to acquire a business which has been carried on for less than three years,
the length of time during which the business has been carried on.
21. If any reserves or profits of the company have been capitalized, particulars of
capitalization and particulars of the surplus arising from any revaluation of the
assets of the company.
22. A reasonable time and place at which copies of all the accounts on which the
report of the auditors is based may be inspected.
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Part II
The following reports are required to be set out in a prospectus :
1. A report by the auditors of the company relating to profits and losses and assets
and liabilities of the company. The report must refer to the rates of dividends, if
any, paid by the company in respect of each class of shares for each of the five
financial years before the issue of the prospectus. The report of the auditors must
also state separately the profits and losses of the company’s subsidiaries and also
the combined profits and losses.
2. If the company proposes to acquire any business, a report should be made by an

accountant, whose name should be disclosed, upon the profits and losses of the
business for five years before the date of the prospectus and the assets and
liabilities of the business.
12.3 STATEMENT IN LIEU OF PROSPECTUS
A company need not approach the public for money. The promoters may tap their
private resources or contacts for raising the requisite capital. In such a case no prospectus
need be issued to the public, but promoters must prepare a document, akin to the
prospectus known as “Statement in lieu of prospectus”. This document must be in the
form set out in Schedule III of the Act and must contain practically the same information
as is required in the prospectus. When a private company converts itself into a public
company it must either issue a prospectus or file a statement in lieu of prospectus.
The document shall be delivered to the Registrar for registration at least three days
before the first allotment of shares. This is intended to preserve an authoritative record of
the terms and conditions of the capital issue. The statement must be signed by every
director or proposed director or his agent. If a company fails to deliver a statement in lieu
of prospectus, it cannot allot any shares or debentures. An allotment, if made, is voidable
if the allottee notifies the company within 2 months after the statutory meeting or in case
where there is no such meeting within two months after allotment.
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If a company fails to fulfil the above conditions, the company and every director
who has been knowingly a party to this contravention shall be liable for fine upto
Rs.1,000. If a statement in lieu of prospectus delivered to the Registrar contains an untrue
or a misleading statement, every person who authorized the delivery of the statement
shall be liable to imprisonment for two years and fine of Rs.5,000.
The above provisions do not apply to a private company. (Section 70).
12.4 LIABILITY FOR MISSTATEMENTS IN PROSPECTUS
Golden rule as to the faming of prospectus. A prospectus constitutes the basis of the
contract between the company and the person who purchases shares or debentures. The
persons who are behind the company have all the knowledge or means of knowledge as
to the present position and future prospects of the enterprise and the investing public has
none. It is but fair that the former should not only disclose all the matters within their
knowledge relating to the enterprise, which might affect the investing mind but should
state them accurately, correctly and unambiguously. A prospectus must, therefore, tell the
truth, the whole truth and nothing but truth. Also it must not conceal any fact which ought
to be disclosed. This is known as the ‘golden rule’ as to the framing of the prospectus and
was laid down by Kindersley V.C. in New Brunswick etc. Co. V. Muggeridge.
What is an untrue statement ?
It is necessary to find out as to what constitutes an untrue statement. Whether a

statement is untrue or not is to be judged by the context in which it appears and the
totality of impression it would create. According to section 65(1) (a), “a statement
included in a prospectus shall be deemed to be untrue, if the statement is misleading in
the form and context in which it is included”. A statement, may be false, not only because
of what it states but also because of what it conceals or omits. Where certain matter
which is material enough has been omitted from the prospectus, the prospectus shall be
deemed, in respect of such omission, to be a prospectus in which an untrue statement is
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included. If taking the whole prospectus together, there was really a mispresentment of
fact, the contract may be set aside, though each statement by itself is literally true.
A person subscribing for shares as a result of a prospectus is not bound to verify

the accuracy of the statements contained in it, and will be entitled to avoid the contract if
they turn out to be untrue, even though he had the means of discovering the inaccuracy.
In order to call a prospectus a ‘misleading prospectus’ there must be mis-representation
of facts and not of law. A statement in the prospectus that property has been acquired but
which has not been in fact acquired, will be a ground for an action against directors even
if the property is acquired a few days after the allotment of shares. But where a
prospectus represents that the company’s fully paid shares will be issued at half their
nominal price whereas section 79 prohibits the issue of shares at a discount exceeding
10% it is a misrepresentation of law and a person deceived by it will have no remedy.
Who can be sued ?

Where a person has bought shares on the faith of a prospectus which is mis-
leading because of a mis-statement in or an omission from the prospectus, he may have a
legal remedy against all or any of the following.
(i) the company;
(ii) every director;
(iii) every person whose name appeared in the prospectus as a proposed director;
(iv) every promoter;
(v) every person who has authorized the issue of the prospectus.
Onus of proof
An allottee must prove that :
(i) the misrepresentation was of fact;
(ii) it was in respect of a material fact;
(iii) he acted on the misrepresentation; and
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(iv) he has suffered damages in consequence
Civil liabilities
A person who has subscribed for shares on the faith of the misleading prospectus has
remedies against—
(a) the company, and
(b) the directors, promoters, and experts
Remedies against the company
A person who has been induced to subscribe for shares may (1) rescind the
contract to take the shares; (2) claim damages.
1. Rescission of the contract

Where a person has purchased the shares of a company on the faith of a prospectus
which contained an untrue or misleading, but not necessarily fraudulent statement, he can
seek rescission of the contract. This right is based on the general rule that a contract
induced by a material misrepresentation is voidable, and may, at the option of the party
induced be rescinded and it makes no difference that the misrepresentation was an
innocent one.
The right to rescind the contract is available if he proves the following :
(i) Prospectus was issued by or on behalf of the company. It must be established

that the prospectus was issued by the company or by some one duly authorized
by the company. If the prospectus was issued by the promoters and the board of
directors have ratified or adopted the issue, the company will be responsible for
it.
(ii) Statement must be untrue. The prospectus must contain a false statement
whether fraudulent or innocent. False representation takes place when there is
positive misstatement or a concealment of matters of fact. Section 65 provides
that a statement included in a prospectus shall be deemed to be false or untrue if
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the statement is misleading in the form and context in which it is included. The
section also provides that in case the omission from a prospectus of any matter is
calculated to mislead, the prospectus shall be deemed, in respect of such
omission, to be a prospectus in which untrue statement is included.
(iii) Statement must be a material misrepresentation. The false statement

contained in the prospectus must be material to the contract to take shares or
debentures. Whether a particular misrepresentation is material or not is a
question of fact in each case. A statement will be material misrepresentation if it
is likely to influence the decision of the person who is considering whether to
purchase shares or not.
(iv) The misrepresentation must have induced the shareholder to take the
shares and he must have relied on the statement in applying for shares. But
it is not necessary that he should have verified it before relying upon it.
Misrepresentation must have been at least one of the inducements for the
contract to purchase the shares, only then the contract can be rescinded. Where a
person ignored the misrepresentation and relied only on an independent report,
he cannot complain of misrepresentation. Further only original allotees can
repudiate the allotment of shares on the ground of misrepresentation and not
subsequent purchasers from them because the effect of a prospectus is exhausted
as soon as allotment is made.
(v) Misrepresentation must be of facts and not of law. The statement which
induced the shareholders to take shares must be one of fact and not merely an
expression of opinion or expectation. Thus, the statement in the prospectus, that
due to honest and efficient management the company is expected to progress by
leaps and bounds, is only a statement of opinion and will give no right of
rescission. Moreover, the representation must be of existing fact. Thus a
calculation as to future profits cannot be taken as a statement of existing fact.
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A misrepresentation of fact entitles the allottee to rescind the contract. But a

misrepresentation of law in the prospectus cannot be pleaded as a ground for the
rescission of the contract, because ignorance of law is no excuse.
(vi) That he has taken action promptly to rescind the contract. The shareholder
must start proceedings for rescission within a reasonable time and before the
company goes into liquidation.
Loss of right to rescind the contract
The subscriber loses his right to rescind the contract in the following cases :
(a) Unreasonable delay : The right to rescind is lost if the shareholder fails to
take any action within a reasonable time after he has come to know the
misrepresentation in the prospectus. Shareholder must make up his mind as to
accept or rescind the contract. In one case even a lapse of fifteen days after the
shareholder became fully aware of the circumstances entitling him to apply for
rescission was held to deprive him of his right to rescind the contract.
(b) Affirmation : If the shareholder, with full knowledge of misrepresentation in

the prospectus, affirms his contract for purchase of shares he cannot rescind the
contract afterwards. However, affirmation may be express or implied.
(c) Commencement of winding up : The right of rescission is lost if the

shareholder does not exercise the right until after the commencement of
winding up. Accordingly, if a shareholder having a right to rescind the contract
for shares is on the register of members at the commencement of the winding
up he cannot escape liability as a contributory unless he has commenced legal
proceedings to enforce rescission before the date of the winding up.
2. Right of action for damages
In cases where misstatement in the prospectus amounts to fraud, injured party is

also entitled to sue the company for damages provided he has rescinded his contract in
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time. This remedy is available even after the company has gone into liquidation. He
cannot both retain the shares and get damages against the company. However rescission
is not possible as where the company has gone into liquidation, as action for damages is
also not maintainable.
In actual practice suits for damages against the company are seldom resorted to.
But damages are claimed from the directors, promoters and other officer who had
authorized the issue of the prospectus. If the action is against the directors or promoters
or other officers of the company, the allottee need no rescind the contract.
Remedies against the directors, promoters and experts
Any person who has purchased shares or debentures on the faith of the prospectus
containing the untrue statement may sue :
1. every director;
2. every person whose name appeared in the prospectus as a proposed director;
3. every promoter; and
4. every person who authorized the issue of the prospectus.
The aggrieved person may claim :
1. Compensation under section 62
Directors, promoters and all others who authorized the issue of the prospectus are
liable to compensate person who subscribe for shares on the faith of the prospectus for
loss sustained by reason of any untrue statement in it. However, it is immaterial whether
the director sees the prospectus or not and it is enough if he authorizes its issue.
Moreover, the allottee does not have to prove that the director knew that the statement in
the prospectus was true. It is the directors who are supposed to know what is true and is
untrue.
The liability consists in paying damages by way of compensation to the aggrieved

party. The principle of measuring damages is same as stated in section 73 of the Indian
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Contract Act, 1972. The compensation payable will be the difference between the price
paid for the shares or debentures and their value at the date they were allotted to the
subscriber.
Defences of directors, promoters, etc. (Section 62(2)).
The persons sued for damages can escape liability for damages by successfully
pleading any of the following defences :
(i) Withdrawal of consent. A director may escape liability if he proves that he

withdrew his consent to act as a director before the prospectus was issued and
it was issued without his authority or consent.
(ii) Issue without knowledge. A director will not be liable if the prospectus was
issued without his knowledge or consent and that on becoming aware of its
issue, he gave reasonable public notice to that effect.
(iii) Ignorance of untrue statement. Some times a director may be ignorant of

the untrue statements contained in the prospectus. Such a director can defend
himself by proving that after the issue of prospectus and before allotment, he
on becoming aware of the untrue statement in it, withdrew his consent and
gave reasonable public notice of the withdrawal and the reasons for it.
(iv) Reasonable ground for belief. A director will also be protected if he proves
that he had reasonable grounds to believe and did believe upto the time of
allotment of shares or debentures that the statement was true.
(v) Statement of expert. A director will also be not liable if he proves that the
statement was a correct copy or a correct and fair extract from the report of
an expert who was competent to make it and that person had given the
consent to the issue of the prospectus and had not withdrawn the consent.
(vi) Correct copy of an extract. A director will also be protected if he proves

that the statement was a correct and true copy of an official document.
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Defences of an expert (Section 62(3)).
An expert will not be liable if he can prove—

(ii) that he withdrew in writing his consent to the issue of the prospectus before it
was delivered to the Registrar for registration;
(ii) that after delivery but before allotment of shares he became aware of a false
statement in the prospectus, and he publicly withdrew his consent in writing
and gave the reasons thereof;
(iii) that he was competent to make the statement and had reasonable grounds to
believe and did upto the allotment of shares believe that the statement was
true.
Right of contribution (Section 62(5))
Where any director or officer of the company is compelled to pay damages under
section 62, he is entitled to recover pro rata contribution from any other person who
would have been liable had the proceedings been instituted against him, unless the former
person was, and the latter person was not guilty of fraudulent misrepresentation.
2. Damages for non-compliance with Section 56
The omission from prospectus of a matter required to be included by Section 56,

may give rise to an action for damages at the instance of a shareholder who has suffered
the loss thereby, even if the omission does not make the prospectus false or misleading.
It should be noted that the remedy to the subscriber is only of recovering damages
and not of rescission. Where, however, omission amounts to fraud or misrepresentation, a
right of rescission will also be available as provided by section 19 of the Indian Contract
Act, 1872.
However the person would not be liable if he proves that

