Test Series: March, 2018

MOCK TEST PAPER

FOUNDATION COURSE
PAPER 2A: BUSINESS LAWS
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions should be made and disclosed
by way of note forming part of the answer.
Working Notes should form part of the answer.
Total Marks: 60
QUESTIONS

1. (a) Ishaan, aged 16 years, was studying in an engineering college. On 1 st March, 2016 he took a loan
of ` 2 lakhs from Vishal for the payment of his college fee and agreed to pay by 30 th May, 2017.
Ishaan possesses assets worth ` 15 lakhs. On due date Ishaan fails to pay back the loan to Vishal.
Vishal now wants to recover the loan from Ishaan out of his assets. Decide whether Vishal would
succeed referring to the provisions of the Indian Contract Act, 1872. (4 Marks)
(b) Krishna, an assessee, was a wealthy man earning huge income by way of dividend and interest.
He formed three Private Companies and agreed with each to hold a bloc of investment as an agent
for them. The dividend and interest income received by the companies was handed back to Krishna
as a pretended loan. This way, Krishna divided his income into three parts in a bid to reduce his
tax liability.
Decide, for what purpose the three companies were established? Whether the legal personality of
all the three companies may be disregarded. (4 Marks)
(c) Explain the difference between Sale and Agreement to sell under the Sale of Goods Act, 1930.
(4 Marks)
2. (a) State the grounds upon which a contract may be discharged under the provisions of the Indian
Contract Act, 1872. (7 Marks)
(b) State the meaning of Limited Liability Partnership (LLP). What are the relevant steps to incorporate
LLP? (5 Marks)
3. (a) State the modes by which a partner may transfer his interest in the firm in favour of another person
under the Indian Partnership Act, 1932. What are the rights of such a transferee? (6 Marks)
(b) ‘X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ ` 5.00 per water bottle, to
be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for the purchase of 1,000 water
bottles @ ` 4.50 per water bottle, and at the same time told ‘Z’ that he did so for the purpose of
performing his contract entered into with ‘Y’. ‘Z’ failed to perform his contract in due course and
market price of each water bottle on that day was ` 5.25 per water bottle. Consequently, ‘X’ could
not procure any water bottle and ‘Y’ rescinded the contract. Calculate the amount of damages
which ‘X’ could claim from ‘Z’ in the circumstances? What would be your answer if ‘Z’ had not
informed about the ‘Y’s contract? Explain with reference to the provisions o f the Indian Contract
Act, 1872. (6 Marks)

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4. (a) What are the implied conditions in a contract of ‘Sale by sample’ under the Sale of Goods Act,
1930? State also the implied warranties operatives under the said Act. (6 Marks)
(b) A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D, a supplier
of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of use in
the ordinary course of the firm’s business. A does not give the stationery to the firm, instead brings
it to his own use. The supplier D, who is unaware of the private use of stationery by A, claims the
price from the firm. The firm refuses to pay for the price, on the ground that the stationery was
never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932 decide:
(i) Whether the Firm’s contention shall be tenable?
(ii) What would be your answer if a part of the stationery so purchased by A was delivered to
the firm by him, and the rest of the stationery was used by him for private use, about which
neither the firm nor the supplier D was aware? (6 Marks)
5. (a) Mr. Samuel agreed to purchase 100 bales of cotton from Mr. Varun, out of his large stock and sent
his men to take delivery of the goods. They could pack only 60 bales. Later on, there was an
accidental fire and the entire stock was destroyed including 60 bales that were already packed.
Referring to the provisions of the Sale of Goods Act, 1930 explain as to who will bear the loss and
to what extent? (6 Marks)
(b) Explain the meaning of Guarantee Company? State the similarities and dissimilarities between a
‘Guarantee Company’ and ‘Company Limited by Shares’. (6 Marks)
6. (a) “No consideration, no contract”. Discuss.
Or
“Mere silence does not amount to fraud”. Discuss. (5 Marks)
(b) What is Partnership Deed and state the information contained therein? (4 Marks)
(c) Examine with reasons whether the following statement is correct or incorrect:
(i) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
(ii) Affixing of Common seal on company’s documents is compulsory. (3 Marks)

