business_law_-_1.pdf - irs65studymaterial

ContentsEditorial Note ........................................................................................ v

Acknowledgements ................................................................................. ix

PARPARPARPARPART I - LAT I - LAT I - LAT I - LAT I - LAW OF CONTRAW OF CONTRAW OF CONTRAW OF CONTRAW OF CONTRACTSCTSCTSCTSCTS

1. CHAPTER IPhenomenon of Agreement ............................................................. 3

2. CHAPTER IILawful Consideration and Contractual Capacity .............................. 23

3. CHAPTER IIIFree Consent ............................................................................... 39

4. CHAPTER IVPlegality of Object and Consideration ............................................ 50

5. CHAPTER VDischarge of Contract and Remedies for Breach ofContract ...................................................................................... 59

6. CHAPTER VIQuasi Contracts, Standard Form of Contracts andCyber Contracts ............................................................................... 85

PPPPPARARARARART II - LAT II - LAT II - LAT II - LAT II - LAW OF TRANSFER OF PROPERW OF TRANSFER OF PROPERW OF TRANSFER OF PROPERW OF TRANSFER OF PROPERW OF TRANSFER OF PROPERTYTYTYTYTY

1. CHAPTER IIntroduction ................................................................................. 96

.2. CHAPTER II

Transfer of Property by Act of Parties ............................................. 118

3. CHAPTER IIISale of Immovable Property ......................................................... 142

PPPPPage No.age No.age No.age No.age No.

4. CHAPTER IVExchange ................................................................................... 152

5. CHAPTER VMortgage of Immovable Property ................................................. 153

6. CHAPTER VILeases of Immovable Property ......................................................... 184

7. CHAPTER VIIGift ........................................................................................... 190

8. CHAPTER VIIITransfer of Actionable Claims ...................................................... 205

PPPPPARARARARART III - HINDU LAT III - HINDU LAT III - HINDU LAT III - HINDU LAT III - HINDU LAWWWWW

1. CHAPTER IHindu Joint Family ...................................................................... 213

2. CHAPTER IICoparcenary .............................................................................. 228

3. CHAPTER IIIDebt .......................................................................................... 237

4. CHAPTER IVHindu Undivided Family - [HUF] .................................................. 250

5. CHAPTER VAlienation .................................................................................. 262

6. CHAPTER VIPartition......................................................................................... 276

7. CHAPTER VIINotional Partition ....................................................................... 306

8. CHAPTER VIIISuccession ................................................................................. 318

9. CHAPTER VIIIGift ........................................................................................... 354

10. CHAPTER VIIIWill ........................................................................................... 368

PPPPPARARARARART IV - COMPT IV - COMPT IV - COMPT IV - COMPT IV - COMPANY LAANY LAANY LAANY LAANY LAWWWWW

1. CHAPTER INature and Kinds of companies................................................... 383

2. CHAPTER IIFormation of a company ............................................................. 412

3. CHAPTER IIIMemorandum of Association ....................................................... 427

4. CHAPTER IVArticles of Association ................................................................. 444

5. CHAPTER VProspectus ................................................................................. 456

6. CHAPTER VIShare Capital ................................................................................ 483

7. CHAPTER VIIAllotment, Calls & Forfeiture of Shares ............................................. 510

8. CHAPTER VIIITransfer of Shares and the Depository Systems .................................. 530

9. CHAPTER IXMembership .................................................................................. 556

10. CHAPTER XBorrowings and Debentures ............................................................ 567

11. CHAPTER XIManagement of a Company ........................................................... 579

12. CHAPTER XIIMeetings and Proceedings .............................................................. 597

13. CHAPTER XIIIAccounts and Audit, Statutory Registers & Dividends .......................... 623

14. CHAPTER XIVInspection, Investigation and Winding Up ........................................ 648

PPPPPARARARARART V - LAT V - LAT V - LAT V - LAT V - LAW OF PARW OF PARW OF PARW OF PARW OF PARTNERSHIPTNERSHIPTNERSHIPTNERSHIPTNERSHIP

1. CHAPTER IPreliminary ................................................................................. 669

2. CHAPTER IINature of Partnership .................................................................. 670

3. CHAPTER IIIRelation of Partners to One Another ............................................. 678

4. CHAPTER IVRelation of Partners to Third Parties .............................................. 685

5. CHAPTER VIncoming and Outgoing Partner .................................................. 696

6. CHAPTER VIDissolution of a Firm ...................................................................... 699

7. CHAPTER VIIRegistration of Firms ....................................................................... 704

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Dr. K. V. S. SarmaProfessor of Law

NALSAR University of Law, Hyderabad

PART - I

LAW OF CONTRACTS

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INDIAN CONTRACT ACT, 1872

CHAPTER-I

PHENOMENON OF AGREEMENT

Need for Law

No society can exist without law. Law is required for the preservationof peace and orderliness in the society. Society creates and imposes lawto make organized living possible. Without law, life and business wouldsoon become a matter of the survival not only of the fittest but also of themost ruthless. In a free and competitive economy like ours, the rights ofthe individual are considered of primary importance; consequently, oneimportant function of law is to regulate the transaction of business andthe acquisition of property. In fact, law and society are inseparablecompanions and have profound effects upon each other.

Law of Contract constitutes the most important branch of MercantileLaw. Without such a law, it would have been difficult, if not impossible,to carry on trade or commerce. It is not only the business communitywhich is concerned with the law of contract, but it affects every person. Itwill not be out of place to say that contract is the foundation of thecivilized world. Every one of us enters into a number of contracts fromsunrise to sunset. When a person drinks a cup of tea, or rides a bus, orgoes to the cinema to see a movie or purchases the goods, or gives aloan to a friend, etc., he enters into a contract though he may be unawareof it. Such contracts create legal rights and obligations. The law of contractis mainly concerned with the enforcement of these rights and obligations.It attempts at the realization of reasonable expectations induced by themaking of promises.

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As a social being, man comes into contact with people in different capacities. Hecomes into contact, for example, with a landlord as a tenant, with Government as a taxpayer, with customers as a seller and with suppliers as a buyer.

A person to earn his livelihood he has to do service or he has to do business. Torender service to another he has to enter into the contract. To purchase and sell goodshe has to enter into contract. Once he earns income in any way he is liable to payIncome Tax. That’s why ‘Law of Contracts’ is important for ‘Income Tax Officers’.

One broad classification of law is that into Public and Private. Public Law deals withthe constitutional and administrative powers of the State, and also certain relationsbetween the State and the individual. Private Law, on the other hand, deals with therights of the subjects inter se. The Law of Contracts forms part of the Private Law. Again,Private Law may be divided into Substantive Law and Adjective Law. The former dealswith rights which may be acquired by one citizen against another, e.g., Law of Property,contracts, torts etc., while the latter deals with the Law of Procedure i.e., the process oflitigation, the processual modalities which secure the redressal of grievances, and themachinery by which rights can be enforced in a court of law, e.g., civil procedure code.

The object of law is the creation and protection of legal rights and has been definedby Holland as a “capacity residing in one person, of controlling with the assent andassistance of the State, the actions of others”. The expression ‘right’ is correlative to theexpression ‘duty’. There can be no rights without duties. Rights may be classified intorights in rem and rights in personam. A right in rem is a right available against thewhole world. If a man owns a property, the right which he has in the property casts aduty on the whole world not to disturb his ownership in any way; similarly, a right tofreedom, reputation, etc., A right in personam, on the other hand, is a right for whichthe corresponding duty is, not one owed by the whole world, but by an individual or adefinite number or body of individuals. If A has a right to a sum of money, it may be thatone person owes the money or a number of persons jointly owe the money, but thewhole world cannot owe a duty to repay the debt. The Law of Contracts deals withrights in personam, and forms part of the Law of Obligations. No branch of the Lawhas a more pervasive influence upon the affairs of individuals than the Law of Contracts.

The Law of contracts in India is governed by Indian Contract Act, 1872. The Actcontains 266 Sections. It is divided into 11 Chapters. They are:

1. Preliminary- Sections 1, 2.

2. Of the Communication, acceptance and revocation of proposals -Sections3 to 9.


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3. Of contracts, voidable contracts and void agreements- Sections 10 to 30.

4. Of contingent contracts- Sections 31 to 36.

5. Of the performance of contracts- Sections 37 to 67.

6. Of certain relations resembling those created by contract- Sections 68 to 72.

7. Of Consequences of breach of contract- Sections 73 to 75.

8. Of Sale of goods- Sections 76 to 173 (repealed).

9. Of Indemnity and guarantee – Sections 124 to 147.

10. Of Bailment- Sections 148 to 181.

11. Of Agency- Sections 182 to 238.

12. Of Partnership- Sections 239 to 266 (repealed).

Sections 1 to 75 deal with General Principles of Contract. These General Principlesof Contract are applicable to all types of contracts. Indemnity, Guarantee, Bailment,Agency, Sale of Goods and Partnership are special contracts. To these special contractsSections 1 to 75 are applicable.

These General Principles of Contract are divided into three Parts. They are:

• Formation of Contract

• Discharge of Contract

• Remedies for breach of Contract

Preamble. WHEREAS it is expedient to define and amend certain parts of the law relatingto contracts; it is hereby enacted as follows -

Preliminary

1. Short title.- This Act may be called the Indian Contract Act,1872. Extent,Commencement.- It extends to the whole of India except the State of Jammu andKashmir; and it shall come into force on the first day of September, 1872. Nothingherein contained shall affect the provisions of any Statute, Act or Regulation nothereby expressly repealed, nor any usage or custom of trade, nor any incident ofany contract, not inconsistent with the provisions of this Act.

Indian Contract Act, 1872 is not a complete code dealing with the law of contracts.When the provisions of the Act do not apply, the principles of English Law, in turn


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would apply-Bhagwandass Goverdhan Dass Kedia v. Girdhari Lal PurushottamDass & Co., AIR 1966 SC 543.

2. Interpretation-clause. In this Act the following words and expressions are used inthe following senses, unless a contrary intention appears from the context:-

(a) When one person signifies to another his willingness to do or to abstain fromdoing anything, with a view to obtaining the assent of that other to such actor abstinence, he is said to make a proposal;

(b) When the person to whom the proposal is made signifies his assent thereto,the proposal is said to be accepted. A proposal, when accepted, becomes apromise:

(c) The person making the proposal is called the “promisor and the personaccepting the proposal is called the promisee“:

(d) When, at the desire of the promisor, the promisee or any other person hasdone or abstained from doing, or does or abstains from doing, or promisesto do or to abstain from doing, something, such act or abstinence or promiseis called a consideration for the promise :

(e) Every promise and every set of promises, forming the consideration for eachother, is an agreement:

(f) Promises, which form the consideration or part, of the. consideration foreach other are called reciprocal promises:

(g) An agreement not enforceable by law is said to be void:

(h) An agreement enforceable by law is a contract:

(i) An agreement which is enforceable by law at the option of one or more ofthe parties- thereto, but not at the option of the other or others, is a voidablecontract:

(j) A contract which ceases to be enforceable by law becomes void when itceases to be enforceable.

The term contract is derived from Latin word ‘Contractum’ which means drawntogether. It is an agreement to do or not to do something.

According to Section 2(h) of the Act, ‘Contract’ means ‘an agreement enforceableby law’. Every contract consists of two connected elements namely obligation andAgreement.


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There are two types of obligations. They are social obligations and legal obligations.There are two types of agreements. They are social agreements and legal agreements.Those agreements which give rise to social obligations are called social agreements.Those agreements which give rise to legal obligations are called legal agreements.Contract means an agreement enforceable by law. In the eye of law only legal agreementsare enforceable. Social agreements are not enforceable. For determining whether aparticular agreement is a social agreement or legal agreement the courts are applyingobjective test but not subjective test. To create a contract there must be a commonintention of the parties to enter into legal obligations. The intention of the parties isnaturally to be known from the terms of the agreement and the surroundingcircumstances. It is for the court in each case to find out whether the parties must haveintended to enter into legal obligations.

In Darlymple vs. Darymple (1811) 161 FR 665, Lord Stowell observed “that contractmust not be the sports of an idle hour, mere matters of pleasantry and badinage, neverintended by the parties to have any serious effect whatsoever.” It is not every looseconversation that is to be turned into a contract, although the parties may seem toagree. The case of Balfour vs. Balfour (1919) 2KB 57 is the authority on this principle.

This defendant and his wife were enjoying leave in England. When the defendantwas due to return to Ceylon, where he has employed, and his wife was advised, byreason of her health, to remain in England. The defendant agreed to send her anamount of 30 pounds a month for the probable expenses of maintenance. He did sendthe amount for some time, but differences afterwards arose which resulted in theirseparation and allowance fell into arrears. The wife’s action to recover the arrears wasdismissed.

Lord Aktin explained the principle thus. “There are agreements between partieswhich do not result in contract within the meaning of that term in our law. The ordinaryexample is where two parties agree to take a walk together, or where there is an offerand acceptance of hospitality. Nobody would suggest in ordinary circumstances thatthese agreements result in what we know as contracts, and one of the most usual formsof agreement which does not constitute a contract appears to be the arrangements donot result in contract at all, even though there may be what would constitute considerationfor the agreement. They are not contracts because parties did not intend that they shallbe attended by legal consequences”.


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So it is for the court to infer and identify in each case whether the parties must haveintended to enter into legal obligations. In all cases we can say the agreements betweenthe relatives are not enforceable. For example in Merritt v merit (1970) 1 WLR 1211 anagreement to transfer to the wife the beneficial ownership of the matrimonial homemade at the time of separation was held to be binding. If on the partition of joint familyproperty among the male members a provision is made for the marriage expenses of afemale member, then such a female member can sue to enforce the agreement. (SundaraRaja vs. Laxmi Ammal 1914 38 Mad.788)

Section 10 of the Indian Contract Act, 1872 lays down the rules as to whatagreements are contracts. According to it “all agreements are contracts if they aremade by the free consent of the parties, competent to contract, for a lawful considerationand with a lawful object and are not hereby expressly declared to be void”. Thus anagreement becomes a contract and is enforceable by law when it fulfils all theseconditions.

Essentials of Valid Contract

1) Consensus Ad Idem:Consensus Ad Idem:Consensus Ad Idem:Consensus Ad Idem:Consensus Ad Idem: It means identity of minds. Two persons are said to consentwhen they agree upon the same thing in the same sense. When they agree uponthe same thing in the same sense they are said to be ad idem. Absence of consensusmakes a contract null and void.

2) LLLLLegal Regal Regal Regal Regal Relations:elations:elations:elations:elations: The agreement must create legal relations. The terms of an offermust be intended to create or at least capable of creating legal relations. If theterms of an offer and acceptance do not create legal relationship then thatagreement is not enforceable in the court of law. For example, an agreement todine at a friend’s house is not an agreement intended to create legal relationsand is not a contract. But an agreement to buy and sell goods are agreement tocreate some legal relationship and are therefore contracts, provided the otheressential elements are satisfied.

3) LLLLLawful Consideration:awful Consideration:awful Consideration:awful Consideration:awful Consideration: One of the essential elements of a valid contract is lawfulconsideration. Consideration means something in return. Every valid agreementmust be supported by lawful consideration. For example if A makes a promise togive something in consideration of that, B also must make a promise to givesomething. Then only that promise is enforceable.


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4) Competent PCompetent PCompetent PCompetent PCompetent Parties:arties:arties:arties:arties: At least two parties are essential for a valid contract. Furtherthe parties must be legally competent to contract. If they are not competent, theagreement is not enforceable.

5) FFFFFree Consent:ree Consent:ree Consent:ree Consent:ree Consent: In order to enforce an agreement there must be consent and thatconsent must be free. If the consent is not free consent, the agreement is notvalid.

6) LLLLLawful Object:awful Object:awful Object:awful Object:awful Object: The object of the agreement must be lawful. If it is not lawful orimmoral or illegal or opposed to public policy then in all these cases agreementsare not valid.

7) The Agreements must not have been expressly declared VThe Agreements must not have been expressly declared VThe Agreements must not have been expressly declared VThe Agreements must not have been expressly declared VThe Agreements must not have been expressly declared Void by any Court or byoid by any Court or byoid by any Court or byoid by any Court or byoid by any Court or byany Lany Lany Lany Lany Law in Faw in Faw in Faw in Faw in Force in the Countryorce in the Countryorce in the Countryorce in the Countryorce in the Country.

According to Salmond ‘According to Salmond ‘According to Salmond ‘According to Salmond ‘According to Salmond ‘All contracts are agreements but all agreements are notAll contracts are agreements but all agreements are notAll contracts are agreements but all agreements are notAll contracts are agreements but all agreements are notAll contracts are agreements but all agreements are notcontracts’.contracts’.contracts’.contracts’.contracts’.

Classification of Contracts

Section 2

1) VVVVValid Contractsalid Contractsalid Contractsalid Contractsalid Contracts: According to Section 2(h) contract means an agreementenforceable by law. An agreement becomes valid contract when all the essentialelements of a contract as laid down in section 10 are fulfilled.

2) VVVVVoid Agreementoid Agreementoid Agreementoid Agreementoid Agreement: A void agreement is one which is not enforceable by law.

3) VVVVVoid Contractoid Contractoid Contractoid Contractoid Contract::::: A contract which ceases to be enforceable by law. An agreementmay be valid at the time of entering into agreement but due to some interveningevent the contract ceases to be enforceable. Ex. A Promises to sell his house to Bfor Rs.1 Lakh. Subsequently the house is destroyed by fire. The agreement ceasesto be enforceable.

4) VVVVVoidable Contractoidable Contractoidable Contractoidable Contractoidable Contract::::: A voidable contract is one which is valid until avoided andvoid when avoided. It is enforceable at the option of one party but not at theoption of the other party. Such a contract is valid until avoided. Once it is avoided,it is void. But if the aggrieved party chooses to enforce it, the contract is valid. Ex.A threatens to shoot B if he does not sell his house for a nominal amount. Thecontract has been brought about force and is avoidable at the option of B. But ifB desires, he can enforce it against A.


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5) Unlawful AgreementUnlawful AgreementUnlawful AgreementUnlawful AgreementUnlawful Agreement::::: An agreement which is prohibited by law.

Ex. An agreement with a minor; agreement without consideration

6) Illegal AgreementIllegal AgreementIllegal AgreementIllegal AgreementIllegal Agreement::::: An agreement which is not only prohibited by law but alsopunished by law.

7) Unenforceable AgreementUnenforceable AgreementUnenforceable AgreementUnenforceable AgreementUnenforceable Agreement::::: An agreement which is void from the beginning.

8) Unenforceable ContractUnenforceable ContractUnenforceable ContractUnenforceable ContractUnenforceable Contract: : : : : A contract which is not enforceable by a court of lawbecause of some technical defect.

Ex. Time-barred debt, non-observance of certain formalities such aswriting, attestation and registration.

9) Express ContractExpress ContractExpress ContractExpress ContractExpress Contract: Contracts entered into between the parties by Words,spoken or written are termed as express contracts.

10) Implied ContractImplied ContractImplied ContractImplied ContractImplied Contract::::: Contracts constituted by Law or obligations imposed by laware known as quasi contracts or implied contracts.

11) Unilateral or Executed ContractUnilateral or Executed ContractUnilateral or Executed ContractUnilateral or Executed ContractUnilateral or Executed Contract: It is a contract in which one party to the contractperformed his obligations under the contract and the other party to the contract isyet to perform his obligations under the contract. Ex. A gave Rs.1000 to B uponwhich B agreed to supply one bag of rice to A after 10 days.

12) Bilateral Contract or Executory ContractBilateral Contract or Executory ContractBilateral Contract or Executory ContractBilateral Contract or Executory ContractBilateral Contract or Executory Contract::::: It is a contract in which both the partiesare yet to perform their obligations under the contract.

Ex. A made a promise to B to sell one bag of rice after one month andB made a promise to purchase one bag of rice after month.

13) Simple Contract or PSimple Contract or PSimple Contract or PSimple Contract or PSimple Contract or Parole Contractsarole Contractsarole Contractsarole Contractsarole Contracts: : : : : They are made by words spoken or written.

14) FFFFFormal Contractsormal Contractsormal Contractsormal Contractsormal Contracts: : : : : Their validity depends upon their for alone. They are requiredto satisfy certain legal formalities in order to be valid and binding.

“““““The LThe LThe LThe LThe Law of contracts is not the whole law of agreements nor is it whole law ofaw of contracts is not the whole law of agreements nor is it whole law ofaw of contracts is not the whole law of agreements nor is it whole law ofaw of contracts is not the whole law of agreements nor is it whole law ofaw of contracts is not the whole law of agreements nor is it whole law ofobligations; it is the law of those agreements which create obligations and of thoseobligations; it is the law of those agreements which create obligations and of thoseobligations; it is the law of those agreements which create obligations and of thoseobligations; it is the law of those agreements which create obligations and of thoseobligations; it is the law of those agreements which create obligations and of thoseobligations which have their source in agreements.”obligations which have their source in agreements.”obligations which have their source in agreements.”obligations which have their source in agreements.”obligations which have their source in agreements.”

Obligations may have their source in agreements or not. Obligations may ariseeven without agreements. Obligations which do not have their source in agreementsare not contracts. Examples are obligations arising from tort, quasi contract or judgment


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of courts. Obligations imposed by law are also excluded. Obligations created by anagreement are only contractual in nature.

Agreements may be of four types they are:

1) Agreements which destroy rights and obligations like release or surrender.

2) Agreements which transfer rights from one party to another, for example completedsale.

3) Agreements which relate to social, moral or religious matters.

4) Agreements which create legal rights and obligations.

The law of contracts deals with only agreements which create legal rights andobligations. Hence Salmond rightly observed that “the law of contracts is not the wholelaw of Agreements, nor is it the whole law of obligations. It is the law of those Agreementswhich create obligations and those obligations which have their source in Agreements”.

Right is an interest recognized and protected by rule of right or by courts. Rights areof two kind’s viz. a) Right in rem and b) Right in Personam. A Right in rem is a rightavailable against the whole world and a right in personam is a right available againsta particular individual. Rights to property are rights in rem, while rights arising under acontract are rights in personam. The law of contract deals with rights in personam only.

Offer

A Contract is an agreement and comes into existence when one party makes anoffer which the other accepts. An offer is a proposal by one party another to enter intoa legally binding agreement with him. A person is said to make a proposal “When oneperson signifies to another his willingness to do or abstain from doing anything with aview to obtaining the assent of that other to such act or abstinence he is said to makea proposal”. The person making the proposal is called the proposer or offeror and theperson to whom the proposal is made is called the proposee or offeree. [Sec.2(a)]

An offer may be either express or implied. It may be either an act or abstinence i.e.an agreement neither to do nor not to do.

3. Communication, acceptance and revocation of proposals.-The communicationof proposals the acceptance of proposals, and the revocation of proposals andacceptances, respectively, are deemed to be made by any act or omission of the partyproposing, accepting or revoking by which he intends to communicate such proposal,acceptance or revocation, or which., has the effect of communicating it.


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Essentials of a Valid Offer :

1. The terms of an offer must be intended to create or at least capable of creatinglegal relations:- A valid offer must be intended to create or at least capable ofcreating legal relations. If the offer is not intended to create legal relationships, itis not an offer in the eyes of law. To offer a friend or relative for a dinner, does notgive rise to a legal action.

For ex. In Balfour vs. Balfour (1919) 2 K.B. 571 D was a civil servant stationed inCeylon. D had promised his wife P, who was living in England for reasons ofhealth, to pay her a monthly allowance 30 pounds, so long as she could notcome over to Ceylon and join him. P sued for the breach of the agreement. Itwas held that P could not sue D for the allowance as no intention to create a legalobligation was contemplated. The promise was only of a domestic nature.

2. The terms of an offer must be certain or at least capable of being made certain.Offer must be certain, definite and not vague.

No contract can come into existence if the terms of the offer are vague andindefinite. To constitute a valid agreement, it is essential that the proposal mustbe so certain, that the rights and obligations of the parties arising out of thecontract can be exactly fixed. A vague offer does not convey what it exactly means.Thus, an offer by A to B to pay the latter a certain sum of money on the lattermarrying A’s daughter is no offer, because the amount to be paid is not certain.Similarly the words “P to receive a reasonable share of the profits” do not constitutea valid offer.

For example A promised to B to take on rent his house for three years at 85pounds per annum if the house was put into through repairs and the drawingrooms handsomely decorated according to present style. It was held that theterms were too uncertain and the promise could not be enforced. –Taylor v.Portington (1855) 44 E.R. 128.

3. Offer must be communicated to the offeree: - there can be no offer by a personto himself. It must always be communicated to another person.An offer becomeseffective only when it has been communicated to the offeree. If there is nocommunication of an offer, there is no acceptance resulting in the contract.According to section 4 of the Indian Contract Act, 1872 lays down that ‘thecommunication of proposal is complete only when it is communicated to theofferree’.


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The leading case on this issue is Lalman Shukla v. Gauri Dutt 11 All.L.J 489. Thefacts of the case are one D sent his servant P to trace his missing nephew. D in themeantime announced a reward for information relating to the boy. P in ignoranceof the announcement traced the boy and informed D. P later on came to know ofthe reward and he claimed it. His claim was dismissed on the ground that hecould not accept the offer unless he had knowledge of the same.

4. Offer must be made with a view to obtaining the assent of the other party:- Anoffer must be distinguished from mere expression of intention. An offer or proposalto do or to abstain from doing anything must be made with a view to obtainingthe assent of the other party to whom the offer is made. Mere enquiry is not anoffer.

a) It is open to a person to whom a conditional offer is addressed to accept ornot to accept condition. A conditional offer lapses when the condition is notaccepted. An offer may be either express or implied.

b) An offer may be conditional:- An offer may be made subject to a condition.In that case it can be accepted only subject to that condition.

Kinds of Offer

General Offer

An offer may be general or specific. When an offer is made to a specific individualit must be accepted by that particular individual only. When an offer is made to aspecial class of persons it can be accepted by any one from that class. When an offeris made to the general public it can be accepted by any one from that class. Theleading case on the subject of general offer is Carlil v. Carbolic Smoke Ball Co., (1893)1 Q.B. 256. In this case, the company offered by advertisement a reward of 100pounds to any one who contacts influenza after using their smoke balls for a fortnightaccording to printed directions. Mrs. Carllil, on the faith of the advertisement, bought asmoke ball and used it as directed but was attacked by influenza. She sued for theadvertised reward. The court decreed the suit on the ground that the advertisement wasnot a mere statement of an intention to give reward but a definite promise, and althoughthe offer was not made to any particular person but to the whole world. It was capableof being accepted by one or more persons who accepted by conduct or performanceof conditions. In such a case acceptance and performance go together and nocommunication is necessary.


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An Invitation to Offer is not an Offer:An Invitation to Offer is not an Offer:An Invitation to Offer is not an Offer:An Invitation to Offer is not an Offer:An Invitation to Offer is not an Offer: An offer is different from invitation to offer. Itonly invites the general public to make an offer. Invitation to offer is also called ‘Offerto negotiate” or ‘offer to receive offer’. An offer in the legal sense is one which ifaccepted becomes a promise. The person, who responds to an invitation to offer,makes the actual offer.

When a man advertises that he has got a stock of books to sell, or houses to let,there is no offer to be bound by any contract. “Such advertisements are offers to negotiate-offers to receive offers –offers to chaffer.” An offer is the final expression of willingnessby the offeror to be bound by his offer should be other party chooses to accept it. Thisshould seem to become more or less obvious from the definition of “proposal” insection 2(a), which emphasis that there should be the expression of willingness to do orabstain with a view to obtaining the assent of the other. The offeror must have expressedhis willingness to contract in terms of his offer with such finality that the only thing to bewaited for is the assent of the other party. Where a party, without expressing his finalwillingness, proposes certain terms on which he is willing to negotiate, he does notmake an offer, but only invite the other party to make an offer on those terms. This isperhaps the basic distinction between an “offer” and an “invitation” to receive offers.

An offer is altogether different from quotation or catalogue. Quotations orcatalogues quoting or indicating the price of the goods do not amount to offers bythemselves. Quotations and catalogues are treated as only an invitation to offers.Similarly a prospectus issued by a company inviting public at large to take shares in thecompany is not an offer but it is only an invitation to offer. When public in response tothat prospectus make an application, they are said to make an offer offering to takeshares in the company.

A declaration by a person that he intends to do something gives no right of actionto another. Such a declaration only means that an offer will be made or invited in futureand not that an offer is made now. An advertisement for a concert or an auction saledoes not amount to an offer to hold such concert or auction sale.

Display of goods by a shop keeper in his window, with prices marked on them, isnot an offer but merely an invitation to the public to make an offer to buy the goods atthe marked prices. Likewise, quotations, catalogues, advertisements in a newspaper forsale of an article, or circulars sent to potential customers do not constitute an offer.They are instead invitation to the public to make an offer. A person, in case the pricesof the goods are marked, can not force the seller to sell the goods at those prices. He


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can at the most, asks the seller to sell the goods to him, in which case he would bemaking an offer to the seller and it is up to the seller to accept it.

AAAAAuction Casesuction Casesuction Casesuction Casesuction Cases:- A mere announcement or an advertisement in the news papers tohold an auction is not an offer and therefore the auctioneer is entitled to withdraw thearticle from the sale after making an announcement to hold the auction. In Harris v.Nickerson, (1873) LR QB 286, the defendant advertised to auction certain furniture ata certain place at a certain date. The plaintiff relying on the advertisement and intendingto buy the furniture traveled all the way to the place of auction spending money ontransport. When the plaintiff reached the place of auction he found the furniture withdrawnfrom the auction. The plaintiff filed a suit for breach of contract. The court held that theannouncement or advertisement to hold an auction is not an offer but only an invitationto an offer and therefore the breach of contract does not arise.

At an auction, the bidder who makes a bid can always retract or withdraw his bidbefore the fall of hammer. In Payne v .Cave (1789) (100) ER 502, the defendant at anauction made a bid of 40 pounds for a warm tub but withdrew his bid before the fall ofhammer. The auctioneer resold the tub at the second auction and the defendanthimself purchased it for a sum of 30 pounds. The plaintiff filed a suit for recovery of 10pounds being the difference between the defendant’s first bid and second bid. It wasargued on behalf of the plaintiff that every bid, being a conditional purchase- conditionalon there being no higher bid and that the hammer is not suspended for the benefit ofthe bidder enabling him to retract his bid and therefore the defendant cannot withdrawhis bid. The court held that every bid at an auction is an offer and until the acceptanceof such bid is signified either by fall of hammer or by some other customary method, thecontract will not be completed, or before such acceptance the bidder is entitled toretract his bid.

In Warlow v. Harrison the defendant advertised to sell a mare by auction ‘withoutreserve’. The plaintiff made a bid of 60 guineas for the mare and subsequently anotherperson made a bid of 61 guineas. The plaintiff although intended to bid still higher butrefrained to do so on knowing that the highest bidder was the owner himself. In a suitfiled by the plaintiff it was held that the auction being “without reserve” the defendanthas to knock down the mare in favour of the plaintiff.

The following are only invitations to offer but not actual offers:

a) Invitation made by the trader for the sale of goods.

b) A price list of the goods for sale.


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c) Quotations of lowest prices.

d) An advertisement to sell goods by auction.

e) An advertisement inviting tenders.

f) Display of goods with price tags attached.

g) Railway time-table.

h) Prospectus issued by the company.

i) Display of goods in a shop for sale.

An offer is something different from Tender

AAAAA TTTTTender is not an Offerender is not an Offerender is not an Offerender is not an Offerender is not an Offer..... After its acceptance, it sometimes becomes what isknown as a standing offer or continuing offer. A contract takes place only after theorder is placed. Reference may be made here of an illustration i.e. Bengal Co., Ltd.Home Wadia & Co. ILR (1899) 22. In this case the defendants entered into an agreementto supply a kind of coal from time to time required by the plaintiff for a period of twelvemonths. The plaintiff, in pursuance of the said agreement, placed certain orders andthe defendants supplied the coal. But before the lapse of 12 months they withdrew theiroffer and refused to supply the coal any more. The plaintiffs thereupon filed the suitagainst them for the breach of contract. The court dismissed the suit on the ground thatthere was no contract. The court pointed out that it was simply a ‘continuing offer’ andthe contract took place only when a certain quantity was ordered. The defendants weretherefore within their right to revoke it. They could not, however, revoke their offer inrespect of the orders actually placed.

Tender is also called Standing Offer or Open Offer or Continuing Offer:-

Where large quantities of goods are required by Railways or other bodies fromtime to time, it is usual to call tenders for the supply of such goods. An advertisementinviting tenders is not an offer but a mere invitation to offer. It is the person who sendsa tender for the supply of such goods is deemed to have made an offer. An offer for thecontinuous supply of a certain articles at a certain rate over a definite period is calleda standing offer. Such offers though accepted do not give rise to contract unless anactual order is placed with him. A by means of an offer agrees to supply coal to B at aparticular rate for a period of two years. B accepts the tender. In this case B is notbound to place an order for all the coal which he requires nor is A bound to keep that


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offer alive during the course of two years unless there is an extra consideration. A’s offeris merely a standing offer which he can revoke at any time before its acceptance by anorder from B.

Cross Offer

Identical offers made by persons in ignorance of each other are known as crossoffers. They do not make a contract.

Firm Offer and Option:-

When an offeror made a firm offer to the offeree to sell a particular property and inturn the offeree asks for some time to give his acceptance or not to give his acceptanceand he requested the offeror to give for some time. In the above situation the offeror isbound to wait in case the offeree gives some consideration to the offeror. By givingconsideration the offeree purchased the option for the firm offer made by the offeror.

S.5. Mode of Revocation of Proposal:

Revocation how made.- A proposal is revoked-

(1) by the communication of notice of revocation by the proposer to the other party

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if notime is so prescribed, by the lapse of a reasonable time, without communicationof the acceptance;

(3) by the failure of the acceptor to fulfill a condition precedent to acceptance ; or

(4) by the death or insanity of the proposer, if the fact of his death or insanity comesto the knowledge of the acceptor before acceptance.

Law Relating to Contract made through Post

It is contained in Sections 4 and 5 of the Act.

Communication when complete.- The, communication of a proposal is completewhen it comes to the knowledge of the person to whom it is made.

The communication of an acceptance is complete,—

as against the proposer, when it is put in a course of transmission to him, so as tobe out of the power of the acceptor; as against the acceptor, when it comes to the,knowledge of the proposer


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The communication of a revocation is complete,—

as against the person who makes it, when it is put into a course of transmission tothe person to whom it is made, so as “to be out of the power of the person who makes it;

as against the person. to whom it is made, when it comes to his knowledge.

Illustrations

(a) A proposes, by letter, to sell a house to B at a certain price.

The communication of the proposal is complete when B receives the letter.

(b) B accepts as proposal by a letter sent by post.

The communication of the acceptance is complete,

as against A when the letter is posted

as against B, when the letter is received by A.

(c) A revokes his proposal by telegram.

The revocation is complete as against A when the telegram is dispatched. Itis complete as against B when B receives it.

B revokes his acceptance by telegram. Bs revocation is complete as againstB when the telegram is dispatched, and as against A when it reaches him.

(5) Revocation of proposals and acceptances.-A proposal may be revoked at anytime before the communication of its acceptance is complete as against theproposer, but not afterwards.

An acceptance may be revoked at any time before the communication of theacceptance is complete as against the acceptor, but not afterwards.

Illustrations

A proposes, by a letter sent by post, to sell his house to B. B

accepts the proposal by a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts hisletter of acceptance, but not afterwards.

B may revoke his acceptance at any time before or at the moment when the lettercommunicating it reaches A, but not afterwards.


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The communication of proposal is complete when it comes to the knowledge of theperson to whom it is made. The communication of acceptance is complete as againstthe proposer once the letter of acceptance properly addressed and stamped is postedthe acceptance is made and binds the offeror, as he is deemed to have received theacceptance at the moment when it is dispatched so as to be out of the power of theacceptor and it becomes on which the acceptor can sue even if the letter never reachesthe offeror. But an acceptance binds the acceptor only when it reaches the offeror.

The offeror can revoke his offer before letter of acceptance is posted by the offeree.The offeree or proposee can revoke his acceptance before the letter of acceptance isreceived by the offeror. But in English Law the offeree cannot revoke the letter ofacceptance once it is posted.

When the communication of an acceptance is made by post, it is complete asagainst the proposer when the letter of acceptance is posted. Where a letter ofacceptance was duly posted but was delayed in post, and offeror sought to repudiatethe contract it was held that the posting of the letter was an acceptance of the offer.

D in an answer to an enquiry as to the price of pig iron wrote to H, “we shall beglad to supply you with 2000 tons of pig iron at 65s per ton”, and after furthercorrespondence wrote on the 28th January, that the price was 65s net.He received thison the 30th January, and on the same day wrote “We will take the 2000 tons pig ironyou offer us”. The post was then delayed and the acceptance was received six hourslater than the scheduled hour. D refused to sell the iron. It was held that the posting ofthe letter was an acceptance of the offer and that D could not refuse to supply the iron.– Dunlop v. Higgins (1948) I H.L.C. 381;

Contract over Telephone and Telex

The law with regard to contracts over telephone and telex is the same in Englandand India. In telex or telephonic communication the parties are to all intents and purposesin each others presence and where a contract is negotiated by such instantaneouscommunications, there is no binding contract until the notice of the offer is received bythe offeree and notice of acceptance is received by the offeror.

The rule that the moment the letter of acceptance is posted completes the contractcannot be applied in case of instantaneous contract like contracts made through telexand telephone. In these instantaneous contract it is necessary that an acceptance to becomplete as against the offeror, the acceptance must actually be received by the offeror


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and consequently to give rise to the contract. The question of acceptance through telexservice came for the consideration of the court in Entores v. Miles Far East Corporation,(1955) (2) Q.B. 327 in this a contract was made by telex between a Dutch CompanyAmsterdam (Holland) and an English Company in England by Telex. Each companyhas a teleprinter machine in its office. Each has a Telex number like a telephonenumber. When one company wishes to send a message to the other, it gets the telephoneexchange to connect up the machines. Then a clerk at one end types the message onhis machine just as if it were a typewriter. Instantaneously the machine at the other endtakes up the message and automatically types it on a paper at that end. In this case theacceptance was complete in Holland from which the message was sent out or in Londonwhere message was received. Denning L.J. held: “The contract is only complete whenthe acceptance is received by the offeror and the contract is made at the place wherethe acceptance is received”. The contract in this case was thus held to have been madein England and not in Holland.

On the same Analogy the Supreme Court of India in the case of BhagwandasKedia v. Girdharilal, AIR 1966 (1) SCR 666, has held in case of offers and acceptancescommunicated by telephone, the contract is complete only at the end of the offerorwhere he has received the acceptance to his offer.

In case of communication of offer and acceptance through post and telegraph, athird agency intervenes and without it the messages cannot be transmitted but in caseof telephone once a connection is established between the offeror and acceptor, generallythe question of third party intervention does not arise.

S.2 (b). Acceptance

Section 2(b) of the Act defines Acceptance as “when the person to whom the proposalis made signifies his assent there to the proposal is said to be accepted.” The Personwho is giving the acceptance is called proposee or offeree or acceptor. Acceptancemay be either expres or implied.

SSSSS.7..7..7..7..7. Acceptance must be absolute.-In order to convert a proposal into a promise, theacceptance must-

(1) be absolute and unqualified;

(2) be expressed in some usual and reasonable manner, unless the proposalprescribes the manner in which it is to be accepted. If the proposal prescribesa manner in which it is to be accepted, and the acceptance is not made in


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such manner, the proposer may, within a reasonable time after the acceptanceis communicated to him, insist that his proposal shall be accepted in theprescribed manner, and not otherwise; but if he fails to do so, he accepts theacceptance.

SSSSS.8..8..8..8..8. Acceptance by performing conditions, or receiving consideration.-Performanceof the conditions of a proposal, or the acceptance of any consideration for areciprocal promise which may be offered with a proposal, is an acceptance of theproposal.

SSSSS.9..9..9..9..9. Promises express and implied.-In so far as the proposal or acceptance of anypromise is made in words, the promise is said to be express. In so far as suchproposal or acceptance is made otherwise than in words, the promise is said tobe implied.

An acceptance should always be accepted in the manner required by the offeror.Section 7(2) of the Act imposes the duty on the offeror or intimate to the offeree that theacceptance is not according to the prescribed manner, and if he keeps quiet, he isdeemed to have accepted the acceptance as made.

1) Acceptance must be By the Offeree and None else

When an offer is made to a particular individual it must be accepted by that particularindividual only. If it is accepted by another individual it is not a valid acceptance. InBoutlon vs. Jones (1877) 157 E.R. 232. A sold his business to B. The sale is not knownto A’s customers. So Jones, who is a usual customer of A, places an order for goodswith A by name B. The new owner receives the order and supplies the goods withoutdisclosing the fact of sale of business to him. It was held that there was no contractsince the order was to A and the acceptance by B. So it is not a valid acceptance.

2) Acceptance must be Absolute and Unconditional

The offeree must give the acceptance absolutely and unconditionally. If theacceptance is conditional acceptance it is not valid acceptance. It amounts to counteroffer. Again the counter offer must be accepted by the offeror. In Neale vs. Merrett(1930) WN 189, an offer of land by M for 280 pounds was accepted by N, whoenclosed 80 pounds with his letter of acceptance and promised to pay the balance ofmonthly instalments of 50 Pounds. M is not bound by the acceptance of N because it isnot unqualified acceptance.


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3) Acceptance must be Communicated to the Offeror

An offer must be accepted and it must be communicated to the offeror. Offer mustbe communicated to the offeree and the acceptance must be communicated to theofferror. Then only the contract is concluded. If the acceptance is not communicated tothe offeror or he comes to know the acceptance through unauthorized means then theofferor cannot enforce the promise. The leading case on this point is Power v Lee(1908) 99 LT 284. The Board of Managers of a school resolved to appoint P as HeadMaster. But the resolution or decision was not communicated to P. One of the Managers,in his personal capacity informed P of the same. But there was no official communicationof the resolution by the Board. The Board later cancelled the resolution. It was held thatin the absence of any authorized communication, there was no completed contract.

4) Acceptance must be in the Mode Prescribed:

If the offeror prescribed the mode of acceptance, the acceptance must be made inaccordance with the mode prescribed.

5) Acceptance must be given within a Reasonable Time:

If the offeror has prescribed a time within which offer must be accepted, it must beaccepted within the prescribed time. If no time is prescribed for acceptance, the offermust be accepted within reasonable time.

6) Provisional Acceptance:

Where acceptance is given ‘subject to approval’ it is not binding unless and until itis approved by the final authority.

7) In the Following Cases Acceptance need not be Communicated to theOfferor:

a) Unilateral contract or executed contract.

b) General offer.

c) Acceptance by conduct.

d) In case, the offeror waives this condition.


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CHAPTER-II

LAWFUL CONSIDERATION ANDCONTRACTUAL CAPACITY

In the words of Lord Denning ‘Consideration is a cardinal necessityof the formation of contract’. Under Indian Law also consideration isnecessary for the formation of contract. Section 25 affirms this propositionby laying down a general rule that “An agreement without considerationis void”. It is legal evidence of the intention of the parties to effect theirlegal relations. When a party to an agreement promises to do “something”he must get “something” in return for it. If he does not get something inreturn the contract is not valid. It is the price for which the promise of theother is bought.

Section 2(d) of the Act defines consideration as “When at the desireof the promisor, the promisee or any other person has done or abstainedfrom doing, or does or abstains from doing or promises to do or abstainfrom doing something, to such act or abstinence or promise is calledconsideration for the promise”. In simple terms, consideration meansthe element of exchange in a bargain, and in order to satisfy therequirements of law consideration must be an act or abstinence of somevalue in the eye of law.

Legal Rules Relating to Consideration

Consideration must move at the Desire of the Promisor

The act performed at the desire of the third party cannot be consideredas consideration for the promise. But the promisor need not necessarilyderive any benefit from the contract. The benefit may be intended for athird party. In Durga Prasad vs. Baldeo ILR (1880) 3 ALL. 221, the plaintiffbuilt a market at the desire of the Collector of the district. The defendant

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who subsequently occupied one of the shops in the market agreed to pay a certaincommission on all goods sold through him in the market. An action brought by theplaintiff on the breach of the said promise was dismissed on the ground that the plaintiffbuilt the market at the desire of the Collector and not that of the defendant and hencethe promise was without consideration and could not be enforced.

Consideration may move from the Promisee or any other Person

Consideration may move from the promisee or any other person. In ChainnayaRau vs. Ramayya (1881) 4 Mad. 137 A, an old lady by deed of gift, made over certainproperty to her daughter with a direction that the daughter should pay an annuity to A’sbrother as had been done by A. The daughter also entered into an agreement with heruncle to pay an annuity. The daughter however did not pay the annuity as promised. A’sbrother sued A’s daughter. It was held that the consideration moved from A, the donorof the estate, though not from her brother. That was sufficient consideration for thedaughters promise to A’s brother, because the consideration in India need not movefrom the promise, but can move from any other person.

Under English law, however, a stranger to the consideration cannot sue to enforcethe contract. The person to whom the promise is made (Promisee) must furnish theconsideration.

Consideration may be Past, Present or Future

Where the promisor had received the consideration before the date of the promise,the consideration is termed as ‘Past consideration’.

Example: A renders some service to B in the month of August. In the month ofOctober B promises to pay A Rs.1,000/-. The consideration of A is past consideration.Where the promisee receives consideration along with his promise, the consideration istermed as present consideration.

Example: A agrees to sell his car for Rs. one lakh. B pays money to A at the time oftaking the car.

Where one party to the contract receives consideration in future the considerationis called future consideration.

Consideration need not be adequate to the Promise

LAWFUL CONSIDERATION AND CONTRACTUAL CAPACITY

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It is up to the parties to fix their own prices. For example, where A voluntarily agreedto sell his car which costs Rupees one lakh for Rupees one thousand, it became a validcontract despite the inadequacy of the consideration. The parties are presumed to becapable of appreciating their own interest and reaching of their own equilibrium, andthe law, as a general rule, leaves people to make their own bargains, and does notconcern itself with the adequacy of consideration.

Consideration must be Real

Consideration must be real. It must not be illegal, impossible or illusory.

Example: A promise to sell nine planets to B for nine lakhs. Here A’s considerationis impossible and so not valid.

Consideration must be Lawful

Consideration for an agreement must be lawful. It must not be illegal immoral oropposed to public policy. If the consideration is not legal, the agreement cannot beenforced.

Example: A agrees with C to destroy B’s house, for which C agrees to payRs. 50,000/- to A. Here the consideration is not legal and so not valid.

Stranger to Contract

As a general rule parties to the contract are only entitled to enforce the contract.Third party to the contract cannot enforce the contract. A stranger to contract cannotsue in England as well as in India though it may be made for his benefit. The leadingcase on this point is Dunlop Pneumatic Tyre Co. Vs. Selfridge & Co (1915) A.C. 847.The facts of the case are A sold a large quantity of tyres to B at a certain price onentering into a covenant not to sell the tyres below the price mentioned in price listsupplied by A. B sold some tyres to C, a retail dealer, under a contract stipulating thesame covenant as between A and B. C sold the tyres at less than the list price. A suedC for the breach. It was held that A could not sue C as A was not a party to the contractbetween B and C.

In Jamuna Dass vs. Rama Autar (1911) 30 I a 7, A borrowed Rs. 40,000/- byexecuting a mortgage of her Zamindari in favour of B. Subsequently she sold the propertyto C for Rs. 44,000/- and allowed C, the purchaser, to retain Rs. 40,000/- of the pricein order to redeem the mortgage, if he though fit. B sued C for the recovery of the


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mortgaged money, but could not succeed because he was not a party to the agreementbetween A and C.

Exceptions to the Rule that a Stranger to Contract Cannot Sue

1. Beneficiary of a TBeneficiary of a TBeneficiary of a TBeneficiary of a TBeneficiary of a Trustrustrustrustrust: The person who created the trust is called the Settlor. Theperson who is appointed by the Settlor to manage the trust is called Trustee. Theperson for whose benefit the trust is created is called Beneficiary. In case ofmismanagement of trust property by Trustee, the Beneficiary can enforce theprovisions of the trust even though he is stranger to the contract creating the trust.

2. Charge Created on a Specific Immovable PCharge Created on a Specific Immovable PCharge Created on a Specific Immovable PCharge Created on a Specific Immovable PCharge Created on a Specific Immovable Property:roperty:roperty:roperty:roperty: The leading case on thispoint is Khwaja Mohammad vs. Hussaini Begum (1910) 37 IA 52. In this case, thesuit was brought by a Mohammedan lady against her father-in-law to recoverarrears of certain allowance called Karcha-I-Pandan under the terms of anagreement executed by the father-in-law in consideration of her marriage with hisson at the time when she and her husband were minors. The amount was to bepaid out of the rent of his specific immovable property. The defendant disclaimedthe liability on the ground that the plaintiff was not a party to the agreement. Itwas held that “in India and among communities circumstanced as theMohammedans, among whom marriages are contracted for minors by parentsand guardians, it might occasion serious injustice if the common law doctrinewas applied to agreements or arrangements entered into in connection with suchcontracts.”

3. Marriage Settlements or FMarriage Settlements or FMarriage Settlements or FMarriage Settlements or FMarriage Settlements or Family Arrangementsamily Arrangementsamily Arrangementsamily Arrangementsamily Arrangements: In case a provision is made forthe marriage or maintenance of a female member of the family on the partition ofa Hindu undivided family, the female member can enforce the promise thoughshe may be a stranger to the contract. In Shuppu Ammal v. Subramanyam (1910)ILR 33 Mad. 238, two brothers in a partition deed agreed to pay Rs. 300/- inequal shares to their mother of her maintenance. The brothers subsequently failedto pay the amount. The court held that the mother could enforce the promiseeven though she was a stranger to the contract.

In Sundara Raju vs. Lakshmi Ammal (1914) 38 Mad. 788 the partition deed betweenbrothers in a joint family contained a provision for payment of marriage expensesto their sister. It was held that their sister could enforce that provision though shewas not a party to the partition agreement.

4. AgencyAgencyAgencyAgencyAgency ::::: Contract entered into by an agent can be enforced by the principal.


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5. Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct : Where the promisor has by his conduct created privityof contract with the stranger. Thus, if A admits to C, that he has received moneyfrom B for payment to C, he constitutes himself as the agent C, who can successfullyrecover the amount from A.

6. Assignment :Assignment :Assignment :Assignment :Assignment : The assignee of a debt or an actionable claim may, if the assignmentis legal assignment, sue the original debtor.

English Law: Past Consideration is No Consideration

According to English Common Law past consideration is not valid. Considerationmust always be present or future. In Roscorla vs.Thomas (1842) 114 ER 496, a horsewas sold by the defendant to the plaintiff. After the sale had been made the defendantexpressly warranted that the horse was sound and fee from vice. The horse happenedto be a vicious one. The question was whether the defendant could be liable for thebreach of this warranty by him? It was held that the plaintiff has no cause of action onthe ground that:

1) There is no implied warranty in the original agreement that the horse is soundand free from vice, and

2) The express warranty is not binding because the same was given after the salewas made and is not supported by any fresh consideration.

Exceptions to the above Rule

1) Past Consideration at the Promisor’s Request

Past consideration though given prior to the promise, but at the request of thepromisor, is deemed to be a good consideration for the promise. The authority for thispoint is the case of Lampleigh vs. Braithwait (1615) Hob. 105 Thomas Braithwait, thedefendant, who was held guilty of having committed a murder, requested Lampleigh,the plaintiff, to make efforts to obtain pardon for him from the King. The plaintiff madeefforts to secure the pardon, going from one place to another with his own expense. Inconsideration of these efforts the defendant promised to pay 100 pounds to the plaintiff.The question was, whether the plaintiff had legal right to recover this amount. It washeld that the plaintiff has a right to enforce the promise and recover the said amountbecause for this promise the consideration, in the form of efforts by the plaintiff toobtain the pardon had been there at the earlier request of the defendant.


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2) Written promise to pay a time-barred debt

3) Negotiable Instrument:

Where a negotiable instrument is given in consideration of some past act, the pastact will form as a good consideration for the issue of the negotiable instrument and theparty who gets the instrument can validly enforce it.

Section 25: An Agreement without Consideration is Void –

25.25.25.25.25. Agreement without consideration, void, uncles it is in writing and registered, oris a promise to compensate for something done, or is a promise to pay a debt barredby limitation law.- An agreement made without consideration is void, unless-

(1) it is expressed in writing and registered under the law for the time being in forcefor the registration of documents, and is made on account of natural love andaffection between parties standing in a, near relation to each other ; or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarilydone something for the promisor, or something which the promisor was legallycompellable to do ; or unless

(3) it is a promise, made in writing and signed by the person to be charged therewith,or by his agent generally or specially authorized in that behalf, to pay wholly or inpart a debt of which the creditor might have enforced payment but for the law forthe limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1.- Nothing in this section shall affect the validity, as between thedonor and donee, of any gift actually made.

Explanation 2.- An agreement to which the consent of the promisor is freely givenis not void merely because the consideration is inadequate; but the inadequacy of theconsideration may be taken into account by the Court in determining the questionwhether the consent of the promisor was freely given.


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Exceptions:-

1) Natural Love and Affection:

An agreement though made without consideration will be valid if it is in writingand registered and is made on account of natural love and affection betweenparties standing in a near relation to each other.

In Venkatwswamy v. Rangaswamy (1903) 13 MLJ 428, A by registered agreementon account of love and affection for his brother B undertook to discharge a debtdue by B to C. The promise was put in writing and registered. This is a validcontract without consideration.

2) Promise to Compensate for Past Voluntary Services

To apply this rule, the following essentials must exist:

a) The act must have been done voluntarily.

b) For the promisor or it must be something which was the legal obligation ofthe promisor

c) The promisor must be in existence at the time when the act was done.

d) The promisor must agree now to compensate the promisee.

Example: A finds B’s purse and give it to him. B promises to give ARs. 50/-. This is a contract.

3) Written promise to pay a time-barred debt.

4) Completed Gift:

It does not affect the validity of any gift actually made between donor and donee.

5) Agency:

Section 185 of the Act says that no consideration is needed to create an agency.

Time-barred claims

A dispute does not cease to exist merely because the claim is barred by the limitationprescribed as per the Limitation Act, 1963 or otherwise though action based on a claimmay be required to be dismissed. A distinction is to be made between arbitration


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agreement entered into about a time-barred claim and a reference to arbitration madeon the basis of an arbitration clause after the expiry of the period of limitation in respectof such a claim. In the latter case, no reference can be made as the right to claimceases to subsist and the relief with respect to the dispute has become time-barred. InRuby General Insurance Co. Ltd. v. Peare Lal Kumar, all differences arising out of theinsurance policy were to be referred to arbitration within twelve months of the disclaimerof the claim by the company. The company had rejected the claim under the policy. Thepolicy holder referred the dispute to arbitration but beyond the period of twelve monthsafter the disclaimer by the company it was held that the question of disclaimer and therights of the parties were themselves questions arising out of the policy and as suchcovered by the terms of the arbitration clause. Whether the claim to be made in thereference to the arbitration is barred or not is a question to be decided by the arbitrators.However period of limitation for commencement of an arbitration runs from the dateon which cause of action accrues.

Compentency of Consideration

Whether the following considerations are valid consideration or not:

1) Charitable Subscriptions

A promise to subscribe to a public or a charitable object is unenforceable becausethere is no benefit to the promisor. But where the other party has undertaken aliability on the faith of the promise made by the promisor, it is enforceable. Apromise to pay a charitable subscription is enforceable as soon as any definitesteps have been taken in furtherance of the object and on faith of the promisedsubscription. In Abdul Aiz v. Masum Ali AIR 1914 A11.22 the defendant promisedto pay a sum of Rs.500 as donation for the repairs and reconstruction of a mosque.The defendant refused to pay the amount. It was held that since nothing wasdone on the faith of the promise, there was no consideration in this case and, thedefendant was not liable to pay the subscription promised by him.

Although a promise to contribute for charitable purpose is not as such enforceable,but if something is done on the faith of the promise or some obligation is incurred,that constitutes consideration for the promise and then it can be enforced. InKedarnath v. Gorie Mohamed there was a proposal to construct a town hall atHowrah provided sufficient funds would be available by way of subscription. Thedefendant was one of the subscribers, having promised to pay Rs. 100/- by signinghis name in the subscription book for the purpose. On the faith of the promised


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subscription the plaintiffs engaged a contractor for the purpose of the constructionand started construction work of the proposed town hall. The defendant refusedto pay his subscription on the ground that he was not legally bound by his promisebecause there was no consideration for the promise. It was held that engaging acontractor and starting the construction on the faith of the promise was sufficientconsideration to enforce the promise and, therefore, the defendant was bound topay the amount promised by him.

2) Forbearance To Sue

Forbearance to sue means not filing a case against the other party. It means aperson has a right of taking action against another person but refrains frombringing the action. Forbearance to sue amounts to good consideration. Ex. Ahas a right to recover Rs. 1,000/- from B. But he did not take legal action againstB at his request and in consideration of that B agreed to pay Rs. 100/- This isvalid consideration.

3) Compromise of a Disputed Claim

Compromise is a kind forbearance. The compromise of a disputed claim is agood consideration for the fresh agreement of compromise.

4) Composition with Creditors

A person who is not in a position to pay his debts fully may enter into a compromiseto pay lesser money, if the creditors agree to it. The agreement is binding.

5) Pre-existing Contract With The Promisor Himself

A promise to do a particular thing which the promisee is already bound to dounder pre-existing contract with the promisor will not constitute a goodconsideration. In Ram Chandra v. Kalu Raju ILR (1877) 2 Bom. 362, the defendantengages the plaintiff as lawyer in a suit and signed the vakaltnama which wasaccepted by the plaintiff. Later on the defendant promised to pay a certain sum asreward to the plaintiff if he won the suit. The plaintiff was able to win the suit forthe defendant, yet the defendant did not pay the promised reward.

It was held that the promise for the reward was without consideration for theplaintiff as a lawyer of the defendant was already bound to do his best to win thesuit. There being no fresh consideration for the sum promised the agreement wasvoid.


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6) Pre-existing Legal Obligation

Performance of a legal duty is no consideration for a promise. In Collins vs.Godefroy (1831) 109 ER 140 A was summoned to appear as a witness at a trialin a civil suit on behalf of B. B Promised to pay A certain amount if A appears asa witness. A appeared as a witness before the court. But B failed to pay thepromised amount. So A filed a suit against B. It was held that the promise waswithout consideration for A was under a duty imposed by law to appear and giveevidence.

Capacity of Parties

Section 11:Section 11:Section 11:Section 11:Section 11: Who are competent to contract.

According to section 10 of the Act an agreement becomes a contract if it is enteredinto between the parties who are competent to contract. According to section 11 of theAct “Every person is competent to contract who is of the age of majority according tothe law to which he is subject and who is of sound mind and is not disqualified fromcontracting by any law to which he is subject”.

Incapacity to contract may arise out of status:

1) Political or civic

a) Foreign Sovereign and Ambassadors

b) Alien

c) Felon or Convict

d) Bankrupt or insolvent

e) Professional

f) Artificial

g) Married Woman

1) Political or Civic

A) FFFFForeign Sovereign and Ambassadors :oreign Sovereign and Ambassadors :oreign Sovereign and Ambassadors :oreign Sovereign and Ambassadors :oreign Sovereign and Ambassadors : Under English Law a person can enterinto a contract with a foreign sovereign but in case of breach of contract foreignsovereign cannot be sued unless he is subject himself to the jurisdiction of EnglishCourts.


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Under Indian Law also a person can enter into an agreement with a foreignsovereign but in case of breach if the aggrieved party wants to enforce theagreement against the foreign sovereign he has to take prior permission from theCentral government.

B) Alien :Alien :Alien :Alien :Alien : An Indian can enter into an agreement with an alien and it is enforceablein the courts of law. In case if the war declared against any country, during thependency of law was an Indian Citizen cannot enter into an agreement with theperson in case if he belongs to the enemy country.

C) FFFFFelon or Convict :elon or Convict :elon or Convict :elon or Convict :elon or Convict : To enter into an agreement a convict must take prior permissionform the state government.

D) Bankrupt or Insolvent :Bankrupt or Insolvent :Bankrupt or Insolvent :Bankrupt or Insolvent :Bankrupt or Insolvent : An undischarged insolvent is not competent to contract.But a discharged insolvent is competent to enter into a contract.

2. Professional:

In England Doctors and Barristers cannot file a suit against the patients andclients to recover the fees. But in India they can sue.

3. Artificial:

A company is a person, artificial, invisible intangible and existing only incontemplation of law. It can enter into those contracts which are permitted by theobject clause of the Memorandum of Association.

4. Married Woman:

Married woman is competent to enter into contract like any other person providedshe fulfils the condition specified in section 11 of the Act.

II) Incapacity to contract may rise out of Mental deficiency.

1) Minority:

Section 3 of the Indian Majority Act, 1875 provides about the age of majority. Itstates that a person is deemed to have attained the age of majority when he completesthe age of 18 years, except in case of a person of whose person or property a guardianhas been appointed by the court in which case the age of majority is 21 years. Now itis reduced to 18 years whether guardian is appointed or not.


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Nature of Minor’s Contracts

Infancy is said to be disability, but in practice it is really a protection granted by lawcourts. It has been rightly observed. “The law protects their (infants) persons; preservestheir estates, excuses their laches, and assists them in their pleadings; the judges aretheir counsellors; the jury are their servants; and Law is their guardian”.

a) An Agreement with or By a Minor is VAn Agreement with or By a Minor is VAn Agreement with or By a Minor is VAn Agreement with or By a Minor is VAn Agreement with or By a Minor is Voidoidoidoidoid : : : : : Section 10 of the Act required that theparties to a contract must be competent and section 11 says that a minor is notcompetent. But neither section makes it clear whether the contract entered into bya minor is void or voidable. Till 1903, courts in India were not unanimous on thispoint. The Privy Council made it perfectly clear that a minor is not competent tocontract and that a contract by a minor is void ab initio i.e. void from the beginning.The leading case on this point is Mohori Bibi vs. Dharmo Das Ghose (1903) 30Cal. 539. The minor had executed a mortgage for the sum of Rs. 20,000/- out ofwhich the lender had paid the minor only about 8,000/- The minor then filed asuit for setting aside the mortgage. It was contended that as the contract wasvoidable and minor was repudiating it, the amount of Rs. 8000/- actually paid tothe minor must be refunded under section 65 of the Contract Act. The PrivyCouncil pointed out that as the minor’s contract was absolutely void, no questionof refunding money could arise in these circumstances.

b) No RNo RNo RNo RNo Ratification by Minoratification by Minoratification by Minoratification by Minoratification by Minor : : : : : agreement even on attaining majority, because a voidagreement cannot be ratified. Whether a minor borrowed a sum of money byexecuting a Pronote and after attaining majority executed a second Pronote inrespect of original loan, a suit upon the second Pronote was not maintainable.

c) No Estoppel against MinorNo Estoppel against MinorNo Estoppel against MinorNo Estoppel against MinorNo Estoppel against Minor : Where a minor by misrepresenting his age andinduced the other party to enter into a contract with him, he cannot be madeliable on the contract. There can be no estoppelestoppelestoppelestoppelestoppel against minor. He can alwaysplead minority. Even if he has, by misrepresenting his age, induced the otherparty to contract with him, he cannot be sued either in contract or in tort for fraudbecause if the injured party were allowed to sue for fraud, it would be giving-himan indirect means of enforcing the void agreement.

d) If a contract is beneficial to minor it can be enforced by him.

e) A claim for necessaries supplied to a minor is enforceable. But a minor is notliable for any price that he may promise and never for more than the value of thenecessaries. There is no personal liability of the minor, but only his property isliable.


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f) A minor being incompetent to contract cannot be a partner in a firm, but undersection 30 of the Partnership Act, he can be admitted to the benefits of thepartnership firm.

g) Restitution: - The court may, where a loan or some property is obtained by theminor by some fraudulent representation and the agreement is set aside directhim, on equitable considerations, to restore the money or property to the otherparty. Whereas the law gives protection to the minors, it does not give themliberty “to cheat men”.

h) There can be no specific performance of the agreements entered into by him asthey are void ab initio. A contract entered into on his behalf by his parent/guardianor the manager of his estate can be specifically enforced by or against the minorprovided the contract is within the scope of the authority of the parent and for thebenefit of the minor.

i) He cannot be adjudged as an insolvent. This is because he is incapable ofcontracting debts.

j) He can be an agent. An agent is merely a connecting link between his principaland a third party. As soon as the principal and the third party are brought together,the agent drops out. A minor binds the principal by his acts without incurring anypersonal liability.

k) His parents are not liable for the contract entered into by him, even though thecontract is for the supply of necessaries to the minor.

l) Minor is not liable under “Law of Contracts” but he is always liable under “Law ofTorts”. In order to make him liable under “Law of Torts” the tortious act must beindependent of contract.

m) Beneficial Contracts of Service: - Some ‘Contracts of Service’ e.g., forapprenticeship, are beneficial to the infant as they provide him education andenable him to earn his livelihood. Such contracts are valid and the other party tothe contract can be enforced against him.

2) Persons of Unsound Mind

What is a sound mind for the purposes of contracting.-A person is said to be ofsound mind for the purpose of making a contract if, at the time when he makes it, he iscapable of understanding it and of forming a rational judgment as to its effect upon hisinterests.


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A person, who is usually of unsound mind, but occasionally of sound mind, maymake a contract when he is of sound mind.

A person, who is usually of sound mind, but occasionally of un-sound mind, maynot make a contract when he is of unsound mind.

Illustrations

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contractduring those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannotunderstand the terms of a contract or form a rational judgment as to its effect onhis interests, cannot contract whilst such delirium or drunkenness lasts.

a) IdiotsIdiotsIdiotsIdiotsIdiots: Idiot is one who has no understanding capacity from his birth. Agreementwith him is void except for necessaries.

b) LLLLLunaticunaticunaticunaticunatic: He can make valid contract during lucid intervals.

c) Drunken PDrunken PDrunken PDrunken PDrunken Personsersonsersonsersonsersons: A contract by a drunken person is altogether void. It must beclearly shown that, at the time of contracting the person pleading drunkennesswas so intoxicated as to be temporarily deprived of reason and so could not givevalid consent to the contract.

Who can Enter into Arbitration Agreement?

Every person who is competent to contract can enter into an arbitration agreement.He must be of the age of majority according to the law to which he is subject and mustbe of sound mind and must not be disqualified from contracting by the law by which heis governed with regard to his contractual capacity. In case of a partnership, a partnercan enter, on behalf of the partnership subject to what is stated hereafter, into anarbitration agreement if so authorized in writing by the other partners or by the deed ofpartnership subject to authorization and/or restriction, if any, contained in the articlesof association of a company, the directors or others officers of a company may enterinto an arbitration agreement on behalf of the company. Though section 389 of theCompanies Act, 1956 had been deleted by the Companies (Amendment) Act, 1960 itsdeletion is not a matter of any consequence so far as the authority to enter into anarbitration agreement is concerned [Society De Traction v. Kamani Engineering Co Ltd.AIR 1964 SC 558]. So also subject to compliance of the constitutional requirements,the Central and State Governments can enter into arbitration agreement. Public


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undertakings can also enter into arbitration agreements. If the subject matter of thearbitration agreement is capable of assignment then the assignee would step into theshoes of his assignor and be both bound by it and entitled to enforce it [Patanji v.Rawalpindi Theatres Pvt Ltd. AIR 1970 Del 19]. A karta of a joint family can make avalid reference to arbitration and where he acts bona fide the award binds other members[Keshrimal Pyarchand v. Basantilal Pyarchand AIR 1966 MP 56]. Though trustees canenter into an arbitration agreement, for reference of disputes arising amongst themselvesto arbitration, in a case where an arbitration clause provided that disputes betweentrustees shall be referred for arbitration and two of the trustees referred the disputes tothe arbitrator without the concurrence of the third, who challenged it on facts, held thatthe acceptance of terms of trust did not mean that the trustees agreed inter-parties tocarry out every term of the trust deed and hence the arbitration agreement could not besaid to have been constituted [Bijoy Ballav Kundu v. Tapeti Ranjan Kundu AIR 1965 Cal628].

Minors and Lunatics

Contracts by minors and lunatics are void, and therefore, by themselves, they cannotenter into a valid arbitration and they can enter through their natural or legal guardians[Ponnayya Moopaner v. Suppammal AIR 1946 Mad 391]. In reference out of court, thenatural guardian of a minor can submit disputes to arbitration [Raghupati Dutta v. RamGopal Dutt AIR 1939 Cal 557]. But where there is no legal or natural guardian, the defacto guardian of a Mohammedan minor has no authority to enter into an agreementof reference on behalf of the minor [Mohammed Anwar v. Mohammad Aslam AIR 1955(NOC) 546]. If the minor is not properly represented and his guardian fails in his dutyto protect his interest, the award is not binding on the minor [Sadashiv Ram ChandraDatar v. Trimbak Keshar AIR 1920 Bom 32]. Leave of the court must be obtained underorder XXXII rule 7, of the Code of Civil Procedure, 1908 before a reference to arbitrationon behalf of the minor is made. However leave of the court under order XXXII rule 7need not be obtained if the reference is made without the intervention of the court[Vishram Mauji v. Gangaram Ladha AIR 1935 Sind 235]. A guardian ad litem or a nextfriend of a minor has the authority to refer to arbitration on behalf of the minor. However,to make the reference valid, permission of the court to refer the dispute should beobtained under order XXXII Rule 7. In the absence of such permission the reference isinvalid [Chhoba Lal v. Kallu Mal AIR 1946 PC 272].

A Minor is not bound by a reference to arbitration made by a person who is neitherthe de facto nor the de jure guardian of the minor [Satya Narayan v. Jugal Kishore AIR


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1950 ALL 512]. A guardian of a minor interested in the subject matter of reference andhimself a party to the reference cannot submit to arbitration on behalf of the minor[Ram Gopal v. Shantilal AIR 1942 All 65].

The Hindu Minority and Guardianship Act of 1956 (XXXII of 1956) which receivedthe assent of the President on the 25th August 1956 governs the extent of powers whichguardian can exercise over the property of the minors. So now the cases as regards thepowers of guardian over the minor’s property are to be read subject to the provision ofthat Act. Under that Act a natural guardian of a minor has power to do all acts whichare necessary of reasonable and proper for the realization, protection or benefit of theminors estate and he may refer disputes involving the minors property to arbitrationprovided the reference is for his benefit or for reasonable and proper protection of theminors property [Kamal Singh v. Shekar & Chand AIR 1952 CAL 447].

A de facto guardian of minor is not competent under the Mohammedan law toenter on their behalf into an agreement to refer to arbitration any dispute, even wherethere is no de jure guardian of the minor, as such agreement would necessarily, if actedupon involve dealings with the immovable properties of the minor [Shah MohammadJamil v. Shah Mohammad Hofizata AIR 1928 Oudh 449].

Under the Hindu law all acts of a natural guardian which the infant might, if of age,reasonably and prudently do for himself must be upheld, when done for him by theguardian. A natural guardian has therefore, power to submit a dispute to arbitration onbehalf of a minor, if the submission is for the benefit of the minor, and the minor wouldin such a case be bound by the award made by the arbitrators on such submission. Apartition by arbitration may be binding on minor but only when he is not injuriouslyaffected thereby when it is fair and when he has been duly represented [Ma Gyi v.Maung Po Bur Lt 46].

After obtaining leave of the court under order XXXII rule 7 of the Code of CivilProcedure 1908, a next friend or guardian, ad litem of a minor, can refer the pendingsuit to arbitration [Ramanthan v. Kumarappa AIR 1940 Mad 650]


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CHAPTER-III

FREE CONSENT

Section 13 to 22: Definition of Consent and Free Consent:

Sec 13 Sec 13 Sec 13 Sec 13 Sec 13 lays down that two or more persons are said to consentwhen they agree upon the same thing in the same sense. When theyagree upon the same thing in the same sense they are said to be adidem i.e. identity of minds.

Not only the parties to a contract should have identity of minds butthe consent of the parties must also real and free.

S.14. Free Consent: -

14. “Free consent” defined.-Consent is said to be free when it is notcaused by-

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or

(3) fraud, as defined in section 17, or

(4) misrepresentation, as defined in section 18, or

(5) mistake, subject to the provisions of sections 20, 21.and22.Consent is said to be so caused when it would not have beengiven but for the existence of such coercion, undue influence, fraud,misrepresentation or mistake.

Section 14 of the Act lays down that a consent is said to be freewhen it is not caused by coercion as defined in section 15 or undueinfluence as defined in section 16, isrepresentation as defined in section18 or fraud as defined in section 17 or mistake subject to the provisionsof sections 20, 21 and 22 of the Act.

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SSSSS.19.19.19.19.19. Voidability of agreements without free consent: - When consent to anagreement is caused by coercion, fraud or misrepresentation, the agreement is a contractvoidable at the option of the party whose consent was so caused.

A party to a contract whose consent was caused by fraud or mis-representation,may, if he thinks fit, insist that the contract shall be performed, and that he shall be putin the position in which he would have been if the representations made had been true.

Exception.- If such consent was caused by misrepresentation or by silence, fraudulentwithin the meaning of section 17, the contract, nevertheless, is not voidable, if the partywhose consent was so caused had the means of discovering the truth with ordinarydiligence.

Explanation.- A fraud or misrepresentation which did not cause the consent to acontract of the party on whom such fraud was practiced, or to whom suchmisrepresentation was made, does not render a contract voidable.

Illustrations

(a) A, intending to deceive B, falsely represents that five hundred maunds of indigoare made annually at As factory, and thereby induces B to buy the factory. Thecontract is voidable at the option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that, five hundred maundsof indigo are made annually at As factory.

B examines the accounts of the factory, which show that only four hundred maundsof indigo have been made. After this B buys the factory. The contract is not voidableon account of As misrepresentation.

(c) A fraudulently informs B that As estate is free from in cumbrance. B thereuponbuys the estate. The estate is subject to a mortgage. B may either avoid thecontract, or may insist on its being carried out and the mortgage debt redeemed.

(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal,and does conceal, the existence of the ore from A. Through As ignorance B isenabled to buy the estate at an under-value. The contract is voidable at theoption of A.

(e) A is entitled to succeed to an estate at the death of B; B dies: C, having receivedintelligence of Bs death, prevents the intelligence reaching Al and thus induces Ato sell him his interest in the estate. The sale is voidable at the option of A.

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SSSSS.19A. .19A. .19A. .19A. .19A. Power to set aside contract induced by undue influence. - When consent toan agreement is caused by undue influence, the agreement is a contract voidable atthe option of the party whose consent was so caused.

Any such contract may be set aside either absolutely or, if the party who was entitledto avoid it has received any benefit there under, upon such terms and conditions as tothe Court may seem just.

Illustrations:

a) As son has forged Bs name to a promissory note. B, under threat of prosecutingAs son, obtains a bond from A for the amount of the forged note. If B sues on thisbond, the Court may set the bond aside.

(b) A, a money-lender, advances Rs. 100 to B, an agriculturist, and, by undue influence,induces B to execute a bond for Rs. 200 with interest at 6 per cent. Per month.The Court may set the bond aside; ordering B to repay the Rs. 100 with suchinterest as may seem just.

When the consent is not free due to coercion or undue influence ormisrepresentation or fraud then the agreement becomes a contract voidable atthe option of one party, i.e. the aggrieved party. When the consent is not free dueto mistake as a general rule the agreement becomes void.

Mistake:-

SSSSS.20..20..20..20..20. Agreement void where both parties are under mistake as to matter of fact.Where both the parties to an agreement are under a mistake as to a matter of factessential to the agreement, the agreement is void.

Explanation.- An erroneous opinion as to the value of the thing which forms thesubject-matter of the agreement is not to be deemed a mistake as to a matter of fact.

Illustrations

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way fromEngland to Bombay. It turns out that, before the day of the bargain, the shipconveying the cargo had been cast away and the goods lost. Neither party wasaware of the facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at thetime of the bargain, though neither party was aware of the fact. The agreement isvoid.

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(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead atthe time of the agreement, but both parties were ignorant of the fact. The agreementis void.

SSSSS. 21. 21. 21. 21. 21. Effect of mistakes as to law.- A contract is not voidable because it wascaused by a mistake as to any law in force in India; but a mistake as to a law not inforce in India has the same effect as a mistake of fact.

Illustration

A and B make a contract grounded on the erroneous belief that a particular debt isbarred by the Indian Law of Limitation: the contract is not voidable.

SSSSS. 22. 22. 22. 22. 22. Contract caused by mistake of one party as to matter of fact.-A contract isnot voidable merely because it was caused by one of the parties to it being under amistake as to a matter of fact.

Mistake is a misconception or error. Mistake means that parties intending to do onething have by intentional error done something else. Mistake may be classified as.

(i) Mistake of Law (ii) Mistake of Fact

Mistake of Law

Mistake of Law may be of two kinds. They are a) mistake of law of land b) mistakeof foreign law. The effect of mistake of law on a contract is expressed by no ground foravoiding a contract. But this rule is applicable only to the law of the country and notforeign law.

Ignorance of foreign law is excusable. No one is expected to be conversant withforeign law, though he is deemed to know the law of his own country. Mistake offoreign law stands on the same footing as the mistake of fact.

Mistake of Fact

Mistake of fact may be either bilateral mistake or unilateral mistake.

BIlateral Mistake

A mistake of fact in the minds of both parties’ negatives consent and the contractbecomes void. The cases falling under bilateral mistake are discussed below:

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Mistake as to the Subject Matter

One of the essentials of every contract is the subject matter of contract. Mistake asto subject matter may take various forms:

i) Mistake as to the Existence of the Subject MatterMistake as to the Existence of the Subject MatterMistake as to the Existence of the Subject MatterMistake as to the Existence of the Subject MatterMistake as to the Existence of the Subject Matter: Where both the parties to thecontract commit mistake with reference to the existence or non-existence of thesubject matter, the agreement becomes void.

ii) Mistake as to the Identity of the Subject MatterMistake as to the Identity of the Subject MatterMistake as to the Identity of the Subject MatterMistake as to the Identity of the Subject MatterMistake as to the Identity of the Subject Matter: Where both the parties to thecontract commit mistake with reference to the identity of the subject matter, thenthe agreement becomes void. In Raffles v Wichellaus (1864) 2 H & C 906, Aagreed 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 was in themind of A and the other in the mind of B. It was held that there was a bilateralmistake and there was no contract.

ii) Mistake as to the TMistake as to the TMistake as to the TMistake as to the TMistake as to the Title of the Subject Matteritle of the Subject Matteritle of the Subject Matteritle of the Subject Matteritle of the Subject Matter: Where unknown to the parties, thebuyer is already the owner of that which the seller wants to sell, the contract isvoid:

In Cooper v. Phibbs (1867) L.R.2HL 149, A agreed to take lease fishery from B.But A was tenant for life of the fishery and B had no title at all. It was held that thelease was void.

iv) Mistake as to the PMistake as to the PMistake as to the PMistake as to the PMistake as to the Price of the Subject Matterrice of the Subject Matterrice of the Subject Matterrice of the Subject Matterrice of the Subject Matter: Where the seller of certain plotsmentioned in his letter the price as Rs. 1250/- when he really intended to write Rs.2250/-, the agreement is void in case if the other party accepts the contract withthe knowledge of the mistake committed by offeror.

v))))) Mistake as to Quantity of the Subject Matter:Mistake as to Quantity of the Subject Matter:Mistake as to Quantity of the Subject Matter:Mistake as to Quantity of the Subject Matter:Mistake as to Quantity of the Subject Matter:There is no contract between theparties if there is a difference between the quantity sold and purchased. In Hankelvs. Pope (1870) L.R. 6Ex.7 D wrote to P asking for a quotation of 50 rifles andlater telegraphed ‘send three rifles’. The Telegraph clerk by mistake sent themessage wrongly as ‘send the rifles’. P sent 50 rifles and upon D’s refusal toaccept files a suit for damages. The agreement was held void and it made nodifference even if the mistake was caused by the negligence of a third party.

Unilateral Mistake

A mistake of fact in the mind of one party to the contract is known as unilateralmistake. It does not generally affect the validity of the contract. The leading case on this

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point is A. A.Singh v. Union of India AIR 1970 Mani 16. In this case, the governmentsold by auction the right of fishery. The plaintiff offered the highest bid thinking that theright was sold for three years but which was actually for one year only. It was held thatthe plaintiff could not avoid the contract because it was his unilateral mistake causedby his own negligence

However, there are two exceptionstwo exceptionstwo exceptionstwo exceptionstwo exceptions to the above rules:

1) Mistake as to the Nature of the TMistake as to the Nature of the TMistake as to the Nature of the TMistake as to the Nature of the TMistake as to the Nature of the Transaction Contracted Wransaction Contracted Wransaction Contracted Wransaction Contracted Wransaction Contracted Withithithithith: Where the unilateralmistake is fundamental and effects the character of the contract, the innocentparty is freed from liability. In Foster v. Mackinnon (1869) L.R.4 C.P. 704 an illiterateold man A was made to put his signature on a document which was a Pronote. Athought the document to be a will where his signature was required as a witness.Under this presumption he signed the document which was in fact a Pronote.Subsequently B endorsed the Pronote to C who paid value for it in good faith. Csued A on the Pronote. It was held that A was not bound by it because he committedmistake as to the nature of the transaction contracted with.

2) Mistakes as to the Identity of the PMistakes as to the Identity of the PMistakes as to the Identity of the PMistakes as to the Identity of the PMistakes as to the Identity of the Person Contracted Werson Contracted Werson Contracted Werson Contracted Werson Contracted With:ith:ith:ith:ith: A contract may beavoided upon mistake as to the identity of a person. Where A intends to contractonly with B, but enters into a contract with C believing him to B, the contract isvitiated. In Cundy v. Lindsay (1878) 3 A.C. 459, a fraudulent person namedBlenkarn by imitating the signature of a respectable firm Blenkiran & Co sent anorder for goods which were duly delivered to him by Lindsay. Blenkarn sold thegoods to Cundy who acted bona fide. It was held that Cundy must return thegoods to Lindsay. Although Cundy was an innocent purchaser, he had no title tothe goods since the contract was between Lindsay and Blenkarn.

Section 18: Misrepresentation:-

18.”Misrepresentation” defined.-”Misrepresentation” means and includes-

(1) the positive assertion, in a manner not warranted by the information of the personmaking it, of that which is not true, though he believes it to be true

(2) any breach, of duty which, without an intent to deceive, gains an advantage tothe person committing it, or any one claiming under him, by misleading anotherto his prejudice or to the prejudice of any one claiming under him;

(3) causing, however innocently, a party to an agreement to make a mistake as to thesubstance of the thing which is the subject of the agreement.

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Mispresentation means ‘mis-statement of a fact material to the contract’. It is afalse representation made innocently, before or at the time of contract, withoutany intention of deceiving the other party. Consent to an agreement obtained bymisrepresentation is not real and valid. It is a voidable contract.

Essentials of Misrepresentation

1) There must be a representation made by one party to another.

2) Such representation must relate to material fact. It must not relate to a matter ofopinion.

3) Such representation must be untrue.

4) Such representation must be the cause of the consent.

5) Such representation must be made with the intention that it shall be acted uponby the other party

Example: A by misrepresentation, leads B erroneously to believe that 500 maundsof indigo are made annually at A’s factory. B examines the accounts of the factorywhich show that only 400 maunds of indigo have been made. After this B buys thefactory. The contract is not voidable on account of A’s misrepresentation.

Section 17: Fraud:-

17. ”Fraud” defined.-”Fraud” means and includes any of the following actscommitted by a party to a contract, or with his connivance, or by his agent with intent todeceive another party thereto of his agent, or to induce him to enter into the contract:-

(1) the suggestion, as a fact, of that which is not true, by one who does not believe itto be true ;

(2) the active concealment of a fact by one having knowledge or belief of the fact ;

(3) a promise made without any intention of performing it

(4) any other act fitted to deceive ;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation.- Mere silence as to facts likely to affect the willingness of a person toenter into a contract is not fraud, unless the circumstances of the case are such that,regard being had to them, it is the duty of the person keeping silence to speak,1* orunless his silence is, in itself, equivalent to speech.

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Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing toB about the horses unsoundness. This is not fraud in A.

(b) B is As daughter and has just come of age. Here, the relation between the partieswould make it As duty to tell B if the horse,is unsound.

(c) B says to A—”If you do not deny it, I shall assume that the horse is sound.” A saysnothing. Here, As silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of achange in prices which would affect Bs willingness to proceed with the contract. Ais not bound to inform B.

Fraud is a false statement made knowingly or without belief in its truth or recklesslycareless, whether it be true or false. It is a wilful misrepresentation made with aview to cheat the other party to the contract.

Essentials

In addition to the above essentials, the following conditions also must be satisfied.

1) The representation must have deceived the other party. A deceit which does notdeceive is no fraud.

2) The representation must have induced the other party to enter into the contract.

3) The party who has been deceived must suffer some loss.

In Smith v. Chadwick (1884) 9 AC 184, A bought shares in a company on the faithof a Prospectus which contained a statement that B was one of the directors of thecompany. A had never heard his name and therefore, the statement was immaterialfrom his point of view. A wanted to set aside the contract on the ground of mis-statementin the Prospectus. It was held that he could not do so because the false statement didnot induce A to buy the shares.

A contract caused by fraud is voidable at the option of the defrauded party.

Coercion (Sec 15)

15. “Coercion” defined.- ”Coercion” is the committing, or threatening to commit,any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening

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to detain, any property, to the prejudice of any person whatever, with the intention ofcausing any person to enter into an agreement. (45 of 1860.)

Explanation.- It is immaterial whether the Indian Penal Code is or is not in force inthe place where the coercion is employed.

Illustration

A, on board an English ship on the high seas, causes B to enter into an agreementby an act amounting to criminal intimidation under the Indian Penal Code. (45 of1860.)

A afterwards sues B for breach of contract at Calcutta.

B. A has employed coercion, although his act is not an offence by the law ofEngland, and although section 506 of the Indian Penal Code was not in force at thetime when or place where the act was done. (45.of 1860.)

Coercion (Sec 15)

In simple words, coercion is threat or force used by one party against another forcompelling him to enter into a contract. It is defined as the committing or threatening tocommit, an act forbidden by the Indian Penal Code or an unlawful detaining, orthreatening to detain, any property, to the prejudice of any person whatever, with theintention of causing any person to enter into an agreement.

In Ranganayakamma v. Alwar Chetti (1889) 13 Mad. 214, a girl of 13, lost herhusband and her husband’s relatives refused to have the husband’s corpse removedunless she adopted a child of their choice, it was held that the adoption was notbinding on her as her consent was obtained under coercion within the meaning ofsection 15, since any person who obstructed a dead body from being removed wouldbe guilty of an offence under section 297 of IPC.

Coercion in India is known as ‘duress’ in England. If the consent of the other partyto a contract is obtained under fear caused by threats of bodily harm, it is known as theuse of duress. The following are the points of distinction between the two.

a) Coercion may be directed even against a third party. But duress must be aimedagainst the life of the contracting party his wife or children.

b) Coercion may be aimed against the person or property of another but duressmust be aimed against the life or liberty of the person.

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c) Duress must proceed from the party to the contract or his agent. Coercion mayproceed from any person.

d) Duress must be such as to cause immediate violence. In the case of coercion it isnot necessary.

S.16. Undue Influence

S.16. ”Undue influence” defined.- (1) A contract is said to be induced by “ undueinfluence where the relations subsisting between the parties are such that one of theparties is in a position to dominate the will of the other and uses that position to obtainan unfair advantage over the other.

(2) In particular and without prejudice to the generality of the foregoing principle, aperson is deemed to be in a position to dominate the will of another-

(a) where he holds a real or apparent authority over the other or where hestands in a fiduciary relation to the other or

(b) where he makes a contract with a person whose mental capacity is temporarilyor permanently affected by reason of age, illness, or mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters into acontract with him, and the transaction appears, on the face of it or on the evidenceadduced, to be unconscionable, the burden of proving that such contract wasnot induced by undue influence shall lie upon the person in a position to dominatethe will of the other.

Nothing in this sub-section shall affect the provisions of section Ill of the IndianEvidence Act, 1872. (1 of 1872.)

Illustrations

(a) A having advanced money to his son, B, during his minority, upon Bs coming ofage obtains, by misuse of parental influence, a bond from B for a greater amountthan the sum due in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease or age, is induced, by Bs influence over him as hismedical attendant, to agree to pay B an unreasonable sum for his professionalservices. B employs undue influence.

c) A, being in debt to B, the money-lender of his village, contracts a fresh loan onterms which appear to be unconscionable. It lies on B to prove that the contractwas not induced by undue influence.

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(d) A applies to a banker for a loan at a time when there is stringency in the moneymarket. The banker declines to make the loan except at an unusually high rate ofinterest. A accepts the loan on these terms. This is a transaction in the ordinarycourse of business, and the contract is not induced by undue influence.

Section 16 of the Act provides that “a contract is said to be induced by undueinfluence where the relations subsisting between the parties are such that one of theparties is in a position to dominate the will of the other and uses the position to obtainunfair advantage over the other.” The essentials are: (i) that the relation subsistingbetween the parties should be such that one of the parties is in a position to dominatethe will of the other, (ii) that the dominant party uses his dominant position, (iii) that thedominant party obtains an unfair advantage over the other.

In Sunder Kumari v. Kishore 5 WR 246, a lady gifted all her property worth Rs.7000/- to P a medical man who was attending on her. The lady disputed the gift deedas soon as she recovered from her illness. P’s suit For Possession Was Set Aside.

Presumptions of Undue Influence:

In the following relationships undue influence is presumed to exist.

1) Parent and child.

2) Guardian and ward.

3) Doctor and patient.

4) Lawyer and client.

5) Religious Advisor and Disciple.

6) Trustee and Beneficiary.

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CHAPTER-IV

LEGALITY OF OBJECT AND CONSIDERATION

SSSSS. 23. . 23. . 23. . 23. . 23. What considerations and objects are lawful and what not.-The consideration or object of an agreement is lawful, unless-

it is forbidden by law; or

is of such a nature that, if permitted, it would defeat the provisions ofany law; or

is fraudulent; or

involves or implies injury to the person or property of another or;

the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreementis said to be unlawful. Every agreement of which the object orconsideration is unlawful is void.

Illustrations

a) A agrees to sell his house to B for 10,000 rupees. Here Bs promiseto pay the sum of 10,000 rupees is the consideration for As promiseto sell the house, and As promise to sell the house is theconsideration for Bs promise to pay the 10,000 rupees. These arelawful considerations.

b) A promises to pay B 1,000 rupees at the end of six months, if C,who owes that sum to B, fails to pay it. B promises to grant time toC accordingly. Here the promise-of each party is the considerationfor the promise of the other party and they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make good to Bthe value of his ship if it is wrecked on a certain voyage. Here As

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promise is the consideration for Bs payment and Bs payment is the considerationfor As promise and these are lawful considerations.

(d) A promises to maintain Bs child and B promises to pay A 1,000 rupees yearly forthe purpose. Here the promise of each party is the consideration for the promiseof the other party. They are lawful considerations.

(e) A, B and C enter into an agreement for the division among them of gains acquired,or- to be acquired, by them by fraud. The agreement is void, as its object isunlawful.

(f) A promises to obtain for B an employment in the public service, and B promisesto pay 1,000 rupees to A. The agreement is void, as the consideration for it isunlawful.

(g) A, being agent for a landed proprietor, agrees for money, without the knowledgeof his principal, to obtain for B a lease of land belonging to his principal. Theagreement between A and B is void. as it implies a fraud by concealment, by A,on his principal.

(h) 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, asits object is unlawful.

(i) As estate is sold for arrears of revenue under the provisions of an Act of theLegislature, by which the defaulter is prohibited from purchasing, the estate. B,upon an understanding with A, becomes the purchaser, and agrees to convey theestate to A upon receiving from him the price which B has paid. The agreement isvoid, as it renders the transaction, in effect a purchase by the defaulter, andwould so defeat the object of the law.

29.(j) A, who is Bs mukhtar, promises to exercise his influence, as such, with B in favourof C, and C promises to pay 1,000 rupees to

A. The agreement is void, because it is immoral.

(k) A agrees to let her daughter to hire to B for concubinage.

The agreement is void, because it is immoral, though the letting may not bepunishable under the Indian Penal Code. According to section 23 of the Act anagreement of which the object or consideration is unlawful is void. The wordobject in section 23 means purpose or design of the contract. The word ‘lawful’means permitted by law.


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The consideration or the object of an agreement is unlawful in the following cases.

1) If it is FIf it is FIf it is FIf it is FIf it is Forbidden by Lorbidden by Lorbidden by Lorbidden by Lorbidden by Lawawawawaw””””” The agreement is forbidden by law, if thelegislaturepenalizes it or prohibits it.

Example: A promises to obtain for B an employment in the public service and Bpromises to pay Rs. 1,000/- to A. The agreement is void as the consideration forit 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 permittedit would defeat the provisions of any law, the agreement is void.

In Alexander v. Rayson (1936) 1 K.B.169, A let out a flat for 1200 pounds a year.To reduce the municipal taxes, he entered into two agreements with B. One by whichthe rent was stated to be 450 pounds only and the other by which B agreed to pay 750pounds. It was held that the agreement was made to defraud the municipal authoritiesand was void. A cannot recover the money.

3) If it is fraudulent: If both the parties entered into an agreement with a view tocheat the other person or public, then the agreement is not enforceable. If anyperson transfers his properties to his friends or relatives with a view to cheat thecreditors, the Insolvency Law says the transfer is fraudulent.

4) If it involves or implies an injury to the person or property of another: The objector consideration of an agreement will be unlawful if it tends to injure the personor property of another. Thus, an agreement to destroy another person’s propertyis unlawful.

5) If the court regards it as immoral the word immoral means contrary to goodmorals. Rent due in respect of a flat let out to a prostitute for the purpose of hertrade cannot be recovered.

6) If the court regards it as being opposed to public policy:

An agreement is said to be opposed to public policy when it is harmful to thepublic welfare. Public policy is that principle of law which provides that no personcan lawfully do that which is injurious to the public or is against the interest of thesociety or the state. Public policy is not capable of exact definition. It is an illusiveconcept and has been defined as “an unruly horse which is difficult to ride.”

The Courts in India have declared the following agreements as opposed to publicpolicy.


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1) Trading with the enemy.

2) An agreement which seeks to prevent the prosecution of guilty party is opposed topublic policy and is void.

3) When a person agrees to help another by money or otherwise in litigation inwhich he is not himself interested, it is called maintenance. These are theagreements which tend to promote speculative litigation. When a person agreesto provide financial assistance with a view to share the profits of litigation, it iscalled champerty. This is also opposed to public policy.

4) Agreement for sale or transfer of public offices or for appointment to public officesin consideration of money is illegal, being opposed to public policy.

5) Agreements unduly restraining personal liberty have been held to be void asbeing opposed to public policy.

6) Agreements interfering with the course of justice.

7) Agreements in restraint of legal proceedings.

8) Agreements to vary the period of litigation.

9) Agreements in restraint of marriage of major.

10) Agreements tending to create monopolies.

11) Agreements in restraint of parental rights.

12) Agreements interfering with marital duties.

13) Agreements in restraint of trade.

Void Agreements

24.Agreement void, if considerations and objects unlawful in part.-If any part of asingle consideration for one or more objects, or any one or any part of any one ofseveral considerations for a single object, is unlawful, the agreement is void.

Illustration

A promises to superintend, on behalf of B, a legal manufacture of indigo, and anillegal traffic in other articles.

B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, theobject of A’s promise, and the consideration for B’s promise, being in part unlawful.


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An agreement seeking to restrain a person from exercising a lawful professiontrade or business of any kind is void to that extent (sec.27). Public policy required thatevery person should be at liberty to work for himself and should not be at liberty todeprive himself or the state of his labour, skill or talent by any contract that he entersinto.

26. Agreement in restraint of marriage void.-Every agreement in restraint of themarriage of any person, other than a minor, is void.

27. Agreement in restraint of trade void.-Every agreement, by which any one isrestrained from exercising a lawful profession, trade or business of any kind, is to thatextent void.

Saving of agreement not to carry on business of which good-will is sold.- Exception1.- One who sells the good-will of a business may agree with the buyer to refrain fromcarrying on a similar business, within specified local limits, so long as the buyer, or anyperson deriving title to the good-will from him, carries on a like business therein, providedthat such limits appear to the Court reasonable, regard being had to the nature of thebusiness.

28. Agreements in restraint of legal proceedings void.- Every agreement,-

(a) by which any party thereto is restricted absolutely from enforcing his rights underor in respect of any contract, by the usual legal proceedings in the ordinarytribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party theretofrom any liability, under or in respect of any contract on the expiry of a specifiedperiod so as to restrict any party from enforcing his rights, is void to that extent.

Saving of contract of refer to arbitration dispute that may arise.- Exception 1.- Thissection shall not render illegal a contract, by which two or more persons agree that anydispute which may arise between them in respect of any subject or class of subjectsshall be referred to arbitration, and that only the amount awarded in such arbitrationshall be recoverable in respect of the dispute so referred.

Suits barred by such contracts.- When such a contract has been made, a suit maybe brought for its specific performance) and if a suit, other than for such specificperformance, or for the recovery of the amount so awarded, is brought by one party tosuch contract against any other such party, in respect of any subject which they have soagreed to refer, the existence of such contract shall be a bar to the suit.


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Saving of contract to refer questions that have already arisen.-Exception 2.- Nor shall this section render, illegal any contract in writing, by which twoor more persons agree to refer to arbitration any question between them which hasalready arisen, or affect any provision of any law in force for the time being as toreferences to arbitration.

29. Agreements void for uncertainty.- Agreements, the meaning of which is notcertain, or capable of being made certain, are void.

Illustrations

(a) A agrees to sell to B “a hundred tons of oil“. There is nothing whatever to showwhat kind of oil was intended. The agreement is void for uncertainty.

(b) A agrees to sell to B one hundred tons of oil of a specified description, known asan article of commerce. There is no uncertainty here to make the agreementvoid.

(c) A, who is a dealer in cocoanut-oil only, agrees to sell to B “one hundred. tons ofoil”. The nature of As trade affords an indication of the meaning of the words,and A has entered into a contract for the sale of one hundred tons of cocoanut-oil.

(d) A agrees to sell to B “all the grain in my granary at Ramnagar“. There is nouncertainty here to make the agreement void.

(e) A agrees to sell B “one thousand mounds of rice at a price to be fixed by C “. Asthe price is capable of being made certain, there is no uncertainty here to makethe agreement void.

(f) A agrees to sell to B “my white horse for rupees five hundred or rupees onethousand”. There I am nothing to show which of the two prices was to be given.The agreement is void,

The Indian law as stated in Sec 27 prevents a partial as well as a total restraint oftrade. Accordingly all agreements in restraint of trade whether general or partial qualifiedor unqualified are void. The restraint in trade is taboo even if it is partial unless it comeswithin the exception laid down in the section.

In Oakes & Co v. Jackson (1876) 1 Mad. 134, D agreed with P not to carry on thesame business of dress makers on the expiry of the period of his service anywhere within800 miles of Madras. The agreement was held void.


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Exceptions

The following exceptions to section 27 are recognized under Indian Law:

a) On the sale of the goodwill of a business, the seller may agree not to carry onsimilar business within specified local limits so long as the buyer carries on likebusiness therein, provided that such limits appear to the court as reasonable.

a) Under section 11(2) of the Partnership Act, partners may enter into anagreement that a partner will not carry on any business other than that of thefirm while he is a partner.

b) Upon or in anticipation of the dissolution of a partnership firm, some or allthe partners may agree not to carry on the same business within a specifiedperiod or within specified local limits (Section 54 of the Partnership Act).

c) Section 36 (2) of the Partnership Act provides that a retiring partner mayagree with his partners that he will not carry on any business similar to that ofthe firm within a specified period or within local limits. The agreement shallbe valid if the restrictions are reasonable.

d) Section 55 (3) of the Partnership Act provides that a partner may upon thesale of the goodwill of a firm, make an agreement with the buyer that suchpartner will not carry on any business similar to that of the firm within aspecified period or within specified local limits. Such agreement shall bevalid only if the restrictions imposed are reasonable.

e) Service agreementsService agreementsService agreementsService agreementsService agreements: An agreement or contract of service by which anemployee binds himself during the term of his agreement not to competewith his employer directly by carrying on similar business, or accepting anyother employment during the term of his agreement is not in restraint oftrade. The employer can prevent the employees from working elsewhereduring the period covered by the agreement.

f) TTTTTrade combinationsrade combinationsrade combinationsrade combinationsrade combinations: An agreement between different firms in the nature ofa trade combination order to maintain a price level and avoid undersellingis not illegal. Further an agreement between manufacturers not to sell theirgoods below a certain price to pool profits and to divide the business andprofits in a certain proportion is perfectly valid.

g) Agreements by way of wagerAgreements by way of wagerAgreements by way of wagerAgreements by way of wagerAgreements by way of wager


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30. Agreements by way of wager void.- Agreements by way of wager are void; andno suit shall be brought for recovering anything alleged to be won on any wager, orentrusted to any person to abide by the result of any game or other uncertain event onwhich any wager is made.

Exception in favour of certain prizes for horse-racing.- This section shall not bedeemed to render unlawful a subscription or contribution, or agreement to subscribe orcontribute, made or entered into for or toward any plate, prize or sum of money, of thevalue or amount of five hundred rupees or upwards, to be awarded to the winner orwinners of any horse-race.

Section 294A of the Indian Penal Code not affected.- Nothing in this section shallbe deemed to legalize any transaction connected with horse-racing, to which theprovisions of section 294A of the Wager means bet. It may be defined as an agreementto pay money or monies worth on the happening or non-happening of a specifieduncertain event. It is void because it is opposed to public policy. No suit will lie forrecovering anything alleged to be won on any wager or entrusted to any person toabide by the results of any game or other uncertain event on which any wager is made(Sec. 30 of the Act).

Example: There is an agreement between A and B which provides that if it rains ona particular day, A will pay B Rs. 100 and if it does not rain B will pay the same amountto A. It is a wagering agreement.

Effect of Transactions Collateral to Wager

All agreements by way of wager are void (They are illegal in case of Maharastraand Gujarat). The winner cannot maintain any action against the loser for breach of hispromise. A wagering agreement being only void and not illegal, a collateral contractcan well be enforced at law.

Exceptions: Subscriptions or contributions made for any plate or prize of the valueof Rs. 500/- or above to be awarded to a winner in a horse race.

Lottery: Conducting Lottery after obtaining license from the Government.

Contingent Contracts

A contract may be conditional or unconditional. Conditional contracts are calledcontingent contracts and unconditional contracts are called absolute contracts. Section


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31 of the Act defines contingent contracts as a contract to do or not to do something ifsome event collateral to such contract does or does not happen.

Example: A promises to sell his house to B for Rs. 5,000 in case it rains the next day.The performance of the contract depends upon the future event. This contract is thereforea contingent contract.

Rules Relating to Contingent Contract

1) Contracts contingent upon the happening of a future uncertain event cannot beenforced by law unless and until that event has happened.

2) Contracts contingent upon the non-happening of an uncertain future event canbe enforced when the happening of that event becomes impossible and not before.

3) Contracts contingent upon the happening of an event within a fixed time becomevoid if the event has not happened before the expiration of the fixed time.

4) Contracts contingent upon the non-happening of an event within a fixed timemay be enforced by law when the event does not happen or becomes impossiblebefore the expiration of the fixed time.


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CHAPTER-V

DISCHARGE OF CONTRACT AND REMEDIESFOR BREACH OF CONTRACT

Discharge of Contract

A contract creates rights and obligations. When the rights andobligations created by a contract come to an end, the contract is said tobe discharged.

Methods of Discharge

1) Discharge by performance.

2) Discharge by breach of contract.

3) Discharge by impossibility of performance.

4) Discharge by agreement.

5) Discharge by operation of law.

6) Discharge by lapse of time.

Now we will discuss each method of discharge:

1) Discharge by Performance

A contract is an agreement to do or not to do an act. It creates legalrights and obligations. Performance of a contract means ‘fulfillment oflegal obligations created by a contract’.

Section 37 of the Act lays down that ‘the parties to a contract musteither perform or offer to perform their respective promises under thecontract, unless such performance is dispensed with or excused underthe provisions of law’.

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Contracts which need not be Performed

1) If the parties to a contract agree to substitute a new contract for it, or to rescind oralter it, the original contract need not be performed.

2) Promisee may dispense with or remit performance or promise.

3) When a voidable contract is rescinded, the other party need not perform hispromise.

4) Where the failure of performance has been caused by the promisee’s neglect orrefusal the promisor will be excused.

Tender

An offer to perform one’s obligations under a contract is called tender. It is alsocalled attempted performance. It is equal to performance. Section 38 of the Act laysdown that where the promisor, has made an offer of performance to the promisee andthe offer has not been accepted the promisor is not responsible, nor does hereby loseshis rights under the contract.

Kinds of Tender

TTTTTender of Goods:ender of Goods:ender of Goods:ender of Goods:ender of Goods: If the offeror or promisor produces goods of the correct qualityand quantity, the rejection of his offer discharges him from further liability. He can bringan action for non-acceptance or defend an action for non-delivery.

TTTTTender of Money:ender of Money:ender of Money:ender of Money:ender of Money: If a debtor makes a valid tender of money but the creditorrefuses to accept it, the debtor thereby is not discharged from making the payment.Tender in this case does not constitute discharge of the debt. Debtor shall continue tobe liable for the payment of the debt. He is however not liable for any interest on thedebt from the date valid tender.

Essentials of Valid Tender

1. It must be unconditional.

2. It must be made at proper time and proper place.

3. The party making the tender must always be ready and willing to perform thepromise whenever called upon.

4. It must be made to the proper person.

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5. It must be in respect of whole of the promise.

6. If the tender relates to the delivery of goods, reasonable opportunity must begiven to the promisee for inspection of goods.

7. In case of tender of money, exact amount should be tendered.

8. Tender may be made to one of several joint promises.

SSSSS.39.39.39.39.39. Effect of refusal of party to perform promise wholly.- When a party to acontract has refused to perform, or disabled himself from performing, his promise in itsentirety, the promisee may put an end to the contract, unless he has signified, by wordsor conduct, his acquiescence in its continuance.

Illustrations

(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at histheatre two nights in every week during the next two months, and B engages topay her 100 rupees for each nights performance. On the sixth night A wilfullyabsents herself from the theatre. B is at liberty to put an end to the contract.

(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at histheatre two nights in every. week during the next two months, and B engages topay her at the rate of 100 rupees for each night. On the sixth night A wilfullyabsents herself. With the assent of B, A sings on the seventh night. B has signifiedhis acquiescence in the continuance of the contract, and cannot now put an endto it, but is entitled to compensation for the damage sustained by him through Asfailure to sing on the sixth night.

SSSSS.40..40..40..40..40. Person by whom promise is to be performed.- If it appears from the nature ofthe case that it was the intention of the parties to any contract that any promise containedin it should be performed by the promisor himself, such promise must be performed bythe promisor. In other cases, the promisor or his representatives may employ a competentperson to perform it.

Illustrations

(a) A promises to pay B a sum of money. A may perform this promise, either bypersonally paying the money to B or by causing it to be paid to B by another ;and, if A dies before the time appointed for payment, his representatives mustperform the promise, or employ some proper person to do so.

(b) A promises to paint a picture for B. A must perform this promise personally.


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SSSSS.41..41..41..41..41. Effect of accepting performance from third person.- When a promisee acceptsperformance of the promise from a third person, he cannot afterwards enforce it againstthe promisor.

SSSSS.42..42..42..42..42. Devolution of joint liabilities.- When two or more persons have made a jointpromise, then, unless a contrary intention appears by the contract, all such persons,during their joint lives, and, after the death of any of them, his representative jointly withthe survivor or survivors, and, after the death of the last survivor, the representatives ofall jointly, must fulfil the promise.

SSSSS.43.43.43.43.43. Any one of joint promisors may be compelled to perform.-When two or;more persons make a joint promise, the promisee may, in the absence of expressagreement to the contrary, compel any one or more of such joint promisors, to performthe whole of the promise.

Each promisor may compel contribution. Each of two or more joint promisors maycompel every other joint promisor to contribute equally with himself to the performanceof the promise, unless a contrary intention appears from the contract.

SSSSS.43. Sharing of loss by default in contribution..43. Sharing of loss by default in contribution..43. Sharing of loss by default in contribution..43. Sharing of loss by default in contribution..43. Sharing of loss by default in contribution.- If any one of two or more jointpromisors makes default in such contribution, the remaining joint promisors must bearthe loss arising from such default in equal shares.

Explanation.- Nothing in this section shall prevent a surety from recovering from hisprincipal; payments made by the surety on behalf of the principal, or entitle the principalto recover anything from the surety on account of payments made by the principal.

Illustrations

(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B orC to pay him 3,000 rupees.

(b) A, B and C jointly promise to pay D the sum of 3,000 rupees.

C is compelled to pay the whole. A is insolvent, but his assets are sufficient to payone-half of his debts. C is entitled to receive 500 rupees from A’s estate, and1,250 rupees from B.

(c) A, B and C are under a joint promise to pay D 3,000 rupees.

C is unable to pay anything, and A is compelled to pay the whole. A is entitled toreceive 1,500 rupees from B.


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(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being onlysureties for C. C fails to pay. A and B are compelled to pay the whole sum. Theyare entitled to recover it from C.

SSSSS.44. Effect of release of one joint promisor.44. Effect of release of one joint promisor.44. Effect of release of one joint promisor.44. Effect of release of one joint promisor.44. Effect of release of one joint promisor.- Where two or more persons havemade a joint promise, a release of one of such joint promisors by the promisee doesnot discharge the other joint promisor or joint promisors ; neither does it free the jointpromisors so released from responsibility to the other joint promisor or joint promisors.

SSSSS.45. Devolution of joint rights.45. Devolution of joint rights.45. Devolution of joint rights.45. Devolution of joint rights.45. Devolution of joint rights.- When a person has made a promise to two ormore persons jointly, then, unless a contrary intention appears from the contract, theright to claim performance rests, as between him and them, with them during their jointlives, and, after the death of any of them, with the representative of such deceasedperson Jointly with the survivor or survivors, and, after the death of the last survivor, withthe representatives of all jointly.

Illustration

A, in consideration of 5,000 rupees, lent to him by B and C, promises B and Cjointly to repay them that sum with interest on a day specified. B dies. The right to claimperformance rests with Bs representative jointly with C during Cs life and after the deathof C with the representatives of B and C jointly.

Time and Place of Performance

Sections 46 to 50 of the Act lay down certain rules in this regard:

SSSSS.46..46..46..46..46. Time for performance of promise, when no application is to be made and notime is specified.- Where, by the contract, a promisor is to perform his promise withoutapplication by the promisee, and no time for performance is specified, the engagementmust be performed within a reasonable time.

Explanation.- The question “what is a reasonable time “ is, in each particular case,a question of fact.

1) Where a contract does not specify any time for performance the promisor mustperform it within a reasonable time.

SSSSS.47.47.47.47.47. Time and place for performance of promise, where time is specified and noapplication to be made.- When promise is to be performed on a certain day, and thepromisor has undertaken to perform it without application by the promisee, the promisor


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may perform it at any time during the usual hours of business on such day and at theplace at which the promise ought to be performed.

Illustration

A promises to deliver goods at Bs warehouse on the first January. On that day Abrings the goods to Bs warehouse, but after the usual hour for closing it, and they arenot received. A has not performed his promise.

When a contract is to be performed on a particular day, without any application thepromisee being required, the promisor may perform the contract on that particular dayduring the usual hours of the business on such day at the place at which the promiseought to be performed

SSSSS.48..48..48..48..48. Application for performance on certain day to be at proper time and place.-When a promise is to be performed on a certain day, and the promisor has not undertakento perform it without application by the promisee, it is the duty of the, promisee to applyfor performance at a proper place and within the usual hours of business.

Explanation. - The question “what is a proper time and place.” is, in each particularcase, a question of fact.

Where the promise has to be performed on a certain day but promisor had notundertaken to perform it without application by the promisee, the promisee is bound toapply 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.

SSSSS.49..49..49..49..49. Place for performance of promise, where no application to be made and noplace fixed for performance.- When a promise is to be performed without applicationby the promisee, and no place is fixed for the performance of it, it is the duty of thepromisor to apply to the promisee to appoint a reasonable place for the performanceof the promise, and to perform it at such place.

Illustration

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must applyto B to appoint a reasonable place for the purpose of receiving it, and must deliver it tohim at such place.

2) When a promise to be performed without application by the promisee and notplace is fixed for the performance of it, it is duty of the promisor to apply to the promisee


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to appoint a reasonable place for the performance of the promise, and to perform it atsuch place

SSSSS.50..50..50..50..50. A contract should be performed in the manner and at the time prescribed inthe contract. A promisor is discharged from liability if he performs the promise in amanner or at a time prescribed or sanctioned by the promisee.

SSSSS.51. .51. .51. .51. .51. Promisor not bound to perform, unless reciprocal promisee ready and willingto perform. When a contract consists of reciprocal promises to be simultaneouslyperformed, no promisor need perform his promise unless the promisee is ready andwilling to perform his reciprocal promise.

Illustrations

a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.

A need not deliver the goods, unless B is ready and willing to pay for the goodson delivery.

B need not pay for the goods, unless A is ready and willing to deliver them onpayment.

(b) A and B contract that A shall deliver goods to B at a price to be paid by installments,the first installment to be paid on delivery.

A need not deliver, unless B is ready and willing to pay the first installment ondelivery.

B need not pay the first installment, unless A is ready and willing to deliver thegoods on payment of the first installment.

52. 52. 52. 52. 52. Order of performance of reciprocal promises.- Where the order in whichreciprocal promises are to be performed is expressly fixed by the contract, they shall beperformed in that order; and, where the order is not expressly fixed by the contract, theyshall be performed in that order which the nature of the transaction requires.

Illustrations

(a) A and B contract that A shall build a house for B at a fixed price. As promise tobuild the house must be performed before Bs promise to pay for it.

(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price andB promises to give security for the payment of the money. As promise need not be


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performed until the security is given, for the nature of the transaction requires thatA should have security before he delivers up his stock.

53.53.53.53.53. Liability of party preventing event on which the contract is to take effect.- Whena contract contains reciprocal promises, and one party to the contract prevents theother from performing his promise, the contract becomes voidable at the option of theparty so prevented; and he is entitled to compensation.

Illustration

A and B contract that B shall execute certain work for A for a thousand rupees. B isready and willing to execute the work accordingly, but A prevents him from doing so.The contract is voidable at the option of B ; and, if he elects to rescind it, he is entitledto recover from A compensation for any loss which he has incurred by its non-performance.

54.54.54.54.54. Effect of default as to that promise which should be first performed, in contractconsisting of reciprocal promises.- When a contract consists of reciprocal promises,such that one of them cannot be performed, or that its performance cannot be claimedtill the other has been performed, and the promisor of the promise last mentioned failsto perform it, such promisor cannot claim the performance of the reciprocal promise,and must make compensation to the other party to the contract for any loss which suchother party may sustain by the non-performance of the contract.

Illustrations

(a) A hires Bs ship to take in and convey, from Calcutta to the conveyance. A doesnot provide any cargo for the ship. A

cannot claim the performance of Bs promise, and must make compensation to Bfor the loss which B sustains by the non-performance of the contract.

(b) A contracts with B to execute certain builders work for a fixed price, B supplyingthe scaffolding and timber necessary for the work. B refuses to furnish anyscaffolding or timber, and the work cannot be executed. A need not execute thework, and B is bound to make compensation to A for any loss caused to him bythe non-performance of the contract.

(c) A contract with B to deliver to him, at a specified price, certain merchandise onboard a ship which cannot arrive for a month, and B engages to pay for themerchandise within a week from the date of the contract. B does not pay within


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the week. As promise to deliver need not be performed, and B must makecompensation.

(d) A promises B to sell him one hundred bales of merchandise, to be delivered nextday, and B promises A to pay for them within a month. A does not deliver accordingto his promise. Bs promise to pay need not be performed, and A must makecompensation.

55. 55. 55. 55. 55. Effect of failure to perform at fixed time, in contract in which time is essential.-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 beforethe specified time, the contract, or so much of it as has not been performed, becomesvoidable at the option of the promisee, if the intention of the parties was that timeshould be of the essence of the contract.

Effect of such failure when time is not essential.-If it was not the intention of theparties that time should be of the essence of the contract, the contract does not becomevoidable by the failure to do such thing at or before the specified time; but the promiseeis entitled to ompensation from the promisor for any loss occasioned to him by suchfailure.

Effect of acceptance of performance at time other than that agreed upon. If, incase of a contract voidable on account of the promisors failure to perform his promiseat the time agreed, the promisee accepts performance of such promise at any timeother than that agreed, the promisee cannot claim compensation for any loss occasionedby the non-performance of the promise at the time agreed, unless, at the time of suchacceptance he gives notice to the promisor of his intention to do so.

Where Time is the Essence of the Contract

Where time is of the essence of a contract and a party who is bound to perform hispromise within the time fixed fails to do so, the contract becomes voidable at the optionof the other party. An intention to make time is the essence of the contract must beexpressed in a very clear language.

Where Time is not the Essence of Contract

Where time is not the essence of the contract and promisor fails to perform it withinthe specified time, the promisee is not entitled to compensation from the promisor forany loss occasioned to him by such failure.


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Acceptance of Performance out of Time

Where the promisee accepts performance of a promise at any time other then thatagreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise unless at the time of such acceptance he gives notice tothe promisor of his intention so to do.

Devolution of Joint Rights and Liabilities

1) When two or more persons have made a joint promise, all of them must jointlyfulfill the promise. If any of the joint promisors dies, his legal representatives willbe jointly liable for the performance along with the surviving promisor or promisors.If all the original promisors die, then the legal representatives of all such promisorswill be jointly responsible for the performance of the promise.

2) The rule of course is subject to a contract to the contrary.

When two or more persons make a joint promise, the promisee is entitled, in theabsence of an express agreement to the contrary to compel any one or more ofsuch joint promisors to perform the whole of such promise. In other words, theliability of joint promisors is joint and several. When one of several joint promisorshas performed the promise, he is entitled to contribution from the other jointpromisors.

If a joint promisor makes default in such contribution, the remaining joint promisorsmust share the loss equally.

3) A release of one of joint promisors by the promisee does not discharge the otherjoint promisors.

4) Where there are joint promisors, the benefits of the promise devolve on therepresentatives of the deceased promisors. All the joint promisors must join togetherto claim performance of the promise.

Sections 57.Sections 57.Sections 57.Sections 57.Sections 57. Reciprocal promise to do things legal, and also other things illegal.-Where persons reciprocally promise, firstly, to do certain things which are legal, and,secondly, under specified circumstances to do certain other things which are illegal, thefirst set of promises is a contract, but the second is a void agreement.

Illustration

A and B agree that A shall sell B a house for 10,000 uses it as a gambling house,he shall pay A 50,000 rupees for it.


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The first set of reciprocal promises, namely, to sell the house and to pay 10,000rupees for it, is a contract.

The second set is for an unlawful object, namely, that B may use the house as agambling house, and is a void agreement.

58.58.58.58.58. Alternative promise, one branch being illegal.- In the case of an alternativepromise, one branch of which is legal and the other illegal, the legal branch alone canbe enforced.

Illustration

A and B agree that A shall pay B 1,000 rupees for which B shall afterwards deliverto A either rice or smuggled opium.

This is a valid contract to deliver rice, and a void agreement as to the opium.

Appropriation of Payments

59.59.59.59.59. Application of payment where debt to be discharged is indicated.-Where adebtor, owing several distinct debts to one person, makes a payment to him, either withexpress intimation, or under circumstances implying that the payment is to be appliedto the discharge of some particular debt, the payment, if accepted, must be appliedaccordingly.

Illustrations

(a) A owes B, among other debts, 1,000 rupees upon a promissory note which fallsdue on the first June. He owes B no other debt of that amount. On the first JuneA pays to B 1,000 rupees. The payment is to be applied to the discharge of thepromissory note.

(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A anddemands payment of this sum A sends to B 567 rupees. This payment is to beapplied to the discharge of the debt of which B had demanded payment.

60.60.60.60.60. Application of payment where debt to be discharged is not indicated.- Wherethe debtor has omitted to intimate and there are no other circumstances, indicating towhich debt the payment is to be applied, the creditor may apply it at his discretion toany lawful debt actually due and payable to him from the debtor, whether its recoveryis or is not barred by the law in force for the time being as to the limitation of suits.


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61.61.61.61.61. Application of payment where neither party appropriates.- Where neither partymakes any appropriation the payment shall be applied in discharge of the debts inorder of time, whether they are or are not barred by the law in force for the time beingas to the limitation of suits. If the debts are of equal standing, the payment shall beapplied in discharge of each proportionally.

Appropriation of Payment

Where there are several debts owing by one person to another, and a certainpayment is made by the debtor which is insufficient to cover the debts, a question arisesas to which of the debts the payment is to be appropriated. The debtor has a right toinstruct the creditor to which account the money so paid is to be appropriated and thecreditor is bound by those instructions. But a difficulty arises when no such instructionsare given by the debtor. The English law relating to appropriation of payment is laiddown in Clayton’s case and those principles are embodied in sections 59 to 61 of theAct and are as follows:

1) Appropriation by DebtorAppropriation by DebtorAppropriation by DebtorAppropriation by DebtorAppropriation by Debtor: If the debtor owes several distinct debts to the samecreditor and makes payment, he has the right to request the creditor to apply thepayment to the discharge of some particular debt. If the creditor accepts thepayments, he must apply it as directed.

2) Appropriation by CreditorAppropriation by CreditorAppropriation by CreditorAppropriation by CreditorAppropriation by Creditor: If the debtor makes payment without indication of hisintention, the creditor is at liberty to apply it to any lawful debt actually due andpayable to him. The creditor may even apply the payment to a debt which is time-barred.

3) Appropriation by LAppropriation by LAppropriation by LAppropriation by LAppropriation by Lawawawawaw: When neither the creditor nor the debtor appropriates thepayment, the law gets the right to appropriate the payment. The law prefers toapply the payment in discharge of debts in the order of time in which they wereincurred. If the debts are of equal standing, payment shall be applied in dischargeof each debt proportionately.

4) PPPPPrincipal and Interestrincipal and Interestrincipal and Interestrincipal and Interestrincipal and Interest: If the debtor fails to clearly state whether the payments is tobe adjusted towards capital or interest, it must be applied towards interest firstand then towards capital.

Discharge by Breach of Contract:

Parties to a contract are expected to perform their respective obligations. If anyparty fails to perform his obligations, there occurs a breach of contract. Breach of the


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contract operates as discharge of the contract. The breach of contract may be actual oranticipatory.

Actual Breach:

When a person does not perform his part of the contract at the time when it is due,he will be liable for breach. Thus where A agrees to deliver to B 100 bags of rice on 1st

July and fails to do so on that day, there is a breach of contract by A.

Anticipatory Breach of Contract

A breach of contract occurring before the due date of performance is known asanticipatory breach of contract.

A agrees to supply certain goods to B on 15th January. Before this date, he informsB that he is not going to supply the goods. This is anticipatory breach of contract.

Effect of an Anticipartory Breach

If the promisee accepts the repudiation of the promisor, the contract is discharged.He is no longer bound by any obligation under the contract. He is excused fromperforming his part of the contract. He is also entitled to sue the promisor for damagesor specific performance immediately.

If the aggrieved party refuses to accept the repudiation of the promisor, the contractwill remain operative for the benefit of both the parties. The party who has previouslyrepudiated may still perform it, if he can. If an event happens which discharges thecontract legally, the promisor may take advantage of such a change.

Discharge by impossibility of Performance

Law does not compel people to do impossible things. It generally results in thedischarge of the contract. Section 56 of the Act lays down that an agreement to do anact impossible in itself is void.

1) When the impossibility is known to the parties at the time of making of the contract,it is known as initial impossibility. Ex. A agrees to sell to B two planets for Rs. onelakh.

2) At the time of entering into a contract parties are not aware about the impossibilityof performance. Ex. A agreed to sell his house to B. But unknown to both theparties the house is destroyed two days before.


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3) Impossibility which arises subsequent to the formation of the contract is called‘supervening impossibility’.

Examples

a) When the subject matter of a contract, subsequent to its formation is destroyed,the contract is discharged.

b) Where the performance of a contract depends on the personal skill of a party, acontract is discharged on the illness or incapacity or death of that party.

c) Subsequent to the formation of the contract, if there is any change in the law theparties are discharged from other obligations under the contract.

d) An agreement with an alien enemy is not valid. But before and after declarationof war, agreements with that alien are valid.

e) If a contract is made on the basis of continued existence of particular state ofthings, the contract stands discharged if the state of things changes or ceases toexist.

In Krell vs. Henry (1903) 2. K.B.740, H hired a room from K for two days to witnesscoronation procession of King Edward VII. K knew the object of the contract. K sued forthe rent. It was held that H need not pay the rent as the existence of the procession wasthe basis of the contract. Its cancellation discharged the contract.

Effects of Frustration In English Law

In 1943 the Law Reform (Frustrated Contracts) Act, 1943, was passed in England.As per the Act the following are the effects of frustration.

When a contract is discharged by frustration, parties are excused from performingtheir respecting obligations.

a) Money paid before the frustrated event is recoverable.

b) Money not yet paid need not be paid.

c) Compensation can be recovered for the work done by a party.

Indian Law:

The Indian Law regarding frustration was made clear in Satyabrata Ghose vs.Mugneeram Bangur & Co. In this case, M & Co., owned a large area of land in


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Calcutta. It started a scheme for the development of the land for residential purposes.It invited offers from the intending buyers. It received advances from applicants andallotted plots to them. Satyabrata was allotted a plot on payment of earnest money. Atthis stage the whole area was requisitioned by the government for military purposes. Asa result, the company pleaded frustration, returned the money received as advanceand took possession of all the plots. Satyabrata refused to take back the advance andexpressed his will to keep the contract alive till the army vacates the land. When theGovernment vacated the land, Satyabarta insisted on the enforcement of the contract.Rejecting the pleas of frustration, the Supreme Court accepted his plea. It was held thatthe contract was not frustrated.

Frustration of Contract containing Arbitration Agreement –Effect of-

Under section 56 of the Indian contract Act 1872, a contract to do an act whichafter the contract was made becomes impossible, becomes void. It is therefore onlythat contract which is for doing such an act that becomes frustrated. An agreement torefer a dispute to arbitration arising out of a contract cannot be said to be a contract todo an act. In a contract containing an arbitration clause there is (1) a promise by oneparty to do an act for a consideration furnished by the other party and (2) an agreementto refer disputes arising out of that contract to arbitration. Section 56 of the contract Actapplies to the former and not to the latter agreement. Referring dispute to arbitration isnot a duty to be performed under a contract and there is hardly any question ofperformance of the duty being rendered impossible. Moreover, whether a contract isfrustrated or not itself a dispute than arises under a contract and if the contract containsan arbitration clause that dispute can be referred to arbitration. Hence even if a contractis said to be frustrated the arbitration clause remains operative.

Doctrine of frustration comes into play when a contract becomes impossible ofperformance after it is made on account of circumstances beyond the control of theparty. Contract is not frustrated merely because the circumstances in which the contractwas made underwent a change. A contract is not frustrated if the frustration of contractis self-generated or the disability is self-induced. Court can relieve a contracting partyfrom the obligations of a contract under section 56 of the Indian Contract Act only byreason of a supervening event or untoward happening beyond the control of the partieswhich renders the contract impossible of performance after the same was made.


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62.62.62.62.62. Effect of novation, rescission, and alteration of contract.- If the parties to acontract agree to substitute a new contract for it, or to rescind or alter it, the originalcontract need not be performed.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C that B shallthenceforth accept C as his debtor, instead of A.

The old debt of A to B is at an end, and a new debt from C to B has beencontracted.

(b) A owes B 10,000 rupees. A enters into an arrangement with B, and gives B amortgage of his (As) estate for 5,000 rupees in place of the debt of 10,000rupees. This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A tocredit C with 1,000 rupees in his books, but C does not assent to the arrangement.B still owes C 1,000 rupees, and no new contract has been entered into.

63.63.63.63.63. Promisee may dispense with or remit performance of promise.- Every promiseemay dispense with or remit, wholly or in part, the the performance of the promise madeto him, or may extend the time for such performance, or may accept instead of it anysatisfaction which he thinks fit.

Illustrations

(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is nolonger bound to perform the promise.

(b) A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the wholedebt, 2,000 rupees paid at the time and place at which the 5,000 rupees werepayable. The whole debt is discharged.

(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, insatisfaction of his claim on A. This payment is a discharge of the whole claim. 2*

(d) A owes B, under. a contract, a sum of money, the amount of which has not beenascertained. A without ascertaining the amount, gives to B, and B, in satisfactionthereof, accepts, the sum of 2,000rupees. This is a discharge of the whole debt,whatever may be its amount.

e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes anarrangement with his creditors, including B, to pay them a 3* [composition] of


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eight annas in the rupee upon their respective demands. Payment to B of 1,000rupees is a discharge of B’s demand.

64.64.64.64.64. Consequences of rescission of voidable contract.- When a person at whoseoption a contract is voidable rescinds it, the other party thereto need not perform anypromise therein contained in which he is promisor. The party rescinding a voidablecontract shall, if he have received any benefit there under from another party to suchcontract, restore such benefit, so far as may be, to the person from whom it was received.

65. 65. 65. 65. 65. Obligation of person, who has received advantage under void agreement, orcontract that becomes void.- When an agreement is discovered to be void, or when acontract becomes void, any person who has received any advantage under suchagreement or contract is bound to restore it, or to make compensation for it to theperson from whom he received it.

Illustrations

(a) A pays B 1,000 rupees in consideration of Bs promising to marry C, A’s daughter.C is dead at the time of the promise. The agreement is void, but B must repay Athe 1,000 rupees.

(b) A contracts with B to deliver to him 250 maunds of rice before the first of May. Adelivers 130 maunds only before that day, and none after. B retains the 130maunds after the first of May. He is bound to pay A for them.

(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre fortwo nights in every week during the next two months, and B engages to pay her ahundred rupees for each nights performance. On the sixth night, A willfully absentsherself from the theatre, and B, in consequence, rescinds the contract. B must payA for the five nights on which she had sung.

d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance.A is too ill to sing. A is not bound to make compensation, to B for the loss of theprofits which B would have made if A had been able to sing, but must refund to Bthe 1,000 rupees paid in advance.

66.66.66.66.66. Mode of communicating or revoking rescission of voidable contract.- Therescission of a voidable contract may be communicated or revoked in the same manner,and subject to the same rules, as apply to the communication or revocation of a proposal.


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67. 67. 67. 67. 67. Effect of neglect of promisee to afford promisor reasonable facilities forperformance.- If any promisee neglects or refuses to afford the promisor reasonablefacilities for the performance of his promise, the promisor is excused by such neglect orrefusal as to any non-performance caused thereby.

Illustration

A contracts with B to repair Bs house.

B neglects or refuses to point out to A the places in which his house requires repair.

A is excused for the nonperformance of the contract if it is caused by such neglector refusal.

Remedies for Breach of Contract

73.73.73.73.73. Compensation for loss or damage caused by breach of contract.-When acontract has been broken, the party who suffers by such breachis entitled to receive, from the party who has broken the contract, compensation for anyloss or damage caused to him thereby, which naturally arose in the usual course ofthings from such breach, or which the parties knew, when they made the contract, to belikely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damagesustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created bycontract.-When an obligation resembling those created by contract has been incurredand has not been discharged, any person injured by the failure to discharge it is entitledto receive the same compensation from the party in default, as if such person hadcontracted to discharge it and had broken his contract.

Explanation.- In estimating the loss or damage arising from a breach of contract,the means which existed of remedying the inconvenience caused-by the non-performanceof the contract must be taken into account.

Illustrations

a) A contracts to sell and deliver 50 maunds of saltpeter to B, at a certain price to bepaid on delivery. A breaks his promise. B is entitled to receive from A, by way of


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compensation, the sum, if any, by which the contract price falls short of the pricefor which B might have obtained 50 maunds of saltpeter of like quality at the timewhen the saltpeter ought to have been delivered.

b) A hires Bs ship to go to Bombay, and there take on board, on the first of January,a cargo which A is to provide and to bring it to Calcutta, the freight to be paidwhen earned. Bs ship does not go to

Bombay, but A has opportunities of procuring suitable conveyance for the cargoupon terms as advantageous as those on which he had chartered the ship. Aavails himself of those opportunities, but is put to trouble and expense in doingso. A is entitled to receive compensation from B in respect of such trouble andexpense.

(c ) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixedfor delivery. A afterwards informs B that he will not accept thrice if tendered tohim. B is entitled to receive from A, by way of compensation, the amount, if any,by which the contract price exceeds that which B can obtain for the rice at thetime when A informs B that he will not accept it.

(d) A contracts to buy Bs ship for 60,000 rupees, but breaks his promise. A must payto B, by way of compensation, the excess, if any, of the contract price over theprice which B can obtain for the ship at the time of the breach of promise.

(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, forsale at that place, starting on a specified day.

The boat, owing to some avoidable cause, does not start at the time appointed,whereby the arrival of the cargo at Mirzapur is delayed beyond the time when itwould have arrived if the boat had sailed according to the contract. After thatdate, and before the arrival of the cargo, the price of jute falls. The measure ofthe compensation payable to B by A is the difference between the price which Bcould have obtained for the cargo at Mirzapur at the time when it would havearrived if forwarded in due course, and its market price at the time when it actuallyarrived.

(f) A contracts to repair Bs house in a certain manner, and receives payment inadvance. A repairs the house, but not according to contract. B is entitled torecover from A the cost of making the repairs conform to the contract.

(g) A contracts to let his ship to B for a year, from the first of January, for a certainprice. Freights rise, and, on the first of January, the hire obtainable for the ship is


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higher than the contract price. A breaks his promise. He must pay to B, by way ofcompensation, a sum equal to the difference between the contract price and theprice for which B could hire a similar ship for a year on and from the first ofJanuary.

(h) A contracts to supply B with a certain quantity of iron at a fixed price, being ahigher price than that for which A could procure and deliver the iron. B wrongfullyrefuses to receive the iron. B must pay to A, by way of compensation, the differencebetween the contract price of the iron and the sum for which A could have obtainedand delivered it.

(i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, toAs mill informing B that his mill is stopped for want of the machine. B unreasonablydelays the delivery of the machine, and A, in consequence, loses a profitablecontract with the Government. A is entitled to receive from B, by way ofcompensation, the average amount of profit which would have been made by theworking of the Mill during the time that delivery of it was delayed, but not the losssustained through the loss of the Government contract.

(j) A having contracted with B to supply B with 1,000 tons of iron at 100 rupees aton, to be delivered at a stated time, contracts with C for the purchase of 1,000tons of iron at 180 rupees a ton, telling C that he does so for the purpose ofperforming his contract with B. C fails to perform his contract with A, who cannotprocure other iron, and B, in consequence, rescinds the contract. C must pay toA 20,000 rupees, being the profit which A would have made by the performanceof his contract with B.

(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price,a certain piece of machinery. A does not deliver the piece of machinery at thetime specified, and in consequence of this, B is obliged to procure another at ahigher price than that which he was to have paid to A, and is prevented fromperforming a contract which B had made with a third person at the time of hiscontract with A (but which had not been then communicated to A), and iscompelled to make compensation for breach of that contract.

A must pay to B, by way of compensation, the difference between the contractprice of the piece of machinery and the sum paid by B for another, but not thesum paid by B to the third person by way of compensation.


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(l) A, a builder, contracts to erect and finish a house by the first of January, in orderthat B may give possession of it at that time to C, to whom B has contracted to letit. A is informed of the contract between B and C. A builds the house so badlythat, before the first of January, it falls down and has to be re-built by B, who, inconsequence, loses the rent which he was to have received from C, and is obligedto make compensation to C for the breach of his contract.

A must make compensation to B for the cost of rebuilding the house, for the rentlost, and for the compensation made to C.

(m) 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 isentitled to be reimbursed this sum by A.

(n ) A contracts to pay a sum of money to B on a day specified. A does not pay themoney on that day; B, in consequence of not receiving the money on that day, isunable to pay his debts, and is totally ruined. A is not liable to make good to Banything except the principal sum he contracted to pay, together with interest upto the day of payment.

(o) A contracts to deliver 50 maunds of saltpeter to B on the first of January, at acertain price. B afterwards, before the first of January, contracts to sell the saltpeterto C at a price higher than the market price of the first of January. A breaks hispromise.

In estimating the compensation payable by A to B, the market price of the first ofJanuary, and not the profit which would have arisen to B from the sale to C, is tobe taken into account.

(p ) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knowsnothing of Bs mode of conducting his business. A breaks his promise, and B,having no cotton, is obliged to close his mill. A is not responsible to B for the losscaused to B by the closing of the mill.

(q ) A contracts to sell and deliver to B, on the first of January, certain cloth which Bintends to manufacture into caps of a particular kind, for which there is no demand,except at that season. The cloth is not delivered till after the appointed time, and


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too late to be used that year in making caps. B is entitled to receive from A, byway of compensation, the difference between the contract price of the cloth andits market price at the time of delivery, but not the profits which he expected toobtain by making caps, nor the expenses which he has been put to in makingpreparation for the manufacture.

(r) A, a ship-owner, Contracts with B to convey him from Calcutta to Sydney in Asship, sailing on the first of January, and B pays to A, by way of deposit, one-halfof his passage-money. The ship does not sail on the first of January, and B, afterbeing in consequence detained in Calcutta for some time and thereby put tosome expense, proceeds to Sydney in another vessel, and, in consequence, arrivingtoo late in Sydney, loses a sum of money. A is liable to repay to Bhis deposit withinterest, and the expense to which he is put by his detention in Calcutta, and theexcess, if any, of the passage-money paid for the second ship over that agreedupon for the first, but not the sum of money which B lost by arriving in Sydney toolate.

74.74.74.74.74. Compensation for breach of contract where penalty stipulated for.- When acontract has been broken, if a sum is named in the contract as the amount to be paidin case of such breach, or if the contract contains any other stipulation by way ofpenalty, the party complaining of the breach is entitled, whether or not actual damageor loss is proved to have been caused thereby, to receive from the party who has brokenthe contract reasonable compensation not exceeding the amount so named or, as thecase may be, the penalty stipulated for.

Explanation.- A stipulation for increased interest from the date of default may be astipulation by way of penalty.

Exception.- When any person enters into any bail-bond, recognizance or otherinstrument of the same nature, or, under the provisions of any law, or under the ordersof the [Central Government] or of any

State Government, gives any bond for the performance of any public duty or act inwhich the public are interested, he shall be liable, upon breach of the condition of anysuch instrument, to pay the whole sum mentioned therein.