(a) he had no knowledge of the matter not disclosed in the prospectus
(b) the non-compliance arose from an honest mistake of fact on his part. or
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(c) the non-compliance was not material and the court thinks that he ought to be
excused.
3. Damages under general law
An allottee may bring an action for deceit against the directors under general law
as provided by section 19 of the Indian Contract Act, 1872. The remedy under general
law shall be available even where :
(i) the right of rescission as against the company is lost either through laches or
negligence; or
(ii) the company goes into liquidation.
But the plaintiff will have to establish the following :
(a) There was a fraudulent misstatement. In a suit for deceit against the
directors the allottee must prove affirmatively that the statement upon
which he acted was false and which was known to the directors to be false,
or was made by them recklessly or without care, whether it is true or false.
But directors would not be liable for damages for false statements in a
prospectus if they honestly believed them to be true, even if there was no
reasonable ground for such belief.
(b) False representation related to some existing material facts. The

aggrieved shareholder must also prove that the fraudulent statement was
made in respect of some existing facts which are material to the contract of
purchasing shares.
(c) Plaintiff was the original allottee. A false statement in a prospectus will
render the directors liable to the original allottees only and not to
subsequent purchasers from them.
Criminal liability of directors. Every person who authorized the issue of a prospectus
containing untrue statement shall be punishable with imprisonment which may extend to
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two years or with fine which may extend to Rs.5,000 or with both. The accused person,
however, may not be liable if he proves—
(a) that the statement was immaterial, or
(b) that he had reasonable ground to believe and did believe upto the time of the
issue of the prospectus that the statement was true. (Section 63).
The punishment for issuing an application for shares or debentures which is not
accompanied by a prospectus is a fine upto Rs.5,000.
Penalty for fraudulently inducing persons to invest money (Section 68). Any
person who makes an untrue, deceptive, or misleading statement in a prospectus with a
view to inducing persons to invest money shall be liable for imprisonment for a term
which may extend to five years or fine upto Rs.10,000 or both. This section attempts at
preventing fraud in connection with obtaining capital from public.
Issue and allotment of shares in fictitious names (Section 68-A)
Benami shareholding and shareholding in the name of fictitious or non existing

persons are common. The object is to avoid tax. Section 68-A makes it an offence to
make applications for shares in the name of, or to induce the allotment or transfer of
shares to fictitious persons. The punishment in such cases is imprisonment which may
extend to five years.
The company has to reproduce in every prospectus and application form the
provisions of section 68-A(1).
12.5 MINIMUM SUBSCRIPTION
When a public company invites the public to subscribe for its shares, it cannot
allot those shares until the minimum amount stated in the prospectus has been subscribed.
This amount stated in the prospectus is known as the ‘minimum subscription’.
The minimum subscription is not a sum fixed by the articles or calculated as a

percentage of the shares issued under the prospectus. It is the minimum amount stated in
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the prospectus which in the opinion of the directors must be raised to provide for the
matters specified below :
(a) the purchase price of any property purchased or to be purchased;
(b) the preliminary expenses and any underwriting commission payable the
company;
(c) repayment of money borrowed by the company in respect of any of the

foregoing matters;
(d) working capital; and
(e) Any other expenditure stating the nature and purpose thereof and the estimate
amount in each case.
The object of the minimum subscription provision is to prevent the company

getting underway until it has raised the capital needed to carry out the objects for which it
has invited the public to participate. This also affords protection to the creditors by
ensuring that a limited company is not able to incur commitments if it is grossly
undercapitalized.
A company making any rights/public issue of shares/debentures shall not make

allotment unless it receives a minimum of 90 per cent subscription against the entire issue
within 90 days from the date of closure of the issue. If the subscription to this extent is
not received, the entire amount collected with applications would have to be refunded to
the applicants at the end of 120 days from the closure of issue. The refund is to be made
without interest within 10 days from the 120th day. If the refund is delayed, then interest
@ 15 per cent per annum is also to be paid.
Consequences when minimum subscription is not received
All moneys received from applicants for shares must be deposited and kept
deposited in a scheduled bank until the certificate to commence business is obtained.
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When the minimum subscription is received within the stipulated period, the ban
imposed by sec. 69(5) disappears and the company is free to make allotment even after
the expiry of 120 days subject to the other requirement of the Act.
An allotment made in contravention of the restriction of the minimum subscription

is not void but only voidable and the applicant may avoid the allotment within the time
specified in section 71(1).
Example : The company by mistake allotted 40,000 shares before the minimum
subscription had been subscribed. It was held that the allottees had a right to rescind the
allotment and on option given by the company to every allottee to have the allotment
cancelled and money returned was valid. (Finance and Issue Ltd. V. Canadian Produce
Corporation Ltd. (1905) 1 Ch. 37).
Underwriting Commission (Section 76)
When a company offers its shares to public, it often wants that the whole issue
should be taken up. Consequently, a company is usually willing to pay a small
commission on all the shares offered to the public to any one who undertakes to take all
the shares, if the public do not take. This is known as ‘underwriting’. It consists of an
undertaking by some person or persons that if the public fails to take up the issue, he or
they will do so. In return for this undertaking, the company agrees to pay the underwriters
a commission on all shares, whether taken by the public or by the underwriters. It is, thus
in the nature of an insurance against the possibility of inadequate subscription. It is usual
to underwrite even when a company is sound and the shares are popular, since changes in
the international situation or financial state of the country can affect an issue adversely.
A company may pay a commission to any person in consideration of his

subscribing or agreeing to subscribe for shares, or procuring or agreeing to procure,
subscriptions for any shares in the company. Underwriting commission may be paid only
if the following conditions are present :
1. The payment of the commission must be authorized by the articles of association.

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2. The underwriting commission paid or agreed to be paid shall not exceed 5 per cent
of the issue price of shares. In case of debentures, it shall not exceed 2-1/2 per cent
of the issue price. The amount of commission shall also not exceed the amount
authorized by the articles of association.
The percentage of commission fixed by section 76 only indicates the

quantum and not the source from which it is to be paid, i.e. the commission may
be paid out of capital or profits.
3. The amount paid or agreed to be paid must be—

(a) disclosed in the prospectus if shares are offered to the public, or
(b) in other cases, disclosed in the statement in lieu of prospectus delivered to the
Registrar.
4. The number of shares or debentures which persons have agreed for a commission
to subscribe for absolutely or conditionally is disclosed in the prospectus or
statement in lieu of prospectus.
5. A copy of the contract for the payment of the commission must be delivered to the
Registrar along with the prospectus or statement in lieu of prospectus. Where
shares or debentures are not offered to the public commission cannot be paid to a
person for his subscribing or agreeing to subscribe for the same.
If default is made in complying with the provisions of section 76, the company
and every officer of the company who is in default, shall be punishable with fine which
may extend to Rs.500.
12.6 SUMMARY
A document inviting offers from the public for the subscription of shares or
debentures of a company is known as prospectus. The prospectus is a document from
which a prospective investor can have an idea of the future prospectus of the company he
is going to invest in. Section 56 of the Companies Act states that every prospectus shall
: 21 :
contain the matters specified in Schedule II of the Act. A public company having a share
capital which does not issue a prospectus is required to deliver to the Registrar a
statement in lieu of prospectus, at least three days before the allotment of shares. It is the
duty of those persons who issue or authorize the issue of prospectus to take reasonable
care that there is no misrepresentation or concealment of any material fact. This is known
as the golden rule as to the framing of a prospectus. If there is any misstatement of a
material fact in the prospectus or if the prospectus is wanting in any material fact, there
may be civil liability or criminal liability. When a public company invites the public to
subscribe for its shares, it cannot allot those shares until the minimum amount stated in
the prospectus has been subscribed. This amount stated in the prospectus is known as
minimum subscription.
12.7 KEYWORDS
Prospectus: A document inviting offers from the public for the subscription of shares in
on debentures of a company is known as a prospectus.
Minimum Subscription: Minimum subscription is the amount which, in the opinion of

the board of directory, must be raised by the issue of share capital.
12.8 ASSESSMENT QUESTIONS
1. What is a prospectus? Discuss its contents.

2. What is the golden rule of framing a prospectus and discuss the consequences
of a mis-statement in a prospectus?
3. Explain the term ‘minimum subscription’. What is the effect of allotting
shares without minimum subscription having been subscribed?
4. Explain the civil and criminal liabilities for mis-statement in a prospectus.
5. When should a statement in lieu of prospectus be issued? Do you notice any
substantial differences between a prospectus and a statement in lieu of
prospectus.
: 22 :
6. Write short notes on:
(a) Statement in lieu of prospectus
(b) Minimum subscription

14.0 Objective
14.1 Definition of Meeting
14.2 Characteristics of a company meeting
14.3 Significance of meeting
14.4 Kinds of Meeting
14.5 Summary
14.6 Keywords
14.7 Se1f Assessment Questions
DEFINITION OF MEETINGS
A ‘meeting’ is said to take place when two or more than two persons meet.
For a meeting to take place, it is essential that two or more than two persons are
present because a meeting implies that one person meets another person’s; but
technically, A ‘meeting’ may be defined as the gathering of two or more persons
by previous notice or by mutual agreement for discussion and transaction of some
business.
In the context of a ‘company meeting’, a ‘meeting’ is a get-together of the

company’s members, shareholders, directors and debenture holders with a
previous notice and a time and place previously defined.
“Any gathering, assembly or coming together of two or more persons for

the transaction of some lawful business of common concern is called ‘meeting’.” –
P.K. Ghosh
“A concurrence or coming together of at least a quorum of members by

previous notice or mutual agreementfortransac1ing business for a common
interest is a ‘meeting’.” – K. Kishore.
From the above definitions, it can be concluded that a meeting is the

coming together of two or more persons, or a quorum of members of a company
by a prior notice and mutual agreement at an agreed place and time for transacting
some lawful business of the company.
14.0 CHARACTERISTICS OF A COMPANY MEETING
From the above definitions, the following characteristics of a meeting are

highlighted:
1. A company’s meeting is a get-together of two or more persons who are members

of the company.
2. The members of the company get together for discussing and taking a decision on
some lawful business of the company.
3. Before a meeting is held, the members are given a notice about the meeting and
the time & place of the meeting.
4. A company’s meeting is held according to the provisions of the Companies Act.
14.1 ONE-MAN MEETING
For a meeting to be there, the presence of two or more than two persons is
required. According to the general law, there cannot be a one-man meeting. But
there are some exceptions stated in the Companies Act where a meeting is deemed
to have been held by the presence of only one person. These exceptions are as
under:
1. Meeting Convened by Central Government: According to Section 167, if a

default is made in holding annual general meeting in accordance with the
provisions of Section 166, the Central, Government may direct that one member of
the company, present personally or by proxy, shall be deemed to constitute a
meeting.
2. Absence of Quorum in an Adjourned Meeting: In case there is no quorum in a

meeting called by the directors of a company within half an hour of the time
specified for such meeting, the directors may adjourn the meeting to be held at the
same place and the same time after one week, and again a time of half an hour
would be allowed for the quorum to attend the meeting. If, after the expiry of this
time, no member of the company comes to attend the meeting, then the meeting
would be deemed to have been held even if there is only one member is present for
such meeting.
3. Meeting Convened by Company Law Board: A general meeting held according of
Section 167 (1) of the Act shall, subject to the directions of the Company Law
Board, be deemed to be an annual general meeting of the company even if only
one member of the company is preset in such meeting, personally or by proxy.
4. Meeting Convened by Court: Where the court orders that a meeting to be

convened, it can also order that such meeting shall be deemed to have been held
even if only one member of the company is present personally or by proxy.
5. Class Meetings of Shareholders or Creditors: When, out of the various classes of

shareholders and creditors of a company, one class of shareholders or creditors has
only one member, the presence of such shareholder or creditor shall constitute a
meeting.
6. Meeting of One-man Committee of Board of Directors: According to clause 77

of Table A of the Act, the Board of Directors may, subject to the provisions of the
Act, delegate any of its powers to committees consisting of such members, or one
such member, of its body as it thinks fit. The presence of one such member
constituting the committee is deemed to be a meeting.
7. Insolvency of the Company: If only one creditor of a company makes a claim to

the company to pay its debt to him in the case of the company being declared
insolvent, it shall be deemed to be a meeting.
14.2 SIGNIFICANCE OF MEETING
All important decisions regarding the functioning of a company are made at

its meetings. A company’s meetings may be of its shareholders or its directors- but
the meetings have an important bearing on the company’s conduct of its business.
14.3 KINDS OF MEETINGS
A company has the following four kinds of meetings.