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 Test Series: March, 2018
MOCK TEST PAPER
FOUNDATION COURSE
PAPER 2A: BUSINESS LAWS
ANSWERS

1. (a) According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract
who is of the age of majority according to the law to which he is subject, and who is of sound mind
and is not disqualified from contracting by any law to which he is subject.
A person who has completed the age of 18 years is a major and otherwise he will be treated as
minor. Thus, Ishaan who is a minor is incompetent to contract and any agreement with him is void
[Mohori Bibi Vs Dharmo Das Ghose 1903].
Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for the
supply of the things which are the necessaries of life to him. It says that though minor is not
personally liable to pay the price of necessaries supplied to him or money lent for the purpose, the
supplier or lender will be entitled to claim the money/price of goods or services which are
necessaries suited to his condition of life provided that the minor has a property. The liability of
minor is only to the extent of the minor’s property. Thus, according to the above provision, Vishal
will be entitled to recover the amount of loan given to Ishaan for payment of the college fees from
the property of the minor.
(b) The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person
distinct and separate from its members, and therefore, has an independent separate legal
existence from its members who have constituted the company. But under certain circumstances
the separate entity of the company may be ignored by the courts. When that happens, the courts
ignore the corporate entity of the company and look behind the corporate façade and hold the
persons in control of the management of its affairs liable for the acts of the company. Where a
company is incorporated and formed by certain persons only for the purpose of evading taxes, the
courts have discretion to disregard the corporate entity and tax the income in the hands of the
appropriate assessee.
(1) The problem asked in the question is based upon the aforesaid facts. The three companies
were formed by the assessee purely and simply as a means of avoiding tax and the companies
were nothing more than the façade of the assessee himself. Therefore, the whole idea of
Mr. Krishna was simply to split his income into three parts with a view to evade tax. No other
business was done by the company.
(2) The legal personality of the three private companies may be disregarded because the
companies were formed only to avoid tax liability. It carried no other business, but was created
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over
to the assessee as pretended loans.
(c) The differences between the sale and agreement to sell is as follows:
Basis of Sale Agreement to sell
difference
Transfer of The property in the goods Property in the goods passes to the
property passes to the buyer immediately. buyer on future date or on fulfilment of
some condition.

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 Nature of It is an executed contract. i.e. It is an executory contract. i.e.
contract contract for which consideration contract for which consideration is to
has been paid. be paid at a future date.
Remedies for The seller can sue the buyer for The aggrieved party can sue for
breach the price of the goods because of damages only and not for the price,
the passing of the property unless the price was payable at a
therein to the buyer. stated date.
Liability of A subsequent loss or Such loss or destruction is the liability
parties destruction of the goods is the of the seller.
liability of the buyer.
Burden of risk Risk of loss is that of buyer since Risk of loss is that of seller.
risk follows ownership.
Nature of rights Creates Jus in rem Creates Jus in personam
Right of resale The seller cannot resell the The seller may sell the goods since
goods. ownership is with the seller.

2. (a) Discharge of a Contract:

A Contract may be discharged either by an act of parties or by an operation of law which may be
enumerated as follows:
(1) Discharge by performance which may be actual performance or attempted performance.
Actual performance is said to have taken place, when each of the parties has done what he
had agreed to do under the agreement. When the promisor offers to perform his obligation,
but the promisee refuses to accept the performance, it amounts to attempted performance or
tender.
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that if
the parties to a contract agree to substitute a new contract for it or to refund or remit or alter
it, the original contract need not to be performed. Novation, Rescission, Alteration and
Remission are also the same ground of this nature.
(3) Discharge by impossibility of performance: The impossibility may exist from its initiation.
Alternatively, it may be supervening impossibility which may take place owing to (a)
unforeseen change in law (b) The destruction of subject matter (c) The non-existence or non-
occurrence of particular state of things (d) the declaration of war (Section 56).
(4) Discharge by lapse of time: A contract should be performed within a specific period as
prescribed in the Law of Limitation Act., 1963. If it is not performed the party is deprived of
remedy at law.
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc.
(6) Discharge by breach of contract: Breach of contract may be actual breach of contract or
anticipatory breach of contract. If one party defaults in performing his part of the contract on
the due date, he is said to have committed breach thereof. When on the other hand, a person
repudiates a contract before the stipulated time for its performance has arrived, he is deemed
to have committed anticipatory breach. If one of the parties to a contract breaks the promise
the party injured thereby, has not only a right of action for damages but he is also discharged
from performing his part of the contract (Section 64).
(7) A promise may dispense with or remit, wholly or in part, the performance of the promise made
to him, or may extend the time for such performance or may accept instead of it any
satisfaction he thinks fit. In other words, a contract may be discharged by remission.
(Section 63).