Explanation.- A person who enters into a contract with Government does notnecessarily thereby undertake any public duty, or promise to do an act in which thepublic are interested.


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Illustrations

(a) A contracts with B to pay B 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 suchcompensation, not exceeding Rs.1,000, as the Court considers reasonable.

(b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay BRs. 5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation,not exceeding Rs. 5,000, as the Court considers reasonable.

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court ona certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent. Atthe end of six months, with a stipulation that, in case of default, interest shall bepayable at the rate of 75 per cent from the date of default. This is a stipulation byway of penalty, and B is only entitled to recover from A such compensation as theCourt considers reasonable.

(e) A, who owes money to B a money-lender, undertakes to repay him by deliveringto him 10 maunds of grain on a certain date, and stipulates that, in the event ofhis not delivering the stipulated amount by the stipulated date, he shall be liableto deliver 20.maunds. This is a stipulation by way of penalty, and B is only entitledto reasonable compensation in case of breach.

f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly installments,with a stipulation that” in default of payment of any installment, the whole shallbecome due. This stipulation is not by way of penalty, and the contract may beenforced according to its terms.

(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearlyinstallments of Rs. 40, with a stipulation that, in default of payment of anyinstallment, the whole shall become due. This is a stipulation by way of penalty.

75. 75. 75. 75. 75. Party rightfully rescinding contract entitled to compensation.- A person whorightfully rescinds a contract is entitled to compensation for any damage which he hassustained through the non-fulfillment of the contract.

Illustration

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for twonights In every week during the next two months, and B engages to pay her 100 rupees


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for each nights performance. On the sixth night, A willfully absents herself from thetheatre, and B, in consequence, rescinds the contract. B is entitled to claim compensationfor the damage which he has sustained through the non-fulfillment of the contract.

As a general rule the aim of Law of contracts is to award liquidated damages, i.e.fixed damages. The person who commits breach of contract is called defaulting partyand the person against whom breach is committed is called the aggrieved party. Aperson who commits breach of contract must make compensation therefore to theinjured party, who is to be placed in the same financial position in which he would havebeen if the contract had been performed. The term damages are used to meancompensation in money as a substitute for the promised performance. Damages forthe breach of a contract are intended to compensate the injured party so far as moneycan do so.

Damages are of Four Kinds

1) General or Ordinary DamagesGeneral or Ordinary DamagesGeneral or Ordinary DamagesGeneral or Ordinary DamagesGeneral or Ordinary Damages: General damages are those which arise naturallyin the usual course of things for the breach of contract. These include damageswhich are the natural and probable consequences of the breach of the contract.General damages are those damages which the law presumes from the breachof the contract. General damages are usually assessed on the basis of actual losssuffered.

2) Special DamagesSpecial DamagesSpecial DamagesSpecial DamagesSpecial Damages: Special damages are those which are a result of usualcircumstances affecting the plaintiff. These are the damages, which the partiesknew, when they made the contract, as likely to arise from the breach of contract.The notice of special circumstances involved in a contract must be known to theparty against whom special damages are claimed for breach of a contract. If hehad no knowledge, he is not answerable. Knowledge of the special circumstancesmust be on the date of the contract. Subsequent knowledge of the specialcircumstances will not create any special liability. Special damages beingexceptional in character do not follow ordinary course. The leading case on thispoint is Hadley vs. Baxendale (1854) 9 Ex. 341. The plaintiff’s mill had beenstopped due to the breakage of a crank shaft. The broken shaft had to be sent tothe makers of Greenwich as a pattern for preparing the new one. The defendantswho were common carriers, agreed to carry the broken shaft to Greenwich. Theonly information given to the carriers was that the article to be carried was thebroken shaft of a mill and the plaintiffs were millers of the shaft. Owing to thedefendants negligence the delivery of the shaft was delayed. Due to this delay the


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mill remained stopped for a longer time, than it would have been, had the shaftbeen delivered at Greenwich without any delay. The plaintiffs brought an actionto recover damages for the loss of profits arising out of the delay. It was held thatit could not be contemplated sending the shaft, as the millers might have anothershaft in reserve. Moreover, the special circumstances were not communicated bythe plaintiffs to the defendants. The plaintiffs were, therefore, not entitled to recoverthe loss.

3) VVVVVininininindictive or Exemplary Damagesdictive or Exemplary Damagesdictive or Exemplary Damagesdictive or Exemplary Damagesdictive or Exemplary Damages: They are awarded with a view to punish thewrong-doer and not primarily with the idea of awarding compensation to theinjured party. The conduct of the defendant cannot be adequately punished onlyby awarding proportionate financial loss actually suffered. It should be sufficientlyexemplary or vindictive. Generally vindictive damages are not awarded for breachof contract, but are as a rule awarded in actions, or tort. But there are two exceptionsto this rule namely.

i) breach of contract to marry;

ii) Wrongful dishonor of a customer’s cheque by a banker having sufficientfunds of the customer at the disposal, to honor his cheque.

iii) Nominal Damages: They are also called ‘contemptuous damages’. Nominaldamages are those which are awarded only for the namesake. These damagesare quite small in amount. It is based on the principle where there is a rightthere must be a remedy.

4) Liquidated Damages and PLiquidated Damages and PLiquidated Damages and PLiquidated Damages and PLiquidated Damages and Penaltyenaltyenaltyenaltyenalty: When the amount of damages fixed by anagreement between the parties to be paid, in case of breach, is in the nature of afair and honest pre-estimation of probable damages, it is called liquidateddamages.

At the time of entering into a contract, if the amounts of damages are fixed andthese damages are disproportionate to the damage likely to accrue in the eventof the breach, it will be termed as penalty.

Indian law does not make any distinction between liquidated damages and penalty.The injured party is allowed only a reasonable compensation.

Rules Relating to the Assessment of Damages

1) The aggrieved party is entitled to recover by way of compensation, only the actualloss suffered by him.


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2) Damages are paid only for the proximate consequences of the breach of a contract.

3) The court may allow special damages, if such damages may reasonably besupposed to have been in the contemplation of both the parties at the time ofmaking of the contract.

4) The aggrieved party is to be placed in the same financial position in which hewould have been if the contract had been performed.

5) The injured party can recover the cost of getting the decree along with the damages.

6) In a contract for the sale of goods the measure of damages on the breach ofcontract is the difference between the contract price and the market price of suchgoods on the date of the breach of contract.


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CHAPTER-VI

QUASI CONTRACTS, STANDARD FORM OFCONTRACTS AND CYBER CONTRACTS

Quasi Contracts

Every contract creates rights and obligations. But under certain specialcircumstances, the law creates and enforces legal rights and obligationsalthough the parties have never entered into a contract. Such obligationsimposed by law are known as ‘quasi contracts’. They are contracts notin fact but in law. They are created by lawyers and judges. The Actdescribes them as ‘certain relations resembling those created by contract’.In English Law they are called as implied contracts or constructivecontracts. In U.S.A. they are discussed under the head ‘Restitution’. Quasicontracts are based on the principles of justice, equity andgood conscience. Its main object is to prevent unjustenrichment.

The Act deals with the following quasi-contractual obligations.

Section 68: Claims for Necesseries Supplied

Where necessaries are supplied to a person who is incompetent tocontract or to someone whom he is legally bound to support, the supplieris entitled to recover the price from the property of the incompetentperson under section 68 of the Act. E.g. A supplied B, a minor, withnecessaries suitable to his condition in life. A is entitled to be reimbursedfrom B’s property.

Essential elements of the section:-

a) If a person supplies necessaries to a person who is incapable ofcontracting or to any one whom he is legally bound to support;

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b) The necessaries must be suited to his condition in life;

c) The person supplying the necessaries is entitled to be reimbursed; but

d) The liability of such person incapable of contracting is limited to his property or inother words he incurs no personal liability for the obvious reason that he isincompetent to contract.

Thus we see that the person supplying the ‘necessaries’ shall be entitled to bereimbursed only when the necessaries are suited to the condition in life of the incapableperson. “Things necessary are those without which an individual cannot reasonablyexist”.

The word “necessaries’ has been used here in a technical sense. It includes notonly the bare necessiries of existence such as clothes and food, but all things that maybe reasonably necessary and suited to the minor’s conditions in life e.g., a watch or abicycle. But the articles of luxury are by no means necessaries.

Expenses for minor’s education, his sister’s marriage, expenses incurred in funeralof minor’s parents, expenses incurred for necessary litigation, etc., have generally beenheld as necessaries. Expenses for minor’s marriage have also been held to be‘necessaries’.

Last but not the least, only “the minor’s property is liable for necessaries, and nopersonal liability is incurred by him, as it may be under English Law”.

Section 69: Payment by an Interested Person

A person who is interested in the payment of money which another is bound by lawto pay, and who therefore pays it, is entitled to be reimbursed by the other.

For e.g. B holds lands in Bengal, on a lease granted by A, the Zamindar. Therevenue payable by A to the Government being in arrears, his land is advertised forsale by the Government. Under the revenue law, the consequence of such sale will bethe annulment of B’s lease. B, to prevent the sale and consequent annulment of hislease, pays to the Government the sum due from A. A is bound to make good to B theamount so paid.

Conditions of Liability:-

PPPPPayer must be interested in making Payer must be interested in making Payer must be interested in making Payer must be interested in making Payer must be interested in making Paymenaymenaymenaymenayment:- Firstly, the plaintiff should be interestedin making the payment. The interest which the plaintiff seeks to protect must, of course,

QUASI CONTRACTS, STANDARD FORM OF CONTRACTS AND CYBER CONTRACTS

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be legally recognizable. His honest belief that he has an interest to protect is enough.Where a party had agreed to purchase certain mills, he was allowed to recover fromthe seller the amount of already overdue municipal taxes paid by him in order to savethe property from being sold in execution. By agreeing to purchase the property he hadacquired sufficient interest in it to safeguard.

But should not be bound to PBut should not be bound to PBut should not be bound to PBut should not be bound to PBut should not be bound to Pay:ay:ay:ay:ay:- Secondly, it is necessary that the plaintiff himselfshould not be bound to pay. He should only be interested in making the payment inorder to protect his own interest. Where a person is jointly liable with others to pay, apayment by him of the others’ share would not give him a right of recovery under thissection.

PPPPPayment should be by one to another:-ayment should be by one to another:-ayment should be by one to another:-ayment should be by one to another:-ayment should be by one to another:- Lastly, the plaintiff should have made thepayment to another person and not to himself. Thus, where a certain Government wasthe tenant of a land and paid to itself out of the rent due to the landlord the arrears ofland revenue due to itself, the Government could not recover from the landlord. It wasa transfer of money from one head to another within the Government and not ‘paymentto another’ and though it was done to save the land from being sold in execution, it didnot come within the principle of the section.

Section 70: Obligation of a Person enjoying Benefit of Non-gratutiousAct

Where a person lawfully does anything for another person or delivers anything tohim, not intending to do so gratuitously, and such other person enjoys the benefitthereof, the latter is bound to make compensation to the former in respect of, or torestore, the thing so done or delivered.

E.g. A, a tradesman leaves goods at B’s house by mistake. B treats the goods as hisown. He is bound to pay A for them.

Conditions of Liability under the Section:-

It is plain that three conditions must be satisfied before this section can be invoked:

1) a person should lawfully do something for another person or deliver something tohim;

2) in doing the said thing or delivering the said thing he must not intend to actgratuitously;


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3) The other person for whom something is done or to whom something is deliveredmust enjoy the benefit thereof.

4) Non gratuitous act: A number of villages were drawing irrigation waters from atank. Some of the villages were under direct State tenancy, others under Zamindars.The Government carried out repairs to the tank for its preservation. The Zamidarsalso enjoyed the benefits of the repairs. They were accordingly held liable tomake proportional contribution towards the expenses of repair. The case showsthat even where the party making payment or rendering services is personallyinterested in the matter, he can recover proportional contribution from those whohave enjoyed the benefits of his services.

Section 71: Responsibility of Finder of Goods

A person, who finds goods belonging to another and takes them into his custody, issubject 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 ofordinary prudence would take of his own goods under similar circumstances. He cannotappropriate the goods without taking proper steps to find out the owner and shouldkeep them for a reasonable time so that the owner may turn up and take them. Thefinder of the goods is entitled to retain the goods against the owner until he receivedcompensation for him. He is also entitled to the possession of the goods as against thewhole world except the true owner.

Section 72: Money paid by mistake or under Coercion

A person to whom money has been paid or anything delivered by mistake or undercoercion must repay or return it. E.g. A and B jointly owe 100 rupees to C. A alone paysthe amount to C and B not knowing of this fact pay 100 rupees over again to C. C isbound to repay the amount to B.

Refund of Tax Money paid without being Due:-

The Supreme Court in its decision in Sales Tax Officer, Banaras v. Kanhaiya LalMukund Lal Saraf (1959) SCR 1350, applied section 72 and ordered the refund ofmoney paid by mistake.

A certain amount of sales tax was paid by a firm under the U.P. Sales Tax law on itsforward transaction and subsequently to the payment; the Allahabad High Court ruled


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the levy of sales tax on such transactions to be ultra vires. The firm sought to recoverback the tax money.

Rejecting the contention based on English, American and Australian laws which donot allow payments made under mistake of law to be recovered, the Supreme Courtallowed the recovery. “The section in terms does not make any distinction between amistake of law and a mistake of fact. The term ‘mistake’ has been used without anyqualification or limitation whatever…. The court found no ground for any estoppelagainst the firm and disapproved the following statement of the Nagpur High Court(Nagorao v. Governor-General in Council, AIR, 1951 Nag 372)

“If the reason for the rule is that a person paying money, they under mistake isentitled to recover it, because it is against the conscience of the receiver to retain it,then when the receiver has no longer the money with him or cannot be considered asstill having it, as in a case where he has spent it on his own purposes, differentconsideration must necessarily arise.”

In reference to this Supreme Court said that “no such equitable consideration canbe imported when the terms of section 72 are clear and unambiguous”.

If a mistake either of law or of fact is established, the assessee is entitled to recoverthe money and the party receiving it is bound to return it irrespective of any otherconsideration. Money paid under a mistake of law comes within ‘mistake’ in section72 of the Contract Act and there is no question of estoppel when the mistake of law iscommon to both the assessee and the taxing authority.

Standard form of Contracts

Due to enormous increase in the volume and complexities of trade and business aconcern may have to enter into a large number of contracts with its customers orclients. When a large number of contracts have got to be entered into by a person,from a practical point of view and for the sake of convenience, a standard form for thenumerous contracts may be used. The contracts with standard terms may be drafted byone party and on the same terms contracts may be made with numerous persons. Forinstance, an insurance company may prepare a draft of insurance policy, which mayform the basis of the contract with a large number of insured persons.

So it would be difficult for such large scale organizations to draw up a separatecontract with every individual. They, therefore, keep printed forms of contract. Such


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standardized contract contains a large number of terms and conditions in fine printwhich restrict and after exclude liability under the contract. The individual can hardlybargain with the massive organizations and therefore, his only function is to accept theoffer, whether he like its terms or not. He cannot alter those terms or even discuss themthey are there for him to take or leave. He therefore, does not undertake the laboriousand profitless task of discovering what the term is. Lord Denning pointed out in Thortonvs. Shoe Lane Parking Ltd. (1971) 1 All ER 686 CA, no customer in a thousand everreads the conditions. If he had stopped to do so, he would have missed the train or theboat.

Such contracts have been variously described as ‘Contracts of Adhesion’ whichmeans that the individual has no choice “but to accept; he does not negotiate, butmerely adheres”.

Protective Devices

The individual, therefore, deserves to be protected against the possibility ofexploitation inherent in such contracts.

Following are some of the modes of protection which have been evolved by thecourts.

1) RRRRReasonable Notice:easonable Notice:easonable Notice:easonable Notice:easonable Notice: In the first place it is the duty of the person delivering adocument to give adequate notice to the offeree of the printed terms and conditions.Where this is not done, the acceptor will not be bound by the terms.

2) Notice should be Contemporaneous with Contract:Notice should be Contemporaneous with Contract:Notice should be Contemporaneous with Contract:Notice should be Contemporaneous with Contract:Notice should be Contemporaneous with Contract: Notice of the terms shouldbe given before or at the time of the contract. A subsequent notification willindeed amount to a modification of the original contract and will not bind theother party unless he has assented thereto;

3) Theory of FTheory of FTheory of FTheory of FTheory of Fundamental Breach:undamental Breach:undamental Breach:undamental Breach:undamental Breach: Even where adequate notice of the terms andconditions in a document has been given, the party imposing the conditions maynot be able to rely on them if he has committed a breach of the contract whichcan be described as ‘fundamental’. An easy illustration is to be found in caseswhere goods different from those contracted are delivered.

4) Strict Construction:Strict Construction:Strict Construction:Strict Construction:Strict Construction: Exemption clauses construed strictly particularly where a clauseis so widely expressed as to be highly unreasonable. Any ambiguity in the modeor expressing an exemption clause is resolved in favor of the weaker party.


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5) Liability In TLiability In TLiability In TLiability In TLiability In Tort:ort:ort:ort:ort: Even where an exemption clause is exhaustive enough to excludeall kinds of liability under the contract, it may not exclude liability in tort.

6) Unreasonable TUnreasonable TUnreasonable TUnreasonable TUnreasonable Terms: erms: erms: erms: erms: Another mode of protection is to exclude unreasonableterms from the contracts. A term is unreasonable it would defeat the very purposeof the contract or if it is repugnant to public policy.

7) Exemption Clauses and Third PExemption Clauses and Third PExemption Clauses and Third PExemption Clauses and Third PExemption Clauses and Third Parties: arties: arties: arties: arties: One of the basic principles of the law ofcontract is that a contract only between the parties to it and no third party caneither enjoy any rights or suffer any liability under it. This should apply to standardform of contracts also. The effect would be that where goods are supplied orservices rendered under a contract which exempts the supplier from liability and athird party is injured by the use of them, the supplier is liable to him notwithstandingthat he has purchased his exemption from the other party to the contract.

Information Technology-contract Formation

Conclusion of contract by electronic means is a new concept. It is not a paperdocument. The validity of electronic contract cannot be questioned in the absence of apaper document, if the agreement is enforceable by law. The means of communicationare not important. Any means can be adopted. The Information Technology Act, 2000is a commercial code of e-business transactions, containing provisions dealing with,among others, how a contract can be formed electronically. It does not amend theIndian Contract Act, 1872 as regards the legal requirement for the formation of a validcontract. It only provides legal certainty as to the conclusion of contracts by electronicmeans.

The Information Technology Act, 2000 does not specifically provide the manner offorming a contract. The offer and acceptance may be communicated electronically.Admissibility of data message as evidence has been recognized. The contract formedby the use of data message is, therefore legally effective and admissible in evidence.

The Law relating to contracts made through telephone, telex or when the partiesare in each other’s presence is mutatis mutadis applicable to electronic contracts.

Contract Formation & Relevant Provisions of Information Technology Act 2000:

Originator and Addressee:-

The expressions of proposer and acceptor as used in regular contract are substitutedby the words ‘originator’ and ‘Addressee’ in case of Electronic Contracts. Section 11 of


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Information Technology Act, 200 referring to these expressions says:-

An electronic record shall be attributed to the originator:

1. if it was sent by the originator himself

2. by a person who had the authority to act on behalf of the originator in respect ofthat electronic record; or

3. by an information system programmed by or on behalf of the originator to operateautomatically.

In case of E-Contracts the originator may send the offer by means of electronicrecord. The originator may not be sure whether the electronic record sent by him hasbeen received by the addressee. The originator may therefore desire to have anacknowledgment from the addressee of the receipt of electronic record sent by him.Section 12 of the Information Technology Act, 2000 referring to the acknowledgementand receipt says:-

Acknowledgement of Receipt.-

(1) Where the originator has not agreed with the addressee that the acknowledgementof receipt of electronic record be given in a particular form or by a particularmethod, an acknowledgement may be given by-

1. any communication by the addressee, automated or otherwise, or

2. any conduct of the addressee, sufficient to indicate to the originator that theelectronic record has been received.

(2) Where the originator has stipulated that the electronic record shall be bindingonly on receipt of an acknowledgement of such electronic record shall be deemedto have been never sent by the originator

(3) Where the originator has not stipulated that the electronic record shall be bindingonly on receipt of such acknowledgement and the acknowledgement has notbeen received by the originator within the time specified or agreed or if no timehas been specified or agreed to within a reasonable time, then the originator maygive notice to the addressee stating that no acknowledgement has been receivedby him and specifying a reasonable time by which the acknowledgement must bereceived by him and if no acknowledgement is received within the aforesaid timelimit he may after giving notice to the addressee, treat the electronic record asthough it has never been sent.


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As per section 12(1) of the Act where there is no agreement between the originatorand the addressee as to the form or mode by which acknowledgment is to be sentby the addressee, the addressee may acknowledge the receipt of electronic recordby any communication automated or otherwise or by any conduct which may besufficient to indicate to the originator as to the receipt of such electronic record.According to section 12(2) of the Act an electronic record shall not be bindinguntil an acknowledgement of receipt of electronic record is received from theaddressee if the originator has stipulated so and in the absence of suchacknowledgement, the electronic record is deemed to have been never sent bythe originator. Further as per section 12(3) of the Act in the absence of anystipulation by the originator that the electronic record shall be binding only on thereceipt of electronic record within the time stipulated or agreed or in case no timeis fixed then within a reasonable time, the originator may give a notice to theaddressee about the non receipt of the acknowledgement by him and specifyfurther reasonable time for the receipt of the same. The originator is entitled todeem as if no electronic record was sent by him even after he has failed to receivethe acknowledgement from the addressee within such aforesaid reasonable time.In such a case no proposal is said to have been made by means electronic recordand the question of acceptance does not arise resulting in no enforceable electroniccontract.

Communication of Acceptance through Internet:-

Electronic Contracts being instantaneous contracts are deemed to be completeonly on such acceptance is received by the originator. The originator after making theproposal, he may do it so before the acceptance of such proposal is transmitted by theaddressee/acceptor. It may appear that the addressee after transmitting the acceptanceinvolving instantaneous communication cannot revoke the acceptance. But accordingto section 4 of the Contract Act the communication of acceptance is complete onlywhen it comes to the knowledge of the proposer. In view of this an addressee canrevoke the acceptance transmitted through internet before such acceptance comes tothe knowledge of the originator. Where the originator fails to open the mail box andthereby the acceptance does not come to his knowledge, there cannot be a contract ifhe comes to know about the revocation of acceptance before the communication ofacceptance. Thus a contract through internet is legally complete only when an acceptanceis received at the end of the originator.


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Dr. K. V. S. SarmaProfessor of Law


PART - II

LAW OF TRANSFER OF PROPERTY

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THE TRANSFER OF PROPERTY ACT, 1882.ACT No. 4 OF 1882. [17th February, 1882.]

CHAPTER-I

INTRODUCTION

Meaning of Property:-

It has been used in many senses. Property includes all the legal rightsof a person of whatever description. In a narrow sense, property includesthe proprietary rights of a person and not his personal rights. Proprietaryrights constitute his estate or property and personal rights constitute hisstatus or personal condition. In this sense, the land, chattels, shares anddebts due to a person are his property but not his life or liberty orreputation.

Kinds of Property:-

Property is essentially of two kinds: Corporeal and incorporeal.Corporeal property can be further divided into movable and immovableproperty and real and personal property. Incorporeal property is of twokinds: rights in re propria and rights in re aliena or encumbrances.

Corporeal Property:-

‘Corporeal Property’ is also called ‘tangible property’. It relates tomaterial things. The right of ownership of a material thing is the general,permanent and inheritable right of the user of the thing.

Kinds of Corporeal Property:-

It is of two kinds. Moveable and Immoveable property. Land isimmoveable property and chattels are moveable property.

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Incorporeal Property:-

Incorporeal Property is intangible property. It is also called intellectual or conventionalproperty.

Kinds of incorporeal Property:-

Incorporeal Property is of two kinds - Viz., rights in re propria and rights in Realiena. Rights in re propria are those rights of ownership in one’s own property whichare not exercised over material objects. Generally, the law of property deals withmaterial objects. However, in some cases, ownership of some non-material thingsproduced by human skill and labour is recognized as property. The most important ofsuch rights are patents, literary copyright, artistic copyrights, musical and dramaticcopyright, commercial goodwill, trade marks and trade names.

Rights in Re Aliena:-

Rights in re aliena are known by the name of encumbrances. They are rights in remover- a res owned by another. Such rights run with the res encumbered. They bind theres in whomsoever hands it may pass. Encumbrances are the rights of a particular useras distinguished from ownership which is right of general user. Encumbrances preventthe owner from exercising some definite rights with regard to his property. The mainkinds of encumbrances are leases, servitudes, securities and trusts.

a) LLLLLeaseseaseseaseseaseseases:-:-:-:-:- A lease is an encumbrance giving a right to the possession and use ofthe property of another person. It is the transfer of a right to enjoy certain property.

b) ServitudesServitudesServitudesServitudesServitudes:-:-:-:-:- A servitude is “ that form of encumbrances which consists in a rightto the limited use of a piece of land without possession of it”. When a personsecures exclusive possession of a piece of land without getting its ownership, it iscalled lease. When a person acquires the right to use that land in some definiteway without getting either its ownership or possession, then he acquires only‘servitude’. Generally servitudes exist with respect to land only. Examples ofservitudes are the right of way across the land of somebody, the right of light andair, the right of view of prospect, the right of the public to pass across a land, rightof pasturage, right of recreation on a piece of land, right of fishing, public right ofnavigations.

c) SecuritiesSecuritiesSecuritiesSecuritiesSecurities:- :- :- :- :- “A security is a possession such that the grantee or holder of thesecurity holds as against the grantor a right to resort to some property or some

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fund for the satisfaction of some demand, after whose satisfaction the balance ofthe property or fund belongs to the grantor. According to Salmond, securities areof two kinds. They are mortgage and lien.

d) TTTTTrustrustrustrustrust:-:-:-:-:- A trust is an obligation annexed to the ownership of property. It arises outof a confidence reposed in and accepted by the owner or declared and acceptedby him for the benefit of another, or of another and the owner. The persons forwhose interest trusts are created are infants, lunatics, unborn persons, etc.

Modes of Acquisition of Property:-

There are four modes of acquisition of property. Those are a) possession, b)prescription c) agreement and d) inheritance.

a) PPPPPossessionossessionossessionossessionossession: - If property belongs to no body, the person who captures it andpossesses it has a good title against the whole world. In this way, the birds of theair and the fish of the sea are the property of that person who first catches them.

According to Salmond prescription may be defined as the effect of lapse of timecreating and destroying rights.

b) AgreementAgreementAgreementAgreementAgreement: - Another method of acquiring property is by means of an agreement.There is a general rule that the title of the transferee by agreement cannot bebetter than that of the transferor. This is due to the fact that no man can transfera better title than what he himself possesses.

c) InheritanceInheritanceInheritanceInheritanceInheritance:- Another method of acquiring property is by means of inheritance.When a person dies, certain rights survive him and pass on to his heirs andsuccessors. There are others rights which die with him. Those rights which survivehim are called heritable rights. Those rights which do not survive him are calleduninheritable rights. Proprietary rights are heritable as they possess value. Personalrights are not inheritable as they constitute merely his status.

Succession to the property of a person may be either testate or intestate. It maybe by means of a will or without a will. If there is a will, succession takes placeaccording to the terms of the will. If there is no will, succession takes place by theoperation of law. If there are no heirs at all, the property goes to the State.

Legal Rights and Duties:-

The terms ‘wrong’ and ’duty’ are closely connected with rights and it is desirable torefer to them before discussing the important subject of legal rights.

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Legal Wrong:-

According to Salmond “A wrong is simply a wrong act – an act contrary to the ruleof right and justice. A synonym of it is injury, in its true and primary sense of injuria,though by a modern perversion of meaning this term has acquired the secondary senseof harm or damage whether rightful or wrongful and whether inflicted by human agencyor not.”

Wrongs are of two kinds, legal or moral. The essence of a legal wrong is that it isa violation of justice according to the law- not the manner in which the guilty aretreated. It is a legal wrong if a debt is not paid within the period of limitation. A moralwrong is an act which is morally or naturally, wrong. It is contrary to the rule of naturaljustice. It is a moral wrong to disobey one’s parents. A legal wrong need not be amoral wrong and vice versa.

Duty:-

According to Salmond “A duty is an obligatory act that is to say, it is an act oppositeof which would be a wrong. Duties and wrongs are correlatives. The commission of awrong is the breach of a duty and the performance of a duty is the avoidance ofwrong.”

Duties are of two kinds, legal and moral. A legal duty is an act the opposite ofwhich is a legal wrong. It is an act recognized as a duty by law and treated as such forthe administration of justice. A moral or natural duty is an act the opposite of which isa moral or natural wrong. A duty may be moral but not legal, or legal but not moral, orboth at once. In the case of England, there is a legal duty not to sell or have for saleadulterated milk knowingly. There is no legal duty in England to refrain from offensivecuriosity about one’s neighbours even if its satisfaction does them harm. There is amoral duty but not a legal duty. There is both a legal and moral duty not to steal.

Duties may be positive or negative. When the law obliges us to do an act, the dutyis called positive. When the law obliges us to forbear from doing an act, the duty isnegative. If P has a right to a land, there is a corresponding duty on persons generallynot to interfere with his exclusive use of the land. Such a duty is a negative duty. It isextinguished only if the right itself is extinguished. If T owes a sum of money to A, thelatter is under a duty to pay the amount due. This is a positive duty. In the case ofpositive duties, the performance of the duty extinguishes both duty and rights but anegative duty can never be extinguished by fulfillment.

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Duties can also be primary and secondary. Primary duties are those which exist perse and independently of any other duty. An example of a primary duty is to forbearfrom causing personal injury to another. A secondary duty is that which has noindependent existence but exists only for the enforcement of other duties. An exampleof a secondary duty is the duty to pay a man damages for the injury already done to hisperson. It is also called a remedial, restitutory or sanctioning duty.

Definition of Legal Right:-

According to Salmond “A right is an interest recognized and protected by a rule ofright. It is any interest, respect for which is a duty and disregard of which is a wrong.” Alegal right must obtain not merely legal protection, but also legal recognition.

Essentials of Legal Right:-

According to Salmond, every legal right has five essential elements:-

i) There must be a person who is the owner of the right. He is the subject of the legalright. He is sometimes described as the person of inherence.

ii) A legal right accrues against another person or persons who are under acorresponding duty to respect that right. Such a person is called the person ofincidence or the subject of the duty.

If A has a particular right against B, A is the person of inherence and B the subjectof incidence.

iii) Another essential element of a legal right is its content or substance. It may bean act which the subject of incidence is bound to do or it may be forbearance onhis part.

iv) Next essential element is the object of the right. This is the thing over which theright is exercised. This may also be called the subject-matter of the right.

v) Another essential element of a legal right is the title to the right. Facts must showhow the right is vested in the owners of the right. That may be by purchase, gift,inheritance, assignment, prescription, etc.

Relation Between Legal Right and Legal Liberty:-

Liberty or privilege denotes the absence of restraint. It is a legal freedom on the partof one person as against another to do a given act or a legal freedom not to do a givenact. In liberty, the prominent idea is the absence of restraint while protection for the

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enjoyment of that liberty is the secondary idea. Right denotes the protection and connotesthe absence of restraint.

Right and Power:-

A power “is an ability on the part of a person to produce a change in a given legalrelation by doing or not doing a given act”. When a person speaks of a testamentarypower, it means that he has the ability to make a will and thereby dispose of his property.A power of appointment enables a person to dispose of the property of another for hisown benefit or that of others. In the case of power, there is no correlative duty imposedon another. In this respect, power differs from right and resembles liberty. The distinctionbetween liberty and power consists in the fact that liberty is what one may do innocentlywithout committing a wrong while power is what one may do effectively and validly.

Powers and Immunity:-

Exemption from the power of another is immunity. The correlative of immunity isdisability. A foreign sovereign enjoys immunity from legal proceedings in our courts.Immunity stands to power in much the same relation as liberty is to right. Liberty arisesfrom the absence of a right in another and the absence of a duty in oneself. Immunityarises from the absence of a power in another and the absence of liability in oneself.

Ownership:-

According to Salmond “Ownership, in its most comprehensive signification, denotesthe relation between a person and right that is vested in him. That which a man owns isin all cases a right. Every right is owned, and nothing can be owned except a right.Ownership is a relation between a person and any right that is vested in him. Thatwhich a man owns is a right and not a thing. To own a piece of land means to own aparticular kind of right in the land.

Essentials of Ownership:-

1) The first essential of ownership is that it is indefinite in point of user.

2) Another essential of ownership is that it is unrestricted in point of disposition.

3) That owner has a right to possess the thing which he owns. It is immaterial whetherhe has actual possession of it or not.

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4) Another essential of ownership is that the owner has the right to exhaust the thingwhile using it, if the nature of the thing owned is such.

5) The last essential of ownership is that it has a residuary character. The owner maypart with several rights in respect of the thing owned by him. In spite of that, hecontinues to be the owner of the thing in view of the residuary character ofownership.

6) The owner has the right to destroy or alienate the thing he owns.

Possession:-

According to Salmond “in the whole range of legal theory, there is no conceptionmore difficult than that of possession.”

Many important legal consequences flow from the acquisition and loss of possession.Possession is the prima facie evidence of the title of ownership. Transfer of possession isone of the chief modes of transferring ownership. The first possession of a thing whichas yet belongs to no one is a good title of right.

Essential Elements of Possession:-

There are two elements of possession and those are the corpus of possession andanimus or the intention to hold possession. Thees two elements must be present in acase of possession and neither of them alone is sufficient to constitute possession.

Corpus of Possession:-

By corpus is meant that there exists such physical power or physical contact of thepossessor in relation to the thing possessed so as to give rise to the reasonable assumptionthat other people will not interfere with it.

The corpus of possession can be considered under two heads: the relation of thepossessor to the other persons and the relation of the possessor to the thing possessed.When a man possesses a thing it means that others shall not interfere with the use ofthat thing;

The next element in the corpus possession is the relation of the possessor to thething possessed. All that is necessary is that the possessor must have the physical powerof dealing with the thing exclusively as his own.

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Animus Possidendi or the Subjective Element in Possession: -

It is the intent to appropriate to oneself the exclusive use of the thing possessed.The animus possidendi is the conscious intention of individual to exclude others fromthe control of an object. According to Inhering, possession is the objective realizationof ownership. It is the external realization of ownership. It is a valuable piece of evidenceto show the existence of ownership. It is the de facto exercise of a claim while ownershipis the de jure recognition of that claim. Possession is the de facto counterpart ofownership. According to Salmond ‘ownership without possession is like a soul withouta body”. So to claim ownership in any particular thing possession is very important andit may be either actual or constructive.

Title:-

The term “title” is derived from the term ‘Titulus’ of Roman Law and ‘Titre’ of FrenchLaw. According to Salmond, title is the fifth element of a legal right. To quote him“Every legal right has a title, that is to say, certain facts or events by reason of which theright has become vested in its owner. Legal rights are created by title. A person has aright to a thing because he has a title to that thing. The title is the de facto antecedentof which the right is the de jure consequent. A person may acquire right on account ofhis birth or he may acquire the same by personal efforts later on but in both cases titleis essential. Title is the root from which the rights proceed. Title leads to a right.

Titles are of two kinds. They are original or derivative. Original titles are those thatcreate a right de novo i.e., for the first time, whereas derivative titles are those thattransfer an existing right to a new owner. Thus, a fisherman catching fish is an instanceof an original title of the right of ownership, as before him, the right did not exist inanyone else. However, when the fisherman sells such fish, the buyer acquires a derivativetitle. In legal theory, no new right is created. That right which is acquired by the purchaseris identical to the one lost by the fisherman, the vendor.

Facts establishing title are of three kinds.

They are a) Vestitive b) Investitive and c) Divestive.

a) VVVVVestitive Festitive Festitive Festitive Festitive Factsactsactsactsacts: - A vestitive fact is one which determines positively or negatively,the vesting of a right in its owner. It is one which either creates or destroys ortransfer rights. If A gifts a house to B, A’s right to ownership in the house isdivested, this right then vests in B. These two are thus what Salmond calls vestitivefacts.

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b) Investitive FInvestitive FInvestitive FInvestitive FInvestitive Facts (Tacts (Tacts (Tacts (Tacts (Titles)itles)itles)itles)itles):- An investitive fact is the defacto antecedent of which theright is the de jure consequence. An investitive fact is also commonly called ‘Title’.In other words, every right involves a title or source from which it is derived.

Thus, an investitive fact is one which shows how the right in question came to becreated or vested. Thus, a right may be vested in X by the law, as for example,when he enjoyed such right because he is a judge of High Court or Member ofParliament. Again, it may vest in him by the will of parties to a contract. Thus, Xmay be given certain rights over Y’s property under an agreement between X andY. In the former case, i.e., when the right is conferred by the State, the investitivefact is also called a privilege, where as in two latter cases, the term title is morefamiliarly used.

c) Divestitive FDivestitive FDivestitive FDivestitive FDivestitive Factsactsactsactsacts: - Just as facts create rights, so do they also take them away.Divestitive facts are those which either destroy rights or transfer them to some oneelse.

Divestitive facts are of two kinds, viz., extinctive and alienative. They are extinctivewhen they divest a right by completely destroying it. The surrender of a lease tothe lessor, for example, divests the right of the lessee by destroying the lease, andtherefore, it is an extinctive fact.

Divestitive facts are alienative when they divest an owner of his right by transferringit to somebody else. Thus in the above example, instead of surrendering thelease, transferred it to a sub-lessee, such a transfer would have been alienativefact. It may be noted that vestitive and divestitive facts are the opposite of eachother. If X sells a book to Y, the right is divested from X and is vested in Y.

An original title is one in which a right is created de novo, i.e., for the first time. Aderivative title is one in which there is some transfer of an original right, so that itsowner gets divested the moment the transferee gets the right. It means that thetransferee derives his title from a derivative title. Thus, if A builds a house himself,he acquires an original title to it, but if he purchases a house from someone else,his title is derivative.

Derivative titles are alienative or extinctive. Thus, if a person alienates his propertyby sale, the one who purchases that property gets a derivative title by reason ofsuch sale. But in case of a debt, if the debtor pays up the debts, the creditor’sright against him is extinguished by such payment. It means that the right whichthe creditor has, now been extinguished as a result of the debtor performing hislegal duty.

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An Act to amend the law relating to the Transfer of Property by act of Parties.

Preamble

WhereasWhereasWhereasWhereasWhereas it is expedient to define and amend certain parts of the law relating to thetransfer of property by act of parties; it is hereby enacted as follows:—

Preamble:-

The preamble to the Act lays down that it is an Act meant to define and amend thelaw relating to Transfer of Property by act of Parties. It does not deal with the transfer ofproperty by operation of law i.e., from dead man to living person.

Objects of the Transfer of Property Act:-

“The chief objects of the Transfer of Property Act are two: firstly, to bring the ruleswhich regulate the transmission of property between living persons into harmony withthe rules affecting its devolution upon death and thus to furnish the complement to thework commenced in framing the law of intestate and testamentary succession; andsecondly, to complete the Code of Contract Law, so far as it relates to immovableproperty.”

The Act merely defines certain expressions used in relation to transfer of propertyand amends the then prevailing rules governing the same. It therefore does not purportto introduce any new principles of law. One of the basic objectives of the Act was tobring in harmony the rules relating to transfer of property between living persons andthose applicable in case of devolution of the same, in the event of the death of aperson, through intestate and testamentary succession. The Act also seeks to completethe law of contract, as most of the transfers primarily arise out of a contract between theparties. The Act has also, by providing for the compulsory registration of the transfers,changed the nature of a transfer of property from private to a public affair.

Act not Exhaustive:-

The Act is not, and does not purport to be an exhaustive enactment. In other words,it does not contain the whole law on the subject of property. This means that it does notcover the entire law relating to transfer of property but deals with certain aspects only.The fact that it is not exhaustive is also apparent from the language that is used in thePreamble. Unlike the Indian Evidence Act, 1872 that uses the term ‘consolidate’, hintingat the completeness of the subject dealt with under the Act, the present Act seeks to

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define and amend only certain parts of the law relating to transfer of property and notall areas or all parts of this branch of law. One of the consequences of the Act notbeing exhaustive, is that if a particular situation is not covered by any provision of theAct, the courts in India are empowered to settle the same by applying the rules ofequity, justice and good conscience or even with the help of English cases on therelevant aspects, but only when the same is not prohibited by any statutory provision ofIndia. However, where the issue is expressly covered by the Transfer of Property Act, orby any other Indian Statute, the Indian courts have no such power.

Scope of the Act:-

The Act is limited to the transfer of property by act of parties as distinguished froma transfer by operation of law, e.g., in case of inheritance, insolvency, forfeiture, or salein execution of decree. It relates to transfers of property inter vivos, i.e., voluntarytransfers between living persons and has no application to the disposal of property bywill.

The Act applies only to transfers inter vivos, i.e., transfers by one living person toanother living person. Transfer of Property is always either by act of parties or byoperation of law. If X sells or mortgages or gifts away his house, it is a case of voluntarytransfer by act of parties. But if X becomes an insolvent, his property vests in the OfficialAssignee or Receiver, whether X likes it or not. So also, if X’s property is sold in executionof a decree against him, it would be a case of a transfer much against the will or desireof X. This is, therefore, known as transfer by operation of law.

Transfer by act of parties is of two kinds.

i) Transfer of inter vivos, and

ii) Transfer by will, i.e., testamentary dispositions of property.

Thus, if X sells his property to Y, it is a case of transfer between living persons. If theproperty is movable, the Sale of Goods Act will apply, and if it is immovable, theTransfer of Property Act will govern the case. If however X bequeaths his property to Yunder his will, Y will get nothing as long as X is living, but as soon as X dies, Y will getthe property. It is, therefore, sometimes said that this is really a gift from the dead to theliving. This is known as testamentary disposition of property. Transfer inter vivos isgoverned by the Transfer of Property Act if the property transferred is movable orimmovable. Transfer by Will is known as testamentary disposition of property (whethermovable or immovable), is governed by the Indian Succession Act. Therefore, the Transfer

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of Property Act relates to the transfer of property inter vivos and has no application tothe disposal of property by will. It does not deal with cases of succession.

The scope of this Act is limited to transfer of property by act of parties in the lifetime. It does not cover transfer by operation of law e.g., in forfeiture or sale in executionof a decree, in case of insolvency, in a transfer by will (AIR 1922, Mad.457) and in acase of succession (Kishore v. Krishna Kamini 37 Cal. 377) and in a transfer made byor on behalf of the Government (Dwaraka Prasad v. Kathlen I.L.R. 1955 Nag. 538).

Beside these limitations section 2 of this Act saves the rules of Muslim Law in so faras they are inconsistent with any of the provisions contained in Chapter II. Furthersection 129 of the Act provides that nothing in Chapter VII of the Act applies to MuslimLaw.

Thus we can say that this Act is not exhaustive, it can not be called a completecode. It did not introduce new principles. The result of the Act being not exhaustive isthat where any case is not covered by any provisions of this Act, the Court as a court ofequity is entitled to apply the principles laid down in English or Indian cases which arenot distinctly prohibited by Statute. (Maharaja of Jaipur v. Rukmini, 42 Mad. 589)

HistoryHistoryHistoryHistoryHistory: - A complete law with regard to transfer of immovable property wasintroduced in India in a codified form, first time in the year 1882. Before passing thisAct, this subject was governed by the principles of “justice, equity and good conscience”and “English Law”. Though there were some Regulations and Acts passed by theGovernor General in Council but in the absence of a statutory provision upon a pointthe Courts had to follow English Law or Equity. So the case law became confused andconflicting. To remove this, a commission was appointed in England to prepare asubstantive law of ‘Transfer of Property for India’.

Legislative Competence:-

Transfer of Property other than of agricultural land, is a subject specified in theconcurrent list. The Constittion of India under its seventh schedule by virtue of Entry 6of List III empowers both the States, as well as the Parliament, to frame laws on thistopic. As far as agricultural land is concerned, the States alone are empowered tolegislate on the same by virtue of Entry 18 List III of the seventh Schedule of the Constitutionof India, and in cases where there is a conflict, a State law relating to transfer ofagricultural land can override a parallel conflicting provision of the Transfer of PropertyAct 1882. The State, therefore, has the power to make special provisions or rules withrespect to the transfer of agricultural property which may include registration, or

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prohibiting persons from alienating such land, including a power to frame rules withrespect to reopening of such transfers or alienations.

The Act contains 137 sections .These 137 sections are divided into 8 chapters.

Ch I – Preliminary of – Ss 1 – 4

Ch II – Of transfer of property – Ss 5 – 53A

Ch III – Of sale of immovable property – 54 – 57

Ch IV – Of mortgages of immovable property and charges – 58 - 104

Ch V – Of the leases of immovable property – 105 - 117

Ch VI – Of exchanges – 118 - 121

Ch VII – Of gifts – 122 –129

Ch VIII – Of transfer of actionable claims – 130 - 137

Ch VII is not applicable to Muslim law.

Preliminary (Ss 1 – 4)

Section 2. Application of the Act:-

SAVING OF CERTAIN ENACTMENTS, INCIDENTS, RIGHTS, LIABILITIES, etc.:-

In the territories to which this Act extends for the time being the enactment specifiedin the Schedule hereto annexed shall be repealed to the extent therein mentioned. Butnothing herein contained be deemed to affect—

a) the provisions of any enactment not hereby expressly repealed;

b) any terms or incidents of any contract, or constitutions of property which areconsistent with provisions of this Act, and are allowed by the law for the timebeing in force;

c) any right or liability arising out of a legal relation constituted before this Actcomes into force, or any relief in respect of any such right or liability; or

save as provided by section 57 and Chapter IV of this Act, any transfer by operationof law or by, or in execution of, a decree or order of a court of competentjurisdiction;

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and nothing in the second chapter of this Act shall be deemed to affect any ruleof Mohammedan law.

The Act expressly repeals the enactments specified in the schedule but saves theprovisions of any enactment that has not been so repealed.

Chapter II of the Act does not apply to transfer of property among Muslims, in sofar as there is a contrary provision under Muslim Law. The rule is not that theTransfer of Property Act does not apply to Muslims, but the rule is that if there is arule of Muslim Law at variance or different from that specified under the Transferof Property Act, it is the Muslim Law that would prevail. However, if there is nocontrary or inconsistent rule under Muslim Law, Muslims would be subject to theprovisions of this chapter as well. Notable in this part are the rules with respect togifts and settlement of property in perpetuity. Under the general rules specified inthe Transfer of Property Act, a gift of immovable property must be executed withthe help of a written, attested and registered gift deed. The delivery of possessionof the property is not an essential requirement to the validity of the gift, and willdepend upon the contract between the parties. Under Muslim Law, however, agift of immovable property can be effected orally, and generally, the gift is notvalid unless it is followed by immediate delivery of possession of the property.

Sec 3:- Immovable property:-

The Act has not defined this term. Sec 3 merely lays down that immovable propertydoes not include standing timber, growing crops or grass.

The definition of immovable property given in section 3 is a negative one and isneither comprehensive nor exhaustive. Thus we can say the following things areimmovable property-

a) Land

b) Benefits to arise out of land

c) Things attached to earth.

d) Some things judicially recognized to be immovable property.

Land: - It includes the following elements-

a) A determinate portion of the earth’s surface.

b) Possibly the column of space above the surface

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c) All objects which are on or under the surface in its natural state e.g., minerals.

d) Buildings, walls and fences.

Benefit to Arise out of Land:-

The Registration Act includes in the term immovable property, the words namely-benefits to arise out of land, hereditary allowances, right of way, lights, ferries andfisheries. A debt decreed by a mortgage of immovable property is also immovableproperty.

Things Attached to the Earth:-

It includes things rooted in the earth e.g., trees bearing fruits, things imbedded inthe earth e.g., an anchor imbedded in the land to hold a ship, things attached to whatis so imbedded, for example doors and windows, chattel attached to earth or building.

General Clauses Act, 1897.

“Immovable property” shall include land, benefit to arise out of land, things attachedto the earth or permanently fastened to any thing attached to the earth; Sec 3(25).

Registration Act, 1908 :-

Immovable property includes land buildings, hereditary allowances right to way,lights, ferries, fisheries or any other benefits to arise out of land and things attached toearth, but do not include standing timber, growing crops or grass.

Immovable property includes:

(a) Right to collect rent of immovable property

(b) Right to fishery

(c) Office of a hereditary priest of a temple

(d) Right to collect lac from trees

(e) Mortgagor’s right to redeem

f) A right of ferry

g) A right of way

h) A right of easement

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i) The equity of redemption

j) A right to severe and collect leaves of the tendu trees.

k) A pension or periodical payment or allowance, granted in permanence.

On the other hand the following are not immovable property:-

a) A right of worship

b) A royalty

c) A decree for sale of immovable property

d) A decree for arrears of rent

e) A right to recover maintenance allowance

f) Standing timber, growing crops and grass.

Attached to the earth :- It means

(a) Rooted in the earth , as in the case of trees and shrubs ; or

(b) imbedded in the earth , as in the case of walls or buildings; or

(c) attached to what is so imbedded for the permanent enjoyment of that to which itis attached ( doors , windows etc.) quicquid plantatur solo, solo cedit- what isplanted on the soil belongs to the soil.

Sec 3 Attested :

“Attested” , in relation to an instrument , means , and shall be deemed always tohave meant , attested by two or more witnesses each of whom has :-

(i) a) seen the executant sign or

b) affix his mark to the instrument

or

(ii) c) seen some other person sign the instrument in the presence of, and by thedirection of the executant; or

d) Received from the executant, a personal acknowledgement of his signatureof such other person, and

e) signed the instrument in the presence of the executant.

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It is not at all necessary that all the witnesses should be present at the same time.No particulars form or attestation is necessary.

To attest means to sign and witness any fact viz., the fact of execution by theexecutants.

In Kaderbhai Ismailji v Fatmalbhai Golamhusain (1944) A.B. 25 it was held that amere signature is sufficient. It may be made at any place on the document.

There is no particular form prescribed in the Act for a valid attestation. An attestingwitness need not be formally described as such on the face of the document. It may bein any form.

It cannot, however, take place before the execution of the deed. The lone requirementis that the witness must sign “in the presence of the executant.” If the executant was notpresent when the witness signed the document, attestation would not be valid. It is notnecessary that more than one of such witnesses should be present at the same time.

Status of An Attesting Witness:-

An attesting witness merely testifies that the executant of the document signed thedocument in his presence. He is not supposed to know the contents of the documentwhich is executed by the executant. (Sarkar Shah v. Abdullah Shah AIR 1963 J & K 14.)

Who can Attest:-

In M.N.Abdul Jabbar v H. VenkataSastri and sons. AIR 1966 S.C. 1147 it was heldthat such signatures can only amount to a valid attestation if the attesting witnesses hadput their signatures with the intention to attest. The court further held that ordinarily theregistering officer puts his signature in the performance of his statutory duty and notwith an intention to attest.

In this Act no qualification is prescribed to become an attesting witness. Any person,whether literate or illiterate is competent to attest the document. The only requirementis that the attesting witness must put his signature for the purpose of attesting thesignature.

Since the object of the attestation is to provide protection against fraud and undueinfluence, therefore it is necessary that it must be attested by a person who is not a partyto the transaction. A scribe, i.e., writer of the deed who has signed on behalf of a partycannot be an attesting witness because that would amount to attestation of his ownsignature.

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In Bhagavat v Gorakh. AIR 1934 Pat 34 it was held that the witness need not knowthe contents of the document.

If the Attestation is invalid, the documents cannot be enforced in the court of law.

As a general rule every document which is required to be registered must be attestedby at least two witnesses.

Notice:Notice:Notice:Notice:Notice: - Kinds of notice:-

Section 3 of the Act lays down that under what circumstances a person is said tohave notice of fact. He may himself have actual notice or he may have constructivenotice, when information of the fact has been obtained by his agent in the course of thebusiness transacted by the agent for him.

(1) Actual or express notice

(2) Constructive or implied notice.

(a) Willful abstention from an enquiry or search

(b) Gross negligence

(c) Registration

(d) Actual possession

(e) Notice to agent

Express or Actual Notice:-

An express or actual notice of a fact is a notice whereby a person acquires actualknowledge of the fact. It must be definite information given by a person interested in thething.

Constructive Notice:-

It is a notice which treats a person, who ought to have known a fact, as if heactually does not know it. A person is said to have constructive notice of all facts ofwhich he would have acquired actual notice had he made those inquiries which heought reasonably to have made. It is a legal presumption. It arises as under:-

a) WWWWWillful abstentionillful abstentionillful abstentionillful abstentionillful abstention- The words ‘wilful abstention’ are said to be such absentionfrom inquiry or search as would show want of bona fides in respect of a particulartransaction, for example, A refuses a registered letter, which contains certain

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information relating to property which A proposes to purchase. A will be deemedto have notice of the contents of the letter.

b) Gross NegligenceGross NegligenceGross NegligenceGross NegligenceGross Negligence- Gross Negligence may be stated to be the omission to dosome thing which a reasonable man, guided by those consideration whichordinarily regulate the conduct of human affairs would do or doing somethingwhich a prudent and reasonable man would not do.

c) RRRRRegistrationegistrationegistrationegistrationegistration- Registration operates as notice in the following cases-

a) The instrument should be compulsorily registrable. If it is not required by lawto be registered, its registration does not amount to notice.

b) The instrument should be registered in the manner prescribed by the IndianRegistration Act, 1908. It should be entered into the books kept under sec.51of the Act and its particulars correctly entered in the indices under sec. 55.

c) The person affected with notice should have acquired his interest subsequentto the registration. The registration of a sub-mortgage does not amount tonotice to the mortgagor.

d) Possession- It is the general rule that it should be deemed as constructivenotice of the rights of a person in possession.

e) Notice to AgentNotice to AgentNotice to AgentNotice to AgentNotice to Agent- The knowledge of the Agent is the knowledge of the principal.The notice should have been received by the agent i) as an agent ii) duringthe agency iii) in the course of agency business iv) in the matter material tothe agency business. However, there is an exception to this rule. Theknowledge of the agent will not be imputed to his principal if the agentfraudulently conceals the fact.

Actionable Claim:-

“It means a claim to any debt, other than a debt secured by mortgage of immovableproperty or by hypothecation or pledge of movable property or to any beneficial interestin movable property not in the possession, either actual or constructive of the claimant,which the civil courts recognize, as affording grounds for relief whether such debt orbeneficial interest be existent, accruing, conditional or contingent.”

Illustrations:

1. A owes Rs.5, 000/- to B, B’s claim is an actionable claim.

2. A borrows Rs.500 from B and mortgages his house to him. The mortgage debt isnot an actionable claim.

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Some instances of actionable claim:-

a) Claim for arrears of rent

b) Claim of benefit arising out of a contract for the purchase of goods.

c) A share in partnership.

d) A claim to money due under an insurance policy.

e) A right to proceeds of the business

f) A claim for return of earnest money.

g) A right to receive money for license given to another to remove back fromthe licensor’s trees is transferable.

h) Usufructuary mortgagee’s liability to pay to the mortgagor the balance leftafter paying the mortgagor’s creditors.

i) Both ordinary and endowment life policies

j) Provident fund amount payable after retirement and not presently.

k) A decree

l) The right to recover damages for breach of contract.

m) A claim to mesne profits

n) A copy right

o) A right to recover profits from the co-shares

p) A debt secured by mortgage of immovable property or hypothecation ofmovable property.

Transfers Governed by the Act:-

It deals with the transfer by act of living persons. According to this Act a propertycan be transferred by the following ways-

1) Sale

2) Mortgage

3) Charge

4) Lease

5) Exchange

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6) Gift

7) Actionable Claims

1) SaleSaleSaleSaleSale: - Sections 54 to 57 relate to sale of immovable property. Sale ofmovable property is not governed by this Act; this is governed by Sale ofgoods Act, 1930.

2) MortgageMortgageMortgageMortgageMortgage: - Sections 58 to 98 relate to mortgage of immovable property.This chapter of mortgage deals with six kinds of mortgages.

3) ChargeChargeChargeChargeCharge: - Section 100 and 101 relate to charge upon immovable property.Charge is security for the payment of money, not by way of mortgage ofimmovable property. This Act deals with charges by act of parties only.

4) LLLLLeaseeaseeaseeaseease::::: - Lease of immovable property can be made according to the provisionsof sections 105 to 117 of the Act.

5) ExchangeExchangeExchangeExchangeExchange: - Sections 118 to 121 deal with exchanges of immovable as wellas of movable property.

6) GiftGiftGiftGiftGift: - Sections 122 to 129 of the Act deal with the provisions of gifts ofimmovable and also of movable property.

7) AAAAActionable Claimsctionable Claimsctionable Claimsctionable Claimsctionable Claims: - Transfer of Actionable Claims of both immovable andmovable property is explained by this Act from sections 130 to 137.

Transfers Not Governed by this Act:-

This Act ‘deals with the transfer by act of parties and transfer inter vivos. Thereforesome other transfers which are not between living persons or which are not created byact of parties are not governed by the provisions of this Act. These transfers are asfollows:-

a) Transfer by a will or a testamen

b) Transfer on the death of a person

c) Transfer by way of trust.

d) Transfer by operation of law.

e) Transfer of Goods where of Sale of Goods Act, 1930 applies.

f) Transfer in cases of partition between the members of a Hindu undivided family.

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CHAPTER-II

OF TRANSFER OF PROPERTY BY ACT OFPARTIES. (Ss 5 – 53A)

(A)Transfer of property whether movable or immovable.

Sec. 5:- TSec. 5:- TSec. 5:- TSec. 5:- TSec. 5:- Transfer of property:-ransfer of property:-ransfer of property:-ransfer of property:-ransfer of property:-

“An act by which a living person conveys property , in present or infuture , to one or more other living persons , or to himself and one ormore others living persons, and to ‘transfer property’ is to perform suchact.”

In this section “living person” includes a company or association orbody of individuals, whether incorporated or not; but nothing hereincontained shall affect any law for the time being in force relating totransfer of property to or by companies, associations or bodies ofindividual.

TTTTTransferransferransferransferransfer:- :- :- :- :- This word has also been used in a wide sense. It maymean transfer of all the rights and interests in the property or transfer ofone or more of subordinate rights in the property.

Thus the term ‘transfer of property’ is a transaction which has theeffect of conveying property from one living person to another. Conveyingof the property involves the creation of new title or interests in favour ofthe transferee.

Essentials of a valid transfer:-Essentials of a valid transfer:-Essentials of a valid transfer:-Essentials of a valid transfer:-Essentials of a valid transfer:-

i) The property must be transferable. S.6

ii) The transferor must be competent to transfer. S.7

iii) The transferee must be competent. S.6(h)(3).

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iv) The consideration and object must be lawful. S.6(h)(2).

v) The transfer must not be opposed to the nature of the interest affected thereby.

vi) The transfer must be made in the manner and in the form required by the Act, if any.

Compromise:-

A mere compromise does not amount to transfer. (AIR 1996.S.C.869). Compromisemeans agreement for the settlement of doubtful claims between the parties in respectof some property. Like family settlement here too the titles or interests of the parties areantecedent or already existing; the compromise deed simply defines them. Since thereis no conveyance, a compromise deed is not a deed of transfer.

Family Settlement:-

Family Settlement or Family Arrangement is not a transfer of property. In a joint-family property all the members, have their specific shares but they are not separatedand are held co-jointly by all of them. When a family settlement takes place, the alreadyexisting specific shares of the members of the family are defined and separated in orderto avoid any possible dispute. Thus, in a family settlement there is a mutual agreementbetween the members of a family to hold their respective shares separately. It simplyacknowledges and defines the title of each member. In a family settlement since thereis no ‘creation of any new title or interest in favour of any member, there is no conveyance;therefore, it is not a transfer of property.

Partition:-

Partition is not a transfer of property. Partition means separating the parts of co-owned property. If in a property there are several co-owners having, under the law, theirrespective interests but the whole property is neither used nor enjoyed by them separatelythen, after the partition each member gets merely the separate right of enjoyment.Accordingly, it has been held that partition is really a process by which a joint enjoymentis transformed into an enjoyment severally, and no conveyance is involved in the processas the conferment of a new title is not necessary. It simply effects a change in the modeof enjoyment of property but it is not an act of conveyancing property from one livingperson to another. (Chandravathi v. Lakshmi Chand AIR 1988 Del.13).

OF TRANSFER OF PROPERTY BY ACT OF PARTIES. (Ss 5 – 53A)

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Surrender:-

Surrender is also not a transfer of property within the meaning of section 5 of theAct. Technically, surrender means merging of a lesser interest with a greater interest insuch a manner that the greater interest is not enlarged. Surrender is therefore falling ofa lesser estate into a greater. Example: Lessee surrendering the leased property to thelessor.

Release:-

Release is a transfer of property. If a larger interest falls into a smaller interest insuch a way that smaller interest is enlarged then, for the holder of smaller interest thereis creation of new titles or interest. Since some new titles or interest are added to hisalready existing interest, there is conveyance hence it amounts to transfer of property.

Relinquishment:-

It means giving up one’s rights or interests. Its effect is extinction of one’s rights ina property; there is no intention that the person relinquishing his interest is conveyingthat interest in favour of another person. Relinquishment is therefore, not a transfer ofproperty. Moreover, since relinquishment connotes the extinction of a right therefore,there is nothing left to transfer so that it may amount to a transfer of property as definedunder section 5 of the Act.

Charge:-

Charge is not a transfer of property. Charge is created on a property for securinga payment out of that property. When the property of a person is charged for securingcertain payments e.g., maintenance, it is simply securing personal obligation out of hisproperty. A charge is, therefore, not a transfer because the only right created under it isa right to payment out of the property subjected to the charge.

Property Situated outside Inida:-

The definition of transfer of property given under section 5 is applicable also toproperties situated outside India or the territories to which the Act is not applicable. Itmay be noted that because of its very nature, transfer of immovable property is governedby the law of the land where the property is situated. But, this does not mean that aperson can not claim rights under the transfer of that property under this Act. However,his claim is subject to contrary claims or rights of the affected party under the law of the


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land where property is situated. But it is for the affected party to prove that the transferis defective or invalid under the law of the land where property situates. (Central Bankof India v. Nusservanji A.I.R.1932 Bom. 642).

Sec 6:-Sec 6:-Sec 6:-Sec 6:-Sec 6:-What property may be transferred:-What property may be transferred:-What property may be transferred:-What property may be transferred:-What property may be transferred:-

For a valid transfer of property, the property must be a transferable property. As ageneral rule, property of every kind may be transferred. But there are certain kinds ofproperties the transfer of which is not allowed under the law. Such properties are callednon-transferable properties. Transfer of any non-transferable property is void. It maybe stated, therefore, that transferability of property is the general rule; its non-transferabilityis an exception. According to section 6 property of every kind may be transferred. Butthe same section says that the following rights can not be transferred:-

a) The chance of an heir-apparent succeeding to an estate , the chance of a relationobtaining a legacy on the death of a kinsman or any other mere possibility of alike nature, cannot be transferred.

Anand Mohan v Gaur Mohan 50 Cal.929

b) a mere right of re- entry for breach of a condition subsequent can not be transferredto anyone except the owner of the property affected thereby.

c) an easement can not be transferred apart from the dominant heritage.

d) an interest in the property restricted in its enjoyment to the owner personally cannot be transferred to him.

e) a right to future maintenance, in what so ever manner arising, secured ordetermined, cannot be transferred.

f) a mere right to sue cannot be transferred.

g) a public office can not be transferred, nor can the salary of a public officerwhether before or after it has become payable.

h) Stipends allowed to military, naval, air force and civil pensioners of the Govt. andpolitical pensions can not be transferred.

i) No transfer can be made (i) in so far as it is proposed of the interest affectedthereby; or (ii)for an unlawful object or consideration within the meaning ofSec. 23 of the Indian Contract Act, 1872; or

(iii) to a person legally disqualified to be transferee.


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(i) Nothing in the section shall be deemed to authorize a tenant having anuntransferable right of occupancy the farmer of an estate in respect of whichdefault has been made in paying revenues, or the lessee of an estate, under themanagement of a court of wards, to assign his interest as such tenant, farmer orlessee.

Nitya Gopal v Nanilal 47 Cal.990 it was held that the right of priests to share inthe offerings that may be made in a temple worshippers is a mere possibility andso inalienable.

Non-transferable under any other law:-Non-transferable under any other law:-Non-transferable under any other law:-Non-transferable under any other law:-Non-transferable under any other law:-

Besides the Transfer of Property Act, there are other law, e.g., Hindu Law, MuslimLaw, Civil Procedure Code etc., which are enforced in India. Under any such law thereare certain properties the transfer of which is prohibited by that law; those propertiesare non-transferable also under section 6 of the Transfer of Property Act.

Clause (a): Clause (a): Clause (a): Clause (a): Clause (a): Spes-Successionis:- Spes-Successionis means expectation of succession.Expectation of succession is expecting or having a chance of getting a property throughsuccession (inheritance or will). Spes-Successionis is therefore, not any present property.It is merely a possibility of getting certain property in future. Spes-Successionis underthis clause includes:

i) Chance of an heir-apparent succeeding to an estate

ii) Chance of a relation obtaining a legacy on the death of a kinsman or

iii) Any other mere possibility of a like nature.

Heir apparent is apparently an heir but not legal heir. Heir-apparent is a personwho would be heir in future if he survives the propositus (the deceased whose propertyhe inherits) and if the propositus dies intestate (without making any will).

Chance of a legacy means expectancy of getting certain property under a will. Thewell settled law of wills is that a will operates only after the death of the testator (whomakes the will) not on the date when it is written. Further, it is the last will which prevailsand if two or more wills have been executed in favour of different persons, only thelegatee under the last will is entitled to get the property. Accordingly, where a personexecutes any will, before the death of that testator, the legatee has simply a chance ofgetting property because i) the legatee may not survive the testator and ii) the will in hisfavour might not be the last will. Before a will operates properties in future provided itis the last will.


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‘Any other possibility of a like nature’ would mean any other possible interest orproperty which is as uncertain as the chances of an heir-apparent or chance of arelation of getting property under a will.

Right to receive future offerings:-In Badrinath v. Punna (AIR 1979 SC 1314) It washeld that the ‘right to receive the offerings being coupled with duties other than thoseinvolving personal qualifications, therefore, transferable and could be inherited. It washeld that the right to receive the future offerings at the sacred temple was held to beheritable right.

Clause (b)Clause (b)Clause (b)Clause (b)Clause (b): Mere right of re-entry:----- It can not be transferred. Under this clause, theright of re-entry refers to the right of a lessor or landlord to resume possession of theproperty from the lessee upon the breach of a condition subsequent.

Clause (c)Clause (c)Clause (c)Clause (c)Clause (c): Easement apart from dominant heritage:-Easement is a right whichexists for the beneficial enjoyment of a land and is exercised upon the land of anotherperson. The land or tenament (house) for whose beneficial enjoyment this right exists iscalled dominant heritage and the land or tenament upon which the right is exercised iscalled servient heritage. A who is the owner of a house has a right of way upon theland owned by B so that he may reach the main road. A’s house is dominant heritageand the land of B is servient heritage. A’s right of way is an easementary right. Althoughthis right is exercised by A but it exists for beneficial enjoyment of A’s house; there,technically, the right is not of A i.e., it is not his personal right but a right attached to thehouse. Since this right is part and parcel of this house i.e., dominant heritage, it cannotbe severed or detached from it. Accordingly, although it is a proprietary right and assuch a property yet, it’s separate transfer is prohibited. So easement cannot be transferredapart from the dominant heritage.

Clause (d)Clause (d)Clause (d)Clause (d)Clause (d): Restricted interest: - An interest in property restricted in its enjoyment tothe owner personally as been made non-transferable. For example religious offices,service tenures i.e., right in certain land which is given to a person by way of remunerationfor personal services being discharged by that person, are also non-transferable.

Clause (dd)Clause (dd)Clause (dd)Clause (dd)Clause (dd): Right to future maintenance: - Where a person is entitled to receivemaintenance allowance, it is his personal right because it is given or is promised to begiven in future solely for his own benefit. As such, the right to future maintenance is arestricted interest which is non-transferable under section 6(d) of the Act.

Clause (e):Clause (e):Clause (e):Clause (e):Clause (e): Mere right to sue: Right to sue for a certain sum of money is actionableclaim. Actionable claim is a claim for a certain amount of money and can be transferred.


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But right to sue for uncertain or indefinite sum of money is not transferable. The right toclaim damages from the wrong-doer is not a claim for any certain or fixed sum ofmoney and shall come within the meaning of ‘right to sue’ as given in this clause.

Clause (f):Clause (f):Clause (f):Clause (f):Clause (f): Public office and salary of a public officer:- Under this clause there isprohibition in the transfer of a public office and the salaries of public officers. Thereason why these interests are non-transferable is, to ensure the dignity to the officeheld by a person appointed for qualities personal to him and getting salary for duedischarge of his public duties.

Clause (g):Clause (g):Clause (g):Clause (g):Clause (g): Pensions and stipends: The stipends allowed to military, naval, air forceand civil pensioners of the Government and the political pensions, and cannot betransferred. These are given to the person concerned because of his past services orpersonal merits, therefore, these interests are personal to the recipient. Transferabilityof such interests would defeat the very purposes for which these interests exist.

Clause (h): Clause (h): Clause (h): Clause (h): Clause (h): Transfer opposed to Nature of interest etc.:- There are certain propertieswhich by their very nature can neither be owned nor transferred. For example, air, light,space, seas are such properties which in their natural form are nobody’s property.

Any property which is otherwise transferable shall become non-transferable if theobject or consideration of the transfer is unlawful within the meaning of section 23 ofthe Indian Contract Act, 1872.

7. P7. P7. P7. P7. Persons competent to transferersons competent to transferersons competent to transferersons competent to transferersons competent to transfer.....-Every person competent to contract and entitledto transferable property, or authorized to dispose of transferable property not his own,is competent to transfer such property either wholly or in part, and either absolutely orconditionally, in the circumstances, to the extent and in the manner, allowed andprescribed by any law for the time being in force.

In a valid transfer of property, following essential conditions must be fulfilled.

1) The property must be transferable property.

2) The transferor must be competent.

3) The transferor must also have right to transfer the property being transferred.

4) Transferee must also be competent.

5) Necessary formalities prescribed by law for the transfer must also be completed.

SSSSS.8. Operation of transfer.8. Operation of transfer.8. Operation of transfer.8. Operation of transfer.8. Operation of transfer.....-----Unless a different intention is expressed or necessarilyimplied, a transfer of property passes forthwith to the transferee all the interest which


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the transferor is then capable of passing in the property, and in the legal incidentsthereof.

Such incidents include, where the property is land, the easements annexed thereto,the rents and profits thereof accruing after the transfer, and all things attached to theearth;

and, where the property is machinery attached to the earth, the moveable partsthereof;

and, where the property is a house, the easements annexed thereto, the rent thereofaccruing after the transfer, and the locks, keys, bars, doors, windows, and all otherthings provided for permanent use therewith;

and, where the property is a debt or other actionable claim, the securities therefore(except where they are also for other debts or claims not transferred to the transferee),but not arrears of interest accrued before the transfer;

and, where the property is money or other property yielding income, the interest orincome thereof accruing after the transfer takes effect.

Property consists of interests. Interests of the property have several incident orthings appertaining to it. When a property is transferred, there is transfer of the interestsand together with them their incidents also passing on to the transferee. There transferorneed not specify each and every incident which shall pass on to the transferee. But, iftransferor so desires, he may express that a particular interest shall remain with him orotherwise shall not go to the transferee. However, such intention must be clearly expressedor be necessarily be implied in the absence of which it is presumed that transfer of theproperty passes forthwith to the transferee all the interests which the transferor is thencapable of passing in the property, and in the legal incidents thereof.

9. Oral transfer9. Oral transfer9. Oral transfer9. Oral transfer9. Oral transfer.-.-.-.-.-A transfer of property may be made without writing in every casein which writing is not expressly required by law.

This section refers to modes of transfer and provides that where writing is not necessaryunder this Act, the property may be transferred orally i.e., without writing any deed.There are two modes of transfer of property. A) Delivery of possession B) Registration.

Where writing is not necessary under law, the property may be transferred orally.Where registration is necessary, the transfer must be in writing. When it is required to beregistered under any law, then it should be registered.


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Illegal restrictions on certain alienations: Ss. 10-12 and 17 and 18.

SSSSS.10. Condition R.10. Condition R.10. Condition R.10. Condition R.10. Condition Restraining Alienationestraining Alienationestraining Alienationestraining Alienationestraining Alienation:-Where property is transferred, subject to acondition or limitation absolutely restraining the transferee (or any person claimingunder him) from parting with or disposing of his interest in the property such conditionor limitation (and not the transfer itself) is void.

Such a condition is, however valid in the following two cases:-

a) in the case if a lease where the condition is for the benefit of the lessor (or thoseclaiming under him)

b) A transfer to, or for the benefit of , a woman(not being a Hindu, Muslim orBuddhist, so that she shall not have power, during her marriage to transfer orchange the same.

Right of disposal is one of the essential features of ownership. Section 10 incorporatesthe rule that any restriction on the right of disposal would against this essential featureof ownership rights. Accordingly, section 10 provides that if a transfer is made subjectto a condition by which the transferee is absolutely restrained from disposing of orparting with his interest in the property, the condition is void. In such cases since thetransferee becomes owner of that property, any restriction limiting his right of disposingthe property would not be binding on him and he would be free to transfer it to anybodyby any means. For example, A makes a gift of his house to B subject to the conditionthat B shall not sell it. The condition being an absolute restraint on B’s right of disposalis void and thus B is not bound by it. If he sells the property, the sale is valid.

Absolute Restraint:-

Under Section 10 only that condition has been declared void which absolutelyrestrains the alienation. Restraint on alienation is absolute if it totally takes away orcurtails the right of disposal.

IllustrationsIllustrationsIllustrationsIllustrationsIllustrations

a) A sells his house to B on a condition that B cannot transfer this house to anyoneexcept C. The condition is void because C may be chosen as a person who maynever purchase the property.

There is a partition of a joint family property between A, B, C and D in which theyagree that if any one of them have no issue, he will have no right to sell his shareand leave it for the other sharers. A sells his share and after sometime, dies


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issueless. The condition being absolute restraint on alienation is void. B, C andD cannot recover the property from the purchaser

Partial Restraint:-

Section 10 is silent about the situation where the restraint is partial. Where therestraint does not take away the power of alienation of the transferee substantially butonly limits it to some extent, the restraint is partial. A partial restraint is valid andenforceable. In Muhammad Raza v. Abbas Bandi Bibi (AIR 1932 P.C.158)

Where the condition restricted the transferee from transferring the property tostrangers i.e. outside the family of the transferor, the Privy Council held that the conditionwas merely a partial restraint which was valid and enforceable.

Exceptions:-

i) Leases:- Lease is a transfer of limited interest where the transferor (lessor) reservesthe ownership and transfers only the right of enjoyment to the transferee (lessee).Therefore, a lessor can impose a condition on the lessee that he shall have noright to sub-lease or assign his interest to another person. Such condition, althoughit is a restraint on the lessee against alienation, is valid and he cannot transfer hisinterest without the consent of the lessor.

ii) Married Woman: - Where property is transferred to a married woman who is nota Hindu, Muslim or Buddhist, the transferor can validly impose a conditionrestraining alienation. Such condition shall not be void under Section 10. Similarprovisions are laid down in the Married Women’s Right to Property Act, 1874which is applicable to married women who are not Hindu, Muslim or Buddhist.The personal laws of Hindus, Muslims and Buddhists already provide for thevalidity of restraint on alienation of the married women of these communities.Thus, a property may be transferred to a married Hindu woman for her life with acondition that she cannot transfer it. Reason behind such a restraint is to safeguardthe interest of the married women who could easily exploited by their unscrupuloushusbands.

11. R11. R11. R11. R11. Restriction repugnant to interest createdestriction repugnant to interest createdestriction repugnant to interest createdestriction repugnant to interest createdestriction repugnant to interest created.-.-.-.-.- Where, on a transfer of property, aninterest therein is created absolutely in favour of any person, but the terms of the transferdirect that such interest shall be applied or enjoyed by him in a particular manner, heshall be entitled to receive and dispose of such interest as if there were no such direction.


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Where any such direction has been made in respect of one piece of immoveableproperty for the purpose of securing the beneficial enjoyment of another piece of suchproperty, nothing in this section shall be deemed to affect any right which the transferormay have to enforce such direction or any remedy which he may have in respect of abreach thereof.

RRRRRestraint on Mode of Enjoyment:-estraint on Mode of Enjoyment:-estraint on Mode of Enjoyment:-estraint on Mode of Enjoyment:-estraint on Mode of Enjoyment:-

Section 11, provides that in the transfer of absolute interest of property, if the transferorimposes any condition restraining the mode of its enjoyment, the condition is void andthe transferee is not bound by that condition. Absolute interest in a property meansownership. Where a property is transferred absolutely, there is transfer of ownershipand the transferee gets all the incidents of ownership including the right to use or enjoythe property as he likes.

Section 11 is applicable only where an absolute interest or ownership has beentransferred. Where ownership is transferred, the transferee gets ownership right whichincludes the right of enjoyment of the property as he likes. Sale, exchange or gift is atransfer of ownership or absolute interest. A condition or direction in a sale, exchangeor gift that the transferee can or cannot use or enjoy the property in a particular manneris repugnant to the ownership rights and is, therefore, void.


i) A sells his agricultural lands to B with a condition that B can cultivate only wheatbut cannot grow the crops of paddy. The condition is void and B is free to growthe crops of paddy.

ii) A sells a house to B directing B that he cannot reside in it but can use it only as agodown or shop. The condition being void, B is entitled to use the house as hisresidence.

This section is not applicable where the transfer is merely of partial interest in theproperty. In the transfer of partial or limited interest, there is no transfer of ownership.For example, lease is a transfer of merely partial interest in which the lessee gets onlythe right of enjoyment of the property not its ownership. Condition imposed by a lessorrestraining the mode of enjoyment of the property is valid and the lessee is boundby it.


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Exceptions:-

EasementsEasementsEasementsEasementsEasements:-:-:-:-:- There is an exception to the above rule. It provides that a conditionor direction restraining the mode of enjoyment may be made by the transferor providedit is for the beneficial enjoyment of transferors own adjoining property. Thus, if aperson owns two properties say, a house in which he is residing and an adjacent landhe can impose a condition on the purchaser that he would not obstruct the air or lightfrom the windows of his house which open on the side of the land sold. This condition,though curtails the right of enjoyment of the purchaser, is a valid condition because it ismeant for the beneficial enjoyment of transferor’s own property.

SSSSS.12..12..12..12..12. Condition making interest determinable on insolvency or attemptedalienation.-Where property is transferred subject to a condition or limitation makingany interest therein, reserved or given to or for the benefit of any person, to cease on hisbecoming insolvent or endeavoring to transfer or dispose of the same, such conditionor limitation is void.

Nothing in this section applies to a condition in a lease for the benefit of the lessoror those claiming under him.

Section 12 provides that where a property is transferred subject to a condition orlimitation that the interest created thereby shall cease to exist on transferee becominginsolvent or on his attempting to transfer it, the condition is void. This section invalidatestwo types of conditions: i) conditions which limit or restrict any attempted transfer by thetransferee and ii) conditions which provide that the interest of the transferee shall ceaseto exist when the transferee become insolvent.

The object of this section is to protect the interest of the creditors. Although it isunjust to lay down a condition restricting transferee from disposing of his property, itwould be equally unjust if such transferee is allowed to defeat the interest of his creditorwho had advanced money only on the basis of his property. In the absence of thisprovision, the transferee may incur debts and is then adjudged insolvent. The resultwould be that creditor can never recover his money because the property would alreadycease to be the property of the debtor. Section 12 avoids this situation.

Section 12 is applicable whether the interest transferred is absolute interest or apartial interest. Thus in the transfer or settlement of an interest ‘for life’ the conditionthat it shall cease to exist upon transferee becoming an insolvent would be a voidcondition under this section.


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Direction for accumulation of Income (Ss. 17, 18)

17. Direction for accumulation:17. Direction for accumulation:17. Direction for accumulation:17. Direction for accumulation:17. Direction for accumulation:-----(1) Where the terms of a transfer of property directthat the income arising from the property shall be accumulated either wholly or in partduring a period longer than—

(a) the life of the transferor, or

(b) a period of eighteen years from the date of the transfer,

such direction shall, save as hereinafter provided, be void to the extent to whichthe period during which the accumulation is directed exceeds the longer of theaforesaid periods, and at the end of such last-mentioned period the property andthe income thereof shall be disposed of as if the period during which theaccumulation has been directed to be made had elapsed.

(2) This section shall not affect any direction for accumulation for the purpose of–

(i) the payment of the debts of the transferor or any other person taking anyinterest under the transfer, or

(ii) the provision of portions for children or remoter issue of the transferor or ofany other person taking any interest under the transfer, or

(iii) the preservation or maintenance of the property transferred; and such directionmay be made accordingly.

18. T18. T18. T18. T18. Transfer in perpetuity for benefit of public:ransfer in perpetuity for benefit of public:ransfer in perpetuity for benefit of public:ransfer in perpetuity for benefit of public:ransfer in perpetuity for benefit of public:----- The restrictions in sections 14, 16and 17 shall not apply in the case of a transfer of property for the benefit of the publicin the advancement of religion, knowledge, commerce, health, safety, or any otherobject beneficial to mankind.

Transfer by Co-owners (Ss. 44 And 47)

Transfer by One Co-owner (S.44)

Where one of two or more co-owners of immoveable property legally competent inthat behalf transfers his share of such property or any interest therein, the transfereeacquires, as to such share or interest, and so far as is necessary to give effect to thetransfer, the transferors right to joint possession or other common or part enjoyment ofthe property, and to enforce a partition of the same, but subject to the conditions andliabilities affecting, at the date of the transfer, the share or interest so transferred.


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Where the transferee of a share of a dwelling-house belonging to an undividedfamily is not a member of the family, nothing in this section deemed to entitle him tojoint possession or other common or part enjoyment of the house.

Where one co-owner of immovable property transfer his share, the transfereeacquires as to that share (1) the right of joint possession, or (2) the right to partition tothe extent enjoyed by the transferor. This would apply to a transferee of all kinds,including mortgages and lessees. But where the transferee of a dwelling house belongingto an undivided family is not a member of the family, he is not entitled to joint possessionor other common or part-enjoyment of the house.

This section is based on the principle of subrogation or substitution. Thus, A, B andC mortgage their field to X. C then transfer his share of the field to D. Under thesecircumstances, D will have the right to joint possession with A and B, and also a right toclaim partition and separate possession of his share. But the recently acquired share ofD is still subject to the mortgage.

PPPPPriority by coriority by coriority by coriority by coriority by co-----owners of share in common property (Sowners of share in common property (Sowners of share in common property (Sowners of share in common property (Sowners of share in common property (S.47).47).47).47).47)

Where several co-owners of immoveable property transfer a share therein withoutspecifying that the transfer is to take effect on any particular share or shares of thetransferors, the transfer, as among such transferors, takes effect on such shares equallywhere the shares were equal, and, where they were unequal, proportionately to theextent of such shares.

IllustrationIllustrationIllustrationIllustrationIllustration

A, the owner of an eight-anna share, and B and C, each the owner of a four-annashare, in mauza Sultanpur, transfer a two-anna share in the mauza to D, without specifyingfrom which of their several shares the transfer is made. To give effect to the transferone-anna share is taken from the share of A, and half-an-anna share from each of theshares of B and C

Joint Transfers (Ss.45-46)

1. Joint transfer for consideration (S1. Joint transfer for consideration (S1. Joint transfer for consideration (S1. Joint transfer for consideration (S1. Joint transfer for consideration (S.45).45).45).45).45)

Where immoveable property is transferred for consideration to two or more persons,and such consideration is paid out of a fund belonging to them in common, they are,in the absence of a contract to the contrary, respectively entitled to interests in such


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property identical, as nearly as may be, with the interests to which they were respectivelyentitled in the fund; and, where such consideration is paid out of separate funds belongingto them respectively, they are, in the absence of a contract to the contrary, respectivelyentitled to interests in such property in proportion to the shares of the considerationwhich they respectively advanced.

In the absence of evidence as to the interests in the fund to which they wererespectively entitled, or as to the shares which they respectively advanced, such personsshall be presumed to be equally interested in the property.

2. T2. T2. T2. T2. Transfer for consideration by persons having distinct interest (Sransfer for consideration by persons having distinct interest (Sransfer for consideration by persons having distinct interest (Sransfer for consideration by persons having distinct interest (Sransfer for consideration by persons having distinct interest (S.46).46).46).46).46)

Where immoveable property is transferred for consideration by persons havingdistinct interests therein, the transferors are, in the absence of a contract to the contrary,entitled to share in the consideration equally, where their interest in the property were ofequal value, and, where such interests were of unequal value, proportionately to thevalue of their respective interests.


(a) A, owing a moiety, and B and C, each a quarter share, of mauza Sultanpur,exchange an eighth share of that mauza for a quarter share of mauza Lalpura.There being no agreement to the contrary, A is entitled to an eighth share inLalpura, and B and C each to a sixteenth share in that mauza.

(b) A, being entitled to a life-interest in mauza Atrali and B and C to the reversion,sell the mauza for Rs. 1,000. As life- interest is ascertained to be worth Rs. 600,the reversion Rs. 400. A is entitled to receive Rs. 600 out of the purchase-money.B and C to receive Rs. 400.

Priority of Rights Created by Transfer (Ss.48 And 78)

(1) P(1) P(1) P(1) P(1) Priority of rights previously created (Sriority of rights previously created (Sriority of rights previously created (Sriority of rights previously created (Sriority of rights previously created (S.48).48).48).48).48)

Where a person purports to create by transfer at different times, rights in or over thesame immovable property, and such rights cannot all exist , or be exercised to their fullextent together,- each later created right shall, in the absence of a special contract orreservation binding the earlier transferees, be subject to the rights previously created:S.48.

SSSSS.78. P.78. P.78. P.78. P.78. Postponement of prior mortgagee.ostponement of prior mortgagee.ostponement of prior mortgagee.ostponement of prior mortgagee.ostponement of prior mortgagee.-----Where, through the fraud,misrepresentation or gross neglect of a prior mortgagee, another person has been


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induced to advance money on the security of the mortgaged property; the priormortgagee shall be postponed to the subsequent mortgagee.

The following, however, are eleven exceptions to the rule that priority is determinedby order of time:

1. Section 50 of the Registration Act, under certain circumstances, giving priority toa registered mortgage over an earlier unregistered deed of which registration isoptional.

2. Another exception to the rule is salvage lien, i.e., advances made for the purposeof protecting a priority from revenue sale, forfeiture of destruction.

3. When a mortgage is constituted a first charge, it takes precedence over priormortgages by an order of the Court.

4. Land revenue falling in arrears subsequent to a mortgage takes precedence overit.

5. A State debt (even if subsequent) takes precedence over all other debts, securedor unsecured, in accordance with statutory provisions.

6. When the prior encumbrance misleads a subsequent encumbrancer by fraud,misrepresentation or gross neglect, his priority is postponed.

7. When the priority is barred by estoppel, a subsequent transferee takes precedence.

8. A mortgage executed by a receiver, for the purpose of preserving the property,takes precedence over all other loans.

9. Advances made to save a mortgaged property from loss or destruction are payablein priority to all other charges.

10. A transfer operates from the date of execution of the deed, although it may havebeen registered at a later date: S.47, Registration Act.

11. A non-testamentary document duly registered has priority over any oral transferthough made earlier, except in the case of a mortgage by deposit of title deeds:S.48, Registration Act.

Transferee’s Rights Under Policy (S.49)

Where immovable property, is transferred for consideration, and –

- such property (or any part thereof) is, at the date of the transfer , insured againstloss or damage by fire, -


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- in the case of such loss or damage, the transferee may – in the absence of acontract to the contrary – require any money under the policy(or so much thereof asmay be necessary)to be applied in reinstating the property:S.49.

Bona Fide Holders under Defective Title (Ss. 50-51)

This topic will be considered under the following two heads:

(1) Rent paid to holder under defective title (S.50)

(2) Improvements made by bona fide holders under defective title (S. 51).

(1)(1)(1)(1)(1) RRRRRent paid to holder under defective title (Sent paid to holder under defective title (Sent paid to holder under defective title (Sent paid to holder under defective title (Sent paid to holder under defective title (S.50).50).50).50).50)

SSSSS.50. R.50. R.50. R.50. R.50. Rent bona fide paid to holder under defective title.ent bona fide paid to holder under defective title.ent bona fide paid to holder under defective title.ent bona fide paid to holder under defective title.ent bona fide paid to holder under defective title.-----No person shall bechargeable with any rents or profits of any immoveable property, which he has in goodfaith paid or delivered to any person of whom he in good faith held such property,notwithstanding it may afterwards appear that the person to whom such payment ordelivery was made had no right to receive such rents or profits.


A lets a field to B at a rent of Rs. 50, and then transfers the field to C. B, having nonotice of the transfer, in good faith pays the rent to A. B is not chargeable with the rentso paid.

S.50 provides that no person can be charged with any rents or profits of anyimmovable property, which he has, in good faith, paid or delivered to any person ofwhom he, in good faith, held such property,-notwithstanding it may afterwards appearthat the person to whom such payment or delivery was made he had no right to receivesuch rents or profits.


A lets a field to B at a rent of Rs 50, and then transfers the field to C. B,

having no notice of the transfer, in good faith, pays the rent to A. B is not chargeablewith the rent so paid S: 50.

(2) Improvements made by bona fide holders under defective title S2) Improvements made by bona fide holders under defective title S2) Improvements made by bona fide holders under defective title S2) Improvements made by bona fide holders under defective title S2) Improvements made by bona fide holders under defective title S.51).51).51).51).51)

SSSSS.51. Improvements made by bona fide holders under defective titles..51. Improvements made by bona fide holders under defective titles..51. Improvements made by bona fide holders under defective titles..51. Improvements made by bona fide holders under defective titles..51. Improvements made by bona fide holders under defective titles.-----When thetransferee of immoveable property makes any improvement on the property, believing


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in good faith that he is absolutely entitled thereto, and he is subsequently evicted therefrom by any person having a better title, the transferee has a right to require the personcausing the eviction either to have the value of the improvement estimated and paid orsecured to the transferee, or to sell his interest in the property to the transferee at thethen market-value thereof, irrespective of the value of such improvement.

The amount to be paid or secured in respect of such improvement shall be theestimated value thereof at the time of the eviction.

When, under the circumstances aforesaid, the transferee has planted or sown onthe property crops which are growing when he is evicted there from, he is entitled tosuch crops and to free ingress and egress to gather and carry them.

When the transferee of immovable property makes an improvement on the property,believing in good faith that he is absolutely entitled thereto, and he is subsequentlyevicted there from by any person having a better title,

- the transferee has a right to require the person causing the eviction –

either

(i) to have the value of the improvement estimated and paid or secured to thetransferee,

or

(ii) to sell his interest in the property to the transferee at the then market value thereof,irrespective of the value of such improvement.

The amount to be paid or secured in respect of such improvement shall be estimatedvalue thereof at the time of eviction,

If the transferee has planted or sown(on the property) crops which are growingwhen he is evicted there from, he is entitled

(i) to such crops, and

(ii) to free ingress and egress to gather and carry them:S.51.

Transfer of Property Pending Suit Relating thereto (Lis Pendens):S.52

During the pendency in any Court having authority within the limits of India excludingthe State of Jammu and Kashmir or established beyond such limits the CentralGovernment any suit or proceeding which is not collusive and in which any right to


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immoveable property is directly and specifically in question, the property cannot betransferred or otherwise dealt with by any party to the suit or proceeding so as to affectthe rights of any other party thereto under any decree or order which may be madetherein, except under the authority of the Court and on such terms as it may impose.

ExplanationExplanationExplanationExplanationExplanation.....—For the purposes of this section, the pendency of a suit or proceedingshall be deemed to commence from the date of the presentation of the plaint or theinstitution of the proceeding in a Court of competent jurisdiction, and to continue untilthe suit or proceeding has been disposed of by a final decree or order, and completesatisfaction or discharge of such decree or order has been obtained, or has becomeunobtainable by reason of the expiration of any period of limitation prescribed for theexecution thereof by any law for the time being in force.

EssentialsEssentialsEssentialsEssentialsEssentials – In order to constitute a lis pendens, the following six elements must bepresent:

(i) There should be a suit or a proceeding.

(ii) The suit or proceeding must be one in which a right to immovable property isdirectly and specifically in question.

(iii) The suit or proceeding must not be a collusive one.

(iv) The suit or proceeding must be pending.

(v) The property in a suit must be transferred during such pendency.

(vi) The suit or proceeding must be pending in a Court of competent jurisdiction.

When the above-mentioned conditions are fulfilled, the transferee is bound by thedecision of the court. If the decision of the court is in favour of the transferor, thetransferee has rights in the property transferred to him. If the decision goes against thetransferor, the transferee cannot get any interest in the property.

The law incorporated in section 52 is based on the doctrine of lis pendens. ‘Lis’means ‘litigation’ and ‘pendens’ means ‘pending’. So, lis pendens would mean ‘pendinglitigation’. The doctrine of lis pendens is expressed in the well-known maxim: Pendentelite nihil innovature, which means, ‘during pendency of litigation, nothing new shouldbe introduced.’ Under this doctrine, it is provided that during pendency of any suitregarding title of a property, any new interest in respect of that property should not becreated. Creation of new title or interest is known as a transfer of property. Therefore,in essence, the doctrine of lis pendens prohibits the transfer of property pending litigation.


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Under this doctrine the judgments in the immovable properties were regarded asoverriding any alienation made by the parties during pendency of litigation. Later on,this doctrine was adopted also by equity for a better and more regular administration ofjustice.

This doctrine is based on notice because a pending suit is regarded as constructivenotice of the fact of disputed title of the property under litigation. Therefore, any persondealing with that property, pending litigation, must be bound by the decision of thecourt. But the correct view is that lis pendens is founded on ‘necessity’. For administrationof justice it is necessary that while any suit is still pending in a court of law regarding titleof property, the litigants should not be allowed to take decision themselves and transferthe disputed property.

The Indian court have also taken the view that basis of section 52 is not the doctrineof notice but expediency i.e., the necessity for final adjudication and public policy.

Fraudulent Transfer (S.53)

SSSSS.53. F.53. F.53. F.53. F.53. Fraudulent transferraudulent transferraudulent transferraudulent transferraudulent transfer.-.-.-.-.-(1) Every transfer of immoveable property made withintent to defeat or delay the creditors of the transferor shall be voidable at the option ofany creditor so defeated or delayed.

Nothing in this sub-section shall impair the rights of a transferee in good faith andfor consideration.

Nothing in this sub-section shall affect any law for the time being in force relatingto insolvency.

A suit instituted by a creditor (which term includes a decree-

holder whether he has or has not applied for execution of his decree)

to avoid a transfer on the ground that it has been made with intent to defeat ordelay the creditors of the transferor, shall be instituted on behalf of, or for the benefit of,all the creditors.

2) Every transfer of immovable property made without consideration with intent todefraud a subsequent transferee shall be voidable at the option of such transferee.

For the purpose of this sub-section, no transfer made without consideration shallbe deemed to have been made with intent to defraud by reason only that a subsequenttransfer for consideration made.


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Under the Transfer of Property Act, a transfer of immovable property by a debtormay be set aside by his creditor –

(1) if the transfer is made with intent to defeat or delay the transferor’s creditor, and

(2) if the transferee is not a transferee in good faith and for consideration.

A transferee from such debtor will be protected –

(a) if he acquires property for value and in good faith , i.e., without being aparty to any design of the transferor to defeat or delay his creditors , even ifthe debtor’s intention may have been fraudulent; or

(b) if he himself is a creditor and the transfer is made in satisfaction of his pre-existing debt.

This section consists of two parts. The first part lays down that every transfer ofimmovable property made with intent to defeat or delay the creditors of the transferorshall be voidable at the option of any creditor so defeated for delayed. To take oneillustration, A, who is heavily indebted, and against whom a suit for the recovery ofdebts is going to be filed, sells his house to B to save it from being attached and sold inpayment of the debt. If B knows of A’s fraudulent intention, the sale to B is liable to beset aside at the option of the creditors. It will be seen that the right of a transferee ingood faith and for consideration are not affected even though the transfer is made withintent to defeat the creditors.

The second part of the section lays down that every transfer of immovable propertymade without consideration with intent to defraud a subsequent transferee shall bevoidable at the option of such transferee, but that no presumption to defraud shallnecessarily arise by reason only that a subsequent transfer for consideration was made.

Section 53, while safeguarding the rights of transferee in good faith and forconsideration, empowers the creditors to avoid any transfer of immovable propertymade by the debtor with intent to defeat or delay the creditors. It, however, requiresthat such a suit must be instituted either in a representative capacity or for the benefit ofall the creditors.

Part Performance (S.53A):

Where any person contracts to transfer for consideration any immovable propertyby writing signed by him or on his behalf from which the terms necessary to constitutethe transfer can be ascertained with reasonable certainty.


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And the transferee has, in part performance of the contract, taken possession of theproperty or any part thereof, or the transferee, being already in possession, continues inpossession in part performance of the contract and has done some act in furtheranceof the contract,

And the transferee has performed or is willing to perform his part of the contract,then, notwithstanding that where there is an instrument of transfer, that the transfer hasnot been completed in the manner prescribed therefore by the law for the time being inforce, the transferor or any person claiming under him shall be debarred from enforcingagainst the transferee and persons claiming under him any right in respect of the propertyof which the transferee has taken or continued in possession, other than a right expresslyprovided by the terms of the contract:

Provided that nothing in this section shall affect the rights of a transferee forconsideration who has no notice of the contract or of the part performance thereof.

Essentials:-

1) There should be a contract to transfer, for consideration, any immovable propertyby a writing signed by the transferor on his behalf, from which the terms necessaryto constitute the transfer can be ascertained with reasonable certainty.

(2) The transferee should, in part performance of the contract, has taken possessionof the property or any part thereof, or, if already in possession should have continuedin possession in part performance of the contract and should have done some actin furtherance of the contract.

(3) The transferee should have performed or should be willing to perform his part ofthe contract.

(4) The rights of any other subsequent transferee for consideration without noticeshould not be affected.

If all the above conditions co-exist, in spite of the fact that –

(i) the contract though required to be registered , has not been registered, or

(ii) the instrument of transfer has not been completed in the manner prescribedthereof by law , e.g., where it is not attested or registered , though requiredto be attested and registered,


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the transferor, or any person claiming under him will be debarred from claimingany relief , in respect of the property as against the transferee which is inconsistent withthe terms of contract.

The proviso to S.53-A saves the right of a transferee for consideration who has nonotice of the contract or its part performance. It is to be noticed, however, that ordinarily,possession will constitute notice of the title of person in possession.

Amendment of Section 53A and other Enactments:-

An amendment has been made in section 53-A of the Transfer of Property Act bythe Registration and other Related Laws Act (48 of 2001). This Amending Act (48 of2001) has made following amendments relating to section 53-A:-

1. In section 53-A, para 4 of the Transfer of Property Act the words “the contract,though required to be registered, has not been registered, or”, omitted.

2. In section 17 of the Registration Act, a) after sub-section (1), the followingsub-section shall be inserted:

“(1A) The documents containing contracts to transfer consideration, any immovableproperty for the purpose of section 53-A of the Transfer of Property Act, 1882 shall beregistered if they have been executed on or after the commencement of the Registrationand other Related Laws (Amendment) Act, 2001 and if such documents are not registeredon or after such commencement, then, they shall have no effect for the purposes of thesaid section 53-A.”

3. In section 49 of the Registration Act, in the proviso: the words, figures andletter or as evidence of part performance of a contract for the purposes ofsection 53-A of the Transfer of Property Act, 1882 shall be omitted.

4. The provisions of this Amending Act (Act 48 of 2001) come into force witheffect from 24-9-2001. This Amendment Act is not retrospective.

Legal Effect of the Amending Act (Act 48 Of 2001) In Section 53A:-

The amendment in section 53-A should be read together with amendments insection 17 and section 49 of the Registration Act. In section 17 of the Registration Act,a new clause has been inserted (17-A), which provides that written documents of thetransfer of an immovable property with consideration must be registered for the purposesof section 53-A of the Transfer of Property Act; and, if such documents are not registered


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then, they shall have no effect for the purposes of section 53-A of the T.P.Act.Thus, anobvious meaning of these amended provisions of section 53-A of the T.P. Act and thatof section 17-A of the Registration Act is that section 53-A shall not be applicable andthe defence of part-performance cannot be available on the basis of un-registereddocuments which are executed on or after 24-9-2001, the date of enforcement of theamending Act 48 of 2001. Therefore, the contract of the transfer of immovable propertywith consideration as provided in section 53-A is now compulsorily registrable document.


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CHAPTER III

SALE OF IMMOVABLE PROPER(Ss. 54-57)

“Sale” defined. Sale how made.-”Sale” is a transfer of ownership inexchange for a price paid or promised or part-paid and part-promise

Sale how made.-Such transfer, in the case of tangible immoveableproperty of the value of one hundred rupees and upwards, or in the caseof a reversion or other intangible thIn the case of tangible immoveableproperty of a value less than one hundred rupees, such transfer may bemade either by a registered instrument or by delivery of the property.

Delivery of tangible immoveable property takes place when the sellerplaces the buyer or such person as he directs, in possession of the property.

Contract for sale.-A contract for the sale of immovable property is acontract that a sale of such property shall take place on terms settledbetween the parties.

It does not, of itself, create any interest in or charge on such property.

55. Rights and liabilities of buyer and seller55. Rights and liabilities of buyer and seller55. Rights and liabilities of buyer and seller55. Rights and liabilities of buyer and seller55. Rights and liabilities of buyer and seller.....-----In the absence of acontract to the contrary, the buyer and the seller of immoveable propertyrespectively are subject to the liabilities, and have the rights, mentionedin the rules next following, or such of them as are applicable to theproperty sold:

(1) The seller is bound—(1) The seller is bound—(1) The seller is bound—(1) The seller is bound—(1) The seller is bound—

(a) to disclose to the buyer any material defect in the property or in thesellers title thereto of which the seller is, and the buyer is not, aware,and which the buyer could not with ordinary care discover;

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(b) to produce to the buyer on his request for examination all documents of titlerelating to the property which are in the sellers possession or power;

(c) to answer to the best of his information all relevant questions put to him by thebuyer in respect to the property or the title thereto;

(d) on payment or tender of the amount due in respect of the price, to execute aproper conveyance of the property when the buyer tenders it to him for executionat a proper time and place;

(e) between the date of the contract of sale and the delivery of the property, to takeas much care of the property and all documents of title relating thereto which arein his possession as an owner of ordinary prudence would take of such propertyand documents;

(f) to give, on being so required, the buyer, or such person as he directs, suchpossession of the property as its nature admits;

(g) to pay all public charges and rent accrued due in respect of the property up to thedate of the sale, the interest on all incumbrances on such property due on suchdate, and, except where the property is sold subject to incumbrances, to dischargeall incumbrances on the property then existing.

(2)(2)(2)(2)(2) The seller shall be deemed to contract with the buyer that the interest which theseller professes to transfer to the buyer subsists and that he has power to transfer thesame:

Provided that, where the sale is made by a person in a fiduciary character, he shallbe deemed to contract with the buyer that the seller has done no act whereby theproperty is encumbered or whereby he is hindered from transferring it.

The benefit of the contract mentioned in this rule shall be annexed to, and shall gowith, the interest of the transferee as such, and may be enforced by every person inwhom that interest is for the whole or any part thereof from time to time vested.

(3)(3)(3)(3)(3) Where the whole of the purchase-money has been paid to the seller, he is alsobound to deliver to the buyer all documents of title relating to the property which are inthe sellers possession or power:

Provided that, (a) where the seller retains any part of the property comprised in suchdocuments, he is entitled to retain them all, and, (b) where the whole of such propertyis sold to different buyers, the buyer of the lot of greatest value is entitled to such

SALE OF IMMOVABLE PROPER (Ss. 54-57)

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documents. But in case (a) the seller, and in case (b) the buyer, of the lot of greatestvalue, is bound, upon every reasonable request by the buyer, or by any of the otherbuyers, as the case may be, and at the cost of the person making the request, toproduce the said documents and furnish such true copies thereof or extracts there fromas he may require; and in the meantime, the seller, or the buyer of the lot of greatestvalue, as the case may be, shall keep the said documents safe, uncancelled andundefined, unless prevented from so doing by fire or other inevitable accident.

(4) The seller is entitled—(4) The seller is entitled—(4) The seller is entitled—(4) The seller is entitled—(4) The seller is entitled—

(a) to the rents and profits of the property till the ownership thereof passes to thebuyer;

(b) where the ownership of the property has passed to the buyer before payment ofthe whole of the purchase-

money, to a charge upon the property in the hands of the buyer, any transfereewithout consideration or any transferee with notice of the non-payment], for theamount of the purchase-money, or any part thereof remaining unpaid, and forinterest on such amount or partfrom the date on which possession has beendelivered.

(5) The buyer is bound—(5) The buyer is bound—(5) The buyer is bound—(5) The buyer is bound—(5) The buyer is bound—

(a) to disclose to the seller any fact as to the nature or extent of the sellers interest inthe property of which the buyer is aware, but of which he has reason to believethat the seller is not aware, and which materially increases the value of suchinterest;

(b) to pay or tender, at the time and place of completing the sale, the purchase-money to the seller or such person as he directs: provided that, where the propertyis sold free from incumbrances, the buyer may retain out of the purchase-moneythe amount of any incumbrances on the property existing at the date of the sale,and shall pay the amount so retained to the persons entitled thereto;

(c) where the ownership of the property has passed to the buyer, to bear any lossarising from the destruction, injury or decrease in value of the property not causedby the seller;

(d) where the ownership of the property has passed to the buyer, as between himselfand the seller, to pay all public charges and rent which may become payable in


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respect of the property, the principal moneys due on any incumbrances subject towhich the property is sold, and the interest thereon afterwards accruing due.

(6) The buyer is entitled—(6) The buyer is entitled—(6) The buyer is entitled—(6) The buyer is entitled—(6) The buyer is entitled—

(a) where the ownership of the property has passed to him, to the benefit of anyimprovement in, or increase in value of, the property, and to the rents and profitsthereof

(b) unless he has improperly declined to accept delivery of the property, to a chargeon the property, as against the seller and all persons claiming under him, to theextent of the sellers interest in the property, for the amount of any purchase-money properly paid by the buyer in anticipation of the delivery and for intereston such amount; and, when he properly declines to accept the delivery, also forthe earnest (if any)

and for the costs (if any) awarded to him of a suit to compel specific performanceof the contract or to obtain a decree for its rescission.

An omission to make such disclosures as are mentioned in this section, paragraph(1), clause (a), and paragraph (5), clause (a), is fraudulent.

56. Marshalling by subsequent purchaser56. Marshalling by subsequent purchaser56. Marshalling by subsequent purchaser56. Marshalling by subsequent purchaser56. Marshalling by subsequent purchaser.....-----If the owner of two or more propertiesmortgages them to one person and then sells one or more of the properties to anotherperson, the buyer is, in the absence of a contract to the contrary, entitled to have themortgage-debt satisfied out of the property or properties not sold to him, so far as thesame will extend, but not so as to prejudice the rights of the mortgagee or personsclaiming under him or of any other person who has for consideration acquired aninterest in any of the properties.

57. P57. P57. P57. P57. Provision by Court for incumbrances and sale freed therefrom.-rovision by Court for incumbrances and sale freed therefrom.-rovision by Court for incumbrances and sale freed therefrom.-rovision by Court for incumbrances and sale freed therefrom.-rovision by Court for incumbrances and sale freed therefrom.-

(a) Where immoveable property subject to any incumbrance, whether immediatelypayable or not, is sold by the Court or in execution of a decree, or out of Court,the Court may, if it thinks fit, on the application of any party to the sale, direct orallow payment into

Court,—

(1) in case of an annual or monthly sum charged on the property, or of a capital sumcharged on a determinable interest in the property—of such amount as, wheninvested in securities of the Central Government, the


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Court considers will be sufficient, by means of the interest thereof, to keep downor otherwise provide for that charge, and

(2) in any other case of a capital sum charged on the property—of the amountsufficient to meet the incumbrance and any interest due thereon.

a) But in either case there shall also be paid into Court such additional amountas the Court considers will be sufficient to meet the contingency of furthercosts, expenses and interest, and any other contingency, except depreciationof investments, not exceeding one-tenth part of the original amount to bepaid in, unless the Court for special reasons (which it shall record) thinks fitto require a large additional amount.

(b) Thereupon the Court may, if it thinks fit, and after notice to the incumbrancer,unless the Court, for reasons to be recorded in writing, thinks fit to dispensewith such notice, declare the property to be freed from the incumbrance,and make any order for conveyance, or vesting order, proper for givingeffect to the sale, and give directions for the retention and investment of themoney in Court.

(c) After notice served on the persons interested in or entitled to the money orfund in Court, the Court may direct payment or transfer thereof to the personsentitled to receive or give a discharge for the same, and generally may givedirections respecting the application or distribution of the capital or incomethereof.

d) An appeal shall lie from any declaration, order or direction under this sectionas if the same were a decree.

(e) In this section “Court” means (1) a High Court in the exercise of its ordinaryor extraordinary original civil jurisdiction,

(2) the Court of a District Judge within the local limits of whose jurisdiction theproperty or any part thereof is situate, (3) any other Court which the State Governmentmay, from time to time, by notification in the Official Gazette, declare to be competentto exercise the jurisdiction conferred by this section.

“Sale” defined (S.54)

“Sale” is a transfer of ownership in exchange for a price paid or promised, or partpaid and part-promised: S.54.


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Essentials of A Valid Sale-

The following are the eight essentials of a valid sale:

1. The seller must be a person competent to transfer: see S.7.

2. The buyer must be a person competent to be a transferee. He may be any personwho is not disqualified to be a transferee under S.6.

3. The subject–matter must be transferable immovable property: see S.6.

4. There must be a transfer of ownership.

5. The transfer must be in exchange for a price.

6. The price must be paid or promised or part paid and part promised.

7. There must be a registered conveyance in the case of –

(i) tangible immovable property of the value of Rs. 100 andupwards, or

(ii) a reversion of an intangible thing of any value.

8. In the case of tangible immovable property value is less than Rs.100, there musteither be –

(i) a registered conveyance, or

(ii) delivery of property.

Sale how effected (SSale how effected (SSale how effected (SSale how effected (SSale how effected (S.54).54).54).54).54)

1. In case of-

(i) tangible immovable property of the value of Rs.100 and upwards, or

(ii) a reversion, or

(iii) any other intangible thing:

a sale can be made by a registered instrument.

2..... In case of tangible immovable property of a value less than of Rs.100: a salecan be made

(i) by a registered instrument,

or


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(ii) delivery of the property.

Delivery of tangible immovable property takes place when the seller places thebuyer , (or such person as the buyer directs) in possession of the property:S.54.

“Contract for sale” defined (S.54): (agreement to sell)

A contract for the sale of immovable property is a contract that the sale of suchproperty shall take place on terms settled between the parties . It does not, of itself,create any interest in, or charge on, such property: S.54.

I.-Buyer’s Rights (S.55 (6))

(a) Before completion of sale, ie. where ownership has not passed to him Sec.55(6)(b).

The buyer is entitled to-

1) A charge on the property for the purchase money properly paid by him inanticipation of the delivery.

2) Interest on such purchase-money

3) The earnest, and costs awarded to him of a suit to compel specific performanceof the contract or to obtain a decree for its rescission in case he properly declinesto accept delivery.

After Completion of Sale, ie., Where Ownership has PAfter Completion of Sale, ie., Where Ownership has PAfter Completion of Sale, ie., Where Ownership has PAfter Completion of Sale, ie., Where Ownership has PAfter Completion of Sale, ie., Where Ownership has Passed toHim Sassed toHim Sassed toHim Sassed toHim Sassed toHim S.55(6)(A).55(6)(A).55(6)(A).55(6)(A).55(6)(A)

The buyer is entitled to –

(i) the benefits of any improvement in, or increase in value of , the property,and

(ii) the rents and profits thereof.

II. -Buyer’s Liabilities (S.55 (5))

(a) Before completion of sale [S.55(5)(a) &(b)]

The buyer is bound –

1. To disclose to the seller any fact as to the nature or extent of the seller’s interest inthe property of which the buyer is aware, but of which he has reason to believethat the seller is not aware, and which materially increases the value of suchinterest(An omission to make such disclosures amounts to fraud).


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2. To pay or tender the purchase –money to the seller or such person as he directs.Where the property is sold free from encumbrances, the buyer may retain, out ofthe purchase-money, the amount of any encumbrances on the property existingat the date of the sale, and shall pay the amount of any encumbrances on theproperty existing at the date of the sale, and shall pay the amount so retained tothe person entitled thereto.

(b) After completion [S.55 (5) (c) & (d)]

The buyer is bound-

1. To bear any loss(not caused by seller)arising from destruction,injury,or decreasein the value of the property.

2. To pay public charges and rents which may become payable in respect of theproperty, the principal moneys due on any encumbrances subject to which theproperty is sold, and the interest thereon afterwards accruing due.

III.-Seller’s Rights [S.55(4)]

(a) Before completion of sale [S.55(4)(a)]

The seller is entitled to rents and profits till ownership passes to buyer.

(b) After completion of sale [S,55(4)(b)]

The seller is entitled to a charge upon the property in the hands of (i)the buyer,or(ii)any transferee without consideration, or(iii)any transferee with notice of non-payment,for the amount of the unpaid purchase-money.

The seller is entitled to such charge, only when the whole or part of the purchase-money is unpaid, and the ownership of the property has passed to the buyer.

IV.-Seller’s Liabilities [S.55(1),(2)&(3)]

(a) Before completion of sale [S.55(1)(a) to (g)]

The seller is bound-

1. To disclose to the buyer any material defect in(i)the property or (ii) the seller’s titlethereto, of which the seller is, and the buyer is not aware, and which the buyercould not, with ordinary care, discover.

2. To produce to the buyer, on his request, for examination, all documents of titlerelating to the property which are in the seller’s possession or power.


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3. To answer, to the best of his information, all relevant questions put to him by thebuyer with respect to the (i) property, or (ii) the title thereto.

4. On payment or tender of the price, to execute a proper conveyance of the propertywhen the buyer tenders it to him for execution at a proper time and place.

5. Between the date of the contract of sale and the delivery of the property, to takeas much care of the property, and all documents of title relating thereto, as a manof ordinary prudence would take.

6. To pay all public charges and rent accrued due in respect of the property up tothe date of sale, the interest on all encumbrances on such property due on suchdate, and (except where the property is sold subject to encumbrances) to dischargeall encumbrances on the property when existing.

(b) After completion [(S. 55(1),(2),(3)]

1) The seller is bound to give to the buyer, or to such person as he directs, suchpossession of the property as its nature admits.

2) Where the whole of the purchase-money has been paid to the seller, he is alsobound to deliver to the buyer, all documents of title relating to the property whichare in the seller’s possession or power.

(a) Where the seller retains any part of the property comprised in such documents,he is entitled to retain all the documents.

(b) Where the whole of such property is sold to different buyers, the buyer of thelot of the greatest value is entitled to such documents.

The seller, or such buyer of the lot of the greatest value, ( as the case may be) isbound, upon the buyer’s request, to produce the said documents and furnish truecopies thereof, and in the meantime, the seller or the buyer of the greatest value, as thecase may be, must keep the said documents safe, uncancelled and undefaced, unlessprevented from so doing by fire or other inevitable accident.

Covenant for title: -Covenant for title: -Covenant for title: -Covenant for title: -Covenant for title: -

The seller shall be deemed to contract with the buyer that the interest which theseller professes to transfer to the buyer subsists and that he has power to transfer thesame.


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Marshalling by subsequent purchaser (s.56):-Marshalling by subsequent purchaser (s.56):-Marshalling by subsequent purchaser (s.56):-Marshalling by subsequent purchaser (s.56):-Marshalling by subsequent purchaser (s.56):-

If the owner of two or more properties mortgages them to one person, and thensells one or more of the properties to another, the buyer is, in absence of a contract tothe contrary, entitled to have the mortgage-debt satisfied out of property or propertiesnot sold to him, so far as the same will extend, but not so as to prejudice the rights ofa) the mortgagees, or b)persons claiming under him, or c) any other person who hasacquired any interest in any of the properties for consideration.

Discharge of encumbrances on sale (s.57):-Discharge of encumbrances on sale (s.57):-Discharge of encumbrances on sale (s.57):-Discharge of encumbrances on sale (s.57):-Discharge of encumbrances on sale (s.57):-

This section prescribes the procedure for discharging an encumbrance on a propertywhich is sold free from an encumbrance. The power which is given to the court underthis section is intended to facilitate the alienation of encumbered estates by relievingthe land from the encumbrance and substituting for the land another form of security.This section has been enacted to facilitate the realization of fair value for encumberedestates.


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CHAPTER IV

OF EXCHANGE

Sec.118Sec.118Sec.118Sec.118Sec.118. “Exchange” defined. “Exchange” defined. “Exchange” defined. “Exchange” defined. “Exchange” defined.----- When two persons mutually transferthe ownership of one thing for the ownership of another, neither thing orboth things being money only, the transaction is called an “exchange”.

A transfer of property in completion of an exchange can be madeonly in manner provided for the transfer of such property by sale.

Sec.119.Sec.119.Sec.119.Sec.119.Sec.119. Right of party deprived of thing received in exchange.Right of party deprived of thing received in exchange.Right of party deprived of thing received in exchange.Right of party deprived of thing received in exchange.Right of party deprived of thing received in exchange.-Ifany party to an exchange or any person claiming through or under suchparty is by reason of any defect in the title of the other party deprived ofthe thing or any part of the thing received by him in exchange, then,unless a contrary intention appears from the terms of the exchange, suchother party is liable to him or any person claiming through or under himfor loss caused thereby, or at the option of the person so deprived, forthe return of the thing transferred, if still in the possession of such otherparty or his legal representative or a transferee from him withoutconsideration.

Sec.120. Rights and liabilities of partiesSec.120. Rights and liabilities of partiesSec.120. Rights and liabilities of partiesSec.120. Rights and liabilities of partiesSec.120. Rights and liabilities of parties.-.-.-.-.- Save as otherwise providedin this Chapter, each party has the rights and is subject to the liabilities ofa seller as to that which he gives, and has the rights and is subject to theliabilities of a buyer as to that which he takes.

Sec.121. Exchange of moneySec.121. Exchange of moneySec.121. Exchange of moneySec.121. Exchange of moneySec.121. Exchange of money.-.-.-.-.- On an exchange of money, eachparty thereby warrants the genuineness of the money given by him.

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CHAPTER –V

OF MORTGAGES OF IMMOVABLE PROPERTYAND CHARGES (Ss. 58-104)

A- Mortgages (Ss.58-99 & 102-104) 58. ”Mortgage”, “mortgagor”,“mortgagee”, “mortgage-money” and

“mortgage-deed” defined. Simple mortgage. Mortgage byconditional sale. Usufructuary mortgage. English mortgage. Mortgageby deposit of title-deeds. Anomalous mortgage. Mortgage when to beby assurance.

5858585858. “Mortgage”, “mortgagor”, “mortgagee”, “mortgage-money”and

“mortgage“mortgage“mortgage“mortgage“mortgage-----deed” defined.deed” defined.deed” defined.deed” defined.deed” defined.-(a) A mortgage is the transfer of aninterest in specific immoveable property for the purpose of securing thepayment of money advanced or to be advanced by way of loan, anexisting or future debt, or the performance of an engagement whichmay give rise to a pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee;

the principal money and interest of which payment is secured for thetime being are called the mortgage-money, and the instrument (if any)by which the transfer is effected is called a mortgage-deed.

Simple mortgageSimple mortgageSimple mortgageSimple mortgageSimple mortgage.....-(b) Where, without delivering possession of themortgaged property, the mortgagor binds himself personally to pay themortgage- money, and agrees, expressly or impliedly, that, in the eventof his failing to pay according to his contract, the mortgagee shall havea right to cause the mortgaged property to be sold and the proceeds ofsale to be applied, so far as may be necessary, in payment of the

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mortgage-money, the transaction is called a simple mortgage and the mortgagee asimple mortgagee.

Mortgage by conditional saleMortgage by conditional saleMortgage by conditional saleMortgage by conditional saleMortgage by conditional sale.-(c) Where the mortgagor ostensibly sells themortgaged property—

on condition that on default of payment of the mortgage-money on a certain datethe sale shall become absolute, or

on condition that on such payment being made the sale shall become void, or

on condition that on such payment being made the buyer shall transfer the propertyto the seller, the transaction is called a mortgage by conditional sale and the mortgageea mortgagee by conditional sale:

[Provided that no such transaction shall be deemed to be a mortgage, unless thecondition is embodied in the document which effects or purports to effect the sale.]

Usufructuary mortgageUsufructuary mortgageUsufructuary mortgageUsufructuary mortgageUsufructuary mortgage.....-(d) Where the mortgagor delivers possession

[or expressly or by implication binds himself to deliver possession]

of the mortgaged property to the mortgagee, and authorizes him to retain suchpossession until payment of the mortgage-money, and to receive the rents and profitsaccruing from the property or any part of such rents and profits and to appropriate thesame in lieu of interest, or in payment of the mortgage-money, or partly in lieu ofinterest or partly in payment of the mortgage-money, the transaction is called anusufructuary mortgage and the mortgagee an usufructuary mortgagee.

English mortgageEnglish mortgageEnglish mortgageEnglish mortgageEnglish mortgage.-(e) where the mortgagor binds himself to re-pay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to themortgagee, but subject to a proviso that he will retransfer it to the mortgagor uponpayment of the mortgage-money as agreed, the transaction is called an Englishmortgage.

Mortgage by deposit of titleMortgage by deposit of titleMortgage by deposit of titleMortgage by deposit of titleMortgage by deposit of title-----deedsdeedsdeedsdeedsdeeds. - Where a person in any of the followingtowns, namely, the towns of Calcutta, Madras, and

Bombay, and in any other town which the [State Government concerned] may, bynotification in the Official Gazette, specify in this behalf, delivers to a creditor or hisagent documents of title to immoveable property, with intent to create a security thereon,the transaction is called a mortgage by deposit of title-deeds.

OF MORTGAGES OF IMMOVABLE PROPERTY AND CHARGES (Ss. 58-104)

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Anomalous mortgage.Anomalous mortgage.Anomalous mortgage.Anomalous mortgage.Anomalous mortgage.-(g) A mortgage which is not a simple mortgage, a mortgageby conditional sale, an usufructuary mortgage, an English mortgage or a mortgage bydeposit of title-deeds within the meaning of this section is called an anomalous mortgage.

Definition [S.58 (a)]

Loans may be secured or unsecured. Where money is given simply on the basis ofdebtor’s promise to pay i.e., on promissory note, the creditor can file suit for recoveryof his money. But if such debtor has no money to repay the loan or becomes insolvent,the creditor’s money is lost because he cannot recover it from debtor’s property. Suchloans are, therefore, called unsecured loans. On the other hand, before giving theloan, the creditor may take security from the debtor for the repayment of his money.Where the loan is secured against any movable property, it is called a pledge. Wherethe loan is secured against some immovable property of the debtor, it is called mortgage.In both the cases, whether the property is movable or immovable, the loan is securedbecause in default of repayment, the creditor can recover his money from the propertywhich has been specified as security.

When a person takes loan and specifies certain immovable property as security, itis said that he has taken loan by mortgaging his property. The transaction of mortgagehas been a very common method of taking loan and was known to oldest systems oflaw. If the money is not repaid within the stipulated period, the land belonged absolutelyto the creditor and debtor lost his rights in the property for ever. Such situation wasregarded as unjust by the equity. Some modifications were, therefore, made by equity.It was provided by the courts of equity that where a person takes loan only in great needof money and for which he has to put his land in security, his intention is not transfer theland in consideration of the money taken on loan. It is a borrowing transaction ratherthan transaction of sale. So, his interest must be protected in case of non-repaymenton the due date. Equity thus provided that, once a mortgage always a mortgage; itshould not become sale on non-payment of loan on the due date. In other words, thestrict common law rule of transfer of legal estate in favour of creditor in default ofrepayment of loan was modified by equity to do justice with, the debtor. Accordingly,mortgage was regarded as essentially a transaction for taking loan not a transactionfor the transfer of title of property. Further, any condition which used to take away themortgagor’s right in his property was void as being penalty for him. Law of mortgageshas developed in India on similar lines.


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A “mortgage” is the transfer of an interest in specific immovable property for thepurpose of securing-

(a) the payment of money advanced or to be advanced by way of loan,

(b) an existing or future debt , or

(c) the performance of an engagement which may give rise to a pecuniary liability.

The transferor is called ‘mortgagor’, and the transferee a ‘mortgagee’; the principalmoney and the interest of which payment is secured for the time being are called themortgage money; and the instrument (if any) by which the transfer is effected is calleda mortgage –deed.[The words ‘mortgagors’ and ‘mortgagees’ include persons derivingtitle from them respectively]; Ss. 58(a) and 59-A.

In an old case, Mahmood J. said of S. 58(a): ‘A mortgage, as understood in thiscountry, cannot be defined better than by the definition adopted by the Legislature insection 58 of the Transfer of Property Act. That definition has not in any way altered thelaw, but, on the contrary, has only formulated in clear language, the notions of mortgageas understood by all writers of text books on Indian mortgages. Every word of thedefinition is borne out by the decision of Indian Courts of Justice” (Gopal v Parsotam,1883 5 All. 121).

Mortgage as defined in this section is transfer of an interest in some immovableproperty. It is not transfer of all the interests but only of some interest in the property.The purpose of this transfer of interest is to give security for repayment of loan. Therefore,where a person mortgages his property, the legal effect is that there is a transfer of an“interest” of that property in consideration of money advanced to him by the money-lender. In case the loan could not be repaid, the money-lender can recover is moneyon the basis of that “interest”. The loan may either be present or might have been takenin the past. It may also be in the form of any pecuniary liability of the mortgagortowards mortgagee.

Six kinds of Mortgages and their Characteristics: -

1) Simple Mortgage S.58 (b)

2 ) Mortgage by conditional sale S. 58 (c)

3 ) Usufructuary mortgage s. 55(d)

4 ) English Mortgage s. 58(e)


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5 ) Mortgage by deposit of title deeds or Equitable Mortgage. S. 58(f)6 ) Anomalous Mortgage s. 58 (g)

1) Simple Mortgage: -

Where-

a ) Without delivering possession of the mortgaged property,

b) the mortgagor binds himself personally to pay the mortgage-money, and

c) A gree that, in the event of his failing to pay, the mortgagee shall have a right tocause the mortgaged property to be sold, and the proceeds of sale to be appliedso far as may be necessary, in payment of the mortgage-money, The transactionis called a simple mortgage, and the mortgagee a simple mortgagee.

In simple mortgage, the mortgagee must have the power to sell the property. Butthe sale cannot be made out of court. He has no right of foreclosure.

So in ‘Simple Mortgage’ that mortgagor binds himself personally for the repaymentof loan. Such personal liability may either be express or implied. The very acceptanceof loan involves personal liability of the borrower. The fact that some immovable propertyhas been mentioned as security for its repayment does not displace the personal liabilityof mortgagor to repay the loan with interest. In this mortgage the possession of themortgaged property is not given to the creditor. In a simple mortgage, it is necessarythat mortgagee is given the right to cause sale of the mortgage-property in default ofpayment. If mortgagor fails to return back the loan, the mortgagee must be entitled torecover his money by causing the sale of the property. Mortgagee himself has no powerto sell the property; he has to get a decree from the court for the sale. When theproperty is sold by intervention of the court, the mortgagee shall get the money advancedby him with interest. Remaining part of the proceeds of sale is given in the mortgagorwhose property was sold. So in simple mortgage, the interest transferred in favour ofmortgage is his right to ‘cause the mortgage-property sold’ in default of non-paymentof loan.

Mortgagee’s RMortgagee’s RMortgagee’s RMortgagee’s RMortgagee’s Remedy:emedy:emedy:emedy:emedy:- In a simple mortgage, if the mortgagor fails to repay theloan within stipulated date, the following two remedies are available to the mortgagee:

i) Since in simple mortgage the mortgagor takes personal obligation to repay theloan, the mortgagee may sue the mortgagor personally for recovery of the money.In such a case, he shall get simple money decree.


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ii) The mortgagee may also move the court for the sale of mortgage property so thathe may recover his money. In such a case he gets a decree for the sale ofproperty. Proceeds of the sale are applied for payment of the debt with interestand the remaining part of it is returned to the mortgagor.

But, in all the cases, the suit must be filed within twelve years from the date onwhich the loan becomes due. Simple mortgage can be made only through aregistered document. Even if the sum of money secured is less than Rupees onehundred, a simple mortgage must be effected by registered instrument.

2) Mortgage by Conditional Sale: -

Where the mortgagor ostensibly sells the mortgaged property on condition that

( i ) on default of payment of the mortgage-money on a certain date, the sale shallbecome absolute, or

( i i ) on such payment being made, the sale shall become void, or

(iii) on such payment being made, the buyer shall transfer the property to the seller,the transaction is called a ‘mortgage by conditional sale’.

In this form of mortgage, there is no personal liability on the part of the mortgagorto pay the debt. The remedy of the mortgagee is by foreclosure only. The mortgageeremains content with the property mortgaged, and cannot look to the other propertiesof the mortgagor, the latter not having any personal liability. No delivery of possessionis given in this type of mortgage. Mortgagee can only acquire ownership over theproperty, which, however, will not vest in him inspite of a default of payment on the duedate, until there is a decree for foreclosure. (S.67)

Mortgage by conditional sale is an apparent sale with a condition that uponrepayment of the consideration amount, the purchaser shall retransfer the property tothe seller.

Ostensible sale means a sale which apparently looks like a sale but in reality thereis no sale. In this mortgage, apparently there is a sale of an immovable property but inreality it is intended to secure a debt. The whole transaction is given the appearance ofa sale. The seller would sell his property on a certain sum of money.


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3) Usufructuary Mortgage:- s.58(d)

Where the mortgagor—

a) delivers possession, or expressly or by implication binds himself to deliver possessionof the mortgaged property to the mortgagee, and

i) to retain such possession until payment of the mortgage-money, and

ii) to receive the rents and profits accruing from the property, and

iii) to appropriate them in lieu of interest or, in payment of the mortgage-money,or partly in lieu of interest and partly in payment of the mortgage-money, thetransaction is called a usufructuary mortgage, and the mortgagee ausufructuary mortgagee:

The mortgagor will not be personally liable, unless there is a distinct agreement tothe contrary. Section 67 denying him the right of foreclosure and sale. A usufructuarymortgagee cannot sue either for sale or for foreclosure. His only remedy is to retainpossession of the mortgaged property till the mortgaged-money is paid up. He is entitledto sue for possession and mesne profits in case if he loses possession.

Since the possession is with mortgagee, he gets the usufruct i.e., produce, benefits,rents or profts of the mortgage-property. In a usufructuary mortgage, the mortgagee isentitled to enjoy the benefits of mortgaged-property in lieu of interest on the principalmoney advanced by him. So, on payment of debt the mortgagee has no right ofpossession. Where the property is capable of giving good produce or benefits, theparties may also agree that mortgagee is entitled to get the usufruct of property not onlyin lieu of interest but also in part payment of the money advanced. Registration isnecessary when the money taken under usufructuary mortgage is Rs.100 or more.Where the mortgage-money is less than Rs.100, registration is not necessary; deliveryof possession is sufficient.

4) English Mortgage: - S.58 (e)

Where the mortgagor—

a) binds himself to repay the mortgage-money on a certain date, and

b) transfers the mortgaged property absolutely to the mortgagee, but subject to aproviso that he will re-transfer to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an “English Mortgage”.


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Characteristics: -

i) there is a personal covenant to pay the amount.

ii) It is effected by an absolute transfer of property with a provision for re-transfer in case of repayment of the amount due.

i ) Power of sale out of court is conferred on certain persons under certaincircumstances stated in S.69.

ii) His remedy is by sale, and not by foreclosure.

iii) An English Mortgagee has the right to enter into immediate possession ofthe property.

iv) Absolute conveyance is converted into a mortgage.

v) Remedy of an English mortgagee is by sale.

An essential feature of English Mortgage is that mortgage binds himself to repaythe loan by transferring the property absolutely. The use of the words ‘absolutely’ createsdoubt because mortgage as such is a transfer of only some interest is conveyed; not theabsolute interest. It is, therefore, settled law that the word ‘absolutely’ in English mortgageis used merely as a matter of form. What really passes to the mortgagee under thismortgage is only an interest in the property which is liable to be redeemed by themortgagor under section 60 of the Act. In English Mortgage, the mortgagor bindshimself personally to pay the debt. It is also necessary that specific date be mentionedupto which the mortgagor must repay the debt. If the mortgagor re-pays the money themortgage is bound to re-transfer the property to mortgagor. If the mortgagor fails torepay the mortgaged money on the stipulated date, the mortgagee has right of saleunder section 67 of this Act. In the event of non-repayment of mortgage-money underan English mortgage, a decree of foreclosure is not passed. In this form of mortgage,the mortgagee has right to apply for passing decree for sale of the mortgage property.

5) Mortgage by Deposit of Title-Deeds or Equitable Mortgage: -

Where a person—

a) in any of the following towns, namely, the towns of Calcutta, Madras and Bombayand in any other town which the State Government concerned may, by notificationin the official gazette, specify in this behalf,

b) delivers to a creditor documents of title to immovable property,


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c) with intent to create a security thereon –the transaction is called a ‘mortgage bydeposit of title deeds’.

Characteristics: -

a) The property need not be situated in the above-mentioned towns.

b) No delivery of possession of property takes place

c) No registration is necessary

d) It prevails against a subsequent transferee who takes under a registeredinstrument

e) His remedy is by a suit for sale and he is not entitled to sue for foreclosure.

f) There is no personal liability to repay the loan.

The mortgagee has no power of sale without the intervention of court.

Mortgage by deposit of title-deeds is a peculiar kind of mortgage. It is peculiar inthe sense that in this mortgage, execution of mortgage-deed by mortgagor is notnecessary. Mere deposit of title-deeds of an immovable property by mortgagor tomortgagee is sufficient. Under English Law this type of mortgage is known as equitablemortgage. It is called equitable mortgage because in the absence of any legally executeddocument, merely on the basis of the possession of title-deeds by mortgagee, equitywould ensure return of his money.

For a valid equitable mortgage it is not necessary that all the documents of titleshould be deposited or, that the document deposited should show a complete title. Itis sufficient if the deeds, deposited bona fide, relate to the property and are materialevidence of title. Mere deposit of title-deeds is not sufficient. The title-deeds must bedeposited by the debtor with the intentio of creating security for a debt.

It is applicable only in certain specified towns of this country. Like other kinds ofmortgages, an equitable mortgage is not applicable through out the country. It may bemade only in Calcutta, Bombay and Madras and in such other town which the StateGovernment may by notification specify in the official Gazette.

It is significant to note that territorial restriction is only with regard to the placewhere transaction takes place. The only transaction in the equitable mortgage is thedeposit of title-deeds of an immovable property. So, the title-deed of the property areto be deposited in any of the towns to which this section is applicable, In other words,the restriction to the specified towns refers to the place where title-deeds are delivered


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and not to the place where property is situated. The mortgage property may situateoutside the specified towns or it may partly situate within and partly outside the townsspecified. But, the transaction i.e., deposit of title-deeds, must take place within thearea specified.

RRRRRemedy in default of repayment:-emedy in default of repayment:-emedy in default of repayment:-emedy in default of repayment:-emedy in default of repayment:-

Where the debtor fails to repay the debt under a mortgage by deposit of title-deeds, the creditor can recover his money just as a creditor recovers the money in asimple mortgage. That is to say, the security can be enforced by a suit for a decree forthe sale of the mortgaged property. As regards the remedies of mortgagee, an equitablemortgage is therefore, stands on the same footing as a simple mortgage. Such a suitmust be filed within 12 years from the date on which the money becomes due.

6) Anomalous Mortgage: -

Section 58 has laid down several kinds of mortgage. But the classification ofmortgage given, in this section is not exhaustive. Besides these forms of mortgage,there are other methods of taking loans on the security of immovable property. Thesemethods although not included in section 58, but are in practice in India. Such modesof taking loans fulfill the essential requirements of a mortgage but do not come underany category of mortgage given in this section. These transactions are in their verynature a mortgage without any specific name. Since most of such mortgages are eithercustomary or combinations of two or more forms of mortgages and thereby causing ananomaly (inconsistency) they are called anomalous mortgage.

Remedy of Mortgagee is by sale and foreclosure, if the terms of the mortgagepermit it.

DefinitionDefinitionDefinitionDefinitionDefinition:-:-:-:-:- According to section 58(g), a mortgage is anomalous mortgage if it isnot a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, anEnglish Mortgage or , a mortgage by deposit of title-deeds.

When a transaction is a mortgage in all respects i.e., there is existence of debt andsecurity of an immovable property for re-payment of that debt but the agreement betweenthe debtor and creditor is of such a nature that it cannot be included in any specificcategory of mortgage, the transaction is anomalous mortgage. It may also becombination of any two or more forms of specific categories of mortgage.


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65. Implied contracts by mortgagor65. Implied contracts by mortgagor65. Implied contracts by mortgagor65. Implied contracts by mortgagor65. Implied contracts by mortgagor..... In the absence of a contract to the contrary,the mortgagor shall be deemed to contract with the mortgagee –

(a) that the interest which the mortgagor professes to transfer to the mortgagee subsists,and that the mortgagor has power to transfer the same;

(b) that the mortgagor will defend, or, if the mortgagee be in possession of themortgaged property, enable him to defend, the mortgagors title thereto;

(c) that the mortgagor will, so long as the mortgagee is not in possession of themortgaged property, pay all public charges accruing due in respect of the property;

(d) and, where the mortgaged property is a lease, that the rent payable under thelease, the conditions contained therein, and the contracts binding on the lesseehave been paid, performed and observed down to the commencement of themortgage; and that the mortgagor will, so long as the security exists and themortgagee is not in possession of the mortgaged property, pay the rent reservedby the lease, or, if the lease be renewed, the renewed lease, perform the conditionscontained therein and observe the contracts binding on the lessee, and indemnifythe mortgagee against all claims sustained by reason of the non-payment of thesaid rent or the non-performance or non-observance of the said conditions andcontracts;

(e) and, where the mortgage is a second or subsequent encumbrance on the property,that the mortgagor will pay the interest from time to time accruing due on eachprior encumbrance as and when it becomes due, and will at the proper timedischarge the principal money due on such prior encumbrance.

The benefit of the contracts mentioned in this section shall be annexed to andshall go with the interest of the mortgagee as such, and may be enforced by everyperson in whom that interest is for the whole or any part thereof from time to timevested.