(A) Shareholder’s Meeting
A company’s shareholders are its de facto owners; but, since they are
scattered over a wide area and are too many in number, they are not in a position
to run the affairs of the company, that is why there is the Board of Directors to
manage the company’s business. To ensure that the shareholders are informed of
the company’s affairs, periodic meetings of the shareholders are called. These are
general meetings of a company, and are referred to as ‘company meetings’.
1. Statutory Meeting
According to Section 165 of the Companies Act, “Every company limited

by shares and limited by guarantee and having a share Capital, shall, within a
period of not less than one month and not more than six months from the date of
which the company is entitled to commence business, hold a general meeting of
the members of the company, which shall be called ‘the statutory meeting’. “This
meeting is called only once in the lifetime of a company.
Necessity of Statutory Meeting
A statutory meeting must necessarily be called by a company limited by

shares or a company limited by guarantee and having a share capital. The
following companies do not need to call a statutory meeting:
(a) A private company

(b) A company limited by guarantee but not having share capital.
(c) An unlimited company
(d) A private company that is later converted to a public company.
(e) A private company which is recognized as a public company under Section 43

(A).
Object and Importance of Statutory Meeting
Statutory meeting is the first meeting of a company, and is only held once
in the company’s lifetime immediately after the company is incorporated. The
object of the statutory meeting is to make familiar the company’s shareholders
with its objectives, its operational tactics and its future plans so that the members
get an overall picture of the company and its future. The statutory meeting of a
company is important because the members want to know how much capital the
company has acquired for its operations, what properties it has acquired, or plans
to acquire, and what are its plans for the future. The shareholders are thus in a
position to contribute what ever they can do to the achievement of the company’s
goals.
2. Annual General Meeting
Meaning: Every company must hold in each year, in addition to any other
meetings, a general meeting of its member, which is called the company’s ‘annual
general meeting’. In the normal course, such meeting is called by the company
only. But in some special circumstance, the Central Government, in exercise of the
powers vested in it, may also call a company’s annual, general meeting. According
to Section 166, every company shall call its annual general meeting once in a year,
and the notice of such meeting being called must clearly state that it is the
company’s annual general meeting.
Objects and Importance of the Meeting: The main object of calling the annual
general meeting is that, at least once in a year, the company’s members get
together and have an opportunity to collectively examine the affairs of the
company. Thus, from the point of view of the shareholders, the annual general
meeting of the company is especially important because, besides other things, the
company declares the dividend that is payable to its shareholders, which is of
primary interest to all its members. The directors and the auditors report is also
presented to the members, which gives them all information about the company’s
activities in the preceding year. In this manner, the members are appraised of the
company’s performance and its profits or losses. The members are free to move
any resolution which relates to them in the meeting. It is mandatory for the
company to present its final accounts in the annual general meeting, and any
member can ask any question to the chairman of the meeting.
Business of the Meeting: The issue relating to general meeting can be classified
as:
(1) General Business: The general business of the meeting constitutes the following:
(a) To discuss the final accounts and profit and loss account of the company, and the
‘directors and auditors’ report of the previous year.
(b) To declare the dividend for the year.
(c) To appoint new directors to replace those who retire by rotation.
(d) To appoint auditors.
(2) Special Business: Any other business besides what is normally conducted in the
meeting is called ‘special business’. The approval of the general meeting for any
special business of a company must necessarily be there. Such business may
include:
(a) The appointment, renewal of appointment and remuneration of directors.
(b) Increasing the company’s share capital.
(c) Altering the company’s articles of association.

When some special business has to be conducted in the annual general
meeting, the notice for the meeting must contain a statement of the important
aspects of such business and must specify the authority vested in any director or
manager (if any) with respect to the business. If such business involves. another
company, and a director of the company holds 20 per cent or more share capital of
such other company, it must be specifically clarified in the notice. In case a
resolution is to be passed, the notice for the meeting must specify the time and
place where any documents relating to the resolution can be inspected.
Since 17 October, 1994, the Board of Directors must also provide

information about the following in a company’s annual general meeting:
(a) The name and address of every officer of the company who has been receiving a
monthly remuneration of Rs.25,000, or more, and has received a remuneration
totaling Rs.3,00,000 in the preceding year (previously this figure was Rs. 3,000
per month or Rs.36,000 per annum).
(b) If any person who has received such remuneration in the preceding year is related
to any director of the company, the name of such director and particulars regarding
such relationship.
(c) Any clarifications with respect to the auditors report to the Board of Directors.
3. Extraordinary General Meeting
Besides the statutory and the annual general meetings, any meeting of the
company’s shareholders called for whatever purpose is an ‘extraordinary general
meeting’. In other words, an extraordinary general meeting of a company is any
meeting of its shareholders which is called during the period between its two
consecutive annual general meetings.
When an Extraordinary General Meeting may be called
The need to call an extraordinary general meeting of a company arises

when any such matter has to be decided which cannot wait till the next annual
general meeting of the company is to be held. An extraordinary general meeting of
a company may be called in the following circumstance:
(1) To make an alteration in the company’s memorandum or articles of association.
(2) To issue fresh debentures.
(3) To increase, reduce or reorganise the company’s share capital.
Who may call such Meetings
An extraordinary general meeting of a company can be called: (1) by the

directors, (2) by the directors on requisition of the members, (3) by the requisitions
themselves and (4) by the Company Law Board.
(1) By the Directors: In case it is authorised by the company’s articles, the

directors may, convene an extraordinary general meeting by passing a resolution
to that effect in the Board’s meeting. According to Rule 48 of Table A, the Board
may, whenever it thinks fit, call on extraordinary general meeting. Such meeting is
called by the directors to do any special and necessary act which must be done
before the next annual general meeting of the company.
In case any such meeting is called by the directors, it is necessary to give a

21-day notice for the meeting. It is also necessary to state the purpose for which
the meeting is being called. If the purpose of the meeting is to seek the support of
members for some resolution, the notice for the meeting must specify the time and
place where the members can examine such resolution. Although it is necessary to
give a 21-day notice for an extraordinary general meeting of the company, it is
possible, under the following circumstances, to call such meeting by a notice
which is less than the prescribed 21 days. These circumstances are:
(a) When the members of a company with share capital who are entitled to vote and
hold 95 per cent of the company’s capital agree that a meeting be called.
(b) When 95 per cent of the members of a. company without share capital agree to
hold such meeting.
(2) By the Directors on Requisition or Members: In case the directors do not

call a general meeting of the company as required under the provisions of the Act,
the members mentioned here under can bind the directors to call an extraordinary
general meeting.
(a) In case of a company having a share capital, members who hold ten per cent of
the, company’s paid-up share capital and have the right to vote.
(b) In case of a company that does not have share capital, ten per cent of the members
who have the right to vote.
When two or more than two persons are the joint owners of a share or
shares of a company, the consent of one or more than one such persons shall be
deemed to be the consent of all the joint holders of shares.
When the above mentioned members of a company demand that an

extraordinary meeting of the company be held, it becomes mandatory for the
directors to call such meeting. The requisition notice must state the issues for
discussing which the demand for the extraordinary general meeting is being made.
The demand notice must bear the signatures of the members making such demand,
and the notice must be delivered to the company’s registered office. After a valid
requisition for such meeting has been delivered, the Board of Directors shall
initiate the procedure to call such meeting within twenty one days of the receipt of
the requisition and the meeting should actually be held within 45 days from the
date of the requisition.
(3) By the Requisitionists Themselves: It the directors fail to call the meeting
within aforementioned time limits, the requisitionists may themselves convene a
meeting within three months from the date of the deposit of the requisition. A
meeting called by the requisitionists must be called in the same manner as a
meeting called by the Board of Directors. Any reasonable expenses incurred by
the requisitionists by reason of the Board’s failure to call a meeting shall be repaid
to the requisitionists by the company, and the company shall retain such amount
out of any sums due or to become due by way of fees or other remuneration of the
directors who were in default.
(4) By Company Law Board: If, for any reason, it is impractical to call a
meeting of a company other than an annual general meeting, the Company Law
Board may, either of its own motion or on the application of any director of the
company, or of any member of the company who would be entitled to vote, order
a meeting of the company to be held in such manner as the Company Law Board
thinks fit and give such directions as it thinks expedient in relation to the calling of
such meeting. The directions may include a direction that one number of the
company present in person or by proxy shall be deemed to constitute a meeting.
– Section 186
4. Class Meetings
When a company issues different types (classes) of shares, and calls a

meeting of a particular type of shareholders. Such meeting is called a ‘class
meeting’. These meetings are called to alter or define the rights and obligations of
a class of shareholders-for example, to convert one class of shares .to another, like
a class meeting of the shareholders needs to be called to convert preference shares
into equity shares. Only those members of a company who hold that class of
shares for which the meeting is called may participate in such meetings. The
articles of a company normally define the conditions and the provisions for calling
class meetings. The rights and obligations of any class of share holders can only
be altered up to the limits defined in the company’s articles and memorandum of
association. In other words, any alteration about any class of shares can only be
made according to the conditions under which the shares were issued. If any
alteration is to be made in such rights and obligations of a class of-shareholders, it
can only be done in a meeting of that class of shareholders by the members of the
class passing a special resolution to that effect, i.e. the resolution must be passed
by a majority of three-fourths of the members of that class.
According to Section 106, where the share capital of a company is divided

into different classes of shares, the rights attached to the shares of any class may
be varied with the consent in writing of the holders of not less than three-fourths
of the issued shares of that class or with the sanction of a special resolution passed
at a separate meeting of the holders of issued shares of that class.
(B) Board of Directors’ Meetings
A company, being an ‘artificial person’, performs all its actions through its
directors. In fact, it is the directors who manage the affairs of a company. A
company’s policy, its management and other important issues are decided in the
meetings of its Board of Directors. It is, therefore, necessary that meetings of the
company’s Board of Directors are held to take decisions relating to its policy and
management. Except for the issues on which the decision-making right rests with
the shareholders, all matters of the company are dealt with in the meetings of its
Board of Directors.
The meetings of a company’s directors can be categorized as:
(a) Meetings of Board of Directors and
(b) Meetings of Directors’ Committees.
(a) Meeting of Board of Directors
Statutory Provision Regarding Board’s Meetings
The main provisions of the Act related to the meetings of a company’s

Board of Directors are as under:
(1) Power to convene the Meeting: A meeting of the Board of Directors may
be convened by any director of the company. The director who wants to convene
the meeting requests the managing director or the chairman of the board to call
such meeting. As a general rule, the managing director or the chairman directs the
company’s secretary to call the meeting.
(2) Period of Meeting: The provisions relating to the periodic meetings of a

company’s Board of Directors have been defined in the Act, but the directors have
the right to call such meetings as and when the need arises. Besides this, each
meeting of the Board decides when the next meeting is going to be held.
The meetings of the Board of Directors of a company, depending upon the

nature of the company’s business, may be called weekly, monthly or after any other
period of time but, according to Section 285 of the Act, in the case of every
company, a meeting of its Board of Directors should be held at least once in every
three months and at least four such meetings should be held in a year.
(3) Notice and Agenda of the Meeting: A written notice of each meeting of
the Board of Directors must be sent to each director of the company who is a
resident in India by registered post. If any director of the company is not in India
for the time when the meeting is to be held, such notice is not necessary.
The notice must state the date, time and place of the meeting. If the articles
of a company provide that the meeting of its Board of Directors shall be held in a
specific period, on a specific day and at a specific place, such notice is not
required to be sent. Normally, however, a notice is always sent for the meeting. In
case a notice is not sent to any director, as a result of which he is not present in the
meeting, the meeting is deemed to be illegal, and all decisions taken by such
meeting are void. But if the subsequent meeting of directors ratifies the decisions
taken, they shall be deemed to be valid decisions. In case a default is made in
sending such notice, then the officer guilty of such default can be fined rupees one
hundred.
It is not necessary, under the provision of the Act, to send the agenda for
the meeting with the notice, but in practice it is done so.
(4) Quorum: By ‘quorum’ is meant the minimum number of directors must be

present for lawful meeting. The required quorum for such meetings of the Board
of Directors is defined in the company’s articles. If there is no such provision in
the company’s articles, then the quorum for a meeting of the Board of Directors of
a company shall be one-third of its total strength (any fraction contained in’ that
one-third being rounded off as one), or two directors, whichever is higher.
– Section 287
If a meeting of the Board could not be held in absence of quorum, then it

shall automatically stand adjourned till the same day in the next week, at the same
time and place. If that day is a holiday, it will held on the succeeding working day
at the same time and place. – Section 288
According to Section 300 of the Act, no director of a company can take part
in the discussion of, or vote on, any contract or agreement if he is in any way
concerned or interested in the contract or agreement. His presence will not count
for the purpose of forming a quorum. – Section 300
(5) Chairman of the Meeting: Every meeting of the Board of Directors of a

company must be presided over by a chairman. The company may name the
chairman, other directors of the company may elect a chairman to preside over the
meetings.
Business to be transacted in Meetings: All such business which is within

the company’s authority is transacted in the meetings of its Board of Directors.
But the Board of Directors cannot transact any business which, according to the
provisions of the Companies Act, or the memorandum or articles of the company,
must be transacted in a general meeting of the company’s shareholders. The main
business to be transacted in the meetings of a company’s Board of Directors can
be:
(a) Issue and allotment of the company’s shares.
(b) Making calls on shares.
(c) Accepting the transfer or transmission of shares.
(d) Forfeiture and re-issue of shares.
(e) Calling meetings of the company’s member.
(f) Making decisions about the company’s management and its business.
(g) Deciding the rate of dividend to be paid to shareholders.
(h) Considering the general problems faced by the company.
(i) Making contracts with third parties on behalf of the company.
(6) Decision-making Procedure: Generally, decisions in a meeting of the

Board of Directors are taken by a majority vote. Every member of the Board
present in the meeting has the right to vote; but if any director has a personal
interest in any matter that is being discussed by the Board, he does not have the
right to vote on such matter. In case the votes for and against an issue being
discussed are equal, normally, under the articles of the company, the chairman of
the meeting may cast the deciding vote for or against the issue. In other words, the
vote of the chairman is the deciding factor in such a case. But, if the articles of the
company do not give authority to the chairman of the meeting to cast the deciding
vote, it is deemed the resolution being voted is not passed and the matter remains
undecided.
There are some situations where a unanimous verdict of the directors is

must for decision-making. These are as follows:
(a) Acceptance of the company’s prospectus.
(b) Election or appointment of a person as managing director or director of the

company who holds such position in another company.
(c) Investment in shares or debentures of another company.
(7) Decision without Meeting: Ordinarily, resolutions are passed in a meeting

of the Board of Directors of the company; but there may be situations under
which, because of shortage of time or for any other reason, It may not be possible
to convene a meeting of the Board of Directors for taking a decision on some
important matter about which the decision making authority vests with the
directors. In such cases, the resolutions may be passed by circulation According to
Section 289 of the Act, the acceptance of a resolution may be obtaine4 from the
directors by circulating the resolution. The chairman and .the secretary prepare the
text of the resolution, which is sent to the directors along with the necessary
documents. Any director who is not in India at such time is posted the text of the
resolution at his registered address. The directors may send their acceptance or
non-acceptance in writing to such resolution, and the resolution shall be passed if
the majority wants it to be passed. It is important to note here that the purpose and
the text of the resolution must be sent to such number of directors that constitute
the quorum of the Board of Directors.
(8) Minutes of Meetings: Minutes are a list of the proceedings of a meeting.