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 (8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of the promise, the promisor is excused by such neglect or refusal (Section 67).
(b) Meaning: A LLP is a new form of legal business entity with limited liability. It is an alternative
corporate business vehicle that not only gives the benefits of limited liability at low compliance cost
but allows its partners the flexibility of organising their internal structure as a traditional partnership.
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its
assets, the liability of the partners will be limited.
Steps to incorporate LLP:
(a) Name reservation
• The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of
LLP.
• Applicant has to file e- Form 1, for ascertaining availability and reservation of the name of a
LLP business.
(b) Incorporate LLP
• After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership (LLP).
• e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated
partners’ details and consent of the partners/ designated partners to act as partners/
designated partners.
(c) LLP Agreement
• Execution of LLP Agreement is mandatory as per Section 23 of the Act.
• LLP Agreement is required to be filed with the registrar in e- Form 3 within 30 days of
incorporation of LLP.
3. (a) Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable
like any other property, but as the partnership relationship is based on mutual confidence, the assignee
of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as
the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring partner and he is bound
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.
(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will
be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner was
entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a firm without the consent
of all the partners. A partner cannot by transferring his own interest, make anybody else a
partner in his place, unless the other partners agree to accept that person as a partner. At the
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 same time, a partner is not debarred from transferring his interest. A partner’s interest in the
partnership can be regarded as an existing interest and tangible property which can be
assigned.
(b) BREACH OF CONTRACT- DAMAGES: Section 73 of the Indian Contract Act, 1872 lays down that
when a contract has been broken, the party who suffers by such breach is entitled to receive from
the party who has broken the contract compensation for any loss or damage caused to him thereby
which naturally arose in the usual course of things from such breach or which the parties knew
when they made the contract to be likely to result from the breach of it.
The leading case on this point is “Hadley v. Baxendale” in which it was decided by the Court that
the special circumstances under which the contract was actually made were communicated by the
plaintiff to the defendant, and thus known to both the parties to the contract, the damages resulting
from the breach of such contract which they would reasonably contemplate, would be the amount
of injury which would ordinarily follow from the breach of contract under these special
circumstances so known and communicated.
The problem asked in this question is based on the provisions of Section 73 of the Indian Contract
Act, 1872. In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from
him for the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the special
circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ ` 500/- at the rate of 0.50 paise i.e. 1000
water bottles x 0.50 paise (difference between the procuring price of water bottles and contracted
selling price to ‘Y’) being the amount of profit ‘X’ would have made by the performance of his
contract with ‘Y’.
If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been the
difference between the contract price and the market price on the day of default. In other words,
the amount of damages would be ` 750/- (i.e. 1000 water bottles x 0.75 paise).
4. (a) The following are implied conditions in a contract of sale by sample in accordance with Section 17
of the Sale of Goods Act, 1930;
(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
(c) that the goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on a reasonable examination of the sample.
Implied Warrants:
1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that the buyer
shall have and enjoy quiet possession of the goods. That is to say, if the buyer havin g got
possession of the goods, is later on disturbed in his possession, he is entitled to sue the seller
for the breach of the warranty.
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied warranty that the
goods shall be free from any charge or encumbrance in favour of any third party not declared
or known to the buyer before or at the time the contract is entered into.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied warranty as to
quality or fitness for a particular purpose may be annexed by the usage of trade.
4. Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that
the goods are inherently dangerous or they are likely to be dangerous to the buyer and that
the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise
he will be liable in damages.
(b) The problem in the question is based on the ‘Implied Authority’ of a partner provided in Section 19
of the Indian Partnership Act, 1932. The section provides that subject to the provisions of Section
22 of the Act, the act of a partner, which is done to carry on, in the usual way, business of the kind
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 carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this
section is called his ‘Implied Authority’ [Sub-Section (1) of section 19]. Furthermore, every partner
is in contemplation of law the general and accredited agent of the partnership and may
consequently bind all the other partners by his acts in all matters which are within the scope and
object of the partnership. Hence, if the partnership is of a general commercial nature, he may buy
goods on account of the partnership.
Considering the above provisions and explanation, the questions as asked in the problem may be
answered as under:
(i) The firm’s contention is not tenable, for the reason that the partner, in the usual course of the
business on behalf of the firm has an implied authority to bind the firm. The firm is, therefore,
liable for the price of the goods.
(ii) In the second case also, the answer would be the same as above, i.e. the implied authority
of the partner binds the firm.
In both the cases, however, the firm ABC can take action against A, the partner but it has to
pay the price of stationery to the supplier D.
5. (a) Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the goods remain
at the seller’s risk until the property therein is transferred to the buyer, but when the property therein
is transferred to the buyer, the goods are at buyer’s risk whether delivery has been made or not.
Further Section 18 read with Section 23 of the Act provides that in a contract for the sale of
unascertained goods, no property in the goods is transferred to the buyer, unless and until the
goods are ascertained and where there is contract for the sale of unascertained or future goods by
description, and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with
the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent
may be express or implied. Applying the aforesaid law to the facts of the case in hand, it is clear
that Mr. Samuel has the right to select the good out of the bulk and he has sent his men for same
purpose.
Hence the problem can be answered based on the following two assumptions and the answer will
vary accordingly.
(a) Where the bales have been selected with the consent of the buyer’s representatives:
In this case, the property in the 60 bales has been transferred to the buyer and goods have
been appropriated to the contract. Thus, loss arising due to fire in case of 60 bales would be
borne by Mr. Samuel. As regards 40 bales, the loss would be borne by Mr. Varun, since the
goods have not been identified and appropriated.
(b) Where the bales have not been selected with the consent of buyer’s representatives.
In this case the property in the goods has not been transferred at all and hence the loss of
100 bales would be borne by Mr. Varun completely.
(b) Meaning of Guarantee Company: Section 2(21) of the Companies Act, 2013 defines a Company
Limited by Guarantee as a company having the liability of its members limited by the memorandum
to such amount as the members may respectively undertake to contribute to the assets of the
company in the event of its being wound up. Thus, the liability of the members of a guarantee
company is limited to a stipulated amount in terms of individual guarantees given by members and
mentioned in the memorandum. The members cannot be called upon to contribute more than such
stipulated amount for which each member has given a guarantee in the memorandum of
association.
Similarities and dis-similarities between the Guarantee Company and the Company limited
by shares: The common features between a “guarantee company” and the “company limited
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 share” are legal entity and limited liability. In case of a company limited by shares, the liability of
its members is limited to the amount remaining unpaid on the shares held by them. Both these type
of companies have to state this fact in their memorandum that the members’ liability is limited.
However, the dissimilarities between a ‘guarantee company’ and ‘company limited by shares’ is
that in the former case the members will be called upon to discharge their liability only after
commencement of the winding up of the company and only to the extent of amounts guaranteed
by them respectively; whereas in the case of a company limited by shares, the members may be
called upon to discharge their liability at any time, either during the life of the company or during
the course of its winding up.
6. (a) No consideration, no contract: Every agreement, to be enforceable by law must be supported
by valid consideration. An agreement made without any consideration is void. No consideration,
no contract is a general rule. However, Section 25 of the Indian Contract Act, 1872 provides some
exceptions to this rule, where an agreement without consideration will be valid and binding. These
exceptions are as follows:
(i) Agreement made on account of natural love and affection: Section 25 (1) provides that if
an agreement is (i) in writing (ii) registered under the law and (iii) made on account of natural
love and affection (iv) between the parties standing in a near relation to each other, it will be
enforceable at law even if there is no consideration. Thus, where A, for natural love and
affection, promises to give his son, B, ` 1,00,000 in writing and registers it. This is a valid
contract.
(ii) Compensation for past voluntary services: Section 25(2) provides that a promise to
compensate, wholly or in part, a person who has already voluntarily done something for the
promisor, is enforceable. Thus, when A finds B's purse and gives it to him and B promises to
give A ` 5,000, this is a valid contract.
(ii) Promise to pay time-barred debts (Section 25 (3)): Where there is an agreement, made in
writing and signed by the debtor or by his agent, to pay wholly or in part a time barred debt,
the agreement is valid and binding even though there is no consideration. If A owes B
` 1,00,000 but the debt is lapsed due to time-bar and A further makes a written promise to
pay ` 50,000 on account of this debt, it constitutes a valid contract.
(iv) Contract of agency (Section 185): No consideration is necessary to create an agency.
(v) Completed gift (Explanation 1 to Section 25): A completed gift needs no consideration.
Thus, if a person transfers some property by a duly written and registered deed as a gift he
cannot claim back the property subsequently on the ground of lack of consideration.
Or
Mere silence not amounting to fraud: Mere silence as to facts likely to affect the willingness of
a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his
silence is equivalent to speech, silence amounts to fraud.
It is a rule of law that mere silence does not amount to fraud. A contracting party is not duty bound
to disclose the whole truth to the other party or to give him the whole information in his possession
affecting the subject matter of the contract.
The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly states
the position that mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud.
Exceptions to this rule:
(a) Where the circumstances of the case are such that, regard being had to them, it is the duty
of the person keeping silence to speak. Duty to speak arises when one contracting party