Implied Contracts by Mortgagor:-

The section embodies the implied covenants of the mortgagor, similar to the impliedcovenants of the seller in section 55(2). The covenants will be read into a mortgagecontract where there is no contract to the contrary. The implied covenants enumeratedin this section are:

a) Covenant for title

b) Defence of title


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c) Liability to pay public charges

d) Performance of conditions of the lease where the mortgaged property is a lease.

e) Liability to discharge prior mortgages.

76. Liabilities of mortgagee in possession76. Liabilities of mortgagee in possession76. Liabilities of mortgagee in possession76. Liabilities of mortgagee in possession76. Liabilities of mortgagee in possession.....- When, during the continuance of themortgage, the mortgagee takes possession of the mortgaged property,—

(a) he must manage the property as a person of ordinary prudence would manage itif it were his own;

(b) he must use his best endeavours to collect the rents and profits thereof;

(c) he must, in the absence of a contract to the contrary, out of the income of theproperty, pay the Government revenue, all other charges of a public nature andall rent accruing due in respect thereof during such possession, and any arrearsof rent in default of payment of which the property may be summarily sold;

(d) he must, in the absence of a contract to the contrary, make such necessary repairsof the property as he can pay for out of the rents and profits thereof after deductingfrom such rents and profits the payments mentioned in clause (c) and the intereston the principal money;

(e) he must not commit any act which is destructive or permanently injurious to theproperty;

(f) where he has insured the whole or any part of the property against loss or damageby fire, he must, in case of such loss or damage, apply any money which heactually receives under the policy or so much thereof as may be necessary, inreinstating the property, or, if the mortgagor so directs, in reduction or dischargeof the mortgage-money;

(g) he must keep clear, full and accurate accounts of all sums received and spent byhim as mortgagee, and, at any time during the continuance of the mortgage,give the mortgagor, at his request and cost, true copies of such accounts and ofthe vouchers by which they are supported;

(h) his receipts from the mortgaged property, or, where such property is personallyoccupied by him, a fair occupation-rent in respect thereof, shall, after deductingthe expenses properly incurred for the managment of the property and the collectionof rents and profits and the other expenses mentioned in clauses (c) and (d), andinterest thereon, be debited against him in reduction of the amount (if any) from


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time to time due to him on account of interest and, so far as such receipts exceedany interest due, in reduction or discharge of the mortgage-money; the surplus, ifany, shall be paid to the mortgagor;

(i) when the mortgagor tenders, or deposits in a manner hereinafter provided, theamount for the time being due on the mortgage, the mortgage must,notwithstanding the provisions in the other clauses of this section, account for hisreceipts from the mortgaged property from the date of the tender or from theearliest time when he could take such amount out of Court, as the case may beand shall not be entitled to deduct any amount therefrom on account of anyexpenses incurred after such date or time in connection with the mortgagedproperty.

LLLLLoss occasioned by his defaultoss occasioned by his defaultoss occasioned by his defaultoss occasioned by his defaultoss occasioned by his default.-.-.-.-.-If the mortgagee fail to perform any of the dutiesimposed upon him by this section, he may, when accounts are taken in pursuance of adecree made under this Chapter, be debited with the loss, if any, occasioned by suchfailure.

In this section the duties of the mortgagee in possession are classified under nineheads, and the last paragraph provides that he may be debited in the mortgage accountwith the loss occasioned by his failure to perform any of them. The position of themortgagee presents some analogy to that of a trustee as will be apparent from thefollowing liabilities:

a) to manage the property with ordinary prudence,

b) to collect rents and profits

c) to pay government revenue,

d) to carry necessary repairs under certain circumstances

e) not to commit any act of waste

f) to apply the insurance money in reinstating the property

g) to keep porper accounts

h) to apply the rents and profits in discharge of the interest after making certaindeductions; and

i) to account for gross receipts.


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SSSSS.77. R.77. R.77. R.77. R.77. Receipts in lieu of interesteceipts in lieu of interesteceipts in lieu of interesteceipts in lieu of interesteceipts in lieu of interest.-.-.-.-.- Nothing in section 76, clauses (b), (d), (g) and(h), applies to cases where there is a contract between the mortgagee and the mortgagorthat the receipts from the mortgaged property shall, so long as the mortgagee is inpossession of the property, be taken in lieu of interest on the principal money, or in lieuof such interest and defined portions of the principal.

This section provides that the obligation in clauses b,d,g,h of section 76 will notapply where the contract is that of usufructuary mortgage and where the receipts fromthe property are taken as wiping off the mortgage debt or interest. In such cases if themortgagee does not collect the rents and profits with diligence, it is the mortgagee andnot the mortgagor who suffers.

SSSSS.60. Right of mortgagor to redeem.60. Right of mortgagor to redeem.60. Right of mortgagor to redeem.60. Right of mortgagor to redeem.60. Right of mortgagor to redeem..... -At any time after the principal money hasbecome due, the mortgagor has a right, on payment or tender, at a proper time andplace, of the mortgage-money, to require the mortgagee (a) to deliver to the mortgagorthe mortgage-deed and all documents relating to the mortgaged property which are inthe possession or power of the mortgagee, (b) where the mortgagee is in possessionthereof to the mortgagor, and (c) at the cost of the mortgagor either to re-transfer themortgaged property to him or to such third person as he may direct, or to execute and(where the mortgage has been effected by a registered instrument) to have registeredan acknowledgment in writing that any right in derogation of his interest transferred tothe mortgagee has been extinguished:

Provided that the right conferred by this section has not been extinguished by act ofthe parties or by [decree] of a Court.

The right conferred by this section is called a right to redeem and a suit to enforceit is called a suit for redemption.

Nothing in this section shall be deemed to render invalid any provision to the effectthat, if the time fixed for payment of the principal money has been allowed to pass orno such time has been fixed, the mortgagee shall be entitled to reasonable noticebefore payment or tender of such money.

RRRRRedemption of portion of mortgaged property:-edemption of portion of mortgaged property:-edemption of portion of mortgaged property:-edemption of portion of mortgaged property:-edemption of portion of mortgaged property:-

Nothing in this section shall entitle a person interested in a share only of themortgaged property to redeem his own share only, on payment of a proportionate partof the amount remaining due on the mortgage, except only where a mortgagee, or, if


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there are more mortgagees than one, all such mortgagees, has or have acquired, inwhole or in part, the share of a mortgagor.

Right of Redemption:-

The most important right possessed by the mortgagor is the right to redeem themortgage. Under this section, at any time after the principal money has become due,the mortgagor has a right on payment or tender of the mortgage-money to require themortgagee to recovery the mortgage property to him. The right conferred by this sectionhas been called the right to redeem and a suit to enforce this right has been called asuit for redemption or right of redemption. In English Law, the mortgagor’s right ofredemption is called the Equity of redemption. As the statutory right of redemptioncontained in this section is derived from the English Law, it would be profitable to givea short account of the equity of redemption under the Englis Law.

Under section 60 of the Transfer of Property Act, at any time after the principalmoney has become due, the mortgagor has a right, on payment or sender, at a propertimeand place, of the mortgage-money, to require the mortgagee to deliver to themortgagor the mortgage-deed and all documents relating to the mortgaged propertywhich are in the possession or power to the mortgagee. This remedy is avaliable to themortgagor only before the mortgagee has filed a suit for enforcement of the mortgage.Subsequent to the filing of the suit, this remedy is not available.

Clog on Redemption:-

The right of redemption cannot be denied to the mortgagor even though he may byexpress contract abandon his right to redeem the property. Equity in its insistence uponthe principle that a mortgage is intended merely to afford security to the lender has heldan agreement which prevents redemption as void.

Redemption involves two things:

a) re-transfer of the interest which had been originally transferred to the mortgagee,and

b) delivery of the possession, Both these things are done by virtue of the terms ofmortgage, and in pursuance of an agreement between the parties. Thus, the re-transfer of the interest is also by virtue of an agreement and redelivery of possessionis also in pursuance of such an agreement. It is, therefore, futile to say that whena mortgagor redeems the land mortgaged by him, with possession and acquires


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back the interest as well as the possession which he had earlier transferred to themortgagee, he does not acquire back in interest or the possession by ‘transfer’ orby ‘agreement’.

Under the Indian Law, the right of redemption is a statutory right which cannot befettered by any condition which impedes or prevents redemption. Any such condition isvoid as a clog on redemption. The Legislature has quite advisedly not used any suchwords as “in the absence of a contract to the contrary’ in section 60 with a view toprevent the mortgagor from contracting himself out of his right of redemption at thetime of the mortgage. It is, therefore, manifest that the right cannot be clogged.

Condition of Sale in Default:-

The courts will ignore any contract the effect of which is to deprive the mortgagor ofhis right to redeem the mortgage. Accordingly, if one of the terms of the mortgage isthat on the failure of the mortgagor to redeem the mortgage within the specified period,the mortgagor will have no claim over the mortgaged property and the mortgage deedwill be deemed to be a deed of sale in favour of the mortgagee, it cannot be giveneffect to. It plainly takes away altogether the mortgagor’s right to redeem the mortgageafter the specified period. This is not permissible for “once a mortgage always amortgage” and therefore always redeemable.

Stipulation barring Mortgagor’s Right of Redemption aftercCertain Period:-

If there is a stipulation which bars mortgagor’s right of redemption after certainperiod, the stipulation is treated as a “clog” on the mortgagor’s equitable right ofredemption.

Condition Postponing Redemption in Case of Default:-

In Mohammad Sher v. Seth Swami Dayal (1992) 44 All. The mortgage was for aterm of five years with a condition that if the money was not paid, the mortgagee mightenter into possession for a period of twelve years during which the mortgagor could notredeem. It was held that such acondition was a clog because it hindered an existingright to redeem.

RRRRRestraint on Alienation:-estraint on Alienation:-estraint on Alienation:-estraint on Alienation:-estraint on Alienation:-

In Ram Saran v. Amrit (1980) 3 All. 369 FB it was held that a stipulation that themortgagor shall not alienate the mortgaged property or shall not take loan on thesecurity of the mortgaged property has been held to be a clog.


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Redemption Restricted to Mortgagor:-

An agreement that redemption should be available to the mortgagor and not to hisheirs has been held as a clog.

Under the proviso to section 60 of the Transfer of Property Act, it is open to theParties to extinguish a mortgage by mutual agreement before the expiry of the termmentioned therein. But the tenant who is lawfully inducted on the property under theterms of the mortgage cannot be evicted by the mortgagor or redemption of the mortgagebefore the expiry of the period mentioned therein. In such a case the mortgage cangive symbolic possession to the mortgagor and the tenants thereafter, continues to bea tenant under the mortgagor until he is evicted by the mortgagor under the provisionsof the Transfer of Property Act. (Thakur Madhaviji v. Lalji A.I.R. 1972 Guj. 37).

Exercise of the Right of Redemption:-

i) The mortgagor’s right of redemption is exercised- by paying or tendering mortgage-money to the mortgagee outside the court, i.e., privately;

ii) by depositing the amount in the court; and

iii) by a suit for redemption, payment or tender

Before redemption can be claimed the mortgage money must have been: Paid, orii) tendered and the payment or tender must have been made at the proper time andplace. Payment may be made on the mortgagee himself or his authorised agent.When, there are several mortgagees, the payment should be made to all of themjointly.

A tender means an unconditional offer to pay the money under such circumstancesthat the mortgagee may receive the money there.

Deposit:-Deposit:-Deposit:-Deposit:-Deposit:-

The second mode of redeeming a mortgagee is by depositing the whole amountdue in court when the mortgage-money becomes due.

Suit:-Suit:-Suit:-Suit:-Suit:-

This is the third mode of redeeming of the mortgaged property. Ordinarily, a suitfor redemption is a suit to enforce the right to redeem. The forms of decree enforcingredemption are enacted in Order 34, Rules 7 and 8 of the Code of Civil Procedure,


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1908. The suit, like deposit or tender, can only be instituted after the principal moneyhas become due.

Mortgagor’s Right on Redemption:-

The mortgagor’s right of redemption are-

a) Delivery of the mortgage-deed and documents of title relating to the mortgagedproperty,

b) Possession, and

c) Reconveyance and acknowledgement.

Extinguishment of Right of Redemption:-

The mortgagor’s right of redemption is extinguished: a) by foreclosure b) when themortgagee has exercised power of sale and c) when it becomes barred under LimitationAct, 1963.

Clog on Redemption:-

A mortgage being a security for the debt, the right of redemption continues althoughthe mortgagor fails to pay the debt at the due date. Any provision inserted to prevent,evade or hamper redemption is void.

60A60A60A60A60A. Obligation to transfer to third party instead of re. Obligation to transfer to third party instead of re. Obligation to transfer to third party instead of re. Obligation to transfer to third party instead of re. Obligation to transfer to third party instead of re- transference to mortgagor- transference to mortgagor- transference to mortgagor- transference to mortgagor- transference to mortgagor.....-(1) Where a mortgagor is entitled to redemption, then, on the fulfillment of any conditionson the fulfillment of which he would be entitled to require a re-transfer, he may requirethe mortgagee, instead of retransferring the property, to assign the mortgage-debt andtransfer the mortgaged property to such third person as the mortgagor may direct; andthe mortgagee shall be bound to assign and transfer accordingly.

(2) The rights conferred by this section belong to and may be enforced by themortgagor or by any encumbrancer notwithstanding an intermediate encumbrance;but the requisition of any encumbrancer shall prevail over a requisition of the mortgagorand, as between encumbrancers; the requisition of a prior encumbrancer shall prevailover that of a subsequent encumbrancer.

(3) The provisions of this section do not apply in the case of a mortgagee who is orhas been in possession.


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SSSSS.60-B.60-B.60-B.60-B.60-B. Right to inspection and production of documents. Right to inspection and production of documents. Right to inspection and production of documents. Right to inspection and production of documents. Right to inspection and production of documents- - - - - A mortgagor, as long ashis right of redemption subsists, shall be entitled at all reasonable times, at his requestand at his own cost, and on payment of the mortgagees costs and expenses in thisbehalf, to inspect and make copies or abstracts of, or extracts from, documents of titlerelating to the mortgaged property which are in the custody or power of the mortgagee.

SSSSS. 61. Right to redeem separately or simultaneously. 61. Right to redeem separately or simultaneously. 61. Right to redeem separately or simultaneously. 61. Right to redeem separately or simultaneously. 61. Right to redeem separately or simultaneously.....-----A mortgagor who has executedtwo or more mortgages in favour of the same mortgagee shall, in the absence of acontract to the contrary, when the principal money of any two or more of the mortgageshas become due, be entitled to redeem any one such mortgage separately, or any twoor more of such mortgages together.

Where the mortgagor has executed several mortgages in favour of the samemortgagee over the same property he is in the absence of contract to the contraryentitled to redeem any of them without at the same time redeeming the others.

Meaning of Consolidation:-

The term ‘consolidation’ means the right of the mortgagee who holds severalmortgages executed by the same mortgagor to require the simultaneous redemption ofall the mortgages. The mortagee has this right in certain circumstances, but when it isexercised the mortgagor cannot redeem the mortgage without at the same timeredeeming the others.

Illustrations

1. A, the owner of farms Z and Y, mortgages Z to B for Rs.1,000/- and afterwardsmortgages Y to B for Rs. 1,000/- . A may institute a suit for the redemption of themortgage of Z alone, B, the mortgagee, cannot compel A to redeem both Z andY together.

2. A, the owner of far Z, mortgages Z to B for Rs.5,000/-. Later, A mortgages Zagain to B for Rs.3,000/-. When the principal money becomes due, A mayredeem either the prior mortgages of Rs.5, 000/- or latter mortgage of Rs.3,000/- or both.

It should be noted that this section applies, “in the absence of contract to thecontrary” so that the mortgagor and the mortgagee may agree among themselves thata mortgagor of two properties shall not redeem one property without redeeming theother property. But such agreement must expressly stated in the deed.


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62. Right of usufructuary mortgagor to recover possession.62. Right of usufructuary mortgagor to recover possession.62. Right of usufructuary mortgagor to recover possession.62. Right of usufructuary mortgagor to recover possession.62. Right of usufructuary mortgagor to recover possession.-In the case of ausufructuary mortgage, the mortgagor has a right to recover possession of the propertytogether with the mortgage-deed and all documents relating to the mortgaged propertywhich are in the possession or power of the mortgagee,

(a) where the mortgagee is authorized to pay himself the mortgage-money from therents and profits of the property,—when such money is paid;

(b) where the mortgagee is authorized to pay himself from such rents and profits orany part thereof a part only of the mortgage-money, when the term, if any,prescribed for the payment of the mortgage-money has expired and the mortgagorpays or tenders to the mortgagee the mortgage-money or the balance thereofordeposits it in Court as hereinafter provided.

This section would be read along with section 60 which lays down that a mortgagorwho wants to redeem must pay the mortgage money. In case of a usufructuary mortgage,special provision is made in this section as to when the mortgagor can recover possessionof the mortgaged property. Under the terms of the section, in cases where the mortgageeis authorised to pay himself out of the rents and profits of the property, the mortgagorcan recover possession only when such money is realised. He cannot pay cash andrecover possession. If, on the other hand, the mortgage-deed provides for the paymentonly of interest or part of the mortgage money out of the income, a term may be fixedfor the payment of the principal or the balance of the mortgage-money out of theincome, a term may be fixed for the payment of the principal or the balance of themortgage-money as the case may be. In such a case, the mortgagor can recoverpossession on the expirty of the term and on the payment or tender to the mortgagee ofthe mortgage-money or the balance thereof.

63. A63. A63. A63. A63. Accession to mortgaged propertyccession to mortgaged propertyccession to mortgaged propertyccession to mortgaged propertyccession to mortgaged property.-.-.-.-.-Where mortgaged property in possession ofthe mortgagee has, during the continuance of the mortgage, received any accession,the mortgagor, upon redemption, shall, in the absence of a contract to the contrary, beentitled as against the mortgagee to such accession.

Accession acquired by virtue of transferred ownership.-Where such accession hasbeen acquired at the expense of the mortgagee, and is capable of separate possessionor enjoyment without detriment to the principal property, the mortgagor desiring to takethe accession must pay to the mortgagee the expense of acquiring it. If such separatepossession or enjoyment is not possible, the accession must be delivered with the property;the mortgagor being liable, in the case of an acquisition necessary to preserve the


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property from destruction, forfeiture or sale, or made with his assent, to pay the propercost thereof, as an addition to the principal money, with interest at the same rate as ispayable on the principal, or, where no such rate is fixed, at the rate of nine per cent. perannum.

In the case last mentioned the profits, if any, arising from the accession shall becredited to the mortgagor.

Where the mortgage is usufructuary and the accession has been acquired at theexpense of the mortgagee, the profits, if any, arising from the accession shall, in theabsence of a contract to the contrary, be set off against interest, if any, payable on themoney so expended.

Accession to the Mortgaged Property:-

The term ‘accession’ primarily denotes physical accretions or additions whetherbrought about by natural or artificial means. The general rule is that where mortgagedproperty in possession of the mortgagee has received any accession, the mortgagor,upon redemption, is entitled to such accession.

63A63A63A63A63A. Improvements to mortgaged property. Improvements to mortgaged property. Improvements to mortgaged property. Improvements to mortgaged property. Improvements to mortgaged property.....-(1) Where mortgaged property inpossession of the mortgagee has, during the continuance of the mortgage, beenimproved, the mortgagor, upon redemption, shall, in the absence of a contract to thecontrary, be entitled to the improvement; and the mortgagor shall not, save only incases provided for in sub-section (2), be liable to pay the cost thereof.

(2) Where any such improvement was effected at the cost of the mortgagee andwas necessary to preserve the property from destruction or deterioration or was necessaryto prevent the security from becoming insufficient, or was made in compliance with thelawful order of any public servant or public authority, the mortgagor shall, in the absenceof a contract to the contrary, be liable to pay the proper cost thereof as an addition tothe principal money with interest at the same rate as is payable on the principal, or,where no such rate is fixed, at the rate of nine per cent. per annum, and the profits, ifany, accruing by reason of the improvement shall be credited to the mortgagor.

Improvements to Mortgaged Property:-

The object is to prevent the mortgagee from spending large sums of money andthen charging the mortgagor for it and in consequence make it almost impossible forhim to redeem.


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67. Right to foreclosure or sale.67. Right to foreclosure or sale.67. Right to foreclosure or sale.67. Right to foreclosure or sale.67. Right to foreclosure or sale.-In the absence of a contract to the contrary, themortgagee has, at any time after the mortgage-money has become due to him, andbefore a decree has been made for the redemption of the mortgaged property, or themortgage-money has been paid or deposited as hereinafter provided, a right to obtainfrom the court a decree that the mortgagor shall be absolutely debarred of his right toredeem the property, or a decree that the property be sold.

A suit to obtain a decree that a mortgagor shall be absolutely debarred of his rightto redeem the mortgaged property is called a suit for foreclosure.

Nothing in this section shall be deemed—

(a) to authorize any mortgagee other than a mortgagee by conditional sale or amortgagee under an anomalous mortgage by the terms of which he is entitled toforeclose, to institute a suit for foreclosure, or an usufructuary mortgagee as suchor a mortgagee by conditional sale as such to institute a suit for sale; or

(b) to authorize a mortgagor who holds the mortgagees rights as his trustee or legalrepresentative, and who may sue for a sale of the property, to institute a suit forforeclosure; or

(c) to authorize the mortgagee of a railway, canal or other work in the maintenanceof which the public are interested, to institute a suit for foreclosure or sale; or

(d) to authorize a person interested in part only of the mortgage-money to institute asuit relating only to a corresponding part of the mortgaged property, unless themortgagees have, with the consent of the mortgagor, severed their interests underthe mortgage.

The Mortgagee’s Remedies:-

Whatever form the mortgage takes, the mortgagee is never really considered inany sense owner of the mortgaged property. He has only a security over the property,and this security consists of nothing more than the aggregate of the various rights. Hehas to enforce the security if the mortgagor defaults to pay the mortgage-debt. Thoserights are, firstly, against the mortgaged property, and, secondly, against the mortgageepersonally. This section refers to the remedy against the property mortgaged, whilesection 68 provides for the personal remedy of the mortgagee. Under certain conditions,the mortgagee is given power under section 69-A to have a receiver of the mortgagedproperty appointed.


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Right to Foreclosure or Sale:-

This section is the counter part of section 60, and gives the mortgagee a right offoreclosure or sale in default of redemption by the mortgagor. If the mortgagor haspaid or deposited the mortgaged money, there is no occasion for the exercise of theright of foreclosure or sale. Again, if a decree for redemption is made, a suit forforeclosure or sale would be in fructuous, especially as a redemption decree itselfprovides for sale or foreclosure in default of payment.

There is, however, one fundamental point of difference between the mortgagor’sright of redemption and the mortgagee’s right to foreclosure or sale. The difference isthat the right of redemption is not subject to a contract to the contrary while the right toforeclosure or sale may be curtailed by agreement of the parties.

Right to Foreclosure or Sale:-

In the absence of a contract to contrary the mortgagee has, at any time after themortgage money has become due to him and before a decree has been made for theredemption of the mortgaged property and the mortgage money has been paid ordeposited as hereinafter provided, a right to obtain from the court a decree that themortgagor shall be absolutely debarred of his right to redeem the property, or a decreethat the property be sold.

A suit to obtain a decree that a mortgagor shall be absolutely debarred of his rightto redeem the mortgage property is called a suit for foreclosure.

Section 67 specifies two remedies, viz., foreclosure and sale available to a mortgageeunder different forms of the mortgage.

S.59-A Reference to Mortgagors and Mortgagees to include PersonsDelivering Title from them:-

Unless otherwise expressly provide references in this chapter to mortgagors andmortgagees shall be deemed to include references to persons deriving title from themrespectively.

According to the section 59-A, the term ‘mortgagor’ includes persons succeedinga mortgagor by inheritance or under a will or by sale or by court-sale. In vew of thissection the word ‘mortgagor’ as used in section 69(1) ( c) includes also a subsequentpurchaser of the mortgaged property.


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For purposes of section 59-A the transfer may either be voluntary transfer or aninvoluntary transfer, for example, court-sale.

Similarly, in view of this section, the word ‘mortgagee’ in section 60 and 62 intendedto mean not only mortgage but all persons who derive title from him.

Right to Sell without the Intervention of Court (S.69)

69. P69. P69. P69. P69. Power of sale when validower of sale when validower of sale when validower of sale when validower of sale when valid.-A mortgagee, or any person acting on his behalf,shall, subject to the provisions of this section, have power to sell or concur in selling themortgaged property, or any part thereof, in default of payment of the mortgage- money,without the intervention of the Court, in the following cases and in no others, namely:-

(a) where the mortgage is an English mortgage, and neither the mortgagor nor themortgagee is a Hindu, Mohammadan or Buddhist or a member of any otherrace, sect, tribe or class from time to time specified in this behalf by the StateGovernment, in the Official Gazette;

(b) where a power of sale without the intervention of the Court is expressly conferredon the mortgagee by the mortgage-deed and the mortgagee is the Government;

(c) where a power of sale without the intervention of the

Court is expressly conferred on the mortgagee by the mortgage-deed and themortgaged property or any part thereof was, on the date of the execution of the mortgage-deed, situated within the towns of Calcutta, Madras, Bombay, or in any other town orarea which the State Government may, by notification in the Official Gazette, specify inthis behalf.

No such power shall be exercised unless and until—

[(a)] notice in writing requiring payment of the principal money has been servedon the mortgagor, or on one of several mortgagors, and default has beenmade in payment of the principal money, or of part thereof, for three monthsafter such service; or

[(b)] some interest under the mortgage amounting at least to five hundred rupeesis in arrear and unpaid for three months after becoming due.

2) When a sale has been made in professed exercise of such a power, the title ofthe purchaser shall not be impeachable on the ground that no case had arisen toauthorize the sale, or that due notice was not given, or that the power was otherwise


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improperly or irregularly exercised; but any person damnified by an unauthorized orimproper or irregular exercise of the power shall have his remedy in damages againstthe person exercising the power.

3) The money which is received by the mortgagee, arising from the sale, afterdischarge of prior incumbrances, if any, to which the sale is not made subject, or afterpayment into Court under section 57 of a sum to meet any prior in cumbrance, shall,in the absence of a contract to the contrary, be held by him in trust to be applied byhim, first, in payment of all costs, charges and expenses properly incurred by him asincident to the sale or any attempted sale; and, secondly, in discharge of the mortgage-money and costs and other money, if any, due under the mortgage; and the residue ofthe money so received shall be paid to the person entitled to the mortgaged property,or authorized to give receipts for the proceeds of the sale thereof.

A mortgagee has the power to sell, or concur in selling, the mortgaged property orany part thereof in default of payment of the mortgage-money without the interventionof the court in the following three cases, and in no others, namely:

1) Where the mortgage is an English mortgage, and neither the mortgagor nor themortgagee is a (i) Hindu (ii) Buddhist, or (iii) Mohammedan, or (iv) a member ofany other race, sect, tribe or class from time to time specified in this behalf by theState Government in the Official Gazette.

2) Where the Government is the mortgagee, and a power of sale without theintervention of court is expressly conferred by the mortgage-deed:

3) Where the mortgaged property is situated in Calcutta, Madras and Bombay, orany other Gazetted town or area, provided the power of sale without the interventionof court is expressly conferred by the mortgage-deed:

4) However this power can be exercised only-

i ) When the principal money (or part thereof) has remained unpaid for threemonths after service of notice in writing requiring payment on the mortgagoror one of several mortgagors, or

i i ) When the interest is not less than Rs. 500/- in amount is in arrears andremains unpaid for 3 months.

The mortgagee himself cannot buy the property directly or through an agent, for aman cannot sell to himself.


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Remedy for Improper Exercise of the Power of Sale:-

SSSSS. 69 (3):. 69 (3):. 69 (3):. 69 (3):. 69 (3): When a sale has been made in the professed exercise of such a power,the title of the purchaser is not impeachable on the ground that no case had arisen toauthorize the sale, or that due notice was not given, or that the power was otherwiseimproperly or irregularly exercised, but any one put to any loss by an unauthorized orimproper or irregular exercise of the power, has a remedy in damages against theperson exercising the power.

Sec.73 Right to Proceeds of Revenue Sale or Compensation on Acquisition: -

(1) Where the mortgaged property or any part thereof or any interest therein is soldowing to failure to pay arrears of revenue or other charges of a public nature orrent due in respect of such property, and such failure did not arise from anydefault of the mortgagee, the mortgagee shall be entitled to claim payment of themortgage-money, in whole or in part, out of any surplus of the sale proceedsremaining after payment of the arrears and of all charges and deductions directedby law.

(2) Where the mortgaged property or any part thereof or any interest therein is acquiredunder the Land Acquisition Act, 1894 (1of 1894), or any other enactment for thetime being in force providing for the compulsory acquisition of immoveableproperty, the mortgagee shall be entitled to claim payment of the mortgage-money, in whole or in part, out of the amount due to the mortgagor ascompensation.

(3) Such claims shall prevail against all other claims except those of priorencumbrances, and may be enforced notwithstanding that the principal moneyon the mortgage has not become due.

4) Where the mortgaged property is sold owing to failure to pay arrears of revenueor public charges or rent due in respect of such property, and such failure did notarise from any default of the mortgagee—the mortgagee is entitled to claimpayment of the mortgage-money out of any surplus of the sale proceeds remainingafter payment of the arrears, charges, deductions etc.,

Where the mortgaged property is acquired under the Land Acquisition Act, 1894,or any other like enactment, the mortgagee is entitled to claim payment of themortgage money, out of the amount due to the mortgagor as compensation.Such claims shall prevail against all other claims except those of prior


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encumbrances, and may be enforced notwithstanding that the principal moneyon the mortgage has not become due.

Mortgagees Right to Get Proceeds of Revenue Sales etc.:-

Section 73(1) provides that if the mortgaged property is sold due to non-paymentof government dues, the mortgagee is entitled to claim the amount of his mortgage-money from the proceeds of such sale. The mortgaged property belongs to mortgagorwho is liable to pay all the outgoings such as revenue, rent and taxes or other chargesof the public nature. Where mortgagor defaults in payment of the government dues,the property is sold by the authorities who recover the required dues from proceeds ofthe sale. After payment of government dues, there may still remain the surplus of theprice on which property was sold. The mortgagee has right to claim his mortgage-debtfrom out of this surplus amount. After payment of mortgagee’s debts, if there stillremains some money, it ultimately goes to the mortgagor whose property was sold.

Right to Compensation on Acquisition:-

Section 73(2) provides that where the mortgaged property is acquired under theLand Acquisition Act, 1894 or any other enactment and compensation is paid, themortgagee can claim his debt from such compensation. Section 73(3) enacts that amortgagee’s claim of mortgage money (from out of the proceeds of revenue sale orfrom compensation on acquisition) shall get priority over other claims on the propertyexcept prior encumbrances, if any. Thus, mortgagee’s claim under this section shallprevail over any unsecured money debt taken by mortgagor. Further, the mortgageeunder this section is entitled to enforce his claim even though the mortgage-money hasnot become due. This is obvious, because neither sale in default of paymentof revenuenor acquisition under an enactment takes into consideration the date on which the debtbecomes payable.

Charges

SSSSS.100. Charges.-.100. Charges.-.100. Charges.-.100. Charges.-.100. Charges.-Where immoveable property of one person is by act of parties oroperation of law made security for the payment of money to another, and the transactiondoes not amount to a mortgage, the latter person is said to have a charge on theproperty; and all the provisions hereinbefore contained which apply to a simple mortgageshall, so far as may be, apply to such charge.

Nothing in this section applies to the charge of a trustee on the trust-property forexpenses properly incurred in the execution of his trust, and, save as otherwise expressly


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provided by any law for the time being in force, no charge shall be enforced againstany property in the hands of a person to whom such property has been transferred forconsideration and without notice of the charge.

SSSSS.101. No merger in case of subsequent encumbrance..101. No merger in case of subsequent encumbrance..101. No merger in case of subsequent encumbrance..101. No merger in case of subsequent encumbrance..101. No merger in case of subsequent encumbrance.-Any mortgagee of, orperson having a charge upon, immoveable property, or any transferee from suchmortgagee or charge holder, may purchase or otherwise acquire the rights in the propertyof the mortgagor or owner, as the case may be, without thereby causing the mortgageor charge to be merged as between himself and any subsequent mortgagee of, orperson having a subsequent charge upon, the same property; and no such subsequentmortgagee or charge-holder shall be entitled to foreclose or sell such propertywithoutredeeming the prior mortgage or charge, or otherwise than subject thereto.

SSSSS.102..102..102..102..102. Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.-Where the person on or to whom anynotice or tender is to be served or made under this Chapter does not reside in thedistrict in which the mortgaged property or some part thereof is situate, service ortender on or to an agent holding a general power-of-attorney from such person orotherwise duly authorized to accept such service or tender shall be deemed sufficient.

Where no person or agent on whom such notice should be served can be found oris known to the person required to serve the notice, the latter person may apply to anyCourt in which a suit might be brought for redemption of the mortgaged property, andsuch Court shall direct in what manner such notice shall be served, and any noticeserved in compliance with such direction shall be deemed sufficient:

Provided that, in the case of a notice required by section 83, in the case of adeposit, the application shall be made to the Court in which the deposit has beenmade.

Where no person or agent to whom such tender should be made can be found oris known to the person desiring to make the tender, the latter person may deposit in anyCourt in which a suit might be brought for redemption of the mortgaged property theamount sought to be tendered, and such deposit shall have the effect of a tender ofsuch amount.

SSSSS.103. Notice, etc., to or by person incompetent to contract.-.103. Notice, etc., to or by person incompetent to contract.-.103. Notice, etc., to or by person incompetent to contract.-.103. Notice, etc., to or by person incompetent to contract.-.103. Notice, etc., to or by person incompetent to contract.- Where, under theprovisions of this Chapter, a notice is to be served on or by, or a tender or deposit madeor accepted or taken out of Court by, any person incompetent to contact, such noticemay be served on or by, or tender or deposit made, accepted or taken by, the legalcurator of the property of such person; but where there is no such curator, and it isrequisite or desirable in the interests of such person that a notice should be served or a


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tender or deposit made under the provisions of this Chapter, application may be madeto any Court in which a suit might be brought for the redemption of the mortgage toappoint a guardian ad litem for the purpose of serving or receiving service of suchnotice, or making or accepting such tender, or making or taking out of Court suchdeposit, and for the performance of all consequential acts which could or ought to bedone by such person if he were competent to contract ; and the provisions of OrderXXXII in the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908)] shall, sofar as may be, apply to such application and to the parties thereto and to the guardianappointed there under.

SSSSS.104. P.104. P.104. P.104. P.104. Power to make rules.-ower to make rules.-ower to make rules.-ower to make rules.-ower to make rules.-The High Court may, from time to time, make rulesconsistent with this Act for carrying out, in itself and in the Courts of Civil Judicaturesubject to its superintendence, the provisions contained in this Chapter.

DefinitionDefinitionDefinitionDefinitionDefinition: - Where immovable property of one person is a) by act of parties oroperation of law, b) made security for the payment of money to another and thetransaction does not amount to a mortgage—the latter person is said to have a chargeon the property.

All the provisions, which apply to a simple mortgage, apply to a charge. No chargecan be enforced against any property in the hands of a person to whom such propertyis transferred for consideration and without notice of such charge.

Exception:Exception:Exception:Exception:Exception: - It does not apply to the charge of a trustee on the trust-property forexpenses properly incurred in the execution of his trust.

Requisites of Charge by Act of Parties:-

1) It does not contemplate any transfer of an interest in the immovable property.

2) The property should be specified.

3) It is not necessary to use any technical terms.

4) It must be created in favour of a particular person specifically named.

5) A charge is a security for the payment of money. A mortgage is a security for thepayment of debt.

6) A charge may be created upon the wealth or property of a person. A mortgagemust be executed in respect of a specified property.


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7 ) In charge there is no covenant to pay. In a mortgage there may be a covenant topay.

8) A charge may arise either by act of parties or by operation of law. A mortgage canonly be made by act of parties.

9 ) In charge there is no personal liability.

10) A charge created by operation of law does not require registration. On the otherhand mortgage can be affected only by a registered instrument.

11) A charge created by act of parties requires registration irrespective of the amountinvolved.

12) A charge does not create right in rem. It is available only against a particular setof persons, who are affected with notice of charge. A mortgage gives rise to aright in rem.

13) A charge holder (by operation of law) cannot follow his security into whatsoeverhands it goes. A mortgage can follow his security into whatsoever hand it goes.

14) A charge on future property is valid and operates on such property when it comesinto existence.

15) A charge cannot be created on a future contingency.

Kinds of Charges:-

Charges are of two kinds. 1) Charges created by act of parties, and2) Charges arising by operation of law.

1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- A charge is created by act of parties whenit takes place between two living persons. A charge by act of parties is constituted by anagreement between two or more persons. Under such agreement some immovableproperty is specified as security for repayment of a certain sum of money, withouttransfer of any interest of that property. No particular mode of creating a charge hasbeen provided in this Act. Therefore, the general rule as laid down in section 9 mayapply under which a charge may also be created orally. But where the agreementcreating charge is in writing, it must be registered if the charge is valued Rs.100 orupwards.

2) Charge arising by operation of law:2) Charge arising by operation of law:2) Charge arising by operation of law:2) Charge arising by operation of law:2) Charge arising by operation of law:- Where a charge is created without referenceto any agreement or stipulation between the parties, the charge is said to be created by


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law. Charge by operation of law results due to some legal obligation. In other words,such charges arise under some provision of law irrespective of any agreement betweenthe paties.

Extinction of Charge:-

Charges are enforced like a simple mortgage. Like a simple mortgagee, the charge-holder too can enforce his claim and recover the money by causing sale of the chargedproperty. Similarly, the charges are extinguished in the same manner as a simplemortgage. Accordingly, the charges may be extinguished by i) act of parties ii) novationand iii) merger.

S.101. Merger:-

This section lays down the rule that when a mortgagee or charge-holder acquiresthe rights of mortgagor or owner of property, there is no merger if there is any subsistinginterest of third person. In other words the mortgagee or charge holder may acquire therights in property without thereby causing merger of such charge or mortgage betweenhimself and the subsequent mortgagee or charge holder.


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CHAPTER VI

OF LEASES OF IMMOVABLE PROPERTY(Ss. 105-117)

Definition of Lease (S.105)

SSSSS.105. L.105. L.105. L.105. L.105. Lease defined.-ease defined.-ease defined.-ease defined.-ease defined.- A lease of immoveable property is a transferof a right to enjoy such property, made for a certain time, express orimplied, or in perpetuity, in consideration of a price paid or promised, orof money, a share of crops, service or any other thing of value, to berendered periodically or on specified occasions to the transferor by thetransferee, who accepts the transfer on such terms.

Lessor, lessee, premium and rent defined.-The transferor is calledthe lessor, the transferee is called the lessee, the price is called thepremium, and the money, share, service or other thing to be so renderedis called the rent. Any class of such leases may be made by unregisteredinstrument or by oral agreement without delivery of possession.

Section 105 defines lease. A lease of immovable property is a transferof a right to enjoy such property for a certain time (express or implied),or in perpetuity, in consideration of (i) a price paid or promised, or (ii) ofmoney (iii) a share of crops (iv) service or (v) any other thing of value, tobe rendered periodically, or on specified occasions, to the transferor bythe transferee, who accepts the transfer on such terms.

As is evident from the definition, lease is not a transfer of ownershipin property; it is transfer of an interest in an immovable property. Theinterest is the right to use or enjoy the immovable property. Since ‘interest’in an immovable property is considered as property, lease is a transfer ofproperty. However, lease is a transfer of only a partial interest. It is not a

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transfer of absolute interest. Lease contemplates separation of right of possession fromthe ownership. The interest which is transferred is the right of enjoyment of property forfixed period on payment of some consideration in cash or kind. The transferor is calledlessor is usually called land lord and the lessee is known as tenant. Price is calledpremium and the money, shares, service or other things so given is called the rent.

A lease of immovable property i) from year to year, or ii) for any term exceedingone year, can be made only by a registered instrument.

In any other case i) either by a registered instrument, or ii) by oral agreementaccompanied by delivery of possession. Both the lessor and lessee must execute theinstrument.

S.106 Duration and Termination of Leases: -

A LEASE OF IMMOVABLE PROPERTY FOR AGRICULTURAL OR MANUFACTURINGPURPOSES SHALL BE DEEMED TO BE A LEASE FROM YEAR TO YEAR TERMINABLE,ON THE PART OF EITHER LESSOR OR LESSEE, BY SIX MONTHS NOTICE, EXPIRINGWITH THE END OF A YEAR OF THE TENANCY.

A lease of immovable property for any other purpose shall be deemed to be a leasefrom month to month terminable, on the part of either lessor or lessee, by fifteen days’notice expiring with the end of a month of the tenancy.

The above statutory presumptions as to duration arise only when there is noagreement between the parties, or local usage to the contrary.

Requisites of Notice: -

Every notice under this section must be in writing, signed by or on behalf of thepersons giving it.

SSSSS. 107. L. 107. L. 107. L. 107. L. 107. Leases how made.-eases how made.-eases how made.-eases how made.-eases how made.-A lease of immoveable property from year to year, orfor any term exceeding one year, or reserving a yearly rent, can be made only by aregistered instrument.

All other leases of immoveable property may be made either by a registeredinstrument or by oral agreement accompanied by delivery of possession.

Where a lease of immoveable property is made by a registered instrument, suchinstrument or, where there are more instruments than one, each such instrument shallbe executed by both the lessor and the lessee:


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Provided that the State Government may, from time to time, by notification in theOfficial Gazette, direct that leases of immoveable property, other than leases from yearto year, or for any term exceeding one year, or reserving a yearly rent, or any class ofsuch leases, may be made by unregistered instrument or by oral agreement withoutdelivery of possession.

S.107 provides for the modes of making leases. Like other transactions, certainformalities are necessary alsofor completinga lease. This section provides for twomodes of creation of leases.

A. Leases which can be made only by registration-

a) Leases from year to year

b) Leases for a term exceeding one year

c) Permanent leases

B) Leases in which registration is optional-

a) Leases from month to month

b) Leases for a term of 11 months.

Effect of non-registration:-Effect of non-registration:-Effect of non-registration:-Effect of non-registration:-Effect of non-registration:-

Where a lease is compulsorily registerable but has not been registered, the leazseis invalid.If the registration of a lease is necessary under section 107; the provision forits renewal shall not affect the requirement of its registration when a registered lease isfurther renewed. No valid lease would come into existence unless registration made.

SSSSS. 108. Rights and liabilities of lessor and lessee.-. 108. Rights and liabilities of lessor and lessee.-. 108. Rights and liabilities of lessor and lessee.-. 108. Rights and liabilities of lessor and lessee.-. 108. Rights and liabilities of lessor and lessee.-In the absence of a contract orlocal usage to the contrary, the lessor and the lessee of immoveable property, as againstone another, respectively, possess the rights and are subject to the liabilities mentionedin the rules next following, or such of them as are applicable to the property leased:—

(A) Rights and Liabilities of the L(A) Rights and Liabilities of the L(A) Rights and Liabilities of the L(A) Rights and Liabilities of the L(A) Rights and Liabilities of the Lessoressoressoressoressor

(a) The lessor is bound to disclose to the lessee any material defect in the property,with reference to its intended use, of which the former is and the latter is notaware, and which the latter could not with ordinary care discover;

(b) the lessor is bound on the lessees request to put him in possession of the property;


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(c) the lessor shall be deemed to contract with the lessee that, if the latter pays therent reserved by the lease and performs the contracts binding on the lessee, hemay hold the property during the time limited by the lease without interruption.

The benefit of such contract shall be annexed to and go with the lessees interest assuch, and may be enforced by every person in whom that interest is for the whole or anypart thereof from time to time vested.

(B) Rights and Liabilities of the L(B) Rights and Liabilities of the L(B) Rights and Liabilities of the L(B) Rights and Liabilities of the L(B) Rights and Liabilities of the Lesseeesseeesseeesseeessee

(a) If during the continuance of the lease any accession is made to the property, suchaccession (subject to the law relating to alluvion for the time being in force) shallbe deemed to be comprised in the lease;

(b) if by fire, tempest or flood, or violence of an army or of a mob, or other irresistibleforce, any material part of the property be wholly destroyed or rendered substantiallyand permanently unfit for the purposes for which it was let, the lease shall, at theoption of the lessee, be void;

Provided that, if the injury be occasioned by the wrongful act or default of thelessee, he shall not be entitled to avail himself of the benefit of this provision;

(c) if the lessor neglects to make, within a reasonable time after notice, any repairswhich he is bound to make to the property, the lessee may make the same himself,and deduct the expense of such repairs with interest from the rent, or otherwiserecover it from the lessor;

(d) if the lessor neglects to make any payment which he is bound to make, andwhich, if not made by him, is recoverable from the lessee or against the property,the lessee may make such payment himself, and deduct it with interest from therent, or otherwise recover it from the lessor;

(e) the lessee may [even after the determination of the lease] remove, at any time[whilst he is in possession of the property leased but not afterwards] all thingswhich he has attached to the earth: provided he leaves the property in the state inwhich he received it;

(f) when a lease of uncertain duration determines by any means except the fault ofthe lessee, he or his legal representative is entitled to all the crops planted orsown by the lessee and growing upon the property when the lease determines,and to free ingress and egress to gather and carry them;


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(g) the lessee may transfer absolutely or by way of mortgage or sub-lease the wholeor any part of his interest in the property, and any transferee of such interest orpart may again transfer it. The lessee shall not, by reason only of such transfer,cease to be subject to any of the liabilities attaching to the lease;

nothing in this clause shall be deemed to authorize a tenant having an un-transferable right of occupancy, the farmer of an estate in respect of which defaulthas been made in paying revenue, or the lessee of an estate under the managementof a Court of Wards, to assign his interest as such tenant, farmer or lessee:

(h) the lessee is bound to disclose to the lessor any fact as to the nature or extent ofthe interest which the lessee is about to take, of which the lessee is, and the lessoris not, aware, and which materially increases the value of such interest;

(i) the lessee is bound to pay or tender, at the proper time and place, the premiumor rent to the lessor or his agent in this behalf;

(j) the lessee is bound to keep, and on the termination of the lease to restore, theproperty in as good condition as it was in at the time when he was put in possession,subject only to the changes caused by reasonable wear and tear or irresistibleforce, and to allow the lessor and his agents, at all reasonable times during theterm, to enter upon the property and inspect the condition thereof and give orleave notice of any defect in such condition; and, when such defect has beencaused by any act or default on the part of the lessee, his servants or agents, heis bound to make it good within three months after such notice has been given orleft;

(k) if the lessee becomes aware of any proceeding to recover the property or any partthereof, or of any encroachment made upon, or any interference with, the lessorsrights concerning such property, he is bound to give, with reasonable diligence,notice thereof to the lessor;

(l) the lessee may use the property and its products (if any) as a person of ordinaryprudence would use them if they were his own;

but he must not use, or permit another to use, the property for a purpose otherthan that for which it was leased, or fell [or sell] timber, pull down or damagebuildings 1*[belonging to the lessor, or] work mines or quarries not open whenthe lease was granted, or commit any other act which is destructive or permanentlyinjurious thereto;


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(m) he must not, without the lessors consent, erect on the property any permanentstructure, except for agricultural purposes;

(n) on the determination of the lease, the lessee is bound to put the lessor intopossession of the property.

SSSSS.109. Rights of lessors transferee..109. Rights of lessors transferee..109. Rights of lessors transferee..109. Rights of lessors transferee..109. Rights of lessors transferee.-If the lessor transfers the property leased, orany part thereof, or any part of his interest therein, the transferee, in the absence of acontract to the contrary, shall possess all the rights, and, if the lessee so elects, besubject to all the liabilities of the lessor as to the property or part transferred so long ashe is the owner of it; but the lessor shall not, by reason only of such transfer, cease to besubject to any of the liabilities imposed upon him by the lease, unless the lessee electsto treat the transferee as the person liable to him;

Provided that the transferee is not entitled to arrears of rent due before the transfer,and that, if the lessee, not having reason to believe that such transfer has been made,pays rent to the lessor, the lessee shall not be liable to pay such rent over again to thetransferee.

The lessor, the transferee and the lessee may determine what proportion of thepremium or rent reserved by the lease is payable in respect of the part so transferred,and, in case they disagree, such determination may be made by any Court havingjurisdiction to entertain a suit for the possession of the property leased.

SSSSS.110. Exclusion of day on which term commences..110. Exclusion of day on which term commences..110. Exclusion of day on which term commences..110. Exclusion of day on which term commences..110. Exclusion of day on which term commences.-Where the time limited by alease of immoveable property is expressed as commencing from a particular day, incomputing that time such day shall be excluded. Where no day of commencement isnamed, the time so limited begins from the making of the lease.

Duration of lease for a year.-Where the time so limited is a year or a number ofyears, in the absence of an express agreement to the contrary, the lease shall lastduring the whole anniversary of the day from which such time commences.

SSSSS.111. Determination of lease.-.111. Determination of lease.-.111. Determination of lease.-.111. Determination of lease.-.111. Determination of lease.-A lease of immoveable property determines—

(a) by efflux of the time limited thereby;

(b) where such time is limited conditionally on the happening of some event—by thehappening of such event;

(c) where the interest of the lessor in the property terminates on, or his power todispose of the same extends only to, the happening of any event—by the happeningof such event;


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(d) in case the interests of the lessee and the lessor in the whole of the propertybecome vested at the same time in one person in the same right;

(e) by express surrender; that is to say, in case the lessee yields up his interest underthe lease to the lessor, by mutual agreement between them;

(f) by implied surrender;

(g) by forfeiture; that is to say, (1) in case the lessee breaks an express conditionwhich provides that, on breach thereof, the lessor may re-enter or (2) in case thelessee renounces his character as such by setting up a title in a third person or byclaiming title in himself; or (3) the lessee is adjudicated an insolvent and the leaseprovides that the lessor may re-enter on the happening of such event]; and in[any of these cases] the lessor or his transferee [gives notice in writing to thelessee of] his intention to determine the lease;

(h) on the expiration of a notice to determine the lease, or to quit, or of intention toquit, the property leased, duly given by one party to the other.

Illustration to clause (f)

A lessee accepts from his lessor a new lease of the property leased, to take effectduring the continuance of the existing lease.

This is an implied surrender of the former lease, and such lease determinesthereupon.

Forfeiture of a Lease (Ss.111, 112,114 &115): -

A lease determines by forfeiture in the following cases—

i) Where the lessee commits a breach of an express condition which provides thaton breach thereof the lessor may re-enter, or ii) where the lessee renounces hischaracter as such by setting up a title in a third person or by claiming title inhimself, or

iii) Where the lessee is adjudged an insolvent and the lease provides that the lessormay re-enter on the happening of such event.

In any of these cases mentioned above the lease does not determine immediatelyon the happening of the contingency. It is obligatory on the lessor or his transferee togive notice in writing to the lessee of his intention to determine the lease. Though thenotice need not be in accordance with section 106, it should contain any one of thegrounds mentioned above and the intention of the lessee to determine the lease.


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Expiration of notice to quit:-Expiration of notice to quit:-Expiration of notice to quit:-Expiration of notice to quit:-Expiration of notice to quit:-

The last mode in which a lease is terminated is when a notice to quit or to determinethe lease expires. Such notice is necessary only in cases of periodic tenancy such as atenancy from year to year or from month to month under section 106. Where the termis fixed, the lease would determine by efflux of time under clause (a) of the section.Where the tenancy is permanent no question of determining it arises. Where it istenancy at will, it is determinable at the will of either party by the tenant giving uppossession or by a demand for possession by the landlord or by the death of eitherparty. A tenancy at sufferance does not need any determination and the landlord canstraightway sue the tenant for eviction. The notice is therefore needed only where thetenancy either expressly or by implication falls under section 106.Where the term isfixed, the lease would determine by efflux of time under clause (a) of the section.Where the tenancy is permanent no question of determining it arises. Where it is atenancy at will, it is determinable at the will of either party by the tenant giving uppossession or by a demand for possession by the land lord or by the death of eitherparty. A tenancy at sufferance does not need any determination and the landlord canstraightway sue the tenant for eviction. The notice is therefore needed only where thetenancy either expressly or by implication falls under section 106.

A notice of determination of tenancy under the T.P.Act is a statutory requirementand constitutes an important ingredient of the cause of action to file the suit, and theparties themselves cannot contract out the provisions of the Act requiring notice ofdetermination. (1972) RCJ.49.

SSSSS. 112. W. 112. W. 112. W. 112. W. 112. Waiver of forfeiture.-aiver of forfeiture.-aiver of forfeiture.-aiver of forfeiture.-aiver of forfeiture.-A forfeiture under section 111, clause (g), is waivedby acceptance of rent which has become due since the forfeiture, or by distress for suchrent, or by any other act on the part of the lessor showing an intention to treat the leaseas subsisting:

Provided that the lessor is aware that the forfeiture has been incurred;

Provided also that, where rent is accepted after the institution of a suit to eject thelessee on the ground of forfeiture, such acceptance is not a waiver.

SSSSS.113. W.113. W.113. W.113. W.113. Waiver of notice to quit.-aiver of notice to quit.-aiver of notice to quit.-aiver of notice to quit.-aiver of notice to quit.-A notice given under section 111, clause (h), iswaived, with the express or implied consent of the person to whom it is given, by any acton the part of the person giving it showing an intention to treat the lease as subsisting.


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(a) A, the lessor, gives B, the lessee, notice to quit the property leased. The noticeexpires. B tenders, and A accepts, rent which has become due in respect of theproperty since the expiration of the notice. The notice is waived.

(b) A, the lessor, gives B, the lessee, notice to quit the property leased. The noticeexpires, and B remains in possession. A gives to B as lessee a second notice toquit. The first notice is waived.

Termination of Leases - (Ss.111-113)

A lease of immovable property determines in the following eight cases:-

1) By efflux of the time limited thereby

A lease is created for a certain time, naturally determines on the last day of theterm without any formality such as notice on either side. Such a lease does notterminate if any of the parties dies during the term, the reason being that theinterest transferred in a lease is a heritable interest.

The lessee cannot dispute the title of the lessor as a ground for refusing to give uppossession at the expiry of the lease, for if he has been let into possession by thelessor, he cannot deny the title under which he entered without first surrenderingpossession. If the lessee does not surrender possession, the estoppels constituteseven after the termination of the tenancy.

Where the lease is for a definite term, it expires by efflux of time. Hence, service ofa notice under section 106 is not necessary for determination of the lease.

2) Where such time is limited conditionally on the happening of some event-by thehappening of such event .

Contingent term:-

If the term of a lease is conditional on the happening of a certain event, the leasedetermines when the event happens. Similarly a lease for life determines on thedeath of the lessee and a lease for the duration of war determines when peace isdeclared.

3) Where the interest of the lessor in the property terminates on, or his power todispose of the same extends only to, the happening of any event- by the happeningof such event.


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By termination of lessor’s interest:-

This clause operates where the lessor has only a limited interest or power to granta lease and the lease is determined with that interest. For instance, a lease by aHindu widow would come to an end on her death unless it is justified by legalnecessity. Similarly, a lease granted by mortgagee in possession determines onredemption.

4) Merger

Where two estates merge into one or unite, it is called merger. In case of a lease,merger occurs when the lease-hold and reversion are acquired by one and thegreater one. The lease hold is the lesser estate for it is carved out of the estate ofthe owner, which is the reversion. The lesser estate is merged in the greater one.The principle is that the same person can not be both a landlord and a tenant.But if there be an intervening estate, there can be no merger. The interest of thelessor and the lessee in the whole of the property should become vested at thesame time in one person in the same right i.e., to say there must be union of theentire interest of the lessor and the lessee.

5) By express surrender

Surrender is the counter part of the merger. Under merger the tenant may acquirethe reversion, whereas under surrender the landlord acquires the leasehold.Surrender consists in the yielding up of the term of the lease accompanied bydelivery of possession. Delivery of possession is essential unless there is anagreement to surrender at some time in future. By surrender the relationship ofthe parties to the lease thereafter comes to an end and the under lessee becomesa lessee directly under the lessor with all incidents of his sub-lease and suchrelationship comes into existence under the operation of the statute on surrenderof the head lease and by devolution on assignment by the lessee of his interest inthe lessor.

Surrender properly is a yielding up an estate for life or years to him that has animmediate estate in reversion ore remainder, wherein the estate for life or yearsmay drown by mutual agreement between them. Thus, if after expirty of lease forfixed period lessee delivers possession to lessor, it is not a case of surrender butexpiry of term of lease.

6) By implied surrender

Implied surrender or surrender by operation of law occurs-


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i) By the creation of a new relationship, or

ii) By relinquishment of possession.

New Relationship:-

When the lessee accepts a new lease, that it itself means a surrender of old lease,for the new lease could not be granted unless the old one was surrendered. Suchsurrender can also be implied from the consent of the parties or from such facts as therelinquishment of possession by the lessee and taking over possession by the lessor.The surrender has been put on the ground of estoppel and surrender by operation oflaw has been said to be ‘an act done by or to the owner of a particular estate, thevalidity of which he is estopped from disputing and which could have been alone if theparticular estate continued to exist.

Relinquishment of Possession:-

Relinquishment of possession operates as an implied surrender, if there is i)an yieldingup by the lessee, and ii) an acceptance of possession by the lessor. There must be ataking of possession, not necessarily a physical taking but something amounting to avirtual taking of possession. Whether this has occurred is a question of fact. Thuswhere the lessor says he will give up his claim for rent if the lessee gives up possessionin the middle of the quarter and the lessee then gives the keys in the lessor who acceptsthem; the lease is terminated by surrender.

7) By forfeiture

A lease determines by forfeiture in the following cases:-

i) Where the lessee commits a breach of an express condition which provides thaton breach thereof the lessor may re-enter, or

ii) Where the lessee renounces his characters such by setting up a title and a thirdperson or by claiming title in himself, or

iii) Where the lessee is adjudged an insolvent and the lease provides that the lessormay re-enter on the happening on such event.

In any of these cases mentioned above the lease does not determine immediatelyon the happening of the contingency. It is obligatory on the lessor or his transferee togive notice in writing to the lessee of his intention to determine the lease. Though thenotice need not be in accordance with section 106, it should contain any one of theground mentioned above and the intention of the lessee to determine the lease.


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8) On the expiration of a notice to determine the lease, or to quit the propertyleased, duly given by one party to the other.

The last mode in which a lease is terminated is when a notice to quit or to determinethe lease expires. Such notice is necessary only in cases of periodic tenancy suchas a tenancy from year to year or from month to month under section 106.

SSSSS. 114. R. 114. R. 114. R. 114. R. 114. Relief against forfeiture for non-payment of rent.elief against forfeiture for non-payment of rent.elief against forfeiture for non-payment of rent.elief against forfeiture for non-payment of rent.elief against forfeiture for non-payment of rent.-Where a lease ofimmoveable property has determined by forfeiture for non-payment of rent, and thelessor sues to eject the lessee, if, at the hearing of the suit, the lessee pays or tenders tothe lessor the rent in arrear, together with interest thereon and his full costs of the suit,or gives such security as the Court thinks sufficient for making such payment withinfifteen days, the Court may, in lieu of making a decree for ejectment, pass an orderrelieving the lessee against the forfeiture; and thereupon the lessee shall hold the propertyleased as if the forfeiture had not occurred.

SSSSS. 114A. 114A. 114A. 114A. 114A. R. R. R. R. Relief against forfeiture in certain other cases.elief against forfeiture in certain other cases.elief against forfeiture in certain other cases.elief against forfeiture in certain other cases.elief against forfeiture in certain other cases.-Where a lease ofimmoveable property has determined by forfeiture for a breach of an express conditionwhich provides that on breach thereof the lessor may re-enter, no suit for ejectmentshall lie unless and until the lessor has served on the lessee a notice in writing—

(a) specifying the particular breach complained of; and

(b) if the breach is capable of remedy, requiring the lessee to remedy the breach;

Nothing in this section shall apply to an express condition against the assigning,under-letting, parting with the possession, or disposing, of the property leased, or to anexpress condition relating to forfeiture in case of non-payment of rent.

SSSSS. 115. Effect of surrender and forfeiture on under. 115. Effect of surrender and forfeiture on under. 115. Effect of surrender and forfeiture on under. 115. Effect of surrender and forfeiture on under. 115. Effect of surrender and forfeiture on under-leases.--leases.--leases.--leases.--leases.-TTTTThe surrender, expressor implied, of a lease of immoveable property does not prejudice an under-lease of theproperty or any part thereof previously granted by the lessee, on terms and conditionssubstantially the same (except as regards the amount of rent) as those of the originallease; but, unless the surrender is made for the purpose of obtaining a new lease, therent payable by, and the contracts binding on, the under-lessee shall be respectivelypayable to and enforceable by the lessor.

The forfeiture of such a lease annuls all such under-leases, except where suchforfeiture has been procured by the lessor in fraud of the under-lessees, or relief againstthe forfeiture is granted under section 114.


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Relief against Forfeiture for Non-payment of Rent:-

“Where a lease of immovable property has determined by forfeiture for non-paymentof rent and the lessor sues to eject the lessee, if at the hearing of the suit, the lessee paysor tenders the lessor the rent in arrear, together with interest thereon and his full costs ofthe suit, or give such security as the court thinks sufficient for making such paymentwithin fifteen days, the court may, in liew of making a decree for ejectment, pass anorder relieving the lessee against the forfeiture and thereupon the lessee shall hold theproperty leased as if the forfeiture had not occurred” S.114.

Conditions on which the relief is given are (1) the lessee must pay all rent in arrearwith interest and costs of the suit, or (2) if he does not agree to give security for paymentwithin 15 days.

The relief as given on the equitable grounds – 1) the equity looks to the essence ofthe transaction and that a condition of forfeiture in simply a security for the rent and 2)that a condition of forfeiture in default of payment is a penalty.

Relief against Forfeiture In Certain other Cases:-

“Where a lease of immovable property has determined by forfeiture for a breach ofan express condition which provides that on breach thereof the lessor may re-enter, nosuit for rejecting shall lie unless and until the lessor has served on the lessee a notice inwriting –

a) specifying the particular breach complained of, and

b) if the breach is capable of remedy, requiring the lessee to remedy the breach, andthe lessee fails, within a reasonable time from the date of the service of the noticeto remedy the breach, if it is capable of remedy.

Nothing in this section shall apply to an express condition against the assigning,under letting, parting with the possession or disposing of the property leased, orto an express condition relating to forfeiture in case of non-payment of rent.(S.114-A).

This section is general and is designed to cover all cases in which notice is requiredunder Sec. 111(G).

SSSSS.116. Effect of holding over.116. Effect of holding over.116. Effect of holding over.116. Effect of holding over.116. Effect of holding over.-.-.-.-.-If a lessee or under-lessee of property remains inpossession thereof after the determination of the lease granted to the lessee, and the


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lessor or his legal representative accepts rent from the lessee or under-lessee, or otherwiseassents to his continuing in possession, the lease is, in the absence of an agreement tothe contrary, renewed from year to year, or from month to month, according to thepurpose for which the property is leased, as specified in section 106.


(a) A lets a house to B for five years. B underlets the house to C at a monthly rentof Rs. 100. The five years expire, but C continues in possession of the house andpays the rent to A. C’s lease is renewed from month to month.

(b) A lets a farm to B for the life of C. C dies, but B continues in possession with A’sassent. B’s lease is renewed from year to year.

Holding Over:-

On the determination of the lease, the lessee is bound to surrender possession tothe lessor, and on default he may be ejected without notice. If there is no earlier assenton the lessor’s part to the continuance of the lessee’s possession after the determinationof the lease, the lessee is simply a tenant-at-sufferance. A tenant-at-sufferance is onbetter than a trespasser and he can be ejected at any time without notice.

The section deals with the holding over of a lease and its effect. If after determinationof the lease, the lessee continues in possession with the assent of the lessor to hiscontinuation, the lease stands renewed from year to year or month to month unlessthere is an agreement to the contrary. Acceptance of rent by the landlord after theexpiry of the lease is treated to be an assent. By this section, the possession of a tenantafter cessation of the tenancy is protected.

The act of holding over after the expiry of the term does not create a tenancy of anykind. If a tenant remains in possession after the determination of the lease, the commonlaw rule is that he is a tenant on sufferance. A distinction should be drawn between atenant continuing in possession after the determination of the term with the consent ofthe landlord and a tenant doing so without his consent. The former is a tenant atsufferance in English Law and the latter a tenant holding over or a tenant at will. In viewof the concluding words of section 116 of the T.P Act, a lessee holding over is in abetter position than a tenant at will. The assent of the land lord to the continuance ofpossession after the determination of the tenancy at will create a new tenancy.

TTTTTenant Aenant Aenant Aenant Aenant At Sufferance:t Sufferance:t Sufferance:t Sufferance:t Sufferance:- A tenant may retain and continue to be in possession of theleased property after the termination of the lease or on its determination by efflux of


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time. In such retention of possession is without the consent of the landlord, a tenant iscommonly known as a “tenant at sufferance”. A tenant in possession with the consentof landlord is a “tenant by holding over” or a “tenant at will”.

SSSSS.117. Exemption of leases for agricultural purposes.-.117. Exemption of leases for agricultural purposes.-.117. Exemption of leases for agricultural purposes.-.117. Exemption of leases for agricultural purposes.-.117. Exemption of leases for agricultural purposes.-None of the provisions ofthis Chapter apply to leases for agricultural purposes, except in so far as the StateGovernment may by notification published in the Official Gazette declare all or any ofsuch provisions to be so applicable [in the case of all Such notification shall not takeeffect until the expiry of six months from the date of its publication.]

Exemption of Leases for Agricultural Purposes

Leases for agricultural purposes are exempted from the operation of this chapterpresumably because the intention of the legislature is to retain in force the specialprovisions in the various Rent Acts in respect of agricultural leases, passed prior to theT.P Act in respect of such leases.

A lease for agricultural purposes is not necessary to be made by a written instrument.It may be effected by an oral agreement, and when so effected, no registration isrequired, but if the transaction is reduced to writing, then, in the case of a lease fromyear to year or for any term exceeding a year or reserving a yearly rent, registrationwould be required under section 17 of Registration Act, and, if un registered, the leasewill be inadmissible in evidence under section 49 of the Registration Act and otherevidence of its terms will be precluded under section 91 of the Evidence Act.


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CHAPTER VII

OF GIFTS (Sections. 122-129)

SSSSS.122. “Gift.122. “Gift.122. “Gift.122. “Gift.122. “Gift” defined.-” defined.-” defined.-” defined.-” defined.-”Gift” is the transfer of certain existingmoveable or immoveable property made voluntarily and withoutconsideration, by one person, called the donor, to another, called thedonee, and accepted by or on behalf of the donee.

Acceptance when to be made- Such acceptance must be madeduring the lifetime of the donor and while he is still capable of giving. Ifthe donee dies before acceptance, the gift is void.

SSSSS.123. T.123. T.123. T.123. T.123. Transfer how effected.ransfer how effected.ransfer how effected.ransfer how effected.ransfer how effected.-For the purpose of making a gift ofimmoveable property, the transfer must be effected by a registeredinstrument signed by or on behalf of the donor, and attested by at leasttwo witnesses.

For the purpose of making a gift of moveable property, the transfermay be effected either by a registered instrument signed as aforesaid orby delivery.

Such delivery may be made in the same way as goods sold may bedelivered.

SSSSS.124. Gift of existing and future property.124. Gift of existing and future property.124. Gift of existing and future property.124. Gift of existing and future property.124. Gift of existing and future property.....-A gift comprising bothexisting and future property is void as to the latter.

SSSSS.125. Gift to several, of whom one does not accept..125. Gift to several, of whom one does not accept..125. Gift to several, of whom one does not accept..125. Gift to several, of whom one does not accept..125. Gift to several, of whom one does not accept.-A gift of athing to two or more donees, of whom one does not accept it, is void asto the interest which he would have taken had he accepted.

SSSSS.126. When gift may be suspended or revoked..126. When gift may be suspended or revoked..126. When gift may be suspended or revoked..126. When gift may be suspended or revoked..126. When gift may be suspended or revoked.- The donor anddone may agree that on the happening of any specified event whichdoes not depend on the will of the donor a gift shall be suspended orrevoked;

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but a gift which the parties agree shall be revocable wholly or in part, at the merewill of the donor, is void wholly or in part, as the case may be.

A gift may also be revoked in any of the cases (save want or failure of consideration)in which, if it were a contract, it might be rescinded.

Save as aforesaid, a gift cannot be revoked.

Nothing contained in this section shall be deemed to affect the rights of transfereesfor consideration without notice.


(a) A gives a field to B, reserving to himself, with Bs assent, the right to take back thefield in case B and his descendants die before A. B dies without descendants in Aslifetime. A may take back the field.

(b) A gives a lakh of rupees to B, reserving to himself, with Bs assent, the right to takeback at pleasure Rs. 10,000 out of the lakh.

The gift holds good as to Rs. 90,000, but is void as to Rs. 10,000 which continueto belong to A.

(S(S(S(S(S.122 & 123) Definition of Gift and gift how effected: -.122 & 123) Definition of Gift and gift how effected: -.122 & 123) Definition of Gift and gift how effected: -.122 & 123) Definition of Gift and gift how effected: -.122 & 123) Definition of Gift and gift how effected: - Gift is the transfer ofownership in an existing movable or immovable porperty without any consideration.The essecne of gift is a voluntary and gratutious transfer of ownership in a property infavour of another person. Gift may be either a gift inter vivos or gift testamentary. A giftinter vivos takes place between living persons. Testamentary gift is termed as “will” andtakes place only after the death of the treasnferor or testator. Gifts by testaments (bywill) are outside the scope of this Act. The Transfer of Property Act lays down the lawrelating to gifts inter vivos only.

A gift is undoubtedly a transfer which does not contain any element of considerationin any shape or for. In fact, where there is any equivalent of benefit measured in termsof money in respect of a gift, the transaction ceases to be a gift and assumes a differentcolour.

Section 122 of the Act, thus, clearly postulates that a gift must have two essentialcharacteristics—

a) that it must be made voluntarily, and

b) that it should be without consideration.


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This is apart from the other ingredients like acceptance, etc.

Requisites of a Valid Gift: -

1) There should be a donor and a done.

2) The subject of the gift must be certain and existing and capable of transfer.

3) The gift should be made voluntarily and without consideration. There should be atransfer on the part of the donor.

4) There should be an acceptance, by or on behalf of the donee during his life time.

5) The acceptance must be at the time when the donor is alive and capable ofgiving.

6) Therefore it necessarily follows that the donor and the donee must both be living.

7) When the property is immovable, there must be a registered instrument properlyattested.

8) In case of movable property, there must be either a registered instrument properlyattested or delivery of possession.

9) The section lays stress on the acceptance of the gift.

10) There can be no gift of future property.

11) Registration is compulsory in the case of a gift of immovable property whateverthe value of the property be.

12) The gift becomes irrevocable once the deed of gift is delivered to the donee, evenbefore its registration.

13) Once the deed is executed and the gift is accepted during the lifetime of thedonor, the deed of gift may even be registered after the death of the donor.

14) An unregistered deed of gift cannot be used under the doctrine of part-performance,as the doctrine is applicable to transfers for consideration.

SSSSS.124. Gift of Existing and F.124. Gift of Existing and F.124. Gift of Existing and F.124. Gift of Existing and F.124. Gift of Existing and Future Puture Puture Puture Puture Property:-roperty:-roperty:-roperty:-roperty:- A gift comprising both existing andfuture property is void as to the latter.

A gift comprising both existing and future property is void so far as future propertyis concerned. There can be no gift of future property. A gift of future property is a merepromise which cannot be enforced and is therefore void.


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SSSSS.125. Gift to Several, of whom one does not A.125. Gift to Several, of whom one does not A.125. Gift to Several, of whom one does not A.125. Gift to Several, of whom one does not A.125. Gift to Several, of whom one does not Accept:-ccept:-ccept:-ccept:-ccept:- 125. Gift to several, ofwhom one does not accept.-A gift of a thing to two or more donees, of which one doesnot accept it, is void as to the interest which he would have taken had he accepted.

A gift of a thing to two or more donees, of which one does not accept it, is void asto the interest which he would have taken had he accepted.

Gift Void as to Donees:-

Where a gift made to several persons and one of them does not take it, it becomesvoid as to the interest which he would have taken had he accepted.

Void Gifts: -

1) Gift made for an unlawful purpose S.6

2) Gift depending on a condition, the fulfillment of which is impossible, or forbiddenby law

3) Where the donee dies before acceptance S.122

4) Gift by a person incompetent to contract S.7

5) A gift comprising existing and future property is void as the latter S.124

A gift of a thing to two or more donees, of which one does not accept it, is voidas to the interest, which he would have taken, had he accepted. S.125.

SSSSS. 127. Onerous gifts. 127. Onerous gifts. 127. Onerous gifts. 127. Onerous gifts. 127. Onerous gifts.-Where a gift is in the form of a single transfer to the sameperson of several things of which one is, and the others are not, burdened by anobligation, the donee can take nothing by the gift unless he accepts it fully.

Where a gift is in the form of two or more separate and independent transfers to thesame person of several things, the donee is at liberty to accept one of them and refusethe others, although the former may be beneficial and the latter onerous.

Onerous gift to disqualified person.-A donee not competent to contract andaccepting property burdened by any obligation is not bound by his acceptance. But if,after becoming competent to contract and being aware of the obligation, he retains theproperty given, he becomes so bound.


(a) A has shares in X, a prosperous joint stock company, and also shares in Y, a jointstock company in difficulties. Heavy calls are expected in respect of the shares in


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Y. A gives B all his shares in joint stock companies. B refuses to accept the sharesin Y. He cannot take the shares in X.

b) A, having a lease for a term of years of a house at a rent which he and hisrepresentatives are bound to pay during the term, and which is more than thehouse can be let for, gives to B the lease, and also, as a separate and independenttransaction, a sum of money. B refuses to accept the lease. He does not by thisrefusal forfeit the money.

Comment:-Comment:-Comment:-Comment:-Comment:-

1) Where a gift is in the form of a single transfer to the same person of severalthings, of which one is, and the others are not, burdened by an obligation—thedonee can take nothing by the gift unless he accepts it fully.

2) Where a gift is in the form of two or more separate and independent transfers tothe same person of several things-the donee is at liberty to accept one of themand refuse the others, although the former may be beneficial and the latter onerous.

SSSSS. 128. Universal donee.. 128. Universal donee.. 128. Universal donee.. 128. Universal donee.. 128. Universal donee.-Subject to the provisions of section 127, where a giftconsists of the donors whole property, the donee is personally liable for all the debtsdue by and liabilities of the donor at the time of the gift to the extent of the propertycomprised therein.

A person, to whom all the properties of another person are given in gift, is called auniversal donee. In order that a person may be universal donee, all the properties, bothmovables and immovables of the donor must be given to him. Under this section suchuniversal donee is personally for all the debts and liabilities of the donor at the time ofthe gift to the extent of the property comprised therein.

SSSSS. 129. Saving of donations mortis causa and Muhammadan law. 129. Saving of donations mortis causa and Muhammadan law. 129. Saving of donations mortis causa and Muhammadan law. 129. Saving of donations mortis causa and Muhammadan law. 129. Saving of donations mortis causa and Muhammadan law.-.-.-.-.-Nothing in thisChapter relates to gifts of moveable property made in contemplation of death, or shallbe deemed to affect any rule of Muhammadan law.

The section exempts gifts of movable property made in contemplation of deathfrom the operation of this Chapter. Such gifts are called a monatio mortis causa andthey are governed by section 191 of the Indian Succession Act, 1925. This section alsoexempts gifts made by Mohammadans from the operation of the provisions containedin this Chapter in so far as they are inconsistent with the principles of MohammadanLaw. For instance, under Mohammadan Law, a gift of an immovable property may bemade orally by a simple delivery of possession. Thus, an assignment of land by a


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Mohammadan bridegroom in favour of his bride at the time of marriage in lieu ofmehar does not require any writing. Similarly, the rules relating to revocation of a giftare different from those enacted in section 126.

S.126 Revocation of Gifts: -

126. When gift may be suspended or revoked.-126. When gift may be suspended or revoked.-126. When gift may be suspended or revoked.-126. When gift may be suspended or revoked.-126. When gift may be suspended or revoked.-The donor and done may agreethat on the happening of any specified event which does not depend on the will of thedonor a gift shall be suspended or revoked;

but a gift which the parties agree shall be revocable wholly or in part, at the merewill of the donor, is void wholly or in part, as the case may be.

A gift may also be revoked in any of the cases (save want or failure of consideration)in which, if it were a contract, it might be rescinded. Save as aforesaid, a gift cannot berevoked.

Nothing contained in this section shall be deemed to affect the rights of transfereesfor consideration without notice.


(a) A gives a field to B, reserving to himself, with Bs assent, the right to take back thefield in case B and his descendants die before A. B dies without descendants in Aslifetime. A may take back the field.

(b) A gives a lakh of rupees to B, reserving to himself, with Bs assent, the right to takeback at pleasure Rs. 10,000 out of the lakh. The gift holds good as to Rs. 90,000,but is void as to Rs. 10,000 which continue to belong to A.

A Gift Once made is irrevocable, Except in thefollowing Two Cases: -

1) When the donor and the donee have agreed that on the happening of a specifiedevent, the gift should be Suspended or revoked.

2) When the donor’s consent is not voluntary.


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CHAPTER VIII

OF TRANSFER OF ACTIONABLE CLAIMS(Ss. 3 & 130-138)

S.30. Transfer of actionable claim.-

(1) The transfer of an actionable claim whether with or withoutconsideration shall be effected only by the execution of aninstrument in writing signed by the transferor or his duly authorizedagent, shall be complete and effectual upon the execution ofsuch instrument, and thereupon all the rights and remedies of thetransferor, whether by way of damages or otherwise, shall vest inthe transferee, whether such notice of the transfer as is hereinafterprovided be given or not:

Provided that every dealing with the debt or other actionable claimby the debtor or other person from or against whom the transferorwould, but for such instrument of transfer as aforesaid, have beenentitled to recover or enforce such debt or other actionable claim,shall (save where the debtor or other person is a party to the transferor has received express notice thereof as hereinafter provided) bevalid as against such transfer.

2) The transferee of an actionable claim may, upon the execution ofsuch instrument of transfer as aforesaid, sue or institute proceedingsfor the same in his own name without obtaining the transferorsconsent to such suit or proceedings and without making him aparty thereto.

ExceptionExceptionExceptionExceptionException.—Nothing in this section applies to the transfer of amarine or fire policy of insurance or affects the provisions of section38 of the Insurance Act, 1938 (4 of 1938)].

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(i) A owes money to B, who transfers the debt to C. B then demands the debt from A,who, not having received notice of the transfer, as prescribed in section 131, paysB. The payment is valid, and C cannot sue A for the debt.

(ii) A effects a policy on his own life with an Insurance Company and assigns it to aBank for securing the payment of an existing or future debt. If A dies, the Bank isentitled to receive the amount of the policy and to sue on it without the concurrenceof A’s executor, subject to the proviso in sub-section (1) of section 130 and to theprovisions of section 132.

The definition of ‘actionable claim’ is contained in section 3. According to thedefinition, an actionable claim means: i) any unsecured debt, or ii) any beneficialinterest in movable property, no in possession, actual or constructive, of the claimant.

An actionable claim or ‘chose in action’ as it is called in ‘English Law’ does notconcern itself with immovable property. It is a claim relating to a simple debt for whichthere is no security of movable or immovable property.

Beneficial Interest:-

A beneficial interest in movable property is also an actionable claim. The right toclaim the benefit of an executory contract constitutes a beneficial interest in movableproperty. After a breach of a contract for the sale of goods, nothing is left but a right tosue for damages. The right to sue for damages is not a beneficial interest in thecontract but a mere right to sue for non-performance of the contract.

Mode of Assignment:-

Section 130 prescribes the mode of assigning an actionable claim. The assignmentmay be by way of sale, mortgage, gift, or exchange. In any of these cases, it must beeffected by an instrument in writing signed by the transferor or his duly authorisedagent. It is not necessary that the assignmentshould be made by a separate document.An endorsement on the back of a document comprising the actionableclaim is enough.

EFfect of Assignment:-

The assignment takes effect from the date of the execution of the writing and itseffect is to vest all the rights and remedies of the transferor in the transferee. Thetransferee may sue for the actionable claim in his own name. After the assignment, the

OF TRANSFER OF ACTIONABLE CLAIMS (Ss. 3 & 130-138)

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assignee is the only person who is entitled to recover the claim. The assignment hasalso the effect of subjecting the assignee to all the liabilities and equities to which thetransferor was subject in respect thereof at the date of the transfer.

Notice of Assignment:-

Although a notice of assignment to the debtor is not necessary to perfect the title tothe assignee, but until the debtor receives notice of the assignment in accordance withlaw, his dealings with the original creditor will be protected. The assignee, therefore, inhis own interest must give notice of the assignment in the debtor as early as possible.Once he does this, the debtor becomes liable to pay the debt to him alone.

The notice must be in writing and it must state the name and address of the transferee.There is no time limit for giving notice. (S.131).

Liability of Assignee-

The question of liability of an assignee had arisen in this case. A plot was allottedto allottee for the establishment of an industrial writ within specified time limit by theIndustrial Development Corporation. Allottee had transferred the plot without the consentof Industrial Corporation. It was held that transferee cannot compel the corporation totreat him as an allottee. He has no locus standi to challenge the order of resumptionpassed the corporation. (Indu Kakkar v. Haryana Industrial Development Corporationand others A.I.R. 2005 AP 345).

SSSSS.131..131..131..131..131. Notice to be in writingNotice to be in writingNotice to be in writingNotice to be in writingNotice to be in writing, signed., signed., signed., signed., signed.-Every notice of transfer of an actionableclaim shall be in writing, signed by the transferor or his agent duly authorized in thisbehalf, or, in case the transferor refuses to sign, by the transferee or his agent, and shallstate the name and address of the transferee.

Essentials of Notice:-

The requirement of a valid notice of transfer of an actionable claim is as under:-

a) it shall be in writing

b) it shall state the following

i) name of the transferee

ii) address of the transferee


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c) it shall be signed by:

i) the transferor or his agent and on his refusal to sign, by

ii) the transferee or his agent.

SSSSS.132. Liability of transferee of actionable claim..132. Liability of transferee of actionable claim..132. Liability of transferee of actionable claim..132. Liability of transferee of actionable claim..132. Liability of transferee of actionable claim.-The transferee of an actionableclaim shall take it subject to all the liabilities and equities to which the transferor wassubject in respect thereof at the date of the transfer.


(i) A transfers to C a debt due to him by B, a being then indebted to B. C sues B forthe debt due by B to A. In such suit B is entitled to set off the debt due by A to him;although C was unaware of it at the date of such transfer.

(ii) A executed a bond in favour of B under circumstances entitling the former to haveit delivered up and cancelled. B assigns the bond to C for value and withoutnotice of such circumstances. C cannot enforce the bond against A.

Liability of Assignee:-

The assignment has the effect of subjecting the assignee to all the liabilities andequities to which the transferor was subject in respect thereof at the date of the transfer.For instance, a debtor has a right to set off any counter-claim against the assigneewhich he could have done against the assignor.

SSSSS.133. W.133. W.133. W.133. W.133. Warranty of solvency of debtorarranty of solvency of debtorarranty of solvency of debtorarranty of solvency of debtorarranty of solvency of debtor.-Where the transferor of a debt warrants thesolvency of the debtor, the warranty, in the absence of a contract to the contrary, appliesonly to his solvency at the time of the transfer, and is limited, where the transfer is madefor consideration, to the amount or value of such consideration.

Warranty of Solvency of Debtor:-

The assignor is not bound to give any warranty as to the solvency of the debtor, butif the assignor gives such warranty to the assignee, it means that the debtor is solvent atthe date of the transfer. Further, the liability to the transferor as regards the solvency ofthe debtor is only limited to the amount of the consideration by him.

SSSSS.134. Mortgaged debt.-.134. Mortgaged debt.-.134. Mortgaged debt.-.134. Mortgaged debt.-.134. Mortgaged debt.-Where a debt is transferred for the purpose of securing anexisting or future debt, the debt so transferred, if received by the transferor or recoveredby the transferee, is applicable, first, in payment of the costs of such recovery; secondly,


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in or towards satisfaction of the amount for the time being secured by the transfer; andthe residue, if any, belongs to the transferor or other person entitled to receive thesame.

Mortgage Debt:-

A transfer of an actionable claim can be made not only by way of sale but also byway of mortgage. Where a debt is transferred for the purpose of securing an existing orfuture debt, the debt so transferred, if received by the transferor, or recovered by thetransferee, should first be applied in payment of the costs of such realisation, secondly,towards satisfaction of the amount secured by the transfer and the remainder, if any, tobelong to the transferor.

SSSSS.135. Assignment of rights under policy of insurance against fire.-.135. Assignment of rights under policy of insurance against fire.-.135. Assignment of rights under policy of insurance against fire.-.135. Assignment of rights under policy of insurance against fire.-.135. Assignment of rights under policy of insurance against fire.-Every assignee,by endorsement or other writing, of a policy of insurance against fire, in whom theproperty in the subject insured shall be absolutely vested at the date of the assignment,shall have transferred and vested in him all rights of suit as if the contract contained inthe policy had been made with himself.

The general rules for assignment of actionable claims are inapplicable to theassignment of rights under the insurance policies of fire or marine. This is due to thefact that such rights cannot be assigned without transfer of the property insured. Meretransfer of such policy cannot entitle the assignee to get ownership of the propertyinsured. The assignment of rights would be meaningless if the assignment is madeapart form the property insured. Accordingly, section 135 enacts that every assignee,of a policy of insurance against fire, in whom the property insured shall be absolutelyvested at the date of assignment, shall have transferred and vested in him all rights ofsuit as if the contract contained in the policy had been made with himself. The assignmentmay have been made either by endorsement or other writing. It is significant to notethat these provisions are applicable only to a policy of insurance against fire. Theseprovisions do not apply to assignment of rights under policy of marine insurance.

SSSSS.136. Incapacity of officers connected with Courts of Justice..136. Incapacity of officers connected with Courts of Justice..136. Incapacity of officers connected with Courts of Justice..136. Incapacity of officers connected with Courts of Justice..136. Incapacity of officers connected with Courts of Justice.-No Judge, legalpractitioner or officer connected with any Court of Justice shall buy or traffic in, orstipulate for, or agree to receive any share of, or interest in, any actionable claim, andno Court of Justice shall enforce, at his instance, or at the instance of any personclaiming by or through him, any actionable claim so dealt with by him as aforesaid.


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Who cannot be Assignees of Actionable Claims:-

Section 136 enacts that certain persons, specified therein, cannot be assignees ofactionable claims. It may be noted that transfer of actionable claims is a transfer ofproperty. As such, transferor and transferee both must be competent persons and theproperty must also be transferable within the meaning of section 6 of this Act.

Section 136 specifies the person who is legally disqualified to be transferee for thetransfer of actionable claims. According to this section no judge, legal practitioner orofficer connected with any court of justice shall buy or traffic in or, stipulate for or agreeto receive any share or interest in any actionable claim. It further provides that noCourt of Justice shall enforce at his instance or at the instance of any person claimingby or through him, any actionable claim, so dealt with by him.

SSSSS.137. Saving of negotiable instruments, etc..137. Saving of negotiable instruments, etc..137. Saving of negotiable instruments, etc..137. Saving of negotiable instruments, etc..137. Saving of negotiable instruments, etc.-Nothing in the foregoing sections ofthis Chapter applies to stocks, shares or debentures, or to instruments which are for thetime being, by law or custom, negotiable, or to any mercantile document of title togoods.

Explanation.Explanation.Explanation.Explanation.Explanation.—The expression “mercantile document of title to goods” includes abill of lading, dock-warrant, ware housekeepers certificate, railway receipt, warrant ororder for the delivery of goods, and any other document used in the ordinary course ofbusiness as proof of the possession or control of goods, or authorizing or purporting toauthorize, either by endorsement or by delivery, the possessor of the document to transferor receive goods thereby represented.

Under section 137 documents which are in the nature of negotiable instrumentsare exempted from the operation of the provisions of this Chapter. Negotiable instrumentsare regulated by the Negotiable Instruments Act.


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Dr. Vijender KumarAssociate Professor of Law


PART - III

HINDU LAW

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Following TEN Chapters viz. Hindu Joint Family; Coparcenary; Debt; HinduUndivided Family; Alienation; Partition; Notional Partition; Succession; Gift and Willare on Hindu Law which comes within the preview of Business Laws-I. As a compulsorycourse, the IRS probationers are required to pass this course. The Hindu Law modulecontains 24 marks as a part [Part C] of the Business Laws-I module. This module needsabout 20 hours teaching. Though necessary information are given in the followingchapters but there is further scope to enhance your knowledge on the subject for whichyou are required to read other sources too.

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CHAPTER - I

HINDU JOINT FAMILY

Introduction:

In tracing society backwards to its cradle it would appear that one ofearliest units is the patriarchal family, which may be defined as “a groupof natural or adoptive descendants, held together by subjection to theeldest living ascendant, father, grand-father, and great-grandfather”1. AHindu Joint Family consists of a common ancestor and all his linealmale descendants up to any generations together with the wife or wives(or widows) and unmarried daughters of the common ancestor and ofthe lineal male descendants.2

It has to be clearly understood that the existence of the commonancestor is necessary for bringing a joint family into existence; for itscontinuance common ancestor is not a necessity. The death of thecommon ancestor does not mean that the joint family will come to anend. Upper links are removed and lower ones are added and in thismanner, so long as the line does not become extinct, the joint familycontinues and can continue indefinitely, almost till perpetuity.

The Hindu Joint Family carries with itself various other importantconcepts of the Hindu Jurisprudence. The Hindu Law confers status andrights to the members of the Hindu Joint family. The concept ofcoparcenary, joint family property etc. revolves around the concept ofthe Hindu joint family. Existence of a Hindu Joint Family is quite importantfor the execution and development of these rights in the family.

1 Alladi Kuppuswami (ed.), “Mayne’s Hindu Law and Usage”, 14th ed. 1996, p. 597.2 Paras Diwan and Peeyushi Diwan, “Modern Hindu Law”, 15 ed. 2003, p. 259.

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Difference between Hindu Undivided Family and Hindu Joint Family:

Though the Supreme Court has observed that the expressions ‘Hindu UndividedFamily’ and ‘Hindu Joint Family’ are synonymous, there are some basic differencesbetween the two:3

(1) The basic presumption under Hindu Law is that every Hindu family is presumed tobe joint Hindu family until contrary is proved. There is no such assumption underthe taxation laws for a Hindu family. On the other hand, this is the main point ofcontention;

(2) Under Hindu law though there is presumption that every Hindu family is a jointfamily, though there is no such presumption that it owns joint family property. Theconcept of a Hindu Undivided Family without owing any property is meaninglessas far as its assessment is concerned;

(3) Under Hindu Law, a son in the womb of his mother in many aspects is treated asequal to a son in existence. He can also restrict the rights of a sole survivingcoparcener to alienate the property, yet for the purpose of revenue laws, such ason is not taken into cognizance till he is actually born alive; and

(4) The very purpose for which the expression Hindu family or HUF is understood bythese two legal branches, viz. the revenue authorities and Hindu Law, are different.The importance of the difference lies in the fact that for the purpose of super taxa person is allowed a larger exemption if he is taxed as the manager of a jointHindu family than, if he is taxed as an individual.4 If the money is spent for themaintenance of joint family member that can be shown as an expense for thejoint family. Thus, this remains the focal point of inquiry whenever there is anexamination of the character of the family for revenue purposes. Under the HinduLaw there cannot be a joint family consisting only of a mother and a daughterand the mother will not be a Karta of this Hindu family; yet for the purpose ofincome tax she can be assessed as the head/manager of the Hindu Undividedfamily.5

3 Poonam Pradhan Saxena, “Family Law Lectures: Family Law II”, 1st ed. 2004, p. 92.4 CIT, Bombay v. Gomedalli Lakshmi Narayan, AIR 1935 Bom 412.5 Sushila Devi v. Income Tax Officer, AIR 1959 Cal 697.

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Mitakshara and Dayabhaga Schools of Hindu Law:

There are two systems of inheritance amongst the Hindus in India, namely, Mitaksharasystem put forth by Vijnaneswara and Dayabhaga system of Jimutavahana. DayabhagaSchool prevails in Bengal and Mitakshara in other parts of India. One of the maindifferences between these two principal schools of Hindu Law relates to the law oninheritance. The right to inherit under Mitakshara is governed sometimes by consanguinityor by religious efficacy; the guiding principle is not defined properly, whereas underDayabhaga School it arises out of spiritual or religious efficacy, that is, the capacity forconferring spiritual benefit on the manes of paternal and maternal ancestors.

Another distinguishing feature relates to certain incidents of the joint family.Mitakshara recognises both survivorship and succession whereas Dayabhaga onlyrecognises succession. The two schools differ radically on the question of partition.

Presumption of Jointness:

The joint and undivided family is the normal condition of the Hindu society. Anundivided Hindu family is ordinarily joint not only in estate but in food and worship.6

May be in one generation, it is broken it is brought to an end by partition, but again inthe next generation it comes into existence automatically, and there is no way in whichone can escape from it. It is in this sense that we say that in Hindu Law there is apresumption that every family is a joint Hindu family.7

The presumption is that the members of a Hindu family are living in a state ofjointness, unless contrary is proved. The presumption is stronger among the nearerrelations, the remoter we go, the weaker is the presumption.8 Merely because memberslived and worked at different places but owned a joint family house in common itcannot be said that they did not form a joint Hindu Family.9 If it is shown that partitionhas taken place earlier, presumption stands rebutted.10 But the burden of proof thatpartition has taken place is on the person who asserts partition.11

6 Ranganath Mishra (rev.), “Mayne’s Treatise on Hindu Law & Usage”, 15 ed. 2003,p. 663,

7 Supra n. 1 at p. 259.8 Indranarayan v. Roopnarayan, AIR 1971 SC 1962.9 Kethaperumal v. Rajendra, AIR 1959 Mad 409.10 Shankar v. Vittairao, AIR 1989 SC 879.11 Jaai Kishore v. Govind Singh, AIR 1920 Pat. 128.

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No Presumption that Joint Family Holds Joint Property:

There is no presumption that a family, because it is Joint, possesses joint property.12

Under the Mitakshara Law, existence of joint property is not condition precedent to theexistence of joint family, though it will be a rare case where a joint family possesses noproperty. It will have at least household utensils and articles which its members use incommon.

Once the existence of the joint family is not in dispute, necessarily the property heldby the family is assumed the character of the coparcenary property and every memberof the family would be entitled by birth to a share in the coparcenary property unless thecontrary is proved.13

It’s Members:

They could be unlimited, and there is no limit to the remoteness of their descentfrom the common ancestor, and also to the distance of their relationship from its members.It is not a corporation and thus, has no legal entity distinct and separate from itsmembers. When we speak of a Hindu Joint Family we include only those persons who,by virtue of relationship, have the right to enjoy and hold the joint property, to restrainthe acts of each other in respect of it, to burden it with their debts, and at their pleasureto enforce its partition.14

Coparcenary:

Coparcenary is a narrow body of persons with in a Hindu Joint Family, and consistsof father, son, son’s son and son’s son’s son15. Like Hindj Joint Family, to begin with, itconsists of father and his three male lineal descendants, in its continuance the existenceof the father – son relationship is not necessary.

Thus, a coparcenary can consist of grand-father and grand-son, of brothers, ofuncle and nephew and so on. The rule is that so long as one is not removed by morethat four degrees from the last holder of the property, howsoever remove one may befrom the original holder, one will be a coparcener. But the son of one of the great-

12 Deepa v. Massa Singh, 1984 SC 1171.13 Sher Singh v. Gamdoor Singh, 1997 (2) HLR 81 (SC).14 Narendranath (N V) v. Commr. of Wealth Tax, AIR 1970 SC 14.15 Paras Diwan and Peeyushi Diwan, “Modern Hindu Law”, 15 ed. 2003, p. 262.

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grandsons would not offer the cake to him, and is out of the coparcenary, so long asthe common ancestor is alive.

Now let us take an example:

It is necessary first to understand the meaning of the term last holder. Last holdermeans the senior most living lineal male ancestor. Now, the following diagram representsthe eight generations.

ABCD

EFGH

In the above illustration A is the last holder. It is evident that the coparcenary consistsof ABCD. If A dies than BCDE and if B then CDEF and if C also dies then DEFGconstitutes the coparcenary. Now if D also dies then EFGH constitutes the coparcenary.

Now presume that B dies before A then the coparcenary will consist of ACD as A isthe last holder and E continues to be removed from the last holder, by fives degrees.Now also if C dies than also E will not become a coparcener. Now what happen if Ddies before A?

If D dies before A than, it will be the disaster to E, F and G as A will continue to bethe last holder and EFG will continue to be removed by more than four degrees. At thisstage A alone remains the coparcener and coparcenary comes to an end: EFGH willnever become coparceners of this coparcenary.

A Coparcener is purely a creature of law; it cannot created by act of parties, savein so far that by adoption a stranger may be introduced as a member thereof.16

16 S A Desai, “Mulla Principles of Hindu Law”, 19 ed. 2005, Vol. I, p. 270; Bhagwan Dayal v. ReotiDevi, AIR 1962 SC 287.

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Incidents of Coparcenership:

A coparcener has an interest by birth in the joint family property, though until partitiontakes place, this is an unpredictable and fluctuating interest which may be enlarged bydeath and diminished by births in the family; every coparcener has the right to be injoint possession and enjoyment of joint family property-both these are expressed bysaying that there is a community of interest and the unity of possession.17

In the light of the Supreme Court decision18 the incidents of the coparcenaryare:

1. Is the property in which the male issue of the coparceners acquires an interest bybirth?

2. Devolves by survivorship, not by succession.

Unpredictable and Fluctuating Interest:

The most remarkable feature of interest by birth is that the interest which a coparceneracquires by birth is not a specified or a fixed interest. The interest fluctuated with thebirths and the deaths in the family. Deaths may enlarge the beneficial interest of thesurvivors just as births may diminish their interests by increasing the number of claimants’.Each coparcener has the right to claim a partition. But until he elects to do so, the jointfamily property continues to devolve up on the members of the family for the time beingby survivorship and, not by succession.19

Community of Interest and Unity of Possession:

The nature of ownership of the Mitakshara coparceners in the joint family propertyis communal ownership. The moment a person is born is the family, he acquires aninterest in the sense that he has a right of common use of all properties and the right ofcommon enjoyment, because of virtue of being born a son, and he becomes themember of the community.

Another aspect of the joint family is that there is unity of possession. This means thatall the coparceners have a right of common enjoyment or common use of property. If

17 Venugopala v. Union of India, 1969 SC 1094.18 State Bank of India v. Gbamandi Ram, AIR 1969 SC 1330.19 Mst. Kashmira v. Dy. Director, 1975 All 458 - 460.

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one of the coparcener is in possession of the joint family property, through him othercoparceners are also deemed to be in possession of property unless the contrary isproved. Thus, he has the right of joint possession and not of the exclusive possession.

Right of Maintenance:

Every coparcener and every other member of the joint family has the right ofmaintenance out of the joint family property. The right of maintenance subsists throughthe life of the member so long as the family remains Joint. Female members and othermale members who do not get a share on partition, either because they have no right,such as unmarried daughter, or they are disqualified from getting a share, such as idiotor lunatic coparcener, are entitled to maintenance even after partition.

CLASSIFICATION OF PROPERTY

Unobstructed and Obstructed Heritage:

The Mitakshara School classifies the property mainly under two heads: firstApratibandha Daya or unobstructed heritage and Sapratibandha Daya or obstructedheritage. All properties inherited by the Hindu male from a direct male ancestor, notexceeding three degrees higher to him are called Apratibandha Daya. In this propertyhis son, son’s son, son’s son’s son acquire an interest by birth. Therefore, it is called asunobstructed heritage. On the other hand, when a person inherits property from anyother relation, such as maternal or paternal uncle or brother, nephew, etc., then it isknown as Sapratibandha Daya and his son, son’s son and son’s son’s son, or for thatmatter, any other person does not acquire an interest by birth.

Joint Family Property and Self-Acquired Property:

Secondly the property is classified into:

(a) Joint Family property or Coparcenary property; and

(b) Separate property or self-acquired property.

Joint Family Property:

In joint family property, the property flows from different sources and from which allmembers of the joint family draw out to fulfill their multifarious needs. Its sources are:

1.1.1.1.1. Ancestral property: Ancestral property: Ancestral property: Ancestral property: Ancestral property: Any property inherited from any ancestor or ancestress maybe called ancestral property. Inherited property may be classified under the followingInherited property may be classified under the followingInherited property may be classified under the followingInherited property may be classified under the followingInherited property may be classified under the followingheads:heads:heads:heads:heads:

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(a) PPPPProperty inherited from paternal ancestorroperty inherited from paternal ancestorroperty inherited from paternal ancestorroperty inherited from paternal ancestorroperty inherited from paternal ancestor: The essential feature of ancestralproperty according to the Mitakshara Law is that the sons, grandsons, andgreat-grand sons of the person who inherits it, acquire an interest, and rightsattached to such property at the moment of their birth. The natural or adoptedson of that son will take interest in it and be entitled to it by survivorship, asjoint family property.20

(b) PPPPProperty inherited from maternal grandfatherroperty inherited from maternal grandfatherroperty inherited from maternal grandfatherroperty inherited from maternal grandfatherroperty inherited from maternal grandfather: In an earlier decision, thePrivy Council held21 that such property would be joint property but in latterdecision their lordship held22, a maternal uncle is not an ancestor, and it hasaccordingly been held that property inherited from a maternal uncle is notancestral property23.

(c) PPPPProperty inherited from collateralsroperty inherited from collateralsroperty inherited from collateralsroperty inherited from collateralsroperty inherited from collaterals: Property inherited by a person from anyother relation is his separate property, and his male issues do not take anyinterest in it by birth. Thus, property inherited by a person from collaterals,such as brother, uncle, etc, or property inherited by him from a female, e.g.,his mother, is his separate property.24

(d) Share allotted on partitionShare allotted on partitionShare allotted on partitionShare allotted on partitionShare allotted on partition: The share, which a coparcener obtains on partitionof ancestral property, is ancestral property as regards his male issue. Theytake an interest in it by birth, whether they are in existence at the time of thepartition or are born subsequently25.

(e) Character of property after severance of statusCharacter of property after severance of statusCharacter of property after severance of statusCharacter of property after severance of statusCharacter of property after severance of status: Whenever a coparcenerexpresses his intention to partition, severance of status takes place. In aSupreme Court in Bhagwati P. Sulakhe v. . . . . Digamber Gopal Sulakhe Justice A.N. Sen observed: the character of any Joint Family property does not changewith severance of status of the joint family and a joint family property continuesto retain its joint family character so long as the joint family property is inexistence and is not partitioned among the co-shares.

20 Valliammai v. Nagappa Chattier, AIR 1967 SC 1153.21 Janarethhe v. Pralhad, AIR 1978 Bom 229.22 Muhammad Husain Kahan v. Babu Kishya, (1997) All 655.23 Karrupai v. Sankarnarayanan, (1904) 27 Mad 300.24 Dharam Singh v. Sadhu Singh, AIR 1997 P & H 198.25 Adurmoni v. Chaudhary, (1878) 3 Cal 18.

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(f) PPPPProperty received in giftroperty received in giftroperty received in giftroperty received in giftroperty received in gift: Under this head, the gift of the following propertiesmay be considered: (1) gift of his self-acquired property by the father to sonAND (2) Gift of joint family property by father-Karta or by Karta.

(g) Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: This question was considered by theSupreme Court in Arunachala Mundaliar v. . . . . Muruganatha26. The SupremeCourt held that it is open to the father to indicate whether the propertyshould be held by the son as coparcenary property or as self-acquired property.A gift of property made by a father to his son on the occasion of the son’smarriage is not the ancestral property in the hands of the son, and it is hisseparate property.27

Separate or Self-Acquired Property:

A member of the Hindu Joint Family or a coparcener can, under Hindu Law, makea separate acquisition of the property.

(i) PPPPProperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors - In the case of Md. Hussain v.Kishwanandan, it was held that the property inherited from maternal ancestors isnot a coparcener property. It is only the self acquired property of the acquirer.

(ii) PPPPProperty received by gift from maternal ancestorroperty received by gift from maternal ancestorroperty received by gift from maternal ancestorroperty received by gift from maternal ancestorroperty received by gift from maternal ancestor- There was considerabledivergence of judicial opinions as to the nature of property acquired by a personunder the will of the father or by way of gift from his father (or paternal ancestor).The question has been dealt by the Supreme Court in Arunachal Mudaliar v.....Muruganatha Mudaliar28; it was held that it is open to the father to indicatewhether the property should be held by the son as coparcenary property or asself-acquired property.

(iii) Gains of learnings Gains of learnings Gains of learnings Gains of learnings Gains of learnings - According to Mitakshara, property acquired by means oflearning would be self-acquired property provided that learning was obtainedwith out detriment to the ancestral property.

KARTA

In the Hindu Joint Family, the Karta or the manager occupies a very importantposition. He is a person with limited powers, but, with in the ambit of his sphere, hepossesses such vast powers as are possessed by none else.

26 AIR 1953 SC 495.27 Adhar Chandra v. Nobin Chandra, (1907) 12 CWN 103.28 AIR 1953 SC 495.

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Who can be a Karta?

(i) Senior most male member - Senior most male member - Senior most male member - Senior most male member - Senior most male member - It is a presumption of the Hindu Law that ordinarilythe senior most male member is the “Karta” of the joint family.29 So long as thefather is alive, he is the Karta. After his death it passes to the senior most malemember, who may be the uncle, if coparcener consists of uncles and nephews.

(ii) Junior male member - Junior male member - Junior male member - Junior male member - Junior male member - In the presence of the senior male member, a juniormember cannot be the Karta. But if all the coparceners agree, a junior malemember can be a Karta30.

(iii) More than one KMore than one KMore than one KMore than one KMore than one Karta - arta - arta - arta - arta - With the consent of the other members there can be morethan one managing member31. There cannot be two Kartas but more than oneperson can look after the affairs of the family.

(iv) FFFFFemale members as Kemale members as Kemale members as Kemale members as Kemale members as Karta - arta - arta - arta - arta - The Supreme Court in Commissioner of Income Taxv. Seth Govind Ram32, after reviewing the authorities, took the view that the motheror any other female could not be the Karta of the joint family and thereforecannot alienate joint family property33. This is in accordance with the texts of theHindu Law. According to the Hindu Sages, only a coparcener can be a Karta;since females cannot be the coparceners, they cannot be the Karta of the jointfamily.

Position of Karta:

The position of the Karta or manager is sui generic; the relation between him andthe other members of his family is not that of principal and agent or of partners. It ismore like that of a trustee and cestui que trust. But in the absence of proof of directmisappropriation, or fraudulent and improper conversions of the moneys to the personaluse of the manager, he is liable to account only to what he has received and not towhat he ought to or might have received if the money had been profitably dealt with.

29 Shreeama v. Krihnavnanamanama, AIR 1957 AP 434.30 Narendrakumar v. Commissioner of Income Tax, AIR 1976 SC 1953.31 Union of India v. Sree Ram, AIR 1965 SC 1531.32 AIR 1966 SC 2.33 Kanji v. Parmanand, AIR 1991 MP 208.

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Karta’s Liabilities:

Karta’s liability is numerous and multifarious. The Karta of the joint family isresponsible to maintain all members of the family, coparceners and others. He is alsoresponsible for the marriage of all unmarried members. This responsibility is particularlyemphasized in respect of daughters. He is entitled to act on behalf of the family with theconsent of the other members and even in spite of their dissent. He has to pay the taxesand other dues on behalf of the family and he can be sued for all this dealings onbehalf of the family with outsiders.

Powers of Karta:

When we enumerate the powers of Karta, the real importance of his legal positioncomes into clear relief. His powers are vast and limitations are few.

(i) PPPPPowers of management - owers of management - owers of management - owers of management - owers of management - As the head of the family, Karta’s powers of managementare almost absolute. He may manage the family affairs and family property andbusiness the way he likes. The Karta has no obligation to save or economies, noobligation to invest funds, or to invest them properly as would be the case with anagent or trustee.34

(ii) Right to incomeRight to incomeRight to incomeRight to incomeRight to income - It is the natural consequence of the joint family system that thewhole of the income of the joint family property, whosoever may collect them, acoparcener, agent or a servant, must be handed over to the Karta.

(iv) Right to representation - Right to representation - Right to representation - Right to representation - Right to representation - The Karta of the joint family represents the family in allmatters, legal, social and religious. The Karta can enter into any transaction onbehalf of the family, and it will be ordinarily binding on the joint family.35 He alsorepresents the family in suits and other legal proceedings.36

(v) PPPPPower of compromise - ower of compromise - ower of compromise - ower of compromise - ower of compromise - The Karta has power to compromise all the disputesrelating to the family property or their management. He can also compromisefamily debts and other transactions. However, if his act of compromise is notbona fide, it can be challenged in the partition.

34 Bhowani v. Jagannath, (1909) 13 CWN 309, 313; Alladi Kuppuswami (ed.), “Mayne’s Hindu Lawand Usage”, 14th ed. 1996, p. 721.

35 Radhakrishnadas v. Kuluram, AIR 1967 SC 574.36 Baskari v. Bhashram, (1908) 31 Mad 318.

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37 Batal v. Chabilal, AIR 1974 Pat. 147.

Dayabhaga Joint Hindu Family:

The joint family is one of the areas where Mitakshara and Dayabhaga differ fromeach other fundamentally.

(i) Sons have no right by birthSons have no right by birthSons have no right by birthSons have no right by birthSons have no right by birth - Strictly speaking under the Dayabhaga School thereis no joint family between the father and son. Sons have no right by birth. Similarly,the sons have no right of survivorship. Under the Dayabhaga School all properties,self acquired as well as coparcenary, devolve by succession.

(ii) CoparcenaryCoparcenaryCoparcenaryCoparcenaryCoparcenary - - - - - Under Dayabhaga School, apparently a joint Hindu family maycome into existence the same way as under the Mitakshara School. But the fact ofthe matter is that the there is no joint family under Dayabhaga School in the sensein which it exists under Mitakshara School. Similarly there is no coparcenaryconsisting of father, son, son’s son and son’s son’ son. A Dayabhaga coparcenarycomes into existence for the first time on the death of the father: when sons inherittheir father’s property, they constitute a coparcenary. On the death of the fatherthe succession is per stripes, i.e., branch of each of his son takes an equal share.This means that the share on succession belongs to each branch. When an heirtakes property by succession, his male or female descendants have no right in itand the heirs take it absolutely. But if the son is dead leaving behind a son, thenthat son (or sons), by representation take the same share which their father wouldhave taken and if a son dies leaving behind the widow or daughter, then she willsucceed and become a coparcener. Thus, under Dayabhaga School a femalecan also be a coparcener.

(iii) Each coparcener takes a defined shareEach coparcener takes a defined shareEach coparcener takes a defined shareEach coparcener takes a defined shareEach coparcener takes a defined share - Unlike Mitakshara coparcener, aDayabhaga coparcener takes a specified and fixed share on the death of hisancestor. It is not fluctuating and uncertain interest.

(iv) Unity of possessionUnity of possessionUnity of possessionUnity of possessionUnity of possession - Although in Dayabhaga coparcenary there is no communityof interest, yet there is unity of possession. Each coparcener is in possession of theentire property, even if he has no actual possession, as possession of one ispossession of all. No one can claim any exclusive possession of property unlessagreed upon by coparcener.37

(v) Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Under Dayabhaga School all propertiesdevolve by succession. Therefore, if a coparcener dies, his share does not devolve

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by survivorship to other coparceners but devolves by inheritance to his heirs. Thedoctrine of survivorship is not recognized under Dayabhaga School.

(vi) Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Under Dayabhaga School, theApratibandha Aaya or unobstructed property is not recognized. All property underDayabhaga School is the obstructed property. On the other hand, the division ofproperty into joint family property and self-acquired property is recognized.

(vii) KKKKKartaartaartaartaarta - The Karta’s power and the liabilities are same as that of Mitakshara Karta.The main difference between Mitakshara and Dayabhaga Karta’s power is thatthe latter must render the full accounts at all time whenever required to do so bycoparceners, while the former is required to render accounts only on partition.

Impact of the Hindu Succession (Amendment) Act, 2005:

The concept of the joint family is under question as female members (daughters) ofthe coparceners are conferred the status of a coparcener. A new concept of dual statusand membership has came into picture as the married female is conferred a status ofmember in her husband’s family as well a status of coparcener is given to her in thefamily of her birth.

1) It makes the daughters coparceners in a Hindu Joint Family governed by theMitakshara Law and gives them coparcenary rights.

2) She will be entitled to dispose of the property which she gets as a coparcener byher will or other testamentary disposition.

3) After the commencement of this Act the devolution of the interest of a member ofHindu Joint Family after his death will be done according to the testamentary orintestate succession and not by survivorship.

4) The share of the daughter will be protected during the notional partition and shewill be given equal share as given to the son.

5) The share of the predeceased son or daughter will be given to his or her son ordaughter. The share of the predeceased child of a predeceased son or daughterwill be given to the child of such predeceased child.

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CHAPTER - II

COPARCENARY

Introduction:

In the Smritis and commentaries, we come across the words‘kutumba38’ or ‘avibhakta-kutumba39’ which mean joint family. A jointfamily consists of all males lineally descended from a common maleancestor and includes their wives and unmarried daughters. A daughteron marriage ceases to be a member of her father’s family and becomesa member of her husband’s family.

A Hindu family is presumed to be joint until the contrary is proved.But when one of the coparceners separates himself from the othermembers of the joint family and has his share if the joint family partitionedoff from him, there is no presumption that the rest of the coparcenerscontinued to be joint.40

Under the Mitakshara, a Hindu coparcenary is a much narrowerconcept than the joint family. It comprises only those males who take bybirth an interest in the joint or coparcenary property, that is, a personhimself and his sons, son’s sons and son’s son’s son from the time beinga coparcenary.41 These persons can enforce a partition whenever theylike. The essence of a coparcenary under Mitakshara School of HinduLaw is community of interest and possession.

38 Nar, dattapradanika 6, Yaj. II. 175.39 Yaj. II. 45.40 Minor Balasubramania Reddi v. Narayana Reddiar, A.I.R 1965 Mad. 409.41 N.V. Narendranath v. Commissioner of Wealth Tax, Andhra Pradesh, A.I.R 1937 PC 36.

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A coparcenary is a pure creation of law. It cannot be created by the act of parties,except by way of adoption and in the case of a re-union, a sub-branch could be acorporate unit, holding and disposing off family properties, subject to the limitationslaid down by the law.42 In order to be able to claim a partition, it does not matter howremote from the common ancestor a person is, provided he is not more than fourdegrees removed from the last male owner who has himself taken an interest by birth43

The reason as to why coparcenership is so limited is to be found in the tenet of Hindureligion that only male descendents up to three degrees can offer spiritual ministrationto an ancestor. Only males can be coparceners.44

Coparcenary under Mitakshara School of Hindu Law:

Under Mitakshara School, coparcenary encompasses unity of ownership, that is,the whole body of coparceners is the owner and no individual member can say, whilethe family is undivided, that he has a definite share, as his interest is always fluctuating,being liable to be enlarged by deaths and diminished by births in the family. There isalso unity of possession and enjoyment, that is, all are entitled to possession andenjoyment of the family property and the possession of one is ordinarily possession onbehalf of all.

Further, while the family is joint and some coparceners have many children andothers have few or none or some are absent, they cannot complaint at the time ofpartition about some coparceners having exhausted the whole income and cannot askfor an account of the past income and expenditure45. Moreover the joint family propertydevolves by survivorship, that is, on the death of a coparcener his interest lapses andgoes to the other coparceners, subject to this that if the deceased has left a son,grandson, or a great-grandson, the latter represents and occupies the place of thedeceased coparcener when a partition takes place.

A female cannot be a coparcener (even if she be the wife or the mother). Anothercharacteristic is that each coparcener has a right to enforce a partition. The affairs of

42 P.N. Venkatasubramania Iyer v. P.S. Easwara Iyer, A.I.R 1966 Mad. 266; Sudarsanam Maistri v.Narasimhalu, (1902) ILR 25 Mad. 149; Bhagwan Dayal v. Reoti Devi, A.I.R 1962 SC 287.

43 Moro v. Ganesh, 10 Bom. H.C.R. p. 444, pp. 461-468 (In this case, Mr. Justice Nanabhai Haridasvery lucidly explains by several diagrams the limits of coparcenary and what persons are entitled todemand a partitions and from whom.

44 Sunil Kumar v. Ram Prakash, AIR 1988 SC 576.45 Kat. (888).

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the family are managed by the father and if he be very old or dead, by the seniorbrother or member or by any other member with the consent of the senior member46.He has special powers of disposition (by mortgage, sale or gifts) of family property(maintenance, education and marriages of members and other dependents) andparticularly for religious purposes (sraddhas and the like).47

The father has the same powers as the manager and certain other special powerswhich no other coparcener has. The father can separate his sons from himself and alsoamong themselves if he so declares, even if they do not desire to separate48, while anordinary coparcener can only separate himself from the family.

The father can make within reasonable limits gifts of ancestral movable propertywithout the consent of his sons for performing indispensable duty and for the purposeslaid down by the texts, such as gifts through affection (to wife, daughter, son or the like),the support of the family and relief from distress. The father can make a gift of evenimmoveable property within reasonable limits for pious purposes only (such as to familyidol or to an idol in a temple at the time of obsequies).49 The father can sell or mortgagethe joint family property to pay off an antecedent debt contracted by him for his ownpersonal benefit, provided it is not illegal or immoral.

On the other hand, no coparcener (except the manager or father) can dispose ofhis undivided interest by gift, sale, or mortgage according to the strict theory of theMitakshara except with the consent of the other coparceners. The right to object toalienations made without legal necessity is another characteristic of the Hindu JointFamily under the Mitakshara.

“Whether kinsmen are joint or separate they are alike as regards immovable property,since a single one among them has no power in any case to make a gift, sale ormortgage of it.50.”

46 Nar., Dayabhaga 5 and Sankha. The manager is called the Karta in modern times though the Smritisand digests works like kutumbin.(Yaj. II 45), grhin, grahapati, prabhu (Kat. 543) and not Karta.

47 S.A. Desai, (rev.), Mulla, “Hindu Law”, 19th ed., Vol. II, p. 49548 Yaj. II. 11449 Ramalinga v. Sivachidambara, AIR 1942 Mad. 440; Gangi Reddy v. Tammi Reddy, 54 I.A. 136,140;

Sri Thakurji v. Nanda, AIR 1943 All. 560 (for the validity of gifts of small immoveable property by theKarta for religious purposes.). But in Jinnappa v. Chimmava, AIR 1959 Bom. 459 a gift of a smallportion of joint family immoveable property by the father to his daughter on the ground that shelooked after him in his old age was set aside at the suit of his grandsons.

50 Br. (S.B.E. 33p. 384 verse 93).

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But in modern times the Courts in Bombay, Madras and the Central Provisions haveloosened their strict rule by holding that a coparcener may sell, mortgage or alienatefor value his undivided interest in a coparcenary property without the consent of theother coparceners51 and the Courts have allowed the undivided interest of a coparcenerin the joint family property to be attached at the instance of the creditor for the individualdebts of a coparcener. This is one of the serious departures from ancient and medievalHindu Law made by the Courts on the ground of equity. One more right of all themembers of the joint Hindu family is the right to be maintained from the income andproperty of the joint family. Such matters as the remedies of the purchaser or mortgageefrom an individual coparcener are here left out of consideration as appropriate only ina treatise on modern Hindu Law.

Rights of an adopted son:

An adopted son, if adopted by a coparcener in a joint family or by a sole survivingcoparcener, becomes under the Mitakshara Law a member of the coparcenary fromthe moment of his adoption and has the same rights to demand a partition as an‘ausura’ son has. Under the Dayabhaga even an ‘ausura’ son cannot claim a partitionduring his father’s lifetime. Therefore, under Dayabhaga School, even an adopted sonis in no better position52.

Rights of an illegitimate son:

An illegitimate son has in certain circumstances rights of partition in the property ofhis putative father. An illegitimate son may be a son of a concubine who is a ‘dasi’53 orthe son of a woman who is not a ‘dasi’.54

The following propositions have been deduced from various texts like the history ofDharmasastras, Srutis, Smritis, Mitakshara Law, Dayabhaga Law.

The illegitimate son of a ‘Sudra’ even under Mitakshara does not acquire by birthany interest in the estate held by the father and so cannot enforce a partition in hisfather’s lifetime, which may even be equal to an illegitimate son.

51 Vasudeva v. Venkatesh, 10. Bom, H.C.R. p. 139 which were approved by the Full Bench in Fakirappav. Chanapa, 10 Bom. H.C.R p. 162, and Vitla Butten v. Yamenamma, 8 Mad. H.C.R. 6.

52 If after a person adopts, he has an ‘ausura’ son, the adopted son’s share becomes reduced accordingto most commentators.

53 Who is in exclusive and continuous living.54 The first is called a ‘dasiputra’ (occurs in the story of Kavasa Ailusa and in the Aitareya and the

Sankhayana Brahmanas. And the second is hardly ever dealt with in the Dharmasastra texts.

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On the father’s death of an illegitimate son of a deceased ‘Sudra’ becomes acoparcener along with the legitimate sons takes only one-half of what he would havetaken if he were a legitimate son, that is if there be one legitimate and one illegitimateson, the former three-fourth.

If no partition takes place and the legitimate son or sons all die without partition,the illegitimate son would take the whole as the last survivor of the coparcenary.

The next situation is where there be no legitimate sons, grandsons, or great-grandsonsof the Sudra father, the illegitimate son takes the whole estate.

As the text of Yajnavalkya refers only to a son, an illegitimate daughter is not entitledto any inheritance.

If the Sudra father be joint with his collaterals such as brothers, uncles or nephews,the illegitimate son cannot demand a partition of the joint family property though he isentitled to maintenance as a member of the family provided the father left no separateestate.

An absent coparcener stood on the same footing as a minor. In modern times, hewould be subject to the Law of Limitations55

Coparcenary under Dayabhaga School of Hindu Law:

The concept of coparcenary under Dayabhaga system is totally different from thatof Mitakshara. Under the Dayabhaga, sons do not acquire any interest by birth inancestral property, but the son’s rights arise for the first time on the father’s death andthe sons take as heirs and not by survivorship56. There is hence, no coparcenary in thesense of the Mitakshara between a father and his sons, as regards ancestral property.

The father has an absolute power to dispose of all kinds of ancestral property,whether moveable or immoveable, by sale, mortgage, gift, or otherwise in the sameway as he can dispose of his separate property. The son has no right to demandpartition during his father’s lifetime. A coparcenary starts on the father’s death betweenhis sons or grandsons, that is, between brothers, uncles or nephews, or between cousins.If a coparcener dies without a male issue, there is no right of survivorship in the other

55 Articles 127 and 144 of the Indian Limitation Act of 1908.56 Dayabhaga, Chapter I, ss. 11-31, 38, 44, 50, Chapter II, s. 8.

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coparceners but the deceased member’s daughter or widow may succeed to his shareand thus even females may become members of a coparcenary under Dayabhaga.57

Each coparcener takes a defined share under the Dayabhaga (not an indefiniteone as under the Mitakshara). Any coparcener under the Dayabhaga can sell, mortgage,or dispose off by gift or will his share58.

Under Dayabhaga School, the father is the absolute owner of property. He canmanage his property the way he likes59 since sons, according to Dayabhaga School, donot acquire ancestral property, they cannot claim any partition or property from theirfather.

Every coparcener is entitled to a share on partition. For instance, if A and his sonsB and C, who are members of a joint family, come to a partition and take one third ofeach of the family property and six months later A’s wife gives birth to a son –D, then thepartition has to be reopened and D will get one-fourth of the family property that willremain after meeting all proper charges since the first partition and taking into accountall accretion during the interval. The same rule applies to a partition among brothers,when the widow of a predeceased brother gives birth to a posthumous son conceivedbefore the partition but born after it.

A Comparative Study of the Coparcenary: under the Mitakshara and theDayabhaga Schools of Hindu Law:

When we do a comparative study of the Mitakshara and the Dayabhaga Schoolswith regard to coparcenary, the main line of difference is embedded in the very meaningof coparcenary. Under Mitakshara Law, the foundation of a coparcenary is first laid onthe birth of a son. The birth of a son marks the beginning of a coparcenary. Thus, if aHindu family governed by Mitakshara Law has a son born to them, the father and sonimmediately become coparceners.60

According to Dayabhaga School, the foundation of a coparcenary is that which islaid on the death of the father. So long as the father is alive, there is no coparcenary in

57 P.V. Kane, “History of Dharmasastra”, 3rd ed., Vol. III, p. 657.58 Dayabhaga II 28-31.59 Dayabhaga, Chapter I, ss. 11-31, 38-44, 50. Chapter II, S. 8; Makhan Lall v. Sushama Rani AIR

1953 Cal 164, 57 CWN 81.60 B.M. Gandhi, “Hindu Law”, 2nd ed. 2003, p. 456.

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the strict sense of the word between him and his male issue. It is only on his death,leaving two or more male issues, that a coparcenary is first formed.

Right of Sons:

Mitakshara LMitakshara LMitakshara LMitakshara LMitakshara Lawawawawaw: According to Mitakshara Law, each son acquires at his birth anequal interest with his father in all ancestral property held by the father, and on thedeath of the father, the son takes the property, not as his heir, but by survivorship.

Dayabhaga LDayabhaga LDayabhaga LDayabhaga LDayabhaga Lawawawawaw: According to Dayabhaga, sons do not acquire any interest bybirth in the ancestral property held by the father. Their rights arise for the first time onthe death of the father. On the death of the father, they take the property of the father,as is left by him, whether separate or ancestral, as heirs and not survivorship.

Position of Women:

Under Mitakshara, no woman can be a coparcener along with male coparceners.However, this is not so under Dayabhaga School. Under Dayabhaga, coparcenaryconsists of both males and females.

The effect of Women’s Right to Property Act, 1937, was not to abolish or disrupt theDayabhaga family. However, the share of a coparcener in the coparcenary property (asin the case of his separate property) will be devolved on his widow and along with hismale issue, and if he did not leave any male issue, his property devolved on his widow,his daughter, and other heirs as before.61

Coparcenary Property under the Dayabhaga School of Hindu Law:

Under the Dayabhaga School, coparcenary consists of ancestral property or ofjoint acquisitions, or of property thrown into the common stock, and accretions to suchproperty62. The essence of a coparcenary under Dayabhaga Law is unity of possession.It is not unity of ownership. The ownership of coparcenary property is not in the wholebody of coparceners. Every coparcenary takes a definite share in the property, and heis the owner of that share. That share is defined immediately when inheritance falls in.It does not fluctuate with the birth and death in the family. So long as there is unity of

61 A.G.Gupte, “Hindu Law”, 2nd ed. 2003, p.456.62 Sreemutty Soorjemooney Dossee v. Denobundee (1856) 6 MLA 526; Partha Talukdar v. Nina Hardinge

AIR 1993 Cal 118. (self-acquired property thrown into the common stock by father is coparcenaryproperty).

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possession, no coparcener can say that a particular share in the property belongs tohim. That he can say only after partition.63

Partition, thus according to Dayabhaga Law, consists in splitting up of joint possessionand assigning specific portions for the property to the several coparceners. Since acoparcener under Dayabhaga Law share takes a defined share in the property, apurchaser of a Court sale of his share is entitled to be put into the physical possessionof his share64.

Since every coparcener takes a definite share in the coparcenary property, it followsthat a coparcener governed by that law, can alienate his share by sale or mortgage, ordispose it off by gift or will, in the same manner as he can dispose of his separateproperty.65 On his death intestate, his share will go to his heirs.

The right of a coparcener under Dayabhaga to dispose of his property by will, isrecognized in effect by Section 30 of the Hindu Succession Act, 1956.66

The power of a manager under Dayabhaga is the same as that of MitaksharaLaw.67 He cannot contract a debt for a joint family purpose, and a decree passesagainst him for such a debt as manager will bind the other members, though they arenot parties to the suit.68 He can also mortgage the family property for the purposes of afamily business.69

63 Mayne, “Hindu Law and Usage”, 14th ed., 1998, p. 657.64 Koonwar Bijoy v. Shama Soonduree, (1865) 2 WR (Mis) 30; Eshan Chunder v. Nund Coomar,

(1867) 8 WB 239.65 Kounla v. Ram Huree, (1827) 4 Beng Sel R 196 ; Anunchand v. Kisben, (1805) 1 Beng Sel R 115.66 It has been held that where the share of a coparcener governed by Dayabhaga law is sold in

execution of a decree passed against him, the purchaser is put into joint possession with the othercoparceners as seen in the case of Ranjanikant v. Ram Nath, (1884) 10 Cal 224. Similarly, it hasbeen held that a coparcener may lease out his share, and put in lease in possession as has beenseen in the case of Ram Debul v. Mitterjeet, (1872) 17 WR 322, and Macdonald v. Lalla Shih,(1873) 21 WR 17.

67 Balakrishma v. Muthaswami, (1909) 32 Mad. 271, 274, 3 IC 878.68 Dwarka Nath v.Bungshi, (1905) 9 CWN 879.69 Bemola v. Mohun, (1880) 5 Cal 792. In a suit on a mortgage by the two managing members of the

family for a debt due by the family, the other members will not be liable until the remedy on themortgage is exhausted. After the mortgaged properties are brought to sale, the other members areliable as seen in the case of Sukhadakanta Bhattachariya v. Jogineekanta Bhattachariya, (1933) 60Cal 1197, 149 IC 878, A.I.R 1934 Cal. 73.

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Since every coparcener under the Dayabhaga Law takes a defined share of thecoparcenary property, he is entitled to make use of the portion of the coparcenaryproperty in the occupation that he likes.70 He may lease out his share, and put out hislessee in possession.71 However, he must not do any act which is injurious to thecoparcenary property72, or which amounts to an infringement of the rights of the othercoparceners. Thus, he cannot enter into possession of a specific portion of jointagricultural land without the consent of the other coparceners, and claim to cultivate itfor his own benefit73. If he is in occupation of a specific portion of such land by consent,he may cultivate it in a proper course of cultivation, and appropriate the income for hissole use74

Like Mitakshara Law, Dayabhaga Law also allows every adult coparcener the rightto call for a partition of the coparcenary property75.

Under Dayabhaga Law, there is no presumption that property purchased by a fatherin the name of his father’s lifetime and of which the son has been in possession since itspurchase, is joint family property. The burden of proof in such a case is on the personwho denies the ownership of the son76.

Thus, coparcenary property may consist of ancestral property, joint acquisitions,and property thrown into a common stock and accretions to such property. However, ifthe facts clearly establish that the property in dispute is the undivided property of jointowners, and if any of the incidents of coparcenary property as mentioned above areabsent, the property cannot be characterized as coparcenary property. However, itwould be the undivided property of co-owners or joint owners.

Coparcenary and the Hindu Succession Act, 1956:

The Hindu Succession Act, 1956, has brought about some radical changes in thelaw of succession without abolishing the joint family and the joint family property. Itdoes not interfere with the special rights of those who are members of a Mitakshara

70 Ehsan Chunder v. Nund Coomar, (1867) 8 WR 239.71 Ram Debul v. Mitterjeet, (1872) 17 WR 32272 Gopee Kishen v. Hem Chunder, (1870) 13 WR 322.73 Stalkarti v. Gopal, (1873) 20 WR 168.74 Robert Watson & Co. v. Ramchand, (1891) 10, 21, 17 IA 110, 120.75 Sreemutty Soorjeemooney Dossee v. Denobundoo, (1856) 6 MLA 526-539.76 Sarada v. Mahananda, (1904) 31 Cal. 448.

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coparcenary. It is however, essential to note that Section 6 of the enactment recognizesthe rights upon the death of the coparcener of certain of his preferential heirs to claiman interest in the property that would have been allotted to him if there had been apartition immediately before his death.

Section 6 of the Hindu Succession Act, 1956 states that “when a male Hindu diesafter the commencement of the Act, having at the time of his death, an interest in aMitakshara coparcenary property, his interest in the property shall devolve by survivorshipupon the surviving members of the coparcenary and not in accordance with this Act.

Provided that, if the deceased had left surviving a female relative specified inClass-I of the Schedule, or a male relative, specified in that class who claims, throughsuch female relative, the interest of the deceased in Mitakshara coparcenary propertyshall devolve by testamentary or intestate succession, as the case may be, under thisAct and not by survivorship.”

This Section means that the interest of a Hindu Mitakshara coparcener shall bedeemed to be the share in the property that would have been allotted to him if apartition of the property would have taken place immediately before his death, irrespectiveof whether he was entitled to claim partition or not.

Nothing contained in the proviso to this Section shall be construed as enabling aperson who has separated himself from the coparcenary before the death of the deceasedor any of his heirs to claim on intestacy a share in the interest referred to therein.

This provision of the Act deals with the question of coparcener in a Mitaksharacoparcenary dying (after the coming into operation of the Act) without making anytestamentary disposition of his undivided share in the joint family property.

Under the old law, a devise by the coparcener in Mitakshara family of his undividedinterest was wholly invalid.

Section 8 states, “the property of a male Hindu dying intestate shall devolve accordingto the provisions of this Chapter-

a) firstly, upon the heirs being the relatives specified in Class-I of the Schedule,

b) secondly, if there is no heir of Class-I then upon the heirs, being the relativesspecified in Class-II of the Schedule,

c) thirdly, if there is no heir of any of the two classes, then upon the agnates of thedeceased, and

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d) lastly, if there is no agnate then upon the cognates of the deceased.

This Section propounds a new and definite scheme of succession and lays downcertain rules of succession to the property of a male Hindu who dies intestate after thecommencement of the Act. The rules are pivotal and have to be read along with theSchedule.

Section 30 in Chapter-III of the Hindu Succession Act, 1956 deals with ‘testamentarysuccession’ for Hindus. Section 30 states, “Any Hindu may dispose of by will or othertestamentary disposition any property which is capable of being so disposed of by himor by her77 in accordance with the provisions of the Indian Succession Act 1925, or anyother law for the time-being in force and applicable to Hindus.78

The interest of a male Hindu in a Mitakshara coparcenary property to the interestof a member of a ‘tarwad’, ‘kutumba’ in the property, notwithstanding anything in thisAct or in any other law for the time being in force, be deemed to be property capableof being disposed of by him or by her within the meaning of this section.

It is interesting to note that the present day law has brought about some radicalchanges in the law of succession without abolishing the joint family and the joint familyproperty. It does not interfere with the special rights of those who are members of aMitakshara coparcenary. It is however essential to note that Section 6 of the enactmentrecognizes the rights upon the death of the coparcener of certain of his preferentialheirs to claim an interest in the property that would have been allotted to him if therehad been a partition immediately before his death.

77 inserted by the Hindu Succession (Amendment) Act, 2005.78 Part of this section was omitted by the Repealing and Amending Act 58 of 1960 and the sub-section

(2) was omitted by the Act 78 of 1956.

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CHAPTER - III

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Introduction:

The law of inheritance consists of those rules and regulations whichaffect the devolution of the property on the death of the person. In theHindu society the practice of joint family is prevalent. It is the fundamentalconception that a Hindu Joint Family consists of a common ancestor hismale lineal descendents up to any degree or generation his wife, theirwives or widows and his unmarried daughters or daughters of linealmale descendents. As long as there is no division of the family, it functionsas a corporate unit.79 The family traces its origin from the commonancestor and this taken from the ancient patriarchal system where fatheris the head or the Karta of the family. After the father the eldest malemember becomes the head or takes his position. Under the early HinduLaw, the rights of the son were recognized and they were given equalshare with the father in the ancestral property as coparceners.

A debt may be contracted by an individual for his own private purposeor for the welfare of the joint property. A Hindu may possess certainproperty which may be his own or may be an undivided property withcoparceners. The separate property of a Hindu whether it is separate ornot is liable for the payment of debts both in his lifetime and after hisdeath. The undivided property is not liable to pay off his debts after hisdeath. It is only liable if during his lifetime the property was divided or isattached to him otherwise he cannot pay his debts from the undividedproperty. There is an exception to this rule that if the father or the paternalgrandfather or paternal great grandfather dies leaving his private debts.These debts can be paid from the entire joint family property, including

79 S A Desai, (rev.), Mulla, “Principles of Hindu Law”, Vol. II, 20th ed. 2007, p.291.

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the son’s undivided interest; he is liable to the payment of debts after his death even ifsuch interest is not attached to his property, the debt can only be paid if it is not immoralin nature80. This is because a Hindu male is under a pious obligation to pay the privatedebts of his father, grandfather and great grandfather provided that they are not immoralin nature. It is not a personal liability this means that the son is not liable for privateproperty of his own to pay the debts of the ancestors. The liability is for the undividedinterest in the joint family property. It is the moral obligation to save the father from thepenalties which would arise from the non payment of debts. When the debt cerates nosuch religious obligation the son is not bound to repay the debt and there is no religiousobligation when the debt is immoral or illegal.

The law of debts illustrates the principal which constantly occurs in HinduJurisprudence is that the moral obligation of a person is more than the legal rights.According to the Dharmasastras the liability to pay debts arises out of three differentsources. It is a religious obligation of a son to pay the debts of his ancestors.81

The first ground for liability arises in case of a debtor and his sons and grandsons.According to the Hindu Law the repayment of debts is not merely a legal obligation butis also a moral obligation, if it is not paid it would continue to the next world82. The dutyof reliving the debtor from such evils the payment falls on his male descendants, to thesecond generation.

Liability of Son to pay Father’s Debt according to the Dharmasastras:

According to the Hindu Law as stated in the Dharmasastras there are three forms ofdebts which a person has to pay First, to release the religious duty of discharging thedebtor from the sin of his debts; Secondly, the moral duty of paying a debt contractedby one whose assets have passed into the possession of another and lastly, the legalduty of paying a debt contracted by one person as an agent, express or implied, toanother person who have an authority conferred by Hindu Law who act on behalf ofanother person. According to Manu when the son has paid the three debts can obtainthe final liberation83. And that person who seeks it without paying the debts sinksdownwards. He can obtain final liberation only if he has studied Vedas according to the

80 S A Desai, (rev.), Mulla, “Principles of Hindu Law”, Vol. I, 19th ed. 2005, p. 510.81 Ranganatha Mishra (rev.), Mayne’s, “Hindu Law and Usage”, 15th ed. 2003, rep. 2005, p.749.82 ibid.83 ibid.

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rule have begotten a son and have offered sacrifices according to his ability andaccording to the prescribed rules then only he can direct himself to the attainment ofliberation. Twice-born men who obtain liberation without performing the above statedessential conditions sink downwards. A son delivers his father from hell called as put;therefore he is called as puttra or the deliverer from hell. It is not essential that the son’sson will only save you from the put but a daughter’s son can also save you from the put.