They constitute a summery of the proceedings of a meeting. Every company have
to keep minutes of all proceedings of Board Meetings Such books are called
‘minutes books’. The pages of the ‘minutes books’ must be consecutively
numbered. Each page of a ‘minutes book’ must be initiated or signed. In case of a
meeting of the Board of Directors, it must contain the names of the directors
present at the meeting; and, in case of each resolution passed at the meeting, the
names of the directors (if any) disagree from the resolution. – Section 193
Minutes of meetings kept in accordance with the provisions of Section 193

shall be evidence of the proceedings recorded therein. – Section 194
(b) Meetings of Director’s Committees

Companies which are big and have diversified fields of activity need to call
meetings of the Board of Director very often. Such companies also have many
directors, and it becomes difficult for all the directors to attend these frequent
meetings. The company, therefore, constitutes committees of its directors to deal
with different issues, and, when a 100 particular issue is to be discussed, only the
directors of the concerned committee need to meet and make a decision. Such
committees are constituted by the Board of Directors, and imply the transference
of the rights of some directors on some issues to other directors. This can only be
done if the articles of the company authorise.
If a company has two or three directors, there cannot be any committees of

directors. The articles of the companies authorise the directors to transfer their
rights with respect to some issues to other directors and these committees can
function on behalf of the Board of Directors. Such committees are of two types:
(a) permanent committees, and (b) temporary committees:
Permanent Committees: The foremost permanent committee is the company’s

working committee. The main function of this committee is the day-to-day
administration of the company. The committee meets frequently and takes
decisions about the company’s administration. The members of the committee are
selected from the members of the Board, and its chairman is the chairman of the
Board of Directors. The other members of the committee are the directors of
specialized fields-like financial, marketing or technical directors.
Temporary Committees: Temporary committees are constituted to take decisions

on matters that are important for the time, being. The Board of Directors considers
the recommendations of the committees and makes the final decision.
(C) Creditors Meetings
When a company issues debentures on its incorporation, or issues any

debentures later, and wants to make an agreement with the holders of debentures,
it calls a creditors’ meeting. A creditors’ meeting, in fact, is not the company’s
meeting because such meeting is organized by the creditors. The provisions for
such meetings are defined in Section 391 of the Companies Act. A creditor’s
meeting may be called to make discussion on the following issues:
(a) To settle any suit between the creditors and the company or to reduce the amount
of their credits or the interest payable.
(b) To get the creditors consent to the reorganisation or amalgamation of the

company.
(c) To get the creditors’ agreement (consent) to the winding up of the company.
In all cases, the object of the company to call such meeting is to get the
consent of the creditors to the company’s reorganization, amalgamation or to solve
any problems facing by the company. In case the company is being wound up, the
court shall appoint an Official Liquidator, and order a meeting of the creditors, or
a class of creditors, to be called, held and conducted in such manner as the court
directs.
(D) Debenture-holders Meeting
When a company issues its debentures, it also plans the meetings of the
holders of its debentures. The rules governing such meetings are printed on the
reverse of the debenture certificates issued by the company. The meetings of
debenture-holders are called:
(a) When the terms of repayment of debentures need to be altered.
(b) When the rights of the holders of debentures need to be altered.
In short, such meetings are called when the company issues any fresh
debentures or wants to alter the rate of interest on any debentures already issued.
In a company above types of meeting can be held and to hold a meeting all
the statuary provisions should be followed.
14.4 SUMMARY
Public borrowing is the one of the source of the company’s capital. A

company can borrow money by issuing debentures, by taking loans in lieu of
providing mortgage of its moveable and immovable properties or uncalled share
capital or public deposit. Company can take such loan upto a limit which is
specified in the company’s Memorandum of the association or Article. Any
borrowing beyond such specification is called Borrowing beyond the authority of
the company and can considered as a debt of the company.
Meeting of the company is gathering of the quorum of the members of the

company by a prior notice for discussing company’s issues. All important
decisions regarding the functioning of the company are made in the meetings. In a
company various types of meetings are conducted for the various purposes. Each
type of the meeting has specified legal provisions which every company have to
fulfill. Every meeting has its own objectives and importance. All proceeding of the
meetings are recorded in a book called minute book. Every member of the
company can check the minute book and get a Photostat copy of it to know the
proceeding of that meeting.
14.5 KEYWORDS
Ultra Vires Borrowing: Where a company borrows money in excess of its
powers, the borrowing would be ultra-vires the company.
Statutory Meeting: Every public company limited by shares and every company
limited by guarantee and having a share capital, shall, within a period of not less
than one month nor more than six months from the date on which the company is
entitled to commence business hold a general meeting of the members of the
company. This meeting is called the statutory meeting.
Annual General Meeting: Every company must in each year hold in addition to
any other meeting, a general meeting as its annual general meeting.
Extra Ordinary General Meeting: Any meeting other than a statutory and an
annual general meeting is called an Extra Ordinary General Meeting.
Class Meeting: Class meetings are separate meetings of holders of different
classes of shares. They are held in cases where their rights are sought to be
affected.
1. Write a note on the Borrowing Power of the Management? What are the
provisions for a lawful borrowing?
2. What do you mean by the Ultra Vires borrowing? Discuss the remedial measures
regarding these?
3. What do you mean by a Meeting? Write down the brief notes on various kinds of
meetings?
4. Can One Man Meeting is possible? If yes the how?
5. What do you understand by the Board of Directors meeting? Write various

provisions regarding this.
6. How many types of the shareholder meeting held in a company? Discuss in detail.
14.7 SUGGESTED READINGS
 Kapoor N.D., Company Law. Sultan Chand & Sons, New Delhi.
 Aggarwal S.C., Company Law, Danpat Rai Publication, New Delhi.
 Chawala R.C. & Garg K.C., Mercantile Law, Kalyani Publishers, New Delhi.
 Bulchandani K.R., Business Law for Management, Himalaya Publication

House, New Delhi.
 Aggarwal S.K., Business Law, Galgota Publishing Co., New Delhi.

 Sharma Ashok, Company Law and Auditing, V.K. Publication, New Delhi.
WINDING UP OF A COMPANY
Structure
18.0 Objective
18.1 Introduction
18.2 Modes of Winding Up
18.3 Who May File Petition
18.4 Commencement of Winding Up (Section 441)
18.5 Official Liquidators
18.6 Voluntary Winding Up
18.7 Winding Up subject to Supervision of the Court
18.8 Consequences of Winding up
18.9 Winding Up of Insolvent Companies
18.10 Effects of Winding Up on Antecedent and other Transactions
18.11 Summary
18.12 Keywords
18.0 OBJECTIVE
(a) Explain the concept of winding up
(b) Discuss the different modes of winding up of a public company
(c) Describe the consequences of winding up.

18.1 INTRODUCTION
Winding up is the process for the realization of the assets, the payment of
creditors, and the distribution of the surplus, if any, among the shareholders, so
that the company may be finally dissolved.
The concept of winding up of a company may be defined in the following

words:
“Winding up of a company is the process whereby its life is ended and its
property administered for the benefit of its creditors and members. An
administrator called a liquidator is appointed and he takes control of the
company, collects its assets, pays its debts and finally distributes any surplus
among the members in accordance with their rights.”
Thus winding up is the last stage in the life of a company. It means a

proceeding by which a company is dissolved. Winding up should not be taken as if
it is dissolution of a company. The winding up of a company precedes its
dissolution. Before dissolution and after winding up, the legal entity of the
company remains and it can be sued in a Court of law. On dissolution the
company ceases to exist, its name is actually struck off from the Register of
Companies by the Registrar and the fact is published in the official Gazette.
18.2 MODES OF WINDING UP
A company can be wound up in three ways:
1. Compulsory winding up by the Court;
2. Voluntary winding up: (i) Members voluntary winding up;

(ii) Creditors’ voluntary winding up;
3. Voluntary winding up subject to the supervision of the Court [Sec. 425].
Winding Up by the Court: A company may be wound up by an order of

the Court. This is called compulsory winding up or winding up by the Court.
Section 433 lays down the following grounds where the Court may wind up a
company.
A petition for winding up may be presented to the Court on any of the

grounds stated below:
1. Special resolution: A company may be wound up by the Court if it has, by

a special resolution, resolved that it be, wound up by the Court. But it is to be
noted that the Court is not bound to order for winding up merely because the
company by a special resolution has so resolved. Even in such a case it is the
discretion of the Court to order for winding up or not.
2. Default in filing statutory report or holding statutory meeting: If a

company has made a default in delivering the statutory report to the Registrar or in
holding the statutory meeting, a petition for winding up of the company may be
presented to the Court. A petition on this ground may be presented to the Court by
a member or Registrar (with the previous sanction of the Central Government) or a
creditor. The power of the Court is discretionary and generally it does not order
for winding up in first instance. The Court may, instead of making an order for
winding up, direct the company to file the statutory report or to hold the statutory
meeting but if the company fails to comply with the order, the Court will wind up
the company.
3. Failure to commence business within one year or suspension of

business for a whole year: Where a company does not commence its business
within one year from its incorporation or suspends its business for a whole year, a
winding up petition may be presented to the Court. Even if the business is
suspended for a whole year, this by itself does not entitle the petitioner to get the
company wound up as a matter of right but the question whether the company
should be wound up or not in such a circumstances entirely is the discretion of the
Court depending upon the facts and circumstances of each case. Even, if the work
of all the units of the company has been suspended then too it will still be open to
the Court to examine as to whether it will be possible for the company to continue
its business. Before the order of winding up on this ground the Court is required to
see what are the possibilities of resumption of the business of the company. The
suspension of the business, for this purpose, must be the entire business of the
company and not a part of it.
The Court will not order for winding up on the grounds, if: (a) suspension
of business is due to temporary causes; and (b) there are reasonable prospects for
starting of business within a reasonable time.
4. Reduction of membership below the minimum: When the number of members

is reduced, in the case of a public company, below 7 and in the case of a private
company, below 2, a petition for winding up of the company may be presented to
the Court.
5. Company’s inability to pay its debts: A winding up petition maybe presented if the
company is unable to pay its debt. ‘Debt’ means definite sum of money payable
immediately or at future date. A company will be deemed to be unable to pay its loan in
the following conditions (Section 434):
(a) A creditor of more than Rs. 500 has served, on the company at its registered
office, a demand under his hand requiring payment and the company has for three
weeks thereafter neglected to pay or secure or compound the sum to the
reasonable satisfaction of the creditor; or
(b) Execution or other process issued on a judgement or order in favour of a creditor

of the company is returned unsatisfied in whole or in part ; or
(c) It is proved to the satisfaction of the Court that the company is unable to pay its
debts, taking into account its contingent and prospective liabilities, i.e. whether its
assets are sufficient to meet its liabilities.
6. Just and Equitable (Sec. 433(1)]: The Court may also order to wind up of a
company if it is of opinion that it has just and equitable that the company should
be wound up. What is ‘just and equitable’ depends on the facts of each case. The
words ‘just and equitable’ are of wide connotation and it is entirely discretionary
on the part of the Court to order winding up or not on this ground.
Thus the Court itself works out the principles on which the order for
winding up under the section is to be made.
Winding up by the Court on ‘just and equitable’ grounds may be ordered in