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 reposes trust and confidence in the other or where one party has to depend upon the good
sense of the other (e.g. Insurance Contract).
(b) Where the silence is, in itself, equivalent to speech.
(b) Partnership Deed
Partnership is the result of an agreement. No particular formalities are required for an agreement
of partnership. It may be in writing or formed verbally. But it is desirable to have the pa rtnership
agreement in writing to avoid future disputes. The document in writing containing the various terms
and conditions as to the relationship of the partners to each other is called the ‘partnership deed’.
It should be drafted with care and be stamped according to the provisions of the Stamp Act, 1899.
Where the partnership comprises immovable property, the instrument of partnership must be in
writing, stamped and registered under the Registration Act.
Partnership deed may contain the following information:-
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
A partnership firm may add or delete any provision according to the needs of the firm.
(c) (i) Correct: Section 3 of the Companies Act, 2013 deals with the basic requirement with
respect to the constitution of the company. In the case of a public company, any 7 or more
persons can form a company for any lawful purpose by subscribing their names to
memorandum and complying with the requirements of this Act in respect of registration. In
exactly the same way, 2 or more persons can form a private company.
(ii) Incorrect: The common seal is a seal used by a corporation as the symbol of its incorporation.
The Companies (Amendment) Act, 2015 has made the common seal optional by omitting the
words “and a common seal” from Section 9 so as to provide an alternative mode of
authorization for companies who opt not to have a common seal. This amendment provides
that the documents which need to be authenticated by a common seal will be required to be
so done, only if the company opts to have a common seal. In case a company does not have
a common seal, the authorization shall be made by two directors or by a director and the
Company Secretary, wherever the company has appointed a Company Secretary.

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