The sources of Hindu Jurisprudence states that the desire for son was not only forthe spiritual purposes but also to liberate or secure guarantee for the discharge of hissecular liability. The most important liability is to pay off one’s debt. The non-paymentof debtor not only affects the next life of the debtor but makes his life miserable.

According to Narada, “the grandsons shall pay the debt of their grandfather, whichhave been legitimately inherited by the son has not been paid by them; the obligationceases with the fourth descendent.”84 The debt of a father should be paid first then thedebt contracted by the person himself, as it was observed by the Privy Council in thecase of Chockaligam v. Official Assignee of Madras85. In this case, after the death ofthe Hindu father, his property was devolved to his sons, two of whom were subsequentlydeclared as insolvents. A creditor of their father claimed in their insolvency proceedingsa priority of the payment of his debts in preference to the claims of the creditors of thesons. It was held that the claim must prevail in respect of the separate estate of thefather, but it was rejected with regard to the joint family assets. It was observed by theLordships in the decision that there can be no doubt that in many respects, the HinduLaw is administered by the doctrines of old Hindu Law.

According to the text given by Narada there is a description of the debts it talksabout which debt must be paid, which other debts must not be paid; by whom shouldit be paid and in what from they must be paid; and all the rules of gift and receiptcomprise the title to recover debts. If the father is dead, it is incumbent on the sons topay his debt and each according to his share of inheritance in the property if they aregiven their respective shares. If they are not divided in their respective interests the debtmust be discharged by that son who becomes the manager or the head of the family. Ifthe debt has been legitimately inherited by the sons, and left unpaid such debt of thegrandfather should be paid by the grandsons, it does not include liability for the fourthgeneration.

84 Ranganatha Mishra (rev.), Mayne, “Hindu Law and Usage”, 15th ed. 2003, rep. 2005, p. 749.85 ILR (1943) Mad. 603; Ranganatha Mishra (rev.), Mayne’s, “Hindu Law and Usage”, 15th ed. 2003,

rep. 2005, p. 750.

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As regards the liability of the ancestor Narada states:

“Three deceased ancestor must be worshipped, three must be reverenced beforethe rest. These three ancestors of a man can claim the discharge of their two fold debtfrom the fourth in descent.”86

According to Jolly who refers Ashaya’s commentary on Naradasmriti and gives hisopinion as the three deceased ancestors that is the father, the grandfather and thegreat grandfather may claim discharge of their liabilities from the person who is fourthin descent. A case was brought before the Court of Patna where there was merchant ofthe Brahman class his name was Sridhana. He had a wealth of about 10,000 drammaswhich was obtained through great labor; he lent his whole wealth to a trader namedDevadhara. He obtained this money with a condition that would pay an interest of 2%should be paid to Sridhana. The interest was duly paid to him at the end of the firstmonth. Devdhara died in the second month and his son died due to an attack ofcholera now his grand son was the person who was alive and his name was Mahidhara.He was addicted to bad habits so his estate was taken care by his cousins and hismaternal uncle’s. Smartadurdhara was a cunning Brahman who advised them not topay Sridhana a single penny as he said that he can prove by the law books that thedon’t have any rights to ask for money. At the end of the second month Sridhara askedMahidhara to pay 200 drammas, as the amount of interest paid to his grandfather butthey refused to pay. Sridhana was angry so he went to the court. Mahidhara and hisuncle have lost the case as Smartadurdhara was not able to prove his point87.

This case illustrates the obligation of a son is independent obligation based onreligious texts. The fact of acquisition of property does not affect the obligation as it isindependent of receipt of property. The liability to pay does not die with the debtor; theson has to pay the debt. If any person fails to pay the debt, it will grow and till 100krores.88 The person is born again in the house of the creditor and serves him as a slaveto give away the debt by serving him.

According to Brihaspati the debt which was contracted by the grand father shouldbe paid first then the debt contracted by the father if any and then the debt of the man

86 Narada, 1,2,4,5, SBE Vol. 33, pp. 43-44.87 Ibid.88 Vijender Kumar, “Basis and Nature of Pious Obligation of Son to pay Father’s Debt vis-à-vis Statutory

Modifications in Hindu Law”, JILI, Vol. 36:3, 1994, pp. 343-344.

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himself must be paid off. The debt paid for the grand father must be paid withoutinterest but the debt of a great grandfather need not pay the debt. According to theviews of Narada and Manu the debts of three ancestors are paid and they are worshippedand their liabilities should be discharged. According to Katyayana a debt which wascontracted by the grandfather and was not paid by the father should be discharged bythe grandson but he had to pay only the amount taken in debt not the interest. The debtcontracted by the father should be cleared at the time of partition.

In view of Mitakshara the son and the grandson are liable where they inherit anyproperty from their ancestors or not. The son is liable to pay the debts of the father in hislifetime if he is not able to pay off his debts due to illness or old age. The son’s duty topay the debt of the father and the grandfather is of religious nature and it is independentwhether they acquire the property or not from them. The texts of Hindu Law illustratevarious views which have been given by the Hindu sages some of them are discussed.

According to Brihaspasti “he who, having received a sum lent or the like does notrepay it to the owner will be born hereafter in his creditor’s house, a slave, a servant, awoman, or a quadruple”. Therefore we can understand it from here that it is a veryessential task to fulfill our ancestors debts so that they a relieved from been born againin any of this form in their creditors home.

Narada says “when a devotee, or a man who maintained a sacrificial fire, dieswithout having discharged his debt, the whole merit of his devotions, or of his perpetualfire belongs to his creditors”. Therefore, Narada is trying to explain that if a devotee ora man, who has maintained some type of sacrifices all his life, will all be cancelled if hedoes not fulfill his debt which he has taken. If the debtor wants to be relieved from allthese evils he should fill all his debts or his male descendents should perform this dutyto save them. The repayment of the debts of the ancestors is called as pious obligationof the son, son’s son or son’s son’s son.

Kinds of Debt:

The Debt ordinarily means liquidated or ascertained money as distinguished fromunliquidated damages for breach of contract or for a tort.89 If a decree has beenobtained against the father for damages for breach of contract or for a tort, the judgmentdebt constitutes a debt within the meaning of this section.

89 S A Desai (rev.), Mulla, “Principles of Hindu Law”, 19th ed. 2005, Vol. I, p 553.

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Avyavaharika Debt:

The debt which has been contracted for some civil purpose consists with theprescriptive usage of good men must be paid by sons and the rest; but if it be thereverse, it need not be discharged.”90 The term is commonly used to describe the debtsof father which were immoral or illegal in nature. It includes debts which are due tospirituous liquor, due to lust, debts which have been contracted due to gambling, thoseof unpaid fines, unpaid tolls. The debts which arise due to anything which has been idlypromised or promises which are made without consideration or any such thing which ispromised under the influence of any person.91 The debts which arise out of surety,commercial debts and debts which are not vyavaharika are all avyavaharika. The Paymentof damages awarded under a decree obtained against the father for defamation, assault,false imprisonment or for malicious prosecution92, instances where money borrowed topay for the criminal offence93, to pay the expenses for the marriage of the granddaughterof his permanently kept concubine,94 to fight the litigation against the son himself, todefeat the legitimate rights of the sons95.

Time Barred Debt:

According to the modern Hindu Law no person is liable to pay his or her timebarred debt. Therefore, the sons are not liable to pay the time barred debt of theirfather or grandfather. But a promissory note if executed by the father for alienationmade for discharge by the father will be binding on the son; it was laid down in the caseof Gujhdhar v. Jagannath.....96 Time barred debt does not come under the avayaharikadebts.

If the debt contracted by the father is tainted with immorality, the mortgagee is notentitled to proceed against the son’s interest at all. The mortgagee is entitled to adecree with limited interest in the mortgaged property and this is observed in parts of

90 Ranganath Mishra (rev.), Mayne, “Hindu Law and Usage”, 15th ed. 2003, rep. 2005,p 752.

91 Ibid. at 751.92 Kamalammal v. Senthil, AIR 2003 Mad. 337.93 Garuda Sanyasayya v. Nerella Murthenna, AIR 1919 Mad 943.94 Lakshmanasawami v. Raghavacharulu, AIR 1943 Mad. 292.95 M Veraghaviah v. M Chini Veeriah, AIR 1975 A P 350.96 AIR 1924 All 551 (FB); Paras Diwan, “Family Law”, 7th ed. 2005, p 413.

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Bombay and Madras. In Uttar Pradesh a mortgage of a father’s own undivided interestin the property without the consent of the son does not bind his interests97. The mortgageeis not entitled to a mortgage decree limited even to his interest.

Commercial Debts:

According to Gautama commercial debts are those debts which are incurred bythe usual course of carrying on a business or trade but mostly for those sums which areborrowed for the speculation of hazardous ventures. Partnership in trade was one of thespecific titles of law and Gautama refers trade as an additional occupation for theVaisya community. It is impossible therefore to believe that commercial debts in theordinary sense were regarded by Gautama as improper and no other Smriti refers to it.

When a father incurs a debt in connection with the buying and selling of shares,which results in a loss is not an immoral debt but a commercial one.98 If a moneydecree is passed against the father for such debt, then the son cannot resist theexecution.99

Antecedent Debt:

According to Lord Dunedin antecedent debt is “Antecedent in fact as well as intime”100. This debt is not a part of transaction. It was held in the case of Brij Narayan v.Mangala.101 There are two essential conditions required for the antecedent debts

(a) the debt must be prior in time; and

(b) the debt must be prior in fact.

The first condition means that keeping the time in mind the debt should precedethe alienation as both cannot be made simultaneously. Thus, we can take an example,suppose the debts are alienated on 04.07.07 and the properties are alienated on09.07.07., the debt is prior in time.102

97 Paras Diwan, “Family Law”, 7th ed. 2005, p 413.98 Gulalchand v. Vadilal, AIR 1950 Kutch 78; S A Desai (rev.), Mulla, “Principles of Hindu Law”, 20th

ed. 2007, Vol II, p. 297.99 Chotka Singh v. . . . . Hasan, (1930) 5 luck 184; S A Desai (rev.), Mulla, “Principles of Hindu Law”, 20th

ed. 2007, Vol. II, p.297.100 ibid at p. 415.101 AIR 1924 PC 59; Paras Diwan, “Family Law”, 7th ed. 2005, p 415.102 Paras Diwan, “Family Law”, 7th ed. 2005, p 415.

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According to the second condition debt and alienation are independent of andthey are separate transactions. In the case of Pathak v. Pathak103 it was observed by theGujarat High Court that if a father sells any properties to discharge a mortgage debtwhich is not avyavaharika, though not justified for legal necessity or benefit, the soncan get the sale set aside provided he meets the liabilities which arise accordingly.

In the case of Brij Narain v. Mangal Prasad104 there was one Sita Ram who on 4th

March 1908 granted a mortgage deed for Rs 11,000 in favour of Raja Narain Brij Raiand Jagdish Narain Rai. The mortgage was secured on ancestral property, of whichSita Ram was at that time manager, the other members of the joint family being his twosons who were minors. In 1912 the mortgagees brought a suit on the mortgage andobtained a decree ex parte. In 1913 the present suit was raised by the mother onbehalf of her two minor sons (the elder one till then had become major) to have itdeclared that the mortgage was not binding on them and that the decree granted was,so far as they were concerned as null and void. The mortgage in suit bears to havebeen executed in order to pay off two prior mortgages on the same property of date 12December 1905, and 19 June 1907, respectively105.

The Privy Council examined the long line of cases and laid down the followingpropositions of law on the basis of the existing authorities:

(i) The managing coparcener of a joint undivided estate cannot alienate or burdenthe estate quo manager except the purposes of necessity.

(ii) If he is the father and the reversionaries are the sons he may, be incurring debt, solong as it is not for an immoral purpose, lay the estate open to be taken inexecution proceeding upon a decree for payment of that debt106.

(iii) If he purports to burden the estate by mortgage, then unless that mortgage is todischarge an antecedent debt, it would not bind the estate.

(iv) Antecedent debt means antecedent in fact as well as in time, that is to say, thedebt must be truly independent and not part of the transaction impeached.

(v) There is no rule that this result is affected by the question whether the father, whocontracted the debt or burdens the estate, is alive or dead.107

103 AIR 1969 Guj 192; Paras Diwan, “Family Law”, 7th ed. 2005, p 415.104 AIR 1924 PC 59.105 AIR 1924 PC 59.106 ibid.107 ibid.

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Pious Obligation Doctrine and the Hindu Succession Act, 1956:

The Hindu Succession Act created far reaching affects on the nature and constitutionof the joint Hindu family. It limited the liability of the son to the extent of joint estate ofthe father and the son. After the commencement of the Act the creditor has no right tosue the son, grandson or great grandson of the debtor for the debts which were contractedby the father, grandfather or great grandfather. Where the son, son’s son, son’s son’sson are joint with their father, and he in his capacity as Karta contracts any debts for thewelfare of the family108. In this case sons as a member of the joint family are responsibleto pay off the debts contracted to the extent of their interest in the coparcenary property.If the debts are contracted by the father for his personal benefits then sons (it includesson, grandson and great grandson) are liable to pay the debts provided that they werenot incurred for immoral or illegal purposes. The liability to pay off debts arises out ofan obligation which is religious in nature which has been placed upon the son underthe Mitakshara Law to discharge the father’s debts which are not immoral in nature.This was held in the case of Hunnoman Persaud v. Musumat Babooee109.

In the case where the father was not the Karta or the manager of the joint family, orwhere the joint family consists of other coparceners alone with the father and sons, itdoes not affect the liability of the sons to pay off the debts.110 The doctrine of piousobligation extends to all the debts which are incurred in the life time except those debtswhich are immoral or illegal in character, this is not confined only to antecedent debtsof the father111.

Abolished Avyavaharika Debt:

According to the Section 6 of the Act the interest of the coparcener who diedintestate shall not devolve by survivorship but under the provisions of the law which islaid down. Therefore, the joint family is partitioned immediately before the death of thecoparcener. Suppose a father dies intestate and indebted and his interest which is to bedevolved by succession to the heir which is enumerated in Class-I of the schedule shallbe liable for the payment of the debt of the deceased and the liability of the heirs will be

108 S A Desai (rev.), Mulla, “Principles of Hindu Law”, 20th ed. 2007, Vol. I, p.507.109 (1856) 6 MIA 393; ibid.110 Chootey Lal v. Ganpat Rai, (1935) 57 All 176; S A Desai (rev.), Mulla, “Principles of Hindu Law”,

Vol. I, 20th ed. 2007, p. 508.111 S A Desai (rev.), Mulla, “Principles of Hindu Law”, Vol. I, 20th ed. 2007, p. 508.

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absolute including that of the son with respect to the share which he gets as an heir ofClass-I of the Schedule.112 Neither the son nor anyone else can ask for an exemptionfrom the liability to pay the debt of the deceased on the ground of that the debt wasimmoral, illegal or avyavaharika. Thus the pious obligation which has been based onreligious sanction is changed into legal obligation113.

The Madras High Court in its landmark judgment of Additional Commissioner ofIncome-Tax v. P. L. Karuppan Chettiar114, gave decision following the Dayabhaga doctrinewhere it was held that property inherited by son from his divided father even afterassuming that the ancestral property in the hands of the father would be his separateand individual property and not of his joint family consisting of his wife, sons ordaughters.115 This decision wiped out the concept of ancestral property in the MitaksharaSchool.

In the case of Shrivallabi v. Modani 116the Madhya Pradesh High Court whileinterpreting the principle laid in section 8 observed “it would be taken as a self containedprovision laying the method of devolution of property of a Hindu”.117 They also gavetheir decision that the court should confine itself to the language used in the newcodifying Act.

In another case of Commissioner of Income-Tax v. Mukung Girji118 the AndhraPradesh High Court observed that the properties which were devolved upon the son in1958, by inheritance, the property was deemed to be of the son not his joint familyproperty. And therefore they cannot sue or ask for partition of such property.

The Supreme Court in the case of Commissioner of Wealth-Tax v. Chandersen119

where there was partition of a joint family business between the father and the son only.After that they continued the business with the same name of the partnership firm. Theson formed a joint family with his own sons. The father died and amount standing to the

112 Ibid at p. 510.113 Ibid114 AIR 1979 Mad. 1.115 Ibid at p.35.116 (1983) 138 ITR 637 (M P).117 Ibid at p. 35.118 (1983) 144 ITR 18 (A P).119 AIR 1986 SC 1753

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credit of the deceased father in the amount of the firm developed on his son. Thewealth tax authorities while assessing the wealth tax in respect of the family of the son,i.e., the assessee, including the amount in computing wealth. Held, that the son inheritedthe property as an individual and not as a Karta of his own family. Therefore he cannotbe included in computing the assessee’s wealth.

The Supreme Court in it opinion stated that it is not possible when in the schedulewhich indicates heirs in Class-I and only includes son and does not include son’s sonbut includes the son of a predeceased son, when son inherits the property in the situationcontemplated by Section 8 he takes it as Karta of his own undivided family. It would bedifficult to hold the property which devolved on a Hindu under the Section 8 of theHindu Succession Act would be Hindu Undivided Family property vis-à-vis son andfemale heirs with respect to whom no such concept could be applied or contemplated.It may be mentioned that heirs in Class-I of the Schedule under Section 8 of the Actincluded widow, mother, and daughter of predeceased son.

The Hindu Succession (Amendment) Act, 2005:

The Hindu Succession Act 1956 was amended in the year 2005 and this amendmentmade the daughter a coparcener by birth. She has the same rights in the coparcenaryproperty as she would have had if she had been a son. There were many changesmade by the amendment in the Hindu Succession Act, 1956. The basic change wasmade in Section 6 which now makes the daughter a coparcener by birth, and shewould have the same rights and liabilities as that of a son. Any reference to HinduMitakshara coparceners shall be deemed to include a reference to a daughter of acoparcener also. She is entitled to an equal share or same share as that allotted to herbrother. She would hold property which she is entitled to as a coparcener; she candispose off her property either by will or any other form of testamentary disposition.These changes gives the daughter equal rights and makes her independent.

There is some change in the payment of Debts of the coparcener which are madeby the Amendment Act, 2005. No Court shall recognize any right to proceed against ason, grandson or great-grandson for the recovery of any debt due from his father,grandfather or great-grandfather solely on the ground of the pious obligation underthe Hindu Law, of such son, grandson or great-grandson to discharge any such debt.The doctrine of pious obligation of a son, grandson or great grandson has been abolishedby the Hindu Succession (Amendment) Act, 2005. Since the provision is prospective innature, the creditor has the right to proceed against the heirs for the debts contractedbefore the commencement of the amendment.

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After the Amended Act there has been no judgment provided as regards this lawbut the law for debts remains the same. The payment of debts was an obligation of theson to pay off the father’s debts but it has been abolished. Therefore, now it dependson the son to pay the debts of the father or grandfather for the debts which werecontracted after the amendment. If the creditor sues or claims the payment of debtswhich were contracted by the father or grandfather or great grandfather, then the sonhave to pay as per Section 6(4) (a)120 and if any alienation was made by the father orgrandfather then the son would have the same liability and is considered as his piousobligation to fulfill the required conditions of alienation, this as given in Section 6(4)(b).121

In the case of A. Chidananda v. Smt. Lalitha V. Naik,122 where the property of theplaintiff (deceased) which was in question was sold in the name of the third defendanteither for the discharge of the antecedent debts or for other necessities. The thirddefendant was not the manager of the family. There was an appeal made against thesale of the property which was dismissed by the Karnataka High Court.

It can be concluded that the Hindu Undivided Family is a family where there is acommon ancestor with all his lineal male descendents their wives, widows, their unmarrieddaughters and the daughters of the male lineal descendents. Any person from this jointfamily can contract a debt which can be for private purpose or for the welfare of thefamily. Any Hindu can possess a certain amount of property which can be either hispersonally acquired property or the property acquired from his ancestors. A debtcontracted must be paid in the life time of the person or should be paid by his linealdescendents as it is essential because it relieves the person who has contracted debtfrom the liability to pay the debt. In early days it was considered as the pious obligationof the son, grandson or the great grandson to pay the debt of the father, grandfather orthe great grandfather.

The son under the Hindu Succession Act, 1956 had a pious obligation to pay offthe debts which were contracted by the father, grandfather and the great grandfather in

120 Section: 6(4)(a): the right of any creditor to proceed against the son, grandson or great grandson,as the case may be. ; S A Desai (rev.), Mulla, “Principles of Hindu Law”, 20th ed. 2007, Vol. II,p. 322.

121 Section: 6(4)(b): any alienation made in respect of or in satisfaction of, any such debt, and any suchright or alienation shall be enforceable under the rule of pious obligation in the same manner andto the same extent as it would have been enforceable as if the Hindu Succession (Amendment) Act,2005 had not been enacted; S A Desai (rev.), Mulla “Principles of Hindu Law”, 20th ed. 2007, Vol.II, p. 322.

122 AIR 2006 Kant. 128.

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their life time. The son was liable to pay off the debts whether the family consisted of thecoparceners or not. It was under the ancient law to relieve the father from the burden ofthe debt or else he would take a rebirth in the family of the debtor and serve as aservant and serve him. The liability of the father to pay the debts lasts till the debts arenot paid. The liability ceases as soon as the debts are paid.

The Hindu Succession (Amendment) Act, 2005 abolishes the doctrine of piousobligation and therefore, it is not the son’s pious obligation to pay off the debts whichwere contracted by his father in his life time. This has been rebutted in the Act itselfwhere the creditor has been given the right to ask for the payment of the debts whichwere incurred before the commencement of the (Amendment) Act, 2005. Therefore,the debts which would be contracted after the commencement of the Hindu SuccessionAmendment Act, 2005 for these debts the son will not be liable for the payment of thedebt.

Therefore, we can conclude that in early times the son was responsible for the debtsas it was considered as his pious obligation to pay all the debts of his father, grandfatherand great grandfather. Now the High Courts and Supreme Court after a series ofdecisions and according to the Sections 6 and 8 of the Hindu Succession Act hadchanges the law and now the son is not liable to pay the debts of the father but thecreditor has the right to sue the son to pay for the debts of his father, etc. He can onlypay the debts out of the joint family property and now it is not considered as piousobligation to fulfill the debts. There is no obligation for him to pay off the debts out ofhis self acquired property.

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CHAPTER - IV

HINDU UNDIVIDED FAMILY - [HUF]

Introduction:

The Hindu Joint Family is still a fascinating institution, though somethink that it has lost its utility, relevance and dynamism. The numbers ofcases that fill the cause list of revenue in Civil Courts indicate that thejoint family has not yet lost its drive or utility, despite the fact that thecorporate sector is having a predominant share in business and industry.The structure of the joint family has become somewhat more complicatedthan it originally was. It seems this has happened because joint familyhas become dearer to both tax collectors and evaders than to an ordinaryHindu. The ease with which a Hindu can convert his separate propertyinto joint family property and the equal ease with which he can abrogatethe joint family and recreate it attract the tax collectors and evadersalike. Blending separate property with joint family property, partition,total or partial, reunion, business combinations which can be createdwithin and outside the joint family are some of the aspects of the HinduJoint Family system which are so easy to handle by an individual Hinduthat has, paradoxically, made the Hindu Joint Family system complicated,complex and a haven of lawyers.

Hindu Joint Family:

When a Mitakshara Hindu male succeeds to the property of hisfather, father’s father or father’s father’s father he takes it as ancestralproperty and if he has a son, son’s son and son’s son’s son, he constitutesa joint Hindu family. Property inherited from any ancestor or ancestressother than father, father’s father and father’s father’s father is not ancestralproperty. Ancestral property is one of the species of the property of theHindu joint family.

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Under Mitakshara Law, when a Hindu male inherits property from his father, father’sfather or father’s father’s father, two situations may arise. First, if he already has a sonor son’s son or son’s son’s son, he will constitute a joint family with this son, son’s sonand son’s son’s son. If he does not have a son, son’s son or son’s son’s son, it will be hisseparate property, but the moment he gets a son or son’s son or son’s son’s son, it willbecome joint family property, as son, grandson and great grandson acquire an interestin it by birth. The fact of the matter is that where joint family does not exist, it comes intoexistence for the first time on the death of the father, when sons inherit his separateproperty and constitute a joint Hindu family with their sons, son’s son and son’s son’sson. Once joint family comes into existence it continues to exist till a partition takesplace or the line becomes extinct. For instance, when P, a Hindu constituting a nuclearfamily, dies leaving behind a son, this son on inheriting his father’s separate property,cannot obviously constitute a joint family since there cannot be a family consisting of asingle person, but the moment he gets a son, whether natural or adopted, he constitutesa Hindu Joint Family. If P dies leaving a son or son’s son or son’s son’s son, joint familycomes into existence the moment he dies.123

On the other hand, when a Dayabhaga Hindu dies and his sons inherit his property,they together constitute a joint family. When one of them dies leaving behind a son,daughter or widow, he or she succeeds to his share in the joint family property andbecomes coparcener with the other surviving sons. Under the Dayabhaga Law, femalescan also be coparceners. But there cannot be coparcenary constituting females alone.Under the Dayabhaga School, a son does not acquire any interest in any property bybirth; but when the father dies, the sons succeeding him constitute a coparcenary andcoparcenary limit is the same as under the Mitakshara School. Thus, if, for instance,three brothers succeed to the property of their father and one of them dies leavingbehind a son, he becomes a coparcener, if he also dies, his son becomes a coparcener.If he also die, his son becomes coparcener, but if this son dies leaving behind a son; hecannot become a coparcener since he is beyond the coparcenary limit of threedescendants. But for the purpose of taxation laws, the Dayabhaga coparcenary is asmuch an HUF (Hindu Undivided Family) as the Mitakshara joint family. In fact, for taxpurposes the concept of coparcenary is not of much significance. The tax laws areconcerned with the HUF and not with coparcenary.124

123 Paras Diwan and Peeyushi Diwan, “Indian Personal Laws: Joint Family System, Debts, Gifts,Maintenance, Damdupat, Benami Transactions and Pre-Emption”, Vol. V, 1st ed. 1993, p. viii.

124 Ibid., p. viii.


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Hindu Undivided Family: Concept and Constitution:

Hindu Undivided Family HUF is a legal expression which has been employed intaxation laws. It has a definite connotation and embodies the meaning ascribed to theexpression “Hindu Joint Family”125. Section 2(31) of the Income Tax Act126 includes aHUF as a separate taxable entity. The reason for not defining the Hindu UndividedFamily in the Income-Tax Act or other allied statutes evidently is that the expression hasa well-known connotation under the Hindu Law and being aware of it, the Legislaturedid not want to define the expression in the Act.127 Therefore, the expression “HinduUndivided Family” must be construed in the sense in which it is understood under theHindu Law.128 The expression has its roots in the Hindu Law and for all tax purposes, isequated to a Hindu Joint Family. The relation of a Hindu Undivided Family does notarise from contract but arise from status129.

Constitution of HUF:

A HUF consists of all persons lineally descended from a common ancestor andincludes their wives and unmarried daughters. A daughter ceases to be a member ofher father’s family on marriage, and becomes a member of her husband’s family. AHindu Undivided Family may consist of a male Hindu, his wife and his unmarrieddaughter130. An unmarried male Hindu on partition does not by himself alone constitutea Hindu undivided family131. It may consist of a single male member and widows ofdeceased male members, and apparently the Income Tax Act does not indicate that aHindu Undivided Family as an assessable entity must consist of at least two malemembers. The Supreme Court, in N.V. Narendra Nath v. CWT132, and Surjit Lal Chhabda

125 Commissioner of Wealth Tax v. Smt. Champa Kumari Singhi, (1972) 83 ITR 720 (SC).126 Section 2(31) defines ‘person’ and included a HUF therein. Section 4 seeks to charge income-tax in

respect of the total income of previous year of every person.127 Acharya Shuklendra, “Hindu Undivided Family: Taxation and Tax Planning”, 1st ed. 2000, Rep.

2003, p 16.128 Surjit Lal Chhabda v. CIT, (1975) 101 ITR 776 (SC); CIT v. Gomedalli Lakshminarayan, (1935) 3 ITR

367 (Bom); CIT v. Arun Kumar Jhunjhunwala & Sons, (1997) 223 ITR 45 (Gau).129 Vinod K. Singhania and Monica Singhania, “Taxman Students’ Guide to Income Tax”, 27th ed.,

2002, p 656.130 Gowli Buddana v. CIT, (1966) 60 ITR 293 (SC).131 Attorney General of Ceylon v. A.R. Arunachalam Chettiar, (1957) A.C. 540 (PC).132 N.V. Narendra Nath v. CWT, (1969) 74 ITR 190 (SC).


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v. CIT133, has concurred with the same view. A family consisting of a single individual isa contradiction in terms of Section 2(31) of the Income Tax Act. In C. Krishna Prasad v.CIT134, it was held that a family signifies a group and it was essential, therefore, thatthere should be a plurality of persons. A single person, whether male or female, cannotbe treated as a HUF for the purpose of the Income Tax Act.

As regards to female members constituting a HUF, in Anant Bhikkappa Patil v.Shankar Ramchandra Patil135, it was held that the Hindu Joint Family cannot be at anend while there is still a potential mother if that mother in the way of nature or in theway of law brings in a new male member. It is well established that a Hindu Joint Familycontinues to exist even though at a particular time there may be no male coparcenerprovided of course there is a “potential mother” in the family. The theory of relationback is relevant in the scenario wherein adoption is made for this purpose.

The presumption is always that the members of a Hindu family are living in a stateof union. This was laid down in Surjit Lal Chhabda v. CIT136 by the Supreme Court,which held that the joint and undivided family is the normal condition of Hindu societyand it is presumed to be in a state of union, unless the contrary is established. Therecan be a scenario, wherein a HUF exists within an HUF.

A Hindu Undivided Family may not possess property by inheritance. This was laiddown in P.N. Srinivasa Rao v. CIT137. It is not necessary at any point of time that a jointHindu family must have connection with ancestral property. A Hindu Joint Family, whichdoes not own any property, may be joint.138 By the enactment of the Kerala Hindu JointFamily System (Abolition) Act, 1975, the property held by an individual member of aHindu Undivided Family on or after December 1, 1976, has lost its character of ancestralproperty and that character could not be revived as no undivided family could comeinto existence.

133 (1975) 101 ITR 776 (SC).134 C. Krishna Prasad v. CIT, (1974) 97 ITR 493 (SC).135 AIR 1943 PC 196.136 Surjit Lal Chhabda v. CIT, (1975) 101 ITR 776 (SC).137 (1998) 232 ITR 730 (Ker).138 Janakiram v. Nagamony, (1926) 49 Mad 98.


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Property of Hindu Undivided Family:

In Surjit Lal Chhabda139, the Supreme Court pointed out that a joint Hindu familyunder the Dayabhaga is, like a Mitakshara family, normally joint in food, worship andestate. The following can be generally recognized as joint family/coparcenary property:

(i) ancestral property;

(ii) property allotted at a partition;

(iii) property jointly acquired by coparceners;

(iv) property acquired with the aid of coparcenary property;

(v) separate property of a coparcener thrown into family hotchpots andtreated as coparcenary property; and

(vi) separate property of a coparcener blended with coparcenary property.140

Any gift that is given specifically to an HUF can be treated as HUF property. Theassets received on the partition of a larger HUF of which the coparcener was a memberis also perceived as HUF property.

The Judicial Committee points out that the expression “ancestral property” must beconfined to property descending to the father from his male ancestor in the male lineand it is only in that property that the son acquires by birth an interest jointly with andequal to that of his father141. However, all property which a son inherits as a Class-I heirfrom his father’s property would become his separate property. This is stipulated inSection 8 of the Hindu Succession Act, 1956. This has also been upheld by the SupremeCourt in CWT v. Chandra Sen142.

In N.V. Narendranath v. CWT143, the Supreme Court dealt with the question that ifafter partition, whether the ancestral property ceases to be of the nature of ancestralproperty and becomes self acquired property in the hands of the sons. It came to theconclusion that, it is only by analyzing the nature of the rights of the members of the

139 (1975) 101 ITR 776 (SC).140 CIT v. Dr. (Mrs.) Sita Bhateja, (1973) 91 ITR 193 (Mys.).141 Md. Hussain Khan v. Babu Kishya, (1937) 64 IA 250.142 (1986) 161 ITR 370 (SC); See also CIT v. Karuppan Chettiar, (1992) 197 ITR 646 (SC); CIT v. Lun

Karan Goyal, (1993) 203 ITR 67 (Raj).143 N.V. Narendra Nath v. CWT, (1969) 74 ITR 190 (SC).


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undivided family, both those in being and those yet to be born, that it can be determinedwhether the family property can be described as ancestral property. Hence in the absenceof a male issue, the dividing coparcener may treat the property as his own property, thatupon the birth or adoption of a son to him, it would assume the character of coparcenaryproperty. When a coparcener having a wife and two minor daughters and no sonreceives his share of property in partition, such property belongs to the Hindu UndividedFamily of himself, his wife and minor daughters and cannot be assessed as his individualproperty.

In CIT v. Radhe Shyam Agarwal144, it was laid down that on a partition of a biggerHindu undivided family, the property coming into the hands of the assessee becomeshis separate property although it continues to be joint vis-à-vis his wife and childrenand he continues a Hindu Undivided Family with them and in the absence of children,with his wife alone. But if on partition separate shares are allotted not only to thechildren but also to the wife, then the existence of the Hindu Undivided Family comes toan end.

As pointed out by a Division Bench of the Madras High Court in CIT v. K.S. SubbaihPillai (HUF)145, it is one of the fundamental principles of Hindu Law that property acquiredby the Karta or a coparcener with the aid or assistance of joint family assets is impressedwith the character of joint family property. To constitute self-acquired property in thehands of the Karta or a coparcener, it should not have been acquired with the assistanceor aid of joint family property. The same was upheld by Allahabad High Court inMangal Singh v. Harkesh146. The presumption of joint family remains, and if any memberof the family claims any portion of the property as his own then the burden lies uponhim to show that it was acquired by him in circumstances which would constitute it hisseparate property.

A coparcener can blend his self-acquired or separate property with the familyproperty. However, for this it should be voluntary thrown by the owner into the commonstock with the intention of abandoning his separate claim therein. It is his right underthe Hindu Law on the exercise of which the property assumes the character of thecoparcenary property147. A coparcener of an HUF can throw his interest in a partnership

144 (1998) 230 ITR 22 (Pat).145 (1984) 147 ITR 87 (Mad).146 AIR 1958 All 42.147 Damodar Krishanji Nirgude v. CIT, (1962) 46 ITR 1252.


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into the common hotchpots of the HUF and in that event the share income from thefirm should be brought to tax only in the assessment of the HUF and not in the assessmentof individual coparcener. One important element in this regard is the clear intention.There must be a clear intention to abandon all his individual rights in respect of thatproperty and make it the property of the joint family, and no longer a separate propertyof himself. It should be noted here that the doctrine of throwing into the common stockis a doctrine peculiar to the Mitakshara School of Hindu Law148. This is so since inDayabhaga School; there is no existence of joint family property in the first place. Thisact of blending however should not be mistaken with a transfer of property since bothare different acts149. The intention manifested may be in any form such as a statementin a deposition, an affidavit, execution of a document as a declaratory deed or bycourse of conduct. Another important thing to note here is that a Hindu female, sincenot a coparcener, cannot blend her separate property even if she is an absolute ownerthereof with the joint family property150.

Tax Treatment of HUF:

Hindu Undivided Family (HUF) is treated as a separate taxable entity for the purposeof income-tax assessment. The statutory provisions relating to HUF are the Income TaxAct, the Wealth Tax Act, and the Gift Tax Act. Apart from these statutory provisions, theHindu Law has to be applied in all matters relating to Hindu Undivided Family. All theincome that arises on the utilization of the HUF’s assets and on the investment of itsfunds is regarded as the HUF’s income that is assessed separately and chargeable totax. This income should have been earned using HUF property or funds or propertyonly; if it arises on account of the personal investments of any member, it will generallybe regarded as the individual income of the member. The individual and the HUF aretotally different units for tax purposes and the same person can be taxed separately asan individual, as well as for and on behalf of the HUF.

Tax Implications on Partition:

Partition, is defined in Section 171, Explanation (a) as-

148 Mallasappa Bandappa Desai v. Desai Mallappa, AIR 1961 SC 1268.149 Goli Eswariah v. CGT, AIR 1970 SC 1722.150 Pushpa Devi v. CIT, AIR 1977 SC 2230.


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“(i) where the property admits of a physical division, a physical division of the property,but a physical division of the income without a physical division of the propertyproducing the income shall not be deemed to be a partition; or

(ii) where the property does not admit of a physical division, then such division as theproperty admits of, but a mere severance of status shall not be deemed to be apartition”151.

An HUF will be continued to be assessed as such until one or more coparcenersclaim partition152. Such claim must be made before the relevant assessment is completed.The Assessing Officer, on receiving such claim, conducts an enquiry to check if anactual partition has occurred or not, and if so, what the date of partition is153. For taxpurposes, income of the family from the first day of the previous year till the date ofpartition is assessed as income of Hindu undivided family154 and after the partition;such income derived from the partitioned property is treated as individual incomesaccording to the share received by each member.155

A total partition happens when the entire joint family property is divided among allcoparceners. Partial partition is defined as “a partition which is partial as regards thepersons constituting the Hindu undivided family, or the properties belonging to theHindu undivided family, or both”156. Thus, a joint family may make a division andseverance of interest in respect of a part of the joint estate while retaining their status asa joint family. By virtue of Section 171(9) of Income Tax Act, 1961, a partial partition ofHUF’s effected after December 31, 1978 are not to be recognized for tax purposes.

Some important cases have been discussed below which would give a fair pictureof the law as it exists in the present. All of them either lay down or upheld importantjudicial principals concerning taxation and property of HUF:

151 Section 171, Explanation (a), The Income-Tax, 1961152 Section 171 (1), The Income-Tax Act, 1961153 Section 171 (2),(3), The Income-Tax Act, 1961154 Section 171 (4)(a), (5)The Income-Tax Act, 1961155 Section 171 (6), The Income-Tax Act, 1961156 Section 171, Explanation (b), The Income-Tax Act, 1961


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Commissioner of Income Tax v. Dharan Prakash HUF157

This case laid down the principle that a Karta of an HUF can give effect to partialpartition of joint family properties between himself and his minor sons. The assessmentyear was 1977-78, which was prior to the introduction of the Finance (No. 2) Bill,1980158 which declared all partial partition occurring after 31 December, 1978, asnull and void. Partial partition was thus recognised. The assessee HUF claimed thatduring assessment year 1977-78, a partial partition had taken place between theKarta, his wife and his minor son. The Income Tax Officer (ITO) rejected this claimsaying that the minor son was not in a position to give consent to the partition and thewife was not a coparcener competent to claim a partition under Hindu Law. The HighCourt quoted a Supreme Court decision in Apoorva Shantilal Shah v. Commissioner ofIncome Tax159. It held that the father, “whether in exercise of his superior right as fatheror in exercise of the right as patria potestas” is valid. The principle was again upheld inCommissioner of Income Tax v. Avinash Kumar Maheshwari160 wherein it was again laiddown that the Karta, in exercise of his right of ‘patria potestas’ had the right to conductpartial partition.

CIT v. Dharam Pal Singh161

Two major issues were dealt with in this case. The first issue was whether there is noipso-facto partition of a joint family property immediately after the death of a malecoparcener having coparcenary interest in the coparcenary property. The court heldthat no ipso-facto partition of joint family is presumed in this regard and the courtfavoured an assumption of continuity of the HUF till actual partition. Second issue wasthis: since under Section 6 (Explanation 1) of the Hindu Succession Act, 1956 says thatafter the death of a coparcener there is deemed partition, would this mean after Karta’sdeath, his share would be liable not to be taxed as income of HUF. The Court held innegative. It held that “the fiction given by Explanation 6 of Section 6 of Hindu SuccessionAct has nothing to do with the actual disruption of status of HUF”. A transaction can berecorded as partition under Section 171 “only if, where the property admits of a physicaldivision, a physical division of the property has taken place”.

157 [2005] 142 Taxman 420 [All].158 Came to effect on 18th June, 1980.159 [1983] 141 ITR 558; 13 Taxman 1 (SC).160 [2003] 133 Taxman 402 (All).161 [2005] 146 Taxman 421 (All.).


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Commissioner of Income Tax v. A. P. S. Parameswaran Pillai162

This case laid down the principal that the share of income derived from assetsdevolved on heirs from estate of deceased Karta had to be assessed in status of individualheirs and not in the hands of joint property. One ‘P’ was the Karta of an HUF consistingof himself and his sons. Then, on partition, his HUF consisted of himself and his wife.On his death, the property he obtained on partition of earlier HUF was devolved on hisheirs. The issue before the Madras High Court was whether the income derived fromasset devolved on heirs from estate of deceased Karta had to be assessed in status ofindividual heirs and not in the hands of the joint family. The Madras High Court citedthe Supreme Court decision in Commissioner of Income Tax v. P. L. Karuppan Chettair163

and ruled that even assuming that there was succession as provided under the HinduSuccession Act, 1956164, the property would devolve on the heirs of the deceasedunder Section 8 of the Hindu Succession Act and that the income from the propertiesdevolved on succession had to be assessed in the status of individual and not in thehands of the HUF.

Tax Planning:

Tax Planning can be defined as an arrangement of the financial affairs within thescope of law in a manner that derives maximum benefit of the exemptions, deductions,rebates and relief and reduces the tax liability to minimal. The HUF is an effective tax-saving vehicle as under the Income Tax Act, 1961 it is treated as a separate taxableentity and is eligible for all the deductions and exemptions, including the benefit of thebasic limit chargeable to tax and wealth tax that’s available to an individual. Accordingly,income up to Rs. 50,000 is tax-free; it can claim various tax benefits such as exemptionsunder Sections 54 (residential house property) and 54F (assets other than residentialhouse property) in respect of capital gains; deductions under Section 80D (insurancepremium paid on the health of its members), 80G (donations made by HUF) andSection 80L (income on bank and post office deposits, etc.); and rebate under Section88 (premium paid on life insurance policies for its members, and contributions to thePublic Provident Fund accounts of its members, etc.).165

162 [2003] 128 Taxman 84 (Mad.).163 [1992] 197 ITR 646.164 Section 8 of the Hindu Succession Act, 1956.165 http://www.outlook-money.com/scripts IIH021C1.asp?sectionid=5&categoryid=46&

articleid=5302.


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166 http://www.indianexpress.com/res/web/pIe/full_story.php?content_id=71695.167 h t t p : / / w w w. o u t l o o k m o n e y . c o m / s c r i p t s / I I H 0 2 1 C 1 . a s p ? S e c t i o n I d = 5 &

CategoryId=125&ArticleId=4590&NoCache=7%2F5%2F2006+5%3A02%3A00+AM.

Under the Income Tax Act 1961, the HUF has been designated the status of adistinct tax entity, and so the income earned by an HUF is assessed to tax as a separateperson. This enables an HUF to enjoy much the same tax breaks as an individual. AnHUF allows an individual to reduce his tax liabilities as he can divide his income intotwo distinct assessment units: as an individual and as the Karta of his HUF and enjoythe tax breaks under two distinct capacities.166 Other tax-planning options are to ensurethat gifts or inheritances meant for the benefit of all the members of a family are giftedspecifically to the HUF, instead of separately to individual members of the family. Sincethere is no gift tax and estate duty, neither the benefactor nor the recipient will attracttax on such a transfer. The capital of an HUF can also be enhanced by borrowing fundsfrom people who are not members. If the borrowing are specifically in the HUF’s name,and it is thereafter invested in the HUF’s name, the income arising on the investmentwill be regarded as the income of the HUF. Another option is to transfer individual fundsto the HUF and then invest the money in tax-free instruments. Since the income fromsuch investments will be tax-free, it will not be clubbed with the individual’s income. Theincome arising on the reinvestment of the tax-free income (which may be in taxableincome-yielding assets) will also not be clubbed, since only the income arising ontransferred amounts is clubbed.167

The taxation scheme governing HUF is such that the incidence of double taxation isavoided. As per proviso to Section 64 (2) of the Income Tax Act, once a particularincome is included in the total income of an individual, it has to be excluded from thetotal income of the HUF of which he is a member. The rate of tax levied on a HUF isquite high and is separately taxed on its income. In order to avail the exemption underSection 10 (2) of the Income Tax Act, income should be distributed amongst membersin order to avoid the same income from being taxed twice. Although it is possible for amember of the HUF to transfer his or her individual assets to the HUF, such a transferisn’t beneficial from the tax point of view. This is because contributions by a coparceneror a member to the HUF’s property will invoke the ‘clubbing provision’, that is theincome will not be split across two entities but will be ‘clubbed’ with the person whotransferred it and therefore taxable at the hands of the contributor and not the HUF. Butif the HUF re-invests or re-employs the funds, the income generated thereafter will be


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taxable in the hands of the HUF and not in the hands of the coparcener or memberwho contributed to the HUF’s property.168

Section 30 of the Hindu Succession Act, 1956169 comes in handy for effective taxplanning as it is well known that testamentary succession alters statutory succession ina pre-determined way. The phenomenon of the bigger and the smaller and the stillsmaller HUF can continue ad infinitum for maximum tax advantage.

With its renowned peculiarity, India has retained its phenomenal characteristic ofbringing to tax such entities apart from individuals as Hindu Undivided Families orHUF’s which have withstood the tests of time. The concept of joint families, joint incomeand joint property that is shared and enjoyed by all the members of the family isrecognized as a legal expression in the form of the Hindu Undivided Family which is arather efficient tax-reducing tool under the Income-Tax Act. It is evident from the flexibilityand leniency of the taxation rules governing the Hindu Undivided Family that it was theintent of the legislature that an establishment such as HUF be encouraged.

For effective tax planning, a tax-payer may resort to a device to divert the incomebefore it accrues or arises to him. Hence, there can be many ways wherein taxes forindividuals can be saved when the income is earned under the aegis of HUF. Forexample, one of the basis principles of tax planning is to create new units of assessmentand to distribute the income/wealth among the old units and the new units. This can beachieved easily by partitions, especially partial partition. An HUF has an obligation tomaintain the wife and minor children of the assessee. Thus, the expenses of maintenancecan be charged to HUF or to the individual assessee depending on whoever earnsmore so that tax can be saved in this way.

However, in the name of tax planning, Tax Avoidance or Tax Evasion may becomerampant and the line between Tax Planning and Tax Avoidance is very thin. Whenfinancial transactions are arranged in a way that it becomes obvious that they wereentered with a malafide intention of either not paying taxes or with a view to defeat thegenuine spirit of law, they cannot be accepted as legitimate Tax Planning. But thedecisions of the Courts suggest that, if need be, the Courts are ready to take sternaction to curb any sort of manipulative action by an individual, which might also harmrights of the coparceners in the future.

168 http://finance.indiamart.com/taxation/income_tax/clubbing_provisions.html.169 Section 30: Any Hindu may dispose of by will or other testamentary disposition any property, which

is capable of being so in accordance with the provisions of the Indian Succession Act, 1925, or anyother law for time being in force and applicable to Hindus.


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CHAPTER - V

ALIENATION

Introduction:

The Hindu Joint Family is much more than just an assemblage ofrelated families living together. The Hindu Joint Family system is aninstitution which means much more to its members than control overjoint family property. Living in a joint family is a wonderful experience ofstaying together with your relatives, of being part of each other’s festivitiesand celebrations, of knowing that you have family members to rely uponin times of emergency. Hindu Joint Family is a institution which originatedin the Vedic period. So, a clear understanding of alienation of jointfamily property first necessitates an understanding of the institution ofjoint family prevalent in ancient Hindu Law and property patterns.

Alienation means transfer of property, such as gifts, sales, andmortgages, it is one of the basic incident of ownership170. Where especiallythe property is owned by more than one owner, no single can acquirethe power to alienate that property or the whole of it. He with respect tojoint family property Karta or the manager is entrusted with themanagement. However, he does not own the property as a whole, andhas an interest in it just like the other coparceners and if all coparcenersgive their consent or authorize him to sell the property, he can do so andsuch a transfer could be binding on the interests of all the members,171andthe purpose of sale will be immaterial.172 But in collective ownership, ifone or more of the coparceners withhold their consent or express their

170 Hari Singh Gour, The Hindu Code, 6th ed.1996, p.586.171 Poonam Pradhan Saxena, Family Law Lecture, 1st ed. 2004, p.217.172 Where it is made without the consent of coparceners, when all are major, the alienation would bind

the share of those of the coparceners who had given the consent.

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dissent to such alienation, or could be due to the minority of the coparceners, then theproperty cannot be transferred.

But with the rise in materialism, even the sacred institution of joint family took thebrunt. The greed of the individual members of the family led to demand of increasingcontrol over the management of property. The Courts, accordingly taking the socio-legal conditions of society into account, interpreted the position of Karta in a modernperspective and curbs were put on his powers of alienation. This chapter aims to examinethe subject of Alienation from both ancient and modern perspectives and establish thepowers of alienation of different members/coparceners of the joint family.

Thus, it can be said that alienation has a very wide scope and application. Thedistinguishing feature of this power is that it was traditionally given only to the father orthe Karta and that, but the power itself is near autocratic as it allows them to sell, gift ormortgage the whole joint family property without the consent of any coparcener, this iswhy the ancient texts have specified several conditions which alone would justify suchacts of the manager. These conditions have changed over the centuries to keep in pacewith the changing conditions and the ancient rules have been modified by the PrivyCouncil in accordance with the principles of equity, justice and good conscience. Theobject of this chapter would be to look into all such changes while at the same timemaking an effort of understanding the various rules and anomalies which govern thelaw of alienation. The lack of any codified law as well the changing face of the commercialtransactions a joint family enters into these days have created many situations whereeven the jurists have still not agreed upon the settled law and this constant situation offlux makes alienation a very interesting study. The effort has been made to list the entirevarying viewpoints and critically analyze them in the light of old traditions and newfoundlegal principles. Alienation is of vast practical utility as it gives a way of using the jointfamily property for the common use of the family and it is a classic example of theunique position of the Hindu Joint Family which is always ready to help its members intimes of need and who work together for common benefit.

Alienation under Sastric Hindu Law:

The vast frame work of Hindu Law was administered by Sastric and customary lawwhich varied from region to region within the country and sometimes it also varieswithin the region. Formation of different Schools ultimately led to the diversity to thecomplexity of law in the country, these are then keep perpetuating in the regions becauseit is known that without which the chaos could rise. But these ancient laws could be

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termed as a dynamic law because they kept changing based on the requirement andunder necessary circumstances.

The Dharmasastras cautioned against the indiscriminate transfer of joint familyproperty to the detriment of its member, as property is always a security in times of needand it is this need backed authorization that is reflected in the dictates of the Smritis andthe commentaries which empower the Karta to alienate the property, despite the dissentof the other major coparceners or the presence of minor coparceners.

The History of Dharmasastra encompasses the notion of manager, as a head of thefamily and its manager, the father has independent authority to spent the ancestralwealth (except immovable property) for indispensable act of religious duty expresslyenjoined by Vedic and Smritis text and for making gifts of affection, for maintenance ofthe family and for ridding the family of distress.173

Mitakshara School of Hindu Law:

A Hindu who governed by Mitakshara Law has full power of alienation over hisseparate property, that is, property which is not held by him jointly with others. He cansell it or mortgage it, or alienate it by gift inter vivos or bequeath it by will either infavour of a stranger or relative.174 Self-acquisition does not belong to co-heirs, and inpassage, Vijnaneswara expressly state that “the son must acquiesce in the father’sdisposal of his own self acquired property”175.

Father’s Power of Alienation:

Mentioned in the text of Mitakshara the father is subject to the control of his sonsand the rest, in regard to the immovable property. Whether self acquired or ancestral,this statement has been a controversial issue in Mitakshara Law.

Vijnaneswara on the one side imposes restriction on father’s power of alienationon the self-acquired immovable properties and on the other it gives full power overancestral movable property. It is now settled that Mitakshara father had no greaterpower on the joint family movable property then immovable property. But it proposes

173 P. V. Kane, History of Dharmasastra, Ancient and Medival Religion and Civil Law, , , , , Vol. III, 3rded.1993,p.554.

174 Allandi Kuppuswami (rev.), Mayne, Hindu Law and Usage, 14th ed. 1998, p.735.175 Mit.I,i, 27.

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“independent power in the disposal of them for indispensable acts of duty and for thepurpose prescribed by the text as gifts through affection, support of the family, relieffrom distress and so forth. The comment on Nilakantha text, “the father is the master ofall gems, pearls and corals” was that it signifies that father is independent in using theproperty but not in alienating them.176 But sometime it never received a full discussion.177

Regarding gift of love and affection, the father has power to make a small portionof movable ancestral property, especially in terms of jewelers, ornaments, etc., by fatherto his wife or daughter or son-in-law or daughter-in-law or to the near relatives. InGuramma v. Malappa178 even the gift of immovable property was held valid, so it isnecessary that gift through affection within reasonable limits of ancestral movable propertyhas to be fully recognized.179 One important rudimentary thing to be noted here is thatin no case the immovable property be given to anyone, not even to wife of daughter inlaw. Nor it is gifted.

Coparcener’s Power of Alienation:

The Mitakshara does not show any individual power to the coparcenary with regardto alienation of the joint family property. The Smritikars also did not seem to confer oncoparceners, the interest over joint property. However, the authorities of the texts are soscanty. The interest of the coparcener is the out come of judicial legislation accordingto Paras Diwan in his Family Law, to this, the first notion was, when it was held thatpersonal money decreed against the coparceners could be excited against his undividedinterest in the joint family property. The Court extended his principle to voluntary alienationalso. So its divided into two head, involuntary and voluntary, the former refers to alienationof the undivided interest in execution proceeding, this is also the fact that the Hindusages laid great emphasis on the payment of debt, so the Court seized this principle ofHindu Law and started executing personal money decrees against the joint family interestof the judgment-debtor coparcener. And the later is just an extension of principle tovoluntary, means it is the next step of the former statement. The inclusion in the latterpart are making gifts, sale and mortgage, renunciation, etc., however, Mitakshara didnot pointed out any rights in this context.

176 Vyav.Mayukha, iv, I,5177 Dev Kishan v. Ram Kishan, AIR 2002 Raj 370; Sunannud v. Bonomalee, Marsh 320,2 Hay 205.178 (1964) SCC 510.179 P.S. Sairam v. P.S. Ramarao Pisey, AIR 2004 SC 1619, Ramalinga v. Narayana, (1992) 49 IA.

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Sole Surviving Coparcener on Alienation:

When all the coparceners die leaving behind one, such coparcener is known assole surviving coparcener, the joint family property passes into the hands of thiscoparcener, it assumes a character of separate property, as long as he does not havea son. The sole surviving coparcener has full power to alienate the joint family propertyas he wishes, by sale, by mortgage or gift since at the time of alienation there is nomember who can challenge the alienation. He may even make a gift of the property tosomeone which is contrary to express provision in Mitakshara Law, no coparcener candispose off his undivided interest in coparcenary property by gift180. The subsequentlyadopted or a later born child cannot challenge either181, but if at the time of alienationa child is present in the womb and is a member then the member on whose birth canchallenge the alienation.

Coparcener’s Right to Challenge the Alienation:

In the states where undivided coparceners are entitled to alienate his interest inMitakshara coparcenary, such alienation cannot be challenged. However, in the stateswhere he is not permitted to do so, any coparcener in existence at time of alienation, orwas conceived and subsequently born alive, can set it aside with the help of the Court.182

The alienation made by Karta of a joint family can be challenged by the coparcenershaving an interest in the joint family property. An alienation of a joint family propertymade without legal necessity is not void, but voidable at the option of othercoparceners183. Where alienation is made by manager without legal necessity, but withconsent of all other coparceners, it is completely valid184. It is justified in equity too torestrain an action against an act to which you have consented185. The coparcener isgiven a right to challenge the alienation only after it is made. A coparcener cannot

180 Karunakar v. Golak,,,,, AIR 1995 Ori 110.181 Mahadevappa v. Chanddabasappa, 1996 Mys 15, the Mysore H.C held that alienation by sole

surviving coparcener, while there was widow in the joint family capable of inducting a child byadopting into joint family is not binding on the son subsequently adopted by the widow if alienationis not made for a purpose binding purpose.

182 Supra n. 1 at p. 253.183 Jose v. Ramakrishnan Nair, AIR 2004 Ker 16; Raghubanchmani v. Ambica Prasad, AIR 1971

SC 776.184 Kandasami v. Somakanda, (1912) 35 Mad 177.185 Ranganath Misra, (ed.), Mayne, Hindu Law and Usage, 15th ed. 2003, p.837.

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claim the relief by injunction restraining the Karta from alienating the coparcenaryproperty. The coparcener has adequate remedy to impeach the alienation made byKarta186.

The right of alienation by sole surviving coparcener is subject to rights over propertyof an unborn child in mother’s womb. Even if he is in utero i.e. the mother’s womb, atthe time of alienation, he can sue to set aside the alienation even though he is bornsubsequent to the alienation187. The right to challenge alienation is limited only tothose male issues who had been conceived at the time of alienation of joint familyproperty and not subsequent to alienation.

The widow had a limited estate in the property which devolved upon her throughsuccession before coming into force of the Hindu Succession Act, 1956. The reversionershad the right to challenge any alienation made by the widow without legal necessity orwhich is not for the benefit of the estate. But after the Act came into force, the limitedestate got converted into absolute ownership by virtue of Section 14(1) of the Act.When the widow had absolute ownership over the property, she had absolute powersof alienating the property which cannot be challenged by coparceners. The only exceptionto this is when the alienation is made before the commencement of the Act which canbe challenged.

Coparcener’s Right to Challenge Alienation:

It is known via notice that the improper alienation can be challenged all or any oneof the coparceners existing at the time of alienation.

It is also settled that a coparcener who was in the womb at the time of alienation isconsidered as an existing son or born son. So he can get alienation after his birth, thislaw also applies to the alienation by sole surviving coparcener.

And also in the case of after born coparcener, as an, a sole surviving or the Karta,who has no male issue makes an alienation of the joint family property without anylegal necessity is valid. Such alienation can be challenged by the subsequently bornson or what known as after born coparcener.

186 Kailash Chand v. Bajrang Lal, 1997 (1) HLR 342 (Raj.).187 Santhosh v. Smt. Saraswathibai, AIR 2006 Karn 85; 2006(3) CCC 253 (Kant); Sabapathy v.

Somasundaram, 16 Mad 76.

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Alienation by Karta:

The senior most male member in joint family is the head of the family and is calledthe Karta or manager. The Karta represents the family and is authorized to act onbehalf of the family188. The Karta is given widespread powers in relation to conductingeveryday business on behalf of other family members. The Karta is given high regardand is deemed to have implied consent of other family members to his decisions byvirtue of his position as Karta.

The Karta, as the head of the family, has control over the income and expenditure,and he is custodian of the surplus. So long as he spends the income for the purposes ofthe family, he can use as much amount out of the family income as he wishes to189.These family purposes would be maintenance, education, marriage, shraadha, andother religious ceremonies of the coparceners and of the members of their respectivefamilies190.

The position is different with respect to alienation of joint family property. The mostcommon property is often dwelling house and lands. There is bound to be an emotionalattachment to the house one stays in and the lands which are used to feed one’s family.Therefore, the powers of Karta regarding alienation of joint family property are restrictedunlike family income. Vijnaneswara recognized three exceptional cases in whichalienation of joint family property could be made:

Apatkale, i.e., in time of distress or it refers to the need for emergency purposeeither faces by the family or a member of the family.

Kutumbarthe, i.e., it was explained in Mitakshara, meant for the benefit of Kutumbor the family, basically it is a cost for maintenance for the joint family.

Dharmarthe, this is in other words indispensable duties, which means for ‘piouspurposes’, these duties have been carried out as a line from ancestral period ofthe family.

The power of alienation of the manager of a joint family is governed by the rule inHanooman Prasad’s case191 - “The power of a manager to charge an estate not hisown is under the Hindu Law a limited and qualified power. It can only be exercisedrightly in case of need or for benefit of the estate”.

188 Vijender Kumar, (rev.), G C V Subba Rao, Family Law in India, 8th ed. 2003 (1st rep. 2004), p.72.189 Satyajeet A. Desai, (rev.), D.F. Mulla, Principles of Hindu Law, 18th ed. 2004, p. 421.190 Ibid.191 (1856) 6 MIA 393. Sivaraman v. Pillai, AIR 2005 Mad. 423.

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Legal Necessity:

Alienation for the purposes of legal necessity is a modern doctrine. The term legalnecessity is intended to cover various situations where it becomes absolutely essentialfor Karta to alienate joint family properties in the best interests of the joint family. Forexample, the following have been held to be legal necessities:

1) Payment of government revenues and debts payable out of the family property192

2) Maintenance of coparceners and members of their families193

3) Marriage expenses of male coparceners and daughters of coparceners194

4) Performance of necessary funeral or family ceremonies195

5) Cost of necessary litigation in preserving the estate196

The situations given above are just few of the examples where alienation wasestablished to have been for legal necessity. The enumeration of criterion for establishinglegal necessity is not even predictable. So, whether alienation was made for legalnecessity or not has to be decided on a case to case basis.

Benefit to the Estate:

There was conflict regarding the meaning of the term ‘Benefit to the Estate’. Oneview is that it is of a defensive character calculated to protect the estate from a threat.Another view is that it is enough for the act to be of benefit to the estate, if it is such asa prudent owner would have carried out himself. In Bal Mukund v. Kamla Wati197, theSupreme Court observed that for a transaction to be regarded as for the benefit of thefamily, it need not be of a defensive character. The facts of each case have to be lookedinto to decide whether such act was reasonably expected to confer benefit upon theestate.

For example, Karta is not entitled to sell joint family land solely for purpose ofinvesting it elsewhere to bring in an income larger than that derived from a safer and

192 Muddit v. Ranglal, (1902) 29 Cal 797.193 Vijay Ramraj v. Vijay Ananda, AIR 2003 All 564.194 Sunderbai v. Shivnarayana, (1908) 32 Bom 81.195 Chhotiram v. Narayandas, (1887) 11 Bom 605.196 Nathuram v. Chhoma Chhagan, (1890) 14 Bom 562.197 AIR 2002 SC 1385.

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more stable property. Such a sale is not for benefit of the estate198. The Karta is also notentitled to sell a land simply for the purpose of purchasing another land. In Vanisimattiv. Jayavarapu199, it was held that selling of joint family property for migrating to a betterplace has been held to be a sale for benefit of the estate. In Hari Singh v. UmraoSingh200, when a land yielding no profit was sold and a land yielding profit was purchasedthe transaction was held to be for benefit. In Gallamudi v. Indian Overseas Bank201,when alienation was made to carry out renovations in the hotel which was a familybusiness, it was held to be for benefit.

Gifts of Love and Affection:

A gift of coparcenary property may be made by the Karta within reasonable limitsfor pious purpose. Thus, on the occasion of father’s funeral, a gift of small item ofimmoveable property may be made to the temple202. The Supreme Court has held inGuramma v. Mallappa203 that a father may make a gift of a reasonable extent of familyproperty to his daughter. Pious purpose does not include gift of love and affection, andKarta cannot gift his property to his wife, including second wife, pregnant wife, anintended wife, a concubine, a daughter in law or even to son or to coparceners. Jointfamily comprises of male and female. Coparceners have a right by birth in thecoparcenary property, but daughters have a claim for maintenance. But daughters aredifferent, they are born in the family and unlike brothers they are restricted in the interestof the joint property, and her right to maintenance ceases to be a member of the family.Therefore, a gift to daughter by the father is neither an indispensable duty nor a piousobligation. But it is the contribution of natal family property to the member of the familyto whom the thread of the relation remain intact even after the marriage.

Manu says:204

To the unmarried daughters by the same mother, let their brother give portions outof their allotments respectively, according to the class of their several mothers. Let eachgive one-forth part of their distinct share and those who refuse to give it shall be degraded.

198 Palaniappa v. Deivasikamony, AIR 1917 PC 33.199 AIR 1995 SC 105.200 AIR 1979 All. 65.201 AIR 2006 A.P. 37.202 Ramalinga v. Sivachidambara, 42 Mad 440.203 AIR 2000 SC 510.204 Manu Ch. IX, S 118.

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Even Mitakshara specifically mentions the providing for a share for the sisters, whenthe father is dead and the partition by brother themselves. He says:205

“The allotment of such share appears to be indispensable requisite since the refusalof it is pronounced to be sin. Even in terms of Judicial view, the judiciary upholds therights of the father and brothers, to validly gift a joint family immovable property todaughter/sister at the time of her marriage or even afterwards”,206 and this is perfectlyvalid.

So, the above mentioned texts clearly express recommendation to give property todaughter at the time of her marriage or at the time of partition.

Father’s Position as Karta:

We have looked at powers of Karta to alienate joint family property. But there canbe different types of coparcenaries having different individuals as Kartas. The relationof an individual to other members of joint family also determines the kinds of power ofalienation that might be attributed to that individual. For example, consider three differentcoparcenaries consisting of father and sons, uncle and nephews, and elder brotherand younger brothers. Out of these three, the father will have maximum rights ofalienating joint family property followed by uncle and then by elder brother.

In the case of father, there is special power of alienating property for his antecedentdebts, which fall within the scope of pious obligation doctrine. Alienation by the fatherbinds the coparcenary interest of his sons. A father can also gift away movable andimmovable joint family properties. The father has power of making, within reasonablelimits, gifts of ancestral movable property for performing ‘indispensable acts of duty’. Agift of affection may be made to a wife, daughter or even son but within reasonablelimits. A Hindu father also has the right of alienating immovable joint family propertyfor ‘pious purposes’. However, the alienation must be by an act inter vivos and not will.The Supreme Court has held that it is competent for father to make gift of immoveableproperty to daughter, if gift is of a reasonable extent207.

205 Mitakshara Ch I, S7, pp10-11.206 Kudutamma v. Narashima Charyalu, 17 Mad L J 528.207 Gurramma v. Mallappa, AIR 1964 SC 5.

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Implication of Section 6, Hindu Succession Act, 1956:

If a coparcener dies leaving behind heir in terms of proviso to Section 6208 of theHindu Succession Act, 1956 can the Karta alienate the female’s share in the coparcenaryproperty, which has vested in her own succession? It seems that he cannot do withouther consent, since the property acquired under Section 6 is her absolute property.

Perhaps the sole surviving coparcener also cannot alienate the interest of anyfemale vested in her by virtue of operation of Section 6 of the Hindu Succession Act, itpossess a limitation to the sole surviving coparceners right to alienation.

It is also submitted in view of Bombay High Court that after coming into force of theHindu Succession Act the sole surviving coparcener cannot alienate the share of thewidow.209

Alienation under Dayabhaga School:

The joint family is the area where Dayabhaga School and Mitakshara School differsfrom one another fundamentally. Actually in true terms under Dayabhaga School thereis no joint family between father and son; sons have no right by birth, similarly sonshave no right of survivorship and therefore, under Dayabhaga all the properties whetherself acquired or coparcenary devolve by succession.

The Dayabhaga rejects the view that Yaj. II. 121 enables the son to demand partitionof the grandfather’s property from the father even against the will of the later or thatfather and son have equal rights in the grandfather’s property. And these entrails thatunder Dharmasastra the father has a full or absolute power of alienation not only inrespect of separate property but also in ancestral property too, this is one of therudimentary differences we find as compared to Mitakshara School. This applies to thenorms of property whether movable or immovable, and the most crucial figure, accordingto that system, since sons have no interest by birth in the ancestral property. Thus, they

208 (1) On and from the commencement of the Hindu Succession (amendment ) Act, 2005, in a HinduJoint Family government by Mitakshara law, the daughter of a coparcener shall,(a) by birth become a coparcener in her own right in a same manner as the son;(b) have the same rights in the coparcener property as she would have had if she had been a son;(c) be subject to the same liabilities in respect of the said coparcenary property as that of son,And any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference…

209 Shankaramma v. Madappa, 1977 Kant, 188.

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can neither enforce a partition against the father nor control his management. It takesplace only after the death of the father.

Father’s Power under Dayabhaga School:

The father is the absolute owner of the property. Jumuthvahana210 took the viewthat the text of Vyasa prohibiting a sale or gift of ancestral immovable property was toindicate a moral offence but not to invalidate the sale or other transfer.211 In 1812, theSudder Court held that, the gift by the father, the whole estate, real and personalancestral, and otherwise, to a younger in the life time of the elder was held valid thoughit was immoral and the whole gift of landed property held being forbidden. In 1831,the Supreme Court of Bengal referred question to the Judges of Suddar Dewanny, whoreturned the following certificate: on mature of the points referred to us, we areunanimously of opinion that the only doctrine that can be held by the Saddar DewanyAdalat, consistently with the decisions of the Court, and the customs and usages of thepeople, is that a Hindu, who has sons, can sell, give or pledge, without their consent,immovable ancestral property, situated in the province of Bengal; and that, to suchproperty.212 This certificate has ever since accepted as a settling a law in Bengal, on thepoints to which it refers and make it no difference that the property is impartable, anddescends by the rule of primogeniture.

Power of Coparcener of Alienation of his Share:

As regards to coparceners in Bengal, that is brothers, cousins, or the like, who havetaken the property jointly, there is no difficulty. In Bengal the rights of every coparcenerare definite to the share, this right passes through the line of inheritance to female orother relations, just as it were already divided, and it may get disposed of by each malemember just as it were separate of self-acquired property. And such alienations will betaken into account as part of his property, and of course no person can disposed ofproperty which is more than his share though he can unless there is consent or when ithas become a part of necessity. So in Bengal undivided coparceners can lessee out theundivided property which is equivalent to his share, and put his lessee in his possession.213

210 Writer of Dayabhaga.211 Daya Bh. II, 28.212 Jugomohum v. . . . . Neemoo, 90 ILR 432.213 Ram Debul v. Miterjeet, (2002 ) 17 All 420.

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A Dayabhaga coparcenary may also start his own business on the land of jointproperty, provided he obtained consent from other coparceners.

Alienee’s Rights and Remedies - Duties of Alienee and Burden of Proof:

The person in whose favour the joint family property has been transferred is calledthe alienee. The alienee acquires a good title to the property when the alienation isvalid. But when alienation is invalid, he does not acquire a good title to the propertyunless he satisfies some duties. In Hanuman Prasad v. Mst. Babooee214, it was establishedthat where the validity of alienation is challenged in a Court, the burden of proving thatthe Karta had the competency to alienate the property is on the alienee and not on theKarta. The rule is in tune with the principle that where the person transferring propertyis not exclusive owner of the property, the duty is on the alienee to act with reasonablediligence. The alienee should enter into the contract only after making reasonableenquiries about the transfer being permissible in law.

The burden of the proof is on the alienee to show that the alienation was either forlegal necessity215 or for the performance of religious or indispensable duties or was onethat would bring benefit to the estate. The reason why burden of proof lies on thealienee is because alienee is seen to be the beneficiary in such a transfer which isprejudicial to the interests of other coparceners. The possibility of this transfer beingdeclared invalid by the Court is enough for the alienee to make the Karta explain tohim, the situation the family is confronted with and the necessary action that Kartawants to take216.

The Courts also realize that although the legal necessity may be there, yet theKarta may misuse the money obtained. So, the alienee is not bound to see the actualapplication of the money advanced or of the consideration because it is impossible forthe alienee to control the utilization of money217.

Rights of Alienee:

Where a coparcener alienates his undivided share, the alienee gets only an interestto the extent of coparcener’s share as it stood at the time of alienation. The position in

214 (1856) 6 MIA 393.215 Faquir v. Harnam, AIR 1967 SC 727.216 P P Saxena, Family Law Lectures, 1st ed. 2004, p. 237.217 Baijnath v. Gokul, AIR 2005 All 37.

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Madras, Uttar Pradesh, West Bengal, Patna, Madhya Pradesh is that the alienee doesnot have a right of joint possession of the property with the coparceners218. The reasonfor not permitting the alienee to have joint possession with the coparceners is to avoidintroduction of a stranger into the family. But the alienee has a right to file a suit forpartition, making all the coparceners defendants as the executing Court has no powerto direct a partition219. Where instead of a general undivided interest, the coparceneralienates a specific item out of the coparcenary property, the alienee’s remedy will bemerely to sue for a general partition and he cannot claim any particular property220.The alienee is permitted to stand in the shoes of the coparcener and is therefore,entitled to only that interest of the coparcener, which the latter had in the property onthe date of alienation. The reason behind this is that it was undivided property at thetime it was alienated, and till it is divided, there is community of interest and unity ofpossession and alienating coparcener himself is incompetent to claim any specificproperty.

The rule in Bombay is different. The purchaser of an undivided interest of coparceneris entitled to sue for partition of property and specification of his share. Once thepartition is affected, he can get an exclusive possession of the same. The alienee alsohas the right to joint possession with other coparceners. In case the partition is notaffected, and he takes the possession, the other coparceners can either have jointpossession with him or they can file a suit to get him evicted. But the Court is not boundto pass an eviction order. The alienee can be allowed to remain in possession astenant-in-common in accordance with facts and circumstances of the case. For example,where the purchaser is a relative in possession for a long time, the Court may pass anorder for joint possession, rather than an eviction order.221

It can be concluded that the Sastric law of alienation though centuries upon centuriesold, is still surprisingly relevant. The rules regarding conditions in which a valid alienationcan be made are very practical and pragmatic, for example, the condition of apatkalei.e. in the time of distress gives actual utility of the joint family property because theshare of all the members can be used to avert distress to any one of them, this is asafety net which saves people from utter ruin and gives them a chance to start afresh, a

218 Dulkiyaar v. Ramsukhwant, AIR 2007 Raj 32, Ramkishore v. Jainarayan, (1913) ILR 40 Cal 966.219 Satyanarayan v. Panalal, AIR 1980 Ori 169.220 Madras Hardware Mart v. Hutcheeswaran, 1997 (1) HLR 569 (Mad).221 Babaji v. Vasudev, (1876) ILR 1 Bom 95.

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chance which is never given to the people in the supposedly highly civilized andprogressive western nations. Secondly, coming to the condition of kutumbarthe or ‘forthe benefit of estate’, it provides the joint family members a chance to improve theirstandard of living by pooling their resources and utilizing them for their own benefit.This can be put to practical use for family benefit also in the shape of family businesswhich is a common Hindu occurrence. Lastly, we come to dharmarhte i.e. alienationsmade for religious purposes, this gives us an insight into the traditional Indian thinkingwhere religion is a way of life. Hence, religious purposes are as important as times ofdistress as they lead to deliverance.

The new changes made by the case law mostly by the Privy Council and the HighCourts have been equally empowering and given the joint family members the powerto use the property for their upliftment. Chief among these are – first, the total controlwhich a father now has on over his separate movable and immovable property, this isa departure from the ancient law which did not allow a father to dispose off his separateproperty according to his own wishes. Secondly, the new powers given to alienate hisshare in the undivided family property for his own use with or without the consent of theother coparceners. This gives the power to him to use his share for purposes which maynot qualify as necessity for the whole family but are very important for him. It also giveshim a right to benefit from his share without severance from the joint family whichoccurs at the time of partition. Thirdly, the ground of apatkale has been satisfactorilyextended to include along with situations of emergency and distress, those situationswhich may seem proper and reasonable to the Court. This has gone a long way inmaking the law of alienation much more suited to present conditions.

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CHAPTER - VI

PARTITION

Partition under Mitakshara School of Hindu Law

Introduction:

The only property that can be made as the subject of partition isCoparcenary Property. It is essential that the property be earlier held asjoint property in the coparcenary for it to be brought within the ambit ofpartition. Separate property cannot be the subject of partition amongstthe members of coparcenary. But if the property is of such a nature thatit has been allotted at a previous partition to a member will of course beindivisible between himself and the separated members but will be divisiblebetween himself and his own descendants222. An important question inthis regard is when does severance of status take place? The SupremeCourt has held that from the date of institution of the suit such severancetakes place223.

Property Indivisible from its Nature: Where the property is indivisiblefrom its very nature it is considered that such property must either beenjoyed by the heirs jointly or sold, and the value distributed; or it maybe valued and retained by one coparcener exclusively and appropriateamount credited to his share. Members may hold family idols in turns oras the Bombay High Court ordered that family idols should be taken in

222 Periasami v. Periaswami (1878) 5 IA 61; Rangnnath Mishra (rev.) Mayne, HINDU LAW AND USAGE,15th ed. 2003, p.850. Also see Gannmani Anasuya v. Parvatini Amarendra Chowdhary, AIR 2007SC 2380.

223 Kakumanu v. Kakumanu, AIR 1958 SC 1042.

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possession by the senior most male member, with liberty to other members to haveaccess to them for purpose of worship224.

Property available for Partition:

Before the division of property is made, it is necessary to make provisions for theliabilities of joint estate, which are payable out of the joint family property, personaldebts of the father neither tainted with immorality nor are illegal in its very purpose,maintenance of dependent female members and of disqualified heirs, and also for themarriage expenses of the unmarried daughters or sisters225. These three are the essentialsub-heads for which provisions have to be made under all circumstances.

As far as marriage expenses of a male member is concerned it was held that sincethe institution of a suit of partition by a member of joint family effects the severance ofjoint status of the family, a male member who is then unmarried, is not entitled to havea provision made on partition for his marriage expenses226. This is in stark contrast tothe position of marriage expenses for unmarried father’s daughters or sisters. But themarriage expense of son’s daughter will be paid out of his own share, as it is the liabilityof his branch and not from the entire joint family property227.

As per the Hindu Law the sons are bound to perform at their own expense thefuneral ceremonies of their widowed mother. It is important to note that if no provisionhas been made exclusively for this purpose, then if one of the sons performs it at hisown expense he is entitled to a contribution from his brothers228.

Mode of Taking Accounts: Under Mitakshara School Karta is not liable to keepaccounts and no coparcener can even at the time of partition ask about previousmisappropriation. After severance of status has been effected an account must betaken of the entire family property in the hands of all the different members. Money laid

224 Damodar Das v. Uttam Ram, (1893) 17 Bom 271.225 Yajnavalkya says, “Uninitiated sisters should have their ceremonies performed by those brothers

who have already been initiated, giving them a quarter of one’s own share.” Yajna 11 124; RangnnathMishra (rev.) Mayne, HINDU LAW AND USAGE, 15th ed. 2003, p.853.

226 Ramalinga v. Narayana, (1922) 49 IA 168, 45 Mad 489, S.A.Desai (rev.) Mulla, “Hindu Law”, Vol.-1,18th ed. 2004, p. 574.

227 Sankarnarayana v. Official Receiver, AIR 1977 Mad 171.228 Vaidyanath v. Aiyasami, (1909) 32 Mad 191; S.A. Desai (rev.) Mulla, “Hindu Law”, Vol.-1, 18th ed.

2004, p. 575.

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out by one member of the family upon the improvement or repair of the property, or forany other object of common benefit would constitute a debt to him from the rest of thefamily only if money which he had expended were advanced out of his separate property,without an intention of making a present of it to the family. He would then be entitled toreimbursement of his outlay as well on partition as before it.229 Same was the ratio incase of Anar Devi v. Parmeshwari Devi230

For the purpose of accounting certain rules have been laid down which have to beadhered to:

1. No coparcener is entitled to call upon the manager to account for his past dealingswith the joint family property, unless he establishes fraud, misappropriation orimproper conversion.

2. No charge is to be made against any coparcener because a large share of thejoint income was spent on his family in consequence of his having a larger familyto support.231

3. Also, a coparcener who is entirely excluded from the enjoyment of joint familyproperty is entitled to an account of the income derived from the family property,and to have his share of the income ascertained and paid to him, that is themesne profits.232 This arises only after partition has come into effect since prior tothat no member of coparcenary has a defined share, and consequently he cannotput forth a claim for mesne profits or for any share of income from the joint familyproperties.

Persons entitled to Claim:

Coparceners: The guiding rule in this regard is that any adult coparcener may suefor partition, and every coparcener is entitled to share upon partition. The earlier law inthis regard was that a son could not ask for partition without the assent of his father,when the father was joined with his own father, brother or other coparcener. But after

229 Muttuswamy v. Subbiramaniya, (1863) 1 Mad HC, 309; Rangnath Mishra (rev.) Mayne, HINDULAW, 15th ed. 2003, p.854.

230 AIR 2006 SC 3332231 Abhay Chandra v. Pyari Mohan, (1870) 5 Beng LR 349; Rangnath Mishra (rev.), Mayne, HINDU

LAW AND USAGE, 15th ed. 2003, p.852.232 S.A. Desai (rev.), Mulla, “Hindu Law”, Vol.-1,18th ed. 2004, pp. 575-576.

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the decision of Abu Hamir v. Aher Duda233, it was held that the assent of father is not apre-requisite to a suit, against grandfather and his collaterals, for partition by metesand bounds, which means actual partition, where there had already been severance ofstatus. This is the status under the Mitakshara Law. Under the Dayabhaga School whichprevails in Bengal and Assam, son has no right to claim partition of property held by hisfather during the life time of his father as the son has no vested interest in it. But wherea stranger to the family acquires a title to a portion of the family property, by a purchase,his remedy is by suit to compel his vendor to come partition; he cannot demand apartition merely, of the portion over which he has a claim.234

Sons born after Partition: There is a difference of opinion among the various scholars;Yajnavalkya holds the view that, the partition has to be opened up again, in order togive the after-born son the share which he would have had if he had been in existenceat that time.235 Whereas Manu along with some others like Narada and Gautamaholds the view that, the after-born son is to receive share only from his father, but incase father has re-united with his brothers, he is to share with them.236

Son begotten at the time of Partition: this means that son who is in his mother’swomb at the time of partition is entitled to a share, although he is born after partition,as if he was in existence at the time of partition. If a share is not reserved for him he hascomplete rights to get partition open and seek his claim237.

After born Son: It is possible that after partition from his sons, father may or may notreserve a share for himself. If he reserves a share for himself a son begotten and bornafter partition cannot reopen partition. This son will be a coparcener with his father andafter father’s death would be entitled to inherit the whole of separate property of father,to the entire exclusion of separated sons238. In case the father has not kept anythingaside as his share the son born as well as begotten after partition is entitled to have the

233 AIR 1978 Guj 10.234 Manjaya v Shanmuga, (1915) 38 Mad 684.235 Yajna, II, 122; Rangnnath Mishra (rev.), Mayne, HINDU LAW, 15th ed. 2003, p.857.236 Manu, IX, 216; Nar XIII, 44; Gaut XXVIII, 29; Rangnath Mishra (rev.), Mayne, HINDU LAW, 15th ed.

2003, p.857.237 Jagat Krishna v. Ajit Kumar, AIR 1964 Ori 75.238 Shivajirao v. Vasantrao, (1909) 13 Bom 267; Rangnath Mishra (rev.), Mayne, HINDU LAW, 15th ed.

2003, p.858.

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partition reopened not only in the property that stood at the time of original partitionbut also in the accumulations made with the help of the property.239 Thus, the unbornchild cannot be deprived of his share in the paternal estate by a prior partition. Thisprinciple can only be applicable in cases where the partition is between father andsons, and there is no warrant for its extension to a son born to a separated coparcener,other than the father of the family of partition.

Minor Coparcener: A suit for partition can be brought on behalf of a minor only ifit is for the benefit of the minor, and advancing his interest. In Pedasubhhayya v.Akkamma240, the Supreme Court opined that the Court should be satisfied that the nextfriend of the minor has, in instituting a suit for partition acted in his interest. An absentcoparcener stands on the same footing as the minor.

Adopted Son: Amongst the three higher classes that is the twice-born classes asadopted son takes the same share as the aurasa son. After the commencement of theHindu Succession Act,1956 there is no difference between an adopted son and a realson.

Illegitimate Son: The illegitimate sons of the three higher regenerate classes are notentitled to claim partition241. In case of Mitakshara School, the son of a Sudra does notacquire by birth any right in his father’s property and hence cannot enforce partition inhis lifetime242. But after his death he succeeds to his estate with the legitimate son of thefather. The Supreme Court had held in the case of Gur Narain Das v. Gur Tahal Das243,that though an illegitimate Sudra son cannot claim partition in the lifetime of his father,he can do so after his death if the father was separate from his collaterals. Where thefather leaves no legitimate male issue, illegitimate son is entitled to inherit half of ashare, which he would have taken had he been legitimate, in Mitakshara School.244

239 Chengama v. Munisama, (1897) 20 Mad; S.A. Desai (rev.) Mulla, HINDU LAW, Vol.1, 18th ed.2004, p. 583.

240 AIR 1958 SC 1042. This view was re-iterated in the case of Venakata Reddi v. Lakshamma, AIR1963 SC 1601.

241 Roshan Singh v. Balwant Singh, (1900) 22 All 191, 27 IA 51; S.A. Desai (rev.) Mulla, HINDU LAW,Vol.-1, 18th ed. 2004, p. 584.

242 Raja Jogendra v. Nityanand, (1891) 18 Cal 151; S.A. Desai (rev.) Mulla, HINDU LAW, Vol.1, 18th

ed. 2004, p. 585.243 AIR 1952 SC 226.244 Kamulammal v. Visvanathaswami, (1923) 50 IA 23.

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Persons entitled to Share:

Apart from those mentioned above, there are some female members who have theright to entitlement in the property even though they themselves cannot claim for it. Anyproperty that these females may take after partition is their absolute property by virtueof Section 14 of the Hindu Succession Act, 1956. Also the fact these females areentitled to maintenance does not adversely affect their share at the time of partition.

Wife: A wife cannot herself claim partition245 but when it takes place between herhusband and her sons she is entitled to a share equal to that of a son and she can enjoythat separately from her husband246 except in South India where it has since long beenan obsolete practice.

Mother: Widowed mother has right to equal share as that of her son’s only whenpartition by metes and bounds takes place247. In Dayabhaga School a widow becomesthe heir of her husband, if he leaves no male issue whether he is undivided or not.

Grand Mother: Paternal grandmother is entitled to a share in case partition takesplace between her grandsons, or between her son and son of predeceased son.

Coparceners Widow: When two or more widows succeed to their husband’s propertyeither of them has the right to partition.248

Daughter: In case of a custom prevailing at a point of time she is entitled to claimshare.249 After the commencement of Hindu Succession (Amendment) Act, 2005 incase of joint Hindu family governed by Mitakshara, the daughter of coparcener shallbecome a coparcener and have the same rights as that of a coparcener. Hence, shecan now claim partition and would have share as a son.

What constitutes Partition?

Partition may come into effect without the instrument of writing250, but where thevalue of immovable property is above rupees 100 requires registration under Section

245 Punna Bibee v. Radha Kissen, (1904) 31 Cal 476.246 Shiromani v. Hem Kumar, AIR 1968 SC 1299.247 Pratapmull v. Dhanbatti, 1973 P.C 21; Paras Diwan, MODERN HINDU LAW, 15th ed. 2003, p.333.248 Venkat v. Keshava, AIR 2003 SC 3314249 Pachi Krishnamma v. Kumaram, AIR 1982 Ker 137.250 Section 9 of the Transfer of Property Act, 1882.

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17(1) of the Indian Registration Act, 1908. It is important to remember that partitiondoes not, amount to a transfer of property as partition means that the totality of propertyof the family in which all coparceners jointly had subsisting title would be transformedinto separate titles of individual coparceners in respect of several items of propertiesallotted to them251. There are various circumstances which indicate whether partitionhas actually taken place or not, but these are not hard and fast rules, the mere existenceof separate transaction252, or division of income is not conclusive evidence. The centralpoint is that when partition is brought there must be an intention of the coparceners, toalter to their title. The Supreme Court has taken the view that an uncommunicateddeclaration is no better than mere formation or harbouring an intention to separate.253

Father’s Power to affect a Partition: A Hindu father under Mitakshara School canaffect a partition between himself and his sons without their consent, for both ancestraland self-acquired property. His power is also extended to division between the sonsinter se254. This power extends to division not only by metes and bounds, but also to adivision of status255. In all such cases father should act in bona fide interest and it mustbe in accordance with law. Whereas in Dayabhaga Law if the father gives his propertyto one son and separates him, the others will get the property on his death.

Partition by agreement: The coparceners in a joint family can by an agreementamongst them separate and cease to be a joint family, and are entitled in suchcircumstance to partition the joint property. When the members agree among themselveseither with reference to a particular property or entire joint estate that it shall henceforthbe the subject of ownership in certain defined shares, this implies conversion of jointtenancy to tenancy-in-common, and each member then enjoys a definite share in theestate which he may claim the right to receive and enjoy in severalty256.

Severance by Unilateral Declaration: the earlier view that severance can take placeonly through mutual agreement no longer holds true. A definite and unambiguous

251 V N Sarin v. Ajit Kumar Poplai, AIR 1966 SC432.252 Baboo Ram v. Bachni, AIR 1978 P & H 343.253 Raghavamma v. Chenchamma, AIR 1964 SC 136.254 Shiv Dayal v. Ram Jiwaya, (1931) 12 Lah 574; Rangannath Mishra (rev.) Mayne, HINDU LAW AND

USAGE, 15th ed. 2003, p. 860. Also see Bhimashya v. Jannavya, 2007(2)AWC1432(SC)255 Venkateswara Pattar v. Mankayammal, (1936) 63 IA 397; Rangannath Mishra (rev.) Mayne, HINDU

LAW AND USAGE, 15th ed. 2003, p.859256 Appovier v. Rama Suba Aiyan, (1866) 11 MIA 75, 92; Rangannath Mishra (rev.) Mayne, HINDU

LAW AND USAGE, 15th ed. 2003,

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indication of intention by one member to separate himself from the family and to enjoyhis share in severalty will amount to division in status257. In such cases it is vital that thedecision has been expressed unequivocally and has been clearly intimidated to theother coparceners. After this his right to obtain and possess share becomesunimpeachable and the Court cannot examine his conscience, it has to give effect tohis right to have share allocated separately from the rest.258

By Conduct: The intention to separate can be evidenced in different ways; it canalso be shown through conduct, the result is same as that of declaration. Attachment ofundivided share causes severance259. Once the coparcener has intimated by a noticeto the others his intention to separate, he cannot later unilaterally remove it; this principlehas been laid by several Courts including the Supreme Court260, which held that onceall defendants have been summoned and one of the defendants dies, it is not up to theplaintiff to revoke the intention.

By Suit: It is a well-settled principle that institution of a suit by an adult member is anunequivocal intimation of his intention to separate and there is consequently a severanceof joint status from the date when suit is instituted.261 Every suit for partition shouldordinarily embrace all joint family properties.262 Once the Court has issued summonsand partition has come into effect it cannot be withdrawn this was held by the ApexCourt in the case of Puttrangamma v. Ranganna263.

By Arbitration: A reference to arbitration or an agreement appointing a person asarbitrator for division of joint family property. The fact that no award is subsequentlymade, will not amount to renunciation of intention to separate264.

257 Puttarangamma v. Mt Ranganna, AIR 1968 SC 1018.258 Girja Bai v. Sadashiv Dhundiraj, (1913) 43 IA 151, 160; Rangannath Mishra (rev.) Mayne, HINDU

LAW AND USAGE, 15th ed. 2003, p. 884.259 Muneswari v. Jugal Mohini, AIR 1952 Cal 368.260 Puttrangamma v. Ranganna, AIR 1963 SC 1018.261 Joala Prasad v. Chanderjot, (1938) 17 Pat 430.262 T.N Rajsekar v. N. Kaviswanathan, AIR 2005 SC 3794.263 Ibid n. 38.264 Syed Kusum v. . . . . Jarawarsingh, (1922) 49 IA 358; Rangannath Mishra (rev.) Mayne, HINDU LAW

AND USAGE, 15th ed. 2003, p.889.

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Births and Deaths pending suit: The share of an adult coparcener who sues forpartition is ascertained on the date of suit and is neither diminished nor augmented bylater births and deaths in the family. If he dies without obtaining a decree, his widow orother legal representative is entitled to continue the suit and inherit the share.

Mode of Division:

The earlier principle of Hindu Law which stated that partition among the coparcenerswas to be of two kinds, one in accordance with priority of birth and the other, allotmentof equal shares. Now this has been changed and the only recognized principle now isequality of division. Partition in itself could be either partial or total. The partiality is inregards with the persons making it, or the property divided.

Partial Separation: When there is partial partition the family as to the property, thefamily ceases to be undivided so far properties in respect of which such partition hastaken place with all the incidents flowing from there, but continues to be undivided withregards to the remaining property.265 The coparceners cannot claim a partition partialas to the persons or the property as of right though such partitions are sanctioned byusage and may be decreed by consent.266

The Privy Council held that the fact of separation having been effected amongbrothers raises no presumption that there was a separation of joint family constitutedand headed by each brother267. But, the Supreme Court in the case of Bhagwati Prasadv. Rameshwari Kuer268 has laid down that, “the general principle is undoubtedly that aHindu family is presumed to be joint unless a contrary is proved but where one of thecoparceners separates himself from the other members of the joint family and has hisshare in the joint family partitioned off to him, there is no presumption that the rest ofthe coparceners continued to be joint. It would be a question of fact to be determinedin each case and the burden of proof would lie on the party who asserts a particularstate of things.”269

265 Kalloomal Tapeswari Prasad v C.I.T, Kanpur, AIR 192 SC 760.266 Chandar Shekhar v. Kundan Lal; H.S Gour, THE HINDU CODE, 6thed. 1996, vol.-1, p.491.267 Hari Baksh v. Baboo Lal, 1924 P.C 126; Paras Diwan, MODERN HINDU LAW, 15th ed. 2003,

p.342.268 AIR 1952 SC 72.269 Ibid.

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Reopening of Partition:

The general rule in this regard is that a partition is made only once. There are someexceptions to this generalization. The posthumous son can claim re-opening of partitionalso an adopted son; similar is the case of an heir of a disqualified person and anabsent coparcener. Whenever a partition is re-opened, shares must be allocated on afair and equitable principle.

Fraud: A partition may be re-opened, if any coparcener has obtained an unfairadvantage in the division of the property by fraud upon the other coparceners270. Similaris the case if undue influence.271

Mistake: In case after a partition has been made and it is discovered that propertyallotted to one of the coparceners did not belong to the family, but to a stranger or issubject to a mortgage, then the coparcener to whom such property has been allotted isentitled to compensation out of the share of other coparceners and if necessary, partitioncan be re-opened for re-adjustment of share272.

At the instance of Minor: It has been very clearly summarized by the Supreme Courtin the case of Ratnam Chettiar v. Kuppuswami273, where a partition is proved to unjustand unfair and is detrimental to the interest of the minors; the partition can be reopenedany time. In such cases, it is the duty of the Court to protect the interest of minors.

Reunion:

A reunion in estate property so called, can only take place between persons whowere parties to the original partition.274 The rules of Mitakshara at this point are fairlyprecise. It was held in the case of Ram Narain Chaudhary v. Pan Kuer275 that in a Hindu

270 Moro Vishvanath v. Ganesh, (1873) 10 Bom HC 444; S.A. Desai (rev.) Mulla, HINDU LAW, Vol. 1,18th ed. 2004, p.628.

271 Venkappa v. Gangama, AIR 1988 Ker 133.272 Damodra Nayak v. Vatsala Nayak, AIR 1990 Ker 348.273 AIR 1976 SC 1.274 Balabux v. Rukhmabai, (1903) 30 Cal 725; S.A. Desai (rev.) Mulla, HINDU LAW,

Vol.-1, 18th ed. 2004, p. 631.275 (1932) 62 IA 16; Rangannath Mishra (rev.) Mayne, HINDU LAW AND USAGE, 15th ed. 2003,

p. 867.

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family governed by Mitakshara, a reunion is valid only if it is with the father, brother orpaternal uncle and only if it is between the parties to partition. Whereas Dayabhaga ismore emphatic at this point, a reunion is only valid with a father, brother or paternaluncle.276

Reunion can be effected either by an oral agreement between the parties after thepartition or by their subsequent conduct. To constitute a reunion there must be anintention of the parties to reunite in estate and interest. In Bhagwan Dayal v. ReotiDevi277 the Supreme Court pointed out that it is implicit in the concept of a reunion thatthere shall be an agreement between the parties to reunite in estate with an intention torevert to the former status.

Effect of Reunion: The effect of reunion is to restore the undivided status of thereuniting coparceners, that is, status quo ante is fully restored in both the Schools.

276 Dayabhaga, XII, 3-4; DKS, V, 4-5; Rangannath Mishra (rev.) Mayne, HINDU LAW AND USAGE,15th ed. 2003, p. 864.

277 AIR 1962 SC 287.

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Partition under the Dayabhaga School of HinduLaw

Introduction:

Much before Jawaharlal Nehru championed the codification of lawapplicable to Hindus, Sastric law and customary usage prevailed. Butthere was no overarching, unifying law as the country was vast andcommunications and social interactions in the past were difficult. Thislead to a diversity in laws differing from region to region and also diversitybased on castes. Consequently, in matters of property also, there weredifferent Schools, like Dayabhaga in Bengal (also known as Bengal Schoolof Hindu Law) and the adjoining areas; Mayukha in Bombay, Konkanand Gujarat and Marumakkattayam or Nambudri in Kerala andMitakshara in other parts of India.278 The multiplicity of succession lawsin India, diverse in their nature, owing to their varied origin made theproperty laws very complex.

In this part we set out to analyze in depth the features of law ofpartition under the Dayabhaga School. This has been discussed at twolevels—one, under the Sastric law and second, the impact of HinduSuccession Act, 1956 and also the Hindu Succession (Amendment) Act,2005 on the Dayabhaga Law of partition. Observe that, thoughDayabhaga was not a prominent treatise in the rest of India except forBengal, however, the way in which this School dealt with subjects ofpartition was more equitable and thus the present law as regards propertymatters has been largely inspired by the Dayabhaga system.

278 Smt. Tara Mani v. Narinder Kumar, AIR 2002 P&H 365; Hamida Khatoon v. Baryapore Panchayat,AIR 1947 Pat. 122.

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The Genesis of Dayabhaga Philosophy:

At the very outset, we must gather the genesis of Dayabhaga philosophy in thissection. Dayabhaga is basically the treatise written by Jimutavahana the first of thetriumvirate of Bengal writers on Dharmasastra.279 There is no doubt that Dayabhaga isthe most popular of Jimutavahana’s works. It stood as a paramount authority in mattersof partition in the British Indian Courts of Bengal.280 Although, there were no divisionsin the earlier work, however, later on in its multifarious translations it was divided intosections based on subjects and also translated into English by Colebrooke. In the originaltext the topical areas covered the following heads—Definition of daya, father’s powerover ancestral property, partition of father’s property, division amongst brothers, propertyof women, person’s excluded because of disabilities, property which is impartible (self-acquired), order of succession to one dying sonless, re-union, partition of coparcenaryproperty concealed but discovered afterwards, indicia of partition.281

Jimutavahana quotes in Dayabhaga among Smriti sages, Manu, Narada, Vishnu,Gautama, Vasistha, Harita, Yama, Vyasa, Baudhayana etc. Manusmriti is of maximumrelevance to us for this has been cited the most number of times in Dayabhaga treatise,and so has been referred to at relevant points.

The words daya and vibhaga have been variously defined by authors. Some defineit to be one in which sons arrange for the partition of their father’s wealth. TheSmritisangraha quoted that the word daya applies to wealth that is to be divided.282

Further authors believe that Dayabhaga also refers to wherever there is a question ofdistribution of wealth of the father or grandfather or even of the mother (as held byNarada).

Tracing the historical roots of the ancient Hindu Law it is said that it originated inwhat we call the Bengal proper which can be roughly described as the valley of theGanges below Bhagalpur. This place is precisely where the prevailing treatise for partitioncame to be known as Dayabhaga, the author being Jimutavahana. There is nosatisfactory authority to affirm the date at which he wrote the treatise. However, it isbelieved that it was written between the 12th and the 16th century.

279 The other two being Sulapani and Raghunandana.280 P. V. Kane, History of Dharmasastra, Vol. I, Part II, 3rd ed., 1997, p. 705.281 Id at p. 704.282 P. V. Kane, History of Dharmasastra, Vol. III, Part II, 3rd ed., p. 545.

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At the outset, it is important to note that Dayabhaga recognizes only one mode ofdevolution, namely succession. It does not recognize the rule of survivorship even in thecase of joint family property because a member of a Dayabhaga joint family holds hisshare quasi-severally, so that it passes on his death to his heirs as if he was absolutelyseized thereof, and not to the surviving coparceners.283 Therefore, it is relevant tounderstand the guiding principle of succession under Dayabhaga School and thereckoning of heirs.

The guiding principle determining the succession under Dayabhaga School is thedoctrine of spiritual efficacy. This essentially means that the test to determine the rivalheirs is the number and also the respective offering he/she makes to the deceased; thatis to say, the three generations next to the owner, in an unbroken male descent.284 Let usnow reckon the class of heirs which can present the spiritual offerings to the deceased.

The term sapinda as used in the Smritis meant only those connected with the funeralobligations. Manu has written that when a man dies, his property goes to his nearestsapinda. Therefore, the question is what the meaning of the word sapinda is. Thatdepends upon the meaning of the word pinda. It is this difference which formulated thecornerstone of the philosophy of the law of partition as developed in the differentSchools in India. For example: according to Mitakshara the word pinda means theparticles of the body of the deceased.

It is pertinent to note that according to Dayabhaga, pinda means the rice cakewhich is offered in the Shraddha ceremony to one’s deceased ancestors. The offeringnext in importance is that of the lepa, or fragments of the rice cake, the crumbs as wemight call them and the persons who make this offering are called sakulyas. The offeringof least importance is the simple libations of water, and persons connected to thisoffering are called samonadacas.

Now, relating the two concepts of ‘spiritual efficacy’ and pinda it follows that underthe Dayabhaga School the traditional rule is that only the person who can performShraddha for his ancestor can inherit the property.

283 Subhadrabai Kachari Khandagale v. Balwanta Narayan Jadhav, 2005 (1) Bom CR 875.284 Dayabhaga XI 34 as quoted in P. V. Kane, History of Dharmasastra, Vol. I, Part II, 3rd ed.

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Who can perform the Sharddha ceremony?

It is now clear that only that person can inherit under Dayabhaga School that canperform the Shraddha ceremony for the deceased. The essential question that we thenface is who can perform the Shraddha ceremony. Also amongst sapindas, sakulyasand samonadacas respectively, whose offering is most efficacious?

In the book called Parvana Shraddha the list of persons who can perform Shraddhais mentioned. First in the list appears the son, their offering being most efficacious;followed by the son’s son, etc. 285 The general rule is that if a person at a higher positionin the list is available, then one cannot go down the list, and the list terminates there.The line is not continued beyond the great-grandsons.

For instance, if the son is alive, then the son’s son (i.e. grandson of the deceased)has no right to perform Shraddha, because the grandson is given in Parvana Shraddha,where the son appears first.

Thus, evolves the fundamental principle of this School which states that there is noright by birth in Dayabhaga when the father is alive.286 Similarly, in Dayabhaga theunborn son in the mother’s womb cannot have a share in the property, because anunborn son cannot perform Shraddha.

Dayabhaga Law also identifies father, then the mother, then the brothers, then thebrothers, sons, and then the brothers’ sons’ sons. The sisters are excluded, but theirsons succeed after the brothers’ sons’ sons; and finally come the brothers’ daughters’sons. But Dayabhaga prefers the father to the mother, because he presents two oblationsin which the deceased son participates, while the mother presents none.287

Dayabhaga also recognises cognates, i.e. the relatives of the deceased throughthe mother. It is said that these are also in some way sapindas. They are generallycalled bandhus. There is some difficulty in finding out the order in which they succeed,and since it is rare that an heir has to be sought outside the father’s family, the questionhas not been much discussed. The question would have to be decided by the religiousdoctrine of spiritual benefit, and it is not improbable that Hindus who are accustomed

285 Markandey Katju, THE IMPORTANCE OF MITAKSHARA IN THE 21ST CENTURY, http://www.ebc-india.com/lawyer/articles/2005_7_3.htm (12th June, 2007).

286 Mathew Varghese v. Rosamma Varghese, AIR 2003 Ker 312.287 Satya Charan Chaunder v. Smt. Kamala Dey, (2000) 3 CAL LT 539 (HC).

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to keep up sacrifices which confer the benefit would be able to say whose sacrifice wasmost efficacious. When all the sapindas both on the father’s and mother’s side areexhausted, we then go to the sakulyas, and practically these are found by continuingthe enumeration of agnates upon the same principle as that already indicated throughthree generations lower and three generations higher. On failure of the sakulyas weshould have to fall back upon the samonadacas, but probably all that can be said withcertainty is that the sakulyas and samonadacas between them exhaust entirely the maleagnates of the deceased. Where there are several persons whose offerings are equallyefficacious, i.e. who stand in the same relationship to the deceased, they all take: themale descendants per stirpes, and the other relatives of the deceased per capita.

To summarize, we trace the heirs under Dayabhaga Law as: First, the sons, thenthe sons’ sons, and then the sons’ sons’ sons, then the widow, then the daughters, andthen the daughters’ sons. After these come the parents, and it is peculiar that of thesethe mother comes before the father, then the father’s sons and then the father’s sons’sons. Then we go back to the preceding generation, and follow the same order.

The Concept of Joint Family:

To begin with, a Hindu Joint Family consists of the common ancestor and all hislineal male descendants up to any generation together with the wife/wives (or widows)and unmarried daughters of the common ancestor and of the lineal male descendants.

As we saw earlier, Dayabhaga School neither accords a right by birth nor bysurvivorship in the property. It is important to note that neither sons nor daughtersbecome coparceners at birth nor do they have rights in the family property during theirfather’s life time. Nevertheless, on his death, they inherit as tenants-in-common.288 Thisis how the notion of joint family and joint property is recognized. Since the ownershiparises only on the extinction of the father’s ownership nobody can compel the father topartition the property in his lifetime and the latter is free to give or sell the propertywithout their consent. Hence, under Dayabhaga Law, succession rather than survivorshipis the rule.

288 Discussed by the Supreme Court recently, in the case of M/s. Meera and Company, Ludhiana etc. v.Commissioner of Income-tax, Punjab, J & K and Chandigarh, Patiala, AIR 1997 SC 1973.

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Furthermore, under Dayabhaga School, if the brothers are living separately for along time and have been performing religious observances separately, they must notbe considered together for the ancestral estate.289

The Position of Women:

We must note at this point that there is a reasonable consideration given to womenin matters relating to partition under Dayabhaga Law and therefore, it becomes essentialto analyze their situation.

The Dayabhaga Law recognized five females relations as being entitled to inheritnamely, widow, daughter, mother, paternal grandmother, and paternal great-grandmother.290 Let us consider their separate cases.

To begin with a widow, she succeeds to her husband’s interest on her husband’sdeath even if he be joint with his brother. It is difficult to establish her claim on theground of spiritual benefit, and it rests upon authority rather than principle. Ideally, shetakes a share equal to that of a son when brothers come to partition. Dayabhaga textremarks on this, that this right is that relating to the partition of the sons of the samemother and thus, the mother is only to be construed as ‘real’.291

Furthermore, as regards the case of a step-mother who is herself sonless, is notentitled to share when her step-sons come to partition, but is entitled to maintenance.292

However, the opinions of ancient writers on the subject are very conflicting; they are setforth at great length in Dayabhaga, with a conclusion in favour of the widow. Probablythe intrusion of the widow is connected with the fact that she could in early times bycohabitation with a brother, and in later times by adoption, procure an heir to hersonless husband. This reasoning is rather obsolete and is now debunked.

In case of more than one son from different mothers, the rule is to allot shares asthere are number of sons and then divide property amongst each branch per capita tothe summation of the entire property.

289 Devi Oarshad v. Thakur Dial, 1 All. 105 F. B. at p. 109.290 M. Indira Devi, WOMAN’S ASSERTION OF LEGAL RIGHTS TO OWNERSHIP OF PROPERTY, in

Women and Few, Contemporary Problems, by L. Sarkar & B. Sivaramayya (ed. 1994), p. 168.291 Dayabhgaa III. 29-30, p.67 as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3rd ed.

p. 1292.292 Srimati Hemangiri v. Kedarnath, L. R.16 I. A. p. 115 at p. 117.

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In case of an unmarried sister, according to the Sastric law, the brothers shouldseverally give fourth part of their share when separated.293 This is based upon thereasoning of father having got the daughter wed at tremendous expense, or otherwiseafter his death the unmarried daughter gets a part of his property. This however inpracticality only takes place in case of a widow daughter.

Note that grandmother cannot herself demand a partition. Grandmother is entitledto a share when the subject matter of the partition is the property of her husband.294 Ifthere occurs a partition between her grandsons, she takes the share equal of hergrandson295 and also if the partition takes place between grandsons and great-grandsonsshe takes the share equal of her grandson.296 Lastly, the doctrine of unchastity appliesto all females under Dayabhaga Law.297

The Property which can be divided:

By traditional definition the joint family properties are those which are obtainedfrom father or paternal grandfather or paternal great-grandfather or share obtained onpartition or self-acquired properties or separate properties of an individual (like thoseinherited from a maternal grandfather) thrown into the joint family properties.

The coparcener might have acquired properties out of his own income, which is hisseparate property. Such coparceners may throw their separate, self-acquired propertyinto the stock of the joint family property, which therefore, becomes the property of thejoint Hindu family. But the intention must be clear. The mere intention that the membersof a joint Hindu family are entitled to enjoy the benefits of the separate property maynot be enough evidence to include the separate property in the joint Hindu familyproperty.

Also note that, the ambit of self acquired property in Dayabhaga is very broad ascompared to that of Mitakshara. Under this, gifts acquired by near relation like member’sfather in law or even if a member learnt a skill at the expense of the family and acquired

293 Ganganath Jha, Manusmrti—With the ‘Manubhasya’ of ‘Medhatiti’, Vol. VII, 2nd ed., verse CXVIII,p. 98.

294 Kiranbala v. Sushil, 53 CWN 709.295 Purna Chandra v. Sarojini, (1904) 31 Cal 1065.296 Sibbosoondery v. Bussomutty,,,,, (1881) 7 Cal 191.297 Ramnath v. Durga, (1879) 4 Cal 550.

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property benefited through that skill, that is supposed to be his own property which isnot so, in case of other schools of partition.298

There must be a specific observation made here, that as regard the property thathad been concealed by a member during the time of partition, the Dayabhaga Schooldoes not direct the same to be distributed proportionally.299 The conclave of joint familyproperty, stricto sensu, is not guilty of wrong. This is not the case with others likeYajnavalkya, Apararka, Vyavaharaprakasa.

Lastly observe that in case of partition under the Dayabhaga Law, sons excludeothers except in case of non agricultural property. In case of non agricultural propertya wife gets a share equal to that of a son.

Initiation of Partition:

The question before us in this section is—who exactly can initiate the partitionunder the Dayabhaga School? Since we are looking at the Sastric law the observationof the renowned author Ganganath Jha in his book—Manusmrti is interesting to notehere. He remarks on Verse CIV of Manusmiriti holding that in the lifetime of parents thesons have no power to divide the property.300 This has been the guiding philosophy ofthe Dayabhaga School. Partition is also not allowed even if the father is ill or sufferingfrom chronic disease nor has not all wits about him.301 Jimutavahana further went on tosay that even though the father was dead there should not have been any partitionduring the lifetime of the mother.302

We thus can relate to the law under Dayabhaga School that developed subsequently.In a Dayabhaga family there can only be a partition as between brothers, or thedescendants of brothers but between a father and his sons there can be no partition,the sons not being owners. The father may, if he chooses to do so, distribute the propertyamongst his sons, and he sometimes does so; but this is a distribution of his own

298 P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3rd Ed., p. 1309.299 Dayabhaga XII. 11-13, as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3rd ed.

p. 1320.300 Ganganath Jha, Manusmrti—With the ‘Manubhasya’ of ‘Medhatiti’, Vol. VII, 2nd Ed.,

p. 87.301 Dayabhaga III. 9, p.60 as quoted in P. V. Kane, History of Dharmasastra, Vol. III, Part II, 3rd ed.,

p. 569.302 Id at p. 568.

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property, and not a partition. The father can distribute the property as he pleases. Insimple words, father’s decision is absolute.

Once the partition has been initiated, the rules governing the property division asunder this School apply. We must observe that it has been specifically mentioned inDayabhaga that after the initiation even if the members of the family are minors orsingle member is demanding the partition, it has been expressly admitted under theSchool.303

A relevant point to be noticed here is that an aurasa son under Dayabhaga systemcannot demand or claim partition during the father’s lifetime and so is the position ofadopted son.304 If after a person adopts he has an aurasa son, the adopted son’s sharebecomes reduced according to most commentators.305

Allotment of Shares:

We have discussed how the partition is initiated under Dayabhaga and in thissection we analyse the process of partition under this School. To begin with, we mustobserve the formalities which are to be dispensed with before the final separationinstigates. The first point in this regard is the payment of the joint family debts out of thejoint family property.306 Secondly, any personal debt of the father which does not fallunder the category of being immoral or illegal must be recompensed. Thirdly by a veryimportant provision is to be made before the partition concerning the female memberswho are entitled to maintenance and disqualified coparceners.307 A case may come upwhere amongst brothers some are unmarried and there must be a provision made fortheir marriage expenses.308

As to the claim for share by coparceners is concerned, under Dayabhaga system, itis submitted that in cases where the father is alive and he wishes a partition, he may as

303 Dayabhaga III. 16-17 as quoted in P. V. Kane, History of Dharmasastra, Vol. III, 3rd ed., p. 573.304 Id at p. 597.305 Id.306 Ponappa v. Pappuvayyanagar, 4 Mad 1 (F.B.) at p. 49.307 Manu VIII. 166.308 This is however the old law on the subject and it is no longer necessary to make any provision of

such sort. See Ramalinga v. Narayan, L.R. 49 I. A. 168; Jairam v. Nathu, 31 Bom 54; Sundrabhaiv. Shiv Narayan, 32 Bom. 81; Venkataraduyu v. Sivaramkrishnayya, 58 Mad. 126; P. V. Kane,History of Dharmasastra, Vol. III, 3rd ed. p. 621.

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he please distribute the property.309 The reasoning to this draws from the very philosophyof Dayabhaga where father is supreme and the sons if by chance try to alter the decisionmade by him, are necessarily to be punished.

If on the demise of the father, the brothers decide for a partition, the ideal way asrecognised now is that to allot them equal shares. Even though an old practice, it ispertinent to note that, the eldest son in all texts has been given a special place inmatters relating to partition by allotting him the whole share, the best of share, thelargest share and so on. Under the Dayabhaga Law, ideal of two shares are allotted forthe eldest brother when the father is not alive and if he is alive, he should retain twoshares with himself.310

Under the present Dayabhaga Law, each coparcener has, a certain definite sharein the joint property of which he is the absolute owner.311 The rule stands as: eachbranch takes per stripes and as regards every other branch, the members take percapita.

Further, on the death of a coparcener who leave a male issue, his property sharewill passes on to this issue. In case, he leaves no male issue, the share shall be takenover by the devisee or assignee.

To make the allotment of shares more clear, let us take an example:

Here, on the demise of A, his sons should ideally distribute equally. The allottedshares for B, C and E are 1/3rd (per stripes). However, E is dead; therefore, F and Gdistribute their father’s share amongst themselves i.e. 1/6th (per capita). But because Cis alive and thus D is not entitled to any share in father’s lifetime.

309 P. V. Kane, History of Dharmasastra, Vol. III, 3rd ed., p. 623.310 Id at p. 625.311 Durga Nath v. Chintamoni, (1904) 31 Cal 214.

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Reunion:

The text of Dayabhaga says: a man who being once separated from his father,brother, or paternal uncle again dwells through affection with them (or any one ofthem) is said to be re-united with them (or him).312 It can be noted that, in Dayabhaga,a re-union is possible only with a father, brother and paternal uncle.313

Mitakshara vis-a-vis Dayabhaga:

One unyielding debate since ages is which of the two Schools—Mitakshara orDayabhaga is more equitable in the light of partition. This section analyses the meritsand downsides of one School over the other.

The myriad questions thus posed before us are— does Mitakshara system not givebetter rights to males or does it protect the financially weaker members of the family?Does it discriminate against women? Whether Mitakshara coparcenary system shouldbe retained or discontinued? Does retention of the system help the agricultural activitiesof the family or will it be detrimental to the business or agriculture?314 We observe fourbasic differences and all other distinguishing factors are subordinate to there threeprime differences.

First, Mitakshara, one of the two schools of Hindu Law prevails in a large part of thecountry. In Mitakshara Law, on birth, the son acquires a right and interest in the familyproperty. However under Dayabhaga system the sons do not have any right in thelifetime of the father and their right arises only after his death.

Secondly, there is no such thing in terms of ‘coparcenary’ under the Dayabhagasystem as in the Mitakshara and the members who can claim share on partition areonly ‘tenants-in-common’.315

312 Dayabhaga Chapter 12, as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3rd ed. p.1303.

313 Abhai Churn Janav v. Mangal Jana, (1892) 19 Cal 634, 638; Tarachand Ghose v. Pudum LochunGhose, 5 WR 249; Ramhari Sarma v. Trihiram Sarma, 7 Beng LR 336; Akshay Chandra v. Haridas,(1908) 35 Cal 721.

314 Lalit Sethi REFORMING PROPERTY RIGHTS OF WOMEN, http://pib.nic.in/feature/fe1099/f1210992.html (20th May, 2007).

315 Tapan Dass v. Sosti Dass, 90 CWN 1018.

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Thirdly, it is true to state that the Mitakshara coparcenary is gender discriminatoryand does not include daughters in the system. This is not so in case of Dayabhaga fora reason that even females can offer pindas in the Shraddha ceremony and hence havea share equal as other coparceners on partition.316

Fourthly, the Dayabhaga Law of partition necessarily relates to the segregation ofproperty as there can be no severance of status as such.

The present law and the relevance of Dayabhaga system:

As it has been discussed in the previous pages that laws under the prevailing Schoolswere first copious and incoherent and secondly, they were discriminatory towards women.To address the drawbacks suffered by the Hindu Law on grounds of property and toremove the disparities and disabilities suffered by Hindu women Pandit JawaharlalNehru, the then Prime Minister of India expressed his unequivocal commitment to carryout reforms.317

As a consequence, despite the resistance of the orthodox section of the Hindus, theHindu Succession Act, 1956318 was enacted and came into force on 17th June, 1956.Besides being applicable to all the Hindus including Buddhists, Jains and Sikhs it laysdown a uniform and comprehensive system of inheritance and applies to those governedboth by the Mitakshara and Dayabahaga Schools and also to those in South Indiagoverned by Murumakkattayam, Aliyasantana, Nambudri and other systems of HinduLaw.

Note that, though this law relates to intestate succession, yet it considerably alteredthe meaning of coparcenaryship in India which was the basis of joint property partition.Many changes were brought about giving women greater rights, yet in Section 6 of theAct Mitakshara Coparcenary was retained.319

316 Ram Dulari v. Batul Bibi, 1976 All 135.317 Reba Som, “Jawaharlal Nehru and the Hindu Code: A Victory of Symbol over Substance?”, ModernModernModernModernModern

Asian StudiesAsian StudiesAsian StudiesAsian StudiesAsian Studies Vol. 28, No. 1 (Feb., 1994), pp. 165-194. (Available at Stable URL:http://links.jstor.org/sici?sici=0026749X% 28199402%2928%3A1%3C165 %3AJNATHC%3E2.0.CO%3B2-%23) (lastvisited on 23rd August, 2007).

318 Hereinafter referred to as ‘the Act’.319 LAW COMMISSION OF INDIA 174TH REPORT ON “Property Rights of Women: Proposed Reforms

under the Hindu Law”, May, 2000, http://www.lawcommissionofindia.nic.in/kerala.htm.

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In effect, Section 6 of the Hindu Succession Act gave recognition to MitaksharaCoparcenary and also Section 4 of the Act gave overriding application to the provisionsof the Act and laid down that in respect of any of the matters dealt with in the Act allexisting laws whether in the shape of enactment or otherwise which are inconsistentwith the Act are repealed. Any other law in force immediately before the commencementof this Act ceased to apply to Hindus in so far as it is inconsistent with any of theprovisions contained in the Act. It is therefore, clear that the provisions of DayabhagaLaw will cease to apply, in so far as they are inconsistent with the provisions of theHindu Succession Act.320 This means, that Section 6 is applicable to Dayabhaga system.

At the very outset, it is interesting to note that Hindu Succession Act could be saidto be inspired by the lesser prevalent law on partition: Dayabhaga though Mitaksharawas much in vogue all throughout India because of the very reason that for the first timerecognised on a uniform basis equal rights for men and women in property matters.321

The right to survivorship was restricted and in the case of a female relative or a malewho claimed through the female relative, an interest in the coparcenary property of theintestate would now devolve upon his heirs though succession.322 This is precisely therule recognised by Dayabhaga philosophy, wherein the guiding principle was successionnot survivorship.

Also, it must be noted that Act distinguished between separate property and jointfamily property. The separate property of a (non-matrilineal) Hindu male dying intestate(that is without leaving a will) devolves, in the first instance, equally on his Class-I heirs,namely, son, daughter, widow and mother (plus specified heirs of predeceased children).If previously governed by Dayabhaga, this rule applied also to joint family property.But, if previously governed by Mitakshara (which covers most of India), a different ruleapplied. Sons, as coparceners in the joint family property additionally had a direct birthright to an independent share; while female heirs (e.g. daughter, widow, and mother)had claims only in the deceased’s “notional” portion.323

320 Sundari v. Laxmi, AIR 1980 SC 198.321 K. D. Shah, CAN A FEMALE MEMBER BECOME A KARTA HUF?, http://www.lexsite.com/services/

network/caa/contro27.shtml (12th June, 2007).322 Kirti Singh, OPINION ABOUT MATTERS OF INHERITENCE, The Independent, Editorial, http://

www.independent-bangladesh.com/news/dec/22/22122005ed.htm (23rd May, 2007).323 BINA AGARWAL , INDIA-HINDU SUCCESSION (Amendment) ACT 2005 Addresses Gender

Inequalities, http://www.un-instraw.org/revista/hypermail/alltickers/fr/0195.html (12th June, 2007).

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Despite Dayabhaga system not being recognised in the Hindu Codified Law oninheritance and partition it is remarkable to notice the Hindu Succession (Amendment)Act, 2005 to be proactive in its content drawing largely from the Dayabhaga viewpoint.324

To analyse this stance let us first look into the changes brought about by the Amendment.

The old institution of joint Hindu family was crumbling fast under pressures ofmodern economic development and conditions. The changed social milieu is adverselyaffecting the joint family system.325 This was affectively realized by the law makers of theday and changes were proposed by the 2004 Bill based on the recommendations inthe 174th Report of the Law Commission of India, on “Property Rights of Women:Proposed Reform under the Hindu Law”.326 Drawing the inspiration from the variousState Amendments to this effect like in Andhra Pradesh, Tamil Nadu, Maharashtra(which is the only one to apply retrospectively), Kerala327, and Karnataka328 the LokSabha members overwhelmingly supported the Hindu Succession (Amendment) Bill,2004, that was moved by Law Minister H R Bhardwaj, which was passed in the UpperHouse to pass it through a voice vote.329

Amendments relating to the Subject:

First, Section 6 as substituted by the Amendment Act recognises same right to adaughter as that of a coparcener by birth, as if she had been a son. Even if shepredeceased her father, her children would be entitled to the share of their mother. She

324 Jaswant Singh Sidhu, EQUAL RIGHTS FOR WOMEN, http://www.freeindiamedia.com/women/24_july1_06.html (25th May, 2007).

325 Id.326 Ranjith Attokaran, MY ESSAYS AND VIEWS ON LAW IN GENERAL AND INDIAN LAW IN PARTICULAR

THE Hindu Succession (Amendment) Bill, 2004, http://indianlawyer.blogspot.com/2005/09/hindu-succession-amendment-bill-2004.html (12th June. 2007).

327 Accordingly the Kerala Government, by the amendment dated 01/12/1976, has abolished the jointhindu family; The Kerala Joint Hindu Family System (Abolition) Act, 1975 (Act 30 of 1976).

328 Selvakumar, Division of the joint Hindu family property, Deccan Herald, Friday, October 14, 2005http://www.deccanherald.com/Archives/oct142005/realty1643320051013.asp (23rd May, 2007).See the Hindu Succession (Maharashtra Amendment) Act, 1994 (Act 40 of 1994); the HinduSuccession (Andhra Pradesh Amendment) Act, 1986 (Act 13 of 1986); the Hindu Succession (TamilNadu Amendment) Act, 1989 (Act 1 of 1990); and the Hindu Succession (Karnataka Amendment)Act, 1994 (Act 23 of 1994).

329 RS clears bill giving women equal right to property, Deccan Herald, Wednesday,August 17, 2005, http://www.deccanherald.com/Archives/aug172005national1456182005816.asp (21st May, 2007).

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has the right to make out a will in respect of her share in joint family property like anyother male member.

Secondly, she will also have a right to demand partition, a right which has beenrecognised in the context of Andhra Pradesh Amendment in Sai Reddy v. S. NarayanaReddy330. She can ask for partition even when her father is alive just as a son unlessthere has already been a registered partition or succession has already taken placebefore 20th December 2004, which is the cut-off date for application of new law.331 Thiswas a right given to females under Dayabhaga system only, and it found recognition inAmendment Act, 2005.

Thirdly, another positive change the Bill brings about is the deletion of Section 23of the Hindu Succession Act, which states that a daughter cannot ask for her share indwelling house if male heirs are still residing in it. This Section previously restricted herright to reside in the inherited residence, unless she is a widow or has been separatedfrom or deserted by her husband. Again, borrowing from Dayabhaga School and alsocatering to the need of the hour, the legislators deleted Section 23.

Fourthly, Section 24 of the Hindu Succession Act, which restricts certain classes ofwidows from inheriting property - like a widow of predeceased sons who has remarried,has also been deleted. Dayabhaga system placed no restriction upon such females toinherit even the coparcenary property.

Lastly, the Act is also amended the list of Class-I of the Schedule in the HinduSuccession Act, giving the predeceased daughter’s heirs the same rights as were earliergiven to the predeceased son’s heirs.332

A long road ahead: What does the Amendment lack?

The Amended Act stops short of giving complete equality and the amendments arenot comprehensive enough. To begin with, first, the Mitakshara Joint Family System is initself is hierarchical while if the inspiration was truly drawn from Dayabhaga systemsuch defects would never have cropped up.

330 (1991) 3CC 647.331 Constitution should abolish caste, November 1005, http://www.themronline.com/200511m1.html

(29th May, 2007).332 Kirti Singh, OPINION ABOUT MATTERS OF INHERITENCE, The Independent, Editorial, http://

www.independent-bangladesh.com/news/dec/22/22122005ed.htm (last visited on 19th June,2007).

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Secondly, the Amendment Act leaves untouched a major source of inequality: rightsin agricultural land.333 Especially with regard to rural India to ensure effective economicsecurity for widows in India it is necessary to ensure their command over property whichis the most significant form of property is arable land.334 This however, was also adefect in the Dayabhaga Law.

Thirdly, the amendment favours some women over others. On the positive side, theamendments will increase the shares of daughters who are unmarried when theamendments come into effect and in the long run increase the shares of all daughters.It will also give daughters direct rights in some property which the father cannot willaway. But the amendments will decrease the shares of other Class-I female heirs, suchas the man’s widow and mother, since the coparcenary share of the deceased malefrom whom they inherit will decline. Therefore, this time the amendment creates problemnot against the other sex but with the same sex and their share of property.

Finally, an amendment of the law can only be successful if daughters ask for andget their share in the parental property. At present, women are routinely coerced intorelinquishing their shares to maintain ‘peace’ in the family and because they are worriedof souring relationships with their natal family. It is important that women effectivelydemand their share as a matter of right as the women in Bengal governed by DayabhagaLaw previously did.

The study on the subject of Dayabhaga School of Partition, can be convenientlyconcluded at the point that the treatise of Dayabhaga though lesser prevalent vis-à-visMitakshara is certainly a more equitable law, both for men and women and also amongstthemselves. Even under Sastric law, the incorporation of women’s share in the propertyand the right of the father being supreme without arbitrary meddling of the sons are justtwo of the features to highlight the reasonableness of the system. Also observe that the

333 Malli, a Rajasthani widow when asked about her condition after the death of her husband and herrights over his agricultural land she made an interesting but true remark: “My bangles are brokenmy days of shame are gone. I have one small son, one calf, one field. A calf to feed, a son tonurture. But the land, baiji, this half acre of earth to feed me, to rest my head.”; Bina Agarwal,Widows versus Daughters or Widows as Daughters? Property, Land, and Economic Security in RuralIndia, http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=69398 (12th

June, 2007).334 Bina Agarwal, The Indian Express 23/12/2004, A BILL OF HER OWN?, http://

www.indiarightsonline.com/Sabrang/gender.nsf/9ad8c95d52b7d568e5256abc00320f4c/1af5e769678d41b3e5256f74004275d3?OpenDocument (30th June, 2007).

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Hindu Succession Act and its proactive provisions are guided by the same line of thought.However, due to prominence of Mitakshara system the coparcenary under it has beenretained under the Section 6 of the Hindu Succession Act which is also applicable toDayabhaga system. There are however substantial changes made to the nature ofcoparcenary retained under Section 6 which is much similar to Dayabhaga Law.

Further, what the Hindu Succession Act has progressively done is that it has abolishedthe ancient disqualifications known to Dayabhaga School like the blind, leprous, anddeaf-and dumb which was previously nowhere done or thought of. 335

As we saw the 2005 Amendment Act, that while the amendments reduce inequalitybetween sons and daughters on some counts, they will increase inequality betweendaughters and other women on the same counts. In this sense, the amendments areflawed. The most democratic step would be to abolish joint family property, as in Kerala.If such measures are met with, it is not a far cry to see the law of partition in India in allcommunities irrespective of the State legislations is more comprehensible and impartial.

There are often allegations raised as to the powers given to the father underDayabhaga system. Under Dayabhaga Law the father has sole rights over all ancestralproperty, whether immovable property such as land, or property such as livestock andhousehold effects. He could divide this property during his lifetime, allotting it accordingto his will and all such powers were considered arbitrary.336 However, the researcherdisagrees with such an argument that under the Hindu Jurisprudence much weight agehas been accorded to father’s supreme authority and it is only for the benefit for thefamily that the authority is exercised.337

335 J. Duncan M. Derrett, THE HINDU SUCCESSION ACT, 1956: AN EXPERIMENT IN SOCIALLEGISLATION, The American Journal of Comparative Law, Vol. 8, No. 4. (Autumn, 1959), pp. 485-501. (Available at Stable URL: http://links.jstor.org/sici?sici=0002919X%28195923%298%3A4%3C485%3ATHSA1A%3E2.0.CO%3B2-K) (last visited 17th September, 2007).

336 Marvin Davis, THE POLITICS OF FAMILY LIFE IN RURAL WEST BENGAL, Ethnology, Vol. 15, No. 2.(Apr., 1976), pp. 189-200. (Available at Stable URL:http://links.jstor.org/sici?sici=0014-1828%28197604%2915%3A2%3C189%3ATPOFLI%3E2.0.CO%3B2-4). (last visited on 17th

September, 2007).337 George Rankin, HINDU LAW TO-DAY, Journal of Comparative Legislation and International Law,

3rd Ser., Vol. 27, No. 3/4. (1945), pp.1-17. (Available at Stable URL:http://links.jstor.org /sici?sici=1479-5949%281945 %293%3A27%3A3%2F4 %3C1%3AHLT%3E2.0.CO%3B2-O) (lastvisited on 5th July, 2007).

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338 Dayabhaga, V1.i. 44-50; Alan Gledhill, THE INFLUENCE OF COMMON LAW AND EQUITY ONHINDU LAW SINCE 1800, The International and Comparative Law Quarterly, Vol. 3, No. 4. (Oct.,1954), pp. 576-603. (Available at Stable URL: http://links.jstor.orgsici?sici=00205893%28195410%293%3A4%3C576%3ATIOCLA%3E2.0.CO%3B2-7) (last visited 16th September, 2007).

English scholars during the British rule, when Dayabhaga was much in vogue inBengal regarded Dayabhaga system as based on the principles of Equity and they oftentook the example of that Dayabhaga was more favourable to self-acquisitions of acoparcener which could not be regarded as joint family property subject to partitionmerely because the family had supplied him with food and other necessaries.338

Such was the legal scholarship enjoyed by Dayabhaga system of partition which ismuch renowned also in the west and hold importance even till date. Even though thesystem is now much altered by the Section 6 of the Hindu Succession (Amendment) Act,2005, yet, the inspiration of the proactive and gender neutral amendments to theproperty laws of Hindus are the derivations from Dayabhaga School.

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CHAPTER - VII

NOTIONAL PARTITION

Introduction:

Since the beginning of Hinduism, the Hindus had lived together asfamilies consisting of a male common ancestor, his male descendants,their sons and their unmarried daughters and widows i.e. they havebeen living together as a Hindu Joint Family. Anthropologists andsociologists still do not agree whether the joint family evolved out ofdespotic patriarchal family or the democratic village community. Onething is certain; the joint family is a unique contribution if Hindujurisprudence that is unparalleled in any modern or ancient system oflaw. A Hindu may not escape a joint family, as there is a presumptionthat every Hindu family is a joint family unless otherwise proven. TheHindu Joint Family may or may not be linked with a piece of ancestralproperty.339 It is not a necessity that the members of a joint family sharejoint ancestral property but it is, at the same time, very rare indeed thatthey do not hold any joint property i.e. they will have at least thoseutensils and implements used in the day to day running of thehousehold.340 The coparcenary on the other hand is a narrow body ofpeople within the joint family consisting of the father, son, son’s son andson’s son’s son. Like joint family, to begin with it consists of father andhis three male lineal descendants; in its continuance the existence of thefather – son relationship is not necessary. The rule is that so long as oneis not removed by more than four degrees from the last holder of theproperty, howsoever one is removed from the original holder, one willbe a coparcener.

339 Chander v. Godhani, 1981 Pat. 43; K.O. Reddy v. Venkata Narayana Reddy, 1984 S.C.117; Pranv. Rejendrra, 1986 Del. 121.

340 Paras Diwan and Peeyushi Diwan, MODERN HINDU LAW, 12th ed., 1998, p. 236.

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What must be noted in the definition of a joint family as well as the coparcenary isthe fact that it is completely patriarchal and woman has been treated as subservient,and dependent on male support. Prior to the Hindu Succession Act, 1956 Sastric andcustomary laws that varied from region to region governed Hindus and sometimes itvaried in the same region on a caste basis resulting in diversity in the law. Consequentlyin matters of succession also, there were different Schools, like Dayabhaga in Bengaland the adjoining areas; Mayukha in Bombay, Konkan and Gujarat andMarumakkattayam or Nambudri in Kerala and Mitakshara in other parts of India withslight variations The multiplicity of succession laws in India, diverse in their nature,owing to their varied origin made the property laws even mere complex. Earlier, womanin a joint Hindu family, consisting both of man and woman, had a right to sustenance,but the control and ownership of property did not vest in her. In a patrilineal system,like Mitakshara School of Hindu Law, a woman, was not given a birth right in the familyproperty like a son.

This construction of partition and succession of property was substantially changedby the Hindu Succession (Amendment) Act, 2005. Section 6 of this Act now creates alegal fiction in order for the daughter of a joint family to be treated on par with the sonwith respect to coparcenary rights. Explanation-I of Section 6 enacts a provision for ofnotional / deemed partition i.e. creates another legal fiction and invests the femaleHindu with rights to notional partition.

This part will discuss the concept of notional partition prior to and after the passingof the Hindu Succession (Amendment) Act, 2005. It will first explain the basic conceptof notional partition and the need for it and it will then discuss the effect of the AmendmentAct of 2005 on notional partition with special reference to women. This part will alsobe dependent on a number of case laws in order to explain the current position withrespect to notional partition in Hindu joint families.

The Concept of Notional Partition:

The concept of notional partition has been laid down in Explanation-I of Section 6of the Hindu Succession Act. This concept may be explained with the aid of two tools;the wording of the Explanation-I itself and the Supreme Court judgment in Gurupada v.Heerabai341 .

341 1978 SC 1239.

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The language of the Explanation must be kept in mind while giving effect to theproviso in this Section. The following underlined phrases are of significance in thelanguage itself342:

“For the purpose of this Section the interest of a Hindu MitaksharaCoparcener shall be deemed to be the share in the property that wouldhave been allotted to him, if a partition of the property had taken placeimmediately before his death irrespective of whether he was entitled to claimpartition or not”343.

The language clarifies that to a very limited extent of separating the share of thedeceased coparcener, the fiction of a notional partition is to be applied. It has to bedone for the purpose of deceased coparceners of ascertaining the interest of the deceasedcoparcener. It is stated in the Explanation that the interest of the deceased coparcenerhas to be ascertained on notional partition by applying a fiction irrespective of whetherhe was entitled to claim partition or not. Outwardly it would appear strange if one saysthat a coparcener was not entitled to a partition of the family property, especially in aMitakshara joint family as is specified by the Explanation. This may in fact happen insome specific exceptions; a full bench of the Bombay High Court interpreted MitaksharaLaw to reach the conclusion that a son is not entitled to ask for partition in the lifetimeof his father without his consent when the father is not separated from his own father,brothers and nephews.344 As a matter of custom in Punjab a son cannot enforce partitionagainst his father during his father’s lifetime.

The wording in the Explanation gave rise to a series of conflicting judgments fromvarious High Courts especially when the female relative happened to be the wife or themother living at the time of the death of the coparcener.345 While the proviso to theSection 6 gives the formula for fixing the share of the claimant, Explanation-I gives theclue for arriving at the share of the deceased. The conflicting judgments basically tookthree separate views:

342 Ranganath Mishra, (rev.), Mayne, TREATISE ON HINDU LAW AND USAGE, 15th ed. 2003, p.1133.

343 Explanation I to Section 6 of the Hindu Succession Act, 1956.344 Apaji v. Ramachandra (1892) 16 Bom 29 FB.345 AIR 1964 Bom 263 at 264.

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(i) The First View: Shirambai v. Kalagonda346:

This decision took the view that under notional partition, shares need be allottedonly to coparceners, and not to female members. The bench stated:

“The interest of a Hindu Mitakshara coparcener available for division underthis section will be such share in the property as would be allotted to him ifa partition of the property had taken place immediately before his deathamongst the coparceners according the rule of Hindu Law providing a shareto mother and maintenance and marriage expenses must be treated asabrogated in view of section 4 which gives the Act overridingeffect……………….347”

The Court was of the opinion that the rule of Hindu Law which provides a share tothe mother and maintenance to and marriage expenses to the daughter stood abrogatedin view of Section 4 of the Act. Therefore, the view was expressed that Section 4 of theAct overrides this concept and provides that the female members are not be includedas claimant in the coparcenary property of the deceased coparcener. The same viewwas endorsed in Kanahaya Lal v. Jamma348

(ii) The Second View: Literal construction

The basic assumption of this view are:(a) notional partition is envisaged only forthe purpose of the ascertainment of the successional shares; (b) notional partitionenvisages taking into account the share of female heirs, marriage expenses of unmarrieddaughters, funeral expenses etc.; (c) nothing contained in the Hindu Succession Act,1956 shall be deemed to affect the uncodified Hindu Law of partition

The above view is indifferent to the anomaly that may arise, namely that while wereduce the successional share of the widow on the assumption that she would beentitled to a share on actual partition, she might not be receiving such share at all. Forexample, if the deceased died leaving behind a widow and a son, according to it underthe notional partition the share of the deceased is 1/3.The successional share of thewidow will be 1/6. The hardship it entails to the widow, that is, while her share isreduced on the assumption that she will be entitled to a share on partition, but thatsuch partition is unlikely as there is one coparcener, is ignored.