the cases given below:
(a) When the substratum of the company has gone: In the words of Shah, J. in Seth
Moham Lal v. Grain Chambers Ltd. the substratum of the company is said to have
disappeared when the object for which it was incorporated has substantially failed,
or when it is impossible to carry on the business of the company except at a loss,
or the existing and possible assets are insufficient to meet the existing liabilities.
The substratum of a company will be deemed to pave gone when
(i) The object for which it was incorporated has substantially failed or has become
impossible or
(ii) It is impossible to carry on business except at it loss or
(iii) The existing and possible assets are insufficient to meet the existing liabilities of
the company.
(b) When there is oppression by the majority shareholders on the minority, or there is
mismanagement.
(c) When the company is formed for fraudulent or illegal objects or when the business
of the company becomes illegal.
(d) When there is a deadlock in the management of the company. When there is a
complete deadlock in the management of the company, it will be wound up even if
it is making good profits. In Re Yenidjee Tobacco Co. Ltd. A and B the only
shareholders and directors of a private limited company became so hostile to each
other that neither of them would Speak to the other except through the secretary.
Held, there was a complete deadlock and consequently the company be wound up.
(e) When the company is a ‘bubble’, i.e. it never had any real business.
18.3 WHO MAY FILE PETITION
The Court does not choose to wind up a company at its own motion. It has
to be petitioned. Section 439 of the Companies Act enumerates the persons those
can file a petition to the Court for the winding up of a company. The petition for
winding up may be brought by anyone of the following:
1. Petition by Company
A company can make a petition only when it has passed a special resolution
to that effect. However, it has been held that where the company is found by the
directors to be insolvent due to circumstances that ought to be investigated by the
Court, the directors may apply to the Court for an order of winding up of the
company even without obtaining the sanction of the general meeting of the
company.
2. Petition by Creditors
The word ‘creditor’ includes secured creditor, debenture holder and a

trustee for debenture holder. A contingent or prospective creditor (such as the
holder of a bill of exchange not yet matured or of debentures not yet payable) is
also entitled to petition for a winding up of the company.
Before a petition for winding up of a company presented by a contingent or

prospective creditors is admitted, the leave of the Court must be obtained for the
admission of the petition. Such leave is not granted (a) unless, in the opinion of the
Court, there is a prima facie case for winding up the company; and (b) until
reasonable security for costs has been given.
Notice that a creditor has a right to winding up order if he can prove that he
claims an undisputed debt and that the company has failed to discharge it. When a
creditors’ petition is opposed by other creditors, the Court may ascertain the
wishes of the majority of creditors.
3. Contributory Petition
The term ‘contributory’ means every person who is liable to contribute to

the assets of the company in the event of its being wound up. Section 428 makes it
clear that it includes the holder of fully-paid shares. A fully-paid shareholder will
not, however, be placed on the list of contributors, as he is not liable to pay any
contribution to the assets, except in cases where surplus assets are likely to be
available for distribution.
A contributory is entitled to present a petition for winding up a company if:
(a) The number is reduced, in the case of a public company below seven and in the
case of private company below two; and
(b) The shares in respects of which he is a contributory either were originally allotted
to him or have been held by him; and
(c) The shares have been registered in his name, for at least six months during the
period of 18 months immediately before the commencement of the winding up;
and
(d) The shares have been devolved on him during the death of a former holder [Sec.
439 (4)].
4. Registrar’s Petition
The Registrar can present a petition for winding up a company only on the
following grounds, viz.,
(a) if a default is made in delivering the statutory report to the Registrar or in holding
the statutory meeting;
(b) if the company does not commence its business within a year from its
incorporation, or suspends its business for a whole year ;
(c) if the number of members is reduced, in the case of a public company below seven
and in the case of a private company below two ;
(d) if the company is unable to pay its debts; and
(e) if the Court is of opinion that it is just and equitable that the company should be
wound up.
Note that the Registrar can file a petition for winding up only with prior
approval of the Central Government. The Central Government before sanctioning
approval must give an opportunity to the company for making its represent
actions, if any.
Again a petition on the ground of default in delivering the statutory report

or holding the statutory meeting cannot be presented before the expiration of 14
days after the last day on which the statutory meeting ought to have been held.
5. Petition by any Person Authorised by the Central Government
If it appears to the Central Government from any report of the inspectors

appointed to investigate the affairs of the company, that it is expedient to wind up
the company because its business is being conducted with intent to defraud
creditors, members or any other person, or its business is being conducted for a
fraudulent or unlawful purpose, or the management is guilty of fraud, misfeasance
or other misconduct, the Central Government may authorise any person to present
to the Court a petition for winding up of the company that is just and equitable that
the company should be wound up.
18.4 COMMENCEMENT OF WINDING UP (SECTION 441)
Where before the presentation of a petition for the winding up of a

company by the Court, a resolution has been passed by the company for voluntary
winding up, the winding up of the company will be deemed to have commenced
from the date of the resolution. In all other cases (i.e. where the company has not
previously passed a resolution for voluntary winding up), the winding up will be
deemed to commence from the time of the presentation of the petition for the
winding up.
The Court may dismiss or allow the petition for winding up and also can
adjourn its hearing or pass conditional order of winding. up. In the case of Misrilal
Dharamchand Ltd; v. B; Patnaik Mines Ltd. (1978) the Court ordered for winding
up but stayed the operation of the order for six months so as to enable the
company to pay the petitioner, if it could do so within this period and in case of
failure the order was to come in force.
Powers of the Court: On hearing a winding up petition, the Court may dismiss it
or adjourn the hearing or make interim orders or make an order for winding up the
company, with or without costs or any other order that it thinks fit (Section 443).
Consequences of winding up: (i) Where the Court makes an order for winding up
of company, the Court must forthwith cause intimation thereof to be sent to the
Official Liquidators and the Registrar (Section 444).
(ii) On the making of a winding up order it is the duty of the petitioner in the
winding up proceedings and of the company to file with the Registrar a copy of
the order of the Court within 30 days from the date of the making of the order
[Section 445(1)].
(iii) The winding up order is deemed to be notice of discharge to the officers

and employees of the company, except when the business of the company is
continued [Section 445(3)].
(iv) When a winding up order has been made, no suit or other legal proceedings
can be commenced against the company except with the leave of the Court. Suits
pending at the date of the winding up order cannot be further proceeded without
the leave of the Court. According to sub-section (2) of Section 446 the Court
which is winding up the company has jurisdiction to entertain or dispose of (a) any
suit or proceeding by or against the company; (b) any claim made by or against the
company; (c) any application made under Section 391 by or in respect of the
company; (d) any question of priorities. or any other question whatsoever which
may relate to or arise in course of the winding up of the company.
(v) An order for winding up operates in favour of all the creditors and of all die
contributories of the company as if it .had been made. on the joint petition of a
creditor and of a contributory (Section 447).
(vi) According to Section 536 any disposition of the property (including

actionable claims) of the company, any transfer of shares in the company or
alteration in the status of its members, made after the commencement of the
winding up shall be void, unless the Court otherwise orders.
Thus the Court can direct that any such disposition of property or
actionable claims or transfer of shares or alteration of status of the members will
be valid. But unless the court so directs, such disposition, transfer or alteration will
be void.
(vii) Section 537 declares that any attachment and sale of the estate or effects of
the company, after the commencement of the winding up, win be void In the case
of winding up by the Court any attachment, distress or execution put in force,
without leave of the Court, against the estate or effects of the company after the
commencement of the winding up will be void. Similarly any sale held, without
leave of the Court, of any of the properties or effects of the company after the
commencement of the winding up will be void. With leave of the Court,
attachment and sale of the properties of the company will be valid even if such
attachment and sale are made after the commencement of the winding up of the
company. Besides this section does not apply to any proceedings for the recovery
of any tax imposed or any dues payable to the Government Thus I.T.O. can
commence assessment proceedings witl10ut leave of the Court.
(viii) It is to be noted that winding up order does not bring the business of the
company to an end. The corporate existence of the company continues through
winding up till the company is dissolved. Thus the company continues to have
corporate personality during winding up. Its corporate existence come to an end
only when it is dissolved.
(ix) An order for winding up operates in favour of all the creditors and of all the
contributories of the company as if it had been made on the joint petition of a
creditor and of contributory.
(x) On a winding up order being made in respect of a company, the Official

Liquidator, by virtue of the office, becomes the liquidator of the company (Section
449).
18.5 OFFICIAL LIQUIDATORS
Under the present Act, the only person who is competent to act as the
liquidator in a winding up is the official liquidator. For the purpose of winding up,
there shall be attached to each high Court an official liquidator appointed by the
Central Government, who may be either a whole time or part time officer
depending upon the volume of work. In district courts the official receiver will be
the official liquidator. The Central Government may appoint one or more deputy
or assistant official, liquidators to assist the official liquidator in the discharge of
his functions. There is no provision in the Act, for the removal of the official
liquidator [Sec. 448 (1) & (1-A)].
Liquidator: On a winding up order being made, the official liquidator, by virtue

of his office, becomes the liquidator of the company (Sec. 449). Where the official
liquidator becomes or acts as liquidator, there shall be paid to the Central
Government out of the assets of the company such fees as may be prescribed.
A liquidator shall be described by the style of “The official liquidator” of

the particular company in respect of which he acts and not by individual name
[Sec. 452].
Provisional Liquidator: The Court may appoint the official liquidator to be the
liquidator provisionally at any time after the presentation of the petition for
winding up and before making winding up order [Sec. 450 (1)]. Before making
such an appointment notice must be given to the company and a reasonable
opportunity must be given to it to make representation. The Court may dispense
with such notice where there are special reasons. Such reasons must be recorded in
writing. A provisional liquidator is as much liquidator as a liquidator in the
winding up of a company. But where a provisional liquidator is appointed by the
Court, the Court may limit and restrict his powers. On a winding up order being
made, the official liquidator shall cease to be provisional liquidator and shall
become liquidator of the company.
General provisions for liquidators: The liquidator shall conduct the proceedings
in winding up the company and perform such duties as the Court may impose. The
official liquidator gets his remuneration from the Central Government and as such
he is not entitled to any further remuneration. For the services rendered by the
official liquidator to the company, the Central Government shall pay such fees out
of the assets of the company as may be prescribed.
The acts of a liquidator shall be valid, notwithstanding any defect that may
afterwards be discovered in his appointment or qualification. But his acts shall not
be valid if they are done after it has been shown that his appointment was invalid
[Sec. 451].
Statement of Affairs (Sec. 454): The company must make out and submit to the
official liquidator a statement, as to the affairs of the company in the prescribed
form verified by an affidavit and containing the following particulars:
(a) The assets of the company, stating separately the cash balance in hand and at the
bank and the negotiable securities held by the company;
(b) Its debts and liabilities;
(c) Names, residences and occupation of its creditors, stating separately the amount of
secured and unsecured debts;
(d) In the case of secured debts, particulars of securities given, their value and the
dates on which they were given;
(e) The debts due to the company and the names, residences and occupations of the
persons from whom they are due and the amount likely to be realised on account
thereof; and
(f) Such further or other information as may be prescribed or as the official liquidator
may require.
Note that the statement must be submitted and verified by one or more of
the directors and by the manager, secretary or other chief officer of the company
and it must be submitted within 21 days from the relevant date or within such
extended time not exceeding three months [Sec. 454 (3)].
Duties of the Liquidator
(i) He must conduct equitably and impartially all proceedings in the winding up
according to the provisions of the law.
(ii) He must submit a preliminary report to the Court as to:
(a) the amount of capital issued, subscribed and paid up and the estimated amount of
assets and liabilities, giving separately, under the heading of assets such as (i) cash
and negotiable securities; (ii) debts due from contributories; (iii) debts due to the
company and securities, if any available in respect thereof; (iv) immovable and
movable properties belonging to the company; and (v) unpaid calls;
(b) if the company has failed, as to the causes of the failure; and
(c) whether in his opinion further inquiry is desirable as to any matter relating to the
promotion, formation or failure of the company or the conduct of the business
thereof.
Note that the Court may extend the period of six months for the submission
of the above report by the official liquidator. The Court may also order that no
such statement need be submitted.
(iii) The official liquidator may, if he thinks fit, make further reports, stating the
manner in which the company was promoted or formed. He may state in the
reports whether in his opinion any fraud has been committed by any person in its
promotion or formation, or since the formation thereof. He may also state any
other matters which, in his opinion, it is desirable to bring to the notice of the
Court [Sec. 455(2)].
(iv) He must take into his custody and control the property of the company.
Notice that so long as there is no liquidator, all the property and effects of the
company are deemed to be in the custody of the Court [Sec. 456(2)].
(v) Control of powers: The liquidator must in the administration of the assets of
the company and the distribution thereof among its creditors have regard to any
directions which may be given by a resolution of the creditors or contributories at
any general meeting or by the committee of inspection [Sec.460 (1)]. Any
directions given by the creditors or contributories at any general meeting override
any directions given by the committee of inspection.
(vi) To Summon Meetings of Creditors and Contributories: He may summon

general meetings of the creditors or contributories for the purpose of ascertaining
their wishes. But he shall be bound to summon such meetings, at such times, as the
creditors or contributories may, by resolution, direct, or whenever requested in
writing to do so by not less than one tenth in value of the creditors or
contributories, as the case may be [Sec. 460 (3)].
(vii) Proper Books: The liquidator must keep proper books for making entries or
recording minutes of proceedings at meetings and of such other matters as may be
prescribed. Any creditor or contributory may, subject to the control of the Court,
inspect any such books, personally or through his agent [Sec. 461].
(viii) He must, atleast twice in each year, present to the Court an account of his
receipts and payments as liquidator. The account must be in the prescribed form
and must be made in duplicate. The Court gets the account audited, keeps one
copy thereof in its records and delivers the other copy to the Registrar for filling.
Each copy shall, however, be open to the inspection of any creditor, contributory
or person interested. The liquidator must also send a printed copy of the accounts
so, audited by post to every creditor and to every contributory.
(ix) Within two months from the date of the direction of the Court, the
liquidator must calla meeting of the creditors for determining the persons who are
to be members of the committee of inspection, if such committee is to be
appointed. Within 14 days of the meeting of the creditors, the liquidator must call
a meeting of the contributories to consider the decision of the creditors.
(x) Within two months of the expiry of each year from the commencement of
winding up, the liquidator must file a statement duly audited, by a qualified
auditor with respect to the proceedings in, and position of the liquidation.
The statement must be filed:
(a) in the case of a winding up by or subject to the supervision of the Court, in the
Court; and
(b) in the case of voluntary winding up, with the Registrar.
Note that when the statement is filed in the Court, a copy must
simultaneously be filed with the Registrar and must be kept by him along with the
other records of the company [Sec. 551].
Powers of the Liquidator: A liquidator has two types of powers under the Act:
(a) Powers exercisable with the sanction of the Court; and