346 Shirambai v. Kalagonda , AIR 1964 Bom 263.347 Ibid at 264348 Kanahaya Lal v. Jamna, ILR (1972) 2 Delhi 64.

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(iii) The Third View: Rangubai v. Laxman Lalji349

The third view that prevailed had been taken in Rangubai’s case, overruling thedecision in Shiramabai’s case. Under this, in the illustration taken earlier, the widowwould be entitled to her share under the notional partition as well as her share underthe succession, together making her share 1/2 = (1/3+1/6). In other words, it convertsthe notional partition into an actual partition, an effect not envisaged by the legislature.It now removes the anomaly in a forthright way.

A Full Bench of the Bombay High Court in Sushilabai v. Narayanrao350 reconsideredthis aspect as to whether the scope of the fiction is as large as was held in Rangubai’scase. The Full Bench adhered to the view of Rangubai’s case on the narrow ground thatwhere there are only two coparceners and one of them died, then if any person otherthan the coparcener is entitled to a share as a result of severance of the deceasedcoparcener, the share of such other person will become fixed. Thus, the Court did notanswer the question as to what would happen if there were more than two coparcenersin the notional partition. Therefore, this judgment, though rational, has only a limitedscope of application, as it does not deal with more complex situations that may routinelyarise.

The Supreme Court confirmed and upheld the view of the Bombay High Court inthe case of Gurupada v. Heerabai,351 which was a landmark judgment with referenceto notional partition. The judgment is discussed in the subsequent pages in order tobetter facilitate the understanding of the concept of notional partition.

The Supreme Court on Notional Partition: Gurupada v. Heerabai -

This case was a landmark judgment of the Supreme Court with reference to notionalpartition and Section 6 of the Hindu Succession Act, 1956. The Court supported theview taken in the Rangabais’ case and further elaborated on the same in order tosupply a decision, which can be used in complex case with more than two survivingrelatives, male or female. The following is the case and bring out the salient features inthe judgment that make it easier to understand the concept being discussed.

349 Rangubai v. Laxman Lalji, AIR 1966 Bom 169.350 Sushilabai v. Narayanrao, AIR 1975 Bom 257 FB.351 Gurupada v. Heerabai, 1987 SC 1239.

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Facts:

The following is the family tree of the deceased coparcener:

Khandappa died and was survived by his wife Hirabai, who is the plaintiff, two sonsGurupad and Shivapad, who are defendants 1 and 2 respectively, and three daughters,defendants 3 to 5.

Hirabai filed a special civil suit for partition and separate possession of a 7/24th

share in her husband’s property on the basis that these properties belonged to the jointfamily consisting of her husband, herself and their two sons. If a partition were to takeplace during Khandappa’s lifetime between himself and his two sons, the plaintiff wouldhave got a 1/4th share in the joint family properties, the other three getting a 1/4th shareeach. Khandappa’s 1/4th share would devolve upon his death on six sharers: the plaintiffand her five children, each having a 1/24th share therein. Adding 1/4th and 1/24th, theplaintiff claims a 7/24th share in the joint family properties. The suit was only contestedby defendant 1 (Gurupada) while the others admitted the claim.

Judgment:

The Trial Court rejected defendant 1’s case that the properties were Khandappa’sself-acquisitions and that he had partitioned them during his lifetime. Upon that findingthe plaintiff became indisputably entitled to a share in the joint family properties but,following the judgment of the Bombay High Court in the Shiramabai case the TrialJudge limited that share to 1/24th, refusing to add 1/4th and 1/24th together. TheBombay High Court dismissed defendant 1’s appeal by holding that the suit propertiesbelonged to the joint family, that there was no prior partition and that the plaintiff isentitled to a 7/24th share.

The Bombay High Court based its decision on the case of the Rangubai’s casewhere another Division Bench of the Bombay High Court had already reconsideredand dissented from the earlier Division Bench judgment in Shiramabai Bhimgonda.

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The bench felt that Shiramabai’s case was not fully argued and was incorrectly decidedand that on a true view of law, the widow’s share must be ascertained by adding theshare to which she is entitled at a notional partition during her husband’s lifetime andthe share which she would get in her husband’s interest upon his death. In the judgmentunder appeal, the High Court based itself on the judgment in Rangubai Laljis’ caseendorsing indirectly the view that Shiramabais’ case was incorrectly decided.

The Supreme Court on appeal held the view of the High Court that the suit propertiesbelonged to the joint family and that there was no prior partition is well founded and isnot seriously disputed, the decision of this appeal rests on the interpretation ofExplanation-1 to Section 6 of the Hindu Succession Act, 1956.

The Court held that before considering the implications of Explanation 1, it isnecessary to remember that what Section 6 deals with is devolution of the interest thata male Hindu has in a Mitakshara coparcenary property at the time of his death. SinceExplanation-1 is intended to be explanatory of the provisions contained in the Section,what the Explanation provides has to be co-related to the subject matter, which thesection itself deals with. In the instant case the plaintiff’s suit, based as it is on theprovisions of Section 6, is essentially a claim to obtain a share in the interest that herhusband had at the time of his death in the coparcenary property. Two things becomenecessary to determine for the purpose of giving relief to the plaintiff: One, her share inher husband’s share and two, her husband’s own share in the coparcenary property.The proviso to Section 6 contains the formula for fixing the share of the claimant whileExplanation-1 contains a formula for deducing the share of the deceased.

The Court also said that they saw no justification for limiting the plaintiff’s share to1/24th by ignoring the 1/4th share which she would have obtained had there been apartition during her husband’s lifetime between him and his two sons. The bench stated:

“We think that in overlooking that 1/4th share, one unwittingly permits one’simagination to boggle under the oppression of the reality that there was infact no partition between the plaintiff’s husband and his sons. Whether apartition had actually taken place between the plaintiff’s husband and hissons is beside the point for the purposes of Explanation 1. That Explanationcompels the assumption of a fiction that in fact “a partition of the propertyhad taken place”, the point of time of the partition being the one immediatelybefore the death of the person in whose property the heirs claim a share”352.

352 Gurupada v. Hirabai AIR 1978 SC 1239, at 1242.

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The Court also stated that that the fiction created by Explanation-1 has to be givenits due and full effect as the fiction created by Section 18-A(9)(b) of the Indian Income-tax Act, 1922, was given by the Supreme Court in Commissioner of Income-tax, Delhiv. S. Teja Singh353. It was held in that case that the fiction that the failure to send anestimate of tax on income under Section 18(a) (3) is to be deemed to be a failure tosend a return, necessarily involves the fiction that a notice had been a failure to send areturn, necessarily involves the fiction that a notice had been issued to the assesseeunder Section 22 and that he had failed to comply with it. In an important aspect, thiscase is stronger in the matter of working out the fiction because in Teja Singh’s case, amissing step had to be supplied which was not provided for by Section 18A(9)(b),namely, the issuance of a notice under Section 22 and the failure to comply with thatnotice. Section 18A(9)(b) stopped at creating the fiction that when a person fails tosend an estimate of tax on his income under Section 18A(3) he shall be deemed tohave failed to furnish a return of his income. The Section did not provide further that inthe circumstances therein stated, a notice under Section 22 shall be deemed to havebeen issued and the notice shall be deemed not to have been complied with. Theselatter assumptions in regard to the issuance of the notice under Section 22 and its non-compliance had to be made for the purpose of giving due and full effect to the fictioncreated by Section 18A(9)(b). In the Gurupad case it is not necessary, for the purposesof working out the fiction, to assume and supply a missing link which is really what wasmeant by Lord Asquith in his famous passage in East End Dwellings Co. Ltd. v. FinsburyBorough Council354:::::

“If you are bidden to treat an imaginary state of affairs as real, you, mustalso imagine as real the consequences and incidents which, if the putativestate of affairs had in fact existed, must inevitably have flowed from oraccompanied it; and if the statue says that you must imagine a certain stateof affairs, it cannot be interpreted to mean that having done so, you mustcause or permit your imagination to boggle when it comes to the inevitablecorollaries of the state of affairs.”

The Court was also very happy to find that the view which that it had taken hadalso been taken by the Bombay High Court in Rangubai Lalji v. Laxman Lalji355 in which

353 AIR 1959 SC 352.354 1952 A.C 109 (132).355 AIR 1966 Bom 169.

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Patel, J., very fairly, produced his own earlier judgment to the contrary in ShiramabaiBhimgonda v. Kalgonda356 as incorrect. Subsequently, a Full Bench of that High Courtin Sushilabai Ramchandra Kulkarni v. Narayanrao Gopalrao Deshpande357, the GujaratHigh Court in Vidyaben v. Jagdischandra N. Bhatt358 and the High Court of Orissa inAnanda v. Haribandhu359 had taken the same view. In recent times, the Bombay HighCourt has applied the same concept and interpretation in the case of Subhash S/oEknathrao Khandekar and Bharat S/o Eknathrao Khandekar v. Sow. Prayagabai W/oManohar Biradar360 by the Gujarat High Court in Surajram Hiralal Bachkaniwala-LateTaragauri P. Bachkaniwala v. Controller of Estate Duty361 and the Supreme Court inAnar Devi v. Parmeshwari Devi362. . . . . In all three cases the ratio of Gurupad’s case hasbeen upheld while taking into account the changes bought about by the Act of 2005.

Hence, according to the Supreme Court decision in the Gurupadas’ case as wellas the subsequent concurring decisions from various High Courts, we find that the legalfiction of notional partition must be taken into account when there is a partitionsubsequent to the death of a coparcener. The claimants in this partition, according tothe Gurupad’s case, as to receive their share from the notional partition as well as theirinterests in the deceased’s property or share in the notional partition.

The Hindu Succession (Amendment) Act, 2005 and Notional Partition:

On 9th September 2005, The Hindu Succession (Amendment) Act 2005 came intoforce. The Act today is viewed as a progressive legislation in personal laws. The aim ofthe Act was to end the gender discrimination in personal laws and give equal rights towomen in succession. It has amended Section 6 to include the right of a daughter to bea coparcener by birth and abolished the doctrine of survivorship. It has also removedSection 23 from the existing Act. Section 23 dealt with the devolution of a dwellinghouse of a male amongst his heirs. The words ‘displaced by him’ was amended to‘displaced by him or her’ to include the women’s right to property.

356 AIR 1964 Bom 263.357 AIR 1975 Bom 257 FB.358 AIR 1974 Guj 23.359 AIR 1967 Ori 194.360 MANU/MH/0611/2007.361 MANU/GJ/1248/2006.362 AIR 2006 SC 3332.

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The Act of 2005 is accompanied by the following implications:

The daughter of a coparcener shall by birth become a coparcener in her ownright in the same manner as the son;

The daughter has the same rights in the coparcenary property as she would havehad if she had been a son;

The daughter shall be subject to the same liability in the said coparcenary propertyas that of a son; and any reference to a Hindu Mitakshara coparceners shall bedeemed to include a reference to a daughter of a coparcener;

The daughter is allotted the same share as is allotted to a son;

The share of the pre-deceased son or a pre-deceased daughter shall be allottedto the surviving child of such pre-deceased son or of such pre-deceased daughter;

The share of the pre-deceased child of a pre-deceased son or of a pre-deceaseddaughter shall be allotted to the child of such pre-deceased child of the pre-deceased son or a pre-deceased daughter.

The Amendment cleared by the Union Cabinet proposes to make the daughteralso a coparcener in the joint family property. It is pertinent to point out that someStates like Karnataka, Andhra Pradesh and Maharashtra have already passed lawsmaking the daughter a member (coparcener) of the joint family while other States likeKerala have completely abolished the joint family system. This could be done as Lawsof Succession fall in Entry–5 of the concurrent list of the VIII Schedule to the Constitution.It is relevant to note that the Hindu Code Bill, as originally framed by the B.N. Raocommittee and piloted by Dr. B.R.Ambedkar, had recommended abolishing theMitakshara coparcenary with its concept of survivorship and the son’s right by birth in ajoint family system and substitute it with a principle of inheritance by succession.

It can be clearly inferred from the aforementioned implications that the Act of 2005will affect the concept of notional partition as envisage by Explanation-I of Section 6 ofthe Act.

The following chart will help us to define the difference in the concept of notionalpartition before and after the amendment:

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Prior to the amendment, according to the concept of notional partition, the wife,Son 1 and Son 2 would each receive ¼ + 1/20 = 6/20 of the property while thedaughters would receive 1/20 each of the property if there was a partition after thedeath of the father. Total property = 6/20 + 6/20 + 6/20 + 1/20 + 1/20 = 1363.

After the amendment of 2005, the daughters would now get the same coparcenaryrights as the sons and that would apply to notional partition as well. Therefore, theywould each get 1/6 + (1/6 1/5) = 1/6 +1/30 = 6/30. Therefore, we find that thenew amendment entitles the daughter to an extra share in the coparcenary propertyand brings her at par with the son by way of a legal fiction.

In the cases of Subhash S/o Eknathrao Khandekar and Bharat S/o EknathraoKhandekar v. Sow. Prayagabai W/o Manohar Biradar364, , , , , Surajram Hiralal Bachkaniwala-Late Taragauri P. Bachkaniwala v. Controller of Estate Duty365 and Anar Devi v.Parmeshwari Devi366 the Gurupad ratio has been enforced with due allowance for theAct of 2005. The result of this interpretation is the same as the mentioned example.

Therefore, the Hindu Succession (Amendment) 2005 has affected the concept ofnotional partition in a significant manner. It must be noted that there have been nospecific legislation with regard to notional partition, and therefore, the Act of 2005leaves certain question about notional partition unanswered, but at the same time, theAct of 2005 clears up certain doubts that have been raised with regard to notionalpartition in prior cases.

363 The equation was followed in Gurupad v. Hirabai, AIR 1978 SC 1239: Raj Rani v. Chief SettlementCommissioner, Delhi, AIR 1984 SC 1234.

364 MANU/MH/0611/2007.365 MANU/GJ/1248/2006.366 AIR 2006 SC 3332.

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Since the Act has declared the rights of a daughter in a Hindu Mitakshara coparcenerjoint family, it has made clear the position of only a daughter with reference to partition.The confusion that had arisen in cases prior to the Gurupad case and had been resolvedto a great extent by Gurupad has been restarted to a certain extent by the Act of 2005.

The Act, yet removing the proviso and leaving Explanation-I to Section 6 unchangedhas merely left to the Courts with a tool to determine the share of the deceased coparcenerbut has taken away the tool that was used to divide this share. Further, by restrictingitself only to the daughter of a coparcener and excluding from its ambit other femalemembers of the family, the amended Section undoes to a great extent its objective ofgender equality.

The main consequence of the Act of 2005, as has been mentioned in the priorpages, is to bring about gender equality with respect to property rights in a Hindu JointFamily. As a result of this gender equality, the daughter of a deceased coparcener maynow claim an extra share in the property of the coparcener in addition to the claim shehas as a Class-I heir. Therefore, the main consequence of this Act with respect tonotional partition is the fact that the daughter now receives an extra portion in the shareof the deceased coparcener of a Mitakshara joint family and as a logical consequence,the son as well as the widow of the coparcener now receives a reduced share in theproperty. This is disadvantageous to the widow as well as other female members of thejoint family.

In the absence of a clear legislation, the ratio passed in Gurupad’s must continueto be followed while dealing with female members of a joint family on the death of amale Hindu coparcener. The concept of notional partition is still relevant after theAmendment Act of 2005. Section 6 the Act does affect Explanation I of the Act but itdoes not make it irrelevant. The concept is still socially as well as economically relevantfor Hindu joint families and will continue to decide the manner in which a partition willtake place in a Mitakshara Hindu Joint Family after the death of a coparcener.

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CHAPTER - VIII

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Introduction:

Hindu Joint Family is a unique contribution to the Hindu jurisprudencewhich might come to an end in one generation by partition but comesinto existence again automatically. Thus every individual is believed tobe a member of a Hindu Joint Family until contrary is proved. Now onevery important aspect, though not a pre-requisite, is Hindu Joint Familyproperty. Since property is important succession of the property becomestopic of discussion. Talking about succession of property in the past,which means succession according to the Sastric laws, there were twoSchools Mitakshara and Dayabhaga through which succession of propertywas governed. Both Dayabhaga and Mitakshara have established twoseparate systems of inheritance. Two fundamental differences are: - onerelates to the ruling cannon in determining the order of succession; inMitakshara, its propinquity, in Dayabhaga its religious efficacy. Anotherradical difference is that in Dayabhaga there is only one course ofsuccession whether the family is divided or undivided and whether theproperty is ancestral or self-acquired. In Mitakshara, property which isjoint will follow one, and property which is self-acquired will follow anothercourse of succession. The former is based on right by birth andunobstructed inheritance while the latter is called obstructed inheritance.For Mitakshara School it is three class of heirs a) Gotraja sapinda; b)Samanodakas; c) Bandhus.

The order of succession was that the first class succeeded before thesecond and the second succeeded before the third. The property of adeceased Hindu governed by Dayabhaga Law passes by succession,including his share his in undivided property. The Class of heirs are: i)sapindas, ii) sakulyas and iii) Samanodakas.

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367 U.P.D. Kesari, MODERN HINDU LAW, 1st ed.1996, pp.1-2.368 (1864) 9 MIA 539, 607-610.369 Ranganath Misra (ed.), Mayne’, TREATISE ON HINDU LAW & USAGE , 15th ed. 2003, p. 915.370 Satyajeet Desai (ed.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 18th ed. 2001, p. 112.

Then the legislatures on 17th June 1956 passed a legislation called the HinduSuccession Act, 1956 which amended and codified the law relating to successionamong Hindus. Through this Act inheritance laws became uniform.

Sections 6 and 8 of the Act mentioned the devolution of property by the Class-I andClass-II heirs and then agnates and cognates. Thus, these two Sections lay down thelaw regarding the succession of property of a male Hindu dying intestate. Similarly,Sections 15 and 16 lay down the rule of succession when a female Hindu dies intestate.

A very recent change was made in the law of succession in 2005. The HinduSuccession (Amendment) Act, 2005 has given the status of a coparcener to a daughterof a coparcener, to be more specific; daughter of a coparcener is also a coparcenerand thus, can ask for partition. Thus, this is a drastic change in the Hindu Law whichhas great socio-legal consequences.

Law of Succession under Mitakshara School of Hindu Law:

The Mitakshara School of Hindu Law prevails in whole of India except in Bengaland its adjoining parts where Dayabhaga system prevails. The Mitakshara systemrecgonizes two modes of devolution of property, namely devolution by survivorship anddevolution by succession. The rule of survivorship governs the devolution of thecoparcenary property while the rule of succession governs the devolution of self acquiredproperty.367

The text of Yajanavalka written by Vijananeswara which forms the basis of theMitakshara School lays down no rules of inheritance as regards the separate propertyof one who dies as an undivided member of a family, but it was finally settled by theJudicial Committee in Katma Nachiar v. Raja of Shivganga368 that the course of successionstated in the Mitakshara should be extended to the separate property of a man when hedies leaving no male issue369. The devolution of property in accordance with the rulesof succession took place in three cases370: 1) if the deceased while being a jointcoparcener dies leaving behind self-acquired property, such property goes to his heirsby succession; 2) if the deceased was at the time of his death, the sole surviving member

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of a coparcenary, the whole of his property including the coparcenary property wouldpass to his heirs by succession; and 3) if the deceased was separate at the time of hisdeath from other coparceners, the whole of his property, however acquired would passto his heirs by succession. The order of succession to the property of the deceased, whohad separated but had reunited at the time of his death is different from the order ofsuccession applicable in the above three cases. The order of succession in MitaksharaSchool was based on the rule of consanguinity or proximity of blood relationship. Therewere three classes of heirs recognized by Mitakshara School namely gotraja sapindas,samanodakas and bandhus. The first class succeeded before the second and the secondclass succeeded before the third. The gotraja sapindas consisted of relationships whichextended to seven degrees inclusive of the deceased. In total there were 57 gotrajasapindas. The samanodakas of a person included all his agnates from the 8th to the14th degree. The bandhus on the other hand are all cognates i.e. persons connectedwith the deceased through a female or females.

The law in all States except in Madras and Bombay was that women in generalwere excluded from inheritance to the estate of a man who died without a male issue.The only recognized exceptions were the widow, the daughter, the mother, the father’smother, the father’s father’s mother, and also other female lineal ancestors above thelast. By the Hindu Law of Inheritance (Amendment) Act, 1929, a son’s daughter, adaughter’s daughter and sister had been admitted as heirs under the Mitakshara Lawand placed immediately after a father’s father and before a father’s brother. The HinduWomen’s Rights to Property Act, 1937 put three female heirs - the widow, the widow ofa predeceased son and the widow of a predeceased son of a predeceased son on thesame level as the male issue of the last owner along with the male issue or in default ofthem.

However, women succeeding as heirs whether to a male or to a female, took onlya limited estate in the property inherited by them, except in certain cases in the BombayState i.e. she was entitled only to the income of the property, she could neither make agift of the property nor could she sell it, unless there was a legal necessity, either for thegift or for the sale and on her death the property would not pass to her heirs, but to thenext heir of her husband. For the purpose of succession to stridhana, under MitaksharaSchool stridhana was divided into two classes: shulka which was gratuity for which agirl was given in marriage and the remaining kind of stridhana constituted the otherclass. Shulka devolved in the following order - uterine brother, father, father’s heirs.Stridhana of the other kind devolved in the following order - unmarried daughter,

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married daughter who is unprovided for, married daughter who is provided for, daughter’sdaughter, daughter’s son, son’s son’s son.371

The Smriti law says that persons on the basis of certain disabilities can be excludedfrom partition as well as inheritance. Under Mitakshara School there were several groundswhich disqualified an heir from inheritance. Unchastity excluded a widow from inheritancebut once the husband’s estate was vested in her, it could not be divested because of hersubsequent unchastity. Change of religion or loss of caste was once grounds for exclusionfrom inheritance but however the Caste Disabilities Removal Act, 1850 brought abouta change in this. Persons suffering from physical disabilities like congenital blindness,deafness, dumbness were disqualified to inherit, those who were lame by birth or impotentor suffering from want of any organs or were victims of incurable disease like leprosywere also excluded from inheritance, however the Caste Disabilities Removal Act removedall this and laid down only congenital lunacy or idiocy as grounds for disqualifications.

In Kenchava v. Girimallappa372, the Privy Council decided that even apart fromHindu Law, principles of justice, equity and good conscience exclude a murderer fromsucceeding to the estate of the murdered person, thus a murderer was excluded frominheritance.

An important principle with regard to disqualification was that property once vestedin a person could not be divested by a subsequent disability.

Law of Succession under Dayabhaga School of Hindu Law:

The Dayabhaga School of Hindu Law recognizes only one mode of devolution ofproperty i.e. by succession. There is no concept of survivorship in Dayabhaga systembecause there is no right by birth. Thus, the rules of inheritance are the same whetherthe family is divided or undivided and whether the property is joint or separate.

Unlike the Mitakshara School where the order of succession is based upon proximityof blood relationship, in Dayabhaga School the order of succession is based uponreligious efficacy i.e. the capacity to confer spiritual benefit on the deceased owner.However, in most cases spiritual efficacy and propinquity run on the same lines as aresult of which the heirs under the two schools are the same, however all persons whoare heirs under Mitakshara Law are not heirs under Dayabhaga Law.

371 S.A. Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 20th ed. 2005, p. 222.372 (1924) 51 IA 368.

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The basis for determining the order of succession based on religious efficacy wasthe parvana sradha ceremony in which three kinds of offerings were made -pinda,pinda-lepas, and liabations of water. On the basis of these three offerings there werethree classes of heirs -sapindas, sakulyas, and samanodakas. The sapindas succeededbefore the sakulyas who succeeded before the samanodakas.

The only females recognized as heirs in Dayabhaga School were the widow, daughter,mother, father’s mother and father’s father’s mother. For the purpose of succession tostridhana, stridhana was classified into four classes -shulka, yautaka, anwadheyka,ayatauka. The order of succession to each class was different.373

The grounds which disqualify an heir from inheritance under Dayabhaga Schoolare the same as under Mitakshara School except that under Dayabhaga School thecondition of unchastity applies not only to the widow but also to other female heirs,such as daughter and mother to the same extent as it does to a widow.

Difference between Mitakshara and Dayabhaga Schools:

Mitakshara divides heirs into three classes a) Sapindas; b) Sakalyas; c) Samandakas.Sapindas of the Bengal School are sapindas of Mitakshara School within four degreesonly, plus bandhus of Mitakshara School but not all bandhus. In Dayabhaga Law nobandhus or cognates can inherit while there is a gotraja sapinda or samanodaka inexistence374. Cognates come within agnates and they inherit before sakulyas andsamanodakas. Cognatic heirs under Mitakshara are limited in number compared tothose under Dayabhaga Law. Every person who is a cognatic heir under DayabhagaLaw is also an heir under Mitakshara Law. Sapinda as per Mitakshara means a personconnected through pinda or body. As per Dayabhaga it means same pinda or funeralcake presented to manes of ancestors at the Parvana Sraddha ceremony375.

Law of Succession under the Hindu Succession Act, 1956:

The object of passing the Act was to amend and codify the law relating to succession.The Act brought about fundamental and drastic changes in the law of succession. Themost important change brought about was the evolution of a fairly uniform system of

373 G.M.Divekar, “HINDU LAW- A CRITICAL COMMENTARY”, 2nd ed., 2002, p. 122.374 S.A. Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 20th ed. 2005, p.213.375 Ibid.

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law in the country among Hindus. Distinctions based on Dayabhaga and MitaksharaSchools were put to an end. However, the old framework has been retained to a greatextent e.g. Mitakshara bias of preference of males over females and of agnates overcognates has been considerably whittled down, but as we go to remote heirs the rule ofagnatic preferences reasserts itself.376

The main object of the Act was to provide equitable rights to women as heirs and toprovide an honourable social status and reasonable security to women.377 The importantchanges brought about by the Act and the various rules of succession laid down by theAct have been further discussed.

Order of Succession:

The order of succession under the Act is based on the Mitakshara principle ofpropinquity i.e. it is based on proximity of relationship. The Dayabhaga principle ofreligious efficacy has been abrogated. The three classes of heirs recognized by theMitakshara School - gotraja sapindas, samanodakas, bandhus and the three classes ofheirs recognized by the dayabhaga i.e sapindas, sakulyas and bandhus ceased to existin case of devolution taking place after the enforcement of the Act.378 The heirs to theestate of a Hindu male under the Act are divided into four classes: 1) heirs specified inClass-I of the Schedule; 2) heirs specified in Class-II of the Schedule; and 3) Agnates 4)Cognates. The property first devolves on the twelve preferential heirs mentioned inClass-I of the Schedule to the Act, secondly on the heirs mentioned in Class-II of theSchedule, thirdly on the agnates and lastly on cognates.379

As per Section 9 of the Act Class-I heirs succeed simultaneously and to the exclusionof all others i.e. they form one group of heirs and succeed as a body and heirs of Class-I are excluded so long there is a single heir mentioned in Class-I.380

Section 10 lays down four rules as per which distribution of property amongst heirsin Class-I of the Schedule takes place:

376 Paras Diwan et.al, MODERN HINDU LAW, 12th ed.1999, p.341.377 R.B.Sethi, THE HINDU SUCCESSION ACT, 1st ed.1957, p.iii.378 Satyajeet Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. II, 17th ed.1998, p.225.379 Section 8 of the Hindu Succession Act, 1956.380 U. P. D. Kesari, MODERN HINDU LAW, 2nd ed.1998, p.235.

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1) The intestate’s widow takes one share. If there is more than one widow all of themtake one share and divide it amongst them equally. However, if the deceased hadtaken a second widow after the Hindu Marriage Act, 1955 had come into force,the marriage would be void and such a widow will not be entitled to get anyshare.381

2) The surviving sons and daughters and the mother of the intestate take one shareeach.

3) Heirs of predeceased son or predeceased daughter take per stripes not per capitai.e. share in the property will devolve branch-wise and not per individual.

4) It is laid down that in case of devolution of property on heirs of predeceased sonor predeceased daughter the doctrine of representation applies i.e. heirs in eachbranch would take the share which their parents would have taken had he/shebeen alive.

Sections 9 and 11 of the Act lay down the rules as per which the property of theintestate is devolved on the Class-II heirs. Heirs in Class-II are divided into 9 groupsand each group is mentioned in a separate entry in the Schedule. According to Section9, the heirs of the 1st entry are preferred to heirs in the 2nd entry and heirs in the 2nd entryare preferred to the heirs in the 3rd entry and so on. As per Section 11 the property of anintestate shall be divided between the heirs specified in any one entry and each heir inthe entry gets an equal share. Thus heirs, which are listed in an entry which is above theentries in which other heirs are listed, inherit equally the entire estate of the intestate. InSatya Charan v. Urmila382 the Supreme Court reiterated that no distinction is to bemade between a brother and sister listed in the second entry of Class-II heirs and thetwo succeed simultaneously. The rule of preference and the mode of the distribution ofproperty among agnates and cognates are the same, with the overriding rule thatagnates are always preferred over cognates. The rules of preference in case of agnatesand cognates are as follows as per Section 12 of the Act –

1) the heirs who have fewer or no degrees of ascent from the deceased will bepreferred.

2) Where the number of degrees of ascent from the deceased is the same or nonethe heir who has fewer or no degrees of descent will be preferred.

381 Paras Diwan, MODERN HINDU LAW, 13th ed.2000. p.248.382 AIR 1970 SC 1714.

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3) In case any of the two or more heirs cannot be said to be nearer to the proposituseven after applying the two rules then such heirs take simultaneously.

If a Hindu male has no heirs as mentioned in the four classes of heirs as per the Actthen as per Section 29 of the Act, the property of such a person devolves upon thegovernment.

Devolution of Coparcenary Interest of a Mitakshara Coparcener dyingintestate:

Section 6 of the Act has brought about drastic and fundamental changes in the lawof succession. The reason for bringing about such an enactment which gave an effectto such a rule was that it was felt that radical reform was required in Mitakshara Law ofcoparcenary and that where one coparcener died it was necessary that not only in caseof his separate property but also in respect of his undivided interest in the coparcenaryproperty, there should be equal distribution of that share between his male and femaleheirs and particularly between his sons and daughters. In order to bring about thesefavourable changes the whole concept of Mitakshara coparcenary could have beendone away with but there was a strong sentiment in favour of the retention of Mitaksharacoparcenary even in attenuated form and the rules laid down under Section 6 are acompromise in consequence of this.

Section 6 of the Act provides that the coparcenary interest would devolve upon thecoparceners as per the rule of survivorship provided that the deceased has left nofemale relative specified in Class-I of the Schedule or a male relative specified in thatclass who claims, through such a female relative. If the deceased has such an heir leftthen the property devolves by testamentary or intestate succession as the case may bebut not according to the rule of survivorship.383

The interest of the deceased in the coparcenary is determined by assuming that apartition had taken place just before the deceased’s death and the interest of thedeceased is the interest that he would have gotten had the actual partition taken placein his life time. An important question that however arises is whether this notionalpartition is to have the effect not merely of bringing about devolution of succession ofthe interest of the deceased coparcener in a Mitakshara family but goes further andresults in a partition among all the members who would be entitled to a share in the

383 Thus Section 6 is read with Section 8 or Section 30 of The Hindu Succession Act, 1956.

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coparcenary property when a regular partition takes place. This important issue wasaddressed in the case of Gurupad v. Hirabai384. In this particular case the deceased wasa member of the Mitakshara coparcenary. He died leaving behind his widow, two sonsand three daughters. His widow subsequently asked for partition and claimed her shareto be 7/24. The 7/24 was the sum total of the 1/4th that she would get at the time of thenotional partition that would take place between the deceased and the others, and the1/24th that she would get out of the interest of her husband. The Supreme Court saidthat though she was not capable of asking for partition, if a partition took place hershare would be 7/24. The decision of the Supreme Court does not say that the fictionand notional partition must bring about total disruption of the joint family or that thecoparcenary ceases to exist even if the deceased was survived by coparceners. Withregard to this it would be appropriate to quote the observation of the Supreme Court inthe subsequent case of State of Maharashtra v. Narayan Rao385: Gurupad’s case “hasto be treated as authority (only) for the position that when a female member whoinherits an interest in joint family property under Section 6 of the Act files a suit forpartition expressing her willingness to go out of the family she would be entitled to boththe interest she has inherited and the share which would have been notionally allottedto her as stated in Explanation 1 to Section 6 of the Act”

Section 6 of the Hindu Succession Act reads- “When a male Hindu dies after thecommencement of this Act, having at the time of his death an interest in a Mitaksharacoparcenary property, his interest in the property shall devolve by survivorship upon thesurviving members of the coparcenary and not according to the provisions of this Act :

Section 6 of the Hindu Succession Act basically denies the female heirs coparcenaryrights in Mitakshara Hindu Joint Family. It confers the coparcenary rights to only themale heirs. This has invited a lot of controversy as it ostensibly discriminates against thewomen. In fact the major amendment which the draft bill envisages is in this Section.The present Section of the Act has grave implications for the female relatives of thedeceased male such as daughters. For example if property rights are devolved accordingto the this law then at the death of a male Hindu who has left two sons and a daughteralong with a widow, the sons and widow will get 1/4th of the deceased’s interest in thecoparcenary. Besides they will also get 1/4th of his share (i.e. the share of their father).However, the daughter will get the rights only according to succession. This will actually

384 AIR 1978 SC 1239.385 AIR 1985 SC 716

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amount to a mere 1/16th of the total property. Thus, we find that the daughter is clearlyin a disadvantageous position.

Other than this the major disadvantage of not being given the coparcenary statusis that they cannot demand partition at their will. Every adult coparcener is entitled toenforce a partition of the coparcenary property.386 However since the women are notawarded the coparcenary status in Mitakshara joint family they cannot demand partitionuntil the male coparceners demand partition.

According to section 6, if the deceased had left him surviving a female relativespecified in Class-I of the Schedule or a male relative, specified in that class who claimsthrough such female relative, the interest of the deceased in Mitakshara coparcenaryproperty shall devolve by testamentary or intestate succession as the case may be,under this Act and not by survivorship”.

This means that when a coparcener dies, his interest in Mitakshara coparcenarywould devolve not by survivorship to his kin, as the case in the past, but would insteadpass on to the female relative in Class-I of the Schedule or any male claiming throughsuch female, any such interest, by succession.

But how do we know what portion the deceased coparcener would have got? It ishere that the concept of notional partition comes in. The same is explained in Explanation1 of Section 6 which reads: - “For the purposes of this Section, the interest of a HinduMitakshara coparcener shall be deemed to be the share in the property that wouldhave been allotted to him if a partition of the property had taken place immediatelybefore his death irrespective of whether he was entitled to claim partition or not.”

The notional partition is not a real partition. On the death of the coparcener thereis no automatic partition under Hindu Law but, it seems, in reference to notional partition,severance of status is deemed to have taken place from the date of death of thecoparcener who has left an heir.387 However there is no direct severance of status andit is merely a fiction. Notional partition has two facets. First, all rules relating to partitionas laid down in the Hindu Law apply to notional partition. If it were not so, the provisionwould not work. Secondly, notional partition not being real partition, no severance ofstatus takes place among the surviving members of the Hindu Undivided Family, andtherefore, no one else’s interest except that of the deceased coparcener gets severed.

386 S.A. Desai (rev.), Mulla, “Principles of Hindu law”, 18th ed., 2004, p.418.387 Shive Honda v. Director, AIR 1992 Bom 72; Diwan, P., “Family Law” 6th ed. 2001, p. 417.

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It may be emphasized that the exercise of notional partition is undertaken to separatethe share of the deceased coparcener as only by doing so, the proviso be made towork.388

Cases related to Section 6 of the Hindu Succession Act, 1956:

Gurupad v. Hirabai389 is the most important case as regard the concept of notionalpartition and section 6 of the Hindu Succession Act go. The area of law was exploredbefore this in much detail by the Bombay High Court in two contradictory decisionsbefore the present case, those being Shriramabai v. Kalgonda390 and Rangubai Lalji v.Laxman Lalji391. In the former case, the widow of a Mitakshara coparcener was givenonly a marginal share in the property and the two shares that ought to have beenclubbed were not. In the latter case, the learned judge felt that the former case was notfully argued and was incorrectly decided and that on a true view of law, the widow’sshare must be ascertained by adding the share to which she is entitled at a notionalpartition during her husband’s lifetime and the share which she would get in her husband’sinterest upon his death. An interesting point here is that both cases were adjudged bythe same judge, Justice Patel. The view of the latter Court would be upheld in thepresent case.

Facts: -

The facts of the case are that the plaintiff (Hirabai) was married to Kandappa S.Magdum. He died on June 27th 1960 leaving behind him his wife, two sons andthree daughters. On November 6th of 1962 Hirabai filed a suit for partition andseparate possession of a 7/24th share in two houses, land, two shops and movableson the basis that these properties belonged to the joint family consisting of herhusband,, herself and her two sons. Her rationale for this was that if a partitionwould have occurred during the lifetime of her husband, she would have got a 1/4th share, along with her husband, and their two sons. Kandappa’s 1/4th sharewould devolve upon his death upon his wife, 2 sons and three daughters, totalingto 6. Thus, each would get 1/6th of one 1/4th = 1/24th of the property. Now

388 Diwan, P., “Law of Joint Family System, Debts, Gifts, Maintenance and Pre-emption” 1st ed. 1993.p. 252.

389 AIR 1976 SC 1239390 AIR 1964 Bom 263.391 AIR 1966 Bom 169.

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Hirabai argued that by virtue of S.6 her share would be 1/24th +1/6th = 7/24th ofthe total property.

One of her sons, Gurupad, disputed the claim saying that the properties were notjoint family properties but Kandappa’s self acquisitions and that on the date of hisdeath there was no joint family in existence since the father had effected a partition ofthe suit properties between himself and his two sons, one in 1952 and the other in1955. There was therefore no question of a fresh partition.

Judgment: -

The trial Court rejected the defendant’s case that the properties were Kandappa’sself acquisitions and that he had partitioned them during his lifetime. However, followingthe decision of the Bombay High Court in Shrirambai v. Kalagonda the judge limitedthe share to 1/24th and refused to add the 1/4th to it.

A division bench of the High Court dismissed the defendant’s appeal and allowedthe plaintiff a 7/24th share, holding that the suit property did indeed belong to the jointfamily. An appeal by special leave was subsequently filed by the Gurupad.

The Supreme Court upheld the Decision of the High Court and allowed Hirabai toclaim her 7/24th share in the property. In doing so, the Hon’ble Court scrupulously tiedto interpret what Section 6 said. Giving the judgment, Chandrachud, C.J. said that theinterpretation of Explanation 1 was the subject matter of acute controversy between theparties. He said that two things were necessary to determine if relief should be given tothe plaintiff or not. Firstly, her share in her husband’s share and secondly, her husband’sown share. He went on to say that the proviso to Section 6 contained the formula forfixing the share of the claimant while Explanation 1 contained a formula for deducingthe share of the deceased.

Though she was not herself a coparcener entitled to demand partition, yet if apartition were to take place between her husband and his sons, she would be entitledto a share equal to that of a son. In such a partition there would thus be 4 shares, thoseof the husband and wife and those of the two sons. The 1/24th of her share woulddevolve upon her by virtue of her being mentioned in the Class-I of the schedule asmentioned in Section 8.

The Court saw no justification for limiting the share of the plaintiff to 1/24th andignoring the 1/4th share that she would have got by virtue of there being an actualpartition. It held that whether a partition had actually taken place between the plaintiff’s

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husband and her sons was besides the point for the purpose of Explanation 1. Thatwould compel the assumption of a fiction that in fact a partition of the property hadtaken place, the point of time of the partition being the one immediately before thedeath of the person in whose property the heirs claim a share. The appeal of Gurupadwas hence dismissed.

Case Analysis: -

In a short but very detailed decision, the Supreme Court analyzed the entire conceptof notional partition and came up with a landmark judgment. The Court interpreted theSection in the best possible way and the same has been used as precedent in severalsuccessive cases. Thus, in the words of Chandrachud, C.J., “what is required to beassumed is that a partition had in fact taken place between the deceased and hiscoparceners before his death. That assumption once made, is irrevocable. The decisionheightens the status of most women and deserves all the credit it can get for that. Butthe question of the property of the daughters is left unanswered, which may be said tobe the biggest flaw of the Act. However, with the Report of the 17th Law Commission ofIndia, and the subsequent Hindu Succession Amendment Bill of 2004 seek to rectifythis flaw in the law which has for ages discriminated against women.

State of Maharashtra v. Narayan Rao

A very important point of law was laid down in State of Maharashtra v. . . . . NarayanRao392 as regards the status of the family after the death of a Mitakshara coparcenerand the subsequent notional partition.

Facts: -

The facts of the case deal with a family that owned extensive lands totaling up toabout 305 acres. The Karta died after the Hindu Succession Act came into forceand his interest devolved upon the 3 surviving members, his wife, mother and sonin equal shares. After the Land Ceiling Act came into force the question ofdetermination of surplus land came into question and it was subsequently held bythe respondents that on the death of the Karta, he surviving members of thefamily ceased to hold the family property as members of a family and each ofthem was hence entitled to be allowed to retain one unit of the ceiling area underthe Act.

392 AIR 1985 SC 716.

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Judgment: -

The Bombay High Court held that each of them entitled to a separate share, eventhough they may be living together at the time.

The Supreme Court on the other hand reversed the decision saying that when afemale member who inherits an interest in the joint family property under Section 6 ofthe Hindu Succession Act files a suit for partition expressing her willingness to go out ofthe family she would be entitled to get both the interest she has inherited and the sharewhich would have been notionally allotted to her, as stated in Section 6 of the HinduSuccession Act. But she does not cease to be a member of the family on the death of amale member of the family whose interest in the family property devolves on her withouther volition to separate herself from the family. It is no doubt true that the right of afemale heir to the interest inherited by her in the family property gets fixed on the deathof a male member under Section 6 of the Act but she cannot be treated as havingceased to be a member of the family without her volition. Thus, the Court held thatnotional partition cannot be taken to be a real partition and there is subsequently noseverance of status.

Section 8 of Hindu Succession Act, 1956:

Section 8 deals with the general rules of succession in case of males. According tothis Section the property of a male Hindu dying intestate shall devolve accordingly-Firstly upon the Class-I heirs393, if there is no Class-I heir than on relatives specified inClass-II394, if there is no heir of any of the two classes, than upon the agnates

393 Class I heirs would include, Son, Daughter, Widow, Mother, Son of a predeceased son, daughter ofa predeceased son, daughter of a predeceased daughter, widow of a predeceased son, son of apredeceased son, daughter of a predeceased son of a predeceased son, widow of a predeceasedson of a predeceased son.

394 I. FatherII (1) Son’s daughter’s son, (2) son’s daughter’s daughter,(3) brother, (4) sister.III (1) Daughter’s son’s son (2) daughter’s son’s daughter, (3) daughter’s daughter’s son (4) daughter’sdaughter’s daughter.IV. (1) Brother’s son (2) sister’s son, (3) brother’s daughter, (4) sister’s daughter.V. Father’s father; father’s mother.VI. Father’s widow; brother’s widow.VII. Father’s brother; fathers’ sister.VIII. Mother’s father; mother’s mother.IX. Mother’s brother, mother’s sister

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of the deceased. Lastly, if there is no agnate395 than upon the cognates396 of thedeceased.

In Savitri v. Devaki 397 the Court held thatwhere a partition of a joint family propertytakes place and a separate share is given to the mother, then in the case of death ofone of the sons the mother would be entitled to have a share in the separate propertyof her son. Fact that earlier when the partition took place she was given a share wouldnot place any bar.

In Yudhistir v. Ashok Kumar398 it was held that a Hindu male governed by Mitaksharaunder Section 8 of the Act, the property that devolves on him will be his separateproperty. Such a property would never amount to join family property in his hands asagainst his son.

It must be noted at this point that a son, as mentioned in the Schedule, or a son’sson, or a son’s son’s son, has to be a legitimate son. This was laid down in the case ofDaddo v. . . . . Raghunath399 by the Bombay High Court, where the Court held that anillegitimate son is not entitled to claim any share in the property of his father. A son ofa voidable marriage is, however, a full fledged legitimate son and will inherit the propertyof his father, but the son of an annulled voidable marriage will inherit the property ofthe father alone and of no other relation.400 Before the Act was passed however, in thecases of Kamalammal v. . . . . Vishwanathaswami401 as well as the Supreme Court decisionof Gur Narain v. . . . . Gur Tahal Das402, it was held that the illegitimate son takes half ofwhat he would have taken had he been a legitimate son. It is the submission of theauthor that the view taken in these two cases is the right one simply because an illegitimateson should not be made to suffer for not apparent fault of his own. The Court must takeinto account the benefit of that illegitimate child because the very reason for the

395 One person is said to be ‘agnate’ of another if they are related by blood or adoption wholly throughmales.

396 One person is said to be ‘cognate’ of another if the two are related by blood or adoption but notwholly through males.

397 AIR 1982 Kar. 67.398 AIR 1987 SC 558.399 AIR 1979 Bom 176.400 Diwan, P., “Family Law”, 6th ed. 2001 p. 420.401 46 Mad 167 (PC).402 AIR 1952 SC 225.

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procreation of the illegitimate child would be the fault of none other than the father andthe child who is not at fault, should subsequently not be made to suffer. It is in this lightthat the judiciary must take some affirmative action in bringing up the status of theseillegitimate children.

In as much as the share of the daughters and more specifically, the illegitimatedaughters goes, the law was finally settled in 1994 with the Supreme Court judgment inVithal Bhai v. . . . . Bhana Bai403 where it was specifically held that an illegitimate daughtermay not inherit.

The people whose names are mentioned in Class-II of the Schedule are next entitledto a share. The Class-II heirs are divided into nine categories. The rule, as laid down inthe case of Satya v. . . . . Urmila404 is that an heir in an earlier category excludes heirs in latercategories. All heirs in one category take simultaneously between themselves. Justbecause numerals have been used in some categories, such as in categories II, III, andIV, it does not indicate any preference of heirs in an earlier numeral over the heirs in alater numeral. Thus, in category II, where son’s daughter’s son bears numeral 1, it doesnot mean that son’s daughter in numeral 2 will be excluded.

Agnates and Cognates will inherit the property if there is no Class-I or Class-II heirto be found. In so far as the agnates and the cognates go, the agnates will be preferredas a general rule to the cognates, howsoever remote an agnate may be.

Thus, from the cases that have been studied above, Section 8, which is otherwise aSection without too much conflict and one which is very clear may be summarized asfollows.

When a male Hindu having an interest in the Mitakshara coparcenary propertydies, his property would first devolve by succession upon any of the relatives mentionedin Class-I of the Schedule. If there is no Class-I heir, then the property would devolveupon the relatives mentioned in Class-II, in the specified order. In the rare case thatthere is no Class-I and Class-II heir, the property will go to the agnates and if there areno agnates then to the cognates. If there are still no heirs then the Government willcome in and escheat the property.

403 AIR 1994 SC 481.404 AIR 1970 SC 1714.

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Act of 2005:

Hindu succession laws have long been viewed as a set of gender discriminatorylaws. However, not much effort has been put in going into the genesis of such laws.These laws were formed at that time and according to the prevailing conditions of thesociety. Thus, to improve the conditions on the contemporary society the governmentintroduced, the Hindu Succession (Amendment) Act, on 9th September 2005. The Acttoday is viewed as a progressive legislation in personal laws. The aim of the Act was toend the Gender discrimination in Hindu personal law and give equal rights to womenin succession.

The prevalent Mitakshara Law which governs the succession in Hindu JointFamily got change substantially now. The first change brought about is thatsub- section (2) of Section 4 which dealt with the non-applicability of the Act.The statute which was responsible for the prevention of fragmentation ofagricultural holdings or fixation of ceilings or devolution of tenancy rightshas been deleted. Now this Act has more applicability.

Another most important change is that Section 6 has been substituted by anew Section. According to which now a daughter would be a coparcenerfrom her birth, and would have the same rights and liabilities as a son. Shewill hold the property to which she is entitled as a coparcener. And she iscapable to disposed off the property by either a will or by testamentarydisposition. In Anar Devi v. Parmeshwari Devi 405 the Supreme Court heldthat after the death of the original owner, the ancestral property should bedivided between the heirs of the owners. The property was divided amongtwo daughters and an adopted son.

The further change is that on the death of a Hindu having an interest incoparcenary property, such property would devolve by either testamentary orintestate succession as the case may be, and not by survivorship.

The amendment removed the pious obligation of Mitakshara Law. Accordingto which there is a pious obligation of a son, grandson or great grandson, tofulfill the debt contracted by his father, grandfather or great grandfather.

Section 23 of Hindu Succession Act has been omitted by the amendment.This Section dealt with special provisions such as dwelling houses and rightof female heir to seek partition of dwelling house. This Section is omitted

405 AIR 2006 SC 3332.

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because daughters are now coparceners and necessary changes have beenmade.

Section 24 of the Act has been deleted. This Act dealt with the disability of awidow of a predeceased son, the widow of a predeceased son of apredeceased son or the widow of a brother, to succeed to the property incase of widow’s remarriage. The deletion of this Section has removed thedisability and permitting succession to the property to which she is entitled.

Section 30 has been amended by inclusion of a female Hindu, thusrecognizing her right over disposal of property that she is capable of disposingoff.

The schedule in Class-I heirs has been amended by inclusion of son of apredeceased daughter of a pre-deceased daughter; daughter of a pre-deceased daughter of a pre-deceased daughter; daughter of a predeceasedson of a pre-deceased daughter and daughter of a pre-deceased daughterof a pre-deceased son. These all be considered as a Class-I heirs.

Santhosh Kumar v Baby

Facts of the case: -

In this case of Santhosh Kumar v Baby406 the respondent filed the suit for partitionclaiming 1/2 share in the plaint schedule property. According to the plaintiff, theproperty belonged to Chellappan Achari, father of the plaintiff and defendantsand the husband of the first defendant. Chellappan Achari died on 29-10-1978.The plaintiff has 1/6th share in the property. She purchased the shares of the othertwo defendants. The trial Court held that the plaintiff has 1/6th share in the propertyand she having purchased 2/6 share of defendants she is entitled to 1/2 share inthe property. The contention that the property was acquired by Chellappan Achariwas accepted by the trial Court.

The plaintiff raised a contention that the house was renovated by her with herfunds. The second defendant, on the other hand, contended that he spent hugeamounts for renovation of the house. The second defendant claimed reservationof house in his favour. The Trial Court held that, the second defendant renovatedthe building by spending his funds and that he is entitled to get reservation of the

406 AIR 2007 Ker 214.

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house. The trial Court took the view that the plaintiff can reside in the room whichis now occupied by her till final decree.

Judgment: -

The second defendant challenged the judgment and decree of the trial Court. Theappellant has raised a contention for the first time in the Second Appeal that in view ofSection 23 of the Hindu Succession Act, the suit is not maintainable since the only sonof Chellappan Achari has not sought partition of the property.

Section 23 was omitted by the Hindu Succession Amendment Act of 2005 (Act 39of 2005). The question whether the deletion of Section 23 of the Hindu Succession Actis retroactive, was considered in Narayanan v. Meenakshi407 it was held that- as theSection was omitted the personal right of a male heir under Section 23 comes to anend, the right of the female heir to claim partition cannot be defeated. In other wordsa defeasible right of a male heir would get defeated the moment his personal rightceases. Such personal right of a male heir is taken away by the omission of Section 23of the Hindu Succession Act, 1956, by the Hindu Succession (Amendment) Act, 2005.

In view of the decision in Narayana v. Meenakshi the question of the appellant thatthe plaintiff is not entitled to claim partition and that Section 23 of Hindu SuccessionAct is a bar to claim partition, cannot be sustained.

Shri Brij Narain Aggarwal v. Sh. Anup Kumar Goyal

Facts of the case: -

In the case of Shri Brij Narain Aggarwal v. Anup Kumar Goyal408, a suit has beenfiled by the plaintiff, husband of deceased Mrs. Mithlesh Aggarwal, after cominginto force of the Hindu Succession Act (Amendment Act 2005) whereby Section 6of the Hindu Succession Act 1956 was amended.

One Mr. Pran Nath Goyal filed a suit for partition in which his sons and daughtersincluding the wife of the plaintiff were the parties. During the pendency of the suit,on a joint application filed by the parties, under Section 21 of the Arbitration Act1940, the entire matter was referred to arbitrator for deciding the question of

407 AIR 2006 Ker 143.408 http://delhidistrictcourts.nic.in/JUL07/Brij%20Narain%20Vs. %20Anup%20Kumar%20Goyal.pdf

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division of property. The Arbitrator gave an award on 11.2.1989 and the awardwas published on 11.12.1989 and wife of the plaintiff Mrs. Mithlesh Aggarwalwas granted 1/36th share in the two immovable properties of the deceased. Anappeal was preferred against the decree. The appeal was dismissed in default.Thereafter, an Execution Petition was preferred before this Court which wassubsequently transferred to the District Court. The contention of the plaintiff is thatsince execution petition was pending and the partition decree passed by theCourt in 1991 has not been given effect to by effecting partition by metes andbounds, the partition is not complete as the decree has not been implemented.Plaintiff relied upon Section 6 (5) of Hindu Succession Act as amended.

On the other hand, the contention of the learned Counsel for the defendant isthat since Mrs. Mithlesh Aggarwal died in the year 1998 and her share hadalready been determined by a competent Court and a decree has been passedwhich became final, no right survived in plaintiff to file a fresh suit even afteramendment of Hindu Succession Act.

Judgment:-

The Court held that the partition had already taken place by a decree of Court in1991 itself. Mrs. Mithlesh Aggarwal, died in 1998. Mere pendency of the executionwould not give right to the plaintiff, who is husband of Mrs. Mithlesh Aggarwal, toreopen the partition. The suit is not maintainable under the amended Hindu SuccessionAct as claimed by the plaintiff.

Disqualifications:

Under the Act there are three grounds which disqualify an heir from succeeding tothe estate of the deceased namely, disqualification arising from re-marriage,disqualification arising on account of commission of murder and disqualification arisingfrom conversion.

Section 24 provides for disqualification of the following heirs by virtue of remarriage:–1) Predeceased son’s widow; 2) The widow of a predeceased son of a predeceasedson; 3) The widow of a brother.

The disqualification arises if she has re-married on the date the succession opens,any subsequent remarriage after the succession has opened will not deprive the widowof the share which she has already inherited as an heir. Heirs other than the threementioned in Section 24 cannot be disqualified by virtue of remarriage. Several cases

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have been decided on the basis of this principle.409 In Kasturi Devi v. Dy Director ofConsolidation410 it was held that a widowed mother was entitled to inherit from her sonin spite of the fact that she had remarried.

Section 25 disqualifies a murderer or an abettor of murder from inheriting theproperty of the person murdered.

Section 26 disqualifies the convert’s descendants and the children born to suchdescendants to inherit the property of any of their Hindu relatives, but the children ordescendants of such children born after his conversion are not affected by the rule ifthey are Hindus at the time when the succession opens.

Other than these three grounds there is no other ground on the basis of which anheir can be disqualified from inheritance, even disease etc. have been ruled out.411

Section 27 lays down that if any person is disqualified from inheriting any propertyunder this Act, it shall devolve as if the person had died before the intestate.

The Progressive facets of the Hindu Succession (Amendment) Act, 2005:

The new amendment incorporated into the Hindu Succession Act has brought theelement of gender equality in to the Act to a large extent which was very much indemand from the communities governed by the Act. The Hindu Succession (Amendment)Act, 2005 has turned out to be the cynosure of all eyes as a result of its far-reachingsocio-legal implications. This legislative piece, which confers coparcenary rights todaughters within a Hindu Joint Family system, is indeed one that is radical andrevolutionary in nature. The Bill, seeking to realize the Constitutional guarantee ofgender equality, was drafted in 2001 by the Law Commission which was then headedby former Supreme Court judge, Justice B. P. Jeevan Reddy. The Constitution of Indiaenshrines the principle of gender equality in its Preamble and Parts III, IV and IV-Apertaining to Fundamental Rights, Fundamental Duties and Directive Principles of theState Policy respectively. The Constitution not only grants equality to women, but alsoempowers the State to adopt measures of positive discrimination in favour of women.And now as India becomes increasingly aware of the need for equal rights for women,the government cannot afford to overlook, property rights have a deep impact on the

409 Chando Mahtain v. Khubalal, AIR 1983 Pat.33.410 (1976) 4 SCC 674.411 Section 28 of the Hindu Succession Act, 1956.

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national economy. The need to dispense with gender justice raises deep political debateand at times acrimony in legislative forums. This enthused the house to move a bill tomake amendments into the Hindu Succession Act, to secure the rights of women in thearea of property. The aim is to end gender discrimination in Mitakshara coparcenary byincluding daughters in the system. Mitakshara is one of the two schools of Hindu Lawbut it prevails in a large part of the country. Under this, a son, son’s son, son’s son’s sonhave a right by birth to ancestral property or properties in the hands of the father andtheir interest is equal to that of the father. The group having this right is termed acoparcenary. The coparcenary is at present confined to male members of the jointfamily. The Hindu Succession (Amendment) Act, 2005 is a landmark piece of legislation.After 50 years, the Government finally addressed some persisting gender inequalitiesin the Hindu Succession Act, which itself was path-breaking. Out of many significantbenefits brought in for women, one of the significant benefit has been to make daughteras part of coparcenary (right by birth) in Mitakshara joint family property. Earlier thefemale heir only had a deceased man’s notional portion. With this amendment, bothmale and female will get equal rights. In a major blow to patriarchy, centuries-oldcustomary Hindu Law in the shape of the exclusive male Mitakshara coparcenary hasbeen breached throughout the country. The preferential right by birth of sons in jointfamily property, with the offering of “shraddha” for the spiritual benefit and solace ofancestors, has for centuries been considered sacred and inviolate. It has also played amajor role in the blatant preference for sons in Indian society. This amendment, in onefell swoop, has made the daughter a member of the coparcenary and is a significantadvancement towards gender equality. The significant change of making all daughters(including married ones) coparceners in joint family property - has been of a greatimportance for women, both economically and symbolically. Economically, it canenhance women’s security, by giving them birth rights in property that cannot be willedaway by men. In a male-biased society where wills often disinherit women, this is asubstantial gain. Also, as noted, daughter can become Karta of the joint family.Symbolically, all this signals that daughters and sons are equally important members ofthe parental family. It undermines the notion that after marriage the daughter belongsonly to her husband’s family. If her marriage breaks down, she can now return to herbirth home by right, and not on the sufferance of relatives. This will enhance her self-confidence and social worth and give her greater bargaining power for herself and herchildren, in both parental and marital families.

Now under the amendment, daughters will now get a share equal to that of sons atthe time of the notional partition, just before the death of the father, and an equal share

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of the father’s separate share it means there will be an equal distribution of undividedinterests in coparcenary property. However, the position of the mother vis-à-vis thecoparcenary stays the same. She, not being a member of the coparcenary, will not geta share at the time of the notional partition. The mother will be entitled to an equalshare with other Class-I heirs only from the separate share of the father computed atthe time of the notional partition. In effect, the actual share of the mother will go down,as the separate share of the father will be less as the property will now be equallydivided between father, sons and daughters in the notional partition. The Preamble tothe Amending Act indicates the objective as the removal of discrimination againstdaughters inherent in Mitakshara coparcenary and thereby eradication of the banefulsystem of dowry by positive measures thus ameliorating the condition of women in thehuman society. It is necessary to understand that if equality exists only as a phenomenonoutside the awareness and approval of the majority of the people, it cannot be realizedby a section of women socialized in traditions of inequality. Thus, there is need to createsocial awareness and to educate people to change their attitude towards the conceptof gender equality. The need of the hour is also to focus attention on changing thesocial attitudes in favour of equality for all by enacting a uniform law. Campaigns forlegal literacy; efforts to enhance social awareness of the advantages to the wholefamily if women own property; and legal and social aid for women seeking to asserttheir rights, are only a few of the many steps needed to fulfill the change incorporatedin the Act.

Therefore, the law of succession under Mitakshara, Dayabhaga and the HinduSuccession Act, 1956 as well as under the Amendment, 2005 reveals a shift inperspectives of the various facets of succession from a gender biased one to the genderneutral one. What we had seen in the Sastric law was a law heavily tilted in favour ofmen. The Act has removed several drawbacks which were inherent in the law of successionas existed under Dayabhaga and Mitakshara Schools of Hindu Law. The Act has beena major step towards creating gender equality and secularizing the laws as per thechanging needs of the modern society. It is however felt that certain more progressivesteps should have been taken for e.g. with regard to Section 14 of the Act, clarity as towhat is meant by restricted estate under sub-section (2) and to narrow it down to as faras possible. It is also felt that coparcenary property should not fall within the ambit oftestamentary succession although that would mean not giving men and women absoluteownership over their property i.e. coparcenary property, thus it is felt that Section 30should not have been enacted in it’s present form and the old law under MitaksharaSchool of Hindu Law should have been retained that did not allow a coparcener todispose of his undivided coparcenary interest by will.

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Succession of Female Hindu’s Property under the Act:

While the Act defines the interest taken by each of the three female heirs mentionedin it, it does not say how their interests are to devolve on their demise.412 The course ofsuccession would depend upon the question whether the female heir took the estate indefault of male issue or in their presence.413

On the death of the widow of the last male holder, her estate would revert to hismale issue, if any. On the analogy of the reverter of a share allotted to a mother onpartition, the sons, grandsons, and great-grandsons will succeed as the heir of thehusband.414 Likewise on the death of the predeceased son’s widow, where in default ofher husband’s male issue, she has taken the share of a son, her interest will pass to themale issue of the father-in-law as his nearest heirs and as the persons entitled to theestate from which her share was taken.

Where the widow of the predeceased takes the share of the grandson only, the Actnecessarily implies a reverter of her interest to her son or grandson or to her husband’sson or grandson. Similarly, the interest taken by the widow of a predeceased son willrevert on her death to her husband‘s branch, as she is allotted a share out of theproperty of that branch. These appear to be the reasonable and probable implicationsof the Act, though the language is defective and susceptible of the result that on thedeath of the daughter-in-law or grand-daughter-in-law, her interest would pass to thewhole of the male issue and the surviving female heirs. But the intention of the lawmakes in this respect appears only to be to convert the inchoate right of a widow whichexisted before it to share along with the male issue, into perfect inchoate and enforceableright.

Whether on the death of any of the female heirs, the other female heir or heirs willbe reversionary heirs entitled to come in before the daughter or the daughter’s son isnot free from doubt. On the wording of Section 3(3) it would seem that the next heir ofthe husband would take the interest of the female heir on her death. Therefore, theother female heir or heirs would come in before the daughter or daughter’s son.415

412 Ranganath Misra (rev.), Mayne’, “Treatise on Hindu Law & Usage”, 15th ed.2003, p.1014.413 Ibid.414 U.P.D. Kesari, “Modern Hindu Law”, 2nd ed., 1998, p.262.415 Kamala Bala Bose v. Jiban Krishna, AIR 1946 Cal 461; Ranganath Misra (rev.), Mayne, “Treatise on

Hindu Law & Usage”, 15th ed. 2003, p.1015.

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Where a person died before the Act and his daughters succeeded to his propertyand the daughter died after the Act, it was held that further succession should begoverned by the provisions of the Act and the widow of a predeceased son of the lastmale holder would be entitled to succeed.

Significance of Section 14416

Section 14 of the Hindu Succession Act, 1956, subject to certain qualifications,now confers full and heritable capacity on a female heir in respect of all propertyacquired by her whether before or after the commencement of that Act, with the resultthat by retrospective operation of that Section she holds the property in her possessionas full owner and not as a limited owner. Male and female heirs are now treated asequal without any distinction. The restraints and limitations on the powers of a femaleheir have ceased to exist even in respect of existing property.

The underscoring of the rights of women to be in equali juria under the constitutionfinds concrete shape in the Act of 1956. The Section 14 of the Hindu Succession Acthas applicability to all kind of property whether movable or immovable and the rightsof the Hindu female to the property, which she acquired as a limited estate before thecommencement of this Act, are enlarged. It is immaterial whether acquisition was throughinheritance, devise, gift, partition in lieu of maintenance or its arrears.417

The Supreme Court in the case of Erramma v. Verupana418 examined the ambit andobject of this Section and observed Section 14(1) of the Act contemplates that a Hindufemale, who in the absence of this provision, would have been limited owner of the

416 Section 14 of Hindu Succession Act 1956- Property of a female Hindu to be her absolute property-(1) Any property possessed by a Female Hindu, whether acquired before or after the commencementof this Act, shall be held by her as full owner thereof and not as a limited owner. Explanation: In thissub-sec.., “property” includes both movable and immovable property acquired by a female Hinduby inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or bygift from any person, whether a relative or not, before, at or after her marriage, or by her own skillor exertion, or by purchase or by prescription, or in any other manner whatsoever, and also any suchproperty held by her as stridhana immediately before the commencement of this Act.(2) Nothing contained in sub-sec. (1) shall apply to any property acquired by way of gift or under awill or any other instrument or under a decree or order of a civil court or under an award where theterms of the gift, will or other instrument or the decree, order or award prescribe a restricted estatein such property.

417 Acharya Shuklendra, “Hindu Law”, 1st ed. 2002, p. 411.418 AIR 1966 SC 1879.

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property, will now become full owner of the same by virtue of this Section. The object ofthis Section is to abolish the estate called “limited estate” or “widow’s estate” in HinduLaw. It also makes a Hindu woman full owner of the property with all powers of disposition.

In case of Tulsamma v. Shashareddi419, it was debated whether sub-section (1) or(2) of the Section 14 would apply. The court considered the conflicting opinions ofdifferent High Court and examined as many as forty three decisions of the of variousHigh courts and the Supreme Court itself and after consideration of these decisionsobserved that when a specific property was allotted to the widow in lieu of her claim formaintenance, the allotment would be in satisfaction of her jus ad reum, i.e. the right tobe maintained out of joint family property was allotted to the widow. Also, where propertywas allotted to the widow under an instrument decree, order or award, which prescribeda restricted estate for her in the property, sub-section (2) of Section 14 would not beapplicable.

In this case, the appellant claimed maintenance out of the joint family properties inthe hands of the respondent who was her deceased husband’s brother. The claim wasdecreed in favour of the appellant and in the execution of the decree for maintenance,a compromise was arrived at between the parties allotting the parties in question to theappellant for her maintenance and giving her limited interest in such properties. TheCourt observed: “Sub-section (1) of Section 14 is large in its amplitude and coversevery kind of acquisition of property by a female Hindu including acquisition in lieu ofmaintenance and where such property possessed by her at the date of the commencementof the Act or was subsequently acquired and possessed, she would become full ownerof the property.” Sub-section (2) is more in the nature of the proviso or exception to thesub-section (1).

The rule laid down in this Section has very wide and extensive application and hasto be read in comprehensive manner. The Act overrides interalia420 the old law onsubject of stridhana in respect of all property possessed by a female, whether acquiredby her before or after the commencement of the Act and this Section declares that allsuch property shall be held by her as full owner421. The Act confers full inheritable

419 AIR 1977 SC 1944; see also Punithavalli v. Ramalingam, , , , , AIR 1970 SC 1730 (The estate taken bya widow under sub-sec.. 1 has been held by the Supreme Court to be an absolute one which is notdefeasible and whose ambit can not be cut down by any text or interpretation of Hindu law)

420 Ramakrishna Mutt v. M. Maheswaran , AIR 2007 Mad. 180.421 Ram Vishal v. Jagan Nath, (2004) 9 SCC 302.

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capacity on the female heir and this Section dispenses with the traditional limitations onthe powers of a female Hindu to hold and transmit property. The effect of this Sectionresults in the independence of women as regards to the absolute ownership of propertyin contrast to stringent provisions against the proprietary rights of a female of older.

Succession to the Property of Female Hindu-Post 1956:

Under the previous law, succession to stridhana – women’s property – variedaccording to the woman being married or unmarried and according to the form of hermarriage. It also varied according to the source from which the stridhana422 came andthe mode and manner of her acquisition of the property. The rules of descent of thedifferent Schools also varied. The Hindu succession Act, 1956 abolishes all this andpropounds in Section 15, a definite and uniform scheme of succession to the propertyof a female Hindu who dies intestate after the commencement of the Act. The rulesrelating to the mode of computation of shares of the various heirs are stated in Section16. Basically Sections 15 and 16 deal with the whole set of rules which are essential forthe succession of the property of a female Hindu under Hindu succession Act, 1956.

Ambit of the Section:

This Section423 deals with general rules of succession to the property of a Hindufemale dying intestate. Since the Act deals only with the intestate succession, this Sectiondeals with intestate succession to the property of a Hindu female. It will apply to the

422 S.A. Desai (rev.), Mulla, “Hindu Law”, 18th ed. 2004, Vol.2, p.282.423 Section 15:-General rules of succession in the case of female Hindus:-

(1) The property of a female Hindu dying intestate shall devolve according to the rules set out inSection 16 :

(a) firstly, upon the sons and daughters (including the children of any predeceased son ordaughter) and the husband;

(b) secondly, upon the heirs of the husband; (c) thirdly, upon the mother and father; ( d ) fourthly, upon the heirs of the father; and ( e ) lastly, upon the heirs of the mother. (2) Notwithstanding anything contained in sub-sec. (1)- ( a ) any property inherited by a female Hindu from her father or mother shall devolve, in the

absence of any son or daughter of the deceased (including the children of any predeceasedson or daughter) not upon the other heirs referred to in sub-sec.. (1) in the order specifiedtherein, but upon the heirs of the father; and

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property of which she is the full owner in terms of Section 14424 of the Act, in the caseof Renuka Bala Chatterjji v. A.K.Gupta,425 it was decided that the Section does notapply to property in which she has only a limited estate.

This Section has only prospective application and does not apply retrospectively toany category of property. Thus, if a Hindu female had before coming into force of theAct, succession to her property will be regulated by old Hindu Law.

Property:

The expression ‘property’ in this Section means property of the deceased heritableunder this Act. It includes both movable and immovable property owned by a femaleHindu and acquired by her by inheritance;426 or by devise; or at a partition; or by a giftfrom any person whether relative or not (before, at or after her marriage); or her ownskill or exertion; or by purchase; or by prescription; or in any other manner whatsoever.It also includes all property, which was held and possessed by her at the date ofcommencement of the Act and of which she is declared to be the full owner by Section14 of the Act427.

There is no distinction as to whether the property was acquired by her duringmaidenhood or during coverture or after the dissolution of marriage. In other words,no distinction is made between the statuses of Hindu female with reference to acquisitionof property.428 Hindu female includes any female who is Hindu in terms of the definitionof Hindu contained in the Act. It is immaterial that she is a widow, married or unmarriedwoman. The term ‘Hindu female’ covers all these women if they just fulfill the criteria ofbeing a Hindu given in Section 2 of the Hindu Succession Act, 1956 as it the requirementprior to Sections 15 and 16.

(b) any property inherited by a female Hindu from her husband or from her father-inlaw shalldevolve, in the absence of any son or daughter of the deceased (including the children ofany predeceased son or daughter) not upon the other heirs referred to in sub-sec. (1) in theorder specified therein, but upon the heirs of the husband.

424 Jamunabai v. Bholaram, AIR 2003 M.P. 40.425 AIR 1961 AP 498.426 Balasaheb v. Jinwala, AIR 1978 Bom 44.427 Jose v. Ramkrishnan Nair, AIR 2004 Ker. 16.428 Paras Diwan, “Modern Hindu Law”, 15th ed. 2003, p.403.

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Three categories of Property:

Category I: Under category I only those properties are covered which are inheritedby her from her father or mother. The emphasis is on the word ‘inherited’; inherited byintestate succession and will not apply to testamentary succession.

Category II: Under this category are included only those properties which sheobtained by way of inheritance from her husband or father-in-law. Properties which shegets from her husband or father-in –law otherwise than by inheritance are not coveredunder this category.

Category III: All those properties which are not covered under categories I and IIare covered under this category, howsoever they are acquired. The properties inheritedby her from persons other than father, mother, husband or father-in-law will fall underthis category. Thus, the property inherited by a Hindu female from her brother429, propertyreceived in gift from parent430, and bequest from a parent431, have been held to fallunder category III.

The rules of succession laid down in this Section cannot apply to property acquiredby a female under an instrument or a decree or an order of a Civil Court or under anaward which itself prescribed a restricted estate in such property. In any such casesuccession to the property would be controlled, by the nature and extent of the restrictedestate thereby created.432

In Emana Veeraraghavamma v. G.Subbarao433, a Hindu female inherited someproperties from her husband. She sold them, the sale was valid. Out of the sale proceedsshe bought some properties. The question was whether these properties are covered bycategory II or category III. The Court held that these properties were covered undercategory III. The reason is that the Hindu female inheriting property from her parentsbecomes her absolute property and has power to deal with it the way she feels like; she

429 Jayantilal Mansukhlal v. Mehata Chhananlal Ambalal, AIR 1968 Guj 212.430 Ayi Ammal v. Sbramania Asari, AIR 1966 Mad 369.431 Bobballapati Kamesawarorao v. Kvir Vasudevarao, AIR 1972 AP 189.432 See Section (2), “Nothing contained in sub-section (1) shall apply to any property acquired by way

of gift or under a will or any other instrument or under a decree or order of a civil Court or under anaward where the terms of the gift, will or other instrument or the decree, order or award prescribe arestricted estate in such property.

433 AIR 1976 AP 337.

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can sale it or gift it. If she alienates it, it cannot be said on her death that the propertyinherited by her is still available for devolution to her parent’s heirs.

The General Order of Succession:

(I) Entry (A): Sons, Daughters and Husband:

(A) Son: The expression ‘son’ used in Entry (a) has not been defined in the Act. Itincludes both a natural son and a son adopted in accordance with the law relating toadoption among Hindus in force at the time of the adoption. In case of a femaleintestate who had remarried after the death of her husband or after divorce her sons bydifferent husbands would all be her natural sons and entitled to inherit the property.434

The expression ‘son’ also includes illegitimate son as according to the proviso to Section3(1)(j) lays down inter alia that illegitimate children to be related to their mother.

In the case of Mallappa v. Shivappa,435 it was decided that a step-son is notentitled as ‘son’ to inherit to his step-mother as one of the heirs under this Entry, but hecan succeed to her property as an heir of her husband under Entry (b) of the sub-section. In Lachaman Singh v. Kirpa Singh436, the Supreme Court approved of the viewthat ‘sons’ in clause (a) does not include step-sons.

(B) Daughter: The rules relating to a ‘son’ stated above apply mutatis mutandis437

to the case of a daughter. A daughter adopted by her husband after death is not heradopted daughter and is not included in the expression ‘daughter’. Nor are includeddaughters of her husband from different wives. In short no step-daughter is an heir toher under this Entry.438

(C)Children of predeceased son and daughter: The sons and daughters of apredeceased son and predeceased daughter take the property as representatives oftheir deceased parent. The children of the predeceased son or daughter include legitimatechildren, natural born or adopted. Illegitimate children are also included accordingSection 3(1)(j). Therefore, a legitimate son of a predeceased illegitimate son is alsoincluded in this Entry. A posthumous son of a predeceased son is also included in thisEntry.

434 Paras Diwan, “Law of Intestate & Testamentary Succession”, 2nd ed.1998, pp.177-178.435 AIR 1962 Mys 140.436 AIR 1987 SC 1616.437 (Mutatis Mutandis- With the necessary changes in points of details.)438 Gurnam Singh v. Ass Kaur, AIR 1977 P&H 103.

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The children of the void or annulled voidable marriage of son or daughter are notincluded, as Section 16 of the Hindu Marriage Act, 1955 permits the children of voidor annulled voidable marriage to succeed to the property of their parents alone439. Thechildren of children of a predeceased son or daughter are also not included as it hasbeen held accordingly in the case of Anusayabai v. Jagdish.440

(D) Husband:- - - - - The husband entitled to succeed under this Entry must be a personwho was lawfully married to the female intestate and whose marriage had not beenannulled or dissolved by a decree of a court or dissolved by any valid custom governingthe parties441. Until and unless divorce is not granted to living husband and wife underany of the grounds of divorce given under Section 13 of the Hindu Marriage Act,1955, such a husband is included in the term ‘husband’.

(II) Entry (B): Heirs of the Husband:

Falling all heirs of the intestate female specified in Entry (a), but not until then, allher property will devolve upon the heirs specified in this Entry. However, property thatshe might have inherited from her father or mother will not devolve upon them and willdevolve upon the heirs of the father.

The devolution upon the heirs of the husband of the female intestate shall be in thesame order and according to the same rules as would have applied if the property hadbelonged to the husband and he had died intestate in respect thereof immediatelyafter her death.

Where a female intestate had remarried after the death of her first husband, the‘heirs of the husband’ would be the heirs of the second husband, who if alive at thetime of the death of the intestate would himself have been entitled to succeed as herhusband under Entry(a). The heirs contemplated in Entry (b) must be the heirs of the lasthusband that is of the person whose widow the intestate was at the time of her death.

(III) Entry (c): Mother and Father:

Failing all heirs of the intestate female specified in Entries (a) and (b), but not untilthen all her property, howsoever acquired, will devolve upon her mother and father.The property that will devolve under this Entry will include property inherited by her from

439 Pandit Devi Datt (Now Deceased) through LRs v. State, 2007(209) ELT343(Del).440 AIR 1962 HP7.441 Section 29 (2) of the Hindu Marriage Act, 1955.

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the mother when the intestate is survived by the father and property inherited by herfrom the father when the intestate is survived by the mother.

The expression ‘mother’ includes both a natural mother and an adoptive motherof the intestate.442 Unchastity of a mother is no bar to her succeeding as heir to herdaughter; nor does remarriage constitute any bar. In the case of Anhia Mandalanin v.Baijnath,443 the Court said that a step-mother is not entitled as ‘mother’ to inherit to herstep-daughter as one of the heirs under this Entry, but she can succeed to her propertyas an heir of her father under Entry(d). The expression ‘father’ also includes both anatural and an adoptive father of the intestate.

(IV) Entry (d): Heirs of the Father:

Failing all heirs of the intestate female specified in Entries (a) and (c), but not untilthen all her property, howsoever acquired, will devolve upon the heirs of her father. Thedevolution upon the heirs of the father shall be in the same order and according to thesame rules as would have applied if the property had belonged to the father and hehad died intestate in respect thereof immediately after her death.

(V) Entry (e): Heirs of the Mother:

Failing all heirs of the intestate female specified in Entries (a) and (d), but not untilthen all her property, howsoever acquired, will devolve upon the heirs of her mother.The devolution upon the heirs of the father shall be in the same order and according tothe same rules as would have applied if the property had belonged to the father and hehad died intestate in respect thereof immediately after her death.

In a case falling under Entry (e) the mother of the intestate becomes the startingpoint. All her sons and daughters by different husbands are her sons and daughterswithin the scope of Entry (a) and are therefore entitled too succeed as such.444

Special order of Succession in case of Childless Female Intestate:

Sub- section (2) carves out two exceptions to that general scheme and order ofsuccession. Clause (a) of sub-section (2) relates to property inherited by the intestate

442 Under Section 8 of the Adoptions and Maintenance Act, 1956, woman married or unmarried, evena widow can adopt a child and hence can be an adoptive mother.

443 AIR 1974 AP 177.444 An illegitimate brother/sister of a female intestate can also succeed to her property.

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from her mother or father and clause (b) relates to the property inherited by her fromhusband or father-in-law.445

Clause (A): Property Inherited from Father or Mother:

The clause enacts that in a case where a female Hindu inherits property from herfather or mother, such property so inherited is to devolve ‘not upon the other heirs butupon the heirs of the father’. In the case of Radhika v. Ahgnu,,,,,446 Where female Hindudied issueless i.e. she is not survived by a child or the child of such child, but herhusband is alive, even in the presence of the husband, the property will revert to herfather’s heirs. The purpose of the clause is that the property should not go into thehands of other heirs as classified in Entry (a) and (b) of sub-sec. (1) but should goinstead to heirs of the father.447

In such cases, it is presumed that upon the death of the woman, her father haddied, and his heirs will be ascertained accordingly. But there appears to be an anomalyhere, which has been noticed and explained by all the writers on Hindu Law. If awoman inherits the property from her mother and dies issueless and her father is alive,would the property go to her father or his heirs?448 The unanimous opinion seems to bethat the property would be taken by the father, and it is only in his default (absence), itwould go to his heirs.

The other question that may arise is that when there is no heir of the father at thetime of her death, but the other heirs are alive as mentioned in sub-section (1), thencan the other heirs inherit the property or not? As it is not explicitly clear from theclause, the inference that can be drawn is that property can be devolved upon thehusband or his heirs in such case.

The property under this clause is only the property that a female inherits from herfather or mother. Property acquired by her under any devise or bequest under a willwould devolve on her death in a manner prescribed in sub-section (1); nor wouldproperty given to her by way of gift by her father or mother fall under this exception.449

445 G.M.Divekar, “Hindu Law”, 2nd ed.2002, p.263.446 (1996) 2 SCC 344.447 Raghuwar v. Janki Prasad, AIR 1981 MP 39.448 Poonam P. Saxena, “Family Law Lectures”, 1st ed.2004, p.427.449 Meyappa v. Kanappa, AIR 1976 Mad 154.

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In Bhagat Singh v. Teja Singh,,,,,450 two sisters inherited the property from their mother.On the death of one, who died as an issueless widow, the other sister took the propertyas her ‘father’s heir’ and entered into an agreement to sell the same to X. the deceasedsister’s husband’s brother challenged the validity of this sale and claimed the propertyas her heir under section 15(1)(b). The Supreme Court held that since both the conditionswere fulfilled i.e. she had inherited the property from her mother and had died issueless,the property would revert to her father’s heirs i.e. the sister in this case.

In another case of Y.P.Duggal v. O.P.duggal,451 an unmarried female inherited theproperty from her mother and died leaving her brother and a widow of another brother.The brother claimed the property as a sole survivor. The Court held that as the propertyis to revert to her father and will devolve as if it belonged to the father, on his heirs, thedeceased brother would be the son of the father, and another brother’s widow wouldbe related to the father as the widow of predeceased son. Thus both will inherit theproperty in equal shares as class I heirs of the father.

Clause (B): Property inherited from Husband or Father-in-Law:

The clause enacts that in a case where a female Hindu inherits property from herhusband or father-in-law, such property so inherited is to devolve ‘not upon the otherheirs but upon the heirs of the husband’.

The clause is important as it elucidate the aspect related to the second marriage ofthe intestate. It is conceivable that the intestate may have remarried after the death ofher husband from whom she may have inherited property or after the death of father-in-law from whom she may have inherited property and may die without issue butleaving her second husband. Such a case will fall under in this clause which enacts thatsuch property will not devolve upon other heirs referred to in sub-section (1), whichwould include the second husband who survives her, but will devolve upon heirs of thefirst husband.

In the case of Danistha Kalita v. Ramakanta Kalita,452 the Gauhati High Court hasruled that for the purposes of inheriting the property of the mother which was inherited

450 AIR 2002 SC 1.451 AIR 2000 Del. 81.452 AIR 2003 Gau 92.

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by her from her deceased husband, ‘son and daughter’ would mean the son and adaughter of that husband from whom or from whose father, she had inherited theproperty. Here a woman died leaving behind a son and a daughter, born to her fromthe husband whose property she had inherited. She also had a son from the previousmarriage. The Court held that the son born of the previous marriage was not entitled toget the property and will be excluded from inheritance, as it was the property that wasinherited by the woman from her second husband and he was not the progeny of thathusband.

Section 16: Order of Succession and Manner of Distribution among Heirsof a Female Hindu453:

This Section is a sequel of Section 15 which lays down the heirs to the property ofan intestate Hindu female.

Rule -1 explicitly declares about the priority of heirs according to Entries from (a) to(e) and the proper method of their prioritization. Rule 2 deals with the case of childrenof a predeceased son or daughter454 so that they will not take per capita with the son ordaughter or husband of the intestate, but will take between them the share which theirfather or mother, as the case may be, would have taken if alive at the time of the deathof the intestate, that is to say they will take per stripes.

Rule-3 applies to different Entries of sub-section (1) like Entry (b) heirs of her husband,(d) heirs of her father and (e) heirs of her mother, along with two clauses of sub-section

453 16. Order of succession and manner of distribution among heirs of a female Hindu -The order ofsuccession among the heirs referred to in sec. 15 shall be, and the distribution of the intestate’sproperty among those heirs shall take place, according to the following rules, namely:- Rule 1-Among the heirs specified in sub-sec. (1) of sec. 15, those in one Entry shall be preferred to those inany succeeding Entry and those including in the same Entry shall take simultaneously.Rule 2- If any son or daughter of the intestate had predeceased the intestate leaving his or her ownchildren alive at the time of the intestate’s death, the children of such son or daughter shall takebetween them the share which such son or daughter would have taken if living at the intestate’sdeath. Rule 3-The devolution of the property of the intestate on the heirs referred to in clauses (b), (d)and (e) of sub-sec. (1) and in sub-sec. (2) of sec. 15 shall be in the same order and according to thesame rules as would have applied if the property had been the father’s or the mother’s or thehusband’s as the case may be, and such person had died intestate in respect thereof immediatelyafter the intestate’s death.

454 Vurukutla Pamulu v. Kuppa Bhanumathi, 2007 (3) ALD 236.

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455 (Terminus a quo- point of beginning.)456 Mohadevappa v. Gauramma, AIR 1973 Mys 142.457 AIR 1974 SC 665.

(2). In all the above cases the terminus a quo455 is the husband or father or motherwere the propositus and the ascertainment of the heirs will once again commence fromthe husband or father,456 father or mother, as the case may be.

The Supreme Court pointed out in Bajya v. Gopikabai,457 that once it is found thata case falls under sub-section (2)(b) of Section 15, the fiction envisaged in Rule 3 ofSection 16 is attracted and it is to be deemed as if the husband had died intestateimmediately after the female intestate’s death and Section 8 will come into operationon that basis.

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CHAPTER – IX

GIFT

Introduction:

Gift is a transfer of movable and immovable property without anyconsideration. The one who makes the gift is the donor and the one inwhose favour the gift is made is the donee. There are various restrictionsimposed on different personal and various essential features that needto be fulfilled for a gift to be considered valid. Earlier, in the HinduPrinciples of Gift, any gift made to an unborn child was held to be voiddue to the non existence of the child during the execution of the gift. Avery important feature which needed to be fulfilled for the completion ofthe gift under Hindu Law was the delivery of possession. The possessionof the gift had to be transferred from the donor to the donee in order toqualify a gift as a valid one. However, as in case of unborn children thegift could not possibly be delivered to the donee and hence the giftmade to the unborn child was accepted by a representative of the child.

Under the Mohammedan Law it is held that the process involvingtransfer of gift have to comply with the three requisites of a contract. (a)tender of property (b) acceptance of property and (c) delivery ofpossession. Considering the fulfillment of these three points, the gift wasqualified to be a valid one. Acceptance in case of unborn child couldbe carried out by a representative of the donee. Under the MohammedanLaw a child in womb for six months or more was taken to be alive and inexistence.

However, a gift made to an unborn child becomes void if the testatordies before the birth of the child. A gift made for a child not born is validup to the extent that the interest of the gift is not devolved in hid/hername.

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Dan (Gifts) - History of Dharmasastra:

Manu and the others state that in the four yugas (ages) i.e. Krta, Treta, Dvaparaand Kali, the principal aspects of religious life were tapas, metaphysical knowledge,sacrifices and gifts. Yama specifies the characteristic features of the four asramas asfollows; dharma of ascetics, cessation from taking ordinary food that of forest hermits,Dan (making gifts) that of householders and obedience or service that of Brahmacarins.Among the objects gifted, the most prominent were cows. It was said that those whomade gifts of Daksina (cows or fee) stand high in heaven and those who make gifts ofhorses stand in the world of the sun, donors of gold were said to obtain immortality,and those who give garments increase the duration of their lives. Donors according tothe Sastric law do not die, but reach mortality. It appears that although in the Rigvedahorses are considered important after cows, the sentiments changed after sometime.The Varuna seizes him (i.e. suffers from dropsy) who accepts the gift of a horse and thatone should offer to Varuna as many offerings prepared on the four potsherds as thehorses accepted. Jaimini establishes two propositions in connection with this that theIsti to the Varuna is to be performed when the gift of a horse or horses is accepted in aVedic sacrifice and that the Isti is to be performed by the donor and not by the acceptor.The Kathaka also recommends that the horse should not be accepted as a gift, as it hastwo rows of teeth. In the Taitriyya Brahmana it is said that he who accepts gifts with tworows of teeth secure a portion of its spirit to themselves and he should offer a messcooked on twelve potsherds to Vaisvanara. Dharmasutra of Gautmama mentions thehorse among the objects that are gifted by way of penance for sins. The SatapathaBrahmana says that he who promiuses to gift and does not do so is reduced to fallinginto a deep pit or is killed. The Aitareya Brahmana says that one should not accept giftsrejected by the priests and if one accepts it should be gifted to ones enemies. Whatconstitutes gift has been defined in the Sastra and accordingly there is a distinctionbetween Yaga, Homa and Dan. Yaga is abandoning something that belongs to oneselfand Homa is throwing into fire something that belongs to oneself. In both the cases theofferings are made to deities along with Vedic mantras. The third kind i.e. Dana consistsof abandonment of ownership and then the transfer of that ownership in the hands ofthe acceptor. The acceptances of the gifts were to be done physically and in caseswhere physical acceptance was not possible like fields, its acceptance was to be effectedby enjoyment of its produce. There are various forms of acceptance defined in theBrihatparasara. When a gift sent to the donee gets lost on the way or never reaches thedonee, then there is no acceptance and hence no complete dan. There are six angas ofdan as stated by Devala; the donor, the donee, sraddha, subject of gift, a proper time

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and a proper place. According to the Devala the donor should be free from incurablediseases, be religious and charitable because seeing a man willing to give up on theirhard earned property is rare. It was believed that the ones who gave gifts to peopleengaged in productive services would bear them sweet fruit, but gifts given to peopleengaged in harmful and irrational work would not bear any fruit. Giving food as giftwas considered to be a duty of every individual and the only consideration in suchcases was if the donee was hungry or poor. Sraddha according to Devala is a feeling ofsatisfaction and relief from irritation that one experiences after helping the needypeople.458

The Dharmasastra talks about how gifts are to be made, who is to be offered withgifts, the consequences that the offer bear and so on and so forth.

Law of gifts deals with the transfer of property, whether immovable or movable, bya person to another person in the life time of the person giving to a person who is aliveat the time the gift is made. The person who transfers the title of the property is knownas the donor and the person to whom the property is transferred is known as the donee.The transfer of property or the gift should be made in good faith.

The law of transfer of property by a person in his lifetime is recorded in the Transferof Property Act, 1882. This Act deals with as to who can make a gift, to whom can hemake, what property can be gifted, the nature of the gift, terms and conditions to bekept in mid while making the gift, revocation of the gift, and so on. It contains all therules and regulations regarding such a transfer of property.

What governs the Law of Gifts?

The Transfer of Property Act, 1882 is perhaps the only Act which is purely dedicatedto describe the Law of Gifts. This Act governs all religions except those who are governedby a special rule of Mohammedan law. It is to say that it governs Hindus, Sikhs, Jains,Buddhists, and not Muslims.

Essentials:

Section 122 of the Transfer of Property Act clearly postulates that a gift must havetwo essential characteristics:

458 V. P. Kane, History of Dharmasastra, Vol II, pt. II, 3rd ed., 1997, p. 837-842.

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(1) that it must be made voluntarily, and

(2) that it should be without consideration.

Love and affection etc., may be motive for making a gift but is not a considerationin the legal sense of the term.459 It is true that in every gift the donor has a particularmotive and objective or a reason to part with his property in favour of the donee, thereason being, in some cases, love and affection where the gift is in favour of a relationor friend, or spiritual benefit in other cases but this will be the immediate motive formaking the gift and cannot be regarded as a consideration for the gift because the veryconcept of gift is based on a purely gratuitous consideration.460

Consideration:

The essence of a gift is that it is gratuitous transfer. The word “consideration” ispecuniary consideration as defined under Section 2 (d) of the Indian Contract Act,1972 and excludes natural love and affection. A transfer in consideration of anexpectation of spiritual and moral benefits, or in consideration of natural love andaffection, is a gift. It must, however, be noted that the gift must be complete in law. Ifthere is only an agreement of gift it is void under Section 25 of the Indian Contract Actunless the agreement is in writing and made on account of natural love and affectionbetween parties.

Voluntarily:

The gift must be made voluntarily and with the free consent. The word “voluntarily”signifies the exercise of the unfettered free will. A man cannot be said to be truly willing.Unless he is in a position to choose freely, and freedom of choice predicates, not onlyfull knowledge of the circumstances on which the exercise of choice is conditioned sothat he may be able to choose wisely, but the absence from his mind any feeling ofconstraint so that nothing shall interfere with the freedom of his will. Thus, if undueinfluence and pressure have been exercised on the donor, it is clear that he has notmade the gift voluntarily.461 If the gift are made by pardanashin ladies, it must beestablished that the transaction was understood by the lady and that she had opportunityto take independent advice and was a free agent.462

459 S.N. Shukla, “The Transfer of Property Act”, 22nd ed., 1999, p. 395.460 Sonia Bhatia v. State of U.P., AIR 1981 SC 1274.461 Phulchand v. Lakhu, (1903) 25 All. 358.462 Wazid Khan v. Ewa Ali 18 Cal. 541 P.C.

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Undue Influence:

Undue influence is the most common ground on which a gift is said to have beenmade without free consent. It is well settled that the law as to undue influence is thesame in the case of a gift inter vivos as in the case of the contract.463 Section 16 of theIndian Contract Act deals with undue influence.

Essentials of Gift:

The essentials of a valid gift are as under;

(i) there must be transfer of ownership;

(ii) the ownership must relate to a property in existence;

(iii) the transfer must be without consideration;

(iv) it must have been made voluntarily;

(v) the donor must be competent person; and

(vi) the transferee must except the gift.

Transfer of ownership:

As in case of sale, there must be a transfer of all rights in the property by the donorto the donee. It may, however, be noted that it is permissible to make conditional gifts.The only restriction is that the condition must not be repugnant to any of the provisionsof Sections 10 to 34 of the Act.

Existence of the property:

Although a transfer may take effect in present or in future but it cannot be made toany property which is not in existence at the date of the gift. Where a gift is made of aproperty which is not in existence, Section 124 declares it to be void. The subject matterof the gift may, however, be movable or immovable, corporeal or incorporeal, but itmust be in existence at the date of the gift and must also be transferable property withinthe meaning of Section 6 of this Act. Actionable claim is an existing property and canbe validly gifted. Similarly a gift of a mortgage is a gift of immovable property within themeaning of this Section.

463 Subhash Chandra Das v. Ganga Pd. Das, AIR 1967 SC 878.

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Competency of donor:

Donor is a person who makes the gift. In a transaction by way of gift the transferoris called a donor and he divests his ownership in the property so as to vest it into thetransferee, the donee. The donee must be sui juris. He must, therefore, have attainedthe age of majority, possess a sound mind and should not be otherwise disqualified.Section 7 of this Act provides that only such person can effect a transfer of property whois competent to contract. The result is therefore, that a minor cannot make the gift of hisproperties. According to Halsbury’s Law of England464 person in fiduciary position,e.g., trustees cannot make gifts of property vested in them on behalf of others unlessthey are authorized to do so.

Acceptance by the donee:

The donee must however, be ascertainable person to persons. A gift cannot validlybe made to the public or society at large. Where a gift is made in favour of two or morepersons, all of them take it as tenant-in-common. If a gift is made to two or morepersons one of whom is capable of taking and she other is not, it has been held that theformer will take the whole of the property.465

The acceptance by the donee need not be express; it may be constructive as wellto be inferred the doneee’s possession of the property or the donee collecting the rentsof property involved or that the gift deed is in his possession. While the possession by oron behalf of the donee may amount to acceptance, where the subject matter of the giftwas enjoyed jointly by the donor and donee, mere possession cannot be treated asevidence of acceptance.466

From very beginning Dan (gift) has been an important aspect of Hindu Law. Thesubject has been dealt with by our sages under the title “Resumption of Gifts”, which isone of the eighteen titles of law. This is also a unique feature of Hindu Law of gifts that,while in other systems of law a gift is clothed in a grab of sale, here the sales are giventhe appearance of gift. This indicates the importance of, and sanctity attached to thegifts in Hindu Law.467

464 Vol 15, Para 795.465 Nandi Singh v. Sita Ram,. (1989) 16 Cal. 677.466 Bandcha Bhol v. Saria Bewa, AIR. 1973 Ors. 18.467 Diwan, Paras, “Family Law”, 5th ed., 2000, p. 479.

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The law of Gifts is governed by the Transfer of Property Act 1972; it defines a giftas under:

“Gift is the transfer of certain existing movable and immovable property madevoluntarily and without consideration, by one person, called the donor. To another,called the donee, and accepted by or on behalf of the donee.”

According to Mitakshara, a gift is defined under as:

“Gift consists in the relinquishment (without consideration) of one’s ownright (in property) and the creation of the another man’s right which iscompeted on that other’s acceptance of the gift, but not otherwise.”468

Under Hindu Law, no writing was necessary for the validity of gift. Hindu Law insistedon the delivery of possession. No gift could be complete without the delivery of possessionand once possession was delivered, there remained nothing else to be done to completethe gift. Mere registration was not enough.469 However, if from the nature of the subjectmatter of the gift delivery of the possession could not be made, it was enough tovalidate the gift if the donor did all that he could do to complete it.470

Under modern Hindu Law compliance with the provisions of the Act, irrespective ofthe fact whether the possession has or has not been given, is necessary. Section 123 ofthe Act provides for the formalities thus:

For the purpose of making a gift of immovable property must be effected by aregistered instrument signed by or on behalf of the donor, and attested by at least twowitnesses.

For the purpose of making a gift of movable property the transfer may be effectedeither by a registered instrument signed as aforesaid or by delivery.

Delivery of Possession:

A gift under pure Hindu Law need not be in writing. However, a gift under that lawis not valid unless it is accompanied by delivery of possession of the subject of the gift

468 Ibid, p. 479469 Vasudeo v. Narayan (1883) 7 Bom 131.470 Kahpas v. Kanhaya Lal (1884) 11 Cal 121 (P.C.)

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from the donor to the donee.471 Mere registration of deed of gift is not equivalent to thedelivery of possession; it is not therefore sufficient to pass the title of the property fromthe donor to the donee.472 However, where from the nature of the case physical possessioncannot be delivered, it is enough to validate a gift, if the donor has done all that hecould to complete the gift, so as to entitle the donee to obtain possession.473

A executes a deed of gift of certain immovable property to B. At the date of the giftthe property is in the possession of C who claims to hold it adversely to A. B sues C torecover possession of the property from him, joining A in the suit as a defendant. A byhis written statement admits B’s claim. C contends that the gift is void, inasmuch as Awas out of possession at the date of the date of the gift, and possession was notdelivered by the donor to the donee. ‘The donor has done all that she can to completethe gift, and is a party to the suit, and admits the gift to be completed’.474

As regards to Hindu gifts to which the Transfer of Property Act, 1882 applies, therule of pure Hindu Law that delivery of possession is essential to the validity of a gift isabrogated by Section 123 of that Act. Under that Act, delivery of possession is nolonger necessary to complete a gift, nor is mere delivery sufficient to constitute a giftexcept in the case of movable property. A gift under that Act can only be effected in themanner provided by Section 123. That Section is as follows:

(i) ‘For the purpose of making a gift of immovable property, the transfer must beeffected by a registered instrument signed by or on behalf of the donor, andattested by least two witnesses’.

(ii) ‘For the purpose of making a gift of movable property, the transfer may be effectedby a registered instrument signed as aforesaid or by delivery.

What Property may be disposed of by Gift:

Where property is absolutely at the disposal of its owner, he may give it away asfreely as he may sell or mortgage it, subject to a certain extent to the claims of thosewho are entitled to be maintained by him. For instance, a father under the DayabhagaLaw may make a gift of his property; so can a coparcener of his share. A Hindu,

471 Harijivan v. Naran (1867) 4 Bom HCAC 31; Mst Nozi v. Mohnlal AIR 1957 Raj 128.472 Vasudev v. Narayan (1883) 7 Bom 131.473 Kalidas v. Kanhaya Lal (1884) 11 Cal. 121(where the gift was effected by an ikrarnama).474 S.A Desai, (rev.), Mulla, “Hindu Law”, 17th ed., 2000, pp. 556-557.

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whether governed by Mitakshara or Dayabhaga, can dispose of his separate or self-acquired property. So too, a woman can make a gift of her stridhana.475

Where the property is not absolutely at the disposal of a person, a transaction canonly be supported on the ground of necessity and as a general rule; a gift of it couldnever be valid. Exceptions, however, are recognized by Hindu Law where gifts can bemade either for pious, religious or charitable purposes, or o occasions when, accordingto the common notions of the Hindus, gifts are usually made. This exceptional powercan only be exercised properly and within reasonable limits. Where a gift consists of adonor’s whole property, the donee is personally liable for all the debts due by andliabilities of the donor at the time of the gift to the extent of the property comprised init.476

Donatio mortis causa:

According to Hindu Law, a donatio mortis causa (void if the donor should recoverfrom his illness or survive the donee) is valid. As regards the legal requisites of suchgifts, the Hindu Law makes no distinction, as does the Mohammedan law, betweenthose made in contemplation of death and other gifts.

Right of Coparcener:

It is well settled that in Mitakshara School no coparcener can dispose of by gift evenhis undivided interest of the joint family property, except with the consent of the othercoparceners. The authority to make a gift depends upon the donor’s power of disposalover the subject matter of gift. If it was his self acquired property, he was entitled todispose it by gift or device at his discretion. But if it was his joint family property then hispower of disposal was necessarily limited by the rights of his coparceners.

Mulla’s Hindu Law provided that according to the Mitakshara Law as applied in allStates, no coparcener can dispose of his undivided interest in the coparcenary propertyby gift. He may, however, make a gift of his interest, with the consent of the othercoparceners.

475 Alladi Kuppuswami (rev.), Mayne, “Hindu Law and Usage”, 12th ed., 1986, p. 1080.476 Bapurao v. Bulaki Das, ILR (1945) Nag. 194.

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In Thamma Venkatasubramma v.Thamma Rattamma477 while considering thequestion of making a gift of his undivided interest in coparcenary property by acoparcener, it was held that a coparcener can make a gift of his undivided interest inthe coparcenary property to another coparcener or to a stranger with the prior consentof all other coparceners. Such a gift would be quite legal and valid; otherwise such agift by a coparcener was void.

The personal law of the Hindus governed by Mitakshara School is that a coparcenercan dispose of his undivided interest in the coparcenary property by a will, but hecannot make a gift of such interest.

Revocation of Unregistered Gift:

At one time there was a doubt whether the donor could revoke a gift after acceptancein cases where the deed was not registered. The Privy Council in Kalyanasundaram v.Koruppa478 held that it may be regarded as setting the final law on this question. It wasdecided that after the acceptance of the deed of gift and before registration, the donorcould not revoke the gift. Registration does not depend upon donor’s consent, but isthe act of an officer appointed by law for the purpose.

Principles of Hindu Law related to Gifts made to unborn Child:

In Hindu Law, a Hindu has full power to make a gift out of his own separateproperty whether inter vivos or by will. Even female members of the family have theright to make gifts to dispose their Stridhana. By Section 14 of the Hindu SuccessionAct, 1956 the position of a woman has improved and she can now make gifts anddispose her property for all purposes.479

Gift as defined in Transfer of Property Act, 1972, Section 122 says, “gift is thetransfer of certain existing movable and immovable property made voluntarily andwithout consideration by one person, called the donor to another called the donee andaccepted by or on behalf of the donee.” A Hindu belonging to both Dayabhaga andMitakshara Schools can dispose his separate or self acquired property as a gift, subjectto certain cases where the owner owes obligations to his/her legal heirs for maintenance.Hindu’s governed by Dayabhaga School can dispose of their property by gift keeping

477 AIR 1987 SC 1775.478 (1927) 50 Mad. 193479 Diwan Paras, Family Law, 7th ed., 2005, p. 517.

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aside a portion of the property for the ones who are entitled to be maintained by him.However, in Mitakshara School one cannot dispose of their property unless provided heis the sole surviving coparcener.480 A female member of a family can also dispose offher stridhana property provided she gets the consent of her husband. The widow howeveron the other hand in the absence of her husband can dispose off her property as a gift.

Under Hindu Law writing was not necessary for the completion of gift. Delivery ofpossession was given more importance. No gift could be complete without the deliveryof possession and once delivery was made then there was nothing that needed to bedone for completing the gift. The principle that registration alone is not sufficient forconstituting a gift was upheld in the case Nozi v. Mohanlal481

Hindu Law did not recognize the validity of grant of gift to unborn child earlier. But,now the Hindu Transfers and Bequests Act, 1960, which is a union law and applicableto the whole of India except the states of Jammu and Kashmir validates gifts executedin favor of unborn child.482 It was held in the case Manigavri v. Narandas483 that a giftonce made cannot be revoked under any circumstances unless the gift was obtained byfraud or undue influence. In another case Bishan v. Asmaida Koer484 the Court held thata gift made with an intention of defrauding the creditor shall be revocable at the optionof the creditor.

A child who at the time of the death of the intestate was in the womb and subsequentlyborn alive is deemed to have the same right on the property of the intestate as he/shewould have had, had he/she been alive during the death of the intestate. The inheritanceof the property by the unborn child is to take effect from the date of the death of theintestate. Section 20 of the Hindu Succession Act, 1956, provides this provision. Thelaw provides that a child even if not born and in womb will have the same rights as achild born for the benefit of the child. An expected child in a family will be given thesame status for inheritance as a child born and present in the family. This view is notpeculiar to the ancient Hindu Law but one, which is adopted by all mature systems ofjurisprudence. It is recognized by this section that a child in womb who is subsequentlyborn is deemed to be born before the death of the intestate and hence inheritance is

480 S A Desai (rev.), Mulla, “Hindu Law, 19th ed., 2005, p. 647.481 AIR 1957 Raj 128.482 Diwan Paras, Family Law, 7th ed. 2005, p. 518.483 (1954) ILJ 1153 Guj.484 (1884) 6 All 560 (P.C.).

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deemed to be vested in the child from the date of the death of the intestate. It recognizesthe rights of not only children born out of legal marriages but also illegitimate childrenby virtue of the provision given for Section 3 (1) (j) of the Hindu Succession Act, 1956.485

Child of void and voidable marriages, who come within the purview of Section 16 ofthe Hindu Marriage Act, 1955 are also entitled to inheritance. It is required that thechild should be born alive for inheritance to take effect.486

The effect of Section 20 of the Hindu Succession Act, 1956 is that during theperiod between the death of the intestate and the date of birth of the child, the inheritanceright that the unborn child has does not come into. The child’s right becomes enforceableonly when the child is born and until then, the quantum of inheritance of the other heirsis suspended487. In a case where the other heirs who were living during the death of theintestate have partitioned the property before the birth of the child, the partition will bereopened after the birth of the child. Even if the child who is born alive dies subsequently,it will have no effect on the child’s right to inheritance and the child will still be consideredas a descent. The knowledge of the other parties entitled to the property is immaterial.Even if the other parties having a right in the property were unaware of the child in thewomb, the unborn child will still be entitled to the property.488

In case of the death of the child after birth, the inheritance devolving on the childwill go by succession to the heirs of the child.489 Section 2 of the Hindu Disposition ofProperty Act, 1916 clearly states that a disposition of property made a Hindu whetherby inter vivos or by will, shall be not be invalid only for the reason that the gift on whosebehalf it was executed was not in existence then.

In Tagore v. Tagore490 the Privy Council held that a gift made in favor of an unbornchild is invalid as the child during the execution of the gift deed was not in existence,

485 According to provision of Section 3 (1) (j) of the Hindu Succession Act,1956, “provided that illegitimatechild shall be deemed to be related to their mother and to one another, and their legitimate descendantsshall be deemed to be related to them and to one another; and any word expressing relationship ordenoting a relative shall be construed accordingly.”

486 S. A. Desai (rev.), Mulla, “Hindu Law, 19th ed., Vol II, 2005, pp. 443-444.487 Anasuya Bai v. Jagadish, 1977 MPLJ 7.488 Ranganath Misra (rev.), Mayne, “Hindu Law and Usage”, 15th ed., 2006, p.1194.489 Ibid.490 AIR 1960 Ker 160.

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but this judgment was overruled by the judgment given in the case Raman Nadar v.Snehapoo491.

Post Development:

The law since Tagore v. Tagore492 has changed to benefit the child with the interestsvested on the child before the child’s birth. It was held by the Privy Council in Tagorecase in 1872, that a Hindu cannot dispose of his property by gift in favour of a personwho was not in existence at the date of the gift, nor could be dispose of his property bywill in favour of a person who was not in existence at the date of the death of thetestator. The first enactment which validated gifts and bequests in favour of unbornperson was the Hindu Transfers and Bequests Act, 1914. This was an Act of the MadrasLegislature. It applied in terms to the whole of the State of Madras and was intended soto apply. It was followed by the Hindu Disposition of Property Act, 1916, which was anAct of the Imperial Legislature. It applied to the whole of British India except the provinceof Madras for which legislation had already been made by the local Act of 1914. Afterthe Act of 1916, was passed, the High Court of Madras held as to the Madras Act of1914, that the local Legislature had no power to take away the right of a Hindu domiciledwithin the local limits of the ordinary original civil jurisdiction of High Court of Madrasto be governed by the Hindu Law as it stood when the High Courts Act, 1861, waspassed. The fact, however, was that the Hindu Law as it then stood did allow gifts andbequests in favour of unborn persons, and Tagore case had misinterpreted that law.This led to the enactment by the Imperial Legislature of the Hindu Transfers and Bequests(City of Madras) Act, 1921. This Act extends in effect the local Act of 1914 to Hindusdomiciled in the City of Madras-It also validates gifts and bequests made by Hindusdomiciled in the City of Madras subsequent to the 14th February, 1914 being the dateon which the local Act of 1914, came into force. The result is that as between them theActs of 1914, and 1921 apply to the whole State of Madras, and the Act of 1916applies to the rest of India.

With effect from 1st February, 1960; the Hindu Transfers and Bequests Act, 1914;and The Hindu Transfers and Bequests (City of Madras) Act, 1921, stand repealed: andThe Hindu Disposition of Property Act, 1960 has now been made applicable to thewhole of India including the State and City of Madras excepting the State of Jammuand Kashmir and The resulting position is that a Hindu can make a bequest in favour of

491 AIR 1970 SC 1759.492 AIR 1960 Ker 160.

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an unborn child. The result of this is, subject to the limitations in Chapter II of theTransfer of Property Act and Sections 113, 114, 115 and 116 of the Indian SuccessionAct, no transfer inter vivos or by will of property by a Hindu shall be invalid by reasononly that any person for whose benefit it may have been made was not born at the dateof such disposition.

In Aniruddha Mitra v. The Administrator General of Bengal493 it was held that aHindu can make a valid bequest in favour of an unborn person subject to the limitationscontained in Sections 113 and 114 of the Indian Succession Act, 1925 and in scrutinizingthe validity of the bequest the rules in Sections 113 and 114 have to be applied as atthe testator’s death. In this case the will directed that son or sons of his sons whethernatural or adopted should be entitled to the residue of the testator’s property withcertain conditions.

In Raman Nadar v. Rasalamma494 the division of property had taken place beforethe birth of the male child who was expected in the family. The High Court dismissedthe case on the ground that the child during the partition of the property was not inexistence, but on appeal to the Supreme Court it was held that as per Section 20 of theHindu Succession Act, 1956 and the Hindu Transfers and Bequests Act, 1960 a child inwomb at the time of the execution of the gift deed has every right on the property as ifhe was in existence at that very instance. Anasuya Bai v. Jagadish495 is another casewhere it has been stated that the child’s right becomes enforceable only when the childis born and until then, the quantum of inheritance of the other heirs is suspended.

There have not been many cases regarding this issue and the principles stated inthe case above are the principles which stand at present. Therefore, the law of gift assuch is confined to the ancient laws, which have been deciphered and codified forpresent usage. When it comes to Hindu Law there is not much change with respect tothe law of gift per se but the topic in question; that is, gift to an unborn child can beconsidered as an addition to the Sastric law which is the basis for the prevailing lawessentially the Transfer of Property (Amendment) Supplementary Act, 1929. This Actprovides provisions for unborn children where in spite of their non existence during theexecution of the gift deed, gifts can be accepted on behalf of them having a generalpresumption of the child being alive.

493 AIR 1949 P.C. 244.494 AIR 1970 SC 1759.495 1977 MPLJ 7.

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CHAPTER - X

WILL

Introduction:

A will is an important document whereby any living person canbequeath (leave behind) his property to other persons after his death496.The person who makes the will is known as the testator. A will isenforceable only after the death of the testator. An executor is the personappointed ordinarily by the testator’s by his will or codicil to administertestator’s property and to carry into effect the provision of the will. Theperson in whose respect the property is given is called legatee. In India,the Indian Succession Act, 1925 is applicable to Hindus, Sikhs, Jains orBuddhists497. However, most of it doesn’t apply to Muslims as Muslimsare largely covered by Muslim Personal Law. Some important featuresof a will are as follows:

• Legal declaration: Will is a legal declaration. Certain formalitiesmust be complied with in order to make a valid will. It must besigned and attested, as required by law.

• Disposition of property: There must be some property which isbeing given to others after the death of the testator.

• Operation after death: A will becomes enforceable only after thedeath of the testator. It gives absolutely no rights to the legatee(the person who inherits) until the death of the testator. It has noeffect during the lifetime of the testator. The testator can changehis will, at any time prior to his death, in any manner he deems fit.

496 S. A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed., 2001, Vol.1, p.551.497 G.C.V.Subba Rao, “Family Law in India”, 7th ed.1995, p.379.

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Codicil:

A Codicil has been defined as an instrument, made in relation to a will that explainsalterations and additions to its disposition. It shall be deemed to form part of the will.For instance, after a will has been made, the testator may still want to make somechanges. By means of a codicil, he may cancel the entire earlier will and make a freshwill, incorporating the desired changes, or, he may alter only the relevant parts of thewill suitably. Such a codicil will form part and parcel of the existing will. A Codicil isvalid only if it is executed and attested in the same manner as a Will. It is a supplementarydocument to the will and, cannot stand independently.

Persons Capable of making a will:

According to Section 59 of the Indian Succession Act, 1925 any person of soundmind, who has reached the age of majority, can make a will. However, the followingpersons cannot make a will:-

1. Lunatics, insane persons.

2. Minors i.e. below 18 years of age.

A Hindu woman cannot alienate the property that she receives from her deceasedhusband, who is a member of Hindu Undivided Family (HUF). However, she can disposeof by will, any property, which is part of her own earnings or which she has received byway of gift during her life time. Persons who are deaf or dumb or blind are not, thereby,incapacitated in making a will, if they are able to know what they do by it.

A person, who is ordinarily insane, may make a will during an interval while he is ofsound mind. No person can make a will while he is in such a state of mind, whetherarising from intoxication or, from illness or, from any other cause, so that he does notknow what he is doing.

Types of will:

A privileged or oral will can be made or executed only by a soldier, employed in anouting or, engaged in actual war, or, by an airman, so employed or engaged, or, by asailor at sea, if he has completed the age of 18 years, to dispose of his property by awill.

Such wills may be in writing or may be by word of mouth. The rules governingprivileged wills are as follows:

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• Such wills may be written wholly by the testator with his own hand. In such a case,it need not be signed or attested.

• It may be written wholly or, in part, by another person and signed by the testator.In such a case, it need not be attested.

• In case the instrument is written wholly or, partly, by another person and, is notsigned by the testator, it shall be deemed to be the testator’s will only if it is shownthat it was written under the testator’s directions or, that he recognized it as hiswill.

• If it appears on the face of the instrument that its execution was not completed inthe manner, intended by the testator, the instrument shall not be invalid just forthat cause. However, non-execution must, reasonably, be ascribed to some causeother than the abandonment of the testaments

• If the soldier, airman or mariner has written instructions for the preparation of hiswill, but has died before it could be prepared and executed, such instructionsshall be considered to be a valid will.

• If the soldier, airman or mariner has, in the presence of two witnesses, givenverbal instructions for the preparation of his will and, they have been put towriting in his life time, but he has died before the instrument could be preparedand executed, such instructions shall be considered to be a valid will.

• The soldier, airman or mariner may make a will by word of mouth, by declaringhis intentions before 2 witnesses present at the same time.

• A will made by word of mouth shall be null and void at the expiration of onemonth after the testator, being still alive, has ceased to be entitled to make aprivileged will.

Conditional or contingent wills become enforceable only on the happening of aparticular event498. E.g. ‘A’ will be entitled to a flat at Mumbai after my death (death oftestator), only if he marries ‘C.

ExecutorExecutorExecutorExecutorExecutor is the legal representative for all purposes of a deceased person (testator)and all the property of a testator vests in him.

498 P .S.Narayana, “Law of Wills”, 1st ed., 2000,p.233.

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LLLLLegatee/Beneficiaryegatee/Beneficiaryegatee/Beneficiaryegatee/Beneficiaryegatee/Beneficiary is a person who inherits the property under a Will.

PPPPPrororororobatebatebatebatebate is a copy of the Will, certified under the seal of a competent Court.

Essential Characteristics of a Will:

LLLLLegal Declarationegal Declarationegal Declarationegal Declarationegal Declaration : The documents purporting to be a Will or a testament must belegal, i.e. in conformity with the law and must be executed by a person legally competentto make it.499

Disposition of PDisposition of PDisposition of PDisposition of PDisposition of Propertyropertyropertyropertyroperty : The Declaration should relate to the property of the personmaking the will. This is the second essential characteristic of a will.500

Death of the TDeath of the TDeath of the TDeath of the TDeath of the Testatorestatorestatorestatorestator : The declaration as regards the disposal of the property mustbe intended to take effect after his death.

Burden of PBurden of PBurden of PBurden of PBurden of Proofroofroofroofroof- The burden is not on person who propounds a will to establish thesame.501

RRRRRevocability evocability evocability evocability evocability : The essence of every Will is that it is revocable during the lifetime ofthe testator. People capable of making Wills are, Every person who is :

• not a minor;

• of sound mind; and

• free from fraud, coercion or undue influence.

Forms and Formalities:

FFFFForm of a Worm of a Worm of a Worm of a Worm of a Will : ill : ill : ill : ill : There is no prescribed form of a Will. In order for it to be effective,it needs to be properly signed and attested. The Will must be initialed by the testator atthe end of every page and next to any correction and alteration.

499 Ibid500 Ibid501 Prahlad v. Damodar, AIR 1958 Bom. 79. Also see, , , , , Surendranath v. Janandranath AIR 1932 Cal

574; Jotindra Nath v. Raj Laxmi, AIR 1933 Cal. 449; Gurdayal Singh v. Kulwant Kaur 1989 (2)0HLR 82 (P&H); (1838 2 Moo P.C. 480; 1947 (2) MLJ 185; Ajit Kumar v. Mukundalal,,,,, AIR 1988Cal. 196

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LLLLLanguage of a Wanguage of a Wanguage of a Wanguage of a Wanguage of a Will :ill :ill :ill :ill : A Will can be written in any language and no technical wordsneed to be used in a Will, however the words used should be clear and unambiguousso that the intention of the testator is reflected in his Will.502

Stamp Duty : Stamp Duty : Stamp Duty : Stamp Duty : Stamp Duty : No stamp duty is required to be paid for executing a Will or a codicil.A Will, therefore, need not be made on stamp paper.

Attestation :Attestation :Attestation :Attestation :Attestation : A Will must be attested by two witnesses who must witness the testatorexecuting the Will. The witnesses should sign in the presence of each other and in thepresence of the testator.

Under Parsi and Christian law, a witness cannot be an executor or legatee. However,according to Hindu Law, a witness can be a legatee. A Muslim is not required to havehis Will attested if it is in writing.

RRRRRegistration :egistration :egistration :egistration :egistration : The registration of a document provides evidence that the properparties had appeared before the registering officers and the latter had attested thesame after ascertaining their identity. In India, the registration of Wills is not compulsoryeven if it relates to immoveable property. The non-registration of a Will does not lead toany inference against the genuineness of a Will. In other words, registration thereforedoes not give any special sanctity to the Will though registration of the Will by thetestator himself evidences the genuineness of the Will.

Whether registered or not, a Will must be proved as duly and validly executed, asrequired by the Indian Succession Act. Once a Will is registered, it is placed in the safecustody of the Registrar and therefore cannot be tampered with, destroyed, mutilatedor stolen.

Procedure for Registration :

A Will is to be registered with the registrar/sub-registrar with a nominal registrationfee. The testator must be personally present at the registrar’s office along with witnesses.

Revocation and Amendment:

A Will can be revoked, changed or altered by the testator at any time when he iscompetent to dispose of his property. A person can revoke, change or alter his Will byexecuting a new Will, revoking the earlier Will, registering the new Will (if the old Will is

502 Ibid

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registered), destroying the old Will or by making a codicil. On the marriage of a Parsior a Christian testator, his/her Will stands revoked, this however does not apply toHindus, Sikhs, Jains and Buddhists.

Property that can be bequeathed by a Will:

Prior to the coming into operation of the Hindu Succession Act, 1956, it was a rulefirmly established that a Hindu cannot by will bequeath property which he could nothave alienated by gift inter vivos. In the famous case of Vailliammai v NagappaChettiar503, the Supreme Court laid down that a father of a Mitakshara family has avery limited right to make a will and the mere fact that the father after making somedepositions, gave the residue to his son and the son took out the probate and carriedout the wishes of the father would not change the nature of the joint family property.Even after the Act, a Hindu cannot by will, so dispose of his property, so as to defeat thelegal right of his wife, or any other person to maintenance504. Section 30 of the HinduSuccession Act, however, permits a member of a Mitakshara coparcenary to dispose ofby will, his undivided interest in the coparcenary property.

As regards property which a Hindu could dispose off by will, the followingpropositions are noteworthy:

According to all the Schools, a Hindu could dispose off by will his separate or selfacquired property.

According to Dayabhaga Law, a father could dispose off by will all his property,whether ancestral or self acquired. Similarly a coparcener could dispose off by will, thewhole of his interest in the joint family property505.

A sole surviving coparcener can however bequeath the joint family property as if itwas his separate property. This however could only be done when it is not possible fora coparcener to be added to the family. Such has been held in the case of Taoram vRamabai506. Since a will operated from the date of testator’s death, it was held that if acoparcener subsequently came into existence, such as a son adopted by him, a sonsubsequently born to him, including a posthumous son or the posthumous son of a

503 AIR 1967 SC 1153.504 S.A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed. 2001, p.655.505 Ibid p.656.506 AIR 1976 Bom 315.

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deceased coparcener, the will so far it dealt with the coparcenary property, was inoperativeand the property passed to him by survivorship507. However, if the son, whether naturalborn or adopted, died in the lifetime of the testator, the will stood and the devisee wasentitled to the property given to him by the will508. Though a father could dispose of asmall portion of ancestral movable by way of gift, he could not do so by will.

(i) A Hindu female could dispose of her stridhana by will, subject to in certaincases with the consent of her husband. After the coming into force of the Hindu SuccessionAct, 1956, her rights are considerably enlarged509.

The owner of an impartible estate could dispose of it by will, in the absence of aspecial custom prohibiting alienation, or where the tenure of such a nature that it couldnot be alienated510.

Form of Will:

The following Hindu wills and codicils are required to be in writing signed by thetestator and attested by at least two witnesses as held in Umakant v Bishwambhar511.This is also provided in Section 63 of the Indian Succession Act, 1925:

= all wills and codicils made by any Hindu, Buddhist, Sikh or Jain, which on orafter the 1st day of September, 1870, within the territories which at the said date weresubject to the Lieutenant-Governor of Bengal or within the local limits of the ordinaryoriginal civil jurisdiction of the High Courts of Judicature at Madras and Bombay.

= All such wills and codicils made outside those territories and limits so far asrelates to immovable property situated within those territories or limits; and

507 S.A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed. 2001, p.657.508 Ibid.509 This has to be read in the light of Section 14 of the Act. It states that 1) any property possessed by a

female Hindu, whether acquired before or after the commencement of this Act, shall be held by heras full owner thereof and not as a limited owner. Here ‘property’ includes both movable and immovableproperty acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu ofmaintenance or arrears of maintenance, or by gift from any person, whether a relative or not,before, at or after her marriage or by her own skill or exertion, or by purchase or by prescription, orin any other manner whatsoever; and also any such property held by her as stridhana immediatelybefore and after commencement of this Act.

510 Ibid.511 AIR 1929 Pat 401.

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= All other wills and codicils made by any Hindu, Buddhist, Sikh, or Jain, on orafter 1st day of January, 1927.

Before the Hindu Wills Act, 1870 no Hindu will was required to be in writing the willcould be oral or in writing512. If the will was in writing, it did not require be signing orattesting. The Hindu Wills Act, 1870 was the first enactment that required Hindu wills tobe in writing. That Act, however applied to certain wills only, and the other wills couldbe made orally. By the Indian Succession (Amendment) Act, 1926, all wills were requiredto be in writing513. The result is that every Hindu will made after 1st January 1927, mustbe in writing signed by the testator and attested by at least two witnesses as provided bySection 63, Indian Succession Act, 1925514.

Unborn People and Bequests:

A person capable of taking under a will must, either in fact or in contemplation oflaw, be in existence at the death of the testator. This rule still applies to cases to whichprovisions of the three Acts do not apply. This rule was discussed by the Supreme Courtin Raman Nadar v S Rasalamma515.

A Child in Womb:

A bequest to a person not in existence at the testator’s death is invalid. A child inthe womb and a son adopted by a widow after the death of her husband is incontemplation of law in existence at the death of the testator. A bequest to the wife ofthe testator’s son in case he should marry within 10 years from the testator’s from thetestator’s death is valid, provided, the son marries a girl who was in existence at thetestator’s death, as the rule in this section does not apply.516

However the rule that had been laid down in the Tagore’s case517 was altered bystatute. The rules that are now in place are:

512 S.A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed. 2001, p.658.513 Ibid.514 Ibid p.659.515 AIR 1970 SC 1759.516 Dinesh Chandra v Biraj Kamini (1912) 39 Cal 87, S.A. Desai (rev.), Mulla, “Principles of Hindu

Law”, 18th ed. 2001, p. 661.517 Tagore v Tagore (1872) 9 Beng LR 377, IA Sup vol. 47.

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The rule of Hindu Law that a bequest cannot be made in favour of a person whowas not born at the date of the testator’s death has been altered by three Acts, namely:the Hindu Transfers and Bequests Act, 1914, the Hindu Disposition of Property Act,1916 and the Hindu Transfers and Bequest (City of Madras) Act, 1921. The rule asaltered by these Acts may be stated as follows:

Subject to the limitations and provisions contained in Sections 113, 114,115 and116 of the Indian Succession Act, 1925 no bequest shall be invalid by reason only thatany person for whose benefit it may have been made was not born at the date of thetestator’s death.

This rule, however, is not of universal application, but is confined to the followingcases, namely to:

Wills executed on or after 14th February, 1914, by Hindus domiciled in the State ofMadras except the city of Madras, and in the case of wills executed before that date, tosuch of the dispositions thereby made as are intended to come into operation at a timewhich is subsequent to that date (Hindu Transfers and Bequests Act,1914);

Wills executed on or after 20th September 1916, by Hindus in any part of Indiaexcept the State of Madras (Hindu Disposition of Property Act 1916);

Wills executed on or after 27 March 1916, by Hindus domiciled within the limits ofthe ordinary original civil jurisdiction of the High Court of Madras, and in the case ofwills executed before that date, to such dispositions thereby made as are to come intooperation at a time subsequent to 14th February 1914 (Hindu Transfers and Bequests(City of Madras) Act 1921).

It may be noted however that with effect from 1st February 1960, the HinduDispositions of Property Act 1916 has been extended to the whole of India and theother two acts repealed518.

Wishes and Notions:

In construing the will of a Hindu, it is not improper to take into consideration whatare known, to be ordinary notions and wishes of Hindus with respect to the devolutionof property. The predilections of the class to which the testator belongs may be kept in

518 S.A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed. 2001, p.658.

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519 AIR 1935 Cal 716.520 AIR 1938 Cal 34.521 S.A. Desai (rev.), Mulla, “Principles of Hindu Law”, 18th ed. 2001, p. 668.522 Section 61of the Indian Succession Act, 1925.523 Boyce v. Rossborough, (1856) 6 HLC 2; Bur Singh v. Uttam Singh, (1911) 38 Cal 355 PC.524 Ranganath Misra (rev.), Mayne, “Hindu Law and Usage”, 15th ed., p. 1321.525 Tagore v. Tagore, (1872) 9 Beng LR 377, IA Sup. Vol.47.

views held in Sasanka Bhushan v Gopi Ballav519. Where a testator gave certain propertiesto his daughters with a direction that they should enjoy the interest with their sons,grandsons etc. and that neither the daughters nor their sons or grandsons etc. shouldbe entitled to give, sell or mortgage their properties, it was held in Bibha Bati Debee vMahendra Chandra Lahiri that the daughters and the daughter’s sons took only lifeestates520.

In construing a will, made after the coming into operation of the recent legislationand particularly the Hindu Succession Act, 1956, the Court may assume that the testatorknew of the radical changes that have been brought about in the general law ofinheritance and that women now, as a general rule, take absolute estates ofinheritance521.

a) Fraud and Coercion:

A will, or any part of a will, the making of which has been caused by fraud orcoercion, or by such importunity as takes away from the free agency of the testator, isvoid.522 To constitute undue influence for setting aside a will, there must be coercion.Neither fiduciary relationship nor a dominating position which will readily raise apresumption of undue influence in cases of gifts inter vivos, will avail.523 The circumstancethat one person had unbounded influence over another thought it was very bad influence,would not be undue influence so as to invalidate the other’s will.524

b) Wills founded on the Law of Gifts:

Wills are not universally regarded to be gifts which take effect upon death, they aregenerally so to be regarded as the property which they can transfer, and the persons towhom it can be transferred. 525

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Bibliography

• Acharya Shuklendra, HINDU UNDIVIDED FAMILY: TAXATION ANDTAX PLANNING, 1ST ed. 2000 (rep. 2003), Modern LawPublications, Allahabad.

• Acharya Suklendra, HINDU LAW, 1st ed. 2002, Modern LawPublishers, Allahabad.

• Acharya Shuklendra and M.G.Gurha, TAX PLANNING UNDERDIRECT TAXES, 8th ed. 2004, Modern Law House, Allahabad.

• A.G. Gupte, HINDU LAW, 1st ed. 2003, Premier PublishingCompany, Allahabad.

• B.M Gandhi, HINDU LAW, 2nd ed., 2003, Eastern book company,Lucknow.

• Ganganath Jha’s “MANUSMRITI with the ‘Manubhasaya’ ofMedhatithi”; Vol.IV English Transalation Part II published by MotilalBanarasidass Publishers Pvt. Ltd., New Delhi.

• G.M. Divekar, HINDU LAW: A CRITICAL COMMENTARY, 2nd ed.2002, Hind Law House, Pune.

• Kusum, FAMILY LAW LECTURES: FAMILY LAW-II, 1st ed. 2003,Lexis Nexis Butterworths, New Delhi.

• K.B. Asthana, et al., (rev.), Hari Singh Gour, THE HINDU CODE,6th ed. 2002, Law Publishers Pvt. Ltd., Allahabad.

• Paras Diwan and Peeyushi Diwan, FAMILY LAW, 7th ed. 2005,Allahabad Law Agency, Haryana.

• Paras Diwan and Peeyushi Diwan, MODERN HINDU LAW, 12th

ed. 1999, Allahabad Law Agency, Haryana.

• Paras Diwan and Peeyushi Diwan JOINTT FAMILY SYSTEM, DEBTS,GIFTS, MAINTENANCE, DAMDUPAT, BENAMI TRANSACTIONSAND PRE- EMPTION published by Wadhwa & Company 1993.

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• Paras Diwan and Peeyushi Diwan, LAW OF INTESTATE AND TESTAMENTARYSUCCESSION, 3th ed. 2006, Universal Law Publishing Co., Delhi.

• Pandurang Vaman Kane’s HISTORY OF DHARMASHASTRA (Ancient and MedievalReligious and Civil Law)”; Vol. III, 3rd edition; published by Bhandarkar OrientalResearch Institute, Pune.

• Poonam Pradhan Saxena, LexisNexis Student Series Family Law Lectures: FAMILYLAW II, LexisNexis Butterworths, 2004.

• Premnath Chadha HINDU LAW published by Eastern Book Company LawPublishers Lucknow.

• Ramesh Chandra Nagpal, MODERN HINDU LAW, 2nd. Ed. 2008, Eastern BookCompany, Lucknow.

• Ranganath Misra and Vijender Kumar, (rev), Mayne, HINDU LAW AND USAGE,16th ed. 2008, Bharat Law House, New Delhi.

• S.A. Desai, (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. 1, 19th ed.2005,Butterworths, New Delhi.

• S.A. Desai, (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. 2, 19th ed.2005,Butterworths, New Delhi.

• T.V. Subba Rao and Vijender Kumar, (rev.), G.C.V.Subba Rao, HINDU LAW, 8th

ed. 2003, rep. 2004, S.Gogia & Company, Hyderabad.

• T.V. Subba Rao and Vijender Kumar, (rev.), G.C.V. Subba Rao, FAMILY LAW ININDIA, 9th ed. 2006, rep. 2007, S.Gogia & Company, Hyderabad.

• U.P.D. Kesari, MODERN HINDU LAW 1st ed. 1996, Central Law Publishers,Allahabad.

BIBLIOGRAPHY

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Dr. V. K. JainM.Com., M.Phil., LL.M. Ph.D. (Tax), F.C.S.

Corporate Law & Tax AdvisorReader, G.S. College of Commerce & Economics,

Recipient of Best Teacher Award from RTM Nagpur UniversityEmail: [email protected]

PART IV

COMPANY LAW

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CHAPTER - I

NATURE AND KINDS OF COMPANIES

What you should know?

1.1 Nature of a company.

1.2 Characteristics of a company

1.3 Lifting the corporate veil

1.4 Kinds of companies

1.5 Conversion of companies

1.6 Illegal Association

1.7 Application of Companies Act

1.8 Administration of Companies Act

1.1 Nature of a Company

There are three major forms of business organisations; the soleproprietorship, the partnership and the company. Companies are,by and large, the most effective symbols of progress of a developingnation. In a developing country like India, the corporate sector isthe most suitable form through which there could be a greaterinvolvement of all sections of the population and utilisation oftheir resources. Corporate device is one form of associatedenterprise. It is an organisational structure run generally byprofessional managers who hire capital from the investors.

There has been tremendous growth of companies in the ninetiesdue to the new economic policy of liberalisation, the new schemeof taxation of partnership firms, the expanding capital market etc.As a result the number of companies increased manifold fromabout 1.25 lacs in 1980 to around 7.5 lacs by 2007.

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• The first Companies Act was passed in India in the year 1850. Thereafter theCompanies Act, 1866 was enacted, followed by the Companies Act 1913, whichwas replaced by the present Companies Act, 1956. The Companies Act 1956has been amended several times. The Companies (Amendment) Act, 1999, 2000& 2002, has drastically amended the Companies Act, 1956, to respond to thechanged economic environment and liberalisation and globalisation policies ofthe Government.

In 2004 a new Ministry of Company Affairs (recently renamed Ministry of CorporateAffairs since 9th May 2007) was created for the first time under the charge of anindependent Minister. A new Companies Act is in the offing and the draft companylaw has already been presented for discussion and feedback.

MCAMCAMCAMCAMCA-21-21-21-21-21 – This is the biggest e- governance initiative taken by the Ministry ofCorporate Affairs in 2006. All manual filing of returns and documents have beenabolished and e-filing has been introduced.

• A Company provides an organisational framework. It is a means to an end. Theend /objective may be to run an industry or business or to execute a project.However, the Companies Act also allows a company to be formed for the promotionof commerce, art, science, religion or charity, i.e., for non-commercial purposes.

MEANING OF A COMPANY

COMPCOMPCOMPCOMPCOMPANYANYANYANYANYIS

ANANANANAN

A

FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE VIZVIZVIZVIZVIZ., BUSINESS., BUSINESS., BUSINESS., BUSINESS., BUSINESS, CHARITY, CHARITY, CHARITY, CHARITY, CHARITY, RESEARCH ET, RESEARCH ET, RESEARCH ET, RESEARCH ET, RESEARCH ETCCCCC

REGISTERED OR INCORPORAREGISTERED OR INCORPORAREGISTERED OR INCORPORAREGISTERED OR INCORPORAREGISTERED OR INCORPORATED UNDER THE COMPTED UNDER THE COMPTED UNDER THE COMPTED UNDER THE COMPTED UNDER THE COMPANIES AANIES AANIES AANIES AANIES ACTCTCTCTCT

WHERE BWHERE BWHERE BWHERE BWHERE BY IT AY IT AY IT AY IT AY IT AQUIRES CERQUIRES CERQUIRES CERQUIRES CERQUIRES CERTTTTTAIN AAIN AAIN AAIN AAIN ATTRIBUTESTTRIBUTESTTRIBUTESTTRIBUTESTTRIBUTES

commonseal

separatelegal entity

limitedliability

perpetualsuccession

transferableshares

separateproperty

separation ofownership frommanagement


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What is a company?

The Companies Act, 1956 defines a company as ‘a company formed andregistered under this Act or an existing Company ‘ sec. 3(1)(i). (An existing companyis one which is formed and registered under any of the previous Companies Act).