(b) Powers exercisable without the sanction of the Court.
Powers with the Sanction of the Court: (a) to institute or defend any suit,
prosecution or other legal proceedings, civil or criminal, on behalf of the
company;
(b) to carry on the business of the company for the beneficial winding up of the
company;
(c) to sell the immovable and movable property and actionable claims of the company
by public auction or private contract;
(d) to raise any money required on the security of the assets of the company;
(e) to appoint an advocate, attorney or pleader to assist him in the performance of his
duties;
(f) to do all such other things as may be necessary for winding up the affairs of the
company and distributing its assets.
Note that the Court may by order provide that the liquidator may exercise
any of the above powers without the sanction of the Court [Sec. 458).
Powers without the Sanction of the Court: The liquidator may exercise the
following powers without the sanction of the Court, namely, powers:
(a) to execute documents and deeds on behalf of the company and use, when
necessary, the company’s seal;
(b) to inspect the records and returns of the company or the files of the Registrar
without payment of any fee;
(c) to draw, accept, make and endorse any bills of exchange, hundis or promissory
notes with the same effect as if drawn, accepted, made, or endorsed by the
company in the course of its business;
(d) to prove, rank and claim in the insolvency of any contributory for any balance
against his estate and to receive dividends in respect thereof;
(e) to take out, in his official name, letters of administration to any deceased
contributory;
(f) to appoint an agent to do any business which he is unable to do himself [Sec.

457(2)]. For example, he can appoint any advocate, attorney or pleader entitled to
appear before the Court to assist him in the performance of his duties [Sec. 459],
but with the sanction of the Court.
Supervision and control over liquidators: The following provisions discuss

about the supervision and control over liquidators:
1. Control by contributories and creditors: The contributories and creditors

exercise control over the liquidator in the performance of his duties through the
medium of the meetings which it is his duty to call from time to time. Any creditor
or contributory may subject to the control of the Court inspect the books which are
maintained by the liquidator. The liquidator is also required to print and send a
copy of the audited accounts to each creditor and contributory.
2. Control by Court: The liquidator shall apply to the Court for directions in
relation to any matter arising in the winding up. The Court has the power to
confirm, reserve or modify any act or decision of the liquidator if complained by
any aggrieved person. The Court has the power to cause the accounts of the
liquidator to be audited in such manner as it thinks fit.
3. Supervision by committee of inspection: The committee of inspection can

inspect the accounts of the liquidator at all reasonable times. The liquidator is
under an obligation to have directions from the committee of inspection.
4. Control by Central Government: Section 463 seeks to bring the conduct

of the liquidators of companies Where the control and scrutiny of the Central
Government. Where a liquidator does not faithfully perform his duties and duly
observe all the requirements imposed upon him by the Act or the rules there under
with respect to the performance of his duties, or if any complaint is made to the
Central Government by any creditor or contributory in regard thereto, the Central
Government shall enquire into the matter, and take such action thereon as it may
think fit. The power includes the power to remove the liquidator from office.
The Central Government may at any time require any liquidator of a

company which is being wound up by the Court to answer any inquiry in relation
to any winding up in which he is engaged. It may also, if it thinks fit; apply to the
Court to examine him or any other person on oath concerning the winding up. The
Central Government may also direct a local investigation to be made of the books
and vouchers of the liquidator.
The provisions of this section do not apply where the winding up has been
completed after dissolution.
Committee of Inspection (Sections 464, 465): The Court may, at the time of
making an order for the winding up or at any time thereafter, direct that there shall
be appointed a committee of inspection to act with the liquidator. Where such a
direction is given by the Court, the liquidator is required to convene, within 2
months from the date of the direction, a meeting of the creditors to determine who
are to be the members of the committee, within 14 days from the date of the
creditors’ meeting, the liquidator must call a meeting of the contributories to
consider the creditors’ decision with respect to the membership of the committee.
Contributories may accept the decision of the creditors with or without
modification or reject it. If the contributories at their meeting do not accept the
creditors’ decision in its entirely, the liquidator shall apply to the Court for
directions as to what the composition of the committee should be and who shall be
its members. The committee shall consist of not more than 12 members, being
creditors or contributories of the company in such proportion as may be agreed on
by the meetings of the creditors and contributories and in case of difference of
opinion, as may be determined by the Court. The Committee may inspect the
accounts of the liquidator at all reasonable time.
The committee will meet at such times as it may from time to time appoint
and the liquidator or any member of the committee may also call a meeting of the
committee as and when he thinks necessary. The quorum for a meeting of the
committee will be one-third of the total number of the members or two, whichever
is higher. The committee may act by a majority of its members present at a
meeting but shall not act unless a quorum is present. A member may resign by
notice in writing signed by him and deliver to the liquidator. If a member of the
committee is adjudged as insolvent or compounds or arranges with his creditor or
is absent from five consecutive meetings of the committee without leave of those
members, who together with himself, represent the creditors or contributories, his
office shall become vacant. A member of the committee may be removed at a
meeting of the creditors, if he represents creditors, or at a meeting of
contributories if he, represents contributories by an ordinary resolution of which
seven days’ notice has been given stating the objects of the meeting. When any
vacancy occurred in the committee, the liquidator will call a meeting of the
creditors or contributories, as the case may be, and the meeting may reappoint the
same person or appoint some other person in the vacancy. However, the liquidator
may apply to the Court that the vacancy need not be filled in and if the Court is
satisfied that in the circumstances of the case the vacancy need not be filled, it
may make an order accordingly.
Dissolution of company in Winding up by the Court: The Court may make an

order for the dissolution of a company in the following conditions: (a) When the
affairs of the company have been completely wound up; or (b) when the Court is
of opinion that the liquidator cannot proceed with the winding up of a company for
want of funds and assets or for any other reason and it is just and equitable in the
circumstances of the case that an order of dissolution of the company should be
made. Where such an order is made by the Court, the company will be dissolved
from the date of the order of the Court. Within 30 days from the date of the order,
the liquidator must send a copy of the order to the Registrar. On the dissolution,
the corporate existence of the company comes to an end.
Company in liquidation exists as juristic personality until order of

dissolution is based by the Court. After the order of dissolution, the legal
personality of the company come to an end. The Court may declare the dissolution
void within 2 years from the date of the dissolution.
18.6 VOLUNTARY WINDING UP
Winding up by the creditors or members without any intervention of the

Court is called ‘voluntary winding up’. In voluntary winding up, the company and
its creditors are left free to settle their affairs without going to the Court, although
they may apply to the Court for directions or orders if and when necessary.
A company may be wound up voluntarily under the circumstances given

hereunder:
1. when the period fixed for the duration of the company the articles has expired or the
event has occurred on the occurrence of which the articles provide that the company
is to be dissolved and the company in a general meeting has passed a special
resolution to wind up voluntarily; or
2. the company has passed a special resolution to Wind up voluntarily. Thus a

company may be wound up voluntarily at any time and for any reason if a special
resolution to this effect is passed in its general meeting.
When a company has passed a resolution for voluntary winding up, it must
within 14 days of the passing of the resolution gives notice of the resolution by
advertisement in the official Gazette and also in some newspaper circulating in the
district where the registered office of the company is situated.
Commencement of Voluntary Winding up: A voluntary winding up is deemed

to commence at the time when the resolution for winding up is passed [Sec.486].
The date of the commencement of the winding up is important for several matters
such as liability of past members and fraudulent preferences, etc.
Consequences of Voluntary Winding up: The consequences of voluntary

winding up are:
1. From the commencement of voluntary winding up, the company ceases to carry on
its business, except so far as may be required for the beneficial winding up thereof
[Sec. 487].
2. The possession of the assets of the company vests in the liquidator for realisation
and distribution among the creditors. The corporate state and powers of the
company shall, however, continue until it is dissolved (Sec 456 and 487).
3. On the appointment of a liquidator, all the power of the board of directors cease
and the liquidator may exercise the powers mentioned in Sec. 512 including the
power to do such things as may be necessary for winding up the affairs of the
company and distributing its assets. The liquidator appointed in a members’
voluntary winding up is merely an agent of the company to administer the property
of the company for purposes prescribed by the statue.
Kinds of Voluntary Winding up: Voluntary winding up may be:
(a) A members’ voluntary winding up; or
(b) A creditors’ voluntary winding up.
Members’ Voluntary Winding Up: A members’ voluntary winding up takes

place only when the company is solvent. It is initiated by the members and is
entirely managed by them. The liquidator is appointed by the members. No
meeting of creditors is held and no committee of inspection is appointed. To
obtain the benefit of this form of winding up, a declaration of solvency must be
filed.
Declaration of solvency: Section 488 provides that where it is proposed to wind
up the company voluntarily the directors or a majority of them, may, at a meeting
of the board, make a declaration verified by an affidavit that the company has no
debts or that it will be able to pay its debts in full within a period not exceeding 3
years from the commencement of winding up as may be specified in the
declaration. Such declaration shall be made within five weeks immediately
preceding the date of the passing of the resolution for winding up and shall be
delivered to the Registrar before that date. It shall also be accompanied by a copy
of the auditors on the Profit and Loss Account and the Balance Sheet of the
company prepared upto the date of the declaration and must embody a statement
of the company’s assets and liabilities as on that date.
Where such a declaration is duly made and delivered, the winding up

following shall be called members’ voluntary winding up. Where the same is not
duly made, it shall be called creditors’ voluntary winding up.
Sections 490-98 of the Act deal with provisions applicable to members’

voluntary winding up. They are as follows:
1. Appointment and Remuneration of Liquidator: On the passing of the

resolution for winding up, the company must in a general meeting appoint one or
more liquidators and fix his or their remuneration. Any such remuneration cannot
be increased at all, not even with the sanction of the Court and the liquidator
cannot take charge of his office unless the remuneration is so fixed [Sec. 490].
2. Powers of the Board on Appointment of Liquidator: On the appointment of a

liquidator, all the powers of the board and of a managing or whole-time director,
and manager, if there be any of these shall cease, except for the purpose of giving
notice of such appointment to the Registrar or in so far as the company in a
general meeting or the liquidator may sanction the continuance thereof [Sec. 491].
3. Office of the Liquidator Falling Vacant: If a vacancy occurs by death,
resignation or otherwise in the office of any liquidator appointed by the company,
the company in a general meeting may fill the vacancy [Sec. 492].
4. Notice of Appointment to Registrar: The company must, within 10 days of the

appointment of the liquidator, or the filling up of the vacancy, as the case may be,
give notice to the Registrar of the event. Default renders the company and every
officer (or liquidator) who is in default liable to fine upto Rs.100 for every days of
default [Sec. 493].
5. Calling Meeting of Creditors: If the liquidator at any time is of opinion that the
company is insolvent, he must summon a meeting of the creditors, and lay before
the meeting a statement of the assets and liabilities of the company [Sec. 495].
Thereafter the winding up proceeds as if it were a creditors’ voluntary winding up
and not a members’ voluntary winding up [Sec. 498].
6. Calling General Meeting at the End of one Year: In the event of the winding up
continuing for more than one year, the liquidator must call a general meeting of
the company at the end of the first year from the commencement of the winding
up at the end of each-succeeding year, or at the first convenient date within three
months from the end of the year or such longer period as the Central Government
may allow, and must lay before the meeting an account of his acts and dealings
and of the conduct of the winding up during the preceding year [Sec. 496].
7. Final Meeting and Dissolution: As Soon as the affairs of the company are fully
wound up, the liquidator bakes up an account of winding up, showing how the
winding up has conducted and how the property of the company has been disposed
of. He then calls a general meeting, of the company and lays before it accounts
showing how the winding up has been conducted. This is called the final meeting
of the company.
The meeting must be called by advertisement:

(a) specifying the time, place and object of the meeting; and
(b) published not less than one month before the meeting in the official Gazette, and
also in some newspaper circulating in the district where the registered office of the
company is situated.
Within one week after the meeting, the liquidator is required to send to the
Registrar and the official liquidator a copy of the accounts. He must also make a
report to each of them of the holding of the meeting and of the date thereof. If at
the final meeting no quorum was present, the liquidator is required to make a
report that the meeting was duly called but no quorum was present at the meeting.
On receipt of the accounts and the report, the Registrar will register them. On
receipt of the accounts and report, the official liquidator will make a scrutiny of
the books and papers of the company and make a report to the Court stating the
result of the scrutiny. If the report shows that the affairs of the company have been
conducted bonafide i.e. not in a manner prejudicial to the interests of its members
or to the public interest, then from the date of the submission of the report to the
Court, the company shall be deemed to have been dissolved. If the official
liquidator in the report has stated that the affairs of the company have been
conducted in a manner prejudicial to the interest of its members or to the public
interest, the Court shall direct the official liquidator to make a further investigation
of the affairs of the company and on the report of the official liquidator on such
further investigation, the Court may either make an order that the company shall
stand dissolved with effect from the date to be specified in the order of the Court
or to make such other order as the circumstances of the case brought out in the
report permit [Sec. 497].
Creditors’ Voluntary Winding Up (Sections 500-509): In creditors’ voluntary

winding up, it is the creditors who move the resolution for voluntary winding up
of a company, and there is no solvency declaration made by the directors of the
company. In other words, when a company is insolvent, that is, it is not able to pay
its debts, it is the creditors’ voluntary winding up.
Special provisions relating to Creditors’ Voluntary Winding up: There are

certain special provisions to be completed with creditors’ voluntary winding up.
They are:
1. Meeting of Creditors [Sec. 500]: The company must call a meeting of the
creditors of the company on the same day or on the next following day on which
the general meeting of the company is held for passing a resolution for voluntary
winding up. The company must send the notice of the meeting to the creditors by
post simultaneously with the sending of the notice of the meeting of the company.
The company must also cause the notice of the meeting of the creditors to be
advertised once at least in the official, Gazettee and once at least in two
newspapers circulating in the district where the registered office or principal place
of business of the company is situated. At the creditors’ meeting, one of the
directors shall preside. The board of directors is required to lay before the meeting
of the creditors (a) a full statement of the position of the company’s affairs and (b)
a list of creditors of the company with the estimated amount of their claims.
2. Notice of Registrar [Sec. 501]: Notice of any resolution passed at a creditors’

meeting shall be given by the company to the Registrar within 10 days of the
passing thereof.
3. Appointment of Liquidator [Sec. 502]: The creditors and the company at their
respective meetings may nominate a person to be liquidator for the purpose of
winding up the affairs and distributing the assets of the company. If the creditors
and the company nominate different persons, the persons nominated by the
creditors shall be the liquidator. If no person is nominated by the creditors, the
person, if any, nominated by the company shall be the liquidator.
4. Committee of Inspection [Sec. 503]: The creditors at their first or any subsequent
meeting may, if they think fit, appoint a committee of inspection of not more than
five members. If such committee is appointed, the company may, either at the
meeting at which the winding up resolution is passed or at a later meeting, appoint
not more than five persons to serve at the committee. If the creditors object to
persons appointed by the company, then the matter will be referred to the Court
for the final decision. The powers of such committee are the same as those of a
committee of inspection appointed in a compulsory winding up.
5. Remuneration [Sec. 504]: The committee of inspection or if there is no such

committee, the creditors may fix the remuneration to be paid to the liquidator or
liquidators. Where the remuneration is not fixed, it will be determined by the
Court. Any remuneration fixed by the committee of inspection or creditors or the
Court shall not be increased.
6. Board’s Power to Cease [Sec. 505]: On the appointment of a liquidator, all the
powers of the board of directors shall cease except in so far as the committee of
inspection, or if there is no such committee, the creditors in a general meeting,
may sanction the continuance thereof.
7. Vacancy in the Office of Liquidator [Sec. 506]: If a vacancy occurs by death,

resignation, or otherwise in the office of the liquidator (other than a liquidator
appointed by or by the direction of the Court), the creditors in a general meeting
may fill the vacancy.
8. Final Meeting and Dissolution (Secs. 508-509]: The liquidator must call a
general meeting of the company and a meeting of the creditors every year within
three months from the close of the liquidation year, if the winding up continues for
more than one year. He must lay before the meeting an account of his acts and
dealings and of the conduct of Winding up during the preceding year and position
of winding up. He must call, in the same manner, a final meeting when the affairs
of the company are fully wound up and place the same statements before it, as he
does in the case of a members’ meeting in a members’ voluntary winding up under
Sections 496 and 497.
Appointment of liquidator: In a members’ voluntary winding up, the

company in general meeting shall appoint one or more liquidators for the purpose
of colle9ting the company’s assets and distributing the proceeds among creditors
and contributories. If a vacancy occurs by death or resignation or otherwise in the
office of the liquidator the company in general meeting may fill the vacancy.
[Section 490 and 492].
In the case of a creditors’ voluntary winding up, the creditors and the
members at their respective meetings, may nominate a person to be the liquidator
of the company. However, the creditors are given a preferential right in the matter
of the appointment of the liquidator with a power to the Court to vary the
appointment on application made within seven days by a director, member or
creditor. (Section 502).
Power of the Court to appoint liquidator: In a members’ or creditors’ voluntary

winding up, if for any cause whatever there is no liquidator acting, the Court may
appoint the official liquidator or any other person as a liquidator of the company.
The Court may also appoint a liquidator on the application of the Registrar.
(Section 515).
Body corporate not to be appointed as liquidator: A body corporate shall not

be qualified for appointment as a liquidator of a company in a voluntary winding
up. Any appointment of a body corporate as liquidator shall be void. (Section
513).
Corrupt inducement affecting appointment as liquidator: Any person who

gives or agrees or offers to give, any member or creditor of the company any
gratification with a view to securing his own appointment or nomination or to
securing or preventing the appointment of someone else, as the liquidator is liable
to a fine which may extend upto Rs.1,000. (Section 514).
Notice by liquidator of his appointment: When a person is appointed as the

liquidator and accepts the appointment, he shall publish in the official gazette a
notice of his appointment, in the prescribed form. He shall also deliver a copy of
such notice to the Registrar. The liquidator shall do this within 30 days of his
appointment. When the liquidator fails to comply with the above provision, he is
liable to a fine which may extend to Rs50 for each day of default. (Section 516).
Effect of the appointment of liquidator: On the appointment of a liquidator, in a

members’ voluntary winding up, all the powers of the directors, including
managing director, whole time directors as also the manager shall cease except so
far as the company in general meeting or the liquidator may sanction their
continuance. (Section 491).
On the appointment of a liquidator in creditors’ voluntary winding up, all the

powers of the board of directors shall cease. The committee of inspection or if
there is no such committee, the creditors’ meeting by resolution may sanction
continuance of the powers of the board. (Section 505).
Remuneration of liquidator: In a members’ voluntary winding up, the general

meeting shall fix the remuneration to be paid to the liquidators. Unless the
question of remuneration is resolved the liquidators shall not take charge of the
company. Once remuneration is fixed it cannot be increased. (Section 490).
In a creditors’ voluntary winding up, the remuneration of the liquidator is

fixed by the committee of inspection and if there is no committee of inspection the
by the creditors. In the absence of any such fixation, the Court shall determine his
remuneration. Any remuneration so fixed shall not be increased (Section 504).
All costs, charges and expenses properly incurred in the winding up,
including the remuneration of the liquidator, shall subject to the rights of secured
creditors, be payable out of the assets of the company in priority to all other claims
(Section 520).
Removal of Liquidator: In either kind of voluntary winding up, the Court may,
on cause shown, remove a liquidator and appoint the official liquidator or any
other person as a liquidator in place of removed liquidator. The Court may also
remove a liquidator on the application of the Registrar.
18.7 WINDING UP SUBJECT TO SUPERVISION OF THE COURT
Voluntary winding up may be under the supervision of the Court. At any

time after a company has passed a resolution for voluntary winding up, the Court
may make an order that the voluntary winding up shall continue, but subject to
such supervision of the Court. The Court may give such liberty to creditors,
contributories or others to apply to the Court and generally on such terms and
conditions as the Court thinks just (Sec. 522).
A petition for the continuance of a voluntary winding up subject to the

supervision of the Court shall be deemed to be a petition for winding up by the
Court (Sec. 523).
The Court will not in general make a supervision order on the petition of a
contributory, unless it is satisfies that the resolution for winding up was so
obtained that the minority of members were overborne by fraud or improper or
corrupt influence. Where the company is insolvent, the wishes of the creditors
only are regarded or the investigation is required.
If a company is being wound up voluntarily or subject to supervision of the

Court, a petition for its winding up by the Court may be presented by:
(a) any person authorised to do so under Sec. 439 (which deals with provisions as to
applications for winding up), or
(b) I the official liquidator [Sec. 440 (1)].

Where a supervision is made, the Court may appoint an additional
liquidator or liquidators, or remove any liquidator at any time and fill any vacancy.
The Court & may also appoint the official liquidator as an additional liquidator or
to fill any vacancy. The Registrar is also given power to apply to the Court for the
removal of a liquidator and the Court may do so (Sec. 524). The liquidator
appointed by the Court will act as a voluntary liquidator (Sec. 525). In a voluntary
liquidation brought under the Court’s supervision, the liquidator’s remuneration
cannot be increased.
A liquidator appointed by the Court has the same powers, is subject to the
same obligations, and in all respects stand in the same position, as if he had been
duly appointed in accordance with the provisions of the Companies Act with
respect to the appointment of liquidators in voluntary winding up (Sec. 525).
18.8 CONSEQUENCES OF WINDING UP
The consequences of winding up may be discussed under the following heads:
1. Consequences as to Shareholders: A shareholder is liable to pay the full

amount upto the face value of the shares held by him. Not only the present, but
also the past members are liable on the winding up of the company. The liability
of a present member is the amount remaining unpaid on the shares held by him,
while a past member can be called upon to pay if the present contributory is
unable to pay.
2. Consequences as to Creditors: A company, whether solvent or insolvent,

can be wound up under the Act. In case of a solvent company, all claims of its
creditors when proved are fully met. But in case of an insolvent company, the
rules under the law of insolvency apply.
A secured creditor need not prove his claim against the company. He may
realise his security and satisfy the debts. For deficiency, if any, he may put his
claim before the liquidator. The secured creditor has also the option to relinquish
his security and to prove the amount as if he were an unsecured creditor.
Where an insolvent company is being wound up, the insolvency rules will
apply and only such claims shall be provable against the company as are provable
against an insolvent person. (Section 529).
When the list of claims is settled the liquidator has to commence making
payments. The assets available to the liquidator are applied in the following order:
a. Secured creditors.
b. Cost of the liquidation.
c. Preferential payments.
d. Debenture holders secured by a floating charge.
e. Unsecured creditors.
f. Balance returned to the contributories.
Preferential payment: Section 530 enumerates certain debts which are to be paid
in priority to all other debts. Such payments are called preferential payments. It
may however by noted that such payments are made after paying the secured
creditors, and costs, charges and expenses of the winding up.
These preferential payments are: (a) All revenues, taxes, cesses and rates
due from the company to the Central or State Government or to a local authority.
The amount should have become due and payable within 12 months before the
winding up. (b) All wages or salary of any employee in respect of services
rendered to the company and due for a period not exceeding 4 months within 12
months, before the winding up and any compensation payable to any workman
under any of the provision of Chapter V-A of the Industrial Disputes Act, 1947.
The amount must not exceed Rs.20,000 in the case of anyone claimant. (c) All
accrued holiday remuneration becoming payable to any employee or in the case of
his death to any other person, in his right, on the termination of his employment
before or by the effect of the winding up. (d) All amounts I due in respect of
contributions payable by the company as employer but this is not payable if the
company is being wound up voluntarily for the purpose of reconstruction and
amalgamation (e) All amounts due in respect of any compensation or liability for
compensation in respect of death or disablement of any employee under the
Workmen’s Compensation Act, 1923 but this is not payable if the company is
being wound up voluntarily for reconstruction or amalgamation. (f) All sums due
to any employee from a provident fund, a pension fund, a gratuity fund or any
other fund for the welfare of the employee maintained by the company. (g) The
expenses of any investigation held in pursuance of Sections 235 and 237, in so far
as they are payable by the company.
3. Consequences as to servants and officers: A winding up order by a Court

operates as a notice of discharge to the employees and officers of the company
except when the business of the company is continued. The same principle will
apply as regards discharge of employees in a voluntary winding up. Where there is
a contract of service for a particular period, an order for winding up will amount to
wrongful discharge and damages will be allowed as for breach of contract of
service.
4. Consequences of proceedings against the company: When a winding up