“By a company is meant an association of many persons who contribute moneyor money’s worth to a common stock and employ it in some trade or business,and who share the profit and loss (as the case may be) arising there from. Thecommon stock so contributed is denoted in money and is the capital of thecompany. The persons who contribute it, or to whom it belongs, are members.The proportion of capital to which each member is entitled is his share. Theshares are always transferable although the right to transfer is often more or lessrestricted.” (Lord Justice Lindley)

On the basis of its characteristics, a company can be defined as “an incorporatedassociation, which is an artificial person created by law, having a separate entity,with a perpetual succession and a common seal“. (Haney)

1.2 Characteristic Features of a Company

a) Incorporated AssociationIncorporated AssociationIncorporated AssociationIncorporated AssociationIncorporated Association. . . . . A company comes into existence when it is registeredor incorporated under the Companies Act, 1956. On registration, a companybecomes a body corporate, i.e., it acquires legal personality of its own, separateand distinct from its members.

RRRRRegistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: Pursuant to section 11 of theCompanies Act, 1956, no company, association or partnership consistingof more than 10 persons for the purpose of carrying on the business ofbanking and more than 20 persons for the purpose of carrying on any otherbusiness can be formed unless it is registered under the Companies Act or isformed in pursuance of some other Indian law.

Illegal Association: Any business carried on for making gain in contraventionof section 11 will be considered illegal and the persons carrying on the saidbusiness will be held personally liable for the debts and obligations incurredin such business.

b) Separate LSeparate LSeparate LSeparate LSeparate Legal entity:egal entity:egal entity:egal entity:egal entity: A company has a separate legal existence, quite distinctfrom the members who constitute it. The following are the implications of a company


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being a separate legal entity: 1) Perpetual succession. 2) Company can holdproperty in it’s own name. 3) Liability of company is not liability of its members. 4)Share holders can enter into a contract with company.

• The principle of separate legal entity of a company was established in thefamous case of Salomon vs. Salomon & Co. Ltd [1895] All. ER 33 (HL). OneSalomon was a boot manufacturer. He formed a company called Salomonvs. Salomon and Co. Ltd., The shareholders of the company consisted ofSalomon himself, his wife, daughter and 4 sons. The business was transferredto the company. In payment Salomon took 20,000 shares of 1 pound eachand secured debentures worth 10,000 pound. One share was given to eachremaining member of his family. Later on, the company went into liquidation.Salomon as a secured creditor (debenture holder) demanded priority in thepayment. The unsecured creditors objected on the ground that Salomonand the company were one and the same person and that the business reallybelonged to him. It was held by the House of Lords that Salomon as anindividual was quite different from Salomon and Co. and hence entitled topriority payment.

• In Lee v. Lee Air Farming Limited (1960) 3 All ER 420 PC, Lee, a qualifiedpilot held all but one of the shares in the company and by the articles wasappointed director of the company and chief pilot. Lee was killed while pilotingthe company’s aircraft and his widow claimed compensation for his death.The company opposed the claim on the ground that Lee was not a worker asthe same person cannot be employer and employee. Held, there was a validcontract of service between Lee and the company and Lee was therefore, aworker. Mrs Lee’s contention was upheld.

c) Limited liability of members:Limited liability of members:Limited liability of members:Limited liability of members:Limited liability of members: The liability of members of a limited liability companyis limited to the extent of the amount unpaid on the shares held by him or theamount guaranteed by him.

d) PPPPPerpetual Succession:erpetual Succession:erpetual Succession:erpetual Succession:erpetual Succession: A company has perpetual succession i.e. continuedexistence. The death, insolvency, or lunacy of any of its members does not affectits continuity or existence. It is created by law and law alone can dissolve it.

e) Separation of ownership from management:Separation of ownership from management:Separation of ownership from management:Separation of ownership from management:Separation of ownership from management: Generally the owners manage thebusiness. Thus in case of sole proprietorship the proprietor, and in case ofpartnership the partners manage the business. But this is not so in the case ofcompanies. There is separation of ownership from management. The shareholders


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who are the owners of share capital and who bear the risk do not actually managethe company. The management is vested in the Board of Directors who are electedby the shareholders.

f) TTTTTransferable shares:ransferable shares:ransferable shares:ransferable shares:ransferable shares: The shares of a company are movable property, transferablein the manner provided by the articles of the company.

g) Separate PSeparate PSeparate PSeparate PSeparate Property:roperty:roperty:roperty:roperty: A company being a distinct entity, can acquire, own, enjoyand dispose of property in its own name. The property of the company is not theproperty of the share holders. Shareholders are not part owners of the companyor its property. (Bucha F Guzdar v CIT, Bombay [1955] 25 Comp. Cas. 1 (S C)

h) Common Seal:Common Seal:Common Seal:Common Seal:Common Seal: A company being an artificial person cannot sign a document asa natural person can do. The common seal is a seal used by a company as asubstitute for a signature. In legal terms the common sea is the official signatureof the company. In terms of sec. 34 (2), the provision of a common seal is astatutory requirement for a company. It is a metal seal on which the name of thecompany is engraved. Sec. 147(1)(b). The purpose of the seal is to furnishauthenticity of a document. Common seal is to be affixed on the documentsexpressly provided in the Act. Other documents need not be under common seal.

As per the provisions of the Companies Act, common seal is required on the followingdocuments –

1. power of attorney executed by the company - Sec. 48(1)

2. share certificates - Sec.84

3. share warrant - Sec.114 & other documents provided in the articles of association.It is to be noted that normal business documents, purchase orders, employeeappointment letters, invoices etc. need not be under common seal (sec 54). Thearticles generally provide the manner in which the seal is to be affixed. Table Aprovides that Common seal is to be affixed on any instrument with the authority ofa resolution passed by the Board of Directors and in the presence of atleast twodirectors and of the secretary or such other person authorised by the Board.

i) Capacity to sue and being sued:Capacity to sue and being sued:Capacity to sue and being sued:Capacity to sue and being sued:Capacity to sue and being sued: The company being a legal entity, it can sueand be sued in its own name. Since company is an artificial person it cannot beimprisoned. However, penalty /fine can be imposed.

• Disadvantages of corporate formDisadvantages of corporate formDisadvantages of corporate formDisadvantages of corporate formDisadvantages of corporate form: a) High cost of formation. b)high cost ofrunning the company c) Difficult to close the company


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1.3 Lifting the Corporate Veil

From the juristic point of view a company is a legal person distinct from its members(Salomon v. Salomon & Co. Ltd.). This principle may be referred to as the veil ofincorporation. The effect of his principle is that there is a fictional veil between thecompany and its members. ‘Lifting the veil’ means looking behind the company as alegal person i.e. disregarding the corporate entity and paying regard instead to therealities behind the legal form. The corporate veil is lifted by the courts when the corporateform is used to evade taxes or personal obligations, justify wrong, protect fraud ordefend crime. The courts ignore the company and concern themselves directly with thepersons who really control the affairs of the company.

The human beings who are engaged to manage the affairs of a company maycommit certain illegal acts or frauds in its name. It may, therefore, become necessary toidentify and hold these individuals personally liable for their deeds. In other words, theveil of corporate personality may be pierced or lifted. The circumstances under whichcorporate veil can be lifted may be grouped in the following two heads-

(a) When the statute itself contemplates lifting corporate veil. For example as persection 179 of Income Tax Act and as per section 18 of Central Sales Tax Act,liability of directors of private company is personal, if tax due cannot be recoveredfrom the company.

(b) When the courts finds that corporate device is used for some illegal or improperpurpose, for committing fraud, for evasion of taxes, for avoiding contractualobligations etc. In all these cases the separate corporate body will be ignoredand the corporate veil lifted, so that individual shareholders managing the companymay be held liable for its acts.

Corporate veil can be lifted for the benefit of the company alsoCorporate veil can be lifted for the benefit of the company alsoCorporate veil can be lifted for the benefit of the company alsoCorporate veil can be lifted for the benefit of the company alsoCorporate veil can be lifted for the benefit of the company also- New HorizonsLtd. v. UOI 1995, 15 SCL 148 (SC); Prem Lata Bhatia .v. UOI (2006) 71 SCL 142 (DELHC DB)

a. Statutory provisions for lifting the corporate veil.

The Supreme Court in LIC .v. Escorts Ltd. (1986) held that corporate veil would belifted when statute itself contemplates it. In the Companies Act there are specific provisionsfor lifting the corporate veil.

1. RRRRReduction of membership below the statutory minimum (sec. 45)eduction of membership below the statutory minimum (sec. 45)eduction of membership below the statutory minimum (sec. 45)eduction of membership below the statutory minimum (sec. 45)eduction of membership below the statutory minimum (sec. 45): : : : : If the numberof members in a company falls below the statutory minimum i.e. below seven in


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the case of public company and below two in the case of a private company, andthe company carries on business for more than 6 months while the number is soreduced, then every person who is member of he company during the time thecompany so carries on business after those six months shall be severally liable forthe payment of company debts contracted during that time.

The unlimited liability of the members under this section will arise only if they areaware of the fact that the number of members of the company has fallen belowstatutory minimum.

2. Misrepresentations in prospectus (sec.62 & 63)Misrepresentations in prospectus (sec.62 & 63)Misrepresentations in prospectus (sec.62 & 63)Misrepresentations in prospectus (sec.62 & 63)Misrepresentations in prospectus (sec.62 & 63): In case of misrepresentation ina prospectus, every director, promoter, or every other person who authorizes issueof such prospectus is liable to the subscribers who subscribe for share on the faithof untrue statement (Sec.62). Besides, these persons may be charged criminallyand fined upto Rs. 50,000 or imprisoned up to two years or may be fined as wellas imprisoned

3. FFFFFailure to return application money (sec. 69)ailure to return application money (sec. 69)ailure to return application money (sec. 69)ailure to return application money (sec. 69)ailure to return application money (sec. 69): Similarly, if minimum subscriptionis not received within prescribed time limit the directors will be liable to pay interestif they fail to return application money as per the time limit fixed by SEBI (Sec 69)

4. Misdescription of name (sec. 147)Misdescription of name (sec. 147)Misdescription of name (sec. 147)Misdescription of name (sec. 147)Misdescription of name (sec. 147): Where on officer of a company sign onbehalf of the company any contract, bill of exchange, hundi, promissory note,cheque or order for money, such person shall be personally liable to the holder ifthe name of the company is either not mentioned, or is not properly mentioned.

5. PPPPPiercing the veil in holding and subsidiary company relationshipsiercing the veil in holding and subsidiary company relationshipsiercing the veil in holding and subsidiary company relationshipsiercing the veil in holding and subsidiary company relationshipsiercing the veil in holding and subsidiary company relationships. A holdingcompany is required to disclose to its members the accounts of its subsidiaries.This amounts to lifting the corporate veil since in the eyes of law a subsidiary is aseparate legal person. Moreover, the Company’s Act itself provides for looking atownership to decide whether a company is a holding company or subsidiarycompany.

(In general, a subsidiary company is treated, as altogether a separate unit enjoyingindependent corporate existence and its holding company is not liable for its acts.But under section 212-214, companies under a group are required to present ajoint picture in relation to accounts and financial position of the group and allcompanies under a group are treated as part of the same entity disregarding therule that each subsidiary company has a separate legal personality.)


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6. Company under investigationCompany under investigationCompany under investigationCompany under investigationCompany under investigation. Inspectors appointed u/s 239 to investigate theaffairs of the company for alleged mismanagement, or oppressive policy towardsits members or to determine its true ownership u/s 247, may investigate into theaffairs of another related company in the same management or group. In thisway the separate legal entity of the company may be regarded.

7. FFFFFraud during winding upraud during winding upraud during winding upraud during winding upraud during winding up. Where the business of the company is found to havebeen carried for fraudulent purpose in the case of winding up (sec. 542). In sucha case the directors and parties responsible for fraudulent conduct can be madepersonally liable.

8. FFFFFor ultra vires actsor ultra vires actsor ultra vires actsor ultra vires actsor ultra vires acts: Directors and other officers of a company will be personallyliable for all those acts which they have done on behalf of a company if the sameare ultra vires the company.

9. For violations of the provisions of statutes like Income-tax Act or Foreign ExchangeManagement Act., the directors and officers in default are personally liable.

b.When courts disregard separtate legal personality of the company.

10. Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: The court has power to disregard the corporateentity if it is used for tax evasion or to circumvent tax obligations. (Sir DinshawManeckjee Petit, Re AIR 1927 Bom. 371, In this case D formed four privatecompanies and transferred his investments to them. D took pretended loans fromthe companies which he never repaid. In a legal proceeding the corporate veilsof all the companies were lifted and the incomes of the companies treated as ifthey were of D. Also, affirmed in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819.

11. Lifting corporate veil where company is used for evasion of personal andLifting corporate veil where company is used for evasion of personal andLifting corporate veil where company is used for evasion of personal andLifting corporate veil where company is used for evasion of personal andLifting corporate veil where company is used for evasion of personal andstatutory obligation:statutory obligation:statutory obligation:statutory obligation:statutory obligation:In Jones v. Lipman [1962]111111 ALL ER 442, thedefendant attempted to avoid completing the sale of his house to the plaintiff bytransferring to a company formed for the purpose. The court ordered both thedefendant and the company specifically to perform the contract with the plaintiff.

12. Lifting corporate veil for determination of the enemy character of the company:Lifting corporate veil for determination of the enemy character of the company:Lifting corporate veil for determination of the enemy character of the company:Lifting corporate veil for determination of the enemy character of the company:Lifting corporate veil for determination of the enemy character of the company:(Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916]2 AC 307. In this case the Daimler company was incorporated in London. Itsmajority shareholders and directors were Germans. On declaration of war betweenEngland and Germany in 1914 it was held that the company was a Germancompany. Accordingly, the suit filed by the company to recover a trade date wasdismissed on the ground that such payment would amount to trading with enemy.


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13. Lifting corporate veil where company is used to avoid welfare legislationLifting corporate veil where company is used to avoid welfare legislationLifting corporate veil where company is used to avoid welfare legislationLifting corporate veil where company is used to avoid welfare legislationLifting corporate veil where company is used to avoid welfare legislation:::::(Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59Comp. Cas. 134 (SC). In this case corporate veil was lifted since the companyformed the subsidiary and transferred investments only to split the profits andreduce liability of bonus.

14. Lifting corporate veil where body corporate is used to commit fraud or improperLifting corporate veil where body corporate is used to commit fraud or improperLifting corporate veil where body corporate is used to commit fraud or improperLifting corporate veil where body corporate is used to commit fraud or improperLifting corporate veil where body corporate is used to commit fraud or improperconduct:conduct:conduct:conduct:conduct: In the case of fraud or improper conduct, Courts can pierce the corporateveil and punish the persons who were actually responsible. Delhi DevelopmentAuthority v. Skipper Construction Company (P) Ltd. (1996) 4SCALE202 (SC); PNBFinance Limited v. Shital Prasad Jain (1983) 54 Comp. Cas. 66 (Delhi).

15. Lifting corporate veil for determining technical competence of the companyLifting corporate veil for determining technical competence of the companyLifting corporate veil for determining technical competence of the companyLifting corporate veil for determining technical competence of the companyLifting corporate veil for determining technical competence of the company::::: InNew Horizons Ltd. v. UOI (1997) 89 Comp Cas 849 (SC) = (1997) 27 CLA56(SC), a company was formed as joint venture by other companies for purpose oftelecom tender. The company was new but its major shareholders had vastexperience in the field. However, tender evaluation company rejected the tenderon the ground that the company has no experience in the field. Supreme Courtheld that experience of major shareholders can be considered as experience ofthe company, for purpose of awarding a tender or contract.

1.3a. Difference between Company and Body Corporate

Body corporate means a body of persons, which is incorporated under some statue.It has three distinct attributes viz. separate legal personality different from the membersconstituting it, perpetual succession and a common seal. A company should, however,be distinguished from a body corporate.

The expression body corporate is a wider expression than company. According tosec 2(7) body corporate includes besides a company, a company incorporated outsideIndia (foreign company), public financial institutions, nationalized banks and any otherassociation of persons declared as a body corporate by the Central Government. ONGChas been notified as a body corporate by Central Government notification no. GSR1883, 20/12/65.

Thus every company is a body corporate but every body corporate is not a company.The term body corporate however does not include u/s 2(7) of the Companies Act:

1. A corporation sole;

2. A co-operative society.


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A society registered under the Societies Registration Act is not a body corporate.(Board of Trustees Aurvedic & Unani Tibia College, Delhi v. State of Delhi AIR 1962 SC458.)

A corporation sole is a single individual constituted as a corporation by virtue ofoccupying a particular office or performing a particular function. It enjoys corporatepersonality and status. For example the offices of President of India, Governor of State,constitute a corporation sole.

1.3.b. Is Company a Citizen?

A company has a nationality and domicile. It is a person But it is not a citizen andtherefore can not be said to have the fundamental rights expressly conferred uponcitizens only. (State Trading Corporation of India Ltd. vs. CTO 1963, 33 Comp. Cas.1057 (SC). However those fundamental rights which are available to all persons, whethercitizens or not, like the right to own property are available to the company.

1.3.c. Is a Company a property of the shareholders?

No. The company is not the property of its shareholders. All the property in thename of the company is its separate property, which is controlled, managed and disposedof by the company in its own name. Thus the company is the owner of its assets andcapital. Moreover, the company being a separate legal person, it cannot be construedas property of the shareholders. The decision of the Supreme Court in the case, NationalTextile Worker’s Union Vs P.R. Ramkrishnan, AIR 1993 (SC), has set at rest at the debatewhich was going on this issue. According to the verdict given in this case....” a company,according to the new socio-economic thinking is a social institution having duties andresponsibilities towards the community in which it functions. Maximization of socialwelfare should be the legitimate goal of a company and shareholders should be regardednot as proprietors of the company, but merely as suppliers of capital entitled to no morethan reasonable return and the company should be responsible not only to shareholdersbut also to workers, consumers and the other members of the community and should beguided by consideration of national economy and progress.”

1.3.d. Company vs Partnership firm

A partnership firm is not a body corporate. It does not have separate legal personality.A company differs from a partnership on the following grounds viz. mode of creation,number of minimum and maximum members, legal status, liability of members, transfer


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of shares, agency of members, management, perpetual succession, powers, dissolutionand legal obligations.

1.4. Kinds of Companies

There are various types of companies. A broad classification can be:

A. Companies not covered by the Companies Act, 1956.

B. Companies covered by the Companies Act, 1956.

A. The companies not covered by the Companies Act are:

1. Statutory companies

2. Chartered companies

B. The companies covered by the Companies Act

These are called registered companies. Such companies on registration get acertificate of incorporation. The two basic types of companies which may be registeredunder the Act are:

• Private companies

• Public companies

These companies may be:

i) Companies limited by shares,

ii) Companies limited by guarantee,

iii) Unlimited companies.

Companies may also be classified on the basis of nature, form andfunctions as

i) Companies not for profit,

ii) Government companies

iii) Foreign companies,

iv) Holding and subsidiary companies.

v) Producer companies.


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1.4a. Companies not covered by the Companies Act

These are:

1. Statutory companiesStatutory companiesStatutory companiesStatutory companiesStatutory companies::::: Statutory companies are those, which are formed under aSpecial Act of Parliament or State legislature. The constitution, powers and functionof such companies are laid down in the Special Act itself. Hence they requiresome special powers and privileges. Statutory companies are formed in specialcases to carry on the work of some special public importance. They do no havethe word “limited” as part of their name. They are also called as corporations.

Example: Reserve Bank of India, is a statutory company since it has been formed bya statute viz., the RBI Act 1934. Other examples are:

i) Life Insurance Corporation (established under the Life Insurance Corporation Act1956)

ii) Indian Airlines and Air India (established under the Air Corporation Act 1953)now converted into a company under the Companies Act.

iii) Damodar Valley Corporation (constituted under the Damodar Valley CorporationAct 1948).

Legal status of statutory companies: Although it is a body corporate, it is not requiredto have memorandum and articles of association, nor it is required to add the word‘Limited’ after its name. Each statutory corporation is governed by the provisions of thespecial Act creating it, as well as the provisions of the Companies Act 1956 in so far asthese provisions are not inconsistent with the provisions of the special Act (Sec. 616).

2. Chartered Companies: Chartered Companies: Chartered Companies: Chartered Companies: Chartered Companies: Chartered companies are those companies which areformed by Royal Charter issued by the King or Queen of England e.g., The EastIndia Company, BBC (British Broadcasting Corporation). The Bank of Englandetc. It is the oldest form of incorporation known to English law. A Charteredcompany is regulated by its charter and the Companies Act does not apply to it.This method of incorporation is now used in England mostly to form non-tradingcorporation. A recent example is of the Institute of Cost and ManagementAccountants, London, which was incorporated under the Royal Charter.

1.4b. Companies Covered by the Companies Act

These may be briefly described as follows:


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i. Private Company - Sec 3 (1) (iii)

A private company means a company which has a minimum paid up capital of onelakh rupees or such higher paid up capital as may be prescribed and which by itsarticles -

(a) restricts the right to transfer its shares.

(b) limits the number of its members to fifty.

(c) prohibits any invitation to the public to subscribe for any shares in, or debenturesof, the company.

(d) prohibits any invitation or acceptance of deposits from persons other than itsmembers, directors or their relatives.

Kinds of companies

COMPCOMPCOMPCOMPCOMPANIESANIESANIESANIESANIES

COVERED BY THE

COMPANIES ACT

NOT COVERED BY THE

COMPANIES ACT

PUBLIC PRIVATE

STATUTORY CHARTERED

BASIC TYPESBASIC TYPES

PUBLIC

THESE COMPANIES MAY BE

1. companies limited by shares

2. companies limited by guarantee

3. unlimited companies

OTHER COMPANIES

on the basis of nature, form and functions

1. companies not for profit

2. government companies

3. foreign companies

4. holding and subsidary companies


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Note 1. In computing the number of persons, the present and past employees arenot taken into account. Joint holders of shares are treated as a single member.

Note 2. The restriction on transfer of shares in case of private company can bebased on (I) Right of pre-emption i.e., the right of the existing members to purchase theshares of outgoing members as and when sold and (ii) Director’s powers to refuse toregister transfer of shares. However, this power must be exercised by the directors ingood faith and for benefit of the company. In the case of limitation of members, theemployees who are members and the ex-employees who continue to be membersshould be excluded from counting the maximum limit of fifty.

ii. Public Company - Sec 3(1)(iv)

Public company means a company which-

a. is not a private company;

b. has a minimum paid-up capital of five lakh rupees or such higher paid-up capital,as may be prescribed;

c. is a private company which is a subsidiary of a company which is not a privatecompany. [Introduced by Companies (Amendment) Act 2000].

Thus a public company is one which is formed by at least seven persons and

a) Which allows free transfer of its shares,

b) Which does not have a limit as regards the maximum number of members.

FEAFEAFEAFEAFEATURES OF PRIVTURES OF PRIVTURES OF PRIVTURES OF PRIVTURES OF PRIVAAAAATE COMPTE COMPTE COMPTE COMPTE COMPANIESANIESANIESANIESANIES

A PRIVATECOMPANY

means acompanywhich has

a minimumpaid-up

capital ofRs. 1 lac

AND

1. NUMBER OF MEMBERS

2. TRANSFER OF SHARES

3. INVITATION FOR PUBLIC SUBSCRIPTION

4. INVITATION OR ACCEPTANCE OF DEPOSITS

Minimum 2, Maximum 50

Restricted

No public offer forshares or debentures

Not allowed from personsother than its members,directors or their relatives


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c) Which allows public to purchase its shares and debentures.

d) Which has a minimum paid-up capital of five lakhfive lakhfive lakhfive lakhfive lakh rupees or such higher paid-upcapital, as may be prescribed; [introduced by Companies (Amendment) Act 2000].

e) Which is a private company which is a subsidiary of a public company.

A company registered under Section 25 before or after the commencement of theCompanies (Amendment) Act 2000, need not have to fulfil the requirement of minimumpaid up capital, as aforesaid.

Some points worth noting about private and public companies are

1. The basic distinction between a private and public company is the extent of publicparticipation. In a public company there is increased public participation.Membership of the company is open to the general public at large, while in aprivate company there is no public participation. It is a private affair or closedaffair of a few persons.

2. The last word in the name of a private limited company must be “Private Limited”(Pvt. Ltd.) e.g. CAPS Education (India) Pvt. Ltd. In case of public company thewords ‘Limited’ must be used e.g. Reliance Industries Ltd.

3. The Companies Act gives different treatment to public and private companies.There are certain provisions in the Act which have been made applicable topublic companies only. As a result private companies have been placed in aprivileged position.

4. The formation of a private company offers combined advantages of partnershipand limited liability. On the one hand advantages of partnership are availablesuch as secrecy of business affairs, no control by outsiders and on the other handthe advantages of company organization are available such as limited liability ofmembers, permanent existence etc. Moreover it is not required to comply with thestatutory obligations of a public limited company. For these reasons private limitedcompanies are very popular nowadays.

1.4c. From the point of view of liability, public and private companies maybe organized as

(i) companies with liability limited by shares

(ii) companies with liability limited by guarantee

(iii) companies with unlimited liability.


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i) Companies with liability limited by sharesCompanies with liability limited by sharesCompanies with liability limited by sharesCompanies with liability limited by sharesCompanies with liability limited by shares. A company limited by shares is one inwhich the liability of the members is limited upto the nominal amount of theshares held by them. The memorandum of association mentions whether theliability of the members is limited or not. In these companies there is a sharecapital divided into shares of fixed amount. The liability of the shareholder islimited to the nominal amount of the shares held by him. Thus, if a person buys100 shares of Rs. 10 each, his maximum liability is to the extent of Rs. 1,000 only.He cannot be asked to pay more than this amount. If he has paid Rs. 6 on eachshare, his remaining liability will be only Rs. 4 per share (i.e. 4 x 100 = Rs.400).A majority of the companies in India belong to this category.

ii) Companies with liability limited by guaranteeCompanies with liability limited by guaranteeCompanies with liability limited by guaranteeCompanies with liability limited by guaranteeCompanies with liability limited by guarantee. In case of a company limited byguarantee, the members voluntarily promise to contribute a certain amount towardsthe payment of company’s debt in the event of its winding up. Such an amount iscalled the Guarantee. The memorandum of association lays down the guaranteeamount. No member is liable to pay more than the amount, which he hasguaranteed to contribute.

These companies may or may not have a share capital. In the case of a guaranteecompany with a share capital, the members are required to purchase shares offixed amount and also give a guarantee for a further sum in the event of windingup. Generally, guarantee companies are formed for non - trading purposes.Such as promotion of commerce, art, science, sports etc., and do not aim forprofit. The Chambers of Commerce, charitable institutions, sport clubs, aregenerally organized as guarantee companies.

Company Limited by SharesCompany Limited by SharesCompany Limited by SharesCompany Limited by SharesCompany Limited by Shares Company Limited by GuaranteeCompany Limited by GuaranteeCompany Limited by GuaranteeCompany Limited by GuaranteeCompany Limited by Guarantee

1. 1. 1. 1. 1. Share capital :Share capital :Share capital :Share capital :Share capital : Must have share capital May have share capital

2. 2. 2. 2. 2. Liability of members : Liability of members : Liability of members : Liability of members : Liability of members : Limited to amount Limited to amount guaranteed.unpaid on shares.

3. 3. 3. 3. 3. Calling the amount : Calling the amount : Calling the amount : Calling the amount : Calling the amount : Unpaid amount on Amount guaranteed can be called onlyshares may be called even before on winding up. If the company has awinding up. share capital, unpaid amount on shares

can be called beforewinding up.


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4. 4. 4. 4. 4. FFFFFilling of Articles : illing of Articles : illing of Articles : illing of Articles : illing of Articles : Filing of articles on Filing of articles in necessary in all incorporation is not necessary in case cases.of public companies.

5. 5. 5. 5. 5. RRRRRaising of funds : aising of funds : aising of funds : aising of funds : aising of funds : Raises initial Does not raise initial funds fromfunds from members unless it has a share

capital also.

iii) Companies with unlimited liability (Unlimited companies)Companies with unlimited liability (Unlimited companies)Companies with unlimited liability (Unlimited companies)Companies with unlimited liability (Unlimited companies)Companies with unlimited liability (Unlimited companies). An unlimited companyis defined as a company not having any limit on the liability of its members. Thusthe members of an unlimited company have unlimited liability.

1.4d. Advantages and Privileges of Private Companies

As already pointed out a private company enjoys certain privileges and is exemptedfrom compliance with certain statutory requirements which are compulsory in the caseof a public company. these privileges of a private company which are its advantages ascompared to a public company are as follows:

1. Formation: It is easy to form a private company as only two members are required.There are less legal formalities for its incorporation than in a public company.

2. Business: (i) A private company is not required to file a prospectus or a statementin lieu of prospectus, as it is not allowed to issue shares to the public. (ii) It cancommence the business as soon as the Certificate of Incorporation is obtained.(iii) It can allot shares immediately after incorporation. There is no restriction ofminimum subscription.

3. Meetings: It is not necessary for a private company to hold a statutory meetingand to file a statutory report.

4. Board of Directors: (i) A private company requires a minimum of two directors, (ii)There are no restrictions regarding remuneration of directors, (iii) The directorscan vote in contracts in which they are interested, (iv) Directors need not retire byrotation. (v) The directors need not file their consent to act as directors with theRegistrar of companies.

However a private company which is a subsidiary of public company does notenjoy many of the privileges mentioned above.


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1.4e. Distinction of a Private Company and a Public Limited Company

The two can be distinguished on the following lines:

1. Number of Members: A private company can be floated with a minimum numberof 2 and maximum of 50 members, while a public company can be floated with7 persons, there being no maximum limit in their case.

2. Number of Directors: A private company requires only 2 directors, while a publiccompany requires at least 3 directors on its Board.

3. Transfer of Shares: Right to transfer of shares is restricted in a private company,while there is no such restriction in case of a public company.

4. Public Subscription: A private company can not accept public subscription throughthe issue of prospectus, while a public company does so.

5. Commencement of business: A private company can start its business immediatelyafter its incorporation, while a public company has to wait till it gets certificate tocommence business.

6. Allotment of Shares: A private company can proceed to allot shares without waitingfor minimum subscription, while a public company has to wait for such minimumsubscription. If it does not receive the stipulated amount, it has to refund thesubscription so received.

7. Statutory Meeting: A private company has not to hold a statutory meeting, whichis a must in case of a public company.

8. Managerial Remuneration: No such binding relation to maximum amount in caseof a private company but a public company has to observe the provisions of theAct relating to managerial remuneration.

9. Index of members: A private company has not to maintain an Index of members,which is a must in case of a public company.

1.4g. Other Companies

On the basis of nature, form and functions, companies can be further divided into

(a) Government company,

(b) Foreign company,

(c) Holding and subsidiary company,


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(d) Company not for profit,

(e) Producer Company.

(a) Government company [Sec 617]

A Government company is a company in which not less than 51% of the sharecapital is held.

(i) by the Central Government , or

(ii) by one or more State Government, or

(iii) partly by Central Government and partly by State Government.

Features:

1. Basically, a Government company is a registered company. It is a company limitedby shares, in which the government is a major (51%) shareholder.

2. The Companies Act in general applies to government companies. But certainprovisions of the Act are not made applicable to them. e.g., provisions regardingappointment of directors and their remuneration.

3. A Government company may be either a public or private company. But agovernment company needs not use the word ‘private’ as a part of its name.

4. The auditor of the government Company shall be appointed by the CentralGovernment on the advice of the Comptroller and Auditor General of India [Sec.619(2)]. The audit and accounting procedures of Government companies aredifferent from those of the other companies.

5. Examples of Government companies are HMT (Hindustan Machine Tools), BokaroSteel Ltd., WCL.

(b) Foreign Companies [Sec 591]

A foreign company is a company, which is incorporated outside India but has aplace of business in India.

It is place of incorporation, which determines the foreign character of a company.Thus, a company incorporated outside India but having a place of business in Indiawould be regarded a foreign company even though all the members might be Indiancitizens.


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The Companies Act lays down certain special provisions applicable to foreigncompanies. A foreign company if it ceases to carry on business in India, may be woundup as an unregistered company.

(c) Holding and subsidiary Companies [Sec 4]

A holding company is one which exercises control over another company, and asubsidiary company is one, over which control is exercised. Control can be exercisedeither through composition of Board of directors or through shareholding in the subsdiary.

Holding company is one

(I) Which holds more than half of the nominal value of the equity share capital ofanother company (subsidiary company) For example, if ‘H’ company hold 51%of the nominal value of the equity capital of ‘S’ company, then ‘H’ company issaid to be a holding company and ‘S’ company is a subsidiary company. or,

(II) Which controls the composition of the board of directors of another company(subsidiary company)? The company which is so controlled by the holding companyis known as Subsidiary Company. Control involves the power to appoint all ormajority of the board of directors without the consent of some other person.

(III) A company shall be deemed to be a subsidiary company of another if it is asubsidiary of a third company which itself is a subsidiary of the controlling company.For example, where company S is a subsidiary of company H and company X is asubsidiary of company S then company X shall be a subsidiary of company H .

To illustrate, company A is a subsidiary of company B if, and only if:

1. company B (holding company) controls the composition of the Board ofdirectors of company A (subsidiary); or

2. company B (holding company) controls more than 50% voting power ofcompany A (subsidiary); or

3. company B (holding company) holds more than half in the nominal value ofequity shares of company A (subsidiary); or

4. if company A (the subsidiary) is a subsidiary of company C which is subsidiaryof company B, then the company A is also a subsidiary of company B.

5. if company D is the subsidiary of company A then D will be the subsidiary ofcompany C and also of company B.


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(d) Companies not for profit (or Association not for profit) [Sec 25]

An ‘association not for profit’ has the following features

(i) It is formed to promote commerce, art, science, religion, charity or any otheruseful object.

(ii) It prohibits payment of any dividend to its members and applies its profits or otherincome in promoting its objects.

(iii) It obtains a license from the Central Government to be registered as a limitedcompany without being required to use the word “limited” or private limited totheir names. (e.g., Institute of Company Secretaries of India, was originally ‘anassociation not for profit’. Now it is a statutory body).

(e) Producer Company

This is a new form of company which can be formed as per the procedure laiddown under Part IXA, containing section 581A to 581ZT of the Companies Act, 1956by Primary Producers of products of agricultural, handloom and other cottage industriesor by Multi-state Co-operative Societies or a combination of these.

Such companies shall be formed as a Private Limited Company, but will not besubject to the maximum limit of 50 members as required for a private limited companyunder section 3(1)(iii) of the Act.

“Producer Company” means a body corporate having objects or activities as specifiedin section 581B and registered as Producer Company under the Act. Section 581A(l).

Objects of Producer Company

The objectives for which Producer Companies may be formed are laid down inSection 581 B. These include inter alia,

Production, marketing, export/import of primary produce of members,

Processing, packaging of produce of its members;

Manufacture, sale of machinery etc. mainly to its members,

Generation and distribution of power, revitalization of land and water resources,

Insurance of producers or their primary produce.

Rendering technical/ consultancy services, training, research and development,.


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Financing of procurement, processing, marketing or other activities specified above,which includes extending credit facilities or any other financial services to itsmembers.

Promoting mutual assistance, welfare measures and

Any other activity for the benefit of the members.

Public financial institutions [ Sec 4A]

Certain institutions have been specified as ‘public financial institutions’ under section4A.

These are ICICI, IFCI, IDBI, LIC, UTI, Infrastructure Development Finance CompanyLimited (IDFCL), the securitisation company or the reconstruction company registeredunder Securitisation and Reconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002.

Central Government has been further empowered to notify any other institution asa public financial institution provided it has been constituted under any Central Act ornot less than 51% of its paid-up share capital is held or controlled by the CentralGovernment. Thirty-nine such institutions have been identified by the CentralGovernment.

Investment companyInvestment companyInvestment companyInvestment companyInvestment company Sec 372 (10) of the Companies Act, 1956 defines aninvestment company as a “a company whose principal business is the acquisition ofshares, stocks, debentures or other securities”.

1.5 Conversion of company

When a Private Company becomes a Public Company?

A Private company becomes a public company in the following cases :—

1. When the private company fails to comply with the essential requirements of aprivate company (viz., restrictions on transfer of shares, limitation of the numberof members to 50, and prohibition of invitation to the public to buy shares ordebentures, accept deposits). [Sec 43 ]

2. When it passes a special resolution altering its articles so as to eliminate the threerestrictions on private companies. [Sec 44]

3. When it becomes a subsidiary of a public company [Sec 3(iv)]


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1.6 Illegal Association [ sec 11]

An association or partnership is an illegal association if all the following conditionsare satisfied :

(a) The number of persons carrying on business exceeds 20 (10 persons in case ofbanking business).

(b) It is formed for the purpose of earning profits.

(c) It is not registered under the Companies Act or formed under any other Indian law(e.g. Cooperative Societies Act ,Trust Act).

(d) It is not a Joint Hindu Family (i.e., an HUF is not an illegal association even if henumber of members exceed 20 or 10, as the case may be).

Thus, illegal associations are the association of persons or partnerships which arenot registered under the Act and are formed with the limited object of acquisition ofgain. An illegal association should not be construed to mean an association formed foran illegal purpose.

Sec 11 of the Companies Act, 1956 provides that where the number of personsexceeds 10 or 20, as the case may be, a company, association or partnership shouldget itself registered under the Companies Act or is formed in pursuance of some otherIndian Law. Thus, if such an association is formed and not registered under either theCompanies Act or any other law, it will be regarded as an ‘Illegal Association’ althoughnone of the objects for which it may have been formed is illegal.

ExceptionsExceptionsExceptionsExceptionsExceptions - However, section 11 does not apply in the following cases:

1. Associations ‘not for profit-making’ - All charitable, religious, scientific, literary,social and other associations including clubs not having as their object theacquisition of gain are excluded from the purview of the section.

2. Joint Hindu Family - Section 11 does not apply to one joint family, that is, a jointHindu family may carry on any business, even for earning profits and with anynumber of members without being registered or formed in pursuance of anyIndian Law as required by section 11 of the Companies Act, 1956 and yet it willnot be illegal association. But, where two joint Hindu families join hands to carryon business, the provisions of section 11 become applicable. However, in such acase, in reckoning the number of members of such an association, the minormembers shall not be taken into account.


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Effects of an illegal association -

Following are the effects of an association being illegal:

1. In the eyes of law it has no legal existence.

2. Every member is personally liable for all liabilities incurred in the business.

3. Members are punishable with fine, which may extend upto Rs. 10,000.

4. Such an association cannot enter into any contract in its own name.

5. Such an association cannot sue any of its members or any outsider, not even if theassociation is subsequently registered as a company.

6. It cannot be sued by a member or an outsider for any debts due to it because itcannot contract any debt.

7. It cannot be wound up even under the provisions relating to winding up ofunregistered companies.

8. The illegality of an illegal association cannot be cured by subsequent reduction inthe number of its members (Kumar Swami Chettiar v. M.S.M. ChinnathambiChetteiar).

9. The profits made by an illegal association are, however, liable to assessment toincome tax (Gopalji Co. v. CITA).

‘Defunct Company’

A company which has stopped carrying on any business or which is not in operationis termed as a defunct company. The Registrar of companies may strike off company’sname from the register of companies under the provisions of Section 560of the Act.

When the name of the company is struck off the register of companies, the companystands dissolved. Thus, a defunct company can be dissolved without resorting to thewinding up procedure.

1.7 Application of the Act.

The Companies Act, 1956 extends to all classes of companies registered under theAct.

• In case of banking companies, insurance companies, and electric companies itapplies in a restricted manner. The provisions of the Companies Act are applicable


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to these companies to the extent they are not inconsistent with the provisions ofthe Special Acts governing them.

• The Companies Act does not apply to - statutory corporations established underthe Special Acts of Parliament., Trusts governed by the Indian Trust Act 1882,Societies, Clubs and Professional Associations governed by the SocietiesRegistration Act, 1860 and Co-operative Societies.

1.8 Administration of Companies Act

Ministry of Corporate Affairs, Government of India, administers the CompaniesAct. It has a three-tier organizational set-up: the Secretariat at New Delhi, the RegionalDirectors at Mumbai, Calcutta, Chennai, Kanpur, the Registrar of Companies in eachState and Official Liquidator attached to High Court.

Central Government has established RRRRRegistrar of Companies (ROCegistrar of Companies (ROCegistrar of Companies (ROCegistrar of Companies (ROCegistrar of Companies (ROC) in each State.The companies have to get incorporated in the State in which it has its RegisteredOffice. Registrar of Companies (ROC) of the State where the company is registeredgives certificate to incorporation. Annual return and other documents returns have to befiled with respective Registrars. The ROC supervises over functioning of the companiesin that State.

RRRRRegional Directors egional Directors egional Directors egional Directors egional Directors There are four Regional Directors in Eastern, Western, Southernand Northern region, who exercise control over the Registrars. They have offices atMumbai, Calcutta, Chennai and Kanpur. Central Government has delegated somepowers to Regional Directors u/s 637.

CLB CLB CLB CLB CLB The Company Law Board is a quasi judicial authority .It deals with the matersregarding oppression and mismanagement of company, rectification of register ofmembers and other specified matters. Its findings in respect of facts are final. Appealagainst the order can be made to the High Court.

After the commencement of Companies (Second Amendment Act), 2002, (till April,2008 this Second Amendment Act, has not been implemented) the Company LawBoard constituted under section 10E shall stand dissolved and all the powers of the CLBshall be vested in the National Company Law Tribunal (NCLT)

National Company LNational Company LNational Company LNational Company LNational Company Law Taw Taw Taw Taw Tribunal (NCLribunal (NCLribunal (NCLribunal (NCLribunal (NCLT) T) T) T) T) is an independent quasi-judicial authorityformed under section 10FB to which certain powers are proposed to be transferred bythe Central Government. Its findings in respect of facts are final. Powers of Tribunal areexercised by Benches, constituted by the President of the Tribunal.


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Appeal against orders of Company Law Tribunal will lie with National CompanyLaw Appellate Tribunal (NCLAT) formed u/s 10FR. Any person aggrieved by any decisionor order of the Appellate Tribunal may file an appeal to the Supreme Court. With theemergence of Tribunals, the civil court shall have no jurisdiction of the over companylaw matters which are within the jurisdiction of the Tribunals. However ,writ jurisdictionof High Court and special petition to Supreme Court is not barred, as these powers aregiven under the Constitution.

Note : National Company Law Tribunal (NCLT), National Company Law AppellateTribunal (NCLAT) is proposed to be formed for which the amending legislation hasalready been passed. However the amendment has not been enforced. The work ofCLB will be transferred to NCLT. The jurisdiction of the High Court over Company Lawmatters would cease, once the amendment is enforced.

• Website of Ministry of Corporate Affairs.

The information on company law matters can be had on the WEBSITE of the Ministryof Corporate Affairs, Gol. The website is http:/www.mca.gov.in.

Supreme Court

National Company LawAppellate Tribunal

National Company LawTribunal

Central Government

Regional Director

Registrar of Companies

Ministry of Corporate Affairs


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QUESTION BANK

I. FAQs’

1. Define a company. Explain its characteristics.

2. Enumerate the advantages that a business organisation enjoys throughincorporation under the Companies Act, 1956.

3. Under what circumstances can the separate personality of a company are ignored?

4. What are the restrictions of a private company?

5. Is a ‘company’ property of its own shareholders? Discuss.

6. Explain clearly the meaning of lifting of the corporate veil of a company.

7. Explain the meaning of ‘perpetual succession’ and ‘common seal’ in the case ofa company.

8. “Members of Limited liability company may nevertheless have unlimited liability”.Comment.

9. What are the consequences of the principle of ‘separate corporate personality?Explain.

10. What are the advantages of a company as compared to a partnership?

11. Define a private company.

12. Can a company be incorporated under the Companies Act without the word‘Limited’ ? If so, explain.

13. State the circumstances under which a company becomes the subsidiary of anothercompany under the provisions of the Companies Act, 1956.

14. What type of associations are prohibited by the Companies Act, and what are thedisabilities of such associations?

15. Explain the basic characteristics of a Private Ltd. Company and state, how does itdiffer from a Public Ltd. Co.

16. Why and when is a group of persons carrying on business required to be registeredunder the Companies Act?


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17. Comment on the following statements.

a. A corporate personality can be used as a device to evade tax.

b. Special privileges and exemptions have been provided to a private limitedcompany.

c. Members of a limited company may nevertheless have unlimited liability.

d. Company can be prosecuted if law provides for compulsory imprisonment.

II. CASE STUDIES

1. X was appointed as a director in a private limited company on 10th April 2005.He resigned on 5th May 2006. The company defaulted in payment of incometax for the previous year 2005-2006 and 2006-2007. Can he be held liable forpayment of income tax? X takes the defence that he is no more a director in thecompany and since company has a separate legal personality, the company isliable and not the director. What will be the position if it is a Public Limited company?

( Hint : The corporate veil will be lifted and under section 179 of the Income TaxAct 1961, the directors of private company are liable. However the directors arenot liable )

2. A firm M/s A & sons has five partners, there is another firm M/s B & sons, whichhas seven partners. They join together and form M/s A & B sons, in which all thepartners of A & sons and B & sons join to carryout the business of Banking. IsM/s AB and sons required to be registered under Companies Act?

(Hint : Yes; Where two joint Hindu families join hands to carry on business, theprovisions of section 11 become applicable.)

3. An H.U.F. consisting of 21 members, is carrying on the business of manufacturingiron-rods. It has four units of Delhi, Mumbai, Chennai and Kolkata. Each unit islooked after by four brothers and their sons, who are residents of these places. Isthis group of persons required to be registered under the Companies Act?

(Hint : No; section 11 does not apply to HUF )

4. Two companies X Ltd. and Y Ltd., registered under Companies Act decide toform a joint venture. Both the companies have more than 100 members. Is theJoint Ventures of X & Y Ltd. required to be registered under Companies Act Theydecide to share profit equally.

(Hint : No ; The joint venture need not be registered under Companies Act )


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5. Some of the creditors of Get Rich Quick Ltd. have complained that the companywas formed by the promoters only to defraud the creditors and circumvent thecompliance of legal provisions of the Companies Act, 1956. In this context theyseek your advice as to the meaning of corporate veil and when the promoters canbe made personally liable for the debts of the company.

(Hint : The corporate veil can be lifted and the promoter can be liable)

6. ABC is a private limited company in which 40% of the paid-up share capital ofCompany is held by the Central government and 11% by Public FinancialInstitutions like the Life Insurance Corporation of India and the Unit Trust of India.Is Company ABC private limited, a government Company?

(Hint : No ; Since the PFI’s shares are excluded)

7. Two joint Hindu families carry on together a business as joint owners. The firstfamily consists of 3 brothers and their respective sons, being 12 in number one ofthe brothers son is a minor. The second family consists of the father, 4 major sonsand 2 minor sons. Is the business illegal?

(Hint : No; the total no of members are 20 excluding minors )

8. On March 31, 2000, the income tax authorities hit almost all the FIIs which haverouted investments through Mauritius with nose-bleeding demands amounting tofew hundred crores. By issuing the notices, the tax department sought to lift thecorporate veil to find the real beneficial owner. The investors who are not peopleof Mauritius origin (Americans, Japanese etc.) route their investments throughMauritius by setting up wholly owned subsidiary there. This subsidiary then investsin India. In this way such FIIs are taking advantage of Indo-Mauritius tax treatyunder which capital gains on securities can be taxed. only in the country of residence(Mauritius) and Mauritius does not levy capital gains tax. Is the IT departmentcorrect in seeking to lift corporate veil.

(Hint: Yes).


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CHAPTER - II

FORMATION OF A COMPANY


2.1 Promotion Stage

2.2 Incorporation Stage

2.3 Raising of Capital Stage

2.4 Commencement of Business Stage

2.5 Pre-incorporation Contracts and Provisional

Four Stages of Company Formation

Relevant Sections of Companies Act, 1956: 12 to 40,146,266,303.

Promotion Stage

Incorporation Stage

Raising of Capital Stage

Commencement of Business Stage.

A private company has to pass through only two stages, namely, thepromotion stage and the incorporation stage. However the formation ofa public company involves all the four stages.

2.1 Promotion Stage

The term ‘promotion’ in the context of company formation refers tothe process by which a company is brought into existence brings acompany into existence. The promotion work is done either by a personor by a group of persons who are called promoters. It is the promoterswho conceive the idea of forming the company and it is they who take

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the necessary steps to incorporate it. After incorporating the company, they handoverthe control to its directors, who are often promoters themselves.

The promotion stage comprises of conceiving a scheme or a project, investigatingthe feasibility of the project; organizing the resources (men, material and money) andto take all necessary steps to float a company. A company provides an organisationalframework. It is a means to an end. The end/objective may be to run an industry orbusiness or to execute a project. The promoters by organizing funds, property andmanagerial ability develop and execute the project under the corporate form.

Preliminary preparations incidental to the incorporation are done in thepromotion stage. This includes-

a. Type of company:

The decision regarding the type of the company to be floated, viz., public companyor private company.

b. Selection / Approval of name of a company:

The following points should be noted in this connection:

The name should be indicative of the main object of the proposed company. Forexample the name TATA STEEL Ltd. indicates that the company is in steel business.The significance of the key or coined word(s), if any, in the proposed name(s)should be stated.

The name of the company should not be UNDESIRABLE (i.e. it should not beidentical with or too nearly resemble the name of any existing company.) Sec. 20.

Offensive name or name suggesting unlawful activity is not permissible.

The provisions of the Emblems and Names (Prevention of Improper Use) Act,1950should be kept in view. The Act prohibits the use of the words UNO, WHO,President, Prime Minister of India, Mahatma Gandhi etc

The guiding instructions of the Department of Company Affairs regarding availabilityof new names should be observed. For e.g. the word Corporation is permittedwhen authorised capital is Rs. 5 crore. The words like international, Global, Asiais permitted if the authorised capital is Rs. 1 crore


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Procedure for availability of name.

An application to the Registrar of Companies (ROC) concerned shall be madeelectronically in e-Form No 1A of the Companies (Central Government ) GeneralRules and Forms,1956.Application fee is Rs. 500.

Six names in order of preference should be submitted to afford flexibility to theRegistrar. Applicant will get SRN (Service Request Number) which can be used to tracethe status about the approval of name. If none of the names is available , further newnames may be suggested.

The ROC shall inform the approval / rejection of name within 7 days of the receiptof the application. The name approval status can also be viewed from the website ofMCA. The approved name shall remain available for adoption by the promoters for 60days from the date of intimation by the ROC. This period may, however, be extendedby the ROC.

As per section As per section As per section As per section As per section 12(1) of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or morepersons in case of Ppersons in case of Ppersons in case of Ppersons in case of Ppersons in case of Public Company or two or more persons in case of aublic Company or two or more persons in case of aublic Company or two or more persons in case of aublic Company or two or more persons in case of aublic Company or two or more persons in case of aPPPPPrivate Companyrivate Companyrivate Companyrivate Companyrivate Company, (ii) associated for lawful purpose may form an, (ii) associated for lawful purpose may form an, (ii) associated for lawful purpose may form an, (ii) associated for lawful purpose may form an, (ii) associated for lawful purpose may form anincorporated companyincorporated companyincorporated companyincorporated companyincorporated company, (iii) by subscribing their names to Memorandum, (iii) by subscribing their names to Memorandum, (iii) by subscribing their names to Memorandum, (iii) by subscribing their names to Memorandum, (iii) by subscribing their names to Memorandumof Association and (iv) otherwise complying with requirements of theof Association and (iv) otherwise complying with requirements of theof Association and (iv) otherwise complying with requirements of theof Association and (iv) otherwise complying with requirements of theof Association and (iv) otherwise complying with requirements of theCompanies Act in respect of registration.Companies Act in respect of registration.Companies Act in respect of registration.Companies Act in respect of registration.Companies Act in respect of registration.

Conversion of Proprietorship / Partnership into Company: It is possible toIt is possible toIt is possible toIt is possible toIt is possible toconvert a Pconvert a Pconvert a Pconvert a Pconvert a Proprietorship concern or Proprietorship concern or Proprietorship concern or Proprietorship concern or Proprietorship concern or Partnership concern into a companyartnership concern into a companyartnership concern into a companyartnership concern into a companyartnership concern into a company.....As per Section 47 of the Income TAs per Section 47 of the Income TAs per Section 47 of the Income TAs per Section 47 of the Income TAs per Section 47 of the Income Tax Act, such conversion will not attractax Act, such conversion will not attractax Act, such conversion will not attractax Act, such conversion will not attractax Act, such conversion will not attractcapital gains if all assets and liabilities of proprietary concern / partnershipcapital gains if all assets and liabilities of proprietary concern / partnershipcapital gains if all assets and liabilities of proprietary concern / partnershipcapital gains if all assets and liabilities of proprietary concern / partnershipcapital gains if all assets and liabilities of proprietary concern / partnershipfirm are transferred into a company and proprietor/ partners holds atleastfirm are transferred into a company and proprietor/ partners holds atleastfirm are transferred into a company and proprietor/ partners holds atleastfirm are transferred into a company and proprietor/ partners holds atleastfirm are transferred into a company and proprietor/ partners holds atleast50% shares in new company50% shares in new company50% shares in new company50% shares in new company50% shares in new company. The consideration for transfer should be. The consideration for transfer should be. The consideration for transfer should be. The consideration for transfer should be. The consideration for transfer should bereceived in shares onlyreceived in shares onlyreceived in shares onlyreceived in shares onlyreceived in shares only.....

A Co-operative Society can also be converted into a Producer company :Under PUnder PUnder PUnder PUnder Part IXart IXart IXart IXart IX-----A, a Multi State CoA, a Multi State CoA, a Multi State CoA, a Multi State CoA, a Multi State Co-----operative society can be converted intooperative society can be converted intooperative society can be converted intooperative society can be converted intooperative society can be converted intoa Pa Pa Pa Pa Producer Companyroducer Companyroducer Companyroducer Companyroducer Company.....

c. Preparation of Memorandum and Articles of Association.

The memorandum defines the nature and objects of the company. It constitutes thecharter of the company. The promoters have to take special care while drafting the


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object clause. In case of object oriented names like Nagpur Coolers Ltd., the mainobject should constitute only that objects (like coolers in case of Nagpur CoolersLtd.),while in case of non-object oriented names (like Tata Sons Limited)there is norestriction as to the number of main objects. The objects specified in the Memorandumof Association should be those specified against column 5 of Form IA. Particular attentionshould be given to see that the following objects/powers are included: a) making loans,b) borrowing power c) making investments, d) donations, e) amalgamation with anothercompany.

Likewise, the articles of association, containing the rules and regulations relating tothe internal management of the company have also to be prepared. A public companylimited by shares may have articles or alternatively adopt the articles given Table A ofSchedule I to the Companies Act,1956.As per section 26 registration of articles isnecessary in the case of the following companies: a) Unlimited company ; b)a companylimited by guarantee c) a private limited company limited by shares.

Who is a Promoter?

The person who initiates promotion of a company is known as ‘the promoter‘.The Companies Act, 1956 does not define a promoter. “The term promoter”,said Bowen, L.J., in Whaley Bridge Calico Printing Co. v. Green and Smith,(1880) 5 Q.B.D. 109, “is a term not of law but of business usually summingup in a single word a number of business operations familiar to thecommercial world by which a company is generally brought into existence”.Whether a person is a promoter or not in a particular case, depends on thefacts and circumstances having regard to the person’s action and hisrelationship to the company that is formed. Any one who assists in theformation for consideration payable if the company is floated is a ‘promoter’.

Duties:Duties:Duties:Duties:Duties: The Companies Act, contains no provisions regarding the duties ofpromoters, it merely imposes liability on promoters for untrue statements inprospectus and for fraudulent trading.

Until a company is formed the promoter stands in a fiduciary capacity towardsthe company and it’s prospective shareholders. The two fiduciary duties ofpromoter are

i) Not to make any secret profit out of promotion and


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ii) To disclose to the company any interest, which he has in, a transactionentered into by it.

What is important is proper disclosure and full transparency. The companiesact, does not prohibit making of any profit by any promoter, provided it isproperly disclosed. Disclosure may be made either to an independent boardor by means of a prospectus to the prospective shareholder.

2.2 Incorporation Stage

Section 12, which states the mode of forming an incorporated company, enablesany seven persons (two for private company)to associate for any lawful purpose and toget themselves incorporated into a company with or without limited liability. They cando so by subscribing their names to a memorandum of association and by complyingwith other requirements.

To obtain the registration of a company an application has to be filed with theRegistrar of Companies of the State in which the company is proposed to be incorporated,along with the requisite documents, and the prescribed registration and filing fees.(Sec33).The documents to be filed with the Registrar are:

1. Memorandum of AssociationMemorandum of AssociationMemorandum of AssociationMemorandum of AssociationMemorandum of Association duly signed by the minimum number of subscribers,stamped and witnessed.

2. Articles of AssociationArticles of AssociationArticles of AssociationArticles of AssociationArticles of Association, which should be similarly signed, stamped and witnessed.

3. A Statutory DeclarationA Statutory DeclarationA Statutory DeclarationA Statutory DeclarationA Statutory Declaration stating that all the provisions of Companies Act, 1956with regard to registration have been complied with. Section 33(2). The declarationshould be in eFeFeFeFeForm No 1orm No 1orm No 1orm No 1orm No 1 on a non-judicial stamp paper of appropriate value.(Rs100/ in Maharashtra). Alternatively, non-juducial special adhesive stamps maybe affixed to the declaration.

4. The particulars of DirectorsThe particulars of DirectorsThe particulars of DirectorsThe particulars of DirectorsThe particulars of Directors, Manager, etc., in eFeFeFeFeForm No. 32orm No. 32orm No. 32orm No. 32orm No. 32. This Form 32 canbe filed either at the time of registration of a company or within 30 days ofincorporation. Together with Form 32 one passport size colour photograph isrequired to be submitted.

5. Notice of registeredNotice of registeredNotice of registeredNotice of registeredNotice of registered address of the company in eFeFeFeFeForm No. 18orm No. 18orm No. 18orm No. 18orm No. 18 This Form 18 canbe filed either at the time of registration of a company or within 30 days ofincorporation.


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6. PPPPPower of attorneyower of attorneyower of attorneyower of attorneyower of attorney signed by all the subscribers, authorising one or more personsto act as their representative (s) to make amendments and/or alterations inmemorandum and articles of association and other forms and papers file beforeROC, for incorporation and also to collect the certificate of incorporation.

7. Consent to act as directorConsent to act as directorConsent to act as directorConsent to act as directorConsent to act as director. In case of both public and private company consentletter is required from all those persons who have agreed to act as directors.

8. Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) This number has to be procured by theproposed directors from Ministry of Corporate Affairs and mention the number inForm 32.

How to obtain DIN ?

Apply online for obtaining provisional DIN.

Take the print of the DIN 1 form and

Affix photograph and take the signature and get it certified by the CS/CA.

Attach the address proof (like telephone bill, passport, driving license etc.)and Identity proof (pan card, driving license, passport etc) duly attested. Andpay Rs100

Send these documents to the DIN Cell , Ministry of Corporate Affairs, Noida.

For registering a private / public company the above documents are required. The The The The Thedocuments are to be submitted electronically as scanned attachment to edocuments are to be submitted electronically as scanned attachment to edocuments are to be submitted electronically as scanned attachment to edocuments are to be submitted electronically as scanned attachment to edocuments are to be submitted electronically as scanned attachment to e-F-F-F-F-Form no 1.orm no 1.orm no 1.orm no 1.orm no 1.After submission, a SRN (Service RAfter submission, a SRN (Service RAfter submission, a SRN (Service RAfter submission, a SRN (Service RAfter submission, a SRN (Service Request Number) will be generated by the system.equest Number) will be generated by the system.equest Number) will be generated by the system.equest Number) will be generated by the system.equest Number) will be generated by the system.

Documents which are also required to be submitted in physical form to ROC areM/A; A/A; POA; Consent letters; e-Form 1( first page).

FFFFFiling of documents for registration: iling of documents for registration: iling of documents for registration: iling of documents for registration: iling of documents for registration: The above-mentioned documents are filedalong with the prescribed fees with the Registrar of Companies of the State in which thecompany is proposed to be incorporated. The amount of Registration Fees to be paidby the company varies with the amount of authorised capital and is given in ScheduleX to the Companies Act. The fees are payable electronically or by challan generated bythe system. Stamp Duty to be paid on documents viz. Memorandum & Articles are asper the relevant State Laws on stamp duty.

Certificate of incorporation:Certificate of incorporation:Certificate of incorporation:Certificate of incorporation:Certificate of incorporation: After scrutinizing the documents and on being satisfiedthat they are in order, the R.O.C. issues the certificate of incorporation. The certificate


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of incorporation is conclusiveis conclusiveis conclusiveis conclusiveis conclusive as to all the requirements of the Act with respect toregistration and matters precedent and incidental thereto having been duly compliedwith. (Specimen certificate of incorporation is given in Annexure 1Annexure 1Annexure 1Annexure 1Annexure 1)

Effect of Certificate of Incorporation:Effect of Certificate of Incorporation:Effect of Certificate of Incorporation:Effect of Certificate of Incorporation:Effect of Certificate of Incorporation: Section 34Section 34Section 34Section 34Section 34. : When a company is registeredand a certificate of incorporation is issued by the Registrar, three important consequencesfollow:-

1. The company becomes a distinct legal entitydistinct legal entitydistinct legal entitydistinct legal entitydistinct legal entity. Its life commences from the datementioned in the certificate of incorporation.

2. It becomes a body corporate and it acquires a perpetual successionperpetual successionperpetual successionperpetual successionperpetual succession and a commona commona commona commona commonsealsealsealsealseal.

3. It is capable of suing and be sued in its corporate name .

4. Its property is not the property of the shareholders. The shareholders have a rightto share in the profits of the company when realised and divided. Likewise anyliability of the company is not the liability of individual shareholders.

Conclusiveness of the Certificate of Incorporation:Conclusiveness of the Certificate of Incorporation:Conclusiveness of the Certificate of Incorporation:Conclusiveness of the Certificate of Incorporation:Conclusiveness of the Certificate of Incorporation: Section 35Section 35Section 35Section 35Section 35 - The Certificate ofIncorporation is conclusive evidence that

A) The requirements of the Companies Act have been complied with and thateverything is in order as regards registration.

B) The association is a company authorised to be registered and duly registeredunder the Companies Act

THE TERM CONCLUSIVE EVIDENCE means that no one can question the regularityof the incorporation once a certificate of incorporation has been granted .After, thecertificate of incorporation is issued,it cannot be challenged in any court on any groundswhat so ever .

2.3 Raising of Capital Stage

When a public company has been incorporated, it is ready for floatation; that is tosay, it can go ahead with raising capital sufficient to commence business. A privatecompany is prohibited from inviting public to subscribe to its share capital and it cancommence business immediately after getting Certificate of Incorporation.

A public company, in actual practice, does not immediately issue prospectus toraise the capital from the public. Normally, the prospectus is issued at a later stagewhen the resources are required to implement the project or for running the business.


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Section 70 makes it obligatory for every public company to take either of the followingsteps:

1. Issue of a prospectus in case public is to be invited to subscribe to its capital or

2. Deliver a statement in lieu of prospectusstatement in lieu of prospectusstatement in lieu of prospectusstatement in lieu of prospectusstatement in lieu of prospectus where the company has either notissued a prospectus or though it has issued a prospectus it has not proceeded toallot any of the shares offered to the public for subscription.

Generally second procedure is followed.

2.4 Commencement of Business Stage

In order to commence its business and exercise its borrowing powers a publiccompany must procure a certificate called the certificate to commence business. Inorder to obtain this certificate the company must comply with the provision of Section149 of the Companies Act.

In the case of a companyIn the case of a companyIn the case of a companyIn the case of a companyIn the case of a company, which has issued a prospectus, the R, which has issued a prospectus, the R, which has issued a prospectus, the R, which has issued a prospectus, the R, which has issued a prospectus, the Registrar will grantegistrar will grantegistrar will grantegistrar will grantegistrar will grantthe certificate only when:the certificate only when:the certificate only when:the certificate only when:the certificate only when:

a. the minimum subscription has been allotted.

b. the directors have taken up and paid for their qualification shares.

c. no money is repayable to the applicants by reason of failure to obtain stockexchange recognition for the shares, when such recognition was promised.

d. a statutory declaration of compliance signed by the Directors or the Secretary inthe prescribed form. (e(e(e(e(e-F-F-F-F-Form No. 19)orm No. 19)orm No. 19)orm No. 19)orm No. 19) the clauses (a), (b) and (c) mentionedabove have been complied with.

Where the company has not issued a prospectus, section 149(2) requires that itshall not commence business unless:

a. it has filed with Registrar a statement in lieu of prospectus.

b. the directors have taken up and paid for their qualification shares.

c. there has been filed with the Registrar, a duly verified declaration by one of thedirectors or the secretary in the prescribed form (e(e(e(e(e-F-F-F-F-Form no. 20orm no. 20orm no. 20orm no. 20orm no. 20) that clause (b)stated above has been complied.

When the company has complied with aforesaid conditions, the ROC will issue acertificate to commence business. (Specimen certificate of commencement of businessAnnexure 2Annexure 2Annexure 2Annexure 2Annexure 2)


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PPPPPenaltyenaltyenaltyenaltyenalty: : : : : If any public company having share capital commences business or exerciseborrowing power without obtaining the certificate to commence business, then everyperson at fault shall be liable to a fine which may extend to Rs. 500 for every day ofdefault.

Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN). To uniquely identify every company registeredwith the ROC a new investor friendly CIN has been introduced w.e.f. 1st November2000. For details see Annexure 3Annexure 3Annexure 3Annexure 3Annexure 3.

2.5 Pre-incorporation Contract and Provisional Contract

PPPPPrerererere-incorporation contract: -incorporation contract: -incorporation contract: -incorporation contract: -incorporation contract: Contracts made on behalf of a company before it isincorporated is called pre-incorporation contract. Contracts prior to incorporation arevoid unless the company adopts the same after incorporation and the contract iswarranted by the terms of incorporation. (section 15 & 19 Specific Relief Act, 1963).

Section 15(h) of the Specific Relief Act, 1963 provides that where the promoters ofa public company have made a contract before its incorporation for the purpose of thecompany, and if the contract is warranted by the terms of its incorporationif the contract is warranted by the terms of its incorporationif the contract is warranted by the terms of its incorporationif the contract is warranted by the terms of its incorporationif the contract is warranted by the terms of its incorporation, the companymay enforce it. “Warranted by the terms of incorporation” means within the scope ofthe company’s objects as stated in the memorandum.

Section 19 of the Specific Relief Act also allows the other party to enforce thecontract against the company of, (i) the company had adopted the same afterincorporation, and (ii) the contract is warranted by the terms of incorporation. Contractslike preparation and printing of the memorandum, and articles, remunerating theprofessionals, if any, for securing the registration of the company, renting premises,hiring secretarial staff are envisaged under the Act.

Provisional Contracts

A contract made by a public company after incorporation but before it is entitled tocommence business is provisional and is not binding on the company. But as soon asthe certificate to commence business is obtained the contract becomes bindingautomatically [Section 149 (4)].

If, therefore, a public company is wounds up before it is entitled to commencebusiness the persons who have rendered services or supplied goods or materials to thecompany can have no claim against it [In Re. Electrical Manufacturing Co., (1906) 2Ch. 390] :


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Annexure-1

Specimen certificate of incorporation


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Annexure-2

Certificate of Commencement of Business


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Annexure-3

Corporate Identity Number (C I N )

A new investor friendly Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN)Corporate Identity Number (CIN) is being introduced touniquely identify every company registered with the Registrar of Companies w.e.f. 1st

Nov 2000. Currently, the present registration number assigned to a company does notreflect the activity or the State or ownership of the company. The CIN assigned to acompany indicates the following:

Listing status

Economic activity (industry)

State

Year of incorporation

Ownership

Sequential Number assigned by ROCs

The CIN is explained schematically below:

U 855110 MH 2000 PTC 130151 1 2 3 4 5 6

This the Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) allotted to POORVI ENTERPRISES PRIVATELIMITED registered with RoC Maharashtra on 20/12/2000. The Corporate IdentityCorporate IdentityCorporate IdentityCorporate IdentityCorporate IdentityNumber (CIN)Number (CIN)Number (CIN)Number (CIN)Number (CIN) can be explained as follows:

Step 1: First place in CIN represents the listing status of a company. The listingstatus code is represented by an alphabet. If company is listed, then assign ‘L’; otherwiseassign ‘U’ for unlisted company.

Step 2: The next five places represent the economic activity of the company accordingto the standard National Industrial Classification (NIC) 98. Select the economic activitycode of the company from NIC’98 Manual and assign the code. In case, if a companyis operating in a diverse field, then assign ‘00000’ as a ‘diversified’ company. TheManual/ Document on NIC’98 can be obtained from CSO.

Step 3: The next two places represents the state in which the company’s registeredoffice is located. All States are represented by a two-alphabet code.


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Step 4: The next four places represent the year of incorporation of the company.Assign the year of incorporation of a company in ‘YYYY’ format. Example, if a companyis incorporated on 20 December, 2000. Then assign 2000 as year of incorporation.

Step 5: The next three places represent the ownership of a company. Whether thecompany is Union Government company or State Government company, private limitedor public limited company. Ownership code is represented by three alphabet code.

The list of code with their description is presented in Annexure I to this note. Assignthe ownership code from the list presented in below.

CodesCodesCodesCodesCodes OwnershipOwnershipOwnershipOwnershipOwnership

GOI Union Government company

SGC State Government company

PLC Public limited Indian non-Government company

PTC Private limited Indian non-Government company

FLC Public limited foreign company incorporated in India

FTC Private limited foreign company incorporated in India

ULL Unlimited liabilities public

ULT Unlimited liabilities private

GAP Guarantee and association public

GAT Guarantee and association private

NPL Section 25 company

Step 6: The last six places represents the unique sequential number assigned toevery company by the concerned RoCs office of the State. This unique six digit sequentialnumber is assigned by the respective RoCs.

Note that there is no space, hyphen, oblique sign, etc. between the various codecomponents.


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QUESTION BANK

I. FAQs’

1. Who is a Prmoter. ? what is Promotion stage?

2. What are the consequences that follow when a company is registered and acertificate of incorporation is issued by the Registrar.

3. What documents are required to be filed with the Registrar of Companies underthe provisions of the Companies Act, 1956, prior to incorporation of a company?

4. State the conditions to be satisfied, by a public company for obtaining Certificateto commence business.

5. What is the meaning of “Certificate of Incorporation”? When may a public companycommence business?

6. What is meant by Promoter? Explain in brief the position of a promoter.

7. State the usual steps to be taken in the formation of a company under theCompanies Act, 1956.

8. Comment on a) “A certificate of incorporation is conclusive evidence that all therequirements of the Companies Act, 1956 have been complied with”. b) “A publiccompany cannot commence business immediately after incorporation.”

9. Explain the meaning of ‘Pre-Incorporation Contract’. Is the company bound bysuch contract? How do such contracts differ from ‘provisional contracts’?

10. State the circumstances under which a company can be incorporated withoutusing the word “Limited or Private Ltd. “ at the end of its name.

11. What is ‘CIN’?

12. Write Short Notes on

i) Consequences of incorporation of a company.

(ii) Promoter and his role in the incorporation of a company.

II. CASE STUDIES

1. Though six, out of the seven signatories to the Memorandum of Association wereforged, the company was registered and the Certificate of Incorporation issued.Can the registration of the company be challenged subsequently on the groundof forged signatures?


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(Hints: No; Registration cannot be challenged. Section 35 declares that a Certificateof Incorporation once issued is conclusive with respect to every thing prior thereto).

2. Registrar of Companies issued a Certificate of Incorporation actually on 8th January,2008. However, by mistake, the certificate was dated 5th January. The allotmentof shares was made on 7th January. Could the allotment declared void?

(Hints: No; Certificate of Incorporation being conclusive with respect to everythingcontained therein, the company is deemed to have been incorporated on 5th

January)

3. XYZ Co. Ltd. was in the process of incorporation. Promoters of the companysigned an agreement for the purchase of certain furniture for the company andpayment was to be made to the suppliers of furniture by the company afterincorporation. The company was incorporated and the furniture was used by it.Shortly after incorporation, the company went into liquidation and the debt couldnot be paid by the company for the purchase of above furniture. As a resultsuppliers sued the promoters of the company for the recovery of money. Examinewhether promoters can be held liable for payment under the following situations:(i) When the company has already adopted the contract after incorporation? (ii)When the company makes a fresh contract with the suppliers in terms of pre-incorporation contract?

(Hint: If the pre-incorporation contract is adopted by the company after itsincorporation and if it is within the terms of incorporation, the other party canenforce the contract against the company. In such a case, promoters will not beliable.)

4. The promoters of your company, incorporated on 9th April, 2008, had enteredinto contract with ‘M’ on 8th March, 2008 for supply of goods. After incorporation,your company does not want to proceed with the contract. Advise the managementof your company.

(Hints: Unless the company adopts the contract, the other party cannot enforcethe same against the company. However, promoters can be held personally liable.)

5. Mr. A prepared the necessary documents, incurred all fees and expenses andregistered a company as per the instructions of the promoters. From whom canhe recover the amount spent?

(Hints: From the promoters)


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CHAPTER - III

MEMORANDUM OF ASSOCIATIONS


3.1 Meaning and Definition

3.2 Purpose of Memorandum of Association.

3.3 Form of Memorandum of Association

3.4 Contents of Memorandum

3.5 Doctrine of Ultra Vires

3.6 Alteration of Memorandum

3.1 Meaning and Definition

The Memorandum of Association is a document of great importance.It contains the basic conditions on the strength of which a company isincorporated, namely, the name of the company, the place of its registeredoffice, the objects within which it can operate, the nature of liability of itsmembers and capital structure. Having regard to these basic conditions,it has also been described as the charter or constitution of the companythe charter or constitution of the companythe charter or constitution of the companythe charter or constitution of the companythe charter or constitution of the company.It defines as well as confines the powers of the companydefines as well as confines the powers of the companydefines as well as confines the powers of the companydefines as well as confines the powers of the companydefines as well as confines the powers of the company. It states whatthe company can do, what are its powers and at the same time sets outthe limit outside which the company cannot function. It also regulatesthe affairs of the company in relation to the outsiders.

DefinitionDefinitionDefinitionDefinitionDefinition: : : : : According to sec. 2(28) of the Companies Act,memorandum of association means “the memorandum of associationof a company as originally framed or as altered from time to time”. Thisdefinition is not satisfactory, as it does not tell us what a memorandum ofassociation is. We can define memorandum of association as the basicdocument of a company. It states positively the range of activitiesrange of activitiesrange of activitiesrange of activitiesrange of activities of the

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company and what the company can do and it also states negatively the limitation ofthe powers of a company i.e., what the company cannot do.

3.2 Purpose

The purpose of memorandum is two-fold: First, to enable the prospective investorsto know the purpose for which their money is going to be used and what risk they aretaking in making the investment. The second, to inform the outsiders dealing with thecompany as to what is its permitted range of activities in which it may lawfully engage.

PPPPPublic document : ublic document : ublic document : ublic document : ublic document : The memorandum of association is a public document, whichcan be inspected by anybody at the Office of the Registrar of Companies(Section 610).Every person dealing with the company is presumed to have sufficient knowledge of itscontents. Thus, memorandum helps in regulating the external affairs of the company inrelation to the outsiders. Outsiders after reading the contents of memorandum canknow whether the contract, which they wish to make, is within the object of the company.

3.3 Form of Memorandum of Association

As per section 15 of the Companies Act, the memorandum of association shouldbe

a) printed,

b) divided into paragraphs numbered consecutively and,

c) signed by seven (two in case of a private company) subscribers in the presence ofat least one witness.

Section 14 of the Companies Act provides that the memorandum of associationshould be in any one of the four model forms which are specified in Tables B, C, D, Eof Schedule I. They relate to the following four types of companies.

Table B is applicable to company limited by shares.

Table C is applicable to company limited by guarantee and not having a sharecapital.

Table D is applicable to company limited by guarantee and having a share capital.

Table E is applicable to unlimited company.


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The memorandum of association should be as per the model forms as may beapplicable in the case of the company.

3.4 Contents of Memorandum

The basic conditions, which the memorandum of association should state, as persection 13 are as follows:-

A. Name Clause:Name Clause:Name Clause:Name Clause:Name Clause: This clause states the name of the company. The name of acompany establishes its identity and is the symbol of its existence. The followingpoints should be noted in connection with the name clause.

FFFFFirstlyirstlyirstlyirstlyirstly,,,,, the name of the company should not be undesirable. That is to say itshould not be similar to the name of another company and it should not bemisleading. (For example one cannot form a company by the name of New BajajAuto Ltd. as it resembles the name of an existing company Bajaj Auto Ltd.).

SecondlySecondlySecondlySecondlySecondly..... The name of a company must end with the word ‘limited’ if it is a publiclimited company or with the words ‘private company’ if it is a private limitedcompany. This enables the outsiders to know which type of company it is; whetherpublic limited or private limited. However ‘companies not for profit’ (to promotescience, art, commerce, etc.) are permitted by the Central Government to dropthe word ‘limited’ from its name.

Every company is required to paint or affix its name and address of its registeredoffice outside of every office or place of business in a conspicuous position and inletters which are easily legible and in the language in general use in the locality.

B. Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): The second clauseof the memorandum specifies the State in which the registered office of the companyis to be situated. It is not necessary to give the exact address of the registeredoffice in the situation clause. The companies are required to communicate to theRegistrar within 30 days of the date of incorporation, the complete address of theregistered office. (e-form no 18)

Registered office is the permanent address of the company. All the communicationsand notices to the company must be addressed to its registered office (Sec. 51).The various registers, books and other records of the company are kept here(Sec. 163). Jurisdiction of High Court, Company Court, Registrar of Companiesis decided on the basis of registered office of the company.


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C. Object Clause:Object Clause:Object Clause:Object Clause:Object Clause: The third clause in the memorandum of association states theobjects of the company. It is the most important clause since it defines the area ofoperations of the company. A company can engage itself in only those types ofbusiness which are expressly included in the objects clause or which are incidentalto the main objects. It cannot carry on any other business or activity, which isbeyond the objects clause. Any act done beyond the powers of the company isultra vires and is void (i.e., it is has no legal effect).

The objects clause of the memorandum of association of a company is split up asfollows:

i) main objects of the company,

ii) objects incidental or ancillary to the attainment of main objects.

iii) other objects not included in (a) and (b) above.

Apart from the powers expressly provided in the objects clause, a trading companyalso has some implied powers such as the power to borrow money, draw and acceptbills of exchange etc. Moreover, the objects of the company must not be illegal, oragainst the public policy.

D. Liability Clause: Liability Clause: Liability Clause: Liability Clause: Liability Clause: The liability clause states the nature of liability of the members.The memorandum of a company limited by shares must state that the liability islimited. This means that the members’ liability is limited to the face value ofshares. In the case of a guarantee company, this clause shall state the amount,which each member undertakes to contribute to the assets of the company in theevent of being wound up.

SPECIMEN OF MEMORANDUM OF ASSOCIASPECIMEN OF MEMORANDUM OF ASSOCIASPECIMEN OF MEMORANDUM OF ASSOCIASPECIMEN OF MEMORANDUM OF ASSOCIASPECIMEN OF MEMORANDUM OF ASSOCIATION OF A COMPTION OF A COMPTION OF A COMPTION OF A COMPTION OF A COMPANYANYANYANYANYLIMITED BLIMITED BLIMITED BLIMITED BLIMITED BY SHARESY SHARESY SHARESY SHARESY SHARES

I . NAME CLAUSE The name of the company is “UTKARSH BUILDERS PRIVATELIMITED”.

II. SITUATION CLAUSE The Registered office of the company will be situatedin the State of Maharashtra.

III. OBJECTS CLAUSE The objects for which the company’ is establishedare:


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A. MAIN OBJECT OF THE COMPANY TO BE PURSUED BY THE COMPANYON ITS INCORPORATION:To carry on the business of builders, contractors,directors, to purchase for investment of resale, houses, lands, real propertyand generally to deal in, sell, lease, exchange, or otherwise deal property,whether real or personal.

B. OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THEMAIN OBJECT:C. OTHER OBJECTS:

IV. LIABILITY CLAUSE The liability of members is limited.

V. CAPITAL CLAUSE The authorised Share Central of the company isRs.10,00,000/- (Rupees ten lacs only) divided into 1,00 ,000 (one lac)Equity Shares of Rs. 10/- (Rupees ten only) each.

VI. SUBSCRIPTION CLAUSE We, the several persons whose names andaddresses are subscribed, are desirous of being formed into a company inpursuance of this memorandum of association, and we respectively agreeto take the number of shares in the capital of the company set opposite ourrespective names.

Names, addresses, description and Number of shares taken by eachsubscriber. Witness of the signatures

occupation of subscribers.

1. A.B. of (Place) Merchant 100 Name, address, description 2. C.D. of ———— Industrialist 100 and occupation of witness.

3. E.F. of ———— Merchant 100 signature of witness.Total shares taken300 ———

Dated at Nagpur this 1st day of Jan, 2008.

E. The Capital Clause:The Capital Clause:The Capital Clause:The Capital Clause:The Capital Clause: This clause states the amount of share capital with which thecompany is to be registered and its subdivision into shares of fixed amounts. Theshare capital so stated in the memorandum is usually called the authorised ornominal capital of the company. The authorised capital is the maximum limitshare capital which a company is authorised to raise. If it wants to raise sharecapital in excess of the limit so set it will have to alter the capital clause.


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After the passing of the Companies (Amendment) Act 2000, the definitions ofpublic and private companies have been modified with reference to the paid-upcapital. Hence, in case of a private company it must be mentioned that thesubscribed and paid-up capital is minimum rupees 1 lac and in case of publiccompany it is rupees 5 lac.

F. Subscription Clause:Subscription Clause:Subscription Clause:Subscription Clause:Subscription Clause: The memorandum concludes with this clause. It contains adeclaration by the subscribers to the memorandum that they are desirous of formingthemselves into a company and that they agree to take up shares stated againsttheir names. Each subscriber must take atleast one share. There must be atleastseven subscribers in the case of public company and atleast two in the case of aprivate company. The signature of each subscriber must be attested by atleastone witness who is not a subscriber.

The Statutory requirements regarding Subscription of Memorandum Are:-

a) the memorandum must be signed by each subscriber in the presence of at leastone witness who must attest the signature;

b) each subscriber must take at least one share;

c) each subscriber must write opposite his name the number of shares he takes [Sec.13(4)(c)]

3.5 Doctrine of Ultra Vires

The word ‘ultra’ means beyond and the word ‘vires’ means the powers. Ultra vires,therefore, means beyond the powers. Any act beyond the objects stated in thememorandum is ultra vires the company and thus void.

To be ultra vires, a transaction has to be outside the capacity of the company. Itdoes not bind the company. Neither the company nor the other contracting party cansue on it. It is absolutely void. The company cannot make it valid, even if every memberapproves it.

The rule is meant to protect shareholders and the creditors of the company. But ifthe act is ultra vires (beyond the powers of) the directors only, the shareholders canratify it. Or if it is ultra vires the articles of association, the company can alter its articlesin the proper way.


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The doctrine of ultra vires was laid down in the case of Ashbury RlyAshbury RlyAshbury RlyAshbury RlyAshbury Rly. Carriage & Iron. Carriage & Iron. Carriage & Iron. Carriage & Iron. Carriage & IronCompany VCompany VCompany VCompany VCompany V. Riche. Riche. Riche. Riche. Riche (1875). LR 7 HL 653. In this case the company was formed “to makeand sell, or lend or hire, railways carriages and wagons and to carry on the business ofthe mechanical engineers and general contractors”. The directors of the companyentered into contract with Riche for financing the construction of a railway line in Belgium.The company subsequently ratified the act of directors by passing a special resolutionat a general meeting. Later, the company repudiated the contract on the ground that itwas ultra vires. Riche filed a suit against the company for breach of contract and claimeddamages.

The House of Lords held that the contract was ultra vires the company and thereforevoid ab initio. It was further held that it can’t be made valid by ratification on the part ofthe shareholders, and so the company was not liable for breach of contract.

The doctrine has been upheld in a large number of Indian cases. (L Mudaliar vs.LIC AIR 1963 SC 1185)

This doctrine now days have been rendered to some extent ineffective due to thepractice of enumerating all objects possible under the sun in the objects clause. Section13(1)(d) of the Companies Act, 1956 now provides that the incidental or ancillary tothe main objects be stated in the memorandum.

After the Companies (Amendment) Act 1996, it is possible for a company to changeits objects clause by passing a special resolution alone. Thus, now it is possible tochange the objects clause without approaching Company Law Board and the procedureof amending the objects clause is relatively easy. (In England, the doctrine of ultra vireshas been diluted and rendered irrelevant by the English Companies (Amendment) Act,1989 and a contract entered on behalf of the company, is now binding against thecompany in England even if it is beyond the powers of the company).

Under section 149 a public company can commence business under “other objects”by passing a special resolution.

Effects of Ultra Vires transactions:

i) Ultra vires contracts are void ab initio. They do not have any legal effect and arenot binding on the company.

ii) Injunction: The members can get an injunction to restrain the company whereinultra vires act has been or is about to be undertaken [Attorney General v. Gr.Eastern Rly. Co., (1880) 5 A.C. 473].


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iii) Personal liability of Director: It is one of the duties of directors to ensure that thecorporate capital is used only for the legitimate business of the company andhence if such capital is diverted to purposes other than the company’s objectives(ultra vires) the director will be personally liable.

iv) Where a company’s money has been used ultra vires to acquire some propertythe company’s right over such property is held secure.

v) Ultra vires borrowing does not create the relationship of creditor and debtor.

vi) Ultra vires act cannot be ratified by the members.

3.6 Alteration of Memorandum of Association

The contents of a memorandum can be altered only in the manner and to theextent provided in the Companies Act. (Section 16)

I. Change of name:

Section 21 provides that the name of a company may be changed at any time bypassing a special resolution at a general meeting of the company and with the writtenapproval of the Central Government

The powers of the Central Government to accord approval to change of namehave now been delegated to Rdelegated to Rdelegated to Rdelegated to Rdelegated to Registrar of Companies (ROC)egistrar of Companies (ROC)egistrar of Companies (ROC)egistrar of Companies (ROC)egistrar of Companies (ROC) w.e.f. 1.7.85. For changingthe name, the company is required to apply to ROC in FORM 1A to ascertain theavailability of name.

However, no approval of the Central Government is necessary if the change ofname involves only the addition or deletion of the word “private” (i.e., when publiccompany is converted into a private company or vice versa).

The Registrar will enter the new name on the Register in place of the old name andshall issue a fresh certificate of incorporation with necessary alterations [Sec. 23(1)].

The change of name becomes effective on the issue of fresh certificate ofincorporation.

Effect of change of name : : : : : The change of name shall not affect any rights/obligationsof the company or render the same defective in legal proceedings by or against it.


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II. Change of Registered Office

Change of Registered Office

IIa. Within the same city

IIb. Within the same State

(i) Within the jurisdiction of the existing RoC in the same State.

(ii) Within the jurisdiction of another RoC in the same State

IIc. From one State to another State

IIa. Change of registered office from one Premises to another Premises in theSame City, Town or Village. (Sec. 146 )

A company can change its registered office from one place to another within thelocal limits of the city, town or village where it is situated, by passing a resolution in themeeting of Board of Directors. However, notice of the change should, within 30 days ofthe change, be given to the Registrar who shall record the same. The notice shall begiven in e-Form No. 18.

II b(i). Change of registered office from one town to another town and within thejurisdiction of existing RoC in the same State.

In this case, the following procedure is to be followed:

i) a special resolution is required to be passed at a general meeting of theshareholders;

ii) a copy of it is to be filed with the Registrar within 30 days of the passing of specialresolution in e-Form No. 23;

iii) within 30 days of the shifting of the registered office, the notice of the new locationhas to be given to the Registrar in e-Form no. 18, who shall record the same.

II b(ii). Change of registered office from one town to another town in the samestate and within the jurisdiction of another RoC. [Sec. 17a].

Procedure

If a company wants to change the place of its registered office from jurisdiction ofone RoC to jurisdiction of another RoC within the same State, it needs to go through thefollowing procedure:


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Special Resolution: The company will convene the General Meeting for approvingthe change in the Registered office from jurisdiction of one RoC to jurisdiction ofanother RoC within the same State.

Obtain confirmation from Regional Director: The company will make an applicationin the prescribed form (1 AD) to the Regional Director for confirmation. Theconfirmation or otherwise shall be communicated to the company within fourweeks from the date of receipt of application for such change.

Filing of confirmation with RoC. After the confirmation by the Regional Director,the company will file the certified copy of the confirmation, within two months tothe Registrar under whose jurisdiction the registered office is being shifted, togetherwith a printed copy of the memorandum as altered.

Registration: The Registrar shall register the same and certify the registration underhis hand within one month from the date of filing of such document. The certificateshall be conclusive evidence that all the requirements of this Act with respect tothe alteration and confirmation have been complied with and henceforth thememorandum as altered shall be the memorandum of the company.

IIb. Change of registered office from one state to another state -

Section 17 provides for the shift of the registered office from one State to anotherand such shift involves alteration of memorandum.

a) Grounds for shiftingGrounds for shiftingGrounds for shiftingGrounds for shiftingGrounds for shifting..... A company can shift its registered office from oneState to another for certain purposes only as specified in sec. 17(1). Theseare :

a. To carry on its business more economically and more efficiently [ Section17(1)(a)].

b. To attain its main purpose by new or improved means [ Sec.17(1)(b)]

c. To enlarge or change the local area of its operation [Sec.17(1)(c)]

d. To carry on some business which under existing circumstances may beconveniently or advantageously combined with the business of the company[Sec. 17(1)(d)]

e. To restrict or abandon any of the objects specified in the memorandum[Sec.17(1)(e)]


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f. To sell or dispose of the whole or any part of the undertaking [Sec.17(1)(f)].

g. To amalgamate with any other company or body of persons [Sec.17(1)(g)].

b) Special RSpecial RSpecial RSpecial RSpecial Resolution.esolution.esolution.esolution.esolution. Registered office of a company can be shifted from one Stateto another by passing special resolution in the general meeting of shareholders.Form 23. should be filed for registering the special resolution.

c) Confirmation by the Company LConfirmation by the Company LConfirmation by the Company LConfirmation by the Company LConfirmation by the Company Law Board*. aw Board*. aw Board*. aw Board*. aw Board*. The company should file a petitionto the Company Law Board for confirmation of the change.

d) Notice to affected parties. Notice to affected parties. Notice to affected parties. Notice to affected parties. Notice to affected parties. Before confirming the change, the Company LawBoard will satisfy itself that sufficient notice has been given to -

a) every creditor and all other persons whose interests are likely to be affectedby the alteration including

b) the Registrar of Companies and the

c) Government of the State in which the registered office is situated.

Also, the Company Law Board will give an opportunity to members and creditorsof the company, the Registrar and other persons interested in the company to be heard.

d) Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. The CLB may confirm the alterationand may impose such terms and conditions as it may deem fit .The company shallfile with Registrar of each State – (The State where it was registered and thenew state)

- A certified copy of the CLB order within three months from the date of suchorder .

- Copy of memorandum as altered.

If it is not filed within the prescribed time, then the alteration shall, at the expiry ofsuch period, become void and inoperative. However the CLB may grand extension oftime for filing upto 3 months.

- The Registrar shall register the change and give a certificate of registration withinwithinwithinwithinwithin1 month1 month1 month1 month1 month from date of filing of such documents.

A notice in e-Form no 18 of the new location of the registered office must be givento the Registrar of the State to which the office has been shifted, within thirty days afterthe change of the office (Sec. 146).


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Case Study - Case Study - Case Study - Case Study - Case Study - A company proposes to shift its registered office from Cuttack toKolkata. The government of Orissa gave objection to the Company Law Board as itwould loose huge revenue if the registered office is shifted. Can it succeed?

The contention of the Government of Orissa is not sustainable because loss ofrevenue is not a proper ground for preventing a company from shifting its registeredoffice from one State to another State.

The powers of CLB have been given to the Central Government by theCompanies (Second Amendment) Act, 2002 However the Act has not beenmade effective.

III. Change of objects.

The grounds for altering objects are the same as required for shifting of registeredoffice. For altering the objects the company is required to pass a special resolution at ameeting of the shareholders.

a) Grounds for change. Grounds for change. Grounds for change. Grounds for change. Grounds for change. A company can change its objects clause for certain purposesonly as specified in sec. 17(1). These are:

1. To carry on its business more economically and more efficiently[Section 17(1)(a)].

2. To attain its main purpose by new or improved means [ Sec.17(1)(b)]

3. To enlarge or change the local area of its operation [Sec.17(1)(c)]

4. To carry on some business which under existing circumstances may beconveniently or advantageously combined with the business of the company[Sec. 17(1)(d)]

5. To restrict or abandon any of the objects specified in the memorandum[Sec.17(1)(e)]

6. To sell or dispose of the whole or any part of the undertaking [Sec.17(1)(f)].

7. To amalgamate with any other company or body of persons [Sec.17(1)(g)].

A Board Meeting should be called to decide on the change in objects clause. In theBoard Meeting, the time and place of the general meeting should be fixed up and thenotice for calling the general meeting for alteration of objects clause should be approved.


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b) Special RSpecial RSpecial RSpecial RSpecial Resolution. esolution. esolution. esolution. esolution. The company should pass a special resolution in the generalmeeting of shareholders for changing the objects clause. Section 18 providesthat a special resolution passed by the company in relation to clauses (a) to (g) ofsub-section (1) of section 17 shall be filed by the company with the Registrarwithin one month of the date of such resolution, together with a printed copy ofthe memorandum as altered.

c) ROC to certify the RROC to certify the RROC to certify the RROC to certify the RROC to certify the Registration. egistration. egistration. egistration. egistration. The Registrar will register the documents andissue, within one month, a certificate which will be conclusive evidence that allthe requirements of the Act, with respect to the alteration of the objects clause inthe memorandum has been complied with (section 18). If the required documentsare not filed within the prescribed time, the alteration shall, at the expiry of suchperiod, become void and inoperative (Sec. 19).

Shifting of objects from “other objects” to main objects or CommencementShifting of objects from “other objects” to main objects or CommencementShifting of objects from “other objects” to main objects or CommencementShifting of objects from “other objects” to main objects or CommencementShifting of objects from “other objects” to main objects or Commencementof new business of an existing companyof new business of an existing companyof new business of an existing companyof new business of an existing companyof new business of an existing company. . . . . According to sec. 149(2A), acompany can commence any business stated under other objects only afterobtaining the prior approval of the share holders in general meeting by aspecial resolution. Where the resolution is passed with simple majority, anapplication will be made to the Central Government for its approval. Theprocedure involved is

The proposal to commence a new business should be considered andapproved by the Board.

A special resolution should be passed approving commencement ofnew business. If ordinary resolution is passed approval of Central Governmentis required.

E-Form no. 23, should be filed within 30 days of passing of the specialresolution.

A duly verified declaration signed by one of Directors or the Secretaryin Form no 20A should be filed with the ROC either within 30 days of thepassing of the special resolution or before commencement of new business,whichever is earlier.


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IV. Alteration of liability clause.

The liability of a member of a company cannot be increased unless the membersagree in writing (Sec 38).

Section 32 permits an unlimited company to register as a limited company. Onalteration, the Registrar shall close the former registration of the company and the newregistration shall take effect as if it were the first registration. The registration of anunlimited company as a limited company shall not, however, affect any debts, liabilities,obligations or contracts incurred or entered into, before the conversion.

Can the liability of the directors be made unlimited in a limited company? If thearticles of a limited company so authorize, the liability clause in its memorandum ofassociation may by a special resolution, be altered making the liability of all of itsdirectors, or of any director or manager, unlimited. Such an alteration however, shallnot affect the liability of any existing director or manager before the expiry of his presentterm of office, unless he gives his consent to making his liability unlimited (Section323).

V. Alteration of Capital Clause. (Sec. 94)

Alteration of capital clause may involve the following types of alterations -

a) Increase of authorised capital of the company, or

b) Consolidation of shares

c) Sub-division of shares into shares of smaller amount.

d) Cancellation of shares not taken or agreed to be taken by any person.

These alterations can be done by passing an ordinary resolution, if authorised bythe articles (Sec. 94).

aaaaa. Increase of authorised share capital. Increase of authorised share capital. Increase of authorised share capital. Increase of authorised share capital. Increase of authorised share capital - A company, limited by shares, if thearticles authorise, can increase its authorised share capital by passing an ordinaryresolution.

Within 30 days of the passing of the resolution, a notice in Form 5, of increase inthe share capital must be filed with the Registrar of Companies. On receipt of thenotice, the Registrar shall record the increase and also make any alterations which may


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be necessary in the company’s memorandum or articles or both. If default is made infiling the notice, the company and every officer of the company who is in default shallbe punishable with fine upto Rs. 50 per day during which the default continues (Sec.97).

b. Consolidation and subb. Consolidation and subb. Consolidation and subb. Consolidation and subb. Consolidation and sub-----division of sharesdivision of sharesdivision of sharesdivision of sharesdivision of shares - Consolidation is the process ofcombining shares of smaller denomination. For instance, 10 shares of Rs. 10 each maybe consolidated into one share of Rs. 100. Sub-division of shares is just the opposite ofconsolidation e.g., one share of Rs. 100 may be dividend into 10 shares of Rs. 10each.

Once a resolution has been passed, e-Form no. 5 which is notice of consolidation,sub-division is required to be sent within thirty days to the Registrar of Companies.

c. Conversion of shares into stock and vice versac. Conversion of shares into stock and vice versac. Conversion of shares into stock and vice versac. Conversion of shares into stock and vice versac. Conversion of shares into stock and vice versa - Section 94 empowers a companyto convert its fully paid-up shares into stock by passing a resolution in general meeting,if its articles authorise such conversion. A notice is to be filed with the Registrar withinthirty days of the passing of the resolution specifying the shares so converted.

When shares are converted into stock, the shareholders are issued stock certificates.In the Register of Members, the amount of stock is written against the name of aparticular member in place of number of shares. The stockholder is as much a memberof the company as a shareholder.

d. Diminution of share capitald. Diminution of share capitald. Diminution of share capitald. Diminution of share capitald. Diminution of share capital If the company has issued the shares for subscriptionbut are not taken up by the investors then naturally the shares cannot be allotted.Section 94(1)(e) provides that a company may, if its articles authorise, by resolution ingeneral meeting, cancel shares which have not been taken or agreed to be taken byany person and diminish the amount of the share capital by the amount of the shares socancelled. This constitutes diminution of capital and it does not amount to reduction ofcapital. It involves only reduction of authorised capital.

Reduction of share capital vs. Diminution of share capital: Section 94(3) specificallystates that diminution does not constitute a reduction within the meaning of theCompanies Act. The expression ‘diminution of share capital’ and ‘reduction of sharecapital’ differ from each other. Refer Chapter 7 for distinction.


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Procedure for alteration of capital clause

a) The articles should authorize the alteration of capital clause

b) The company must pass an ordinary resolution.

c) Notice of alteration must be given to the ROC within 30 days of alteration in e-form no. 5.

QUESTION BANK

I. FAQs’

1. Explain clearly the meaning of Memorandum of Association.

2. State the requirements which must be stated in the memorandum of association.

3. Explain the circumstances under which the object clause of the memorandum ofassociation may be altered.

4. Can a company act beyond the powers of its Memorandum of Association? If no,why?

5. Explain the doctrine of ultra vires.

6. When shall the shifting of registered office of a company require alteration ofMemorandum of Association? State the procedure for effecting such an alteration.

7. Explain the importance of registered office of a company.

8. What are the circumstances under which the alteration of objects as stated in theMemorandum of association is permissible by the Companies Act?

9. When and how can a company change its registered office from one State toanother?

10. Explain the extent to which the ‘Objects’ for which a company was incorporatedmay be amended. State the procedure, as prescribed by the Companies Act,1956, a company has to follow for giving effect to the above.

11. XY Ltd. has its registered office in Bihar. For better administrative control thecompany plans to shift its registered office from Bihar to Delhi. The Bihargovernment opposes such shifting on the ground that such transfer will causerevenue loss to the State. Discuss the validity of such opposition with reference tothe case law on the subject.


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12. Write Short Notes on:

(i) Doctrine of Ultravires (ii) Exceptions to Doctrine of Ultravires(iii) Procedure for alteration of Capital

13. ‘Doctrine of ultra vires is a dark cloud for adventurous directors and careless creditors’.Discuss the statement.

II. CASE STUDIES

1. The object clause of the Memorandum of Association of the Alphanso (Pvt.) Ltd.,New Delhi, authorised to do trading in mangoes. The company, however, enteredinto partnership with Mr. A and traded in mangoes and incurred liabilities to Mr.A. The Company, subsequently, refused to admit the liability to ‘A’ on the groundof “ultra vires the Company” Advice, whether stand of the company is legallyvalid and if so, give reasons in support of your answer

(Hints: Alphanso Pvt. Ltd. is authorised to trade directly on mangoes. It has nopower to enter into a partnership with Mr. ‘A’. Such act can never be treated as‘express’ or ‘implied’ powers of the company. Mr. ‘A’ who entered in to partnershipis deemed to be aware of the lack of powers of Alphanso (Pvt.) Ltd. Mr. ‘A’ cannotenforce the agreement or liability against Alphanso Pvt. Ltd. Mr. ‘A’ should beadvised accordingly. This conclusion is supported by the decision reported in thecase of ‘The Ganga Mata Refining Company (Pvt.) Ltd. vs. Commissioner of Income-tax reported in 1968(38) Companies Cases 117.)

The object clause of the Memorandum of a company empowers it to carry ondistillery business and any other business that is allied to it. The company wants toalter its Memorandum so as to include the cinema business in its object clause.Advise the company.

(Hints :The company has to comply with Sec.17 and pass a special resolution)

M Ltd. has its registered office at Nagpur in the State of Maharashtra. For betteradministrative convenience the company wants to shift its registered to Pune.Advice.

( Hints: Special resolution plus confirmation from Regional Director)

XYZ Ltd. wishes to shift their registered office from Hyderabad to Secundrabad.State the procedure.

(Hints: Special resolution and file Form 18).


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CHAPTER - IV

ARTICLES OF ASSOCIATION


4.1 Meaning of Articles and its relationship with memorandum

4.2 Contents of Articles of Association

4.3 Alteration of Articles

4.4 Doctrine of constructive notice

4.5 Doctrine of Indoor Management

4.6 Binding Effect of Memorandum and Articles

4.1a. Meaning

Articles of Association are another important document of a company.It contains the bye-laws or rules and regulations regarding the internalmanagement of the company. In it are found rules for the conduct of thecorporate affairs e.g., rules regarding allotment of shares, transfer andtransmission of shares, company meetings, appointment of directors,their powers, accounts and audit etc. Articles define the powers of itsofficers. They also establish a contract between the company and themembers and between members inter se.

In relation to ‘memorandum’, ‘article’ occupies a position subordinateto ‘Memorandum’. It is the memorandum that prevails in the event of aconflict between the two.

b. Relationship between Articles and Memorandum ofAssociation

Articles of association are subordinate to and controlled by thememorandum. The memorandum lays down the scope and powers of

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the company and the articles govern the ways in which the objects of the company areto be carried out.

The articles constitute a contract between the company and its members definingtheir respective rights and duties and are binding upon the members and the company.Unlike the memorandum, they have nothing to do with the outsiders. As Lord Cairnsobserves “The memorandum is the area beyond which the action of the companycannot go; inside that area the shareholders may make such regulations for their owngovernment as they think fit”.

c. Registration of Articles

It is compulsory to get the articles of association registered, along with thememorandum of association in case of

a) an unlimited company

b) a company limited by guarantee and

c) a private company limited by shares (sec 26)

Is it legally compulsory for a company to have its own A/A?

It is not compulsory for public company limited by shares to prepare and registerthe articles of association. If it does not register its own articles then all the regulationsin Table A of schedule I of Companies Act, will apply to it.

Tables A, C, D and E to Schedule I give the model form of articles for various typesof companies. A public limited company having share capital may-

a) frame its own set of articles or

b) straightway adopt Table A and thus need not have separate articles.

c) partly frame its own articles & partly incorporate some of the regulations containedin Table A.

But if does not register any Articles, Table A applies. (sec 28)

Unlimited companies, companies limited by guarantee and private companies limitedby share capital must have their own articles.

Difference between Memorandum of Association and Articles of Association.


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NatureNatureNatureNatureNature

Memorandum of association contains thebasic conditions on which the companyis incorporated. It provides for Name,situation objects, capital and liability ofthe company.

ScopeScopeScopeScopeScope

a) It determines the objects, scope andextent of the activities of the company.

b) It is the charter and constitution of theb) It is the charter and constitution of theb) It is the charter and constitution of theb) It is the charter and constitution of theb) It is the charter and constitution of thecompanycompanycompanycompanycompany.....

AlterationAlterationAlterationAlterationAlteration

Memorandum of association cannot bealtered easily.

RRRRRegistrationegistrationegistrationegistrationegistrationEvery company must have its ownmemorandum. It must be compulsorilyfiled for registration.

Ultra-viresUltra-viresUltra-viresUltra-viresUltra-vires

Acts done by a company beyond thescope of the memorandum are absolutelyvoid (ineffective). They cannot be ratifiedeven by unanimous vote of all theshareholders.

Memorandum of Association Articles of Association

1.

2.

Articles of association can be altered if itis desired by 3/4ths, majority.

Articles of association are the rulesgoverning the internal management of thecompany. It provides for rules andprocedures for the conduct of its business.

a) It governs the ways in which the objectsof the company are to be carried out.

b) The articles are subordinate to thememorandum. If there is conflict betweenthe two, memorandum shall prevail.

A company limited by shares need nothave articles of its own. In such a case itmay adopt Table A. The articles need notbe compulsorily filed for registration.

Acts done by the company beyond itsArticles can be ratified by theshareholders.

Articles of association govern the internalrelationship between the company and itsmembers.

5.

3.

4.


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d. Statutory Requirements

i) Form and signature: According to sec. 30 the articles of association of everycompany shall be

a) printed

b) divided into paragraphs numbered consecutively, and

c) signed by each subscriber of the memorandum of association in the presenceof atleast one witness.

It should be stamped and filed along with the memorandum of association.

ii) The articles of association should not contain anything, which is inconsistent withthe memorandum or contrary to the provisions of the Companies Act.

iii) The articles of a private company must contain the four restrictions (viz., restrictionon the transfer of shares, limitation of the number of members to 50, prohibitionof invitation to the public for the purchase of shares, debentures and deposits).

4.2 Contents of Articles of Association

The matters with which the articles of association of a company usually deal with are:

1. Applicability of Table A

2. Share capital and its subdivision into different classes of shares, rights ofshareholders..

3. The provisions and procedures regarding:

a) Allotment of shares, b) lien on shares c) calls on shares d) transfer andtransmission of shares e) forfeiture and surrender of shares f) conversion ofshares into stock h) share warrants g) share certificates.

4. Alteration of capital and reduction of capital.

5. General meetings - a) proceedings at general and other meetings b) Voting rightsof members and proxies

6. Board of Directors - Powers of Board, proceedings of Board and its committees

7. Borrowing powers.

8. Accounts & Audit

9. Dividends and reserves; Capitalization of profits


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10. Common seal

11. Winding up

12. Indemnity

4.3 Alteration of Articles of Association

Sec. 31 of the Companies Act, 1956, provides that a company may by passing aspecial resolutionspecial resolutionspecial resolutionspecial resolutionspecial resolution, alter regulations contained in its Articles any time subject to

a) the provisions of the Act and

b) conditions contained in the Memorandum of Association [Section 31(1)]. Anynew regulations in the Articles may be adopted which could have been lawfullyincluded in the original Articles. However, no alteration made in the articles whichhas the effects of converting a public company into private company shall haveeffect unless such alteration has been approved by the Central Government.

A copy of every special resolution altering the Articles shall be filed in Form no 23,with the Registrar within 30 days its passing and attached to every copy of the Articlesissued thereafter.

Limitations to alteration

The fundamental right of a company to alter its articles is subject to the followinglimitations:

1) The alteration must not exceed the powers given by the Memorandum ofAssociation of the company or conflict with the provisions thereof.

2) It must not be inconsistent with any provisions of the Companies Act, listingagreement or any other statute.

3) It must not be illegal or against public policies

4) The alteration must be bona fide for the benefit of the company as a whole.

5) It should not be a fraud on minority, or inflict a hardship on minority without anycorresponding benefits to the company as a whole.

6) The alternation must not be inconsistent with an order of the court. Any subsequentalteration thereof which of inconsistent with such an order can be made by thecompany only with the leave of the court.


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7) The alteration cannot have retrospective effect. It can operate only from the dateof amendment. [Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989]3 comp. L.J. (SL) 70].

8) An alteration that has the effect of increasing the liability of a member to contributeto the company is not binding on a present member unless he has agreed theretoin writing.

9) An assumption by the Board of Directors of a company of any power to expel amember by amending its Articles is illegal or void.

Effect of altered articles:Effect of altered articles:Effect of altered articles:Effect of altered articles:Effect of altered articles: Any alternation so made in the Articles shall be as valid asif originally contained in the Articles [Sec. 31(2)].

SPECIMEN OF ARSPECIMEN OF ARSPECIMEN OF ARSPECIMEN OF ARSPECIMEN OF ARTICLES OF ASSOCIATICLES OF ASSOCIATICLES OF ASSOCIATICLES OF ASSOCIATICLES OF ASSOCIATION OF A PRIVTION OF A PRIVTION OF A PRIVTION OF A PRIVTION OF A PRIVAAAAATE LIMITEDTE LIMITEDTE LIMITEDTE LIMITEDTE LIMITEDCOMPCOMPCOMPCOMPCOMPANYANYANYANYANY

I. PRELIMINARY Subject as hereinafter otherwise provided the regulationscontained in Table ‘A’ in Schedule I of the Companies Act, 1956, (hereinaftercalled Table A) shall apply to the company so far as the same are applied toPrivate Company.

II. PRIVATE COMPANY The company is a Private Company within themeaning of Section 3(1)(iii) of the Companies Act, 1956, and accordingly:

i ) No invitation shall be issued to the public to subscribe for anyshares in or debentures of the company.

ii) The number of members of the company shall not exceed fifty.

iii) The right to transfer the shares is restricted in the manner and tothe extent hereinafter provided.

iv) No invitation shall be issued to the public for acceptance of depositfrom persons other than its members, directors or their relatives.

III. OTHER CONTENTS Such as capital and shares, transfer, and transmissionof shares, voting rights, Directors, Borrowing powers, Management,Meetings, Common seal, Audit, Secrecy clause, indemnity clause, windingup. We, the several persons whose names and addresses are subscribed,are desirous of being formed into a company in pursuance of this Articles of


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Association, and we respectively agree to take the number of shares in thecapital of the company set opposite our respective names.

Names, addresses, description and number of shares taken by eachsubscriber. Occupations of the subscribers.

4.4 Doctrine of Constructive Notice

Section 610 provides that the memorandum and articles when registered withRegistrar of Companies ‘ ‘ ‘ ‘ ‘become public documents’become public documents’become public documents’become public documents’become public documents’ and then they can be inspectedby any one on payment of a nominal fee. Therefore, any person who contemplatesentering into a contract with the company has the means of ascertaining the powers ofthe company and is thus, presumed to have read these documents and understoodthem in their true perspective. This is known as “ “ “ “ “doctrine of constructive notice”.doctrine of constructive notice”.doctrine of constructive notice”.doctrine of constructive notice”.doctrine of constructive notice”.

Even if the party dealing with the company does not have actual notice of thecontents of these documents it is presumed that he has an implied (constructive) noticeof them. Consequently, if a person enters into a contract which is beyond the powers ofthe company, as defined in the memorandum, or outside the limit set on the authorityof the directors as per the memorandum or articles, he cannot, as a general rule,acquire any rights under the contract against the company.

However, the aforesaid rule of constructive notice has been held to be subject tothe rule of indoor managementindoor managementindoor managementindoor managementindoor management. The ‘rule of indoor management’ was first laid downin the case of Royal British Bank v. Turquand. The ‘rule of indoor management’ offersprotection to those dealing with the company through its officers who fail to follow theprocedures prescribed under the article before exercising those powers. This doctrinelaid down that the persons dealing with the company are not bound to inquire into theregularity of internal proceedings.

4.5 Doctrine of Indoor Management

The doctrine of Indoor Management constitutes an exception to the “doctrine ofconstructive notice”. According to the doctrine of constructive notice people enteringinto contracts with a company is presumed to have read and have notice of the contentsof the company’s memorandum and the articles. The doctrine of Indoor Managementon the other hand allows all those who deal with the company to assume that theprovisions of the articles have been observed by the officers of the company. In otherwords, the persons dealing with the company are not bound to inquire into the regularityof internal proceedings.


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While the doctrine of constructive notice seeks to protect the company against theoutsiders, the principle of indoor management operates to protect the outsiders againstthe company. The doctrine of indoor management was laid down in the case of RoyalBritish Bank v. Turquand, (1986) 119 E.R. 886. In this case, the directors of a bankingcompany were authorised by the articles to borrow on bonds such sums of money asshould from time to time, by resolution of the company in general meeting, be authorisedto borrow. The directors gave a bond to Turquand without the authority of any suchresolution. It was held that Turquand could sue the company on the strength of thebond, as he was entitled to assume that the necessary resolution had been passed.Lord Harthely observed: “Outsiders are bound to know the external position of thecompany, but are not bound to know its indoor management”.

Exceptions to the Doctrine of Indoor Management

However, the relief under ’indoor management’ cannot be availed of by the directorswho have the means of verifying the truth or those who did not read articles at all.Again, it is not available in case of forgery or even negligence

The doctrine of indoor management is not applicable in the following cases:

a) Knowledge of irregularity:Knowledge of irregularity:Knowledge of irregularity:Knowledge of irregularity:Knowledge of irregularity: The rule does not protect any person who has actualor constructive notice of the internal irregularity. [Howard v. Patent Ivory Mfg. Co.,(1888)38 Ch. D. 156]. Obviously then the presumption that every internalproceeding has been conducted regularly shall stand rebutted, i.e., they cannotassume that everything has been done regularly. Therefore, the benefit of doctrineof indoor management shall not be available in such a case.

[Howard v. Patent Ivory Mfg. Co., (1888)38 Ch. D. 156]. The directors of acompany could borrow upto £1,000 without the sanction of members inGeneral Meeting. The consent of the shareholders was required to borrowin excess of £1,000. The directors themselves lent £3,500 to the company.It was held that the directors had the notice of the internal irregularity andtherefore the company was liable to them only for £1,000.

b) No knowledge of the articles:No knowledge of the articles:No knowledge of the articles:No knowledge of the articles:No knowledge of the articles: The rule cannot be invoked in favour of a personwho did not in fact consult the company’s memorandum and articles andconsequently did not act in reliance of those documents.


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Rama Corporation v Proved Tin & General Investment Company Ltd. [1952]1All ER 554.The articles of the investment company provided that the directorscould delegate their powers to one of them. T was a director in this investmentcompany. T, purporting to act on behalf of the company, entered into acontract with Rama Corporation and received a cheque from it. RamaCorporation had never read the articles. Later, it was found that the directorsof the company have not delegated their powers to T. It was held that RamaCorporation could not rely on the nature of irregularity as it did not knowthat the power could be delegated. Accordingly, the benefit of the doctrineof indoor management was not available.

c) Negligence:Negligence:Negligence:Negligence:Negligence: The doctrine is not applicable incase of negligent persons. If anofficer of the company acts in a manner, which would not ordinarily be within hispowers, the person dealing with him must make proper inquiries and satisfy himselfas to the officer’s authority. If he fails to make enquiry, he cannot rely on the rule.

In Anand Biharilal v. Dinshaw & Co., A.I.R. 1942 Oudh 417, an accountant of acompany transferred some property of the company in favour of Anand Bihari,who brought an action for the breach of contract. The transfer was held by theCourt to be void, since the power of transferring property could not be consideredas within the apparent authority of an accountant.

d) FFFFForgery:orgery:orgery:orgery:orgery: The protection under this rule is not available where the outsider isfound to have relied upon the document, which is a forged one.

Where a person is cheated upon a forged document the company cannot beheld liable. In Ruben v. Great Fingall Consolidated Ltd., (1906) A.C. 439, thesecretary of the company issued a share certificate in favour of Ruben, whichapparently complied with the company’s articles, as it was purported to be signedby two directors and the secretary and it had the company’s common seal affixedto it. In fact, the secretary had forged the signature of the directors and affixed theseal without any authority.

It was held that the certificate was not binding upon the company. Lord Loreburnheld : “It is quite true that personal dealing with limited liability companies are notbound to inquire into their indoor management ........ but this doctrine which iswell established, applied to irregularities which otherwise might affect genuinetransaction. It cannot apply to a forgery”.


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e) Illegal TIllegal TIllegal TIllegal TIllegal Transactions: ransactions: ransactions: ransactions: ransactions: The rule does not apply to transactions which are illegal orvoid ab initio. The benefit is available only if there is some procedural or internalirregularity. If the contract is ultra vires, it is not, and can never be made, enforceableagainst any of the parties to the contract.

4.6 Binding effect of Memorandum and Articles

Section 36 provides that the memorandum and articles, when registered, bind thecompany and its members to the same extent as if they have been signed by the companyand by each member. The company and each of its members are to observe and bebound by all the provisions of the memorandum and of the articles.

Members bound to the company - Members bound to the company - Members bound to the company - Members bound to the company - Members bound to the company - The M/A and A/A constitute a binding contractas between the members and company. Each member must observe the provisions ofthe articles and memorandum as if each member had signed the same.

Company bound to members -Company bound to members -Company bound to members -Company bound to members -Company bound to members - A company is bound to members by whatever iscontained in its memorandum and articles of association. An individual member canmake the company fulfil its obligation to him, such as to send the notice for the meetings,to allow him to cast his vote in the meeting. If the company violates the provisions of itsmemorandum and articles, a member can bring action against the company.

Members bound to membersMembers bound to membersMembers bound to membersMembers bound to membersMembers bound to members - - - - - As between the members inter se, each member isbound by the articles. However this does not mean that the memorandum and articlescreate an express contract among the members of the company. A member has noright to bring a suit to enforce the articles in his own name against the members. It is thecompany, alone which can sue the offender.

Whether company or members bound to outsiders? -Whether company or members bound to outsiders? -Whether company or members bound to outsiders? -Whether company or members bound to outsiders? -Whether company or members bound to outsiders? - The memorandum or articlesdo not confer any contractual rights upon outsiders against the company or its members,even though the name of the outsider is mentioned in the articles. An outsider (i.e., anon-member) cannot rely on articles of association for his action against the company.


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QUESTION BANK

I. FAQs’

1. Explain the meaning of the term ‘Articles of Association’.

2. Distinguish between Memorandum of Association & Articles of Association?

3. Which type of companies must register Articles of Association with the Registrar ofCompanies?

4. Discuss, whether it is legally compulsory for a company to have its own Articles ofAssociation?

5. What restrictions should the Articles provide to give a company the status of aprivate company?

6. In what manner the Articles of Association of a company be altered under theprovisions of the Companies Act, 1956? What are the limitations for such analteration?

7. The power of altering the Articles is wide, yet it is subject to a large number oflimitations. Comment.

8. Explain clearly the doctrine of ‘indoor management’, as applied in the case ofjoint stock companies. Under what circumstances the ‘doctrine of indoormanagement’ is not applicable? Illustrate.

9. Briefly explain the doctrine of “Constructive notice” under the Companies Act,1956. are there any exceptions to the said doctrine?

10. Doctrine of Indoor Management is a ‘silver lining ‘to strangers dealing with thecompany. Comment

11. “Every Person” dealing with the company is deemed to have notice of the contentsof its Memorandum & Articles of Association. Comment

II. CASE STUDIES

1. The authorised signatory of a company issued a share certificate in favour of X,which apparently complied with the company’s articles as it was purported to besigned by two directors and the secretary and it had the company’s common sealaffixed to it. In fact, the secretary had forged the signatures of the directors andaffixed the seal without any authority. Will the certificate be binding upon thecompany?


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(Hint: No)

2. The Articles of a company provided that the shares of a member who becamebankrupt would be offered for sale to other shareholders at a certain price. Is theprovision binding on the shareholders?

(Hint: Yes)

3. The Articles of Association of a Limited company provided that ‘X’ shall be theLaw officer of the company and he shall not be removed except on the ground ofproved misconduct. The company removed him even though he was not guilty ofmisconduct. Decide, whether company’s action is valid?

(Hint: : : : : Articles of Association is a document which does not bind the company withoutsiders. It is a document for the internal management of the Company. Therewas no contract between X and the company. No outsiders can enforce the Articlesagainst the company even if they are given some rights. X is an outsider and nota 7member of the company. As such the provisions of the Articles do not bind him.(Brown v La Trinidad. (1887) 37 Ch. D 1) Even if he is a member, he can’t succeedbecause a member also can’t enforce the provisions of the Articles for his benefitin some other capacity than that of a member as was held in Eley V Positive GovtSecurity Life Association Co. (1867) 1 EXD 88.)

4. Discuss the validity of a provision in the Articles depriving itself of the power toalter its Articles of Association.

(Hints: Statutory powers cannot be curtailed. Hence, such provision will not bevalid. However reasonable restriction may be placed).


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CHAPTER - V

PROSPECTUS


5.1 Prospectus: What it is and why it is issued?

5.2 Various methods of raising of share capital

5.3 Types of Prospectus

5.4 What are the statutory requirements for the issue of prospectus?

5.5 Contents of prospectus

5.6 Statement in lieu of prospectus

5.7 Shelf prospectus

5.8 Book Building

5.9 Information memorandum

5.10 Is there any liability for mis-statement in prospectus?

5.1 Prospectus: What it is and why it is issued?

Unlike a private company, a public company can raise its capital byissue of prospectus. Section 2(36) of the Companies Act defines theprospectus as ‘any document, described or issued as a prospectus andincludes any notice, circular advertisement or other document invitingdeposits from the public or inviting offers from the public for thesubscription or purchase of any shares, or debentures of, a bodycorporate.’

A document would be considered a prospectus only if it meets thefollowing requirements, viz.

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i. it should be in writing

ii. it should be issued by or on behalf of a body corporate

iii. it should be issued to public

iv. it should contain invitation to public for making deposits or for subscription ofshares in or debentures of a body corporate.

A prospectus contains vital information about the operational and financialA prospectus contains vital information about the operational and financialA prospectus contains vital information about the operational and financialA prospectus contains vital information about the operational and financialA prospectus contains vital information about the operational and financialperformance of the companyperformance of the companyperformance of the companyperformance of the companyperformance of the company, its track record and future prospects and the purposes, its track record and future prospects and the purposes, its track record and future prospects and the purposes, its track record and future prospects and the purposes, its track record and future prospects and the purposesfor which money raised from the public will be utilized. On the basis of this documentfor which money raised from the public will be utilized. On the basis of this documentfor which money raised from the public will be utilized. On the basis of this documentfor which money raised from the public will be utilized. On the basis of this documentfor which money raised from the public will be utilized. On the basis of this documentthe investors make their investment decisionsthe investors make their investment decisionsthe investors make their investment decisionsthe investors make their investment decisionsthe investors make their investment decisions.

What constitutes an offer to the public?What constitutes an offer to the public?What constitutes an offer to the public?What constitutes an offer to the public?What constitutes an offer to the public? Section 67 lays down the following criteriaas to what shall constitute an invitation to public:

a. An invitation to the public shall include an invitation to any section of the public,[Section 67(2)]. Thus public includes any section of the public whetherselected as.

members or debenture holders of the company; or

clients of the person issuing the prospectus; or

In any other manner.

b. In the following circumstances, it will not be regarded as an offer made to public:

If the offer or invitation can be accepted only by persons to whom it is made.

If it is the domestic concern of those making and receiving the offer. This isthe reason why the companies resort to the practice of writing “Private andConfidential”, on the offer document.

If it is offered to the existing shareholders of the company.

It is offered to less than 50 persons.

It is not necessary that a company should issue a prospectus.It is not necessary that a company should issue a prospectus.It is not necessary that a company should issue a prospectus.It is not necessary that a company should issue a prospectus.It is not necessary that a company should issue a prospectus. Its agents may issueit on behalf of the company. An offer of sale of shares in or debentures of a companyby an issuing house(merchant banker) is an instance in point.

Prospectus Invitation to offer

Application for shares Offer

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Allotment of shares Acceptance of the offer, resulting in a binding contract.

5.1a. Is the issue of prospectus compulsory?

If a company can raise the capital by private channels/sources then there is noneed to issue a prospectus. It will operate as an unlisted company. Prospectus is necessarywhen offer of shares is to public. The issue of a prospectus by a company is notcompulsory in the following cases:

1. Where there is a bona fide invitation to a person to enter into an underwritingagreement. [Section 56(3)(a)].

2. When the shares or debentures are privately placed, i.e., when shares or debenturesare not offered to the public [Section 56(3) (b)]. If offer is made to 50 or morepersons it will be treated as offer to public and prospectus will be required.

3. Where rights issue is made to existing members/ debenture holders. [Section56(5) (a)].

4. Sweat equity to directors and employees does not require prospectus.

5. Issue of shares under Employees Stock Option Scheme or Employees StockPurchase Scheme does not require prospectus

6. A private company cannot issue shares to public and hence cannot issueprospectus.

NoteNoteNoteNoteNote----- In case of (3) as the securities issued are of the same class for which Prospectushas been already been issued and filed , fresh prospectus need not be issued for thesame

Offer of securities to more than 50 persons will be treated as public offer section[proviso to section 67(3)]. This proviso is not applicable to (a) NBFC and PFI (publicfinancial institution)

5.1b. SEBI’s powers under new section 55A in respect of listed companies

Securities and Exchange Board of India (SEBI) was established with the followingobjectives:

(i) Investor protection,

(ii) Promotion, development and regulation of securities market.

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SEBI has taken a number of steps from time to time in the pursuit of accomplishingthe aforesaid objectives. It has made Disclosure and Investor Protection Guidelines andhas made a large number of Rules and Regulations for the market intermediaries.

Section 55A confers power on the SEBI to deal exclusively in respect of listed publiccompanies and those public companies which are proposed to be listed, so far as theyrelate to matters of issue and transfer of securities and non-payment of dividend:

What is SEBI’S Role in an issue?

Any company making a public issue or a listed company making a rights issue ofvalue or more than Rs. 50 lakhs is required file a draft offer document with SEBI for itsobservation. The company can proceed further on the issue only after getting observationsfrom SEBI. The validity period of SEBI’s observation letter is three months only i.e. thecompany has to open its issue within three months period.

5.2 Apart from the issue of prospectus, what are the other ways of raisingof capital?

In a bought-out deal the shares of an unlisted company are first purchased by amerchant banker and then off loaded to the public within an agreed time frame. Thissystem is popular in OTC Exchange of India.

In private placement the shares are directly offered to the financial institutions,mutual funds or high worth investors. The first proviso to section 67(3) as inserted bythe Companies (Amendment) Act, 2000 provides that if a private offer is made tosubscribe for shares/ debentures, such offer will be treated as public issue if the offer orinvitation to subscribe for shares/ debentures is made to 50 persons or more. Thisprovision shall be not apply to non-banking financial companies or Public FinancialInstitutions. This means that these institutions will be free to offer securities on privateplacement.

RRRRRaising Capitalaising Capitalaising Capitalaising Capitalaising Capital

Private Placement Bought-out Deal(Offer for Sale)

Issue of Prospectus

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What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or Preferential issues (alsoknown as private placements). While public and rights issues involve a detailedprocedure, private placements or preferential issues are relatively simpler. Theclassification of issues is illustrated below:

Public issued can be further classified into Initial Public offerings and further publicofferings. In a public offering, the issuer makes an offer for new investors to enter itsshareholding family. The issuer company makes detailed disclosures ad per the DIPguidelines in its offer document and offers it for subscription The significant features areillustrated below:

Initial PInitial PInitial PInitial PInitial Public Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) is when an unlisted company makes either a freshissue of securities or an offer for sale of its existing securities or both for the first time tothe public. This paves way for listing and trading of the issuer’s securities.

A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) Is when an already listed company makes eithera fresh issue of securities to the public or an offer for sale to the public, through an offerdocument. An offer for sale in such scenario is allowed only if it is made to satisfy listingor continuous listing obligations.

Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) is when a listed company which proposes to issue fresh securitiesto its existing shareholders as on a record date. The rights are normally offered in aparticular ratio to the number of securities held prior to the issue. This route is bestsuited for companies who would like to raise capital without diluting stake of its existingshareholders unless they do not intend to subscribe to their entitlements.

ISSUESISSUESISSUESISSUESISSUES

Public Rights PreferentialPublic

Initial PublicOffering (IPO)

Further PublicOffering (FPO)

Fresh Issue Offer for Sale Fresh Issue Offer for Sale

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A PA PA PA PA Preferential Issue referential Issue referential Issue referential Issue referential Issue is an issue of shares or of convertible securities by listedcompanies to a select group of persons under Section 81 of the Companies Act, 1956which is neither a rights issue nor a public issue. This is a faster way for a company toraise equity capital. The issuer company has to comply with the Companies Act and therequirements contained in Chapter pertaining to preferential allotment in SEBI (DIP)guidelines which inter-alia include pricing, disclosures in notice etc.

5.3 TYPES OF PROSPECTUS

1. Abridged prospectus (section 2(1)):

The prospectus is a bulky document and to supply prospectus with each applicationform is economically not feasible. In order to reduce the cost of public issue, the conceptof abridged prospectus has been introduced by the Companies (Amendment) Act,2000.

Abridged prospectus means a memorandum containing such salient features ofa prospectus as may be prescribed (section 2(1)). It has to be in FORM NO. 2A.It contains all the salient features of a prospectus. It accompanies the applicationform of public issues.

A company cannot supply application forms for shares or debentures unless theform is accompanied by abridged prospectus (Section 56(3)).

Penalty for failure to comply with this provision can be upto Rs. 50,000.

When is such an ‘Abridged Form of Prospectus’ not required to beaccompanied with the share application form? Ans: Ans: Ans: Ans: Ans: Where a bona fideinvitation is made to a person to enter into an underwriting agreement withrespect to the shares or debentures. b. If shares or debentures are not offeredto the public.

2. Deemed prospectus (section 64):

In order to avoid the expenses of issue of prospectus, which are quite exorbitant(approximately 10% of the capital raised through public issue) one practice is that thecompany may allot or agree to allot shares to an “issue house” (merchant banker orfinancial institutions) without issuing the shares to the public through issue of prospectus.The issue house in turn makes an offer for sale to the public. This offer for sale oradvertisement of such issue house is called “deemed prospectus”. The following twoconditions must be satisfied in order to construe ‘offer for sale’:

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a. the company should have received the full consideration for the shares ordebentures.

b. the ‘offer for sale’ to the public should be made within 6 months after the allotmentor agreement to allot .

Therefore, offer of shares or debentures through the medium of Issue Houses shallrequire the provisions relating to prospectus to be duly complied with. Provisions ofresponsibility of directors and promoters remain the same. In addition, Issuing Houseincurs its own liability regarding disclosures. They incur the same civil and criminalliability as the directors of the company will incur [section 64(4)].

“Offer documentOffer documentOffer documentOffer documentOffer document” means Prospectus in case of a public issue or offer forsale and Letter of Offer in case of a rights issue which is filed Registrar ofCompanies (ROC) and Stock Exchanges. An offer document covers all therelevant information to help an investor to make his/her investment decision.

“Draft Offer Document“Draft Offer Document“Draft Offer Document“Draft Offer Document“Draft Offer Document” ” ” ” ” means the offer document in draft stage. The draftoffer documents are filed with SEBI, atleast 21 days prior to the filing of theOffer Document with ROC/ SEs. SEBI may specifies changes, if any, in thedraft offer Document and the issuer or the Lead Merchant banker shallcarry out such changes in the draft offer document before filing the OfferDocument with ROC/SEs. The Draft Offer document is available on theSEB website for public comments for a period of 21 days from the filing ofthe Draft Offer Document with SEBI.

3. Shelf prospectus (section 60A): refer para 5.6.

4. Red herring prospectus (RHP) (section 60B):

A “red-herring prospectus” means a prospectus which does not have completeparticulars on the price of the securities offered and the quantum of securities offered.It contains all other contents of prospectus. Red-herring prospectus will have to be filedwith Registrar of Companies and must contain the information as per schedule II exceptthe price and quantity of the securities offered, it shall also be filed with SEBI for itsvetting and comments. Information memorandum need not be filed with ROC.

This is used in book building issues only. In the case of book built issues, (it is aprocess of price discovery) the price cannot be determined until the bidding processis completed. Hence, such details are not shown in the Red Herring prospectus

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filed with ROC in terms of the provisions of the Companies Act. Only on completionof the bidding process, the details of the final price are included in the offerdocument. The offer document filed thereafter with ROC is called a prospectus.

When the public issue is through book building process the red herring prospectusis filed with the ROC atleast three days before the opening of the offer an mustcontain and all the features of a prospectus as per schedule II of the CompaniesAct. It should be signed by all the directors of the company or their constitutedattorney.

Who are the intermediaries in an issue?

Merchant Bankers to the issue or

Book Running Lead Managers (BRLM), syndicate members,

Registrars to the issue, Bankers to the issue,

Auditors of the company, Underwriters to the issue, Solicitors, etc. are theintermediaries to an issue. The issuer discloses the addresses, telephone/fax numbersand email addresses of these intermediaries. In addition to this, the issuer also disclosesthe details of the compliance officer appointed by the company for the purpose of theissue.

5.4 What are the statutory requirements for the issue of prospectus?

Three set of regulations which govern the issue of prospectus are -

Sections 55 to 79 of the Companies Act, 1956.

Requirements of Stock Exchange, AND the provisions of the Securities Contract(Regulation) Act.

SEBI guidelines relating to disclosures in prospectus, and vetting of prospectus.

1. Contents of PContents of PContents of PContents of PContents of Prospectus: rospectus: rospectus: rospectus: rospectus: (Section 56) Every prospectus must state the mattersspecified in Schedule II to the Companies Act 1956. The prospectus must alsocontain the information as given in the consolidated new SEBI guidelines forDisclosure and Investor Protection, 2000. It must also fulfill the listing requirementsof stock exchange.

2. Dating and signing of PDating and signing of PDating and signing of PDating and signing of PDating and signing of Prospectus: rospectus: rospectus: rospectus: rospectus: Section 55 requires that a prospectus shouldbe dated and that date shall be taken as the date of publication of the prospectus.

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All directors should sign the prospectus personally or through authorisedrepresentative to whom they have given power of attorney. This is required, asDirectors are responsible for mis-statements in prospectus.

3. VVVVVetting/Checking of prospectus:etting/Checking of prospectus:etting/Checking of prospectus:etting/Checking of prospectus:etting/Checking of prospectus: The issuer company must appoint a MerchantBanker to manage the public issue. SEBI guidelines stipulate that the draftprospectus complete in all respects along with Due Diligence Certificate (of LeadMerchant Banker to the issue) should be forwarded to SEBI for vetting. Apart fromSEBI the prospectus should also be vetted by (a) legal advisers, (b) stock exchange,(c) lead financial institution.

Draft prospectus should be made publicDraft prospectus should be made publicDraft prospectus should be made publicDraft prospectus should be made publicDraft prospectus should be made public..... The Lead Managers shallsimultaneously file copies of draft prospectus with the stock exchanges,where the issue is to be listed. Draft prospectus should be made availableto the public by the Lead Managers/ Stock Exchanges on payment.

IPO gradingIPO gradingIPO gradingIPO gradingIPO grading::::: In the year 2007-08, SEBI has made grading of IPO mandatory.No unlisted company shall make an IPO of equity shares unless it hasobtained grading for the IPO from at least one credit agency. Disclosures ofall grades obtained, along with description should be made in the prospectus(in case of fixed price issue) or red herring prospectus in case of book builtissue. IPO grading will facilitatethe assessment of equity shares offered topublic.

4. R R R R Registration of prospectus with ROCegistration of prospectus with ROCegistration of prospectus with ROCegistration of prospectus with ROCegistration of prospectus with ROC::::: After the prospectus is checked by SEBI,companies can file prospectus for registration with Registrar of Companies (Sec.60).

The registration of prospectus must be done before the prospectus is issued to thepublic.

The prospectus must contain a statement that a copy has been delivered forregistration, also indicating the requisite documents (giving names) delivered with it.

The following documents must be attached to the copy of prospectus filed with theRegistrar:

a) the consent of the expert mentioned in the prospectus, if his report is included inthe prospectus;

b) a copy of every contract relating to the appointment or remuneration of a managingdirector or manager;

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c) a copy of every material contract not being a contract entered into in the ordinarycourse of business of the company entered into within two years of the issue of theprospectus;

d) a written statement relating to the adjustments, if any, in respect of figures of anyprofits or losses, and assets and liabilities.

e) the consent in writing of the person, if any, named in the prospectus as the auditor,legal adviser, attorney, and solicitor, Issue House, banker managers to the issueor broker of the company to act in that capacity;

f) the consent of director under section 266 in respect of new directors, if any,named therein;

g) a copy of the underwriting, agreement if any, should also be filed as required bysection 76 (1)(b)(v).

The company and every person who knowingly issues a prospectus withoutdelivering a copy thereof to the Registrar for the registration shall be punishablewith fine up to Rs. 50,000.

5. Issue of prospectus: Issue of prospectus: Issue of prospectus: Issue of prospectus: Issue of prospectus: [Section 60(4)] The prospectus must be issued within 90days of its registration.

6. TTTTTerms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: [Section 61] A company shall not vary, theterms of contract referred to in the prospectus, except subject to the approval ofmembers in general meeting.

7. The expertThe expertThe expertThe expertThe expert’s consent to the issue of prospectus’s consent to the issue of prospectus’s consent to the issue of prospectus’s consent to the issue of prospectus’s consent to the issue of prospectus. (Section 57, 58 & 59.) A prospectusmay contain a statement purporting to be made by an expert.

Meaning of expert: Meaning of expert: Meaning of expert: Meaning of expert: Meaning of expert: The term “expert” includes an engineer, a valuer, anaccountant, and any other person whose profession gives authority to astatement made by him. The reports from an expert must not be included ina prospectus unless:

(i) such expert is unconnectedunconnectedunconnectedunconnectedunconnected with the formation or management of thecompany (section 57).

(ii) he gave his written consentwritten consentwritten consentwritten consentwritten consent to the issue of the statement in the formand context in which it appears and had not withdrawn the consentuntil the prospectus is delivered to the Registrar for registration.

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(iii) he is competent competent competent competent competent to make the report, valuation or statement.

(iv) a statement that he has given and not withdrawngiven and not withdrawngiven and not withdrawngiven and not withdrawngiven and not withdrawn his consent theretoappears in the prospectus (section 58).

If the report of the expert is published in contravention of the abovementioned provisions, every person who is knowingly a party to the issue ofthe prospectus shall be punishable with fine up to Rs.50,000 (section 59).

8. Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Section 56(3) requiresthat every application for shares in or debentures of a company is required to beaccompanied with FFFFForm 2A (Memorandum containing salient features oform 2A (Memorandum containing salient features oform 2A (Memorandum containing salient features oform 2A (Memorandum containing salient features oform 2A (Memorandum containing salient features ofprospectus)prospectus)prospectus)prospectus)prospectus). However a copy of prospectus shall be furnished to a person whomakes a request before the closing of the subscription list. This provision hasbeen made to reduce cost of issue, as detailed prospectus is a very bulky documentand hence costly. As per SEBI guidelines , an investor who wants to have detailedcopy of prospectus will be required to pay Rs. 100 to the company.

5.5 Contents of Prospectus

A. Contents as per Section 56

B. Disclosures as per SEBI Guidelines

A. Contents as per Section 56

Under section 56 every prospectus must state the matters and reports mentioned inSchedule-II to the Companies Act.. The present format requires the prospectus to bedivided into three parts:

Part-I to Schedule-II contains the following information:-

I. General information about the name and address of the company, name of stockexchange where application for listing is made, date of opening and closing ofthe issue, name and address of the Auditors and Lead Managers, Underwriters.

II. Capital Structure of the company.

III. Terms of the present issue.

IV. Particulars of the issue, stating object of the issue, project cost and means offinancing.

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V. Company, Management and project. This will include history and main objectsand present business, promoters and back-ground location of the project, natureof the product, name and address of the directors, schedule of implementation ofthe project, approach marketing, future prospects.

VI. Stock market data regarding high/low price during the last six months includingparticulars of other listed companies in the same management.

VII. Outstanding litigation’s and particulars of defaults in respect of statutorycompliances.

VIII. Management perception of risk factors with regard to the successful implementationof the proposed project.

Part-II to Schedule-II contains the following information divided into three parts viz.,

a) General information,

b) Financial information and

c) Statutory and other information.

General information includes information on matters like consent of Directors,Auditors, Managers to the issue, Registrar to the issue, Bankers of the Company, names& addresses of Company Secretary, Legal Advisors, Lead Managers, Brokers, authorityfor the issue, procedure and time schedule for allotment and issue of certificates.

In the financial information are given report by the auditors of the company aboutthe profits/loss, assets and liabilities, rates of dividend paid in respect of each class ofshares, during the preceding five financial years. If the company has subsidiaries similarinformation about them should also be given.

The statutory and other information includes:

1. Details of minimum subscription

2. Particulars of underwriting and brokerage including the full particulars ofunderwriters and brokers

3. The extent of underwriting by the underwriters

4. Details of previous issues during the last five years.

5. If the company proposes to purchase any property out of the proceeds of thepresent issue, the details of the vendors and the properties.

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6. Any benefits paid to the promoters during the previous two years.

7. Details of interest of promoters and directors in any property acquired by thecompany during the previous two years.

8. Rights of members regarding voting, dividend lien and transfer of shares.

9. Revaluation of assets if any during the previous five years.

10. Particulars of material contracts and inspection of documents by the prospectiveinvestors.

11. Minimum subscription amount, expenses of the issue, underwriting commissionand brokerage, details of directors and managing directors, material contractsand inspection of documents.

Part-III to Schedule-II gives explanations of certain terms and expressions usedunder Part-I and Part-II of the schedule Section 56(3). The prospectus ends with adeclaration signed by the Directors that all the relevant provision of the Companies Act1956 and the guidelines issued by the Government have been complied with.

B. Disclosures as per SEBI Guidelines

After the repeal of Capital Issue Control Act, 1992 the Securities and ExchangeBoard of India (SEBI) has issued a set of guidelines to regularize the capital market inthe country. These guidelines aim at investor protection through disclosures in prospectus.These guidelines which were issued by SEBI with effect from 11.6.92 and have beenamended several times in line with market dynamics and requirements.

It is mandatory for all companies issuing shares, debentures or other instruments topublic to make appropriate disclosures in the prospectus or other document, in additionto the requirements of schedule to of the Companies Act. The guidelines have sincebeen replaced by consolidated SEBI (Disclosure and Investor Protection) Guidelines,2000, w.e.f. 27.1.2000.

As per the revised disclosures of SEBI the prospectus shall contained followinginformation :-

The cover page. i) The cover page of the prospectus shall be white andshall contain the following information –

i) name and address of issuer company, the nature number, price andamount of the shares offered.

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ii) Risk in relation to the first issue, general risk factors, and issuer’s absoluteresponsibility clause shall be disclosed on the front page.

iii) On the cover page the following information is also mentioned - thename of the stock exchange where listing of the securities is proposed,the name and address of Lead Manager to the issue and Registrars tothe issue, and issue opening date and closing date.

a) Front inside cover page – index i.e. table of contents of prospectusshall appear.

b) Inner cover pages

i) abbreviations and glossary and technical terms

ii) internal and external risk factors and management perception thereof.

iii) highlights of the issue.

iv) The prospectus contents are divided into three parts.

PPPPPart Iart Iart Iart Iart I gives information about management of company and its project,capital structure, cost of the project and means of finance, promoters andtheir background, issue management team and other prescribed information.There is also a disclaimer clause, stating that SEBI/stock exchange does nottake any responsibility either for the financial soundness of the project or forthe correctness of statements made or opinions expressed in the prospectus.

PPPPPart II art II art II art II art II contains general information, financial information, statutory andother information, main provisions of the articles of association, and materialcontracts and documents for inspection.

PPPPPart IIIart IIIart IIIart IIIart III contains a declaration of compliance of the legal provisions andguidelines.

c) Back inside cover page and back outside cover page shall be inwhite.

5.6 Statement in lieu of prospectus Sec 70

A public company having a share capital is required to file a ‘statement in lieu ofstatement in lieu ofstatement in lieu ofstatement in lieu ofstatement in lieu ofprospectus’prospectus’prospectus’prospectus’prospectus’ with the Registrar of Companies in the following cases –

a) where it does not issue a prospectus or

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b) where it issued a prospectus but did not proceed to allot any of the shares offeredthereunder, because of failure to raise the minimum subscription.

c) When a private company is converted into a public company by deletion of therestrictions contained in section 3(1)(iii) of the Companies Act, 1956.

The ‘statement in lieu of prospectus’ must be filed at least three days before anyallotment of shares or debentures is made. The statement has to be in form prescribedunder Schedule-III.

Consequences of non-filing SLP –

a) if allotment of shares is made without filing statement in lieu of prospectus, theallottee may avoid the allotment.

b) the person to authorised the delivery of SLP may be punishable with imprisonmentupto two years or with fined upto Rs. 50,000 or with both.

Integrated Power Pvt. Ltd. became a public company by altering its Articlesso that it no longer includes the provisions of section 3(1)(iii) of the CompaniesAct, 1956. Is it required to file a prospectus with the Registrar of Companies?

Ans : Ans : Ans : Ans : Ans : As per section 44 of the Companies Act, 1956, if a private company alters itsArticles in such a manner that it no longer contains the provisions of section 3(1)(iii) ofthe Companies Act, 1956, it shall within 30 days after the date of such change file withthe Registrar a statement in lieu of prospectus.

5.7 Shelf prospectus (Section 60A)

a) Need. a) Need. a) Need. a) Need. a) Need. The public financial institutions like IDBI, SBI, etc. tap the capital marketmore than once in a year. Under the Act, a Company must issue a full-fledged prospectuseach time it accesses the capital market. While this is good in principle, its certainlyleads to needless repetition – more so when a company takes recourse to capitalmarkets more than once in a year. A way out is through shelf prospectus for a specifiedtime period. Such a prospectus has a limited life during which it remains on the “shelf”and is updated for any changes that have occurred between two successive offerings.

Section 60A has been inserted with a view to minimize the procedural burden onpublic financial institutions, public sector banks or scheduled banks whose main objectis financing. The new provisions will help in reducing the expenses of preparation andissue of prospectus and will also give the investor’s upto date information.

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b) Shelf prospectus, meaningb) Shelf prospectus, meaningb) Shelf prospectus, meaningb) Shelf prospectus, meaningb) Shelf prospectus, meaning. . . . . “Shelf prospectus” means a prospectus issued byany financial institution or bank for one or more issues of the securities or class ofsecurities specified in that prospectus.

c)c)c)c)c) Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Any public financial institutions, public sectorbank or scheduled bank whose main object is financing shall file a shelf prospectus.The explanation to section 60A provides that financing would mean making loans to orsubscribing in the capital of private industrial enterprise engaged in infrastructuralfinancing or other companies as Central Government may notify.

d)d)d)d)d) RRRRRegistration of Shelf Pegistration of Shelf Pegistration of Shelf Pegistration of Shelf Pegistration of Shelf Prospectus.rospectus.rospectus.rospectus.rospectus. A shelf prospectus should be filed with theRegistrar of Companies. Validity period of shelf prospectus is one year from the issuedate i.e. the date of opening of the offer. A company filing shelf prospectus with theRegistrar shall not be required to file prospectus afresh at every stage of offer of securitiesby it within a period of validity of such shelf prospectus.

e)e)e)e)e) RRRRRequirement of filing information memorandum.equirement of filing information memorandum.equirement of filing information memorandum.equirement of filing information memorandum.equirement of filing information memorandum. In subsequent issues,information memorandum is to be filed to update the shelf prospectus. In such caseshelf prospectus along with information memorandum shall constitute a prospectus.

A company filing a shelf prospectus shall be required to file an informationmemorandum on all material facts and updations before the ROC, before second andeach subsequent offer of securities. The information memorandum must contain theinformation –

- relating to new charges created,

- changes in the financial position as have occurred since the first offer.

An information memorandum shall be issued to the public along with shelf prospectusfiled at the stage of the first offer of securities and such prospectus shall be valid for aperiod of one year from the date of opening of the first issue of securities under thatprospectus.

Where an update of information memorandum is filed every time an offer of securitiesis made, such memorandum together with the shelf prospectus shall constitute theprospectus.

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5.8 Book Building

Book Building is basically a capital issuance process used in Initial Public Offer(IPO) which aids price and demand discovery. It is a process used for marketing apublic offer of equity shares of a company. It is a mechanism where, during the periodfor which the book for the IPO is open, bids are collected from investors at variousprices, which are above or equal to the floor price. The offer/issue price is then determinedafter the bid closing date based on certain evaluation criteria.

As per SEBI definition, ‘book building’ means a process undertaken by which ademand for securities proposed to be issued by a body corporate is elicited and built-up and the price of securities is assessed for the determination of quantum of suchsecurities to be issued by means of a notice, circular, advertisement, document,information memoranda or offer document.

Public Issue Through Book Building Process

Advantages of book building are – (a) Minimum cost (b) Fast (c) Realistic and fairprice.

5.9 Information Memorandum (Section 60B)

For facilitating the raising of capital through book building process the Companies(Amendment) Act, 2000 has introduced section 60B

a) Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- For the purposes of book buildingissue, information memorandum is issued. Section 2(19B) defines informationmemorandum as a process undertaken prior to the filing of a prospectus by

Circulation of information memorandum to the public priorto filing of Prospectus

Filing of red herring prospectus with ROC and SEBI

Variation between information memorandumand red herring prospectus to be intimated to applicants

Filing of final prospectus

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which a demand for the securities proposed to be issued by a company is elicited,and the price and the terms of issue for such securities is assessed. Informationmemorandum could be in the form of a notice, circular, advertisement ordocument.

b) Who may circulate Information MemorandumWho may circulate Information MemorandumWho may circulate Information MemorandumWho may circulate Information MemorandumWho may circulate Information Memorandum : - A public company making anissue of securities may circulate information memorandum to the public prior tofiling of a prospectus. It serves the purpose of an offer document but cannot becalled a prospectus as it does not contain the price structure or the offer price ofsecurities. It contains all other major information as may be necessary to makeinvestment decision. The purpose is to ascertain the quantum and acceptableprice of securities.

c) FFFFFinal prospectus to be filed after closing of the offer of securitiesinal prospectus to be filed after closing of the offer of securitiesinal prospectus to be filed after closing of the offer of securitiesinal prospectus to be filed after closing of the offer of securitiesinal prospectus to be filed after closing of the offer of securities:- Upon theclosing of the offer of securities, a final prospectus stating therein the total capitalraised, whether by way of debt of share capital and the closing price of thesecurities and any other details as were not complete in the red-herring prospectusshall be filed in a case of a listed public company with the Securities and ExchangeBoard and Registrar, and in any other case with the Registrar only.

Used in book buildingprocess

Used in book buildingprocess after issueof informationmemorandum

To be made in bookbuilding process or anyother method of issue

It is a process undertakenprior to the filing of aprospectus by which ademand for the securitiesproposed to be issued by acompany is elicited and theprice and the terms of issuefor such securities isassessed, by means of anotice, circular,advertisement or document

It means a prospectus,which does not havecomplete particulars on theprice of the securities,offered and the quantum ofsecurities offered. It has tobe filed with the ROC priorto the opening of thesubscription list as a redherring prospectus.

Prospectus is 'anydocument, described orissued as a prospectus andincludes any notice, circularadvertisement or otherdocument inviting depositsfrom the public or invitingoffers from the public for thesubscription or purchase ofany shares, or debenturesof, a body corporate.'

1

2

InformationInformationInformationInformationInformationmemorandummemorandummemorandummemorandummemorandum

RRRRRed herring prospectused herring prospectused herring prospectused herring prospectused herring prospectus PPPPProspectusrospectusrospectusrospectusrospectus

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It must contain particularsas per schedule II of the Actand should be signed by allthe directors of thecompany. Must beapproved in a boardmeeting

It must contain all contentsof a prospectus as perScheduled II of theCompanies Act but doesnot have information onprice of securities offeredand number of securitiesoffered through suchdocument. All the directorsof the company must alsosign it. Must be approvedin a board meeting.

4

5 Need not be filed with SEBI Must be filed with SEBI Must be filed with SEBI

It shall carry sameobligations as areapplicable to theprospectus.

6 It shall carry sameobligations as areapplicable to theprospectus.

Civil and criminal liabilitiesare attached in case of mis-statement in the prospectus.

No such requirement7 Variation betweeninformation memora-ndum and red herringprospectus to be inti-matedto the applicants.

Not applicable

InformationInformationInformationInformationInformationmemorandummemorandummemorandummemorandummemorandum

RRRRRed herring prospectused herring prospectused herring prospectused herring prospectused herring prospectus PPPPProspectusrospectusrospectusrospectusrospectus

Need not be filed with ROC Red herring will have to befiled with ROC atleast threedays before the opening ofthe offer.

Prospectus to be filed afterfinalization of price andquantum of securities.

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Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Section 68Bprovides that every listed public company, making initial public offer of any securityfor a sum of rupees ten crores or more, shall issue the same only in dematerialisedfrom by complying with the requisite provisions of the Depositories Act, 1996 (22of 1996) and the regulations made thereunder

5.10 Is there any Liability for Mis-statement in Prospectus?

The prospectus should contain true statements and accurate disclosures. Thereshould not be any omission of material facts. This is known as “golden rule” for framingof prospectus laid down in Kindersley in New Brunswick & Canada Rly. & Land Co. v.Muggeridge (1860). It is the duty of those who issue the prospectus to be truthful in allrespects.

The following are the implications of the golden rule” for framing of prospectus :

The prospectus must present the whole picture of the company

The prospectus must disclose all material facts truly, honestly and accurately.

All facts which are likely to influence the decision regarding applying for sharesmust be disclosed.

It should not contain any untrue or misleading statement.

No fact should be omitted, the existence of which might, in any degree, affect thenature or quality of privileges and advantages disclosed by the prospectus.

Example : Example : Example : Example : Example : A prospectus stating that the company is regularly paying dividend, butnot disclosing that the company is incurring losses and that the dividend was paid outof reserves, is misleading.

A. Civil Liabilities for mis-statements in prospectus

B. Criminal Liabilities for mis-statements in prospectus

A. Civil Liabilities for mis-statements in prospectus

a. Remedies against the company.

b. Remedies against directors.

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a. Remedies against the company.

Rescission of contract : The first remedy against the company is to rescind thecontract. A person who takes shares on the faith of a prospectus containing falsestatement, may apply to the court for the contract to be set aside, and his name to bestruck off from the register of members. He may also claim his money back. But theallottee must act within a reasonable time and before he does anything, which isinconsistent with his right to rescind e.g., attends general meeting or receives dividend.

Suit for damages: The second remedy against the company has to sue for damagesfor deceit. The company shall be liable to pay compensation to every person whosubscribes on the basis of prospectus for any loss or damage he may sustain becauseof mis-statement in the prospectus.

The allottee cannot both retain the shares and get damages against the company.

b. Remedies against directors

A person who subscribed for shares on the faith of a false prospectus may claimfrom directors or promoters:

i. damages for fraudulent misrepresentation,

ii. compensation under section 62 of the Act,

iii. damages for non-compliance with the requirements of section 56 of the Act.

i) Damages for fraudulent mis-representation: An allottee may sue the director fordamages for deceit, if there are fraudulent misrepresentation in the prospectus.But the directors will not be liable for damages for mis-statement if they believedthem to be true [Derry v. Peek, (1889) 14 AC 337].

ii) Compensation under section 62 of the Act: An allottee is also entitled to claimcompensation from directors, promoter and any other persons who authorisedthe issue of the false prospectus, for damages sustained by reason of any untruestatement in it. This civil liability of directors is provided in section 62.

iii) Damages for non-compliance with the requirements of section 56 of the Act: Anomission from a prospectus of a matter required to be stated under section 56may give rise to an action for damages at the instance of a subscriber for shares,who has suffered loss thereby, even if the omission does not make the prospectusfalse or misleading. But the plaintiff must prove that he has sustained damage byreason of the omission of a matter required to be stated in the prospectus.

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A director or other person sued under section 56 may defend himself by showing:

a) that he had no knowledge of the matter not disclosed; or

b) that the contravention arose out of an honest mistake of fact; or

c) in the opinion of the Court, non-acceptance or contravention was not material orthat the person sued ought reasonably to be excused, having regard to all thecircumstances of the case.

Defences available to directors/ promoters against claim for damages u/s 62.

A director/ promoter sought to be made liable may escape his liability, if he provesthat

(i) Withdrawal of consent. Having consented to become a director, he withdrew hisconsent before the issue of prospectus and that it was issued without his authorityor consent.

(ii) Issue without knowledge. Prospectus was issued without his knowledge or consentand that on becoming aware of its issue, he forthwith gave public notice that itwas issued without his knowledge or consent.

Liability for false statements in a PLiability for false statements in a PLiability for false statements in a PLiability for false statements in a PLiability for false statements in a Prospectusrospectusrospectusrospectusrospectus

Civil Liability (Secs. 62 & 56) Criminal Liability (sec. 63)

Against theCompany

Against thePromoters,

Directors, otherOfficers and Experts

Against theCompany

Against thePromoters,

Directors, otherOfficers (not

availableagainst experts)

Rescission ofContract

Claim fordamages

fine uptoRs. 50,000

Damages Compensationunder Section 62

and 56

Imprisonmentupto 2 years

Fine uptoRs. 50,000

both

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(iii) Public notice of withdrawal of consent. After issue of prospectus and beforeallotment, he on becoming aware of the misstatement withdrew his consent to theprospectus and gave public notice of the withdrawal.

(iv) True statement. He had reasonable grounds to believe that the statements weretrue and believed them to be true.

(iv) Experts report. The statement was a correct and fair summary or copy of anexpert’s report.

(v) Official document. The statement was a correct and fair representation from anofficial document.

When an expert is not liable:

An expert who would be liable by reason of having given his consent to the issue ofprospectus containing a statement made by him will not be liable if he proves:

a) Withdrawal of consent. He withdrew his consent before the issue of prospectusand that it was issued without his authority or consent.

b) Issue without knowledge. Prospectus was issued without his knowledge or consentand that on becoming aware of its issue, he forthwith gave public notice that itwas issued without his knowledge or consent.

c) that he was competent to make the statement and he had reasonable grounds tobelieve, and did up to the time of allotment of the shares or debentures believedthat the statement was true. [Section 62(3)].

B. Criminal Liabilities for mis-statements in prospectus

a) Section 63 provides for criminal liability for misstatement in the prospectus. Wherethe prospectus includes any untrue statement, every person who authorised theissue of the prospectus, shall be punishable:

with imprisonment for a term which may extend to two years or

with fine which may extend to Rs.50,000 or

with both unless he proves that the statement was immaterial or he hadreasonable ground to believe that the statement was true.

However an expert is not subject to criminal liability.

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b) Penalty for Fraudulently Inducing Persons to Invest Money. Under section 68 anyperson who, either knowingly or recklessly makes any statement, promise or forecastwhich is false, deceptive or misleading, or by any dishonest concealment of materialfacts induces or attempts to induce another person to enter into-

(1) Any agreement for, or with a view to acquiring, disposing of, subscribing foror underwriting shares or debentures.

(2) Any agreement the purpose of which is to secure a profit, shall be punishablewith imprisonment for a term which may extend upto 5 years or fine uptoRs.1,00,000 or both.

c) Prohibition of allotment of shares in fictitious name. Section-68A prohibits makingof an application for acquiring shares of a company under a fictitious name. Thesection makes the act punishable with imprisonment for a term, which may extendupto 5 years.

QUESTION BANK

I. FAQs’

1. Define ‘Prospectus’.

2. Discuss briefly the contents of ‘Prospectus’. What guidelines have been issued bySEBI in this regard?

3. Mention cases in which a prospectus is not required to be issued by a publiccompany.

4. When is a company not required to issue prosecutes in connection with issue ofshares or debentures?

5. When can the invitation of offer to subscribe for shares be treated as not havingbeen made to the public?

6. In what way does the Companies Act, 1956, regulate the furnishing of an “AbridgedForm of Prospectus’ by a company, along with the share application form

7. Explain the provisions of the Companies Act, 1956 with regard to the registrationof a prospectus of a public company going for public issue of equity share. Whatare the documents required to be submitted by the company to the Registrar ofCompanies for the above purpose?

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8. A company issued a prospectus containing material mis-statements of fact. Relyingon the prospectus Mr. Gullible purchased shares from the market. Would thecompany be liable in damages to him? Can he rescind the contract?

9. State the remedies available to a person who has been deceived by a false andmisleading prospectus.

10. When a director of a company is not liable to an aggrieved party for the issue ofa prospectus containing a ‘Mis-statement’? In what manner he can defend himselffor non-compliance of the provisions of section 56 of the Companies Act?

11. What is prospectus? Who are liable for mis-statements in a prospectus? Explainthe remedies available to a shareholder against the company, who has been soinduced.

12. What do you understand by the term ‘Golden Rule’? Explain the legal remediesavailable to the aggrieved parties when representation is made in the prospectus.

13. Examine the defences available to a Director, who is held liable for issue of aProspectus containing an ‘Untrue’ statement, in a suit filed against him by anaggrieved Party.

14. Write short note on – a) Information Memorandum

b) Deemed prospectus

c) Shelf prospectus

d) Red-herring prospectus

15. The Board of Directors of Reckless Investments Ltd. have allotted shares to theinvestors of the company without issuing a prospectus or filling a statement in lieuof prospectus with the Registrar of Companies, Mumbai. Explain the remediesavailable to the investors in this regard

16. What is book building? Explain the process of raising capital through book building.

II. CASE STUDIES

1. A company issued a prospectus. All the statements contained there were literallytrue.. It also stated that the company had paid dividends for a number of years,but did not disclose the fact that the dividends were not paid out of trading profits,but out of capital profits. An allottee of shares want to avoid the contract on theground that the prospect was false in material particulars. Decide.

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(Hints: Yes the allotee can rescind the contract as there is misrepresentation.Concealment of a material fact is fraudulent. He can also claim compensationu/s 62 of the Companies Act)

2. The directors of a company issued prospectus inviting subscription for debenturesstating the object of the issue of the debenture as expansion of a project. Actuallythe money was spent for paying off other liabilities. Are the directors liable?

(Hints: Yes, the directors are liable because the prospectus was issued by themand contained misstatements and tried to deceive the investors. It misrepresentedthe state of mind of the investors which is as much as a fact as the state of hisdefection. A person who lends money must know the purpose for which the moneyshall be used. A similar decision was made in Edington v Fitzmaurice (1885) 29Ch D 459.)

3. A company issued a prospectus containing material mis-statements of fact. Relyingon the prospectus Mr. Gullible purchased shares from the market. Would thecompany be liable in damages to him? Can he rescind the contract?

(Hints: Yes the allotee can rescind the contract as there is misrepresentation. Hecan also claim compensation u/s 62 of the Companies Act.)

4. An allottee of shares in the company has brought an action against Director Q inthe company in respect of false statements in the prospectus. The director hascontended that the statements were prepared by promoters and he had relied onthem. Is the director liable under the circumstances?

(Hints:Yes, director shall be held liable. A director can escape liability for mis-statements in a prospectus only on grounds specified under section 62(2). Relyingon statements prepared by promoters is not a ground included there under.Accordingly, no defence shall be available to the director.)

5. ABC Ltd. issued a prospectus containing false information. X, an investor receiveda copy of the prospectus from the company. But he did not apply for any shares.After the listing of the shares, X purchased shares through the stock exchange athigher price which later on fell sharply. X sold these shares at a heavy loss. Xclaims damages from the company for the loss suffered on the ground that theprospectus issued by the company contained false

(the shares were purchased through stock exchange. The purpose of prospectusis over after the shares are subscribed. There is no liability on the company sincehe did not purchased shares on the basis of prospectus.)

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6. BPL Co. Ltd. issued a prospectus on 20th November 2007 for issue of debenturesbut a copy of the same was delivered to the Registrar on 21st November 2007.What is the liability of the Company?

(Hint : As per section 60 of the Act no prospectus shall be issued unless a copythereof is delivered to the Registrar for registration on or before such issue. As perclause 5 of the said section if any prospectus is issued without a copy thereofbeing delivered to the Registrar, every person who is a party to the issue of theprospectus, shall be punishable with fine which may extend to Rs. 50,000.)

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CHAPTER - VI

SHARE CAPITAL


6.1 What is share capital?

6.2 Nature of shares & Kinds of shares.

6.3 New types of share.

6.4 Rights shares and Bonus Shares.

6.5 Share Certificate and Share Warrant.

6.6 Reduction of Share Capital.

6.1 What is share capital?

In modern company law, the word capital is used to cover:

1. Share capital—the funds subscribed by members;

2. Loan capital –the fund provided by commercial finance providersand investors holding debentures or giving fixed deposits.

3. All funds whether provided by member, creditors or by retention ofprofits; and

4. The assets in which all the funds have been invested.

However in relation to a company limited by shares, the word capitalgenerally means share-capital, i.e. the capital in terms of rupees dividedinto shares of fixed amount. In other words, the contributions of personsto the common stock of the company form the capital of the company.The proportion of the capital to which each member is entitled, is hisshare. A share is not a sum of money; it is rather an interest measured bya sum of money and made up of various rights contained in the contract.

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Types of capital

According to Section 86, the share capital of a company limited by shares shall beof two kinds only, namely:

a) equity share capital –

i) With voting rights; or

ii) With differential rights as to dividend, voting or otherwise in accordance withsuch rules and subject to such conditions as may be prescribed;

b) preference share capital

Equity share capital Equity share capital Equity share capital Equity share capital Equity share capital consists of equity shares.

PPPPPreference share capital reference share capital reference share capital reference share capital reference share capital consists of preference shares

Thus share capital of a company can be either equity share capital consisting ofequity shares or preference share capital consisting of preference shares. The Companies(Amendment) Act, 2000 allows the issue of equity shares with differential rights. Earlierunder section 90 only a private limited company, which is not a subsidiary of a publiccompany, could issue shares with disproportionate rights.

The term capital is used in the following senses in the Company Law:

1. Nominal or authorised or registered capital:Nominal or authorised or registered capital:Nominal or authorised or registered capital:Nominal or authorised or registered capital:Nominal or authorised or registered capital: It is the sum stated in thememorandum as the capital of the company with which it is to be registered. It isthe maximum amount, which a company authorised to raise by issuing shares.

2. Issued capital:Issued capital:Issued capital:Issued capital:Issued capital: It is that part of authorised capital, which is offered by the companyfor subscription. It is obligatory to disclose issued capital in balance sheet - Part Iof Schedule VI.

For e.g. A company may have total authorised share capital of Rs. 10 lacs dividedinto 1 lac shares of Rs. 10 each. It may decide to issue 80,000 shares of Rs. 10each. In that case the issued capital shall be Rs. 8,00,000.

3 Subscribed capital: Subscribed capital: Subscribed capital: Subscribed capital: Subscribed capital: It is that part of the issued capital for which applications havebeen received from the investors. In the above example out of 80,000 sharesissued by the company, if applications are received for only 70,000 shares of Rs.10 each, the subscribed capital will be Rs. 7,00,000.

4..... Called up capital: Called up capital: Called up capital: Called up capital: Called up capital: It is that part of the subscribed capital, which has been calledup or demanded by the company. A company may call the amount due on shares

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in two or three instalments. In the above example if the company has called upRs. 5 per share, then its called up capital shall be 70,000 x 5 = 3.5 lacs.

5. PPPPPaid up capital:aid up capital:aid up capital:aid up capital:aid up capital: It is the total amount actually paid up on shares by the subscribers.Sometimes a few subscribers fail to pay the full amount called up. Thus paid upcapital is equal to called - up capital less calls in arrears. In the example givenabove, if only Rs. 3,00,000 is actually received by the company, then the paid upcapital shall be to Rs. 3,00,000.

6. RRRRReserve capital eserve capital eserve capital eserve capital eserve capital it is that part of the uncalled capital of the company which can becalled up only in the event of winding up. The company can determine this bypassing special resolution. The company cannot demand the payment of moneyon the shares to that extent during its lifetime. When once the reserve capital hasbeen so created, it cannot be charged or mortgaged as security for any loanraised by the company and it cannot be called up.

The reserve capital is different from capital reserve, which is created out of profits.

6.2 Nature of shares and kinds of shares

“ A share is bundle of rights and obligations”

a) Meaning and nature of share:

The capital of a company is divided into a number of units of a fixed amount. Theseunits are known as ‘shares’. According to section 2(46) of the Companies Act, “a shareis a share in the share capital of a company, and includes stocks except where a distinctionbetween stock and share is expressed or implied.”

In Boreland Trustees v. Steel Bros. & Co., Justice Farewell defined the shares as theinterest of the shareholder in the company measured by a sum of money, for the purposeof liability in the first place, and of dividend in the second also consisting of series ofmutual covenants entered into by all the shareholders inter se in accordance with theCompanies Act.

According to section 82, the share or other interest of any member in a companyshall be movable property, transferable in the manner provided by the Articles of thecompany. Shares are treated as “goods” under the Sale of Goods Act and they can betransferred to other persons. It may, however, be noted that a share certificate is not anegotiable instrument.

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To sum-up, a share signifies the following:

i. the interest of the shareholders in the company;

ii. the right to receive dividend;

iii. the right to attend and vote at the meeting;

iv. the right to share in the surplus assets of the company, if any, in the event of thecompany being wound up;

v. the liability of the shareholder in the company to pay calls on shares until fullypaid up;

vi. the right of the shareholder to transfer the shares subject to the Articles ofAssociation;

vii. binding covenant on the part of the company as well as the shareholder, as givenin the Articles of the company.

Thus, a share of a company in the hand so of a shareholder signifies a bundle ofrights and obligations. Section 83 requires each share to bear a distinctive number(except those which are with a depository).

Stock: Stock: Stock: Stock: Stock: A share should be distinguished from a similar term “stock “stock “stock “stock “stock””””” A stock may bedefined as the aggregate of fully paid -up shares of a member merged into one fund ofequal value. It is a set of shares put together in a bundle. The stock is expressed in termsof money and not as so many shares. Stock has the convenience of being divided intofractions of any amount.

However, no company can make an original issue of stock. It is only a companylimited by shares, which, if authorised by its Articles, may by passing a resolution in thegeneral meeting convert all, or any of its fully paid-up shares into stock (section 94). Astock is thus always fully paid up as against shares, which may also be partly paid -up.On conversion into stock, the register of members must show the amount of stock heldby each member instead of the number of shares. The conversion does not affect therights of the members in any way.

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ShareShareShareShareShare

A share has a nominal value

StockStockStockStockStock

A stock has no nominal value

A share has a distinctive number(except those which are with adepository)

A stock bears no such number

Shares can be issued originally tothe public

A company cannot make an originalissue of stock. Stock can be issuedby existing company by convertingits fully paid-up shares.

A share may either be fully paid-upor partly paid-up

A stock can never be partly paid-up, it is always fully paid-up.

A share cannot be transferred infractions. It is transferred as a whole

A stock may be transferred in anyfractions.

1

2

3

4

5

All the shares are of equaldenomination

Stock may be of differentdenominations

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b) Types of shares

TTTTTypes of sharesypes of sharesypes of sharesypes of sharesypes of shares

Equity SharesEquity SharesEquity SharesEquity SharesEquity Shares PPPPPreference sharesreference sharesreference sharesreference sharesreference shares

With voting rights With differentialrights as to

dividend, voting(non votingshares etc.)

(a) Cumulative - non cumulative(b) Participating - non participating(c) Convertible - non convertible(d) Redeemable preference shares

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Equity Shares: Equity Shares: Equity Shares: Equity Shares: Equity Shares: Equity Shares, with reference to any company limited by shares, arethose, which are not preference shares [Section 85(2) of the Companies Act, 1956].

The important characteristics of equity shares are as follows:

1. Equity shares carry voting rights at the general meetings of the company andhave the right to control the management of the company.

2. Equity shares carry the right to share in the profits of the company in the form ofdistribution of dividend and bonus shares.

3. In the event of winding up of the company, equity share capital is repayable onlyafter repayment of the claims of the creditors and preference shareholders.

4. Equity shareholders enjoy various rights as members, which include, inter alia,the following rights:

(a) Right of pre-emption in the matter of fresh issue of capital (Section81).

(b) Right to apply to the NCLT /CLB to have any variation of their rights setaside (Section 107)

(c) Right to receive a copy of the statutory reports (Section 165).

(d) Right to apply to Central Government to call an annual general meetingwhen the company fails to call such a meeting (Section 167).

(e) Right to apply to CLB/NCLT for calling an extraordinary general meeting ofthe company (Section 186).

(f) Right to receive copies of annual accounts along with auditors report (Sections210 & 219).

Equity shares constitute the permanent capital of the company. However the equityshares are to be repaid (a) in case of buyback of shares u/s77A (b) in case of reductionof capital u/s 100 (c) winding up.

FFFFFreedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: Till recently the companieswere permitted to issue shares only in two standard denominations Rs. 10/- or Rs. 100/-. In June 1999 on the recommendation of SEBI the CentralGovernment has issued notification allowing the freedom to companies toissue shares in any denominations. Accordingly many companies in theStock Exchange have reduced the face value of shares. Thus the par valueof shares can be rupees 2,5, 10, 100 or rupee 1. However it should not beless than rupee one or being other than multiple of rupee one.

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For example the par value of Infosys is Rs 5 (Market value in NSE on 2ND

May, 2008 is Rs 1789), face value of DLF Ltd. is Rs 2 (Market value in NSEon 2ND May, 2008 is Rs 720), face value of Tata Steel Ltd is Rs.10 (whilemarket value in NSE is Rs 797 on 2nd May, 2008), par value of RelianceIndustries is Rs 10/ (while market value is Rs 2674 in NSE on 2nd May,2008).

c) Preference Shares:

A preference share is defined to mean a share which fulfils the following tworequirements:

i) During the life of the company it must be paid preferential dividend either of fixedamount or at a fixed rate;

ii) On the winding up of the company it must carry a preferential right to be repaidthe capital in preference to the equity shareholders.

Kinds of Preference Shares:

1. Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: They carry the right to cumulative dividends if thecompany fails to pay the dividend in a particular year. All preference shares arealways presumed to be cumulative unless the contrary is stated in the terms ofissue.

Non-Non-Non-Non-Non-cumulative preference shares: cumulative preference shares: cumulative preference shares: cumulative preference shares: cumulative preference shares: Such shares do not carry the right to receivethe arrears of dividend in a particular year, if the company fails to declare dividend.if no dividend is paid in a particular year, it lapses.

2. PPPPParticipating preference sharesarticipating preference sharesarticipating preference sharesarticipating preference sharesarticipating preference shares They are entitled to a fixed rate of dividend plusparticipate in surplus profits along with the equity shares after a certain fixedpercentage has been paid to equity shareholders

Non-participating preference sharesNon-participating preference sharesNon-participating preference sharesNon-participating preference sharesNon-participating preference shares Such shares are entitled only to the fixeddividend and do not have the right to further participate in the surplus profits

3. Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares They are converted into equity shares at a laterdate. The holder of such shares is given the right of conversion of his shares intoequity shares at a later date.

Non-Non-Non-Non-Non-Convertible preference sharesConvertible preference sharesConvertible preference sharesConvertible preference sharesConvertible preference shares The holder of such shares does not get aright to convert such shares into equity shares at a later date.

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4. RRRRRedeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) Redeemable preference shares arethose shares which are to be redeemed (paid back) to the shareholders. Theyhave to be redeemed within a period of 20 years from the date of issue.Irredeemable preference shares cannot be issued. A company limited by sharesmay, if so authorised by its Articles, issue preference shares which are redeemableat the option of the company. Redemption of preference shares does not amountto reduction of company’s authorised share capital.

Conditions for the issue and redemption.

a. Such shares can be issued only if it is authorised by the Articles of Association.

b. Redeemable preference shares can be redeemed I) out of profits of the companyor ii) out of proceeds of a fresh issue of shares made for this purpose. Generalreserves need not be used for the purposes of redeeming the preference sharesso long as there is a debit balance in the profit and loss account.

c. No such shares shall be redeemed unless they are fully paid-up.

d. Premium, if any, payable on redemption should be provided from the profits orfrom the company’s share premium account.

e. An amount equal to redemption amount must be transferred to ‘capital redemptionreserve account’ where the redemption is effected out of profits, which wouldotherwise be available for distribution as dividend. Such capital redemption reservewill be utilised for redemption of redeemable preference shares. It may also beutilised for issue of fully paid bonus shares (sub-section 5)

f. On redemption of preference shares, the payment is to be made in cash, unlessthe terms of the issue provide for an option to convert them into equity shares.

g. Whenever, preference shares are redeemed, a notice is required to be given tothe Registrar of Companies within 30 days of the redemption [section 95(1)].

Meaning of SecuritiesMeaning of SecuritiesMeaning of SecuritiesMeaning of SecuritiesMeaning of Securities

As per section 2(45AA) of Companies Act, ‘Securities’ means securities asdefined in section 2(h) of Securities Contracts (Regulation) Act, ‘ 1956 andincludes hybrids.....

As per section 2(h) of Securities Contracts (Regulation) Act, ‘Securities’ include

4. RRRRRedeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) Redeemable preference shares arethose shares which are to be redeemed (paid back) to the shareholders. Theyhave to be redeemed within a period of 20 years from the date of issue.Irredeemable preference shares cannot be issued. A company limited by sharesmay, if so authorised by its Articles, issue preference shares which are redeemableat the option of the company. Redemption of preference shares does not amountto reduction of company’s authorised share capital.

Conditions for the issue and redemption.

a. Such shares can be issued only if it is authorised by the Articles of Association.

b. Redeemable preference shares can be redeemed I) out of profits of the companyor ii) out of proceeds of a fresh issue of shares made for this purpose. Generalreserves need not be used for the purposes of redeeming the preference sharesso long as there is a debit balance in the profit and loss account.

c. No such shares shall be redeemed unless they are fully paid-up.

d. Premium, if any, payable on redemption should be provided from the profits orfrom the company’s share premium account.

e. An amount equal to redemption amount must be transferred to ‘capital redemptionreserve account’ where the redemption is effected out of profits, which wouldotherwise be available for distribution as dividend. Such capital redemption reservewill be utilised for redemption of redeemable preference shares. It may also beutilised for issue of fully paid bonus shares (sub-section 5)

f. On redemption of preference shares, the payment is to be made in cash, unlessthe terms of the issue provide for an option to convert them into equity shares.

g. Whenever, preference shares are redeemed, a notice is required to be given tothe Registrar of Companies within 30 days of the redemption [section 95(1)].

Meaning of SecuritiesMeaning of SecuritiesMeaning of SecuritiesMeaning of SecuritiesMeaning of Securities

As per section 2(45AA) of Companies Act, ‘Securities’ means securities asdefined in section 2(h) of Securities Contracts (Regulation) Act, ‘ 1956 andincludes hybrids.....

As per section 2(h) of Securities Contracts (Regulation) Act, ‘Securities’ include

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(i) Shares, scrips stocks, bonds, debentures, debenture stock or othermarketable securities of a like nature in or of any incorporated company orother body corporate

(ia) Derivative

(ib) Units or any other instrument issued by any collective investmentscheme to the investors in such schemes

(ic) Security Receipt issued by Securitisation Company, as defined insection 2(1)(zg) of ‘ Securitisation & Reconstruction of financialassets & Enforcement of Security Interest Act, 2002’ (id) units orothersuch instruments issued to investors under any mutual fundscheme

(ii) Government securities

(iia) Such other instruments as may be declared by the CentralGovernment to be securities; and

(iii) Rights or interest in securities. [Section 2(h)]

Hybrid security -Hybrid security -Hybrid security -Hybrid security -Hybrid security - Hybrid security means any security which has characters ofmore than one type of security, including their derivatives. [section 2(19A)]Thus, a convertible or partly convertible debenture is a ‘hybrid security’.

6.3 Rights shares and Bonus Shares

Rights shares: Rights shares: Rights shares: Rights shares: Rights shares: Rights shares are the shares offered to the existing members inproportion to their existing shareholding. According to section 81, the directors of thecompany are under obligation to make offer of the new shares (known as right shares)to the existing members of the company in proportion to their shareholding. Sec 81grants the existing shareholders the right of pre-emption, namely, the right to be firstoffered the share before they are offered to the general public.

When this right accrues?

The right accrues where the company proposes to issue further shares

- after the expiry of two years from the date of incorporation of the companyor

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- after one year from the date of the first allotment of shares, whichever isearlier.

Thus if a company makes issue after the above specified time it will be a rightsissue, unless the members decide otherwise.

According to section 81(1), a company proposing to make a rights issue is requiredto send a ‘letter of offerletter of offerletter of offerletter of offerletter of offer’ to members. Since it is offer to the existing shareholders, thecompany is not required to issue prospectus.

The letter of offer contains a notice to the equity shareholders giving them theoption to take the shares offered by the company against the money so specified pershare. A minimum 14 days notice must be given for exercising his option.

The notice must also state that the shareholder shall have the right to renounce theoffer, in whole or in part, in favour of some other person who need not be a member ofthe company. If any shareholder to whom right shares or offered, declines to accept theshares, the board of directors may dispose them of in a manner most beneficial to thecompany.

When shares need not be given to existing shareholdersWhen shares need not be given to existing shareholdersWhen shares need not be given to existing shareholdersWhen shares need not be given to existing shareholdersWhen shares need not be given to existing shareholders? / Issue of shares to non-Issue of shares to non-Issue of shares to non-Issue of shares to non-Issue of shares to non-members and other personsmembers and other personsmembers and other personsmembers and other personsmembers and other persons..... However section (81[1A]) carves out an exception to sec.81. A company may offer further shares to any person i.e., to the public, or issue byway of private placement or preferential allotment to any segment of shareholders, viz.,promoters, foreign collaborators, employees, etc., in the following circumstances:

Special resolution. The further issue of capital to outsiders/other persons can bemade if it is approved by a special resolution in a general meeting authorisingthat shares need not be offered to the existing shareholders.

Ordinary resolution: If a special resolution is not passed then, by an ordinaryresolution in a general meeting shares can be offered to the outsiders providedan approval of Central Government is obtained thereto. The Central Governmentshall grant approval if it is satisfied that the proposal is beneficial to the company.[(Sec.81 (1a)]

Issue before time limit: Shares need not be given to existing shareholders in caseof an issue or allotment of shares within two years of the incorporation of acompany or within one year after the first allotment whichever event occurs earlier.

A private company need not offer its further issue first to existing shareholders.[Section 81 (3)].

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In the case of issue of shares against conversion of loans or debentures if certainconditions are satisfied.

SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. These guidelinesare applicable to listed companies. For an issue size of more than 50 lakhs.These include:

i) Appointment of an authorised merchant banker where issue size exceedsRs. 50 lakhs.

ii) Letter of offer should be given to shareholders for exercising right topurchase. The letter of offer shall contain disclosures specified by SEBIas per Form 2A. A minimum 14 days notice must be given for exerciseof right option.

iii) The Letter of Offer should be filed with SEBI atleast 21 days beforefiling of the same with Stock Exchange. Offer document to be madepublic for a period of 21 days from the date of filing with SEBI.

iv) The rights issue must be kept open for a minimum period of 30 daysbut not beyond 60 days.

v) Raising of minimum subscription of 90% against the entire issue andthe refund of the entire money in case the minimum subscription is notreceived within 42 days from the closure of the issue. In case of failureto refund the money within next 10 days, the company and the directorsshall be personally liable to repay with interest at the rate of 15% perannum.

vi) Agreement with depository for dematerialization giving an option toshareholders to get the shares in demat form.

vii) Issue shall be made fully paid up within 12 months except where totalissue exceed Rs. 500 crores.

viii) Compliance certificate to SEBI within 45 days of closure of the issue.

Conversion of loans or debentures into shares – Conversion of loans or debentures into shares – Conversion of loans or debentures into shares – Conversion of loans or debentures into shares – Conversion of loans or debentures into shares – The provisions of right issue donot apply to conversion of loans or debentures into shares. However, the company cando so only if such conversion has been approved before the issue of debentures orraising of the loan by a special resolution and also by the Central Government

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[sec. 81(3)]. However, no such special resolution shall be necessary were the lender ordebenture holder is either the government or any institution specified by the CentralGovernment in this behalf.

Conversion in public interest– Sub-sections (4) to (7) of section 81 provide thatwhere a company has taken any loans from the Central Government by issuing anydebentures or otherwise, the Government may, in the public interest, convert suchdebentures or loans into shares in the company. The conversion shall be on such termsand conditions as appear to the Government to be reasonable in the circumstances ofa particular case. While making an order for conversion, the Government shall considerthe following factors:

(a) the financial position of the company;

(b) the original terms of the issue;

(c) the rate of interest;

(d) the capital of the company;

(e) liabilities and reserves;

(f) the profits during the preceding 5 years; and

(g) the current market price of the shares of the company.

A copy of every order proposed to be issued by the Government must be laid indraft before each House of Parliament for a total period of 30 days [sec. 81(6)].

Share capital to stand increased [Sec. 94A] – Section 94A, inserted by theAmendment Act of 1974, provides that where the Government or any public financialinstitution has converted its debentures or loans into capital, the capital of the companyshall thereby stand increased by an equal amount and its memorandum alteredaccordingly. The Central Government is required to send a copy of the order to theRegistrar so that he may effect the necessary alterations in the company’s Memorandum.

Bonus shares: Bonus shares: Bonus shares: Bonus shares: Bonus shares: A company may, if its articles so provide, capitalize profits by issuingfully paid shares to the members. Such shares are known as bonus shares. Thus, bonusshares are given free of cost by the company and are allotted out of its distributableprofits. There is no actual cash flow. It is only a book entry. However, issue of bonusshares gives positive signals to the investors that the company is doing well.

The purpose of bonus issue is to match the capital base of the company with theasset base, when the company has large reserves.

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The articles of association must authorise capitalization of reserves. Bonus sharesshould not be given by reserves created by revaluation of fixed asset.

The company must pass resolution first at the Board meeting and thereafter at thecompany’s General Meeting for bonus issue. Management’s intention regardingthe rate of dividend to be declared in the year immediately after the bonus issueshould be indicated in that resolution.

After the allotment of bonus shares, return of allotment in e-form no. 2 is filedwith ROC.

The bonus issue of listed company is governed primarily by SEBI guidelines. SEBIguidelines provide, inter alia, that

No bonus issue shall be made within 12 months of any public/right issue;

Bonus issue to be made out of free reserves or share premium collected incash only;

No bonus issue to be made in lieu of dividend;

No bonus issue to be made unless partly paid shares, if any, existing aremade fully paid-up or where company has defaulted in repayment of itsfixed deposit or redemption of its debentures or payment of statutory dues toits employees like provident fund, gratuity, bonus, etc.

Right SharesRight SharesRight SharesRight SharesRight Shares

To be paid for - Right shares confersa privilege on the existingshareholders to have a claim on theshares offered after the first publicissue.

However, the shareholders must payfor the shares accepted.

Bonus SharesBonus SharesBonus SharesBonus SharesBonus Shares

Bonus shares are issued tothe existing members free of charge.It refers to capitalization of reserves.

1

Partly paid - The existingshareholding of the members as wellas rights shares may be partly paid.

Bonus shares are always fully paid.2

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6.4 New types of Shares – Recently introduced

i) Sweat equity (introduced by Companies (Amendment) Act, 1999).

ii) Equity Shares with discriminating rights (introduced by Companies (Amendment)Act, 2000).

i) Sweat equity (section 79A)

Sweat equity shares refer to equity shares issued by the company to employees ordirectors

- at a discount or

- for consideration other than cash

Money to be kept in a separate bankaccount - Till the concerned regionalstock exchange approves theallotment, money received againstrights must be kept in a separatebank account.

This is not relevant to bonus issuesas no money is to be received bythe company.

Right to renounce - Rights sharesmay be renounced by a member infavour of his nominee. He mayrenounce all or part of the sharesoffered to him. Guidelines - Rightsissue are essentially regulated underthe provisions of the Companies Act,although SEBI guidelines also applyto listed companies.

Right SharesRight SharesRight SharesRight SharesRight Shares Bonus SharesBonus SharesBonus SharesBonus SharesBonus Shares

4

5 No such facility is available inrespect of bonus shares.Bonus issuesare essentially regulated by expressprovisions in the articles ofassociation and detailed guidelinesissued by SEBI which are applicableto listed companies.

Minimum subscription - In the eventof a company failing to receive aminimum of 90% subscription, thecompany shall have to return theentire money received.

There is no such requirement.3

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- for providing know-how or making available rights in the nature of intellectualproperty rights or value additions, by whatever name called.

Thus sweat equity shares are issued as a reward for hard work or value additionsor contributions in the form of IPRs.

Pre-conditions for the issue of Sweat Equity Shares

a. Sweat Equity Shares can only be of a class of shares already issued;

b. These can be issued by a company after expiry of one year from the date ofentitlement for commencement of business;

c. The issue is authorised by special resolution passed in a General Meeting;

d. The resolution should specify the number of shares, current market price,consideration, if any, and the class or classes of directors or employees to whomsuch equity shares are to be issued;

e. The sweat equity shares of a company whose equity shares are listed on arecognized stock exchange are issued in accordance with the regulations madeby the Securities and Exchange Board of India in this behalf; Incase of unlistedcompany, the Unlisted companies (Issue of Sweat Equity Shares) Rules, 2003provide for procedure for issue of sweat equity.

f. All the limitations, restrictions and provisions relating to equity shares shall beapplicable to such sweat equity shares.

Unlisted companies (Issue of Sweat Equity Shares) Rules, 2003.

The main features of these rules are:

Sweat Equity can be issued only to permanent employees or whole time directoror executive director.

Issue of Sweat Equity Shares must be authorized by a special resolution. Noticefor the meeting shall include explanatory statement giving the details aboutapproval by the board of directors, reasons for issue, number and class of sharesto be issued, value of sweat equity shares etc.

Separate Resolution for each employee/promoter, if it is 1% or more of issuedcapital – if proposed sweat equity shares to any identified employees and promotersis 1% or more of issued capital (excluding outstanding warrants and conversion),separate resolution shall be passed for each such employee / director.

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Register of Shares – Company shall maintain register of sweat Equity Shares inprescribed form.

Disclosure in directors report – Directors Report shall disclose number of sharesissued, conditions of issue, pricing formula, total sweat equity shares issued, moneyrealized or benefit accrued and diluted EPS pursuant to issue of sweat equityshares.

Reporting in general meeting – If sweat equity shares are issued, a certificate willbe placed at each Annual General Meeting (AGM) that sweat equity shares havebeen allotted in accordance with the resolution passed in the general meetingand in accordance with the rules. The certificate shall be issued either by auditorsof the company or practicing company secretary.

Pricing of Sweat Equity – Pricing of sweat equity shall be at a fair price calculatedby independent valuer. He will consider intellectual property or know how orother value addition. He shall consult such experts as he deems fit.. His reportshould indicate justification for valuation.

Restrictions on quantum of issue – – – – – Company shall not issue sweat equity sharesfor more than 15% of total paid-up capital in a year or shares of value of Rs. Fivecrores whichever is higher. If it is proposed to issue more equity shares, priorapproval of Central Government is required.

Employees Stock Option / Stock PEmployees Stock Option / Stock PEmployees Stock Option / Stock PEmployees Stock Option / Stock PEmployees Stock Option / Stock Purchase (ESOP / ESOS)urchase (ESOP / ESOS)urchase (ESOP / ESOS)urchase (ESOP / ESOS)urchase (ESOP / ESOS)

One of the popular ways of giving incentives to the employees is by offeringthem shares of the employer company at a discounted price or free of cost.This is one of the ways of participation in the company’s profit and can givefantastic capital gain to the employees. SEBI has issued guidelines for issueof ESOP / ESOS. Sweat Equity Shares as defined in section 79A of theCompanies Act 1956 are different from ESOP / ESOS.

Fringe Benefit Tax on ESOP and sweat equity. Company issuing ESOP orsweat equity is liable to FBT after 1-4-2007 @ 33.99%. However the FBTcan be recovered from the employee. Fair market value on date on whichoption vests with the employees as reduced by amount actually paid byemployee or recovered from employee shall be the value of fringe benefit[section 115WB(1)(d) of Income Tax Act].

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ii) Equity Shares with discriminating rights [section 2(46A), 86(a)(ii)]

Section 2(46A) defines “share with differential rights” as a share that is issued withdifferential rights in accordance with the provisions of section 86.

According to section 86 a company can issue equity shares with differential rightsas to –

a. dividend

b. voting or

c. otherwise in accordance with such rules and subject to such conditions a may beprescribed.

Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Equity shares with discriminating rights will not only includenon-voting shares but also shares, which carry differential rights. This variation in rightsmay relate to future conversion of capital, participation in right offers participation inpreferential offers, class meetings, loyalty bonuses, differential dividends, different facevalue etc.

Non-voting shares are the shares which do not carry any voting rights and areissued in accordance with Company (Issue of share capital with Differential Rights)Rules, 2001.

Procedural rules regarding issue of non-voting shares/ shares withdifferential rights:

1. The issue of such shares should be permissible under the Articles of association ofthe company.

2. Issue of such shares must be authorized by the articles of association of thecompany.

3. Shares with differential voting rights, including non-voting shares shall be allowedto the extent of 25 per cent25 per cent25 per cent25 per cent25 per cent of the total issued share capital.

3. The company must have distributable profits, as per section 205, in the threeyears preceding such issue.

4. Equity capital with regular voting rights will not be allowed to be converted intoshares with differential voting rights and vice-versa.

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5. Issue of such shares shall have to be approved by the shareholdershareholdershareholdershareholdershareholder’s resolution in’s resolution in’s resolution in’s resolution in’s resolution ina general meetinga general meetinga general meetinga general meetinga general meeting..... A listed company should obtain the shareholders’ approvalthrough postal ballot.

6. The notice of the general meeting must give the prescribed detailsdetailsdetailsdetailsdetails by way ofexplanatory statementexplanatory statementexplanatory statementexplanatory statementexplanatory statement.

7. A company which has defaulted in filing annual returns during the precedingthree years or has failed to repay its deposits or interest thereon on due date orredeem debentures on due date or pay dividend shall not be eligible to issueshares with differential rights.

8. Again, a company should not have defaulted in addressing investors’ grievancesor has been convicted of any offence under SEBI Act, Securities Contract RegulationAct, 1956 and FEMA.

AAAAAdvantages of NVSdvantages of NVSdvantages of NVSdvantages of NVSdvantages of NVS Non-voting shares have off late became popular in USA andEuropean Countries, although investors prefer to have voting rights. Holders of non-voting shares are compensated by offering them higher dividends as compared toshares with voting rights.

1. NVS are good buffers against hostile takeover bids. A promoter who feelsthreatened by a hostile takeover bid can issue NVS to protect his company.

2. Promoter can use NVS to raise funds in the market without creating any compulsoryobligation to pay, as in case of debentures or preference shares.

3. There will be dilution of equity but no-dilution of control.

4. Mobilization of funds through NVS would also help companies to reduce theirdebt equity ratio and enhance their financial health and profitability.

5. Holders of NVS get higher dividend than holders of equity shares with votingrights.

DisDisDisDisDis-proportionate voting rights-proportionate voting rights-proportionate voting rights-proportionate voting rights-proportionate voting rights: Non-voting shares and shares with differentialrights are two different types of shares. While in the first case, voting rights are sacrificed,in the later one, they may be differential in any type of right including of voting right. Forexample, a company may issue two types of shares X and Y with equal face value.While, X may have one vote for one share, Y may have five votes for every ten shares.The lower weightage of voting power may be compensated by additional dividend onsuch shares.

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Note: Section 85 to 89 do not apply to a private company, unless it is subsidiary ofa public company. Thus, a private company was authorized to issue shares with differentialrights even before the introduction of these shares with differential rights

6.5 Share Certificate and Share Warrant

Share certificate

A share certificate is a document of title issued by the company declaring that theperson named therein is the owner of a specified number of shares in the capital of thecompany.

- It is a prima facie evidence of the title of the members to such shares.[section84(1)] It also serves as estoppels as to payment.

- Every share certificate must be issued under the common seal of the companywhich must be affixed in presence of two directors or persons acting on behalf ofthe directors under a duly registered power of attorney and the secretary or someother person appointed by the Board for the purpose.

- Every share must have a distinctive number(other than shares held in adepository)sec 83.

- Every share certificate shall have distinctive number. A share certificate has to beissued for partly or fully paid shares.

- Time limit: A company shall deliver share certificate within three months of theallotment of shares In case of transfer, the certificate duly transferred should bedelivered in two months.

- No share certificate is required to be issued if the shares are in the demat form.Where securities are dealt with in a depository, the company shall intimate thedetails of allotment of securities to depository immediately on allotment of suchsecurities.(S. 113)

- The share certificate is liable for stamp duty under the State Stamp Act It is to bepaid on the issue price and not on the face value of shares.

Circumstances for issue of duplicate share certificates: Section 84(2) provides thata company may renew or issue the duplicate of a certificate, if such certificate:

a) is proved to have been lost or destroyed, or

b) having been defaced or mutilated or torn is surrendered to the company.

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Section 84(4) makes it obligatory for companies to follow the rules prescribed bythe Government in regard to the following matters:

(i) The manner of issue or renewal of a certificate or issue of a duplicate thereof.

(ii) The form of a certificate (original or renewed) or a duplicate thereof.

(iii) The particulars to be entered In the Register of Members or in the register orrenewed or duplicate certificate

(iv) The form of such registers.

(v) The fee on payment of which, the terms and conditions, if any ( including termsand conditions as to evidence and indemnity and reimbursement for expensesincurred in connection with investigating evidence) on which a certificate may berenewed or duplicate thereof may be issued.

FFFFFine for issuing false certificate – ine for issuing false certificate – ine for issuing false certificate – ine for issuing false certificate – ine for issuing false certificate – If a company renews a certificate or issues duplicatecertificate with intent to defraud, the company is punishable with fine upto Rs. one lakh.In addition, every officer who is in default can be imprisoned upto 6 months and a fineupto Rs. one lakh can be imposed or both imprisonment and fine can be imposed[Section 84(3)].

Share warrant

A share warrant is a bearer document of title to shares specified therein and isissued by the public limited company against fully paid shares. (section 114). Sharewarrant can be issued only with the previous approval of the Central Government.

A share warrant is treated as a negotiable instrument. It can be transferred bysimple delivery. Thus, there is no necessity to register the transfer of share warrantwith the company.

On issue of a share warrant the name of the shareholder is struck off from theregister of members. Thus the bearer of share warrant is not a member, but he iscertainly a shareholder. The articles of a company may provide that the bearer ofa share warrant shall be deemed a member of the company for all or any of thepurposes defined in the articles. Notice of general meeting is not required to besend to the warrant holder. He can vote if the articles so provide.

According to section 114 only a public company limited by shares, if so authorisedby its articles can, with the previous approval of the Central Government beallowed the facility of conversion of share certificate into share warrants.

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A share warrant shall mention that its bearer is entitled to the shares specifiedtherein. Dividend on shares specified in the warrant may be paid by coupons orotherwise.

A share warrant holder may convert the same back into a share certificate. (Sec.115)

According to section 115 the following particulars shall be entered in the register ofmembers upon the issue of share warrant:

a. The fact of the issue of the warrant ;

b. A statement of the shares specified in the warrant, distinguishing each share by itsnumber.

c. The date of issue of the warrant.

A private company cannot issue share warrant.

Difference between share certificate and share warrant

a. A share certificate is prima facie evidence of document of title, stating that theholder is entitled to a specified number of shares. Share warrant is a bearerdocument stating that the holder is entitled to certain number of shares specifiedtherein.

b. The holder of a share certificate is a member of the company whereas the bearerof a share warrant can be a member only if the articles so provide.

c. A share warrant is a negotiable instrument whereas a share certificate is not so.

d. Only a public company can issue share warrant whereas a public as well as aprivate company can issue a share certificate.

e. In order to qualify as a director, the person should acquire a share certificateinstead of a share warrant

f. A share certificate can be issued for fully paid or partly paid up shares whereas ashare warrant can be issued in respect of only fully paid up shares.

6.6 Reduction of Share Capital vs. Alteration of Share Capital

Sec. 94 deals with alteration of share capital. While sections 100 to 103 lay downthe procedure for reduction of share capital. A company can alter its share capital, Ifauthorised by its articles, by an ordinary resolution, in 5 ways:

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a. Increase the share capital by issuing new shares

b. Consolidate its existing shares into larger denomination

c. Sub-divide its existing shares into smaller denomination

d. Convert fully paid up shares into stock

e. Cancel shares, which have not been taken up and diminish the amount of theshare capital by the number of shares so cancelled. Such cancellation is notdeemed as reduction of share capital.

While u/s section 94 alteration of share capital involves reduction in authorisedshare capital by cancellation of shares which have not yet been taken or agreed to betaken by any person, whereas Section 100 deals with reduction of share capital by wayof cancellation of shares which have already been subscribed, whether fully paid ornot.

Reduction of share capital:

Reduction of share capital means reduction in respect of that portion of:::::

a. Issued capital which has been subscribed, called up and paid up, or

b. Issued capital which has been subscribed but not called up.

MechanismMechanismMechanismMechanismMechanism :

Sec. 100 lays down that a company can reduce its capital -

- by reducing or extinguishing the liability of members in respect of uncalled or un-paid capital

if Rs. 50 are paid up, on a share of Rs. 100 and the company extinguishes theliability of the remaining Rs. 50 , then it will amount to reduction in capital.

- by paying off or returning paid-up capital not wanted (excess capital) for thepurposes of the company

- by paying off a part of the paid-up capital on the footing that it may be called-upagain

- by writing off or cancelling the capital which has been lost or is unrepresented bythe available assets.

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PPPPProcedure:rocedure:rocedure:rocedure:rocedure:

1. The articles should permit reduction in share capital.

2. Special resolution should be passed.

3. Confirmation of the High Court/NCLT must be taken to reduce the share capital.

4. The High Court /NCLT order should be filed with ROC and registered.

Procedure and Formalities for reduction (Section 100 to 105):

1. Authorisation by Articles: Reduction in share capital can be done only when it isauthorised by Articles of Association.

2. Special Resolution: The company must pass a special resolution for reduction ofcapital (Section100).

3. Petition to High Court /NCLT: After passing special resolution for reducing sharecapital, the company must then apply to the High Court/ NCLT by petition for anorder confirming the reduction scheme. It is the duty of NCLT to look after theinterest of the creditors and shareholders.

4. Consideration of petition by the High Court/ NCLT: The High Court /NCLT thensettles a list of such creditors who are entitled to object and may publish noticefixing a day or days within which creditors not entered on this list are to claim tobe so entered or are to be excluded from the right of objecting to the reduction.

Where a creditor entered on the list does not consent to such reduction and hisdebt is not discharged or determined by the company, the High Court /NCLT mayeither have his interest secured or, if it thinks fit, dispense with his consent(Section 101).

5. Interest of shareholders: Before sanctioning the scheme for reduction of sharecapital, the NCLT must look after the interest of shareholders. High Court /NCLTshould see that the scheme for reduction of capital is fair and equitable to allkinds of shareholders.

6. Order confirming the reduction: If the High Court /NCLT is satisfied that everycreditor of the company entitled to object has consented to the reduction or thathis debt has been discharged or secured, it may make an order confirming thereduction on such terms and conditions as it thinks fit.

7. To add “and reduced” words to the name of the company: It may require thecompany to add to its name as last words, the words “and reduced” for a specified

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time. The company may also be directed to publish reasons for the reduction ofcapital for public information (Section102).

8. Registration of order for reduction: The order of the High Court/ NCLT confirmingthe reduction must be produced before the Registrar and a certified copy thereofalongwith minutes should be filed with him for registration.

9. On such registration by the Registrar, the resolution for reducing share capital asconfirmed by the order of the High Court /NCLT takes effect. Notice of theregistration must be published in such manner the High Court /NCLT may direct.

10. The Registrar must certify the registration of the order of the High Court/ NCLT.

11. If any officer of the company knowingly, conceals the name of any creditor entitledto object to the reduction of capital, or knowingly misrepresents the nature of hisclaim, or debts any such concealment or misrepresentation, he is punishable withimprisonment up to one year or with fine, or with both (section 105).

RRRRReduction in Capital where company has suffered loss of capital is done byeduction in Capital where company has suffered loss of capital is done byeduction in Capital where company has suffered loss of capital is done byeduction in Capital where company has suffered loss of capital is done byeduction in Capital where company has suffered loss of capital is done bycancelling share capital, which has been lost or is unrepresented by available assets.cancelling share capital, which has been lost or is unrepresented by available assets.cancelling share capital, which has been lost or is unrepresented by available assets.cancelling share capital, which has been lost or is unrepresented by available assets.cancelling share capital, which has been lost or is unrepresented by available assets.This is one of the most common method of reduction.This is one of the most common method of reduction.This is one of the most common method of reduction.This is one of the most common method of reduction.This is one of the most common method of reduction.

Reduction of share capital vs. Diminution of share capital:

Reduction of capital means cancellation of that part of share capital which hasalready been subscribed whether fully paid or not.

Diminution means cancellation of unissued share capital.

1) Reduction may involve reduction inter alia of paid up capital or subscribed &issued capital, whereas diminution is in respect of unissued share capital.

2) If the articles authorise, the procedure for diminution can be effected by an ordinaryresolution, while reduction (which also needs authorisation by articles) can beeffected only by a special resolution.

3) Diminution needs no confirmation by the High Court /NCLT [Section 94(2)]’ butreduction needs such confirmation (Section 101).

4) In case of reduction, the company is ordered to add to its name the words “andreduced’ after its name. But such a provision does not exist in the case of diminutionof the share capital as envisaged in [Section 94(1)(e)].

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5) In the case of diminution, notice is to be given to the Registrar within 30 days fromthe date of cancellation whereupon the Registrar shall record the notice andmake the necessary alteration in the memorandum or articles or both (Section95(1)(f) and (2) where as in the case of reduction more detailed procedureregarding notice to the Registrar has been prescribed by Section 103, thoughthere is no such time limit as aforesaid. (i.e. 30 days).

Circumstances which does not amount to reduction of capital

i) Redemption of redeemable preference shares in accordance with the provisionsof sections 80 and 80A.

ii) A surrender of shares by a member to the company.

iii) Forfeiture of shares for non-payment of calls.

iv) Diminution of capital does not amount to reduction of capital.

v) Buy back of shares by a company does not amount to reduction of share capital.

QUESTION BANK

I. FAQs’

1. “A share is bundle of rights and obligations” Discuss.

2. Distinguishes between Equity Shares & Preference Share

3. What is the meaning of preference share capital of a company? Explain verybriefly the various kinds of preference shares a company is allowed to issue underthe provisions of the Companies Act, 1956

4. What is meant by ‘sweat equity shares’? What are the conditions to be fulfilled bya company proposing to issue ‘sweat equity shares’ under the Companies Act,1956?

5. What do you mean by Bonus Shares. Are they taxable under the Income tax Act?

6. Explain the right of pre- emption under the Companies Act when further capital isissued.

7. In what way does the Companies Act, 1956 regulate the issue of further sharecapital by a public limited company to persons other than the existing shareholders?

8. “While the offer for new shares being issued by a public limited company is to bemade only to the existing shareholders, yet these shares can also be offered to

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outsiders”. Discuss the statement in the light of the provisions of the CompaniesAct, 1956.

9. Explain clearly the meaning of the term ‘Share Certificate’. What is the time limit,under the provisions of the Companies Act, 1956 for the issue of such certificatesfor shares allotted by a company? State as to how and under what circumstancescan a company issue duplicate share certificates.

10. Distinguish between ‘share certificate’ and ‘share warrant’.

11. Explain clearly the difference between ‘Reduction of Share Capital’ and ‘Diminutionof Share Capital’.

12. Under what circumstances can a company reduce its share capital?

II. CASE STUDIES

1. The capital of X Ltd. is Rs. 50 lakhs, consisting of Equity Share Capital of Rs. 40lakhs and Redeemable Preference Share Capital of Rs. 10 lakhs. The PreferenceShare Capital is to be redeemed before 31st Dec., 2007. The Company is runningin losses and its accumulated losses aggregated to Rs. 15 lakhs. The companywants to borrow Rs. 20 lakhs from Financial Institutions to improve its workingand also to redeem the Preference Share Capital. Advise.

(Hint: No, the company cannot borrow from financial institution for the purpose.)

2. A Public Ltd. Co. wants to increase its subscribed share capital by offering thenew shares to the persons who are not the members of the company. Referring tothe provisions of the Companies Act, 1956, advice the company about theprocedure the company has to adopt to give effect to the above proposal.

(Hint: the company will have to pass special resolution or ordinary resolution withapproval of Central Government as provided in [Sec.81(1A)]

3. The authorised signatory of a company issued a share certificate in favour of X,which apparently complied with the company’s articles as it was purported to besigned by two directors and the secretary and it had the company’s common sealaffixed to it. In fact, the secretary had forged the signatures of the directors andaffixed the seal without any authority. Will the certificate be binding upon thecompany?

(Hint: No: due to forgery)

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4. Board of Directors of X ltd. made a final call of Rs. 25 per share on 10000 Equityshares of Rs. 10 each. Some of the shareholders challenged the validity of the actof the Board of Directors on the ground that the appointment of one of theDirectors was invalid. Discuss the case.

(Hint: Call is invalid )

5. XYZ Company Ltd. is holding 45% of total Equity shares in AB Company Ltd. TheBoard of Directors of AB Company Ltd. (incorporated on January 1, 2004) decidedto raise the share capital by issuing further equity shares. The Board of Directorsresolved not to offer any shares to XYZ Company Ltd. on the ground that it wasalready holding a high percentage of the total number of shares already issued,in AB Company. The Articles of Association of AB Company Ltd provide that thenew shares be offered to the existing shareholders of the company. On March, 1,2007 new shares were offered to all the shareholders except XYZ Company Ltd.Referring to the provisions of the Companies Act, 1956 examine the validity ofthe decision of the Board of Directors of AB Company Ltd. of not offering anyfurther shares to XYZ Company Ltd.

(Hint: Under section 81(1A) shares can be issued to outsiders if special resolutionis passed in general meeting or ordinary resolution with approval of CentralGovernment as provided in [Sec.81(1A)]. The decision is correct if the companyhas complied with sec. 81(1A).

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CHAPTER - VII

ALLOTMENT, CALLS & FORFEITUREOF SHARES


7.1 Allotment of shares

7.2 Underwriting and brokerage

7.3 Purchase of its own shares by company / Buy back of shares.

7.4 Issue of shares at a premium / Discount

7.5 Call on shares

7.6 Forfeiture of shares

7.7 Surrender of shares

7.1 Allotment of Shares

a. What is allotment?

Allotment may be defined to mean the appropriation by the Boardof Directors of the company out of the previously unappropriated capitalof the company of a certain number of shares to persons who havemade applications for shares. Allotment results in a binding contract,since it amounts to acceptance of offer.

Prospectus Invitation to offer

Application for shares Offer

Acceptance of application Allotment resulting in abinding contract

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Allotment of shares gives a subscriber a right to demand shares and acquireshareholders rights. Re-issue of forfeited shares does not constitute appropriation outof unappropriated capital and therefore does not amount to allotment.

An allotment to be valid

should be made by proper authority, namely, the board of directors or a committeeauthorised by the Board.

should be against application in writing,

should not be in contravention of any other law and

must be made within a reasonable time and

must be communicated to the applicant by dispatch of allotment letter.

must be absolute and unconditional

b) Conditions to be complied with by a public company before allotment ofshares

Statutory restrictions on allotment of shares: Sections 69 to 75 of the CompaniesAct, provides for a number of statutory requirements with regard to allotment of shares:these are also sometimes termed as “restrictions on allotment”.

1. Conditions to be complied with when a prospectus is issued -

No allotment of shares to the public can be made by a public company which hasissued a prospectus unless the following conditions are satisfied:

i. Registration of prospectus: A copy of prospectus is duly filed with the Registrar ofCompanies (section 60)

ii. Application money: The amount received on application money should be atleast 5% of the nominal amount of the shares (section 69(3)).

iii. Moneys to be kept deposited in separate bank account: section 69(4) Shareapplication money collected should be kept deposited in a separate account withbankers to issue.

(a) until the certificate to commence business has been obtainedu/s 149,

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(b) where such certificate has already been obtained, until the entire amountpayable on application for shares in respect of minimum subscription hasbeen received by the company.

iv. Minimum subscription section 69(1): A company cannot allot the shares unlessthe minimum subscription as specified in a prospectus has been subscribed andthe application money on them has been received. As per SEBI guidelines, acompany making public issue of shares must receive a minimum of 90%subscription against the entire issue before making an allotment of shares to thepublic.

As per section 69(5) minimum subscription is to be received before the expiry of120 days after the first issue of the prospectus. In case of failure, the entire amount is tobe repaid within 130 days after the issue of prospectus. If the money is not repaid within130 days as aforesaid, the directors become liable to repay the same along with interestat the rate of 6 per cent per annum payable from the expiry of the 130th day.

Minimum Subscription as per SEBI guidelines

For non-underwritten public issue: Minimum subscription received must be 90%ofthe public or rights issue. If the subscription is less than 90%, shares cannot be allotted.In such a case the company shall forthwith refund the entire subscription amount received.If there is a delay beyond 8 days after the company becomes liable to pay the amount,the company shall pay interest as per section 73. (i.e. interest upto 15%)

For underwritten public issue: If the company does not receive the minimumsubscription of 90% of the net offer to public including devolvement of underwriterswithin 60 days from the date of closure of the issue, the company shall forthwith refundthe entire subscription amount received without interest. If there is a delay beyond 8days after the company becomes liable to pay the amount (i.e. after 68 days), thecompany shall pay interest prescribed under section 73 of the Companies Act. (i.e.interest upto 15%).

The requirement of minimum subscription shall not be applicable to offer for sale,or to an eligible infrastructure company.


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The significance of ‘Minimum Subscription’ and the specified time for openingof subscription list in the matter of Public Issue of Shares.

According to Section 69(1) of the Companies Act, minimum subscription isthe amount which in the opinion of the Board Of Directors of the companymust be raised by the issue of those shares which are offered to the publicfor subscription with a view to provide for the following purposes:

(I) The purchase price of any property which is required to be paid out ofthe proceeds of the issue.

(ii) Any preliminary expenses payable by the company and any commissionpayable for the sale of shares.

(iii) The repayment of any monies borrowed by the company for any of theabove said two matters.

(iv) Working Capital.

(v) Any other expenditure stating the nature and purpose thereof and theestimated amount.

The purpose behind the provision of minimum subscription is to prevent acompany from starting its business without adequate financial resources.This is also an investor protection measure as the company has to refundthe amounts collected on applications in case the minimum subscription asstated in the prospectus is not received.

Shares cannot be issued immediately after the issue of prospectus.Shares cannot be issued immediately after the issue of prospectus.Shares cannot be issued immediately after the issue of prospectus.Shares cannot be issued immediately after the issue of prospectus.Shares cannot be issued immediately after the issue of prospectus.AAAAAccording to Section 72(1), no allotment shall be made until the beginningccording to Section 72(1), no allotment shall be made until the beginningccording to Section 72(1), no allotment shall be made until the beginningccording to Section 72(1), no allotment shall be made until the beginningccording to Section 72(1), no allotment shall be made until the beginningof the 5th day from the date of issue of prospectus. This is known as theof the 5th day from the date of issue of prospectus. This is known as theof the 5th day from the date of issue of prospectus. This is known as theof the 5th day from the date of issue of prospectus. This is known as theof the 5th day from the date of issue of prospectus. This is known as thetime of opening of subscription list. The subscription list for public issuestime of opening of subscription list. The subscription list for public issuestime of opening of subscription list. The subscription list for public issuestime of opening of subscription list. The subscription list for public issuestime of opening of subscription list. The subscription list for public issuesshould be kept open for at least 3 working days and this fact should beshould be kept open for at least 3 working days and this fact should beshould be kept open for at least 3 working days and this fact should beshould be kept open for at least 3 working days and this fact should beshould be kept open for at least 3 working days and this fact should bestated in the prospectus. The maximum period of keeping the subscriptionstated in the prospectus. The maximum period of keeping the subscriptionstated in the prospectus. The maximum period of keeping the subscriptionstated in the prospectus. The maximum period of keeping the subscriptionstated in the prospectus. The maximum period of keeping the subscriptionlist open is 21days if the issue was underwritten and 10 days in otherlist open is 21days if the issue was underwritten and 10 days in otherlist open is 21days if the issue was underwritten and 10 days in otherlist open is 21days if the issue was underwritten and 10 days in otherlist open is 21days if the issue was underwritten and 10 days in othercases.cases.cases.cases.cases.

The object of this provision is to give applicants sufficient time to study theThe object of this provision is to give applicants sufficient time to study theThe object of this provision is to give applicants sufficient time to study theThe object of this provision is to give applicants sufficient time to study theThe object of this provision is to give applicants sufficient time to study theprospectus and to withdraw their offer to subscribe for the shares in caseprospectus and to withdraw their offer to subscribe for the shares in caseprospectus and to withdraw their offer to subscribe for the shares in caseprospectus and to withdraw their offer to subscribe for the shares in caseprospectus and to withdraw their offer to subscribe for the shares in casethey are not satisfied with the prospectus.they are not satisfied with the prospectus.they are not satisfied with the prospectus.they are not satisfied with the prospectus.they are not satisfied with the prospectus.


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v. Allotment can be made only from the beginning of the 5th day after the date ofissue of prospectus section 72(1). Where shares are issued in terms of a prospectusissued generally, allotment cannot be made before the beginning of the 5th dayafter the issue of prospectus. Prospectus is issued generally by issue of a newspaperadvertisement.

The subscription list for public should be kept open for at least three working daysand disclosed in the prospectus.

vi. Listing of shares on one or more recognised stock exchange(s) (section 73):Allotment shall be void, where permission for listing has not been applied, or ifapplied the same has not been granted by a stock exchange or all the stockexchanges before the expiry of 10 weeks from the date of the closing of thesubscription list. Thus, if a single stock exchange refuses to grant permission, theentire allotment becomes void, unless the refusal of the stock exchange is setaside on appeal.

The company shall repay the moneys received from the applicants, within 78days from the closure of the subscription list, without interest. If the money is notso repaid on the expiry of 78th day, the company and every officer who is indefault is liable to repay that money to the applicants with interest at the rate of 15per cent per annum.

vii. Basis of allotment and minimum no. of shareholders: In case the issue is oversubscribed, the applicant will have to be allotted lesser no. of shares than appliedfor. In such a case allotment will be done pro-rata in consultation with the stockexchange authorities and as per SEBI guidelines in this regard.

viii. Resolution for allotment: The Board of Director shall then pass resolution regardingallotment of shares and authorise the issue of letters of allotment and letters ofregret.

ix. Refund of excess of application money: Section 73(2A) Where listing permissionhas been granted, all monies in excess of the application money on shares allottedmust be repaid forthwith without interest. Section 73(2A) provides that if suchmoney is not repaid on the expiry of 78th day from the closure of the subscriptionlist, the company and every director of the company, who is an officer in default,shall be jointly and severally liable to repay the same with interest @ 15% p.a.

x. Issuance of share certificates: as per section 113, the company should deliver theshare certificates within 3 3 3 3 3 months after the allotment of shares.


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xi. Return of allotment: After allotment, the company must file with the Registrar areturn of allotment within 30 days of the allotment of shares.

ALLOTMENT WITHIN 30 DAYS –Companies must allot the securities within30 days after close of issue. In case of issue through book building, allotmentshould be completed in 15 days. If allotment is not made within 30 days,interest will be payable after 30 days @ 15%.

2. Conditions to be complied with when prospectus is not issued -

Statement in lieu of prospectus: Where prospectus is not issued, a public companyshall not allot any shares unless it files a statement in lieu of prospectus with theRegistrar atleast 3 days before the first allotment of shares.

Resolution of Board of Directors for allotment of shares should be passed.

Return of allotment should be filed with the ROC within 30 days from the date ofallotment.

c. What is irregular allotment?

If an allotment of shares is made in contravention of the provisions of Secs. 69, 70or 73 (discussed in the previous pages), then the allotment is termed as irregular. Thus,an allotment will be considered irregular in the following cases:

(i) where minimum subscription has not been received;

(ii) where prospectus or a statement in lieu of prospectus has not been filed with theRegistrar;

(iii) where subscription list is opened before the beginning of the 5th day from the dateof the issue of prospectus;

(iv) where a minimum of 5% payable on application has not been received;

(v) where the application money is not kept in a separate account with a scheduledbank; and

(vi) where stock exchange has either not listed shares within ten weeks or has refusedpermission.

d. Effect of irregular allotment

1. Allotment valid but punishment of fine: (section 60) Where the irregularity resultsin failure to deliver a copy of the prospectus to the Registrar, the company and


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every person who is knowingly a party to the issue of the prospectus shall bepunishable with fine which may extend to Rs. 50,000.

2. Allotment voidable: (section 71(1)) If a company without complying with theprovisions relating to: (i) minimum subscription, or ii) application money, or iii)the filing of a statement in lieu of prospectus, make an allotment, it, thoughirregular, is nonetheless an allotment. But an applicant may, if he so desires,avoid the allotment:

a) within 2 months from the date of the statutory meeting where it was madebefore that meeting;

b) If allotment is made after statutory meeting, within 2 months after the date ofallotment.

It should be noted that an irregular allotment can be avoided only within the timelimits indicated above, but within the time limit it can be avoided even if the companygoes into liquidation. The allottee must inform the company within the time limits that heavoids the allotment.

3. Liability of Directors: (section 71(3)) In the event of non-compliance with theprovisions of section 69 and section 70, the allotment is rendered voidablevoidablevoidablevoidablevoidable at theoption of the applicant. Besides, any director who has knowledge of the fact ofthe irregularity shall be liable to compensate the company and the shareholderrespectively for any loss, damage or costs which the company or the allotee mayhave sustained or incurred thereby.

4. Fine in case allotment is made before the beginning of the 5th day from the dateof issue of the prospectus (section 72(3)) In such a case the company and everyofficer of the company shall be punishable with fine which may extend to Rs.50,000. However, the allotment will remain valid.

5. Failure to get listing-Allotment void: (section 73) In case of company’s failure toapply for listing of its share on a stock exchange to list its shares or permissionhaving not been granted before the expiry of ten weeks from the date of closingof the subscription list, the allotment before void. Besides, the entire money receivedby way of application money must be refunded forthwith. In case it is not repaidwithin 8 days of becoming due, the company and every director who is an officerin default shall be jointly and severally liable to repay that money with interest atthe rate of 15% per annum.


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Further, the company and every officer of the company who is in default shall bepunishable with fine up to Rs. 50,000 and where the repayment is delayed beyond sixmonths, also with imprisonment for a term up to one year.

e) Return as to allotment

A return of allotment in the prescribed form is required to be filed with the Registrarof Companies within 30 days of the allotment. In case of allotment of shares againstcash, the return must state the number and nominal amount of the shares allotted; thenames, address and occupation of the allottees; and the amount paid or payable oneach share.

Failure to file the return as aforesaid renders every officer of the company who is indefault punishable.

7.2 Underwriting

Underwriting is in the nature of an insurance against the possibility of inadequatesubscription. Underwriting is a contract by which a person (known as underwriter) agreesthat if the shares/debentures about to be offered for subscription are not, within aspecified time taken up by the public, he will himself take them up and pay for what thepublic do not take up. Thus the underwriter guarantees subscription of shares. Acompany may pay underwriting commission to any person in consideration of his (a)subscribing to or agreeing to subscribe or (b) to procure subscription for shares/debentures. Underwriting of shares or debentures is not compulsory .

Conditions:Conditions:Conditions:Conditions:Conditions: Section 76 permits the payment of underwriting commission subject tothe following conditions:

1. The payment of commission should be authorised by the Articles.

2. The names and addresses of the underwriters and the number of shares ordebentures underwritten by each of them should be disclosed in the prospectus.

3. The amount of commission should not exceed, in the case of shares, 5% of theprice at which the shares have been issued or the amount or rate authorised bythe Articles whichever is less and in the case of debentures it should not exceed2.5% of the price of debentures or lower rate, if lower rate is prescribed underarticles.

4. The Underwriting Commission can be paid out of capital or out of profits.


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5. The rate should be disclosed in the prospectus or in the statement in lieu ofprospectus and should be filed with the Registrar along with a copy of theunderwriting contract before the payment of the commission.

6. The number of shares or debentures which persons have agreed to subscribeabsolutely or conditionally for commission should be disclosed in the manneraforesaid.

7. A copy of the contract for the payment of the commission should be delivered tothe Registrar along with the prospectus or the statement in lieu of prospectus forregistration.

8. Section 76(4A) clarifies that commission to the underwriters is payable only inrespect of those shares or debentures which are offered to the public for subscription

7.2a Brokerage [(sec. 76(3)]

Brokerage is different from underwriting commission in as much as a broker doesnot undertake to subscribe for shares in case the same are not subscribed by the public.Brokerage is essentially the reward paid to middle man who brings about a bargainbetween the company and the purchaser of shares or debentures. Payment of brokerageis permissible in addition to brokerage. The amount of brokerage paid or payableshould be disclosed in the prospectus or statement in lieu of prospectus. However,brokerage can be paid only to brokers registered with SEBI.

In case of default in respect of provisions relating to commission or brokerage,company and every officer in default is punishable with fine which may extend upto Rs.5,000.

7.3 Purchase of its own shares by company

Section 77 prohibits a company limited by shares or a company limited by guaranteehaving a share capital from buying its own shares. The section further disallows thepublic company and a private subsidiary of a public company to give loan or providefinancial assistance to any person to enable him to purchase or subscribe to company’sown shares or shares of a holding company.

The aforesaid restrictions are however subject to certain exceptions which include:

lending of money by a banking company in the ordinary course of its business;

the lending of money or purchase of shares for the benefit of its employees;


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giving loans to employees to purchase fully paid shares of the company but notexceeding his six months’ salary or wages.

However, buy back of shares by the company can be done subject to the provisionsof 77A, 77AA and 77B.

7.3a Buy Back of Shares

Buy-back can be described as a procedure, which enables a company to go backto the holders of its shares and offer to purchase from them the shares that they hold.(Sec. 77A)

Why buy-back? : There are three main reasons why a company opt for buy-back:

To improve shareholder value, since buy-back provides a means for utilising thecompany’s surplus funds which have unattractive alternative investment optionand since a reduction in the capital base arising from buy-back would generallyresult in higher earning per shares (E. P. S).

As a defence mechanism, in an environment where the threat of corporate take-over has become real, buy-back provides a safeguard against hostile take-oversby increasing promoters’ holdings. Buy back will increase shares prices and theshares available in market for the purchase will get reduced. Buy back will increaseholding to promoters. This will ward off take overs.

Management signaling its confidence The decision to buy-back articulatesmanagement’s’ view that the company’s future prospects are good and henceinvesting in its own shares is the best option. A company may buy back the sharesif it is of the opinion that its market price is lower than its real worth.

Power of Company to purchase its own Shares (Securities) section77A/ 77B

A company can buy back its own shares or securities subject to the provisions ofsec. 77A , 77B and the buy back rules and regulations. The buy-back by a listedcompany is to be made in accordance with SEBI (Buy-Back of Securities) Regulations,1998, and by an unlisted company in accordance with Private Limited Company andUnlisted Public Limited Company (Buy-back of Securities) Rules, 1999.


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A. Pre- conditions for buy-back

1. The buy-back is permitted only if the articles of the company so authorise.

2. The buy-back of shares/securities is restricted to 25% of the total paid-up capitaland free reserves. ( in any financial year it cannot exceed 25% of the paid-upcapital and free reserve)

3. Debt-Net worth ratio is not more than 2:1 after buy-back

4. Shares/Securities for buy-back are fully paid-up. The shares are not subject toany lock - in period.

B. Restrictions imposed for buy - back [section 77B]

A company shall not buy-back its shares or other specified securities.

through any subsidiary company, including its own subsidiary company.

through any investment company or group of investment companies

if default subsists in repayment of deposit or interest payable thereon, redemptionof debentures or preference shares, or payment of dividend to any shareholder,or repayment of any term loan or interest payable thereon to any financial institutionor bank

if the company has not complied with the provisions of sections 159,207, and211 i.e. when it has failed to file the annual return with the Registrar, or failed topay dividend within 30 days from the date of declaration, or failed to prepare thebalance sheet and profit and loss account as per requirements of Schedule VI

C. Sources of funds for buy-back [section 77A(1)]

Buy-back may be out-of

(I) its free reserves

(ii) the securities premium account

(iii) the proceeds of any shares/securities*

However, buy-back cannot be made out of proceeds of an earlier issue of the samekind of shares or same kind of other specified securities-proviso to section 77A(1) .

Capital Redemption Reserves Account: If buy-back is out of free reserves a sumequal to nominal value of shares so purchased shall be transferred to capital redemptionreserves account Section 77AA


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D. From whom can company purchase its shares [section 77A(5)]

The buy-back may be :

(a) from existing securities holders on a proportionate basis (tender method) or

(b) from open market (through stock exchange or book building process) or

(c) from holders of odd lots of shares or

(d) from employees pursuant to Employees Stock Option Scheme (ESOS) / SweatEquity.

E. Procedure of buy-back of shares /securities

Before buy-back

1 The buy-back is authorised by its Articles.(Otherwise articles will have to beamended)

2 A special resolution is passed in General Meeting authorising the buy-back (if itexceeds 10% of paid up capital and free reserves). The buy-back of shares/securities is restricted to 25% of the total paid-up capital and free reserves BoardBoardBoardBoardBoardRRRRResolution is only required when the buy back is 10% or less of the total paid upesolution is only required when the buy back is 10% or less of the total paid upesolution is only required when the buy back is 10% or less of the total paid upesolution is only required when the buy back is 10% or less of the total paid upesolution is only required when the buy back is 10% or less of the total paid upequity capital and free reserves. In case of listed companyequity capital and free reserves. In case of listed companyequity capital and free reserves. In case of listed companyequity capital and free reserves. In case of listed companyequity capital and free reserves. In case of listed company, special resolution, special resolution, special resolution, special resolution, special resolutionmust be passed only by postal ballot.must be passed only by postal ballot.must be passed only by postal ballot.must be passed only by postal ballot.must be passed only by postal ballot.

3 The notice of the meeting at which special resolution is proposed to be passedshall be accompanied by an explanatory statement stating –

a.) a full and complete disclosure of all the material facts;

b.) the necessity for the buy –back ;

c.) the class of security intended to be purchased under the buy-back;

d.) the amount to be invested under the buy-back;

e.) the time limit for completion of buy -back .

4 Declaration of solvency: Before making buy-back file with ROC, SEBI a declarationof solvency - that is capable of meeting liabilities. The declaration of solvencyneed not be filed with SEBI in case of non- listed company.

5 Time limit for completion of buy back: Every buy back shall be completed within12 months from the date of passing of special resolution.


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After the buy-back

1 Verification and payment .The company shall after the closure of the offer, verifythe offers received within 15 days of such closure , and the shares so lodged bythe members and make payment to the shareholders.

2. Extinguishment of securities. The company shall extinguish & physically destroythe securities so bought-back within 7 days of completion of buy-back.

3. Public advertisement of completion of buy-back. The company shall, within twodays of the completion of buyback issue a public advertisement in a nationaldaily regarding such buy-back Applicable to a listed company.

4. Return of buy-back. The company shall file a Return of buy-back with ROC, SEBIwithin 30 days of such completion.

5. Register of buy-back. The company shall maintain register of buy-back mentioningthe details of the securities bought

6. Cooling period. After completion of buyback there is a prohibition of new issue ofshares within 6 months of buy-back (except bonus, conversions)

7. Penalty for default: Non- compliance of the provisions relating to buy-back shallbe punishable with 2 years imprisonment or fine upto Rs. 50,000/- or both.

7.4 Issue of Shares at a Premium

When the shares are issued at a price more than its nominal value / face value, itis called as issue of shares at a premium. For example, if the nominal value of share isrupees 10 and it is issued at rupees 30, the premium charged is rupees 20 per share.

The Companies Act is silent with regard to issue of shares at a premium. A privatecompany and an unlisted company can issue shares at a premium as may be decidedby the board of directors. Due to free pricing of shares, a company coming with apublic issue can issue share at any price. However, SEBI Guidelines provide that offerdocument should indicate justification for the price. Thus, the issuer can issue shares ata premium which the market is ready to accept.

The share premium amount should be transferred to Securities Premium Account.Section 78 enumerates the uses to which the securities premium amount can be put.This account should be used only for the following purposes:


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for issue of fully paid bonus shares;

for writing off preliminary expenses;

for writing off commission or discount allowed or expenses incurred on issue ofshares or debentures;

for payment of premium payable on redemption of preference shares ordebentures;

for buy-back of shares u/s 77A.

Thus the securities premium amount can not be used otherwise than for the specificpurposes mentioned above. A company may issue shares at a premium for considerationother than cash such as acquisition of land, building, technical know-how, IPRs etc.

The balance sheet must disclose the amount of share premium as a separate itemand must also indicate how it is disposed of or exhausted (Schedule VI Part I).

7.4a Issue of shares at a discount

A company may issue shares at a discount i.e. at a price less than the nominalvalue/ face value of shares. However, there are rigorous conditions to be compliedwith.

Issue of shares at a discount is regulated by provisions contained in section 79. Theconditions are:

Shares at a discount can be issued only after one year from commencement ofbusiness.

Only existing class of shares are allowed to be issued at a discount.

The discount issued should be approved by general meeting of the company andthe resolution (ordinary) should specify the maximum rate of discount.

The discount should be confirmed by Company Law Board.

The maximum discount should not exceed 10% unless the Company Law Boardpermits a higher rate.

Every prospectus must contain particulars of the discount allowed on the issue ofthe shares or so much of that discount as has been written off at the date of theissue of prospectus.


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Any default in this requirement will render the company and every officer liable andpunishable with fine extending to Rs.500.

Directors liability in respect of improper issue of shares at a discount: If the directorshave improperly issued the shares at a discount, the directors render themselves liableto compensate the company to the extent of the amount of discount.

7.5 Calls on shares

A call may be defined as a demand by the company for payment of part of the issueprice of shares or debentures which has not been paid. A Company may call the moneydue on shares at intervals depending upon the requirements of funds for its activities.Now days, the entire money due on shares is called in one installment. For example,when TCS issued Re.1 share at a price around Rs. 850, the entire amount was called inone installment with the share application. This saves the company from the administrativeinconvenience of calling money at various intervals and the hassles of forfeiture ofshares.

The power to make calls is exercised by the Board in its meeting by means of aresolution (section 292(1) (a)).

Requisites of a valid call:

i) In accordance with the Articles. The call must be made in accordance with theprovisions of the Articles of Association and the Companies Act.

ii) Properly constituted Board Meeting: To be valid call must be made by the directorsduly appointed and duly qualified; against a resolution passed at the meeting ofthe Board of directors in which proper quorum must have been present.

iii) Uniform Basis: (section 91) It must be made on a uniform basis and bonafide inthe interest of the company.

iv) Notice of call: Notice of call must specify the exact amount and the time ofpayment. For each call at least 14 days notice must be given to members.

v) Amount: A call cannot exceed 25% of the nominal value of shares. An interval of30 days is required between 2 calls. (Table A, Reg. 13)

vi) Payment of calls in advance: (section 92) Calls may be collected in advance andinterest may be paid thereon as per the provisions in the articles. Table A allowsthe payment of interest on calls in advance not beyond 6% per annum, unless


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company in general meeting decides otherwise. However, Sec. 92(2) makes itclear that a member who has paid calls in advance shall not be entitled to votingrights in respect of such call in advance. He will get voting rights only whenamount is called and becomes due.

vii) Forfeiture: If call is not paid shares can be forfeited by the company.

viii) Articles of a company may restrict voting rights in respect of any shares on whichcalls are not paid, after a valid call notice was served.

According to SEBI Guidelines, the entire amount is to be called along with applicationin case of an offer for sale. In case of an issue size below Rs. 500 crores, the companymust ensure that the shares are made fully paid-up within 12 months of the allotment.When the size of the issue exceeds Rs. 500 crores, the size on each call should notexceed 25% of the total quantum of issue.

7.6 Forfeiture of shares

A company’s articles usually contain a provision to forfeit shares of a member whofails to pay his calls due within the stipulated time. Forfeiture to be valid must fulfill thefollowing conditions-

i) In accordance with the articles: The Articles of Association must empower thecompany to forfeit the shares. As per Reg. 29 of ‘Table A’, shares can be forfeitedonly for non-payment of calls. The Articles of a company may, however, lawfullyincorporate any other grounds of forfeiture.

ii) Proper notice: Before the shares of a member are forfeited, a proper notice tothat effect must have been served. Regulation 30 of Table A provides that a noticerequiring payment of the amount due together with any interest accrued must beserved mentioning a further day (not less than 14 days from the date of service ofthe notice) on or before which the payment is to be made. The notice must alsomention that in the event of non-payment, the shares will be liable to be forfeited.

iii) Resolution for Forfeiture: If the defaulting shareholder does not pay the amountwithin the specified time as required by the notice, the directors may pass aresolution forfeiting the shares (Article 31 of Table A).

iv) Power of forfeiture must be exercised bonafide and in good faith: The power toforfeit is in the nature of the trust and must therefore be exercised bonafide andfor the benefit of the company. Thus, the power of forfeiture cannot be used tohelp a shareholder to relieve his liability on partly paid-up shares.


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Effect of forfeiture

i) A forfeiture has the effect of termination of membership.

ii) The amount already paid by the shareholder gets forfeited.

iii) However, a person whose shares have been forfeited continues to remain liableas a past member in case liquidation takes place within one year of forfeiture.

iv) Liability for unpaid calls remains even after forfeiture of shares.

Re-issue of forfeited shares

Normally, forfeited shares are re-issued. In case they are not re-issued it may amountto reduction of share capital and therefore require the approval of the Court. The forfeitedshares may be re-issued at par or at premium or at a discount. However, the discounton re-issue should not exceed the amount forfeited on those shares. Re-issue of forfeitedshares is not a fresh allotment of shares. Hence filing of Allotment Return is not necessary.

The Board of directors, may, on a request of a shareholder whose shares havebeen forfeited, cancel the forfeiture.

7.7 Surrender of shares

Surrender of shares means voluntary return of shares to the company for cancellation.There is no provision for the surrender of shares either in the Companies Act or in TableA, but the Articles of some companies may allow it as a short cut to the long procedureof forfeiture. Surrender of shares shall be valid only -

a. When there is a provision to this effect in the Articles of Association of the company.

b. Surrender of shares is an alternative to forfeiture. Surrender of shares shall bevalid only where their forfeiture is otherwise justified. However, in any othercircumstances, surrender of shares cannot be accepted without sanction of thecourt since it would amount to reduction of capital.

Surrendered shares may be re-issued in the same way as forfeited shares.


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QUESTION BANK

I. FAQs’

1. Explain the meaning of the term “allotment of shares”.

2. What essential conditions must be satisfied by a public company before making avalid allotment of shares?

3. State briefly the provisions relating to minimum subscription and consequencesof non-receipt of minimum subscription as per the Companies Act, 1956 and theprovisions as per SEBI SEBI SEBI SEBI SEBI Guidelines.

4. When is an allotment of shares made by a public company considered to beirregular? What are its effects? Explain.

5. What are the effects of an irregular allotment of shares made by a public company?

6. The Board of Directors of M/s Reckless Investments Ltd. have allotted shares tothe investors of the company without issuing a prospectus or filling a statement inlieu of prospectus with the Registrar of Companies, Mumbai. Explain the remediesavailable to the investors in this regard.

7. Explain the term “Underwriting Commission”. What are the conditions to be fulfilledby a company for the payment of such commission?

8. Whether a Company can buy-back its own shares? Explain in brief the provisionsof Companies Act, 1956 relating to the sources of funds and conditions for buy-back its own shares by the company.....

9. A public company proposes to purchase its own shares. State the source of fundsthat can be utilised by the company for purchasing its own shares and therequirements to be complied with by the company under the Companies Actbefore and after the shares are so purchased

10. Whether a company can issue shares at premium? State the purposes for whichthe share Premium account can be used under provisions of the Companies Act,1956.

11. Can company issue at discount? What is the law in this relation, laid down in thecompanies Act, 1956?

12. What are the conditions and procedure where under shares may be forfeitedunder the Companies Act, 1956?????


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13. State the conditions to be satisfied before a company may forfeit the shares. Whatis the effect of such a forfeiture?

II. CASE STUDIES

1. After receiving 80% of the minimum subscription a stated in the prospectus, acompany allotted 100 equity shares in favour of ‘X’. The company deposited thesaid amount in the bank but withdrew 50% of the amount, before finalisation ofthe allotment, for the purchase of certain assets. X refuses to accept the allotmentof shares on the ground that the allotment is voilative of the provisions of theCompanies Act, 1956. Comment.

(Hints: Allotment is irregular.)

2. P Ltd issued a prospectus for the purpose of issuing shares. The prospectus statedthat application had been made to the Stock Exchange, Mumbai (Regional StockExchange) and Calcutta Stock Exchange for their permission for listing of theshares. The Stock Exchange, Mumbai gave their permission but the CalcuttaStock Exchange refused to give the permission. The company allotted the shares.Is the allotment valid?

(Hints: As per section 73 of the Companies Act, 1956 any allotment of sharesmade by a company if the company has not obtained permission for listing of theshares as stated in the prospectus from each of the stock exchanges whose nameshave been mentioned in the prospectus within 10 weeks of the closing of thesubscription list shall be void. In this problem the Calcutta Stock Exchange towhom application has been made and stated in the prospectus refused thepermission though the Mumbai Stock Exchange gave the permission. As such theallotment of the shares by the company was void)

3. “Sunrise Ltd.” is authorised by its articles to accept the while or any part of theamount of remaining unpaid calls from any member although no part of thatamount has been called up. ‘X’, a shareholder of the Sunrise Ltd., deposits inadvance the remaining amount due on his shares without any calls made by“Sunrise Ltd.”. Referring to the provisions of the companies Act, 1956, decide therights and liabilities of Mr. ‘X’, which will arise on the payment of calls made inadvance.....

(Hints: Can claim interest on advance calls. If company goes in winding up, thecalls in advance paid will be treated as amount payable to unsecured creditors.)


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4. A member of LS & Co. Ltd., holding some shares in his own name on which Finalcall money has not been paid, is denied by the company voting right at a generalmeeting on the ground that the articles of association do not permit a member tovote if he has not paid the calls on the shares held by him. With reference to theprovision of the Companies Act, 1956, examine the validity of company’s denialto C of his voting right.

(Hints: Articles of a company may restrict voting rights in respect of any shares onwhich calls are not paid, after a valid call notice was served.)

5. Dowell Co. Ltd. issued 10,000 shares of Rs. 10 each. The entire issue wasunderwritten by ICICI; but before the prospectus was issued the entire capital wassubscribed by the friends of directors of the company. Would ICICI be entitled toreceive any underwriting commission?

(Hints: Yes, Section 76 (4))

6. The Board of Directors of a company decides to pay 5% of the issue price asunderwriting commission to the underwriters. On the other hand the Articles ofAssociation of the company permit only 3% commission. The Board of Directorsfurther decides to pay the commission out of the proceeds of the share capital.Are the decisions taken by the Board of Director valid under the Companies Act,1956?

(Hints: Underwriting commission cannot be paid in excess of 3%.It can be paidout of proceeds of share capital)

7. ABC Company Limited at a general meeting of members of the company passesan ordinary resolution to buy back 30% of its equity share capital. The articles ofthe company empower the company for buy back of shares. The company furtherdecides that the payment for buy back be made out of the proceeds of thecompany’s earlier issue of equity shares. Explaining the provisions of the CompaniesAct, 1956 and stating the sources through which the buy back of company’s ownshares be executed, examine: (i) whether company’s proposal is in order? (ii)Wouldyour answer be still the same in case the company instead of 30%, decides to buyback only 20% of its equity share capital?

(Hints: (i) No. (ii) Co. cannot buy back more than 25% in a year.)


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CHAPTER - VIII

TRANSFER OF SHARES AND THEDEPOSITORY SYSTEMS


8.1 Right to transfer shares

8.2 Procedure of transfer of shares

8.3 When can company refuse transfer of shares

8.4 Forged transfer and blank transfer

8.5 Transmission of shares

8.6 Transfer of shares under the depositories system

8.7 Restrictions on transfer in case of

8.1 Right to Transfer Shares

Transfer of shares means a change in the ownership of shares. Oneof the important features of a company is that its shares are transferable.This provides liquidity to the investors and also contributes to a growingcapital market.

Shares of a company are freely transferable subject to the restrictionscontained in the Companies Act, any other statutes and the provisionsof the Memorandum and Articles of Association of the company (sec. 82).

However, in case of private company, by its very definition, there hasto be restrictions on the transfer of shares. This restriction should not bein the form of prohibition. But in the case of a listed company / unlistedpublic company, after the enactment of Depositories Act, 1996, thesecurities have become freely transferable. Even the Board of Directorscannot refuse transfer of shares.

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8.2 Procedure of Transfer of Shares

a. Prescribed share transfer form: Section 108 provides that transfer cannot beregistered unless there is proper instrument of transfer duly stamped and executedby transferor and transferee. The share transfer form should be in form no. 7B(see at the end of this module) and must be accompanied by the relevant sharecertificates. However in the case of shares, which are transferred through adepository, neither the approval of the company would be necessary nor theinstrument of transfer will be required.

b. Stamping of presentation date: The instrument of transfer should be presented tothe Registrar of Companies or the prescribed authority before it is signed by thetransferor and transferee who shall stamp or otherwise endorse the instrumentwith the date on which it is presented.

c. Submission of transfer form: The instrument of transfer together with the relatedshare certificate should be submitted by the transferor or transferee to the companyor the share transfer agent.

The duly filled transfer form should be submitted:

- in case of listed companies within 12 months of the presentation date orbefore the closure of register of members, whichever is later,

- In any other case, within 2 months from the date of such presentation.

d. Verification and scrutiny of transfer form: The share transfer form will be checkedand verified. The specimen signature will be tallied. The guidelines of StockExchange and SEBI will have to be followed for scrutinizing the share transferform.

e. Intimation to transferor/ transferee: In the case of partly paid up shares, intimationshould be sent to the transferee especially when the transfer deed is submitted bythe transferor. In case no objection is received from the transferee within 2 weeks,the company may proceed to register the transfer. It is customary to send intimationto the transferor if the documents are lodged by the transferee.

f. Board resolution: A board resolution should be passed for approving the transferof shares and authorising issue of share certificates to the transferees.

g. Endorsement and entry in register of members: At the back of the share certificateendorsement will be made and the name of transferee will be entered in theregister of members.

TRANSFER OF SHARES AND THE DEPOSITORY SYSTEMS

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h. Delivery of share certificates to the transferee: The share certificates afterendorsement will be delivered to the transferee within 2 months of lodgement oftransfer. In the case of listed company, share transfers should be effected within1 month of lodgement of transfer deeds.

The various steps involved in the transfer of shares is described below:

Share Transfer Procedure

Fill up the share transfer form

Obtain prescribed share transfer form (Form No. 7B) with the presentation date

Get the deed signed by transferor and transferee, duly witnessed and attested

Attach the share certificate with the deed and affix share transfer stamps andcancel it

Deliver the deed and the certificate to the company with an application fortransfer within the prescribed time

The company gives notice to the transferee in the case of partly paid up shares

The company board considers the application and orders for, or refuses,registration

If transfer is refused, the company notifies the transferor and the transferee,Returns the documents

When transfer is in order, the transferee is registered as member and the sharecertificate is sent to him after endorsement of title


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Certification of Transfer

U/s 108, transfer of shares shall not be registered unless the transfer deed isaccompanied with share certificate. However, sometimes attaching the original certificatemay not be possible e.g. in cases where the shareholder want to sell only part of hisholding or wishes to sell them to two or more persons. In such cases, the member cansubmit original shares to the company. The company will make endorsement on thetransfer form itself that the original share certificate has been lodged with the company,specifying the number of shares. This is called certification of transfer.

The Company will issue “balance ticket” for remaining shares. The person can sellthe shares on the basis of endorsement made by the company and get balance sharecertificates on submitting the “balance ticket”.

A who holds one share certificate of 1000 equity shares in a company wants totransfer 300 shares in favour of B. Explain the procedure to be followed forexecuting the partial transfer under the provisions of the Companies Act, 1956.....Ans: Ans: Ans: Ans: Ans: A is required to get the instrument of transfer certified for 300 shares andobtain a balance ticker for the rest 700 shares.

8.3 When can the Company refuse transfer of shares?

A) In case of private company (Sec. 111)

A private company prescribes restrictions on transfer of shares in its Articles ofAssociation. A private company can refuse transfer of shares in the interest of thecompany and only on bonafide grounds (Bajaj Auto ltd. v. CLB AIR 1999 SC 345)

Board resolution and notice of refusal. In case a private company refuses to registera transfer, it shall within two months from the date of the lodgement of transfer, sendnotice of refusal to the transferee and the transferor, giving REASONS for such refusal.A board resolution should be passed for refusing to transfer the shares.

Appeal Against Refusal To Register Transfer.

First Remedy - Appeal to CLB/ NCLT In case the company refuses to register atransfer, an appeal may be made to the CLB / National Company Law Tribunal withintwo months of the receipt of notice of refusal and where no notice is received, withinfour months from the date the instrument of transfer was delivered to the company. Sec.111(2),(3).

Second Remedy - Appeal for Rectification of register of members. [Sec. 111(4)].


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If a persons name appears in the register of members, he is presumed to be themember of the company even though in fact he is not so. It is the duty of the companyto maintain the register of members accurately and updated regularly. If the companydoes not do so, the aggrieved shareholder can appeal for rectification of register ofmembers to the Company Law Board. Right to appeal u/s 111 extends to wrong entriesmade in the register of members as well as refusal to register transfer of shares.

Grounds for rectification of register of members: An aggrieved person may apply toCLB for rectification of register of members under two situations.

(a) If the name of any person -

i) is, without sufficient cause, entered in the register of members of a company(thus rectification has been ordered on this ground where a person wasinduced to become a member by mis-leading prospectus, where allotmentwas invalid or where a forged transfer has been registered), or

ii) after having been entered in the register, is without sufficient cause omittedtherefrom; or

(b) If default is made, or unnecessary delay takes place, in entering in the register thefact of any person having become, or ceased to be, a member.

Appeal against refusal of transfer u/s 111(2) and application for rectification u/s111(4) has to be by way of petition in writing and shall be accompanied by suchfee as may be prescribed.

Powers of CLB: The CLB/NCLT after such inquiry as it thinks fit may either dismissthe appeal or reject the application or by an order

i) direct the registration of transfer or transmission within 10 days of receipt oforder, or

ii) direct rectification of the register and also direct the company to pay damages,if any sustained by the aggrieved party.

It is also empowered to pass interim orders or grant injunction regarding dividend /bonus shares / right shares and award of costs.

Penalty: If the default is made in giving effect to orders of CLB (later it will be NCLT),company as well as every officer who is in default is punishable with fine up to Rs.10,000 plus Rs. 1,000 for every day after the first day till default continues [sec. 111(9)].When a company does not intimate refusal of transfer or transmission within two months,


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there is a general penalty of Rs. 500 for every day of default for violation of any provisionof sec 111.

B) In case of a public company listed or unlisted (Sec. 111A)

Shares of public company are freely transferable. The Board of Directors of suchcompany does not have any discretion to refuse or withhold transfer of any security. Thetransfer is immediate and automatic when the shares are in the demat form in adepository.

Appeal to CLB/NCLAppeal to CLB/NCLAppeal to CLB/NCLAppeal to CLB/NCLAppeal to CLB/NCLT(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) If the Company refuses to transfer the shareswithin two months from the date of lodgement of shares without sufficient cause, without sufficient cause, without sufficient cause, without sufficient cause, without sufficient cause,an aggrieved transferee may seek remedy by filing an appeal before CLB /NationalCompany Law Tribunal. The CLB / Tribunal are empowered to issue directions tothe concerned company to register the said transfer of shares.

RRRRRectification of register of members ectification of register of members ectification of register of members ectification of register of members ectification of register of members The rectification of register of members orrecord of depository can be done if the transfer is made in contravention of any ofthe provisions of the SEBI Act, 1992, Sick Industrial Companies Act, 1985 or anyother law. Thus, these three grounds would be the only ‘sufficient cause’ for refusalto register of shares within the meaning of sec.111A (3). The expression ‘anyother law’ would certainly include non-compliance with the provisions of sec.108or sec 108A to 108I (restriction on transfer of shares on or by a dominantundertaking). For rectification of register of members, an application should bemade by an aggrieved depository, company, investor or depository participant orSEBI to the CLB/ National Company Law Tribunal.

The application should be moved within two months of the transfer. . . . . Afterinquiry, if the CLB/NCLT is satisfied of the contravention, it can direct thecompany/depository to rectify ownership records of securities. However, beforecompletion of enquiry, the CLB/NCLT can suspend voting rights in respect ofsecurities so transferred.

Right of transferees pending registration of transfer [Sec 206A.]: Sometimes, duringthe intervening period of registration of transfer, the company may declare dividend orissue rights shares or bonus shares. In order to protect the interest of transferees in sucha situation, section 206A was added by Amendment Act of 1988.This section providesthat in such cases the right to dividend, rights shares or bonus shares shall be kept inabeyance till the company gets a clear mandate in that regard from the transferor inwriting.


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8.4 Forged Transfer and Blank Transfer

FFFFForged transfer orged transfer orged transfer orged transfer orged transfer does not confer any title. In case of forged transfer, the signature ofthe transferor is forged.

Effect

Forged transfer is nullity at law. No title can pass on basis of forged document. Itis not defect in title but complete absence of title.

When the company transfer shares on the basis of forged share transfer form, thetransferee will not get any title to the shares. The original member will continue tohave all the ownership rights.

According to section 84(1) of the Companies Act, a share certificate specifyingany shares held by any member is prima facie evidence of the title of the memberto such shares. If the company has issued a share certificate to the transferee andhe has sold the shares to an innocent purchaser, the company cannot deny histitle, for the certificate stops it from doing so. Therefore, the innocent purchaser isentitled to compensation from the company if it refuses to register him as ashareholder (Balkis Consolidated Co. v. Tamkinson 1893 AC 396).

If the company has been put to loss by reason of forged transfer, it may recovercompensation from the person who lodged it. (Sheffield Corporation v. Barclay,1905 AC 392)

Blank transfer: Blank transfer: Blank transfer: Blank transfer: Blank transfer: Where a share holder signs a share transfer form without filling inthe name of the transferee and hands it over along with the share certificate to thetransferee thereby enabling him to deal with the shares, he is said to have made a“blank transfer”.

Ills of blank transfer - Loss of stamp duty

- Loss of Income-tax.

Restrictions on blank transfer - Sec. 108(1A), (1B)

a) Share transfer form to be presented to prescribed authority for stamping the datethereon.

b) The duly filled transfer form should be sent for transfer within 12 months of thepresentation date or before the closure of register of members, whichever is later,in case of listed shares. In any other case, within 2 months from the date of suchpresentation.


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8.5 Transmission of Shares

Transmission of shares may be referred to as the involuntary transfer of shares byoperation of law. It takes place in the event of death or insolvency of a shareholder orif a shareholder is a company it goes into liquidation. The Supreme Court in WorldwideAgencies v. Margarate T Desor AIR 1990 SC 607(SC) held that, transmission on deathof last holder of shares is by operation of law. It is instantaneous transfer of ownershipto the legal heirs from moment of death. A simple letter of request accompanied byproof of succession entitles the legal representative for registration of the same in hisname. No stamp duty is accordingly payable on transmission.

The following are the main points of difference between the transfer of shares andtransmission of shares:

i) Nature of Act: Nature of Act: Nature of Act: Nature of Act: Nature of Act: Transfer of shares is the effect of deliberate voluntary act of theparties; while transmission of shares is the result of operation of law on thehappening of some relevant event such as the death of the shareholder, insolvencyor lunacy of a shareholder or purchase in a court sale.

ii) Consideration: Consideration: Consideration: Consideration: Consideration: There must be some consideration for the transfer of shares in allcases except where the shares are transferred by way of gift, whereas the questionof consideration does not arise in cases of transmission of shares.

iii) Instrument of transfer: Instrument of transfer: Instrument of transfer: Instrument of transfer: Instrument of transfer: A validly executed instrument of transfer is required in thecase of transfer of shares, but for the purposes of transmission of shares, executionof any instrument of transfer is not required and only a written request to thateffect is sufficient. However, evidence showing the entitlement of the transferee(e.g., legal representative) may be required by the company such as successioncertificate etc.

iv) Stamp Duty: Stamp Duty: Stamp Duty: Stamp Duty: Stamp Duty: In case of transfer stamp duty is payable on the amount of themarket value of shares; while no stamp duty is payable in case of transmission ofshares.

v) TTTTTransfer during Lransfer during Lransfer during Lransfer during Lransfer during Lockockockockock-in period:-in period:-in period:-in period:-in period: Transfer during lock-in period is not permissible.Transmission of shares is allowed even if shares are under lock-in period.

vi) Liabilities: Liabilities: Liabilities: Liabilities: Liabilities: In case of transfer, transferee does not get liabilities of transferor, exceptin case of amount payable on partly paid-up shares. In case of transmission,transferee gets all liabilities and rights of original owner.


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8.6 The System of Depositories

A. What is a Depository?

The system of depositories has revolutionized stock markets. The most singleimportant development in the Indian Capital Market in the last decade is the emergenceof the Depositories System. A depository is a company where securities of investors areheld in electronic accounts. Just as the banks holds money, in the same way a depositoryholds securities. A depository in India, must have a networth of 100 crores and mustobtain a certificate of commencement of business from SEBI.

Depository Depository Depository Depository Depository vsvsvsvsvs Bank Bank Bank Bank Bank A depository is similar to a bank. Just as you leave money inbanks rather than holding it in cash, you leave shares in the depository instead ofholding them in physical form. As proof of you holdings, you get a statement fromthe depository, just as you get a statement from a bank giving you the balance inyour account. For withdrawing cash from bank you issue a cheque. In the depositorywhen you sell the shares you have to issue a debit instruction for delivery ofsecurities from your account. Similarly to receive securities into your account, youhave to issue a credit instruction similar to a pay -in-slip used for crediting moneyto your bank account. The depository thus is to shares what a bank is to money.

Depository Depository Depository Depository Depository Bank Bank Bank Bank Bank

- Holds securities in Accounts - Holds funds in Accounts

- Transfers securities between Accounts - Transfers funds between Accounts

- Transfers without handling securities - Transfers without handling money

- Safe keeping of securities - Safe Keeping of money

National Securities Depository Limited (NSDL) is the first depository in India, whichcommenced its operation in November, 1996. It was setup at the initiative ofNSE, IDBI and other financial institutions. The Central Depository Services Limited(CDSL) is the second depository set-up in March 99. It has been promoted byBSE, Bank of India, Bank of Baroda, SBI and HDFC Bank.

Constituents : Constituents : Constituents : Constituents : Constituents : There are four constituents in the depositories system:

a) The depository

b) The depository participants

c) The beneficial owner

d) The issuer


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a) The depository: The depository holds the securities of the investors in the form ofelectronic book entries (dematerialised form). It maintains ownership records ofsecurities and effects transfer ownership through book entry.

b) The depository participant: The depository cannot deal with millions of investorsdirectly. It appoints agents called depository participants who open and maintainaccounts. It is similar to the branch of a bank. You can open account in anybranch of a bank.

c) Beneficial owner: By fiction of law, the depository is registered owner of the securitiesheld with it with the limited purpose of effecting transfer of ownership at thebehest of the owner. The name of the depository appears in the records of theissuer as registered owner of securities. The name of actual owner appears in therecords of the depository as beneficial owner. The beneficial owner has all therights and liabilities associated with the securities. The owner of securities intendingto avail of depository services opens an account with a depository through adepository participant (DP). The securities are transferred from one account toanother through book entry only on the instructions of the beneficial owner.

d) The issuer: It is the company which issues the security.

Models of depository: Models of depository: Models of depository: Models of depository: Models of depository: There are two models of depository – Immobilisation anddematerialisation. In the immobilization model, physical scrips are held in thedepository vaults, supporting the book entry records kept on the computer. Itmeans storage of scrips in the vaults of the depository so that the physical movementof scrips is frozen. In contrast, in dematerialisation, there is no physical scrip inexistence and the scrips are held in dematerialised form (electronic form). Indiahas adopted dematerialisation model of depository system.

Structure/Design of Depository

Depository Issuer /R&T Agent

Clearing Corporation Clearing Member Depository Participant

Stock Exchange Trading Member Investor


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B. Why Depository?

The depository system was introduced to eliminate the ills associated with paperbased securities system such as delay in transfer, bad delivery, theft, fake and forgeshares etc. Before the introduction of the depository system the following problemswere faced by the investors and the companies:

- Forged and fake share certificates

- Bad deliveries

- Loss of certificates in transit

- Mutilation of certificates

- Delays in transfer

- Long settlement cycles

- Mismatch of signatures

- Delay in refund and remission of dividend interest etc.

Benefits of a depository:

- Eliminates bad deliveries

- Improves Liquidity:- Immediate transfer of shares

- Low cost of public Issue

- No stamp duty in case of transfer within the depository.

- Eliminates the scope of theft, forgery etc. risks associated with physical form.

- Entitles the transferee to all rights immediately and settlement of transaction.

- Reduction in handling large volumes of paper

- Reduction in transaction cost

- Convenient method of consolidation of folios/accounts

- Holding investments in equity, debt instruments and Government securities in asingle account

C. Key concepts of depository :

Depository facilitates paperless trading and electronic book entry transfer of securities.The following are its key concepts :


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- Principle of FREE TRANSFERABILITY of shares.

- Concept of FUNGIBILITY of shares

- Concept of DEMATERIALISATION

- Concept of REMATERIALISATION

- Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: is the process of transferring physical scrips intocomputerised ledger A/c maintained by Depository. Demat securities are in fungibleform i.e. they do not carry distinctive numbers.

1 In dematerialisation process, investor surrenders defaced certificates along withDematerialisation Request Form to the depository participant.

2 Depository participant intimates NSDL of the request through the system.

3 Depository participant submits the certificates to the registrar.

4 Registrar confirms the dematerialisation request from NSDL.

5 After dematerialising certificates, registrar updates accounts and informs NSDL ofthe completion of dematerialisation.

6 NSDL updates its accounts and informs the depository participant.

7 Depository participant updates its accounts and informs investor.

FFFFFungible Shares:ungible Shares:ungible Shares:ungible Shares:ungible Shares: Under a depository, shares do not have distinctive numbers,this means that shares, like currency are fungible meaning exchangeable forany other. Share certificates shall become interchangeable. In case theinvestors want to convert dematerialized shares in to physical shares, will notget the same share certificates bearing same distinctive numbers which theysurrendered at the time of entry into depository.

Dematerialisation Process

NSDL Depository Participant

Registrar Investor

3

6

4

15

2

7


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RRRRRematerialisation: ematerialisation: ematerialisation: ematerialisation: ematerialisation: The conversion of dematerialised holdings back intocertificates is called rematerialisation. If the investor wishes to get back hissecurities in physical form, all he has to do is to request his depositoryparticipant for rematerialisation of the same by filing up RematerialisationRequest Form. Depository Participant will then forward the request to thedepository after verifying that the investor has necessary balances. Depository,in turn will intimate the registrar who will print the certificates and dispatchthe same to the investor. The entire process of rematerialisation usually takesa maximum of 30 days.

D. Facilities offered by Depository

FFFFFunctions: unctions: unctions: unctions: unctions: The functions of depository include account opening, dematerialisation,rematerialisation, settlement and clearing, pledge and hypothecation etc. Depositoryparticipant is the key player in the system who acts as an agent of the depository and isin fact the customer interface of depository. It opens the accounts of the investors,facilities dematerialisation, settles trades and effects corporate actions.

Depository also provides electronic credit in new issued wherein investor opens anaccount with the depository participant, submits application with depository giving DP-Id and client-Id, the registrar uploads list of allottees to the depository and depositorycredits allottee account with depository participant (DP). The refunds, if any, are sent byregistrar as usual in any public issue. The following facilities are offered by a depository:

Dematerialisation i.e., converting physical certificates to electronic form;

Rematerialisation i.e., conversion of securities in demat form into physicalcertificates;

Facilitating repurchase/redemption of units of mutual funds;

Electronic settlement of trades in stock exchanges connected to depository;

Pledging/hypothecation of dematerialised securities against loan;

Electronic credit of securities allotted in public issued, rights issue;

Receipt of non-cash corporate benefits such as bonus, in electronic form;

Freezing of demat accounts, so that the debits from the account are not permitted;

Nomination facility for demat accounts;

Services related to change of address;


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Effecting transmission of securities;

Instructions to your DP over Internet through SPEED-e facility.

Account monitoring facility over Internet for clearing members through SPEEDfacility;

Other facilities viz. holding debt instruments in the same account, availing stocklending/borrowing facility etc.

E. Legal Framework

Government of India promulgated the Depositories Ordinance Act in September,1995, which was later enacted as Depositories Act of 1996. the legal framework fordepositories has been laid down by this Act and is regulated by SEBI. The depositoriesin India are regulated by the following Acts:

- The Companies Act, 1956;

- The Depositories Act, 1996;

- The SEBI (Depositories and Participants) Regulations, 1996.

- Bye-laws of Depository;

- Business Rules of Depository

The other Acts are:

- The Indian Stamp Act, 1899;

- Securities and Exchange Board of India act, 1992;

- Securities Contracts (Regulation) Act, 1956;

- Benami Transaction (Prohibition) Act, 1988;

- Income-tax Act, 1961;

- Banker’s Book Evidence Act, 1891.

The Depositories Act, 1996, provides for a legal framework for the establishment,functioning and dealing in securities. However, the Act allows only securities of companiesto be dealt in depository mode.

SEBI (Depositories and Participants) Regulations, 1996, provides for the regulationsfor depositories.


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F. How to trade in electronic shares?

Buying and selling shares in the electronic form is just like buying and selling physicalshares, the only difference is trading in securities in the electronic form is simpler andsafer.

If investor wish to sell his shares, he places an order with his broker and instruct hisdepository participant by way of a delivery instruction (which is a cheque like instrument)to debit his account with the number of shares sold by him.

When he buys shares he must inform his broker about his depository account numberso that the shares bought by him are credited into his account and instruct his participantby way of Receipt instruction to receive credit in his account.

Payment for electronic shares either bought or sold is made in the same way as inthe case of physical securities. The shares thus bought are transferred in the investors’name the very next day of pay out. No formalities of filling transfer deeds, affixing sharetransfer stamps and applying to the company for registering the shares in investor’sname are required to be observed as in case of physical transfer of securities.

Performance of dematerialisation

Dematerialisation of shares has been becoming popular with the investors as wellas the companies as technological progress has become part of stock market in India.All the scrips in the stock market are being traded in dematerialized form. The depositoryservices were available in almost all major cities in the country.

Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Section 68B providesthat every listed public company, making initial public offer of any security for a sum ofrupees ten crores or more, shall issue the same only in dematerialised form by complyingwith the requisite provisions of the Depositories Act, 1996 (22 of 1996) and theregulations made thereunder.

Days to come:

The details of some forthcoming things to come are given below :

- Securities to be mandatorily dealt in electronic form

- Public issue only in demat form

- Dividend distribution


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- Securities lending and borrowing

- Increased participation by international investors.

- Faster settlement cycle – rolling settlement.

G. Effects of Depository System or Dematerialization of Shares

Sec. 83Sec. 83Sec. 83Sec. 83Sec. 83 Shares shall cease to have distinctive numbers.

Sec. 41Sec. 41Sec. 41Sec. 41Sec. 41 The beneficial owner specified in the register maintained bythe depository shall be deemed to be the member of thecompany.

Se. 152 ASe. 152 ASe. 152 ASe. 152 ASe. 152 A The register and index of beneficial owners maintained by thedepository shall be deemed to be the register and index ofmembersand debenture holders.

Sec. 113Sec. 113Sec. 113Sec. 113Sec. 113 No share certificate shall be issued to the shareholder whenshares are issued in dematerialized form. Also, where sharesare transferred in dematerialized form, thetransferee shallnot be issued a share certificate.

However, where the shares are required to be issued indematerialized form, the companyshall immediately, afterallotment, intimate the details of allotment to thedepository.

Sec.108Sec.108Sec.108Sec.108Sec.108 The provisions relating to production of transfer deed alongwith share certificate for effecting the transfer of shares shallnot apply where the shares are held in dematerialized from.In other words, no transfer deed is required to be executedwhere shares are held in depository system.

8.7 Restrictions on Transfer in case of Dominant Undertaking (section 108A– 108 I)

The object of these provisions is to prevent concentration of economic power andacquisition of controlling interest in public company or a private company which is asubsidiary of a public company.


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RRRRRestriction on transfer in case of dominant undertakingestriction on transfer in case of dominant undertakingestriction on transfer in case of dominant undertakingestriction on transfer in case of dominant undertakingestriction on transfer in case of dominant undertaking – As per sec. 108G ofCompanies Act there are restrictions on transfer in following cases-

(a) If a group or bodies corporate under same management taken together are‘dominant undertaking’ in a particular goods or services and its share in marketof the goods or services will increase by acquisition of sharesacquisition of sharesacquisition of sharesacquisition of sharesacquisition of shares in other company.

(b) If the group or bodies corporate taken together will become dominant undertakingif they acquire sharesacquire sharesacquire sharesacquire sharesacquire shares in another company.

(c) If the group or body corporate under same management are already a ‘dominantundertaking’ and it wants to transferto transferto transferto transferto transfer its shares.

Meaning of ‘Dominant undertaking’Meaning of ‘Dominant undertaking’Meaning of ‘Dominant undertaking’Meaning of ‘Dominant undertaking’Meaning of ‘Dominant undertaking’ – As per section 2(d) of MRTP Act, ‘Dominantundertaking’ means an undertaking, which by itself or with interconnected undertakingsproduces, supplies or controls 25% or more goods of any description produced inIndia or 25% or more of any services rendered in India. As per sec.108H, definition of‘dominant undertaking’, ‘group’ etc. under MRTP Act will apply to sections 108A to108G.

PPPPPrior approval of Central Government rior approval of Central Government rior approval of Central Government rior approval of Central Government rior approval of Central Government (Sec.108A)(Sec.108A)(Sec.108A)(Sec.108A)(Sec.108A) This section applies only wherethe acquirer (or transferor of shares) is the owner of a dominant undertaking and as aresult of transfer, its dominance is increased. Prior approval of Central Government isrequired where any individual, firm, body corporate, group, constituent of a group orbodies corporate under the same management jointly or severally, acquire more thanacquire more thanacquire more thanacquire more thanacquire more than25% of the paid-up equity share capital25% of the paid-up equity share capital25% of the paid-up equity share capital25% of the paid-up equity share capital25% of the paid-up equity share capital of a public company or a private companywhich is a subsidiary of a public company.

No approval is required for acquisition of preference shares or equity shares of aprivate company. Similarly, no approval will be required if they do not in the aggregate,along with the existing holding if any exceed 25% of its paid up share capital. Wherethe present holding and the intended acquisition put together would exceed the prescribedlimit of 25%, approval of Central government would become necessary.

Intimation to Central Government if proposed transfer will exceed 10% of holdingsIntimation to Central Government if proposed transfer will exceed 10% of holdingsIntimation to Central Government if proposed transfer will exceed 10% of holdingsIntimation to Central Government if proposed transfer will exceed 10% of holdingsIntimation to Central Government if proposed transfer will exceed 10% of holdings(108B)(108B)(108B)(108B)(108B) – Every body corporate or bodies corporate under the same managementholding 10% or more of the subscribed equity capital, whether singly or together of anycompany shall intimate to the Central Government of any proposal for transfer of suchshares.


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If the Central Government is of the opinion that there is likely to be change inmanagement of the dominant undertaking due to such transfer and such interest isprejudicial to the interests of the company or to public interest, the Central Governmentmay by order that no such shares shall be transferred to the proposed transferees. Incase of industry specified in schedule XV, Central Government can order that suchshares should be transferred to Central Government or a corporation named by CentralGovernment. Such acquisition will be at prevalent market value (sec. 108B). [Industriescovered in schedule XV are - Arms and Ammunition and allied defense equipment,Atomic Energy, Minerals specified in Schedule to Atomic Energy (Conditions of Productionand Use) Order, 1953 and Railway transport.]

TTTTTransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company (108C)(108C)(108C)(108C)(108C) – If a groupor bodies corporate under same management is a ‘dominant undertaking’ and if itholds more than 10% shares in a foreign company having established business inIndia, shares in such foreign company cannot be transferred to any citizen in India orbody corporate in India without approval of Central Government. The approval can berefused only if Central Government is of the opinion that such transfer is prejudicial tothe public interest (sec 108C). Application for approval should be made in Form 7E.

PPPPPower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer –Central Government can order that a transfer should not be given effect, if after suchproposed transfer, the controlling interest in the dominant undertaking is likely to change.Such order can be made only if the Central Government is of the opinion that suchtransfer is prejudicial to the interest of company or prejudicial to the public interest. Iftransfer is already taken place, Central Government can order that the shares shouldbe re-transferred to the person who had sold them and the person shall refund theamount which was received by him on sale (sec108D). If the permission of CentralGovernment is not refused within 60 days, the permission is deemed to have beengranted (sec 108E).

RRRRRestriction not applicable to corporate bodied controlled by Central Governmentestriction not applicable to corporate bodied controlled by Central Governmentestriction not applicable to corporate bodied controlled by Central Governmentestriction not applicable to corporate bodied controlled by Central Governmentestriction not applicable to corporate bodied controlled by Central Government– The restrictions are not applicable to transfer to or by Central Government, anyCorporation established under any Central Act or any financial institution (sec 108F).However, it has been clarified that the Government Company or the said institutionsshall not transfer any shares unless the acquirer has obtained pervious approval of theCentral Government.


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PPPPPenalty for violationenalty for violationenalty for violationenalty for violationenalty for violation – Violation of these provisions is punishable with fine uptoRs.50, 000 and even imprisonment in some cases, as prescribed under section 108-I.If transfer is against these provisions, transfer can be denied.

8.8 Nomination of Shares /Debentures/Deposits (section 109A, 109B)

Earlier, there was no provision for making nomination by the holders of shares/debentures/ deposits. In the event of death of a shareholder/ debenture holder/ depositholder, the formalities of transmission had to be completed by producing successioncertificate, letter of probate, affidavit, indemnity bond, etc. To simplify this time consumingprocess, sections109A, 109B introduced nomination facility Provisions in respect ofnomination are as follows:

1. For what can nomination be made?

Nomination can be made for:

(i) shares

(ii) debentures and

(iii) fixed deposits

2. Who can make nominations?

Nomination can be made by-

i) Individuals only applying or holding shares or debentures on their own behalf,either singly or jointly, and

ii) If the shares are held jointly, all joint holders should sign the nomination form. (Inthe amended form, space has been provided as a specimen, if there are morejoint holders, more sheets can be added for signatures of holders of shares ordebentures and witness. In the earlier form there was space for only 2 nameswhich meant that 3 joint holders were not allowed to nominate. This is a welcomestep).

iii) A minor can be nominated by a holder of shares or debentures or deposits and inthat event the name and address of the guardian should be given by the holder.(If nominee is minor, the holders of shares / debentures can appoint a personwho will be entitled to hold shares/ debentures in the event of death, duringminority).


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iv) A non-resident Indian can be nominated on repatriable basis

The nomination, as aforesaid, will hold good against any legal successor(whether by will or status).

The nomination overrides any provision in respect of transmission by operation oflaw or by will. Thus, if a person has been appointed as nominee, the shares will betransferred in his/ her name, irrespective of any provision in will or succession certificateor probate [ section 109A(3)]

Nomination can be varied or cancelled in prescribed manner, but nomination prevailsover any provision of law of succession, will etc.

3. Who cannot be a nominee?

Facility of nomination is available only to individual’s i.e. natural persons (who candie). Nomination by non-individuals like trust, society, body corporate, partnership firm,karta of HUF or a power of attorney holder is not permissible.

Similarly, the following cannot be a nominee:

(i) trust, (ii) society, (iii) body corporate, (iv) partnership firm, (v) Karta of HinduUndivided Family or (vi) a power-of-attorney holder.

4. How to make a nomination

An investor is required to file nomination in duplicate prescribed form no. 2B withcompany or registrar and share transfer agents of the company who will return onecopy thereof to the investor. The form should be signed by two witnesses. If nominee isminor, name and address of guardian shall be given by holder.

If shares/ debentures are held jointly, all joint holders must sign the nominationform. In case of joint holding, the title passes to the nominee only if all joint holders die.[if one of the joint holder dies, the shares are transferred in name of surviving jointholders]

5. Rights of nominee holder

i. The nominee is entitled to all rights of deceased member / debenture holder likedividend and bonus. However, he will not be eligible for voting rights or otherrights as a member, unless he makes application in writing and is registered as amember in respect of the shares / debentures.


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ii. If nominee becomes entitled to any shares/ debentures by virtue of nomination,he will apply to company along with proof of death of holder/ joint holders. Hecan either

a. request Board to register himself as the share holder/ debenture holder or

b. transfer the shares / debentures of deceased share/ debenture holder. [section109B(1)]. Thus, the nominee can either register his name or directly transferthe debentures/ shares in some other’s name.