order is made, or an official liquidator has been appointed as provisional liquidator
no suit or legal proceedings can be commenced and no pending suit or legal
proceeding continued against the company except with the leave of the Court and
on such terms as it may impose. In the case of a voluntary winding up, the Court
may restrain proceedings against the company if it thinks fit.
It may be noted that law does not prohibit proceedings being taken by the
company against others including directors, or officers or other servants of the
company.
5. Consequences as to cost: Where the assets of the company are insufficient
to satisfy the liabilities, the Court may make an order for payment out of the assets
of the costs, charges and expenses incurred in the winding up. The Court may
determine the order of priority in which such payments are to be made (Section
476).
6. Consequences as to documents: When a company is being wound up

whether by or under the supervision of the Court or voluntarily, the fact must be
made known to all those having any dealing with the company; every document in
the nature of an invoice, order for goods or business letter issued in the name of
the company, after the commencement of winding up must contain a statement
that the company is being wound up (Sec. 547).
Where a company is being wound up, all documents of the company and of
the liquidators shall, as between the contributories of the company, be primafacie
evidence of the truth of all matters recorded therein (Sec. 548).
Where an order for winding up of the company by or subject to the

supervision of the Court is made, any creditor or contributory of the company may
inspect the books and the papers of the company, subject to the provisions made in
the rules by the Central Government in this behalf.
18.9 SUMMARY
Winding up of a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An administrator, called
a ‘liquidator’ is appointed and he takes control of the company, collects its assets,
pays its debts and finally distributes any surplus among the members in
accordance with their rights. A company may be wound up in any of the following
three ways: (a) Compulsory winding-up under an order of the Court. (b) Voluntary
winding-up (c) Voluntary winding-up under supervision of the Court. A petition
for winding-up may be made by a company by passing a special resolution to that
effect, by creditors, by a contributory or contributories, by any of these jointly, by
the Registrar, by any person authorised by the central Government. The only
person who is competent to act as the liquidator in a winding up is the official
liquidator. For the purpose of winding up, there shall be attached to each high
Court an official liquidator appointed by the Central Government, who may be
either a whole time or part time officer depending upon the volume of work. In
district courts the official receiver will be the official liquidator. The Central
Government may appoint one or more deputy or assistant official liquidators to
assist the official liquidator in the discharge of his functions.
18.10 KEYWORDS
Winding-up: Winding-up is a proceeding for the realisation of the assets, the
payment of creditors, and the distribution of the surplus, if any, among the
shareholders so that the company may be finally dissolved.
Contributory: A contributory means any person liable to contribute to the assets
of a company in the event of its being wound up.
Liquidator: A liquidator is a person who is appointed by the court to conduct the

proceedings in winding up the company and perform such duties in reference
thereto as the court may impose.
Voluntary winding-up: Winding-up the creditors or members without any
intervention of the court is called voluntary winding-up.
Defunct Company: A defunct company means a company which has never
commenced business or which is not carrying on any business.
1. What are the different modes of winding up? Discuss in detail.
2. What is compulsory winding up? What are the grounds for compulsory winding
up?
3. Who can petition for the winding up of a company? On what grounds can the
Registrar of Companies petition for winding up of the company?
4. Who is a liquidator? What are the duties of a liquidator?
5. Explain the provisions of the Companies Act in respect of the creditors’ voluntary
winding up. How does it differ from a members’ voluntary winding up?
6. What is winding up subject to the supervision of the Court? What are the
advantages of a supervision order? What are the consequences of such a winding
up?
18.12 SUGGESTED READINGS
P.P.S. Gogna, Mercantile Law, S.Chand & Company, New Delhi.

N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.
S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi
POWERS OF DIRECTORS
General Powers of the Board (Sec. 291). The Board of directors of a company is entitled to exercise all
such powers and to do all such acts and things as the company is authorised to exercise and do. This means
the powers of the Board of directors are co-extensive with those of the Company. This proposition is,
however, subject to two conditions:
First, the Board shall not do any act which is to be done by the company in general meeting.
Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or in
the Memorandum or the Articles of the company or in any regulations made by the company in general
meeting. But no regulation made by the company in general meeting shall invalidate any prior act of the
Board which would have been valid if that regulation had not been made.
Powers to be exercised at Board meetings (Sec. 292). The Board of directors of a Company shall
exercise the following powers on behalf of the company by means of resolutions passed at the meetings of
the Board, viz., the power to

make calls on shareholders in respect of money unpaid on their shares ;
issue debentures ;
(c) borrow moneys otherwise than on debentures (say, through public deposits) ;
(d) invest the funds of the company; and
(e) make loans.
The Board may, by a resolution passed at a meeting, delegate the last three powers to a committee of
directors or the manager or any other principal officer of the company, but the Board shall specify the
limits of such delegation.
Powers to be exercised with the approval of company in general meeting (Sec 293)
The following powers can be exercised with consent of the company general meeting
(a) To sell, lease or otherwise dispose of the whole, or substantially the whole of undertaking of the
company.
(b) To remit or give time for repayment of any debt due to the company by a director except in the case of
renewal or continuance of an advance made by a banking company to its director in the ordinary course of
business.
(c) To invest (excluding trust securities) the amount of compensation received by the Company in respect
of the compulsory acquisition of any undertaking or property of the company.
(d)To borrow moneys where the moneys to be borrowed are more than the paid-up capital of the company
and its free reserves
The expression temporary loans' does not include loans raised for the purpose of financing expenditure of
a capital nature.
(e) To contribute to charitable and other funds not directly relating to the business of the company or the
welfare of its employees, amounts exceeding in any financial year Rs. 50,000 or 5 per cent of the average
net profits of the three preceding financial years, whichever is greater. The Board may contribute up to Rs.
50,000 even if the company is incurring a loss.
The term winding up' of a company may be defined as the proceedings by which a company is dissolved
(ie., put to an end). According to Prof. Gower.
“Winding up of a company is the process whereby us life is ended and its property is administered for the
benefit of its creditors and members. And an administrator called a liquidator is appointed and he takes
control of the company, collects its assets and pays its debts and finally distributes any surplus among the
members in accordance with their rights”.
MODES OF WINDING UP
1. Winding up by the Court, i.e. , Compulsory winding up (Secs. 433 to 483)
2. Voluntary winding up (Secs. 484 to 521). This may be
(a) Members' voluntary winding up
(b) Creditors' voluntary winding up.
Winding up of a company under the order of a Court is also known as compulsory winding
GROUNDS FOR COMPULSORY WINDING UP (Sec. 433)
A company may be wound up by the Court in the following cases:
1. Special resolution of the company [Sec. 433 (a)). Winding up order under this head is not common
because normally the members of a company prefer to wind up the company voluntarily for in such a case
they shall have a voice in its winding up. Moreover, a voluntary winding up is far cheaper and speedier
than a winding up by the Court.
2. Default in delivering the statutory report to the Registrar
(Sec. 433 (b)).
A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the
petition for winding up can be filed only after the expiry of 14 days from the day on which the statutory
meeting ought to have been held [Sec. 439 (7)1. The Court may, instead of making a winding up order,
direct that the statutory report be delivered or that a statutory meeting be held. The Court may order the
costs to be paid by any persons who are responsible for the default |Sec. 443 (3)
3. Failure to commence, or suspension of, business (Sec. 433 (c)).
The Court exercises power in this case only if the company has no intention of carrying on its business or
if it is not possible for it to carry on its business.
If a company has not begun to carry on business within a year from its incorporation or suspends its
business for a whole year, the Court will not wind it up if-
(a) there are reasonable prospects of the company starting business within a reasonable time and
(b) there are good reasons for the delay, i.e. the suspension of business is satisfactorily accounted for and
appears to be due to temporary causes.
4. Reduction in membership [Sec. 433 (d)). If, at any time, the number of members of a company is
reduced in the case of a public company below 7 or in the case of a private company below 2, the company
may be ordered to be wound up by the Court. If the Company carries on business for more than 6 months
while the number is so reduced every member who is cognizant of the fact that it is carrying on business
with members fewer than the statutory minimum, wil be severally liable for the payment of the whole of
the debts of the company contracted after those 6 months (Sec. 45).
5. Inability to pay its debts (Sec. 433 (e).
A company may be wound up by the Court if it is unable to pay its debts. The test is whether the company
has reached a stage where it is commercially insolvent that is to say, that its existing and probable assets
would be insufficient to meet the existing liabilities.
'Commercially insolvent' means that the company is unable to pay debts or liabilities as they arise in the
ordinary course of business.
6. Just and equitable (Sec. 433 ). The words just and equitable' are of the widest significance and do not
limit the jurisdiction of the Court to any particular case
The principle of just and equitable clause baffles a precise definition. It must rest with the judicial
discretion of the Court depending upon the facts and circumstances of each case
Meaning of voluntary winding up:
In the preceding pages we have discussed the company may also be wound up without any intervention of
the Tribunal. And it is called compulsory winding up of the company ie., the winding up by an order of the
Tribunal. The voluntary winding up. In other words, the voluntary winding up means the winding up by
the members or creditors themselves without any intervention of the Tribunal. Thus, the members and the
creditors are left free to settle their affairs without going to the Tribunal.
However, they may apply to the Tribunal for any directions when necessary.
2. Circumstances of voluntary winding up: Section 304 of the Companies Act, 2013 contains the cases in
which the company may be voluntarily wound up, which under:

(i) By ordinary resolution: Sometimes, the article of the company fixes the period for the duration of the
company, or provides that the company shall be dissolved on the occurrence of some event. In such cases,
when that time expires or that event occurs, the company may pass an ordinary resolution in its general
meeting for its voluntary winding up.
(ii) By special resolution: The company may, at any time, pass a special resolution that the company be
wound up voluntarily. It may be noted that when the company passes a special resolution for its voluntary
winding up, no reason is required to be given for the winding up. Under this clause, the company may be
wound up even if it is prosperous.
3. Notice by advertisement: Within 14 days of the passing of a resolution (ordinary special) for voluntary
winding up, the company must give a notice of the resolution by advertisement in the Official Gazette, and
also in some newspaper circulating nu district where the registered office of the company is situated
[Section 307|

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ESSENTIALS OF A VALID CONTRACT

(b) Describe the essentials of a valid contract

1.2 OBJECT OF THE ACT

1.3 DEFINITION OF CONTRACT

A contract is a legally binding agreement, that is, an agreement which will be

1. Agreement : An agreement gives birth to a contract. An agreement is defined as,

Facts of the case are :

1.4 CLASSIFICATION OF CONTRACT

(a) From the point of view of enforceability

An agreement made by a minor; agreements made without consideration (except

Consequences of Recession of Voidable Contract : Section 64 lays down the rights

(c) From the point of view of extent of execution or classification according to

Unilateral Contract : A contract is said to be unilateral where one party to a contract

It is to be remembered that a contract comes into being on the date on which it is

Quasi-Contracts : Contractual obligations are generally created voluntarily; but there

1. Agreement : As already mentioned, to constitute a contract there must be an

3. Competency of parties : The parties to the agreement must be competent to

1. A patient in a lunatic asylum who is at intervals of sound mind may make a

5. Lawful consideration : All contracts must by supported by consideration.

2. A promises to obtain for B an employment in the public service, and B promises to

3. A promises B to drop a prosecution which he has instituted against B for robbery,

8. Certainty and possibility of performance : The terms of the contract must be

9. Legal formalities : An oral contract is a perfectly valid contract, except in those

Contract: A contract is an agreement creating and defining obligations between the

Agreement: An agreement is the sum total of offer and acceptance.

1.8 SELF ASSESSMENT QUESTIONS

It will be useful to distinguish between illegal and void agreement. An unlawful or

6. Agreements in restraint of marriage (Sec. 26).

2.2 AGREEMENT MADE BY INCOMPETENT PARTIES

An infant or a minor is a person who is not a major. According to the Indian

Effects of minor’s agreement

1. An agreement with or by a minor is void

3. Minor can be a promisee or beneficiary

If a contract is beneficial to a minor it can be enforced by him. There is no

Contracts of apprenticeship : Contracts of apprenticeship are also for the benefit of

4. No estoppel against a minor

Fraudulent misrepresentation as to age by an infant will operate against him in

If by misrepresenting himself to be of full age, a minor has obtained money from a

6. Liability for torts

A minor being incompetent to contract cannot be a partner in a partnership firm,

9. Minor can be an agent

10. Minor cannot bind parent or guardian

In the absence of authority, express or implied, an infant is not capable of binding

11. Joint contract by minor and adult

12. Liability for necessaries

Example : Inman an infant undergraduate in Cambridge bought eleven fancy waistcoats

Certain services rendered to a minor have been held to be 'necessaries'. These

On the other hand, following have been held not to be necessaries :

2.2.2 Persons of unsound mind

Unsoundness of mind does not mean weakness of mind or loss of memory. It

2.3 AGREEMENT MADE UNDER A MUTUAL MISTAKE OF FACT

(d) It must be about a fact essential to the agreement.

Example : X buys a painting believing it to be worth Rs.2,000 while actually it is worth

The cases falling under bilateral mistakes are as follows :

1. Mistake as to the subject matter

Mistake as to subject matter falls into six heads, namely

Examples : There is an agreement between A and B for the purchase of a certain

2. Mistake as to the possibility of performing the contract

(b) Legal impossibility. A agreement is void if it provides that something should be

2.4 AGREEMENT, THE CONSIDERATION OR OBJECT OF WHICH IS