If he elects to be registered holder of shares / debentures, he will have to send awritten notice to the company stating that he elects to be the registered holder. Suchnotice should be accompanied by death certificate of share / debenture holder. [section109B(2)].

Default of the nominee Default of the nominee Default of the nominee Default of the nominee Default of the nominee The nominee must either register himself as member ortransfer the shares/ debentures is some other’s name. If he does neither, company cansend him a notice to elect either to become a member or transfer the shares/ debentures.if the nominee does not comply within 90 days, Board can withhold payment of dividends,bonuses or other money payable, till the requirement of notice is complied with – section109A(4).

6. When does nomination stand rescinded?

Nomination will stand rescinded upon (i) transfer of share or (ii) transfer of debentureor (iii) repayment of deposits or (iv) renewal of deposits.

7. Valid Discharge by company

Transfer of share or debenture in favour of a nominee and repayment of amount ofdeposits to nominee shall be a valid discharge by a company against the legal heir.

QUESTION BANK

I. FAQs’

1. What are the rights of the transferees pending registration of shares?

2. What is the validity period of a share transfer deed?

3. State the procedure to be followed for transfer of shares

4. Explain the provisions regarding nomination facility available to shareholders,depositor, and debenture holders.


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5. Write short notes on blank transfer and forged transfer.

6. What are the remedies against refusal to transfer shares?

7. What is depository? Explain the concept of dematerialization and rematerialisation.

8. How does transfer of shares takes place in case of demat shares.

9. How does the system of depository functions? State the benefits to the companyand the investors.

10. Explain clearly the meaning of ‘transfer’ and ‘transmission’ of shares. In what waydone the ‘transfer of shares’ differ from that of ‘transmission of shares’?

11. Distinguish between transfer of shares and transmission of shares. Discuss theright of aggrieved party against refusal to transfer the shares.

12. Explain clearly the meaning of ‘certification of transfer’. What is the effect of acompany refusing to register the transfer of shares?

II. CASE STUDIES

1. Hero Cycles Ltd. has received an application for transfer of 1,000 equity sharesof Rs. 10 each fully paid up in favour of Mr. Balak. On scrutiny of the applicationform it was found that the applicant in minor. Advise the company regarding thecontractual liability of a minor and whether shares can be allotted to Mr. Balak byway of transfer.

(((((Hints::::: Minor can be admitted as a member only when shares are fully paid up.)

2. ‘A’ commits forgery and thereby obtains a certificate of transfer of shares from acompany and transfers the shares of B for value acting in good faith. Companyrefuses to transfer the shares to ‘B’ whether the company can refuse? Decide theliability of ‘A’ and of the company towards ‘B’.

(Hints: The company must restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner.....The bonafidebuyer is entitled to get compensation from company on basis of principle ofestoppel.Company can claim compensation from person to lodged forgeddocument.)

3. The Board of directors of X Co. Ltd. have refused transfer of shares in favour of Son the ground that if the shares were transferred it would be difficult to pass anyspecial resolution (which requires 3/4 majority) without S’s consent. Advice S.


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(Hints: S should appeal to the court as the directors have no right to refuse transferof shares on this ground, as it is not a legitimate reason. Passing of special resolutionis needed for limited purpose and is not a matter of daily routine administrativenature. As such, the directors in such situation are acting with an oblique motiveand also on wrong footings. A similar view was expressed by the Supreme Courtin Bajaj Auto Ltd v Flrodia (1970) 2 SCC 550.)

4. A private company refused transfer of shares lodged by Mr. X. State the provisionsof the Companies Act, 1956 regarding the ground for refusal of transfer.

(Hints: Refusal of transfer by unlisted or private companies : In case of unlisted orprivate companies the Board of directors of the company has the powers in termsof the provisions of the Articles of the company to refuse transfer of any shares ifthe power of the Board is exercised bona fide and in the interest of the company.In Bajaj Auto Ltd v N.K. Florida (1970) 2 SCC 550 it was held by the SupremeCourt that even the Articles give the Board absolute power to refuse transfer ofshares, they must act bona fide in the interest of the company and for generalinterest of the shareholders as they are in a fiduciary position towards the companyand the shareholders)

5. Mr. KK purchased some shares from Mr. YK and delivered the same to the companyon 23 July. The company neither registered the shares nor informed the transfereerefusing the transfer of the shares. Mr. KK filed an appeal under section 111 ofthe Companies Act, 1956 to the CLB on 22 December. Advise Mr. KK.

(Hints: According to section 111(3) of the Companies Act, 1956 an appeal againstrefusal of transfer of shares shall be made to the CLB within 2 months from thedate of receipt of the notice of refusal or within 4 months from the date lodgmentof the shares if no notice of refusal is received. In this case the transfer was deliveredto the company on 23 July and therefore appeal to the CLB should have to bemade on or before 22 November. Therefore the appeal made by Mr. K is timebarred and not valid.)

6. Mr. Ps who has 200 shares registered in his name in a company died. His executorsapplied to the company to have the shares registered in their name. The Articlesof the company provides that “the directors may at any time in their absolute anduncontrolled discretion refuse to register any transfer of shares”. The directors ofthe company refused to register the shares in the name of the executors under thesaid provisions of the Articles. Advise the executors.


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(Hints: The executors may apply to the court for an order for registration of theshares in their favour. On the death of the shareholders the shares are transferredto the executors by operation of law which is called transmission of shares and nottransfer of shares. In Indian Chemical Products Ltd v State of Orissa (1966) 2Comp LJ 63 it was held that the directors cannot refuse transmission of shares forthey have no right to interfere with the course of law)

7. Mr. B applied for 100 shares in a company but no allotment was made to him.However, 100 shares were transferred to him by the company and his name wasregistered in the register of members. Mr. B did not take any steps to ratify it. Thecompany was wound up. Is Mr. B liable to the company?

(Hints: Yes. Section 111 of the Companies Act, 1956 provides for rectification ofthe register of members. When a person knows that his name is registered in theregister of members and he allows it to be so registered, he has fallen to thedoctrine of holding out and becomes a shareholder. He has also lost his rights tohave his name removed from the register of members)


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CHAPTER - IX

MEMBERSHIP


9.1 Definition of a member

9.2 Member v. Shareholder

9.3 Modes of acquiring membership

9.4 Who may become a member?

9.5 Termination of membership

9.6 Rights of a member

9.7 Liabilities and duties of a member

9.8 Variation of the rights of a member

9.1 Definition of a member

A company is an artificial person and has a separate personalitydistinct from its members; even then it is composed of members.

Section 41 of the Companies Act defines a member in the followingwords:

1. The subscribers of the Memorandum of a company shall bedeemed to have agreed to become members of the company,and on its registration, shall be entered as members in its registerof members.

2. Every other person who agrees in writing to become a member ofa company and whose name is entered in its register of members,shall be a member of the company.

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3. Every person holding equity share capital of a company and whose name isentered as beneficial owner in the records of the depository shall be deemed tobe a member of the concerned company.

On this basis, apart from signing of the memorandum two pre-requisites for aperson to become a member of a company are:

i) the agreement in writing to take shares of the company; and

ii) the registration of his name in its register of members.

Besides, a person may also become a member of a company through the depositorysystem.

9.2 Member v. Shareholder

In the case of a company, limited by shares, the persons whose names are put onthe Register of members, are the members of the company. They may also be calledshareholders of the company as they have been allotted shares and are holding themin their own right. In such a situation, the terms ‘member’ and ‘shareholder’ areinterchangeably used to mean the same person.

However, a distinction is made between a member and a shareholder in the followingcases:

a. A person who is holding a share warrant is a shareholder but he is not a memberof the company as his name is struck off the Register of members [Section 2(27)and Section 115].

b. In the case of a company limited by guarantee having no share capital or anunlimited company having no share capital, there will be only ‘members’ but no‘shareholders’.

c. A person who subscribers to the memorandum of association, immediatelybecomes the member, even though no shares are allotted to him. Till shares areallotted to the subscriber, he is a member but not the shareholder of the company.

d. Technically a person whose name is not entered in the Register of members isgenerally not regarded as a member. Thus, there may be situation where a personis the holder of shares but his name is not entered in the Register of members yetor vice versa.

MEMBERSHIP

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Thus in the case of transfer of shares where the transferor has delivered theshares to the transferee for consideration, the transferee shall merely be ashareholder but not the member of the company till his name is entered inthe Register of members.

Likewise, in the event of death of a member, the deceased will continue toremain the member of the company though, quite naturally he cannot bethe shareholder. The legal heir will be the shareholder but not the membertill his name is entered in the Register of member.

When a shareholder S becomes insolvent and his property, including shares,vests in the Official receiver or Official Assignee. The Official Receiver orAssignee is holding the shares in his own right. Therefore, S is no longer theshareholder, though he continues to be the member of the company.

9.3 Modes of acquiring membership

A person may become a member or a shareholder of a company in any of thefollowing ways :

1. By subscribing to the memorandum of association. Subscribers to the memorandumbecome members, the moment the company is registered, and it is not necessarythat their names must have been entered in the Register of members.

2. By agreement and registration According to sec. 41(2), except in the case of thesubscribers to the Memorandum, to be a member of the company, two conditionsmust be satisfied, namely, (i) that there is an agreement in writing to become amember; and (ii) his name is entered in the Register of members of the company.

Registration of the name of a person as a member of a company may arise:

a) by application and allotment.

b) by transfer - the member may acquire shares from an existing member bysale, gift or some other transaction.

c) by transmission.

d) by estoppel/holding out - this arises when a person holds himself out as amember or knowingly allows his name to remain on the register when he hasactually parted with his shares.

e) on conversion of convertible debentures or loans into shares.

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f) on acquisition of shares on take-overs/ merger/ amalgamation throughCourt’s order.

3. By holding Shares as Beneficial Owner in the Records of a Depository:- Pursuantto section 41(3) ,a person holding equity share capital of a company whosename has been entered in the records of the depository shall be deemed to be amember of the concerned company.

4. By agreeing to purchase qualification shares:- A person who has agreed to purchasequalification shares from the company is deemed to have become a memberautomatically on incorporation of the company. This applies to the directors.

Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. When a person allows hisname to be on the register of members of the company, or holds himself out as amember, or allows other to believe that he is a member (by attending meetings, byaccepting dividends, etc.), then such a person is deemed to be a member of the companyand he is known as a member by holding out. The rule of estoppel shall apply and sucha person is estopped from denying that he is a member. Such a member shall be liableas a contributory in the event of winding up, like any other member of the company.However, he may escape liability by applying for removal of his name under section111 of the Act.

9.4 Who may become a member?

a) MinorMinorMinorMinorMinor..... A minor can become a member in respect of fully paid shares throughtransfer or transmission.

The Company Law Board has laid down in Nandita Jain v. Bennett Coleman & Co.Ltd. that a minor can become a member provided four conditions are fulfilled:

i. Company must be a company limited by shares.

ii. Shares are fully paid up.

iii. Application for transfer is made on behalf of minor by lawful guardian.

iv. The transfer is manifestly for the benefit of the minor

It has been held in several Court decisions that there is no legal bar to minorbecoming a member of a company by acquiring shares (by way of transfer) providedthe shares are fully paid up and no further obligation or liability is attached to them.

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Minor can become member by transfer or transmission, but a company may notallow a minor to be a member by allotment.

b) CompanyCompanyCompanyCompanyCompany..... A company being a legal person can become a member of anothercompany if it is so authorised by its memorandum to purchase or invest in shares.

c) PPPPPartnership firmartnership firmartnership firmartnership firmartnership firm Since a firm is not a legal person, it cannot be registered as amember of a company. However, partners may hold shares as joint members.

d) FFFFForeigneroreigneroreigneroreigneroreigner A foreigner can become a member subject to the provisions of FEMAand other legal provisions.

e) Hindu Undivided FHindu Undivided FHindu Undivided FHindu Undivided FHindu Undivided Family (HUF): amily (HUF): amily (HUF): amily (HUF): amily (HUF): An HUF is not a legal person (though it is a‘person’ under Income Tax Act.), hence, it cannot be a member of a company.However, an HUF can hold shares in the name of its ‘Karta’ (i.e. Manager) e.g.shares cannot be held in the name of V.K.Jain HUF, but shares can be held in thename of V.K.Jain – Karta (V.K.Jain HUF).

f) PPPPPawnee:awnee:awnee:awnee:awnee: A pawnee never had the absolute ownership.A pawnee cannot be treatedas the holder of the shares pledged in his favour.

g) Bankrupt.Bankrupt.Bankrupt.Bankrupt.Bankrupt. A bankrupt may be a member of a company, as long as he is on theregister of members. He is also entitled to vote. (Morgan v. Gray 1953) Ch. 83.

h) Joint Membership.Joint Membership.Joint Membership.Joint Membership.Joint Membership. Shares may also be held by two or more members jointly.However listing agreement provides the maximum limit of three members to holdthe shares jointly. All persons comprised in a joint holding will be treated a memberfor the purpose ceiling limit of fifty members under section 3(1)(iii).The rightssubjected to the shares can however be exercised by any one of the such membersand usually whose name appears first.

i) RRRRRegistered trust:egistered trust:egistered trust:egistered trust:egistered trust: A trust is a legal obligation annexed to a ownership of property.A trust is not a legal person. According to section 153 of Companies act acompany cannot take notice of any trust in the register of members or debentures.A trust cannot be a member. The trustees should take shares in their individualnames(without describing them as trustees.).

9.5 Termination of membership

Membership is terminated when a person’s name is removed from the register ofmembers for some proper reason. This may occur when:

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a) he transfers all of his shares;

b) his shares are forfeited, surrendered or sold to enforce a lien;

c) he holds redeemable preference shares and they are redeemed;

d) he dies and his legal representative transfers the shares or secures their registrationin his own name;

e) his contract to take the shares is rescinded or repudiated;

f) he becomes insolvent and the Official Assignee or Receiver disclaims the sharesor transfers them; &

g) the shares are held by a company in the course of liquidation, and the liquidatordisclaims the shares or transfers them.

h) the company seals his shares in exercise of its rights under the articles of associationof the company.

i) the Court or any other competent authority attaching and selling the share insatisfaction of a decree or claim.

9.6 Rights of a member

These are as follows:

1) To have the certificate of shares held or the certificate of stock issued to him withinthe prescribed time (Section 113).

2) To have his name borne on the register of members.

3) To transfer shares subject to any restrictions imposed by the articles (Section 82).

4) To attend meetings of shareholders, receive proper notice and to vote at themeetings.

5) To associate in the declaration of dividends and to apply to the Court for aninjunction restraining the directors from paying dividends on an ultra viresdeclaration or out of capital.

6) To inspect the registers, indexes, returns and copies of certificates, etc. kept by thecompany and to obtain extracts or copy thereof (Section 16).

7) To obtain copies of Memorandum and Articles on request on payment of theprescribed fees (Section 39).

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8) To have the first option in case of issue of new shares or a further issue of shares(i.e., the right of pre-emption)) by the company (Section 81).

9) To receive a copy of the statutory report [Section 165(1) & (2)].

10) To apply to the Court to have any variation or abrogation to his rights set aside bythe Court (Section 107).

11) To have notice of any resolution requiring special notice [Section 196(2)].

12) To obtain on request minutes of proceedings at general meeting[Section 196(2)].

13) To remove directors by joining with others (Section 284).

14) To obtain a copy of the profit & loss account and the balance sheet with theauditor’s report (Sec 210, 219).

15) To apply for the appointment of one or more competent inspectors by theGovernment to investigate into the affairs of the company as well as for reportingthereon (Section 235, 237)

16) To participate in the appointment of an auditor or auditors at the Annual GeneralMeeting (Section 224).

17) To inspect the auditor’s report at the Annual General Meeting of the company(Section 230).

18) To receive a share in the capital of the company and in the surplus assets, if any,on the company’s liquidation.

19) To participate in passing of the special resolution that the company may be woundup by the Court or voluntarily [Section 433, 484(a)(b)].

20) To participate in appointment and in fixation of remuneration of one or moreliquidators in the case of a Member’s Voluntary Winding up and to fill any vacancyin the office of a liquidator so appointed by him (section 490,492).

9.7 Liabilities and duties of a member

1) To take shares, when they are allotted in due time and in compliance with theprovisions of the Act, unless the refusal to accept the shares has been sent on theground of non-compliance with the provisions of the Act as regards the issue ofthe prospectus or as regards allotment.

2) To pay for the shares allotted to him when the allotment is made and when callshave been made validly and in conformity with the provisions of the articles.

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3) To abide by the doing of the majority of members unless the majority actsvindictively, oppressively, malafide of fraudulently.

4) To contribute to the assets of the company in the case of winding up when theshares held are partly paid-up.

5) Members are severally liable for debts of the company contracted, where its businessis carried on beyond the expiry of six months from the date at which its membershipis reduced below the legal minimum (i.e., seven members in the case of a publiccompany and two members in the case of a private company). However, suchmembers are not liable for debts contracted before the expiry of six months.(Section 45).

Member vs. ContributoryMember vs. ContributoryMember vs. ContributoryMember vs. ContributoryMember vs. Contributory. . . . . In the event of winding-up of a company, since a membermay be called upon to contribute towards the assets of the company, he is accordinglycalled a contributory. However, under section 428, the expression ‘contributory’ includesthe holder of fully paid up shares. Even a past member may be held liable as a ‘list B’contributory in case the winding-up commences within one year of his ceasing to be amember of the company.

Can a member be expelled? Can a member be expelled? Can a member be expelled? Can a member be expelled? Can a member be expelled? The view expressed by the Courts and the Departmentof Company Affairs in this regard is that a company cannot empower itself even bymaking a provision in the Articles of association to expel a member

9.8 Variation of shareholders’ rights (Section 106)

The share in a company may be equity shares and/or preference shares. Usually,the rights attaching to different classes of shares are different. These are termed as classrights’ or special rights of class shares. These rights are given by the memorandum, thearticles, the terms of issue of shares or a special resolution.

According to section 106 for variation of shareholders rights two things should benoted:

There should be only variation in the rights and rights alone and such variationshould not affect the liability of the member; and

Such variation in right is in respect of ‘share of any class’ and not to ‘shares of anykind’.

These rights may be varied subject to the fulfilment of the following conditions:

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(1) The holders of atleast 3/4ths of the issued shares of the class whose rights are tobe varied must give their consent in writing or a special resolution must be passedat a separate meeting of holders of the issued shares of that class.

(2) The Memorandum or the Articles of the company must contain a provision withrespect to such variation.

(3) In the absence of any such provision in the Memorandum or Articles, such variationmust be not be prohibited by the terms of issue of the shares of that class.

Rights of dissenting shareholders

The holders of not less than 10 per cent of the issued shares of a class, who did notconsent to or vote in favour of the resolution for the variation, may apply to the court tohave the variation cancelled, if the same is oppressive or unfairly prejudices their rights.

Where such application is made, the variation shall have affect only if the courtconfirms it. Application to the court should be made within 21 days after the variationof rights was effected. The court if it is satisfied, having regard to all the circumstancesof the case, that the variation would unfairly prejudice the shareholders of the classrepresented by the applicants, disallow the variation; and shall if not so satisfied confirmthe variation. The decision of the court on any such application is final.

The company must within 30 days, forward a copy of the order to the Registrar. Ifdefault is made the company and every officer of the company who is in default arepunishable with fine which may extend to Rs. 500. (Section 107).

QUESTION BANK

I. FAQs’

1. Distinguish between a ‘shareholder’ and ‘member’ of a company.

2. To what extent is it possible for a minor to become a member of a company underthe provisions of the Companies Act, 1956. Explain.

3. Define the term ‘member’ of a company as laid down under the provisions of theCompanies Act, 1956. State the circumstances under which a member may notbe a shareholder or a shareholder may not be a member.

4. Explain the different ways through which a person may become member of acompany.

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5. Who is a member of a public limited company? How membership is acquired?Can a company be member of another company?

6. How is membership of a company terminated? In what respects may a memberbe differentiated from a shareholder?

7. State the conditions under which the rights attached to any class of shares can bevaried. Explain the rights of dissenting shareholders in this regard.

8. Comment: Every shareholder of a company is also known as a member, whileevery member may not be known as a shareholder.

9. Explain, very briefly, the various ways by which membership of a company may beacquired.

10. How far can a minor become a member of a company under the Companies Act,1956?

11. State with reasons whether the following can become member of a company:

a) a minor, b) foreigner, c) a partnership firm, d) a company. e) a HUFf) a registered trade union

II. CASE STUDIES

1. A company issued 20 partly paid equity shares and registered them in the nameof the minor describing him as minor. The father of the minor signed the applicationon the minor’s behalf. After some time company went into liquidation. The companyfiled a suit against father of the minor to recover the remaining amount on theshares. Whether the company will succeed? Advice.....

(((((Hints: : : : : The allotment is void as agreement with minor is void. Hence, neither theminor nor the guardian will be liable. The facts of case are similar to Palaniappav.Official Liquidator AIR 1942 Mad 470=12 Comp Cas 89(Mad HC)

2. Mr. B applied for 100 shares in a company but no allotment was made to him.However, 100 shares were transferred to him by the company and his name wasregistered in the register of members. Mr. B did not take any steps to rectify it. Thecompany was wound up. Is Mr. B liable to the company?

(Hints:Yes. Section 111 of the Companies Act, 1956 provides for rectification ofthe register of members. When a person knows that his name is registered in theregister of members and he allows it to be so registered, he comes in the purview

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of doctrine of holding out and becomes a shareholder. He has also lost his rightsto have his name removed from the register of members)

3. Western Cycles Ltd. has received an application for transfer of 1,000 equity sharesof Rs. 10 each fully paid up in favour of Mr. Balak. On scrutiny of the applicationform it was found that the applicant in minor. Advise the company regarding thecontractual liability of a minor and whether shares can be allotted to Mr. Balak byway of transfer.

(Hints:As provided in section 41(2) of the Companies Act, 1956 every personwho agrees in writing to become a member of the company and whose name isregistered in the register of members of the company becomes a member of thecompany. Membership of a company creates contractual liability of the members.As per section 11 of he Indian Contract Act, 1872 a minor is not eligible to enterinto any contract. In terms of the aforesaid provisions the minor is not eligible tobecome a member of the company. However it has been held and clarified inmany cases that the liability of the members arises between the member and thecompany interse if any amount is lying unpaid on the shares of the company.

In the present case the shares are fully paid up. As such the company maytransfer the shares in favour of Mr. Balak.( Nandita Jain v. Bennett Coleman & Co.Ltd Appeal no 27 of 1972 dated 17.2.78)

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CHAPTER - X

BORROWINGS AND DEBENTURES


10.1 Borrowing Powers.

10.2 Meaning of Debentures

10.3 Types of Debentures.

10.4 Debenture Trust Deed

10.5 Redemption of Debentures and Remedies of Debenture Holders

10.1 Borrowing Powers

Every trading company has an implied power to borrow. A non-trading company must, in its Memorandum or Articles, contain an expresspower to borrow; it cannot be implied.

A public company is not allowed to exercise its borrowing powersuntil it has obtained the certificate to commence business. A privatecompany may, however, exercise the borrowing powers immediately afterincorporation. The power to borrow money is generally exercised by thedirectors but articles normally provide for certain restrictions on theirpower to borrow. In any case, directors cannot borrow beyond theaggregate of the paid up capital and free reserves of the company withoutobtaining the approval of the shareholders by way of a resolution passedin a general meeting. This restriction, however, does not apply totemporary loans obtained from the company’s bankers in the ordinarycourse of business.

10.2 Meaning of Debentures

Meaning of Debenture Debenture means” an instrument in writingissued by a company under its common seal, acknowledging its

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indebtedness for a certain sum of money and undertaking to repay it on or after a fixedfuture date.” According to sec. 2(12) of the Companies Act, “ Debenture includedebenture stock, bonds and any other securities of a company, whether constituting acharge on the assets of the company or not.”

Characteristic features of a debenture - The characteristic features of a debentureare as follows:

1. It is issued by the company and is the form of a certificate of indebtedness.

2. It usually specifies the date of redemption. It also provides for the re-payment ofprincipal and interest at specified date or dates.

3. It generally creates a charge on the undertaking or undertakings of the company.

Usually the words ‘pari passu‘ appear in the terms and conditions of debentures.This means that all the debentures of a particular class will receive the moneyproportionately in case the company is unable to discharge the whole obligation.

What are Bonds?

Bonds are similar to debentures. In India, the two terms are used interchangeably.Some consider bond to be an American term while others consider bond as long-termgovernment securities. Thus there is hardly any difference between bonds and debentures.

In India, a bond with a maturity of less than 1 year is regarded as a money marketa money marketa money marketa money marketa money marketinstrumentinstrumentinstrumentinstrumentinstrument, bonds of 1 to 3 year maturity are called shortshortshortshortshort-term bonds, -term bonds, -term bonds, -term bonds, -term bonds, those with 4 to7 year maturity are called intermediate term bondsintermediate term bondsintermediate term bondsintermediate term bondsintermediate term bonds and those with a maturity periodbeyond 7 years are called longlonglonglonglong-term bonds.-term bonds.-term bonds.-term bonds.-term bonds.

10.3 Types of Debentures

1. Classification on the basis of transferability –

a. Registered debentures. These are debentures in respect of which the interest aswell as the principal is paid only to the registered holders i.e., persons whosename appear in the Register of debenture holders. Such debentures are transferablein the same way as shares i.e. by executing transfer deed.

b. Bearer Debentures. These debentures are payable to the bearer and aretransferable by mere delivery. The company does not maintain any register ofholders of these debentures and payment of interest is made to the bearer on theproduction of interest coupons attached to the debentures.


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2. Classification on the basis of security –

a. Unsecured debentures (Simple/Naked Debentures). These are the debentures,which are not secured by any charge or mortgage on the assets of the company.They do not give any security to the holders but merely signify an acknowledgementof the debt. Holders of these debentures rank as ordinary creditors in a winding up.

b. Secured debentures (Mortgage Debentures). These are debentures, which aresecured by a charge or mortgage on the assets of the company. If some particularassets of the company (e.g., fixed assets like land, building, etc.) are mortgagedor charged as security, it is known as fixed chargefixed chargefixed chargefixed chargefixed charge. When the charge or mortgageis not fixed on any particular asset or assets, but is over all the assets of thecompany, including floating assets, it is called a floating chargefloating chargefloating chargefloating chargefloating charge. The mortgageor charge is created by means of a Mortgage (Trust) Deed entered into betweenthe company and the trustees (representatives) for the debentureholders. Thetrustees hold the mortgage in trust for the debentureholders and if the companyfails to redeem the debentures, the trustees realise the mortgage and distributethe proceeds among the debentureholders.

3. Classification on the basis of redemption or payment –

a. Redeemable Debentures. These are debentures, which have to be paid off by thecompany on a certain future date or on the expiry of a certain period stipulated inthe terms of issue. However, redeemed debentures can be re-issued in accordancewith the provisions of Section 121.

b. Irredeemable Debentures /Perpetual. These are debentures, which are notordinarily repayable within the lifetime of the company. These become redeemableonly on the liquidation of the company. However, the company has the option ofredeeming them whenever it likes. Irredeemable debentures are also called‘Perpetual’ debentures. Under the Companies Act, a debenture will be treated asirredeemable where no period is fixed for repayment of the principal amount orrepayment is made conditional on the happening of a contingency.

4. Classification on the basis of convertibility –

Convertible Debentures. Convertible debentures may be defined as debentureswhich are convertible into shares at the option of the holders after a specified period.Such debentures assure a fixed rate of interest to the holders during the initial years ofprogress as well as hold out of the prospect of higher returns later on. The company


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has also the advantage of getting relieved of the fixed interest burden in due course.Convertible debentures may be partly convertible debentures (PCDs) or fully convertibledebentures (FCDs).

(a) Fully Convertible Debentures: Fully convertible debentures are those debenturesthat are converted into equity shares of the company on the expiry of a specifiedperiod or periods where the conversion is to be made at or after 18 months fromthe date of allotment but before 36 months. The conversion is optional on thepart of the debenture holders in terms of SEBI guidelines. Convertible debenturesmay or not carry any interest.

(b) Partly Convertible Debentures: PCD consist of two parts-convertible and non-convertible. The convertible portion (s) is/are convertible into equity shares at theexpiry of specified period(s) whereas non-convertible portion is redeemed at theexpiry of a certain period(s). Where the conversion takes place at or after 18months, the conversion is optional at the discretion of the debenture holders.

(c) Non Convertible Debentures: (NCD) or plain vanilla debentures These debenturesdo not have any option for conversion into equity shares. They are to be redeemedon maturity.

(d) Optionally convertible debenture (OCD) These are the debentures wherein theholder has the option to convert them into shares within a stipulated time. Forexample a company may issue OCD with a face value of Rs100 with theinterest rate of 8% for six years.According to the conversion terms each debentureis to be converted into 4 shares at the end of 18 months at the option of theholder. The holder may decide to convert into shares or decide to just receiveinterest.

The OCDs are similar to mezzanine financing which is a hybrid of debt andequity. Here the debt is converted into equity at the option of the holder.

Under SEBI guidelines ,conversion must take place within 36 months from theissue of debentures.

5. Other types –

(a) Zero Interest Debentures. These are sold at discount from their eventual maturityvalue and have zero interest rate .These debentures are sold to the investors fordiscount .The difference between the face value of the debentures and theacquisition cost is the gain to the investors. The investors are not entitled to anyinterest and are entitled to only repayment of principal sum on the maturity period.


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The Finance Act,2005 has introduced a new bond called Zero coupon bond,which has been defined as follows:

Zero Coupon Bond – Zero Coupon Bond – Zero Coupon Bond – Zero Coupon Bond – Zero Coupon Bond – ‘Zero Coupon Bond’ means a bond issued by any

- infrastructure capital company or infrastructure capital fund or a public sectorcompany

- on or after 11111ststststst June, 2005 June, 2005 June, 2005 June, 2005 June, 2005,

- in respect of which no payment and benefit is received or receivable beforematurity or redemption

- from such issuing entity and which the Central Government may notify in thisbehalf. Section 2(48)

For example, a 5-year zero coupon bond is offered at a discount (say Rs. 65)fetches no periodic interest and is redeemed at the face value of say Rs. 100 at the endof 5 years.

(b) Indexed Bonds/ Debentures. These debentures provide investors an effective hedgeagainst inflation. The returns are indexed to stock-exchange index or the priceindex.

(c) Debentures with Warrant option: A company may issue the convertible debentures,whether fully convertible or partly convertible with detachable warrant. The warrantgives a right to the holder to get equity shares mentioned in the warrant after theexpiry of a certain period at a price not exceeding the price fixed in the warrant.

(d) Fixed rate debentures and floating rate debentures: In case of fixed rate debenturesthe rate of interest is fixed. In case of floating rate debentures the interest rate islinked to some benchmark such as a bank rate, a particular index rate or MumbaiInter Bank Offer Rate (popularly known as MIBOR).

(e) Debentures with Call or Put Options: A Put Option gives the debenture holder theright to redeem the debentures before their maturity period while a Call Optiongives the right to the company to redeem the debentures before the maturity.

Prohibition on issue of debenture with voting rights: Section 117 prohibits issue ofdebentures with voting rights. Thus a debenture owner does not carry any voting rightsince he is a creditor and not a shareholder of the company.


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Distinction between share and debenture-

The points of distinction between share and debenture may be noted as follows:

1. A shareholder is a member of the company. A debenture holder is a lender to thecompany.

2. A shareholder has a right to vote. A debenture holder does not enjoy such a right.Section 117 declares that no company shall after the commencement of theCompanies Act, 1956 issue any debentures carrying voting rights at any meetingof the company.

3. Income on shares depends on the profits, Shareholders are entitled to get dividendonly out of profits. Debentureholders are entitled to a fixed rate of interest whichthe company must pay irrespective of profits, i.e., profits or no profits.

4. Shareholders cannot be paid back (except in case of redeemable preferenceshares) until its winding up. Debentureholders, unless the debentures areirredeemable, may be paid back on the expiry of the specified time.

5. In the event of winding-up, shareholders cannot claim payment unless all outsidecreditors have been paid in full. Debentureholders, normally being secured lenders,have prior claim for repayment.

6. Dividend on shares is not a charge against profit. Interest on debentures, on theother hand, is a charge against the profits and is deducted from revenues for thepurpose of calculating tax liability.

Debenture Certificate: Debenture Certificate: Debenture Certificate: Debenture Certificate: Debenture Certificate: Just like a share certificate, a company issues a debenturecertificate acknowledging that the certificate holder is a creditor of the company to theextent of the amount shown in the certificate with interest at specified rate. The certificateis transferable just like a share certificate. Debenture certificate must be delivered todebenture holder within 3 months after allotment.

10.4 Debenture Trust Deed

In case of companies which issue debentures to the public it becomes necessary toexecute a debenture trust deed. The purpose of executing a debenture trust deed is tocreate a charge on the company’s properties in favour of the trustees. It is not possiblefor the company to create separate charge in favour of a large number of debentureholders. Therefore, the system of debenture trust deed takes care of the interest on thedebenture holders by conveying the property of the company to the trustees and declaring


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a trust in favour of the debenture holders. The trust deed contains the terms and conditionson which the debenture are issued and defines the rights of the debenture holders andthe company. As per SEBI guidelines the trust deed should be executed within six monthssix monthssix monthssix monthssix monthsfrom the closure of the issue for listed companies.

SEBI guidelines pertaining to debentures – SEBI Guidelines 2000 protect the interestof the debenture holders. According to SEBI guidelines, a company should obtaincompulsorily credit rating from a recognised credit rating agency (CRISIL or ICRA orCARE etc.) for issue of debentures. The interest on debentures is freely determinable. Adebenture redemption reserve should be created.

Steps taken for protection for interest of debentures (sections 117A, 117Band 117C)

Sections 117A, 117B and 117C have been inserted by the Companies (Amendment)Act 2000 in order to protect the interest of debenture holders. These newly addedsections contain provisions relating to debenture trustees, trust deed, creation of securityand debenture redemption reserve.

Debenture Trustees (Section 117B)

i) Appointment of debenture trustees made compulsory

Section 117B provides that no company shall issue a prospectus or a letter of offerto the public for subscription of its debentures, unless the company has, before suchissue, appointed one or more debenture trustees for such debentures and the companyhas, on the face of the prospectus or the letter of offer, stated that the debenture trusteeor trustees have given their consent to the company to be so appointed.

ii) Bar on certain persons to become trustees

A debenture trustee should be an independent person. According to proviso tosection 117B, a person shall notshall notshall notshall notshall not be appointed as a debenture trustee, if he-

a. beneficially holds shares in the company.

b. is beneficially entitled to moneys which are to be paid by the company to thedebenture trustee;

c. has given any guarantee in respect of principal debts secured by the debenturesor interest thereon.


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iii) Functions of trustees

The function of the debenture trustees shall generally be to protect the interest ofholders of debentures (including the creation of securities within the stipulated time)and to redress the grievances of holders of debentures effectively.

In particular, and without prejudice to the generally of the foregoing functions, adebenture trustee may take such other steps he may deem fit –

a. to ensure that the assets of the company issuing debenture and each of theguarantors are sufficient to discharge the principal amount at all times;

b. to satisfy himself that the prospectus or the letter of offer does not contain anymatter which is inconsistent with the terms of the debentures or with the trustdeed;

c. to ensure that the company does not commit any breach of convenant andprovisions of the trust deed;

d. to take such reasonable steps to remedy any breach of the convenant of the trustdeed or the term of issue of debentures;

e. to take steps to call a meeting of holders of debentures as and when such meetingis required to be held.

The trustees should show due care and diligence as trustee. A trust deed cannotexempt trustee from liability of breach of trust (Section 119(1).

iv) Trustees to file petition if the interest of debenture holders are in jeopardy

Where at any time the debenture trustee comes to a conclusion that the assets ofthe company are insufficient or are likely to become insufficient to discharge the principalamount as and when it becomes due, the debenture trustee may file a petition beforethe CLB and the CLB may, after hearing the company and another person interested inthe matter, by an order, impose such restrictions on the incurring of any further liabilitiesas the Central Government thinks necessary in interest of holders of the debentures.

Debentures trust deed (Section 117A)

i) A trust deed for securing any issue of debenture shall be in such form and shall beexecuted within the prescribed period.

ii) Copy of the trust deed to be available for inspection.


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A copy of the trust deed shall be open to inspection to any member or debentureholder of the company and he shall also be entitled to obtain copies of such trustdeed on payment of such sum as may be prescribed.

iii) Penalty for non-compliance

If a copy of the trust deed is not made available for inspection or is not given toany member or debenture holder, the company and every officer of the companywho is in default, shall be punishable, for each offence, with fine which mayextend to five hundred rupees for every day during which the offence continues.

A debenture trust deed authorises the trustees to enforce the security if the companydefaults in the payment of interest or repayment of debentures

Debenture redemption reserve (section 117C)

i) Creation of debenture redemption reserve

In respect of debentures issued after the commencement of the Amendment Act,a company is required to create a debenture redemption reserve for “theredemption of such debentures, to which adequate amount shall be credited,from out of its profits every year until such debentures are redeemed”.

ii) Utilisation of debenture redemption reserve

The amount standing to the credit of debenture redemption reserve shall be utilisedby the company only for the purposes of debenture redemption.

iii) Payment of interest and redemption of debentures

The company shall pay interest and redeem the debentures in accordance withthe terms and conditions of the issue.

iv) Failure in redeeming the debentures on maturity date

Where a company fails to redeem the debenture on the date of maturity, theCompany Law Board may, on the application of any or all the holders of debenturesshall, after hearing the parties concerned, direct, by order, the company to redeemthe debentures forth with by the payment of principal and interest due thereon.

v) Non compliance of order of company law board

If default is made in complying with the order of the company low board, everyofficer of the company who is in default, shall be punishable with imprisonment


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which may extend to three years and shall also be liable to a fine of not less thanfive hundred rupees for every day during which such default continues.

10.5 Redemption of Debentures

Redemption of debenture refers to extinguishing or discharge the liability on accountof debentures and in accordance with the terms of redemption stated in the debenturetrust deed. There are three aspects that a company has to keep in mind regardingredemption, viz. the time of redemption, the amount to be paid and the sources fromwhich redemption will have to be carried out:

Remedies to debenture holders:

i. When the debentures are not secured: When the debentures are not secured byany mortgage or charge then the holder has alternative remedies either

a) to sue the company for the recovery of the money secured by the debentureand execute the decree against the company’s property; or

b) to present petition for the winding up of the company under section 433(e)of the Companies Act, 1956 on the ground of the company’s inability to payits debts. However if winding up is already in progress the holder has toprove in such winding up the amount due to him like any other unsecuredcreditor.

ii. Where the debentures are secured: Where the debenture are secured by amortgage or a charge, the holder thereof who wishes to realise his security andrecover the money due to him may resort to all or any of the following remedies:

a. A debenture holder may sue on his behalf and on behalf of other debentureholders of the same class to obtain payment or enforce his security by sale.

b. All the debenture holders may file petition to CLB. The CLB, after hearing theparties concerned, direct the company to forthwith redeem the debenturesand pay interest thereon. [Section 117C(4)].

c. He may apply to the court for an order of foreclosure, the effect of which isthat the borrowers interest in the assets charged is completely extinguishedand the lender becomes the owner of them. For an action of foreclosure, itis necessary that all debentures holders of class concerned join hands.

d. He may in the capacity of a creditor present an application for winding upfor the principal and interest thereon. [Section 433(e)].


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e. He may have the property sold by the trustee if the debenture trusts deedpermits the sale.

f. In case of company insolvency, he may realise value of his security andprove for the balance of his debt, if the security is insufficient or give up thesecurity and prove for the whole debt. But he will not be entitled for paymentof interest after the date of liquidation of the company. He is not entitled torecover the interest out of his security when arriving at a balance for whichhe can prove in the winding up.

Directors of defaulting company are disqualified if debentures are not redeemedin time. [Section 274(1)(g)(B)].

Powers of the Central Government in regard to conversion of debentures andloans into shares of the company. This can be studied under the following heads:

(i) When terms of issue of such debentures or terms of loan do not include termproviding for and option conversion:

(ii) Matters considered in determining the terms and conditions of suchconversion;

iii) Remedy available to the company if conversion or terms of conversion is notacceptable to it

(a) Central Government can compulsorily order to convert part of debentures issuedto Central Government or loans given by Central Government into equity shareson terms and conditions fixed by Central Government,even if the terms ofdebentures or loan do not contain any such provision for option of conversion ofdebentures or loans into equity [section 81(4)]

(b) These provisions apply only when debentures are issued or loan is given by CentralGovernment. Central Govt. can order conversion only when it is in public interest.

(c) If C.G.issues such order,appeal can be filed in Court within 30 days. 81(7).


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QUESTION BANK

I. FAQs’

1. Explain the meaning of the term ‘Debentures’ under the Companies Act, 1956.When a debenture certificate is required to be issued?

2. Explain clearly the meaning of ‘Fully Convertible Debenture’ and ‘PartiallyConvertible Debenture’. In what way do they differ from each other?

3. State the types of debentures that a company may offer to the public.

4. What is meant by redemption of debentures? State the types of remedies availableto debenture holders: (i) when the debentures are not secured by any mortgageor charge, and (ii) when the debentures are secured by a mortgage or charge.

5. What are the provisions of the Companies Act, 1956 relating to the appointmentof “Debenture Trustee” by a company?

6. Explain briefly the distinction between shares and debentures and state whether acompany can issue debentures with voting rights.

7. Write short note on debenture trust deed.

8. List out the important features of debentures.

II. CASE STUDIES

1. The directors of Unity Ltd.; without the authorisation of the company, borrowedfunds and utilised it for the benefit of the company. The company repudiates itsliability to repay. Decide.

(Hint: The company cannot repudiate the liability)

2. Whether the following can be appointed as ‘Debenture Trustees’:

(1) A shareholder who has no beneficial interest.

(2) A creditor whom the company owes Rs. 499 only.

(3) A person who has given guarantee for repayment of amount of debenturesissued by the company.

(Hint: (1) Yes; (2) No (3) No )

3. ‘A company limited’ wants to issue debentures of Rupees fifty lakhs with an optionto debenture holders to convert 50% of debentures into equity after two years.Advise the company.

(Hint : The company can issue optionally convertible debentures)


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CHAPTER - XI

MANAGEMENT OF A COMPANY


11.1 Who Manage the Company?

11.2 Choice of Managerial Personnel

11.3 Number of Directors.

11.4 Who can be a Director?

11.5 Who cannot be a Director?

11.6 How Directors are Appointed?

11.7 How a Managing Director or Wholetime Director is appointed?

11.8 Powers of Directors (S. 291 To 293)

11.9 When Directors cease to hold office

11.10 Remuneration to Directors

11.1 Who manage the Company?

One of the important features of a company is that there is separationof ownership from management. The shareholders do not directlymanage. Instead, they elect some persons from among themselves astheir representative to act on behalf of the company. Such persons areknown as directors. The power to manage however is not entrusted toany single director but to all the directors, collectively called the Boardof Directors. The chief organs of company management are

a) The ShareholdersThe ShareholdersThe ShareholdersThe ShareholdersThe Shareholders, who have ultimate control of the company. Theycan elect and remove directors and amend corporate documentsviz., Memorandum of Association and Articles of Association.

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b) The Board of DirectorsThe Board of DirectorsThe Board of DirectorsThe Board of DirectorsThe Board of Directors, who frame the business policies of the company and areresponsible for overall management, supervision and control.

c) The Chief ExecutiveThe Chief ExecutiveThe Chief ExecutiveThe Chief ExecutiveThe Chief Executive, who may be a Managing Director (MD) or a Manager (M)responsible for day-to-day administration of the company. The chief executiveimplements the decisions of the Board and functions under its control andsupervision . For the assistance of the chief executive there may be Whole-TimeDirectors (WTD) and other departmental managers such as finance manager,production manager, personnel manager and company secretary.

11.2 Choice of Managerial Personnel

Managerial Personnel is the term used to refer to all categories of persons whomanage the company or are involved in the management of a company. As statedearlier they are:

a) Managing Director,

b) Whole Time Director

c) Manager. (Refer Part-I, Schedule XIII)

A public company or a private company which is a subsidiary of a public company(referred to as a public company hereinafter) having a prescribed paid up share capitalwhich at present is rupees five crores or more must have at least one of the threerupees five crores or more must have at least one of the threerupees five crores or more must have at least one of the threerupees five crores or more must have at least one of the threerupees five crores or more must have at least one of the threecategories viz. MDcategories viz. MDcategories viz. MDcategories viz. MDcategories viz. MD, WTD OR M., WTD OR M., WTD OR M., WTD OR M., WTD OR M. Other public companies or private companies haveno such compulsion [S.269(1)].

It should be noted here that the term manager means a person who has themanagement of the whole or substantially the whole of the affairs of the company.[S.2(24)] A manager need not be a director of a company. WTD is defined as a directorin Whole time employment of the company, looking after some aspects of the businessof the company delegated to him by the board of directors.

As per SAs per SAs per SAs per SAs per S. 197 A, a company can appoint either one of MD or M at a time. 197 A, a company can appoint either one of MD or M at a time. 197 A, a company can appoint either one of MD or M at a time. 197 A, a company can appoint either one of MD or M at a time. 197 A, a company can appoint either one of MD or M at a time. Acompany cannot have both MD and M at one time. There is no such bar on appointmentof WTD who can be appointed without any restriction along with M or MD.

Legal status of managerial persons

Are managerial persons ‘officers of the company’?

Yes, section 2(30) – Officers include any director, manager


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Are managerial persons ‘officers in default’ of the company?

Yes, section 5

11.3 Number of Directors

i) Minimum Number of Directors:

a) A public company must have at least three directors.

b) A private company must have at least two directors.

Section 252 of the Act has been amended by the Companies (Amendment) Act,2000, to the effect that a public company having (a) a paid up capital of five crorerupees or more and (b) one thousand or more small shareholders maymaymaymaymay elect a directorby the small shareholders. ‘Small shareholders’ means a shareholder holding shares ofnominal value of twenty thousand rupees or less in a public company.

ii) Maximum Number of Directors:

The Companies Act does not fix any maximum number. It is usual for the articles ofthe company to fix a maximum number of directors. However if the company wants toincrease the total number of directors beyond the maximum fixed by the articles, approvalof the Central Government is required. Where the maximum fixed by articles is lessthan 12, the number can be increased to 12 without Government approval.

Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. (clause 49(I) of Listing Agreement) Acompany should have optimum combination of executive and non-executive directors.There should be at least 50% independent directors if Chairman is executive. In case ofnon-executive chairman, at least one-third should be independent directors.

Independent Directors: Independent Directors: Independent Directors: Independent Directors: Independent Directors: ‘Independent directors’ means a non-executivedirector who-

(a) apart from receiving directors remuneration, does not have any othermaterial pecuniary relationship or transactions with company, itspromoters, its directors, its senior management or its holding company,subsidiaries and its associates, which may affect independence ofdirector. Senior management means members of management onelevel below executive directors including functional heads


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(b) is not related to promoters or management at the board level or at onelevel below the Board

(c) has not been executive of the company in immediately preceding threefinancial years

(d) is not an partner or an executive or was not partner or an executiveduring the preceding three years, of any of the following – i) the statutoryaudit firm or the internal audit firm that is associated with the companyand ii) the legal firm/s that have a material association with the entity

(e) is not a material supplier, service provider or customer or a lessor or alessee of the company, which may affect independence of the directorandandandandand

(f) is not a substantial shareholder of the company i.e. owing two percentor more of the block of voting shares. [clause 49-I(A)(iii) of ListingAgreement][Concept of ‘materiality’ implies that minor transactions withcompany will not affect the independent character of the director]

Nominee directors appointed by an institution which has invested in or lentto the company shall be deemed to be independent directors [Explanation(c) to clause 49-I(A) of Listing Agreement].

11.4 Who can be a Director ?

The Companies Act does not lay down any academic or technical qualifications fordirectors. However the articles, usually provide that, in order to be eligible to becomea director, a person must own certain number of shares. This is known as qualificationshares. If no such share qualification has been laid down in the articles, then even anon-member can be a director. Thus it is not necessary that a director should be ashareholder of the company

Any person can be a director, if he satisfies the following conditions:

i) He must be an individual (i.e., natural person) sec. 253

ii) He must hold qualification shares if the articles so provide.

iii) He must not suffer from any of the statutory disqualificationdisqualificationdisqualificationdisqualificationdisqualification’s’s’s’s’s (mentioned in S.274)


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Director Identification Number:Director Identification Number:Director Identification Number:Director Identification Number:Director Identification Number: Every person who is a director or who intendsto become a Director, must obtain DIN (Director Identification Number).Section 266A provides that every Director must apply for obtaining DIN inForm DIN-1 electronically at the website of the MCA. According to Sec266C one person should have only one DIN.

The objective of DINThe objective of DINThe objective of DINThe objective of DINThe objective of DIN is to ensure that

the Government keeps a track on Directors to prevent thephenomenon of Vanishing Companies.

Legal action can be taken on Directors for violating thelaw.

The directors do not exceed the maximum number of directorshipspermissible under the Companies Act, 1956.

According to proviso to Section 253 introduced by the Companies(Amendment) Act, 2006 no company shall appoint or reappoint a personas director, unless a DIN has been allotted to him.

DIN- 2 FDIN- 2 FDIN- 2 FDIN- 2 FDIN- 2 Form orm orm orm orm According to Section 266D, every director must inform hisDIN to company within one month from receipt of number from CentralGovernment. (in DIN- 2 Form)

DIN- 3 FDIN- 3 FDIN- 3 FDIN- 3 FDIN- 3 Formormormormorm Section 266E imposes obligation on every Director to intimateDIN to ROC within one week of receipt of information u/s 266D in FormDIN-3.

DIN- 4 FDIN- 4 FDIN- 4 FDIN- 4 FDIN- 4 Form orm orm orm orm If there is any change in information supplied in DIN 1 form,it should be informed to ROC in Form DIN – 4.

A Director must quote his DIN in every Return and information underCompanies Act.

DIGITDIGITDIGITDIGITDIGITAL SIGNAAL SIGNAAL SIGNAAL SIGNAAL SIGNATURETURETURETURETURE: : : : : Those Directors who are required to sign e-formsare required to obtain Digital Signature Certificates (DSC).


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11.5 Who cannot be a Director?

The following persons are disqualified from being the directors of a company:-sec. 274

1. A person who has been found to be of unsound mind by a Court.

2. A person who is an undercharged insolvent.

3. A person who has applied to the Court of Insolvency to be adjudged (declared)as an insolvent.

4. A person who has been convicted of an offence, involving moral turpitude (an actdone contrary to justice, honesty or good morals) and sentenced to an imprisonmentof not less than six months, and five years have not elapsed since the expiry of thesentence.

5. A person who has not paid his call-money on his shares for six months and

6. A person who has been disqualified by the court for fraudulent activities in companypromotion or management.

7. The Companies (Amendment) Act, 2000 has, in addition to the existing groundsadded one more disqualification. A person shall not be capable of being appointeddirector of a company, if he is already a director of a public company which –

a. has not filed the annual account and annual returns for any continuousthree financial years commencing on or after 1.4.1999 or

b. has failed to repay its deposit or interest thereon on due date or redeem itsdebenture on due date or pay dividend and such failure continues for oneyear or more.

A private company which is not a subsidiary of a public company may, by its articles,provide additional disqualifications.

Ceiling on number of directorships –Ceiling on number of directorships –Ceiling on number of directorships –Ceiling on number of directorships –Ceiling on number of directorships –

Section 275 of the Act provides that no person, shall hold directorship inmore than 15 companies. In calculation of 15 15 15 15 15 companies pursuant to theprovision of section 275 the following companies shall be excluded:-

a. a private company which is not a subsidiary/ holding company of apublic company;

b. an unlimited company;


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c. an association not carrying on business for profit – section 25;

d. if he is an alternative director in another company.

PPPPPenalty: enalty: enalty: enalty: enalty: Any person who holds office, or acts, as a director in more than 15companies in contravention, of the provisions shall be punishable with fineup to Rs. 50,000 (Section 279)

11.6 How Directors are Appointed?

Appointment of Directors

Nominee directors -Nominee directors -Nominee directors -Nominee directors -Nominee directors - Usually, Government, foreign collaborators, holding companies,financial institutions or other lenders reserve a right to nominate a directors(s) to representtheir interest on the Board. In the case of a public company or a private company whichis a subsidiary of a public company, nominee directors can be appointed only if aprovision to that effect exists in the Memorandum of Association or Articles of Associationof the company. The total strength of the non-rotational directors including the nomineedirectors cannot exceed 1/3 of the total strength of the Board.

11.7 How a Managing Director or Wholetime Director is Appointed ?

Definition:

Managing Director- Section 2(26)

Managing director must be a director of the company.

He must be entrusted with substantial PPPPPower of management ower of management ower of management ower of management ower of management of the company.

First Directors Subsequent Directors* By Articles * By Company in General Meeting S.255* By Subscribers to the * By Board of Directors S.260,262,313 Memorandum. S 254 * By Central Government S.408

* By Third parties. (Nominee directors)* By Principle of Proportional Representation S.265* By Small shareholders. S.252


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Powers to be entrusted by an agreement OR a resolution passed at a general/board meeting OR by Memorandum of Association.

Powers to do administrative acts not deemed to be substantial PPPPPowers ofowers ofowers ofowers ofowers ofmanagement.management.management.management.management.

PPPPPowers of managementowers of managementowers of managementowers of managementowers of management to be exercised subject to superintendence, control anddirection of the Board.

Manager –Section 2(24)

Manager must be an individual.

He must be entrusted with the managemententrusted with the managemententrusted with the managemententrusted with the managemententrusted with the management of the whole or substantially thewhole of the affairs of the companyaffairs of the companyaffairs of the companyaffairs of the companyaffairs of the company.....

He must be in-in-in-in-in-charge of the managementcharge of the managementcharge of the managementcharge of the managementcharge of the management of the whole or substantially the wholeof the affairs of the companyaffairs of the companyaffairs of the companyaffairs of the companyaffairs of the company.....

He must exercise the power conferred on him subject to the superintendence,control and direction of the Board of the company.

He may or may not be a director of the company.

He may or may not be under a contract of service, i.e. an employee of thecompany.

Term of office:

(a) Managing director - Maximum of 5 years* at a time (Section 317)

(b) Whole time Director - No time limit stipulated in the Act

(c) Manager - Maximum of 5 years* at a time (section 388)

*Reappointment or re-employment possible not earlier than two years from thedate on which it is to come into force {section 317(3)}.

A MD, WTD can be appointed by the Board of Directors and will further needapproval in general meeting. Further, in case of public companies, the appointmentof MD/WTD needs approval from Central Government if the appointment is not madein accordance with the conditions specified in Schedule XIII. If the appointment is as perthe conditions mentioned in Schedule XIII then no approval of Central Government isnecessary and the return in prescribed form is to be filed within ninety days from thedate of such appointment. Refer Schedule-XIII


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In case the approval of Central Government is required, an application has to bemade within 90 days from the date of appointment [S. 269(3)]. The Central Governmenthas power to reject the application it finds that the person proposed to be appointed isnot a fit and proper person or such appointment is not in public interest or that theterms and conditions of the appointment are not fair and reasonable [S. 269(4)].

11.8 Powers of Directors (Section 291 to 293)

The Board of Directors are the top most organ of a company. They derive theirpowers from two sources

(i) the Articles of Association and,

(ii) the Companies Act.

Individual directors have no powers. The powers are exercised by the board (i.e.,directors collectively). But the Board has the power of delegating authority to an individualdirector or to a committee of directors. The Articles of Association generally contain alist of the powers, which may be exercised by directors and the limitations on thosepowers if any. The Board exercises its powers in the Board meetings. According to theCompanies Act, the Board must meet at least once in every three calendar months, i.e.at least four such meetings must be held in every year. The powers of the directors canbe explained with the help of the following chart.

Statutory PStatutory PStatutory PStatutory PStatutory Powersowersowersowersowers

1. Powers exercisable only atmeetings of the Board

2. Powers exercisable only withthe consent of the company,in general meeting.

3. General (Residue) Powers.

PPPPPowers of Directorsowers of Directorsowers of Directorsowers of Directorsowers of Directors

Managerial PManagerial PManagerial PManagerial PManagerial Powersowersowersowersowers

Power of superintendence controland direction of affairs of the

company.


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Statutory Powers

The statutory powers are set out in the Companies Act, 1956. The directors areThe directors areThe directors areThe directors areThe directors areempowered to do all the things that the company can do.(Sempowered to do all the things that the company can do.(Sempowered to do all the things that the company can do.(Sempowered to do all the things that the company can do.(Sempowered to do all the things that the company can do.(S.291).291).291).291).291). Of course, this issubject to the provisions of the articles and the Companies Act. The Companies Actmakes specific provisions in regard to the powers of the directors and the manner inwhich they should be exercised. The powers may be grouped under three heads.

A. Powers exercisable only at meetings of the Board (S.292)

These include the following :

1. the power to make calls.

2. the power to authorise buy-back of shares.

3. the power to issue debentures.

4. the power to borrow money otherwise than on debentures

5. the power to invest the funds of the company

6. the power to make loans.

The Board may, however, by a resolution passed at a meeting delegate to anycommittee of directors, the managing director, or the manager, the powers to borrowmoney, to invest the funds and to make loans.

Some other powers which must also be exercised at the Board meetings are. :

7. the power to fill up casual vacancies among directors (S.262)

8. the power to give consent to contracts in which any director is interested. (S.297)

9. the power to recommend the rate of dividend.

B. Powers exercisable only with the consent of the company in general meeting(S 293)

In case of public companies and their subsidiaries, the Board of directors cannotexercise any of the following powers without the consent of the shareholders in generalmeeting :

i) the power to sell, lease or otherwise dispose of the whole or part of the undertaking,

ii) power to remit debt due by a director,


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iii) power to borrow in excess of capital and free reserves of the company,

iv) power to make contributions to charity in excess of Rs. 50,000 or 5% of theprofits and the funds not directly related to company’s business,

v) power to appoint sole-selling agents.

PPPPPolitical contributions by directorsolitical contributions by directorsolitical contributions by directorsolitical contributions by directorsolitical contributions by directors - Under section 293A a company shall notmake a political contribution unless all the following conditions are satisfied:

a. The company is not a government company.

b. The company has been in existence for 3 or more financial years.

c. The amount of donation in any financial year cannot exceed five per centfive per centfive per centfive per centfive per cent ofthe average net profits of a company earned during the three immediatelypreceding financial years.

d. Besides, a resolution authorising the making of the contribution must also bepassed at a meeting of the Board of directors.

e. Further the amount of contribution along with the name of the party orperson must also be disclosed in the profit and loss account.

Section 80GGB (Income TSection 80GGB (Income TSection 80GGB (Income TSection 80GGB (Income TSection 80GGB (Income Tax Aax Aax Aax Aax Act) – Deduction for contributions byct) – Deduction for contributions byct) – Deduction for contributions byct) – Deduction for contributions byct) – Deduction for contributions bycompanies to political partiescompanies to political partiescompanies to political partiescompanies to political partiescompanies to political parties

Eligible Assessee : Indian Company

Amount of deduction : Any contribution made by an Indian company to any registeredpolitical party.

C. General (Residue) Powers

These include all other powers which subject to the provisions of the Act, the Boardis authorised to exercise. These may be exercised either at meetings of the Board or byResolution by circulation or by delegating the same to committees or others.

The general powers of the Boards as stated in ‘C’ above are restricted in manyways. Firstly, the Board cannot do anything which the company itself cannot do. Secondly,the Board shall not exercise its powers of its accord that are to be exercised or done bythe company at the general meeting. Thirdly, the Board cannot exceed the powerswhich are delegated to it by the company.


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11.9 When Directors cease to Hold Office

A director ceases to hold office in the following circumstances.

1. When he resigns from his office; or

2. When he retires by rotation; or

3. When he vacates his office;

4. When he is removed from his office

i) By shareholders in general meeting

ii) By Central Government.

iii) By Court.

i) The shareholders in the General Meeting may remove the directors by passing anordinary resolution and giving proper notice. ii)The Central Govt. may, by order,remove director from office if the High Court has found him to be guilty of fraud,negligence, mismanagement, breach of trust etc, iii)The Court may remove adirector with a view to prevent oppression and mismanagement in a company.

11.10 Remuneration to Directors / Managerial Person

Remuneration when company is making profits

1. Overall Ceiling of Directors’ Remuneration

Section 198 lays down the overall limits of remuneration payable to the managerialpersonnel. Section 309 fixes limits in respect of individual directors or directors actingas a Board. Under section 198 managerial remuneration must not exceed 11 per cent11 per cent11 per cent11 per cent11 per centof the net profitsof the net profitsof the net profitsof the net profitsof the net profits of any financial year. The sitting fee payable to Directors for attendingthe meetings of the Board is not included in remuneration.

2. Remuneration of Part-time Directors

Sub-section (4) and (7) of section 309 deal with remuneration payable to part timedirectors i.e. directors other than managing and whole-time directors. The remunerationcan be paid in any of the following two modes:

- By way of monthly, quarterly or annual payment with the approval of the CentralGovernment.

- By way of commission with the approval of the shareholders by a special resolution.


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Limits - Limits - Limits - Limits - Limits - The remuneration payable to part time directors shall not exceed 1% of thenet profits if the company employs any whole time director or managing director ormanager and 3% of the net profits in any other case. However, any remuneration inexcess of these limits can be paid with the approval of the Central Government.

3. Remuneration of Managing/ Whole time Director

Sub-section (3) of section 309 lays down the ceiling on the remuneration payableto a managing or whole-time director. The remuneration may be paid either:

- By way of a monthly payment or

- At a specified % of the net profits or

- Partly by one and partly by the other

LimitsLimitsLimitsLimitsLimits - The remuneration paid to any one managing or whole time director shallnot exceed 5%5%5%5%5% of the net profits and if more than one such directors are employed bythe company, then the total managerial remuneration payable to all the directors shallnot exceed 10% 10% 10% 10% 10% of the net profits of the company. However, the company can payhigher remuneration with the approval of the Central Government.

Directors sitting fees:-Directors sitting fees:-Directors sitting fees:-Directors sitting fees:-Directors sitting fees:- The overall remuneration excludes the sitting fees.Sitting fees are payable to the director for attending the board meetings orcommittee meetings.

As per the recent notification (July 2003) of Department of Company Affairsthe Government has hiked sitting fees for directors for attending boardmeetings and committee meetings.

Directors of companies with a paid-up capital and free reserves ofRs. 10 crore or more, or a turnover in excess of Rs.50 crore can bepaid up to Rs. 20,000 per meeting of the board and its committee.

Directors of all other companies can be paid up to Rs. 10,000 permeeting attended, either board or committee.

Overall limits of remuneration to managerial persons :

PPPPParticularsarticularsarticularsarticularsarticulars LimitLimitLimitLimitLimit

(a) Where the public company has : Not more than 5% of net profit.one managerial person


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(b) Where the public company has : 10% of net profit.more than one managerial person

(c) Remuneration to directors including : 1% of net profit.to non executive directors whereMD/WTD is appointed

(d) Remuneration to directors where : 3% of net profit.the company does not have anymanagerial persons

Remuneration when profit is inadequate or company is in loss

In case of loss making companies or if the profits are inadequate, a MD orWTD or Manager is entitled to minimum remuneration. The ceiling has beenprescribed in Part II of Schedule XIII. Monetary ceilings have been placedvarying with the effective capital of the company concerned.

However, the company in general meeting may, with the approval of theCentral Government, authorise the payment of higher remuneration thanstipulated under section 309 or Schedule XIII.

However, no approval of the Central Government is required if the increasein remuneration is in accordance with the conditions specified in ScheduleXIII (See annexure I regarding schedule XIII).

RRRRRemuneration to Managing / Whole time Directors in case of Pemuneration to Managing / Whole time Directors in case of Pemuneration to Managing / Whole time Directors in case of Pemuneration to Managing / Whole time Directors in case of Pemuneration to Managing / Whole time Directors in case of Private Limitedrivate Limitedrivate Limitedrivate Limitedrivate LimitedCompanyCompanyCompanyCompanyCompany

Sections 198, 269, 309, 310, 311, & Schedule XIII do not apply to aprivate company which is not a subsidiary of public company.

As a result, such a company is free to pay any remuneration to its directorsincluding managing and whole time directors, subject to the provisions ofthe Article of Association, if any. These companies are not required to complywith Schedule XIII or seek approval of the Central Government.

PPPPProhibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. Company can not pay remuneration whichis tax free i.e. the remuneration is subject to income tax at the hands of thedirector (Sec. 200)


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Meaning of ‘Remuneration’

Section 198 has defined ‘Remuneration’ inclusively.

‘Remuneration’ shall include:

(a) any expenditure incurred by the company in proving rent freeaccommodation.

(b) Any expenditure incurred by the company in providing any otherbenefits or amenity free of charge.

(c) Any expenditure incurred by the company on account of themanagerial person.

(d) Any expenditure incurred by the company to effect any issuance onthe life of or to provide any pension, annuity or gratuity for, anymanagerial person or his spouse or child.

How perquisites should be valued?How perquisites should be valued?How perquisites should be valued?How perquisites should be valued?How perquisites should be valued?

It should be valued at actuals.

Where valuation is not possible, it should be as per Income Tax Rules.

FFFFFurther the maximum percentage of remuneration of 11% shall noturther the maximum percentage of remuneration of 11% shall noturther the maximum percentage of remuneration of 11% shall noturther the maximum percentage of remuneration of 11% shall noturther the maximum percentage of remuneration of 11% shall notincludeincludeincludeincludeinclude:

Sitting fees payable to directors [section 309(2)]

Guarantee commission payable to directors for standingsurety for loans and credit facilities [circular no.3/94,dated 16 February,1994]

Payment to directors for rendering services of a professional nature[proviso to subsection (1) of section 309]

Payment to directors for holding office or place of profit under thecompany [section 314]

Consideration received by a director under a contract governed bysection 297

Payment of interest to directors for advancing loan to a company [letterno. 8/26 (309)/76-CL-V, dated 9 January, 1978]


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Annexure – I

Schedule XIII to the Act (See Section 198, 269, 310,311)

Schedule XIII is divided into three parts:

Part I deals with the eligibility conditions for the appointment of MD/WTD/Managerwithout Central Government approval.

Parts II deals with the remuneration payable to such managerial personnel

Part III deals with procedural part.

Part II

Section I : Remuneration by the companies having profits.

Maximum limits are: 5% of net profit for one managerial person.

10% of net profit for more than one managerial person.

Section II : Remuneration by companies having inadequate profits:

The remuneration is based on ‘effective capital’‘effective capital’‘effective capital’‘effective capital’‘effective capital’ of the company and payable on aslab rate stipulated: By notification dated 16.1.2002 the Central Government hasamended Schedule XIII and now the new section II prescribes three different situationsand provides a different ceiling under each situation.

Situation. A – Ceilings not requiring special resolution and Government approval(Not exceeding Rs. 2,00,000 p.m.)

Situation. B – Ceilings requiring special resolution but not Government approval(Not exceeding Rs. 4,00,000 p.m.)

Situation. C – Ceilings requiring special resolution and Government approval(Exceeding 4,00,000 p.m.)

Situation. D – Ceilings in respect of companies in Special Economic Zones (NotExceeding 20,00,000 p.m.)

In the above first three cases, payment of remuneration is to be approved by theapproved by theapproved by theapproved by theapproved by theRRRRRemuneration Committee.emuneration Committee.emuneration Committee.emuneration Committee.emuneration Committee.


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QUESTION BANK

I. FAQs’

1. Define ‘director’. What is his legal position in a company?

2. What are the provisions relating to payment of sitting fees to the directors forattending Board meetings?

3. Examine the position of directors of a company as its trustee, agent and employee.According to you, what is the true relationship between the company and itsdirectors?

4. What do ‘managerial personnel’ and ‘managerial remuneration’ mean?

5. Is there any prohibition on a company to simultaneously appoint differentcategories of managerial personnel? Does the law prescribe any limit on paymentof remuneration to such personnel?

6. Distinguish between ‘managing director’ and ‘manager’. What are theirdisqualifications?

7. Can a director resign from his office?

8. What are the statutory and other powers, which the Board of directors can exerciseat Board Meeting?

9. What are the powers of directors that cannot be exercised without the approval ofmembers given in a general meeting.

10. “The Board of Directors of a company shall be entitled to exercise all such actsand things as the company is authorised to exercise and do”. – Examine thestatement.

11. How is managerial remuneration determined in case of loss-making companies?Is Central Government approved necessary in such cases?

12. What are the powers which directors can exercise in the board meeting?

II. CASE STUDIES

1 Advise the Board of Directors of a public company about their powers in respectof the following proposals explaining the relevant provisions of the CompaniesAct, 1956:


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a. Donation of Rs. 5,00,000 to a hospital established exclusively for the benefitof employees.

b. Buy back of shares of the company for the first time upto 10% of the paid upequity share capital.

c. Delegating to the managing director of the company the power to investsurplus funds of the company in the shares of some other companies.

(Hint : a Yes b Yes c No)

2 The Board of Directors of a public company in the private sector having made anaverage profit of Rs. 1 crore during the last three financial years propose todonate during the current year the following amounts:

a. Rs. 1,00,000 to a school run exclusively for the benefit of employees;

b. Rs. 40,000 to a general charitable fund; and

c. Rs. 4,00,000 to a political party.

Advise the Board of Directors about their powers in respect of the above explainingthe relevant provisions of the Companies Act.

(Hint: a Yes; b Can donate upto Rs. 50,000 or 5% of average net profits during 3preceding financial years, whichever is greater; c It can give political donationupto 5% of net profit.

3 The Board of Directors of a public limited company borrowed in excess of thelimits as laid down by the Companies Act, 1956. The money was utilized forgenuine purposes in the interests of the company. Can the company repudiatethe liability being ultra vires the director?

(Hint: No)


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CHAPTER - XII

MEETINGS AND PROCEEDINGS


12.1 Types of company meetings

12.2 Requisites of a Valid Meeting

12.3 Law & Practice relating to General Meeting

12.4 Statutory Meeting

12.5 Annual General Meeting

12.6 Extra Ordinary Meeting

12.7 Board Meetings

12.8 Meetings of Debenture Holders

12.9 Annexure I – Comparison of Meetings

12.1 Types of Company Meetings

Meetings play a very important role in the management of a company.In fact all the important decisions of the company are taken in the meetingsonly. The shareholders express their will and exercise their rights in thegeneral meetings of members. While the board of directors’ exercisetheir powers and take decisions through board meetings. Companymeetings may be classified as:

A. Shareholders Meetings

(i) Statutory Meeting.

(ii) Annual General Meeting.

(iii) Extra ordinary General Meeting.

(iv) Meetings of a class of Members.

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B. Directors Meetings

i) Meetings of the Board of Directors.

ii) Meetings of the Committee of Board of Directors.

C. Creditors Meetings

i) Debentureholders Meeting.

ii) Other Creditors Meeting.

12.2 Requisites of a valid Meeting

Meetings of a company must be convened and held in perfect compliance of theapplicable provisions of the Companies Act, 1956 and rules framed there under. Everymeeting, in order to be valid, must be properly convened, properly constituted andproperly convened, properly constituted andproperly convened, properly constituted andproperly convened, properly constituted andproperly convened, properly constituted andproperly conducted.properly conducted.properly conducted.properly conducted.properly conducted.

I. MEETING TO BE PROPERLY CONVENED means that -

(a) the meeting must have been convened by the proper authority, namely the Boardof Directors, Shareholders or Central Government/ Tribunal and

(b) proper and adequate notice must have been given to all those entitled to attend.

Refer para 12.3 for provisions regarding notice

II. MEETING TO BE PROPERLY CONSTITUTED means that -

a) there must be a proper quorum and

b) there must be a proper Chairman.

Refer para 12.3 for provisions regarding quorum and chairman

III. MEETING TO BE PROPERLY CONDUCTED means that-

the proceedings of the meeting must be conducted in accordance with the lawrelating to meetings as per the Companies Act (sections 171 to 185), the Company’sown articles of association or by the common law relating to meetings. Proper rules forascertaining the sense of the meeting, the rules for discussion and order in debate mustbe observed. Also, the proceedings should be recorded properly.


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TTTTTele Conferencingele Conferencingele Conferencingele Conferencingele Conferencing

‘‘‘‘‘Tele-conference’ means a meeting conducted among participants in differentlocations via telecommunications equipment; a conference with participantsin different locations linked by telecommunication devices, and ‘tele-conferencing’ means the holding of teleconferences.

‘Video-conferencing’ means a tele-conference conducted via televisionequipment and; video-conferencing’ means the holding of video-conferences. It involves the use of television sets linked by telephone linesetc. to enable a group of people to communicate with each other in soundand vision. Video-conferencing is a system enabling groups of people atvarious locations to see and speak to each other, making it possible to holdmeetings, seminars, etc., without the expense and time wasted in travel.Special studios are not required; information is available from Telecomdepartment.

The Companies (Amendment) Bill, 2003[it never become a law] providesthat a company may hold Board Meeting through tele-conferencing or videoconferencing and such meeting shall be valid if the minutes of such meetinghave been approved and signed subsequently by all directors of the Boardwho participated in such meeting. The Central Government may specify thepowers, which shall not be exercised in the Board Meeting held through teleconferencing or video conferencing.

12.3 Law and Practice relating to Meetings

a. Notice

b. Ordinary and Special Business

c. Quorum

d. Voting and the Right to Demand a Poll

e. Proxies

f. Resolutions

g. Chairman

h. Minutes


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A. Notice

The notice of a meeting should be in accordance with -

(i) General rules in relation to notice,

(ii) Rules as laid down in the Articles and the Companies Act, and

(iii) Secretarial standards on Board Meetings (SS-1) and General Meetings (SS-2) ofInstitute of Company Secretaries of India (which is recommendatory in nature).

1.1.1.1.1. Authority: Authority: Authority: Authority: Authority: The proper authority to call the meetings are –

a) Board of Directors - - - - - The authority to summon a meeting is generally prescribedin the Articles. The Articles normally empower the Board of Directors toconvene meetings.

b) Shareholders – – – – – The shareholders of a company in certain circumstances cancall an extraordinary general meeting.

c) CLB If for any reason it becomes impracticable to call a meeting (other thanAnnual General Meeting, the CLB can order calling, holding and conductingof a meeting (section 186). Under section 167, power is conferred on theCLB to call or direct the calling of annual general meeting if there is adefault in holding the same.

2.2.2.2.2. RRRRRequirements of notice - equirements of notice - equirements of notice - equirements of notice - equirements of notice - The three main requirements of notice are that

- it is given to every person entitled to receive it;

- it is given at the proper time; and

- it contains the necessary information, and fairly discloses the purpose of themeeting particularly of any special business.

3.3.3.3.3. PPPPPersons entitled to notice ersons entitled to notice ersons entitled to notice ersons entitled to notice ersons entitled to notice As per section 172(2) notice of every general meetingmust be sent to

- every member at his registered address in India,

- the legal representative of a deceased member,

- the official assignee or Official Receiver of an insolvent member, and

- the auditor of the company.


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The other recipients of the notice include

- in the case of a listed company, the stock exchanges on which the shares orother securities of the company are listed;

- financial institutions, pursuant to a covenant in the agreement entered intowith them for availing financial assistance;

- trustees of debenture trust deed;

4.4.4.4.4. LLLLLength of notice: ength of notice: ength of notice: ength of notice: ength of notice: For general meeting of any kind (Statutory, AGM, EGM) atleast21 clear days notice must be given. A shorter notice for AGM will be valid if allthe members entitled to vote at the meeting give their consent.

In case of Extra Ordinary General (EGM), a shorter notice will be valid if consent isgiven by members holding atleast 95% of the paid up capital carrying voting rights orrepresenting atleast 95% of the voting power (section 171). The consent of the shorternotice may be given either at the meeting or before the meeting in Form 22A.

For Board Meeting, the directors can fix their own norms for dispatch and service ofnotice. Even the dispatch of agenda is not necessary for the meetings of the BoardDirectors.

21 clear days must be calculated excludingexcludingexcludingexcludingexcluding the day on which the notice isserved (where served by hand delivery) and the day on which the meeting isto be held. Where notice is served by post, it will mean excluding the day onwhich notice is posted, 48 hours (i.e. 2 days for postal transit and the day onwhich meeting is to be held (21 + 2 + 2 = 25 days). Therefore, notice ofa general meeting must be sent atleast 25 days before the date of meetingwhere the service of notice is sent by post.

5.5.5.5.5. Serving of Notice: Serving of Notice: Serving of Notice: Serving of Notice: Serving of Notice: The notice must be served in the manner prescribed in theArticles read with the Companies Act. A notice can be served on a member eitherpersonally, or by sending it by post to him to his registered address. Notice ofBoard meeting should be given in writing to every director by hand or by post orby fax or by e-mail or by any other electronic mode.

6.6.6.6.6. Contents of the notice: Contents of the notice: Contents of the notice: Contents of the notice: Contents of the notice: The notice must contain the following particulars -

a. Time, day, date and place of holding a general meeting.

b. Agenda - The notice should clearly specify the nature of the meeting and thestatement of the business to be transacted at the meeting. It may be ordinarybusiness or special business.


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If special business is to be transacted, each such item should be in the formof a resolution and should be accompanied by an explanatory statementwhich should set out all such facts as would enable a member to take aninformed decision on the matter.

c. The notice should be accompanied by an attendance slip and a Proxy formwhich clear instructions for filling, stamping, signing and depositing the Proxyform.

d. Documents accompanying the notice -

i. For AGM – Audited Financial Statement of accounts, directors’ andauditors’ reports, proxy from, etc.;

ii. For Statutory Meeting – statutory report, proxy form, etc., and

iii. For EGM – explanatory statement, proxy form, etc.

e. Notes to notice – Notes to the notice are given immediately after theinformation regarding ordinary and special business items. The notes to thenotice contains the information regarding the following:

i. The notice must state about the right of a member to appoint Proxy andinform them to lodge Proxies atleast forty-eight hours before the timefixed for the meeting.

ii. An intimation that an explanatory statement pursuant to section 173(2)is annexed to the notice.

iii. Dates of closure of Register of Members and Share Transfer books.

iv. Information about the nomination facility available to members

v. Intimation that dividend, if declared, shall be paid withinthirty days from the date of declaration to Members whose names appearas beneficial owners with depositories or in the Register of Members onor before the date specified.

vi. Request to members to bring to the meeting the admission slip alongwith their copy of the Annual Report.

B. Ordinary and Special Business

The business to be transacted at a company general meeting may comprise of (i)ordinary business (ii) special business.


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Ordinary businessOrdinary businessOrdinary businessOrdinary businessOrdinary business relates to :

(a) consideration of the accounts, balance sheet and the reports of the Board ofdirectors and auditors;

(b) the declaration of dividends;

(c) the appointment of directors in place of those retiring ; and

(d) the appointment of auditors and fixation of their remuneration. These items areconsidered at the AGM.

Any other business scheduled to be transacted at the meeting will be deemed to bespecial businessspecial businessspecial businessspecial businessspecial business. In case of special business an explanatory statementexplanatory statementexplanatory statementexplanatory statementexplanatory statement should be attachedto the notice of the meeting. The statement must state all material facts concerningeach item of special business including the nature of interest of any director or managertherein. It must also state the time and place where the documents in respect of suchitems can be inspected.

In case of EGM, all business transacted shall be special business.

C. Quorum

a. Meaning: Meaning: Meaning: Meaning: Meaning: Quorum means the minimum number of the members who must bepresent at a meeting as required by Law/Rules. In order that the meeting may beproperly constituted, the quorum of members must be present at a meeting.

b. Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: In the absence of anyprovisions in the articles, the quorum, in respect of general meeting, is –

fivefivefivefivefive members personally present in case of a public company and

two two two two two members personally present in case of private company [Section 174(1)].

The quorum for a Board meeting is one one one one one-third-third-third-third-third of its total strength or two directorswhichever is higher. Interested directors shall not be counted for the purpose of quorum.

(i) Proxies are not counted for quorum purposes. Only members present in personcan be counted for purposes of quorum. However the representative of a bodycorporate appointed under section 187 or the representative of a Governor of aState under section 187-A is a member ‘personally present’ for purpose of countinga quorum.

(ii) Quorum must be present throughout the meeting.


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(iii) If the quorum is not complete, the chairman and members will wait for half anhour from the scheduled time for the meeting. If the quorum is not present evenafter half an hour, the provisions are as follows:

a. if the meeting is a requisition meeting, the meeting stands dissolved

b. in case of AGM or EGM called by Board of Directors, the meeting shall beadjourned to same day in the next week at the same time and place, unlessBoard determines otherwise. No quorum is necessary for such adjournedmeeting. (However, there should be at least two members, as ‘meeting’requires at least two members, and the wording used is members presentshall be the quorum.)

c.c.c.c.c. Can a single member present constitute a meeting?Can a single member present constitute a meeting?Can a single member present constitute a meeting?Can a single member present constitute a meeting?Can a single member present constitute a meeting?

A single member present cannot by himself constitute a meeting. There are, howeverfew exceptions to this general rule which permits a meeting to be constituted byone shareholder only.

(i) where a person holds all the shares of a class, that person may constitute theclass meeting;

(ii) where default is made in holding the annual general meeting pursuant tosection 166, the CLB may convene a meeting and direct that one memberpresent in person or by proxy shall constitute the meeting. (Explanation tosection 167(1))

(iii) where CLB orders a meeting to be held with the direction that one memberpresent in person or by proxy shall constitute that meeting (Explanation tosection 186(1))

d.d.d.d.d. Consequences of lack of quorumConsequences of lack of quorumConsequences of lack of quorumConsequences of lack of quorumConsequences of lack of quorum: If a meeting is held without a proper quorum,the meeting will be a nullity. If no quorum is present, there is no meeting and theproceedings are invalid.

D. Voting and the Right to Demand a Poll

Every holder of equity shares shall have a right to vote. The preference shareholdersshall have right to vote only on resolutions, which directly affect the rights attached tothe preference shares held by them (sec 87). In general meetings vote is taken by thefollowing methods -


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– by show of hands

– by poll

– by postal ballot

Show of handsShow of handsShow of handsShow of handsShow of hands----- In the first instance, vote is taken by show of hands (sec. 177).Each member has one vote in such voting. The shareholders present at the meetingindicate their views by raising their hands. However, the voting by show of hands maynot always reflect the opinion of members upon a value basis.

Demand for pollDemand for pollDemand for pollDemand for pollDemand for poll – Section 179 provides that before or on declaration of the resultof the voting on any resolution on a show of hands, a poll may be ordered to be takenby the Chairman of the meeting of his own motion, and shall be ordered to be taken byhim on a demand made in that behalf by the person or persons specified below, namely:

a. In the case of a public companypublic companypublic companypublic companypublic company having a share capital, by any member ormembers present in person or by proxy and holding shares in the company:

(i) which confer a power to vote on the resolution not being less than 1/10th ofthe total voting power in respect of the resolution, or

(ii) on which an aggregate sum of not les than fifty thousand rupees has beenpaid up;

b. In the case of a private companyprivate companyprivate companyprivate companyprivate company having a share capital, by one member, presentin person or by proxy, if not more than seven members are personally present,and by two members present in person or by proxy, if more than seven membersare personally present;

c. In the case of any other companyany other companyany other companyany other companyany other company, by any member or members present in personor by proxy and having not less than 1/10th of the total voting power in respect ofthe resolution.

Postal ballot

The concept of obtaining the approval/ consent of the members by postal ballothas for the first time been introduced in the Companies Act, 1956 by the CompaniesAmendment Act, 2000 by inserting a new section – section 192A into the Act. Underthis section listed companylisted companylisted companylisted companylisted company has been given the option of having the resolutions ofshareholders passed by a postal ballot instead of having them passed at a generalmeeting.


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Thus, a listed company maymaymaymaymay get any resolution passed by means of a postal ballot,instead of transacting the business in general meeting. It shallshallshallshallshall do so if such business isnotified by the Central Government as capable of being passed by postal ballot. Inexercise of the powers conferred by section 192A of the Act, the Central Governmenthas prescribed the Companies (Passing of the Resolution by Postal Ballot) Rules 2001.

The notice of a decision to pass any resolution by postal; ballot should be sent toall shareholders along with a draft resolution explaining the reasons therefore.

a. The shareholders may send their assent or dissent in writing on a postal ballotwithin a period of 30 days from the date of passing of the letter.

b. The notice shall be sent by Registered Post Acknowledgement Due.

c. The notice shall include a postage pre-paid envelope for facilitating communicationof assent or dissent.

d. There are several business items which can be passed through only by postalballot by a listed company. Some of these are; Alteration in the object clause ofmemorandum; Buy-back of own shares by the company etc.

E. Proxies

‘Proxy’ is the term applied to a person appointed to act on behalf of anotherperson entitled to attend and vote at a meeting. The term is also used to denote theinstrument by which the appointment is made. Thus a person who is authorised to votefor another and the document by which he is so authorised both are called proxy. If amember is unable attend to meeting he can appoint another person as proxy (Section176). Such another person may or may not be member of the company.

F. Resolutions

i. Ordinary resolution

ii. Special resolution

iii. Resolution requiring special notice

iv. Resolution by Circulation.

v. Registration of resolution and agreement

RRRRResolution:esolution:esolution:esolution:esolution: A resolution refers to the decision of a meeting. Thus, once the motionshave been put to the members and they have voted in favour of it, it becomes a


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resolution. With respect to general body meetings, there are three kinds of resolutions,namely, ordinary, special and requiring special notice.

Motion:Motion:Motion:Motion:Motion: A proposal made at a meeting by any member is called “ Motion “ . Amotion when passed is called a resolution. A person proposing a motion is called amover. A motion must be signed by its mover.

A motion may be passed as originally moved or with certain amendments proposedduring the meeting. Motions may relate to the closure of discussion or postponement ofthe discussion.

(i)(i)(i)(i)(i) An ordinary resolutionAn ordinary resolutionAn ordinary resolutionAn ordinary resolutionAn ordinary resolution is a simple majority resolution, i.e., the votes cast in favourof the resolution, are more than the votes cast against the resolution, if any.

Matters requiring ordinary resolution -Matters requiring ordinary resolution -Matters requiring ordinary resolution -Matters requiring ordinary resolution -Matters requiring ordinary resolution -

To increase the share capital To appoint Directors/ managing/Whole-time Directors

To adopt annual accounts To declare dividends

To wind-up company voluntarily To give consent for selling undertakingof the company

(((((ii)ii)ii)ii)ii) AAAAA special resolution,special resolution,special resolution,special resolution,special resolution, on the other hand, requires a special majority (3/4th majority)to approve the resolution. The three requirements are:

1. The votes in favour must atleast be three times the votes cast against theresolution, if any.

2. The notice as per the provisions of the Companies Act must have been dulygiven .

3. The notice must specify the intention to propose the resolution as a specialresolution.

The 3/4th majority is of the members present and voting. For example, if there are12 members present and vote, 9 or more voting in favour will carry the resolution as aspecial resolution. If 8 abstain from voting, 3 vote in favour and 1 against, the resolutionis carried.


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Matters requiring special resolution -Matters requiring special resolution -Matters requiring special resolution -Matters requiring special resolution -Matters requiring special resolution -

To alter the objects or the place of registered office of a company

To alter the articles of association To reduce the share capital

To change the name of the company To pay interest on shares out ofcapital

To have the company wound up by the court

(iii) A A A A A resolution requiring special noticeresolution requiring special noticeresolution requiring special noticeresolution requiring special noticeresolution requiring special notice means that at least fourteen days beforethe meeting, the member proposing to move such a resolution must inform thecompany. The company in turn is required to inform all members, of the proposedresolution, at least seven days before the date of the meeting. Such a resolution isrequired for appointing or removing a director or auditor.( Sec 189)

(iv) RRRRResolution by circulation. esolution by circulation. esolution by circulation. esolution by circulation. esolution by circulation. Sometimes it is not practicable for the company tohold the board meeting. In such cases the Board may pass resolution by circulationunder section 289. The Board may pass any resolution by circulation exceptthose resolutions which are required by the Companies Act or the Articles to bepassed only at a Board meeting. Passing of resolution by circulation does notdispense with the statutory requirement of holding Board meeting at least once inevery quarter. The following are the rules regarding the passing of resolution bycirculation:

a. The draft of the resolution along with all the necessary papers should becirculated to all the directors in India at their usual address.

b. The resolution is approved by all or majority of them as are entitled to voteon the resolution.

c. The number of directors present in India must not be less than the quorum.

The system of passing the resolution by circulation is a convenient practice and italso ensures quick decision making. When a resolution is passed by circulation, it isadvisable to record it in the minutes of the next Board meeting.

(v) RRRRRegistration of certain resolutions and agreementsegistration of certain resolutions and agreementsegistration of certain resolutions and agreementsegistration of certain resolutions and agreementsegistration of certain resolutions and agreements - Section 192 enumeratescertain resolutions and agreements, a copy of which must be forwarded to theRegistrar of Companies for registration within thirty days after their passing /making. Such resolutions or agreements shall be filed with the Registrar within 30days in form no. 23.


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G) Chairman

The chairman plays a very important role in the conduct of a meeting. A meeting isnot properly constituted unless the proper person is in the chair. The chairman’s mainfunction is to preside over the meeting and conduct it in an orderly manner.

The articles of the company may provide, that the board of directors shall appointone of the members of the board, to be the chairman of the board as well as forthe general meeting. The chairman of the board shall preside as chairman atevery general meeting of the company (Regulation 50 of Table A)

As per Regulations 51 and 52 of Table A, if no chairman is designated beforehandor he is not present within fifteen minutes of the appointed time of the meeting oris unwilling to act as Chairman of the meeting, the directors present shall electone amongst themselves to be Chairman of the meeting. But, if no director iswilling to act as Chairman or if no director is present within 15 minutes after theappointed time of the meeting, the members present may elect one amongstthemselves to be Chairman of the meeting. The chairman, if required to be soelected shall be elected by a show of hands unless a poll is demanded.

Duties and role of Chairman:

A chairman is required to maintain order and decorum at a meeting, to give rulingon points of order, decide priority of speakers, to maintain relevancy and order indebate, to adjourn a meeting, to exercise a casting vote in case of tie, and to ascertainthe sense of a meeting and declare the result of voting.

H) Minutes

What do you mean by the term ‘minutes’? Minutes constitute the official record ofbusiness transacted at meetings. It is the record of the proceedings at a meeting ofdirectors or shareholders of a company. Minutes are the record of resolution and mattersancillary thereto and not a complete transcript of every word used in the course of ameeting.

Section 193 creates a statutory obligation on every company to maintain minutesof all proceedings of

a) every general meeting; and

b) every meeting of the board of directors or its committee.


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Dissolution, PDissolution, PDissolution, PDissolution, PDissolution, Postponement & Adjournment of Meetingostponement & Adjournment of Meetingostponement & Adjournment of Meetingostponement & Adjournment of Meetingostponement & Adjournment of Meeting

Dissolution Dissolution Dissolution Dissolution Dissolution of the meeting refers to the situation where the meeting nolonger exists as such. Its proceedings are not merely suspended but exhausted.

PPPPPostponement ostponement ostponement ostponement ostponement When the date of the meeting is shifted to another date,without conducting the meeting at all it is called postponement.

Adjournment Adjournment Adjournment Adjournment Adjournment When a meeting is dissolved with the object of holding itagain on some future date, such act is called adjournment. A meeting isusually adjourned in the following cases:

1. When the business is not finished.

2. When a quorum is not present within half an hour from the appointedtime.

3. When a motion for adjournment is adopted.

4. When a poll is demanded.

12.4 Statutory Meeting (sec 165)

Object:Object:Object:Object:Object: The statutory meeting is the first meeting of the shareholders of a publiccompany. The basic purpose of the statutory meeting is to acquaint the members aboutthe development after the formation of the company and to discuss the various mattersarising out of the promotion and formation of the company. Holding of statutory meetingis important due to the fact that u/s 433 (b) of the Act, the company may wound up ifthere is default in holding the statutory meeting or delivering the statutory report to theRegistrar.

TTTTTime limit:ime limit:ime limit:ime limit:ime limit: As per section 165 every public company limited by shares or guaranteeand having a share capital, must hold statutory meeting, within a period of not lessthan one month and not more than six months from the date the company becomesentitled to commence business.

However, the following companies are not required to hold a statutory meeting:

(a) a private company;

(b) a public company not having share capital;

(c) a public company liability of its members unlimited;


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(d) a public company limited by guarantee and not having share capital and

(e) a Government company.

Notice:Notice:Notice:Notice:Notice: Notice of the statutory meeting along with the statutory report must begiven to every member of the company and also to the Registrar. The notice must begiven at least twenty-one clear days before the meeting. The meeting at a shorter noticeshall be valid if consent is accorded thereto by members of the company holding notless than 95 percent of such part of the paid-up share capital of the company as givesa right to vote at the meeting.

The members may discuss any matter relating to the formation of the company orarising out of the statutory report.

Statutory reportStatutory reportStatutory reportStatutory reportStatutory report - The statutory report is required to be sent to each member alongwith the notice of the meeting. A copy of it should also be sent to the Registrar forregistration. The statutory report must contain matters set out under section 165(3).The report should be certified by not less than two directors, one of whom should be themanaging director where there is one. Further, the auditors of the company shall certifythat part of the statutory report which relates to the shares allotted, cash received inrespect thereof and the receipts and payments and the balance of cash in hand

Contents of statutory report:Contents of statutory report:Contents of statutory report:Contents of statutory report:Contents of statutory report: Such report shall state the following

(a) the total number of shares allotted

(b) the amount of cash received in respect of all the shares allotted

(c) the receipts and payment upto a date within seven days of the date of the report

(d) details of contract

(e) the particulars of arrears of calls due from any director or manager

(f) details of commission or brokerage paid or to be paid to any director or to themanager in connection with the issue or sale of shares or debentures

Default:Default:Default:Default:Default: If default is made in complying with any requirement of section 165, everydirector or other officer of the company who is in default shall be punishable with fine,which may extend to five thousand rupees.

In case of default in filing the statutory report or in holding the meeting, the companymay be wound up under section 433 (b).


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12.5 Annual General Meeting (sec 166)

The purpose of AGM is to inform the shareholders the progress made by the companyduring the previous year and the present position and the future prospects of the company.Such a meeting must be held annually.

a.a.a.a.a. Which companies to hold Which companies to hold Which companies to hold Which companies to hold Which companies to hold - Every company, whether public or private, having ashare capital or not, limited or unlimited must hold an Annual General Meeting.

b.b.b.b.b. When to hold.When to hold.When to hold.When to hold.When to hold. The first Annual General Meeting of a company may be heldwithin eighteen months from the date of its incorporation. Further, the first AGMmust be held within 9 months of the close of the first financial year of the company(section 166 & 210).

In respect of subsequent Asubsequent Asubsequent Asubsequent Asubsequent AGM’sGM’sGM’sGM’sGM’s, section 166 read with section 210 provides asfollows:

(a) There must be one meeting held in each calendar year.

(b) The gap between two AGMs must not be more than fifteen months.

(c) Meeting must be held not later than six months from the close of the financialyear.

Thus subsequent AGM must be held at the earliest of the above three dates.

The Registrar of Companies is empowered to grant extension of timeextension of timeextension of timeextension of timeextension of time, for specialreasons, up to a maximum period of three months.

c.c.c.c.c. DayDayDayDayDay, Hour and Place of A, Hour and Place of A, Hour and Place of A, Hour and Place of A, Hour and Place of AGM - GM - GM - GM - GM - Every annual general meeting shall be heldduring business hours and on a day that is not a public holiday (except in certaincases). Further, the meeting shall be held either at the registered office of thecompany or at some other place within the city, town or village in which registeredoffice of the company is situated.

d.d.d.d.d. Agenda of A Agenda of A Agenda of A Agenda of A Agenda of AGM - GM - GM - GM - GM - The business to be transacted at an AGM may comprise of (i)ordinary business (ii) special business.

Ordinary businessOrdinary businessOrdinary businessOrdinary businessOrdinary business relates to:

(a) consideration of the accounts, balance sheet and the reports of the Board ofdirectors and auditors;

(b) the declaration of dividends;


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(c) the appointment of directors in place of those retiring ; and

(d) the appointment of auditors and fixation of their remuneration.

Any other business scheduled to be transacted at the meeting will be deemed to bespecial businessspecial businessspecial businessspecial businessspecial business and therefore, every item on the agenda must be accompanied by anexplanatory statement in terms of section 173.

e.e.e.e.e. Notice of ANotice of ANotice of ANotice of ANotice of AGM - GM - GM - GM - GM - The noticenoticenoticenoticenotice of the meeting must be given to every person entitledthereto at least twenty one clear days before the date of the meeting. A shorternotice may be held valid if consent is accorded to by all the members entitled tovote at the meeting. A copy of the directors’ report and auditors’ report mustaccompany the notice. Also a proxy form must be attached to the notice, onwhich it must be specifically mentioned that a member entitled to vote is entitledto appoint proxy and proxy need not be a member of the company. The noticemust contain a statement of the business to be transacted thereat.

fffff..... AAAAAGM must be held even if accounts are not ready – GM must be held even if accounts are not ready – GM must be held even if accounts are not ready – GM must be held even if accounts are not ready – GM must be held even if accounts are not ready – Requirement of holding anannual general meeting is independent of presenting audited accounts at theAGM. Thus, annual general meeting must be held within prescribed time even ifaudited accounts are not ready. If the meeting is adjourned, then the adjournedmeeting must be held within the maximum time allowed.

ggggg..... Default in holding ADefault in holding ADefault in holding ADefault in holding ADefault in holding AGM - GM - GM - GM - GM - If default is made in holding an AGM in accordancewith the provisions of the Act, the Central Government may, on the application ofany member of the company, call or direct the calling of a general meeting of thecompany and give such directions as it thinks fit including direction that onemember of the company present in person or by proxy shall be deemed to constitutea valid meeting.

In case of default in holding an AGM in accordance with section 166 or in complyingwith any directions of the Central Government, National Company Law Tribunal, thecompany, and every officer of the company who is default, shall be punishable with fineup to rupees fifty thousand. In case the default continues, a further fine upto Rupees2500 per day may be levied till such default continues.

12.6 Extra Ordinary General Meeting (sec 169)

All general meetings other than the statutory and annual general meeting shall becalled as extraordinary general meetings.


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All business transacted at such meetings is called special business and therefore,every item on the agenda must be accompanied by an explanatory statement in termsof section 173.

An EGM may be called:

i) by the Board of directors of its, own accord;

ii) by the directors on requisition;

iii) by the requisionists themselves;

iv) by the Company Law Board/ Tribunal.

i)i)i)i)i) By the Board of directors of its, own accord – By the Board of directors of its, own accord – By the Board of directors of its, own accord – By the Board of directors of its, own accord – By the Board of directors of its, own accord – The Board of Directors may callEGM at an time by giving not less than 21 days clear notice. A shorter noticemay, however, be given if consent is accorded thereto by members of the companyholding, if the company has share capital, not less than 95% of such part of thepaid up capital of the company as gives a right to vote at the meeting. If thecompany has no share capital, by members having not less than 95% of the totalvoting power exercisable at that meeting.

ii)ii)ii)ii)ii) By the directors on requisition - By the directors on requisition - By the directors on requisition - By the directors on requisition - By the directors on requisition - The Board of Directors must convene a generalmeeting upon request or requisition under the following conditions:

i. The requisition must be signed by member(s) holding atleast 1/10th of thepaid up share capital of the company, in the case of companies having ashare capital; and by members holding atleast 1/10th of the total votingpower in other cases.

ii. The requisition must state the objects of the meeting.

iii. The requisition must be deposited at the registered office of the company.

iv. The directors must, within 21 days of the receipt of a valid requisition, issuea 21 clear day’s notice for the holding of the meeting on a date fixed within45 days of the receipt of the valid requisition.

iii)iii)iii)iii)iii) By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - On a valid requisition being made as persection 169, the Board of directors are under an obligation to convene the meetingwithin forty five days forty five days forty five days forty five days forty five days of the receipt of the valid requisition. In case, the Board ofdirectors fails to call the meeting as aforesaid, the requisitionists or such majorityof them as spelt out under section 169 may call and hold the meeting withinthree monthsthree monthsthree monthsthree monthsthree months of the date of the requisition.


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iv)iv)iv)iv)iv) By the CLB/National Company LBy the CLB/National Company LBy the CLB/National Company LBy the CLB/National Company LBy the CLB/National Company Law Taw Taw Taw Taw Tribunal - ribunal - ribunal - ribunal - ribunal - If for any reason it is impracticableto call a meeting of the company, the National Company Law Tribunal on itsmotion or on an application of any director or any member entitled to vote at thatmeeting. The directions given by the Company Law Board/ Tribunal may includea direction that one member present in person or proxy shall be deemed toconstitute a valid meeting.

Class meetingClass meetingClass meetingClass meetingClass meeting - When it is proposed to alter, vary or affect the rights of a particularclass of shareholders and it is not possible to obtain the consent in writing, of theholders of 3/4th of the issued shares of that class, a meeting of the holders of thoseshares may be called. Such a meeting is commonly known as a ‘class meeting’. Allresolutions in a class meeting are required to be passed as special resolutions. Theholders of at least ten per cent of the issued shares of that class who did not consent infavour of the consent may apply to the Court within twenty one days to have the resolutioncancelled and where such application is made, the resolution shall not have effectunless and until it is confirmed by the Court.

12.7 Board Meetings

A company essentially acts through its Board of directors. The Board generallyacts by taking decisions collectively through resolutions made in the meeting ofthe Board. A decision of a Board meeting will not be considered valid unless themeeting was properly convened and duly constituted.

According to section 285, a Board meeting must be held at least once in everythree calendar months and at least four such meetings must be held every year.

The proper authority to call meeting of Board of directors is any director. However,a manager or secretary may also call a meeting of the Board if a requisition tothat effect is made by a director.

Board meetings may be held at any place and also outside business hoursaccording to the convenience of the directors.

The quorum for a meeting of the Board of directors shall be 1/3rd of its totalstrength (any fraction contained in that 1/3rd to be rounded of to one) or twodirectors, whichever is higher. However, in case the interested directors exceedsor are equal to 2/3rd of the total strength, the remaining directors, i.e., the numberof directors who are not interested, present at the meeting shall be the quorumprovided they are not less than two.


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It may be noted that in case of Board meetings, quorum is required to be presentthroughout the meeting.

The minutes must be so entered within thirty days of the conclusion of such meeting.The minutes must be duly signed by the chairman of the said meeting or the chairmanof the next succeeding meeting.

12.8 Meetings of Debenture Holders

The terms of issue of debentures and the trust deeds invariably contain provisionsfor meetings of the debenture-holders. These meetings are held for –

a. Modification or compromise of rights between the company and the debenture-holders.

b. to release a particular property from the charge.

c. to reduce the amount of debenture interest or to defer its payment or to effect anexchange of debentures for equity or preference shares.

To facilitate this, there is commonly inserted in a trust deed a clause enabling aspecified majority of debenture holders by resolution to bound the whole body ofdebenture holders.

The provisions of general meetings of the company as contained in section 171 to175 and sections 177 to 186 as modified by the company’s articles shall apply to themeetings of debenture holders.

12.9 Annexure I – Comparison of Company Meetings

Board MeetingBoard MeetingBoard MeetingBoard MeetingBoard Meeting StatutoryStatutoryStatutoryStatutoryStatutoryMeetingMeetingMeetingMeetingMeeting

AnnualAnnualAnnualAnnualAnnualGeneralGeneralGeneralGeneralGeneralMeetingMeetingMeetingMeetingMeeting

ExtraordinaryExtraordinaryExtraordinaryExtraordinaryExtraordinaryGeneralGeneralGeneralGeneralGeneralMeetingMeetingMeetingMeetingMeeting

1. ApplicableProvision

Section 285& Article ofAssociation

Section 165 Section 166 Section 169& Article ofAssociation

2. Who canconvene?

According toArticle ofAssociation andstanding order.

DulyconstitutedBoard meting/Court.

DulyconstitutedBoard meeting/Company LawBoard.

Duly constitutedBoard meeting/Requisitionists/ Company LawBoard.


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3. Duration Once every3 months - atleast fourmeetings duringthe year.

Once incompany'slife time. Withinnot less than 1month and notmore than 6months of thedate ofcommencementcertificate.

Once every year- with 15months of lastAnnual GeneralMeeting and 6monthsof end offinancial year.

As and whenBoard thinksnecessary orwhenrequisitionedby members.

4. Objective The enabledirectors todetermine policy,make decisionsand exercisecontrol, directionand supervisionovermanagement.

To acquaint

members, as

soon as possible

after

incorporation,

with matters

reformation of

the company and

its financial

position and

prospects.

To enable

members to

review at the end

of the company

on the basis of

report and

annual accounts,

to elect directors

and auditors and

in general to

exercise their

rights

To transactbusiness outsidethe scope ofAnnual Generalmeeting andother businessof urgent nature

5. Agenda Approval ofminutes,considerationof financial andtrading reports,passing accountsfor payment,transfers, staffmatters, conveningof generalmeeting, etc.

Adoption of

Statutory Report,

approval of any

modification of

any contract.

Adoption of

Directors Report,

Audited Accounts,

Balance sheet,

etc., declaration

of dividend,

election of

directors and

auditors and any

special business.

Any specialbusiness.


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Board MeetingBoard MeetingBoard MeetingBoard MeetingBoard Meeting StatutoryStatutoryStatutoryStatutoryStatutory AnnualAnnualAnnualAnnualAnnualGeneralGeneralGeneralGeneralGeneral

ExtraordinaryExtraordinaryExtraordinaryExtraordinaryExtraordinaryGeneralGeneralGeneralGeneralGeneral

6. Notice toWhom

To every director -as per Article ofAssociation orreasonablelength.

To all members

and Auditors -

21 days clear

notice.

Same as

Statutory

Meeting.

Same asAnnualGeneralMeeting.

7. Annexures toNotice

Proposedresolution of anydirector.

Statutory Report,

Proxy Form,

Admission Card.

Audited

Accounts and

Balance Sheet,

Auditors Report,

Directors Report,

Proxy Form,

Admission Card,

Explanatory

statement (if

special

business).

ExplanatoryStatement,Proxy Form,AdmissionCard.

8. Quorum 1/3rd of total(disinterested)directors or 2whichever ishigher - Articleof Associationmay providelarger number

Public company

- 5 Private

company - 2

Public company

- 5, Private

company - 2

(Article of

Association may

provide larger

quorum)

Same asAnnualGeneralMeeting

9. Chairperson As per ArticlesusuallyChairman of theBoard.

As per Article of

Association -

usually

Chairman of the

Board.

Same as

Statutory

Meeting.

Same asAnnualGeneralMeeting


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10. Proxies Proxy cannot beappointed.

Members entitled

to attend and vote

can appoint

proxy/ proxies.

Members of

company without

share capital

cannot appoint

proxy unless

provided by

Articles of

Association.

Members of

Private company

can appoint one

proxy.

Same as

Statutory

Meeting.

Same asAnnualGeneralMeeting]

11. Resolutions Only ordinaryResolution -passed atmeeting or byCirculation

Special business

- ordinary

resolution

For Ordinary

Business -

ordinary

resolution. For

Special

Business -

ordinary or

special

resolution.

Specialbusiness -Ordinary orSpecialresolution


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12. Voting Each directorhas one vote,chairman hascasting vote ifallowed byArticle ofAssociation.Voting usually byshow of hands.Decisions bysimple majority.

Each member

has one vote; by

show of hands -

voting right

proportional to

shareholding

only in poll.

Voting by show

of hands unless

poll demanded

Same as

Statutory

Meeting.


13. In case ofdefault

Fine up toRs. 1000 forevery officer fordefault in issuingnotice.

For default in

holding meeting

fine up to Rs.

5000 for

company and

every office in

default.

For default in

holding meeting

fine up to Rs.

50,000 and Rs.

2,500 per day

for continuing

default for

company and

every officer in

default.


QUESTION BANK

I. FAQs’

1. Discuss the requisites of a valid general meeting as per the Companies Act,1956.

2. In what circumstances an Extra-ordinary General meeting is to be held?

3. State the conditions and procedure for holding an Extra-ordinary general meetingon requisition.


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4. “Every meeting, in order to be valid must be duly convened, properly constitutedand conducted.” Elucidate.

5. What is the quorum for a general meeting?

6. Differentiate between a ordinary resolution and special resolution.

7. Under what circumstances do special resolutions becomes necessary?

8. Explain the provisions of the Companies Act, 1956 relating to holding of AnnualGeneral Meeting of the Company with regard to the following :

- Period within which the first and the subsequent Annual Meetings must beheld.

- Business which may transacted at the Annual General Meeting.

9. What are the items that constitute ordinary business in an annual general meeting.

10. Distinguish between Special business and Special resolution.

11. Explaining the provisions of the Companies Act, 1956 with regard to holding ofthe Annual General Meeting.

12. What is statutory meeting? Explain it’s significance.

II. CASE STUDIES

1. Low Esteem Infotech Ltd. was incorporated on 1.4.2006. No General Meeting ofthe company has been held so far. Explain the provisions of the Companies Act,1956 regarding the time limit for holding the first annual general meeting of thecompany and the power of the Registrar to grant extension of time for the firstAnnual General Meeting.....

(Hint: The First AGM should be held within earlierearlierearlierearlierearlier of the following dates:-

- being 18 months from the date of incorporation.

- being 9 months from the close of the financial year.

Thus if the company is incorporated on 1.4.2006. The First AGM can be heldlatest by 1.10.2007. If AGM is held on or before 1.10. 2007, any further AGMfor 2006 and 2007 is not necessary. Thereafter AGM must be held every year.

There is no provision to grant extension for holding 1st AGM by the ROC.)


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2. Decide the last date for holding the next Annual General Meeting in the followingcase : Public Limited Company – incorporated on – 15-2-2000; Certificate ofCommencement of Business – 10-4-2000; Annual General Meeting for 2002-2003 held on – 10-7-2003; Accounting year – April- March

(Hint: Gap between two general meetings should not be more than 15 monthsand should be held within 6 months from close of financial year)

3. The financial year of the Company ended on 31st March, 2007. By what timeshould the Company hold its Annual General Meeting?

(Hint: The AGM has to be held within 6 months from close of financial year(section 210). Hence, meeting should be held before 30-9-2007.)

4. The financial year of Up-to-date Business Consultants Ltd. ends on 30th Juneevery year. For the financial year ended 30.06.2001, the company could nothold its annual general meeting on or before 31.12.2001 and accordinglyrequested the Registrar of Companies, Chennai to grant an extension of time fora period of 3 months so that the general meeting could be held on or before31.03.2002. The company held its last annual general meeting on 31.12.2000for adopting its annual accounts for the year-ended 30.06.2000. Examine whetherthe request of the company would be considered by the Registrar in view of thefact that if extension was granted there would be no annual general meeting ofthe company during the calendar year 2001.

(Hint: The time for holding AGM can be extended for special reasons by threemonths, with permission of Registrar of companies. [proviso to section 166(1)]under section 210(3)(b), annual accounts must be submitted within six monthsfrom date of closure of accounts. This period can be extended upto 9 months withpermission of ROC. If such permission is granted, it may happen that in a particularcalendar year, there will be no AGM held. This would be permissible- Departmentletter NO. 34/11/69- CL-III dated 13-1-1972- same view in madras & SouthernMaratha Railway v. Bezwada Municipality AIR 1944 PC 71 In view of this, here isno offense if no AGM was held in year 2001.)


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CHAPTER - XIII

ACCOUNTS AND AUDIT, STATUTORYREGISTERS & DIVIDENDS


13.1 Accounts and audit. (209 – 233 B)

13.2 Statutory Registers, Books, Returns to be maintained by a company.

13.3 Divisible Profits and Dividend (205 – 207

13.1 Accounts and Audit (Sections 209 - 233 B)

(a)(a)(a)(a)(a) Books of account required to be kept -Books of account required to be kept -Books of account required to be kept -Books of account required to be kept -Books of account required to be kept - Section 209 of theCompanies Act requires every company to maintain proper books ofaccount with respect to certain receipts and payments, sales andpurchases, assets and liabilities. Besides, companies engaged inproduction, processing, manufacturing or mining activities are requiredto keep proper cost accounting records in relation to utilisation of materialor labour or other items of costs, as may be prescribed.

Location of Books of Accounts: The aforesaid books of account arerequired to be kept at the registered office of the company except wherethe Board of directors decide to keep the same at any other place inIndia and the Registrar is intimated the full address of that other placewithin seven days of the decision.

Preservation of Books of Accounts: Books of Accounts for 8 yearsimmediately preceding the current year shall be maintained.

What do you mean by PWhat do you mean by PWhat do you mean by PWhat do you mean by PWhat do you mean by Proper Books of Accounts?roper Books of Accounts?roper Books of Accounts?roper Books of Accounts?roper Books of Accounts?

Books which give true and fair view of the state of affairsof the company

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The books of account explain the transactions; and

The books of account are kept on accrual basis and according to thedouble-entry system of accounting.

The accounts are prepared as per accounting standards.

(b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (section 209A) ----- The books of account of acompany shall be open to inspection by:

i) any director during business hours,

ii) the Registrar of Companies,

iii) such officer of Government, as may be authorised by the Central Government inthis behalf,

iv) the Reserve Bank of India.

v) SEBI in respect of listed companies (inserted by Companies (Amendment) Act,2000).

Although a director has a right of inspection of books of account during businesshours, this right does not extend to a shareholder except where such a right is specificallygiven in the Articles.

(c) P(c) P(c) P(c) P(c) Persons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account - Section 209(6)primarily makes the managing director or manager, if there is one, liable for keepingproper books of account. In case the company does not have a managing director ora manager, every director of the company shall be liable.

Besides the liability extends to every officer, employee, agent and any other personwho has been made responsible to ensure that the requirements of section 209 arecomplied with.

(d) P(d) P(d) P(d) P(d) Preparation and presentation of Freparation and presentation of Freparation and presentation of Freparation and presentation of Freparation and presentation of Financial Statements -inancial Statements -inancial Statements -inancial Statements -inancial Statements - Section 211 requiresthat every balance sheet of a company shall give a true and fair view of the state ofaffairs of the company as at the end of the financial year.

Format of balance sheet: The balance sheet should be in form as given in Part I ofSchedule VI or as near thereto as circumstances permit. The balance sheet may, however,be drawn in any other form if approved by the Central Government, either generally or

ACCOUNTS AND AUDIT, STATUTORY REGISTERS & DIVIDENDS

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in any particular case. The balance sheet may be either in vertical form or horizontalform. Previous year’s figures should be indicated.

Schedule VI does not prescribe any form for profit and loss account. However, theprofit and loss account should give a true and fair view of the profit and loss of thecompany for the financial year and should comply with the requirements of Part II ofSchedule VI so far as they are applicable thereto.

Apart from balance sheet and profit and loss account, a summary sheet containingBalance Sheet abstract and company’s General Business Profile should be given inprescribed form.

Schedule VI is, however, not applicable to insurance or banking companies or anycompany engaged in the generation or supply of electricity or any other class ofcompanies for which a form of balance sheet has been specified in or under the Actgoverning such company.

Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: According to section 211 every profit andloss account and balance sheet of the company shall comply with the accountingstandards. If the accounts do not comply with the accounting standards, such companyshould disclose in its profit & loss account and balance sheet, the following namely,:

a) the deviation from the accounting standard;

b) the reasons for such deviations; and

c) the financial effect, if any, arising due to such deviation.

The accounting standards will be prescribed by the Central Government inconsultation with “National Advisory Committee on Accounting Standards, which consistof one nominee each from ICAI, ICSI, ICWA apart from other members from Govt.and Chambers of Commerce. Till Accounting Standards are prescribed by the CentralGovernment, present Accounting Standards specified by ICAI will be the accountingstandards.

A financial year may be less or more than a calendar year, but it cannot be morethan 15 months. A ‘financial year’ can be extended upto 18 months with specialpermission of Registrar of Companies. [section 210(4)].

(e) Authentication of Accounts -(e) Authentication of Accounts -(e) Authentication of Accounts -(e) Authentication of Accounts -(e) Authentication of Accounts - Every balance sheet and profit and loss accountof a company (except a banking company) is required to be signed, on behalf of the


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Board of directors, by its manager or company secretary, if any, and by not less thantwo directors of a company one of whom must be the managing director where there isone. The authentication by a single director shall be valid in case he is the only onepresent in India at that time provided the reasons for his signing alone are attached tothe balance sheet and profit and loss account.

CEO/CFO certification: In case of listed company, clause 49(V) of Listing Agreementprovide that CEO (MD) and the CFO (whole-time Finance Director or other persondischarging this function) of the company shall certify to Board that, they have reviewedthe financial statements and the cash flow statements and to the best of their knowledgeand belief these statements are true, there were not fraudulent or illegal transactions,they accept responsibility of internal control, they have indicated to auditors and auditcommittee significant changes and instances of fraud etc.

The certificate should be submitted to Board annually before or at the time whenthe annual accounts are presented to Board.

(f) Board’s R(f) Board’s R(f) Board’s R(f) Board’s R(f) Board’s Report -eport -eport -eport -eport - Section 217(1) requires that there must be attached to everybalance sheet laid before a company in general meeting, a report by its Board ofdirectors with respect to the state of the company’s affairs, reserves to be created,dividends proposed to be declared and material changes and commitments, if any,affecting the financial position of a company which have occurred between the end ofthe financial year of the company to which the balance sheet relates and the date of thereport, the measures taken in respect of conservation of energy, technology absorption,foreign exchange earnings and outgo.

The report of the Board of Directors should also contain certain particulars ofemployees drawing salary above prescribed limits (present limit is Rs. 2 lakh per month)in respect of certain employees.

The report of the Board and any addendum thereto must be signed by the Chairman.

Directors’ Responsibilities Statement: The Companies (Amendment) Act, 2000, hasamended section 217A to provide that the Boards reports will also include a Directors’Responsibilities Statement shall state that the directors had followed,

(a) in the preparation of annual accounts, the applicable accounting standards andgiven proper explanation relating to material departures, if any;

(b) selected such accounting policies and applied them consistently to ensure trueand fair view.


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(c) take and proper and sufficient care for the maintenance of adequate records forsafeguarding the assets of the Company and for detecting fraud and otherirregularities.

(d) prepared the annual accounts on a going concern basis.

(g) Circulation of Annual Accounts -(g) Circulation of Annual Accounts -(g) Circulation of Annual Accounts -(g) Circulation of Annual Accounts -(g) Circulation of Annual Accounts - Section 219(1) requires that a copy of everybalance sheet (including the profit and loss account, auditors’ report and every otherdocument required to be annexed or attached thereto) which is to be laid before theannual general meeting of the company shall be sent, not less than twenty-one cleardays before the meeting, to every member of the company and to all other persons soentitled.

As per SEBI guidelines, unabridged balance sheet with full details as statutorilyrequired, has to be sent to all members in case of listed companies. A debenture holderor depositor is also entitled to get a copy of balance sheet with all required documentsfree of cost, if he asks for the same[section 219(2)].

(h) Adoption of Accounts -(h) Adoption of Accounts -(h) Adoption of Accounts -(h) Adoption of Accounts -(h) Adoption of Accounts - One of the business to be transacted at an annualgeneral meeting is adoption of the accounts including the balance sheet, profit andloss account and the directors’ report thereon. The annual accounts must be presentedwithin six months from close of financial year. This period can be extended by furtherthree months by RoC. In case of the first AGM, the annual general meeting should beheld within nine months from close of financial year.(section 210)

(i) F(i) F(i) F(i) F(i) Filing of Accounts -iling of Accounts -iling of Accounts -iling of Accounts -iling of Accounts - Every company is required to file with the Registrar threecopies of its balance sheet and profit and loss account duly authenticated together withthree copies of all documents required to be annexed to the or attached thereto. Section220 requires these documents to be filed with the Registrar within thirty days from thedate on which the balance sheet and profit and loss account were laid before the AGMof the company. Where, however, the AGM has not been held, these documents mustbe filed within thirty days from the latest date on or before which the AGM should havebeen held.

In case of default, the company, and every officer of the company who is in default,shall be punishable with fine which may extend to five hundred rupees for every dayduring which the default continues.


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(j) Disclosure of accounts of subsidiary companies:(j) Disclosure of accounts of subsidiary companies:(j) Disclosure of accounts of subsidiary companies:(j) Disclosure of accounts of subsidiary companies:(j) Disclosure of accounts of subsidiary companies:

Balance sheet of a holding company should include following details of eachsubsidiary company [section 212]-

(a) Balance sheet, P&L account

(b) Report of Board of Directors

(c) Report of Auditors of the subsidiary company.

(d) Statement of holding company’s interest in the subsidiary at the end of financialyear.

Audit

(i) Audit - (i) Audit - (i) Audit - (i) Audit - (i) Audit - Audit is the systematic check of books of accounts. The main purposeof audit is detection and prevention of errors and detection and prevention of fraud. Itis to ensure that the statement of accounts of the relevant financial year truly and fairlyreflect the state of affairs of the company. In the company form of organisation there isseparation of ownership from management hence the need for audit of accounts is amust. The owners of the funds, namely, shareholders as well as the creditors would liketo see that their investments are safe, are being used for intended purpose(s) and theannual accounts of the company present a true and fair view of the state of affairs ofthe company. The audit by a duly qualified and independent professional serves theaforesaid purposes. Sections 216, 218 & 224 to 233B contains a provisions relating toaudit and auditors.

(ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - According to section 226 of the Companies Acta person who is a chartered accountant within the meaning of the Chartered AccountantsAct, 1949 and holds a certificate of practice is qualified for appointment as auditor.According to section 224(8)(aa) inserted by the Companies (Amendment) Act, 2000 anauditor of a company holding any security which carries voting rights of that companywill not be eligible for appointment as auditor.

(iii) Appointment of first auditors -(iii) Appointment of first auditors -(iii) Appointment of first auditors -(iii) Appointment of first auditors -(iii) Appointment of first auditors - The first auditors of a company are to beappointed by the Board of directors within one month of the date of registration of thecompany. The auditor or auditors so appointed shall hold office until the conclusion ofthe first annual general meeting.

If the Board of directors fail to appoint the first auditor / auditors, the company ingeneral meeting may appoint the first auditor / auditors. The auditor appointed must


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inform (in eForm 23B) his appointment to RoC within 30 days after receivingcommunication from company.

(iv) Appointment of subsequent auditors(iv) Appointment of subsequent auditors(iv) Appointment of subsequent auditors(iv) Appointment of subsequent auditors(iv) Appointment of subsequent auditors----- subsequent auditor / auditors of acompany are appointed every year by the member in annual general meeting by passingan ordinary resolution.

Reappointment of retiring auditor- - - - - A retiring auditor, by what so over authorityappointed, shall be reappointed except : (I) Where he is not qualified for reappointment,(ii) Where he has, in writing, expressed his unwillingness to be reappointed, (iii) Wherea resolution appointing somebody else instead of him or providing expressly that heshall not be reappointed, has been passed, (iv) Where a notice for a resolution toappoint some other auditor was given but because of the death, incapacity, etc, of theother person(s), the resolution cannot be proceeded with , (v) Where he holds the auditof specified number of companies or more in terms of section 224(1B). (vi) Where aspecial resolution is required for his reappointment.

In the absence of the aforesaid circumstances, the retiring auditor will reappointedby the member by passing an ordinary resolution,

(v) Appointment by special resolution-(v) Appointment by special resolution-(v) Appointment by special resolution-(v) Appointment by special resolution-(v) Appointment by special resolution- Section 224A requires that in case of acompany in with 25 per cent25 per cent25 per cent25 per cent25 per cent or more of the subscribedsubscribedsubscribedsubscribedsubscribed share capital is held, whethersingly or in any combination by a public financial institution / a Government company/ Central Government / any State Government or State Financial Institution or anationalised bank or an insurance company carrying on general insurance business;the appointment of an auditor shall be made by a special resolutionspecial resolutionspecial resolutionspecial resolutionspecial resolution only.

(vi) Appointment by Central Government -(vi) Appointment by Central Government -(vi) Appointment by Central Government -(vi) Appointment by Central Government -(vi) Appointment by Central Government - Section 224(3) empowers the CentralGovernment to appoint an auditor in case no auditor is appointed or reappointed atan annual general meeting of the company.

(vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - Casual vacancy caused by the death, insanity, disqualificationor insolvency, etc., of the auditor may be filed by the Board of directors. However, thecasual vacancy caused by the resignation of the auditor can only be filed by the companyin general meeting.

(viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - No individuals can be appointed as an auditor of morethan twenty companies at a timetwenty companies at a timetwenty companies at a timetwenty companies at a timetwenty companies at a time. Further, out of these twenty companies, not morethan ten should be companies having a paid-up share capital of rupees twenty-five lacsor more. In case of partnership firms of auditors, the ceiling is twenty companies per


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partner of the firm. However, audit of guarantee companies not having share capitaland private companies will not be counted for the purpose of aforesaid twenty companies.Likewise, audit of foreign companies are also excluded. Again special audits, investigationand audits of corporations set up under a separate Act are excluded.

(ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - The auditor of aGovernment company shall be appointed by the Comptroller and Auditor General ofIndia (C&AG) who is also given power to direct the manner in which the company’saccounts shall be audited. Thus, the government company are subject to two kinds ofaudit. First is the statutory audit done by a Chartered Accountant and the other is thegovernment audit done by the C&AG. The statutory auditor must submit a copy of hisaudit report to the C&AG. C&AG has the right to comment upon or supplement theaudit report.

(x) R(x) R(x) R(x) R(x) Removal of an Auditor – emoval of an Auditor – emoval of an Auditor – emoval of an Auditor – emoval of an Auditor – An auditor retires automatically at the AGM. Forremoval of auditors before the expiry of the term (i.e. before next AGM), besides passingan ordinary resolution, prior permission of the Central Government must be obtained.

The first auditor, appointed by the Board of directors may be removed by merelypassing an ordinary resolution. For removing an auditor, at the expiry of his term, onlyan ordinary resolution of which a special notice has been given to the effect that aretiring auditor shall not be reappointed is sufficient.

(xi) R(xi) R(xi) R(xi) R(xi) Remuneration of Auditors -emuneration of Auditors -emuneration of Auditors -emuneration of Auditors -emuneration of Auditors - In the case of an auditor appointed by the Boardof directors or the Central Government, his remuneration may be fixed by the Board orthe Central Government, as the case may be. In all other cases, it must be fixed by thecompany in general meeting or in such manner as the company in general meetingmay determine.

(xii) Rights of the Company Auditor -(xii) Rights of the Company Auditor -(xii) Rights of the Company Auditor -(xii) Rights of the Company Auditor -(xii) Rights of the Company Auditor - Rights of a company’s auditor include

(a) the right of access to books and accounts, etc.,

(b) the right to obtain information or explanations,

(c) the right to inspect branch account,

(d) the right to receive notices of general meetings of a company,

(e) the right to attend general meetings and

(f) the right to remuneration.


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(xiii) Duties of Company Auditor -(xiii) Duties of Company Auditor -(xiii) Duties of Company Auditor -(xiii) Duties of Company Auditor -(xiii) Duties of Company Auditor - Section 227 prescribes the duties of the companyauditor. The auditor has a duty to make inquiries into financial transactions. The dutiesinclude the duty to make a report to the members on the accounts of the companystating compliance with the various statutory provisions. The auditor’s report shall statethe following :

a) Whether in his opinion and to the best of his information and according to theexplanations given to him, the accounts depicts a true and fair view of the state ofaffairs of the company.

b) Whether he has obtained all the information and explanations which to the bestof his knowledge and belief were necessary for audit,

c) Whether in his opinion, proper books of account as required by law have beenkept by the company,

d) Whether the company’s balance sheet and profit and loss account dealt with bythe report are in agreement with the books of account and returns,

e) Whether the report on the accounts of any branch office audited under section228 by a person other than the company’s auditor has been forwarded to himand how he has dealt with the same in preparing his report.

The auditor ‘s duties also include to report on the matters specified under Companies(Auditor’s Report) Order, 2003 (CARO, 2003 has replaced MAOCARO ‘Manufacturingand Other Companies (Auditors’ Report) Order, 1988’).

Another duty cast upon the auditors is to ensure that the accounting standardsissued by the Institute of Chartered Accountants of India have been implemented in thepresentation of financial statements covered by the auditors’ report.

Section 227 of the Companies Act as modified by the Amendment Act, 2000provide to the effect that the auditor’s report shall also state in thick types or in italicsthe observations or comments of the auditors which have any adverse effect on thefunctioning of the company. The report shall also state whether any director of a companyis disqualified from being appointed as director under the newly inserted clause (g) ofsub-section (1) of Section 274 of the Act.

(xiv) Special audit -(xiv) Special audit -(xiv) Special audit -(xiv) Special audit -(xiv) Special audit - Under section 233A, the Central Government is empoweredto direct that a special audit of the company’s accounts for a specified period shall beconducted. Such a direction shall be issued where it is of the opinion that -


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a) the affairs of any company are not being managed in accordance with soundbusiness principles or prudent commercial practices; or

b) that the company is being managed in a manner likely to cause serious injury ordamage to the interest of trade, industry or business to which it pertains ;

c) that the financial position of any company is such as to endanger its solvency.

For the purpose of special audit, the Central Government may either appoint achartered accountant or the company’s auditor himself.

(xv) Cost audit -(xv) Cost audit -(xv) Cost audit -(xv) Cost audit -(xv) Cost audit - Certain companies which are engaged in the production, processing,manufacturing or mining activities as referred to section 209(1)(d) are required tomaintain cost accounting records. Cost audit is a process for verifying the cost ofmanufacture or production of an article on the basis of the accounts as regards utilisationof material or labour or other items of costs maintained by the company. It helps themanagement in cost control and cost reduction and in improving efficiency.

Section 209(1)(d) makes it compulsory for certain class of companies to maintaincost record as per Cost Accounting Record Rules. Central Government can order auditof the cost accounts of the company u/s 233B(1). The cost audit is necessary only whenspecific order is issued by Central Government. It is not regular yearly audit as in caseof financial audit. There are 47 industries to which cost audit is prescribed such asCement, Cycle, Sugar, Chemical Industries, Textile, Aluminum etc. The cost auditor hasto be a cost accountant within the meaning of the Cost and Works Accountants Act,1959.

The cost auditor is to be appointed by the Board of directors of the company, withprior approval of the Central Government. The cost auditor has to submit cost auditreport within 180 days from the closure of financial year to the central government andto the company.

(xvi) Audit Committee(xvi) Audit Committee(xvi) Audit Committee(xvi) Audit Committee(xvi) Audit Committee - The Company (Amendment) Act, 2000 provides forconstitution of an audit committee in case of a public company having a paid upcapital of not less than Rs. 5 crore (section 292A). All listed companies have to constitutean audit committee as per the stipulation of clause 49 of the Listing Agreement. Themain functions of the audit committee is to discuss with the auditors periodically aboutthe internal control systems, the scope of audit including the observations of the auditors.

(xvii) Constitution of National Advisory Committee on Accounting Standards(xvii) Constitution of National Advisory Committee on Accounting Standards(xvii) Constitution of National Advisory Committee on Accounting Standards(xvii) Constitution of National Advisory Committee on Accounting Standards(xvii) Constitution of National Advisory Committee on Accounting Standards -(section 210A) - The Central Government shall constitute an Advisory Committee on


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Accounting Standards to advise the Central Government on the formulation and layingdown of accounting policies and accounting standards for adoption by companies ora class of companies. This advisory committee shall comprise of 12 members who shallbe nominated by different professional bodies/authorities mentioned in sub-section(2). These are ICAI, ICSI, ICWA, RBI, CBDT etc. The committee shall give itsrecommendations to the Central Government on matters relating to accounting standardsand auditing. Till Accounting Standards are prescribed by the Central Government,present Accounting Standards specified by ICAI will be the accounting standards.

13.2 Statutory Registers / Books / Returns to be maintained by a company

STATUTORY REGISTERS, BOOKS, RETURNS AND OTHER RECORDS TO BEPREPARED OR MAINTAINED BY COMPANIES UNDER THE COMPANIES ACT, 1956.

49(7) Register of investments - where investments of the company in shares orsecurities are not held in its own name.

58A Register of Deposits (Read with rule 6 of the Companies (Acceptance ofDeposits) Rules, 1975.

136 Copy of every instrument creating any charge requiring Registration.

#143(1) Register of charges.

#150(1) Register of members.

#151(1) Index of Members, where their number is more than fifty.

#152(1) Register of Debenture holders.

#152(2) Index of Debenture holders where their number is more than fifty.

157-158 Foreign Register of members and debenture holders.

#159-160 Copies of Annual Return.

193-196 Minutes Books of Proceedings of General Meetings and of meetings of theBoard of Directors of Committees of the Board.

209(1) Books of accounts and Cost Records.

301 Register of contracts, Companies and Firms in which the Directors of theCompany are interested.


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302 (6) All contracts entered into by the Company for the appointment of a Manageror Managing Director.

#303(1) Register of directors, manager and secretary.

307 Register of shareholding or debenture holdings of Directors and Manager.

370(IC) Register of loans made and guarantees given or securities provided toCompanies under the same management.

372(6) Register of all investments made by the Company in the shares of anyother body corporate or bodies corporate (Whether in the same group ornot).

1. Register of members [sec.150]

Particulars to be recorded- section 150 of the Companies Act, 1956 requires everycompany to maintain a Register of Members in one or more books. The Register mustcontain the prescribed particulars, viz.-

The name and address, and the occupation, if any, of each member,

Shares held by each member with distinctive numbers (except where such sharesare held with a depository), nominal value and the amount paid or agreed to beconsidered as paid on those shares.

The date at which the name of each person was entered in the Register as amember, and

The date at which any person ceased to be a member.

In addition to the aforesaid particulars, the Register of members should also be inconformity with the format as prescribed under Rule 7 of the companies (Issue of shareCertificate) Rules, 1960.

Further, all entries in this register are required to be authenticated by the secretaryor any other person so authorised by the Board of directors.

Closing of registerClosing of registerClosing of registerClosing of registerClosing of register- As per section 154 of the companies Act, 1956, the Register ofmembers of a company can be closed after giving not less than 7 days previous notice,by advertisement in some newspaper circulating in the district in which the registered

# To be kept open for public inspection.


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office of the company is situated, But in no case the register be closed for more thanthirty days at a stretch and for an aggregate period of 45 days in a year.

The Register of members is usually closed immediately prior to the annual generalmeeting for the purpose of finalising the list of shareholders to whom notice should besent as also to determine the entitlement of dividend for shareholders if and whendeclared at the annual general meeting. For purposes of rights or bonus issues, theregister may again be closed, though normally a record date is announced for thepurpose of determining the entitlement of rights of bonus, as the case may be. Wherethe shares are listed, the company shall be required to comply with the listing agreementalso.

Place of keeping the registerPlace of keeping the registerPlace of keeping the registerPlace of keeping the registerPlace of keeping the register- Under section 163, the Register of members is requiredto be kept at the registered office of the company or any other place in the same cityprovided such other place has been approved by a special resolution in general meetingand the Registrar has been given an advance copy of the proposed resolution.

Inspection of register of membersInspection of register of membersInspection of register of membersInspection of register of membersInspection of register of members- Under section 163, the Register of membersmust be kept opened during business hours for inspection of any member or debentureholder without fee, and for any other person, on payment of the prescribed fee. TheRegister must be kept opened for at least two hours on every working day duringbusiness hours.

2. Index of members [sec. 151]

Every company having more than 50 members must maintain an index of membersexcept where the Register of members in itself constitutes an index. The index may be inthe form of a card index or a bound one. Any alteration made in the Register of membersmust be recorded in the index within 14 days.

The index must, in respect of each member, contain a sufficient indication to enablethe entries relating to that member in the register to be readily found.

The index must, at all times, be kept at the same place as the Register of members.

3. Register and Index of beneficial owners [sec. 152A]

The register and index of beneficial owners maintained by a depository under section11 of the Depositories Act, 1996, shall be deemed to be an index of members andregister and index of debentureholders as the case may be, for the purpose of this Act.


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4. Register of debentureholders [Sec. 152]

A company required to maintain a register of its debenture-holders stating theprescribed particulars. It is required to maintain an index of debenture-holders in caseit has more than fifty debenture-holders except where the register is in itself an index.

5. Annual return [sec.159 to 162]

Annual Return to be made by Company having share capital [section 159]- Everycompany having a share capital shall file with the Registrar of companies an annualreturn within 60 days from the date of holding of the Annual General Meeting.

If no Annual General Meeting is held in a particular year then annual return has tobe filed within 60 days from the day on which the meeting should have been held,which is normally six months from the date of the closing of the accounting year of thecompany and in any event not more than 15 months from the last Annual GeneralMeeting.

If no Annual General Meeting has been held, the company shall along with thereturn, file a statement giving the reasons for not holding the Annual General Meeting.Therefore, not holding the Annual General Meeting cannot be upheld as an excuse fornot filing the annual return- State of Bombay v. Bandhan Ram, AIR 1961 SC 186;[1961] 31 comp.case. 1 (SC.);

The Annual Return of a company must be prepared in the form prescribed in part IIof schedule V of the Act or as near thereto as possible and must contain the particularsregarding:

i. its registered office,

ii. the register of its members,

iii. the register of its debenture-holders,

iv. its shares and debentures,

v. its indebtedness,

vi. its members and debenture-holders, past and present, and

vii. its directors, managing directors, managers and secretaries, past and present.

The copy of the Annual Return filed with the Registrar must be signed by a directorand by the manager or secretary, or where there is no manager or secretary, by twodirectors including the managing director where there is one.


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Where the annual return is filed by a company whose shares are listed on arecognised stock exchange, the copy of such annual return shall also be signed by asecretary in whole-time practice [sec. 161(1)].

Full particulars every 6 years: Annual return is required to give full particulars ofmembers once in every six years, and for the intervening period, i.e., every year duringthe remaining period of 5 years, to state only the changes in membership (Section159).

13.3 Divisible Profits and Dividend (Sections 205 - 208)

The term ‘dividend‘ has not been defined in the Companies Act, 1956. In commercialusage, however, ‘dividend’ is the share of the company’s profits distributed among themembers. The term ‘dividend’ is also used to include distribution of the company’sassets in the event of its winding up.

(i) Types of dividend

FFFFFinal dividend – inal dividend – inal dividend – inal dividend – inal dividend – It is declared by the shareholders at the annual general meeting.The final dividend is recommended by the board of directors in its report to theshareholders u/s 217. The shareholders cannot increase the rate of dividend asrecommended by the board but they can declare dividend at a rate lower than the onerecommended by the directors.

Interim dividend Interim dividend Interim dividend Interim dividend Interim dividend – Interim dividend is declared by the board of directors if authorisedby the articles. It is declared between two annual general meetings. The Companies(Amendment) Act, 2000 has for the first time-defined dividend to include any interimdividend [section 2(14A)]. Thus interim dividend stands on the same footing as that ofthe final dividend. Both interim and final dividend when declared become debt and arepayable within 30 days of declaration.

(ii) Meaning of divisible profits -(ii) Meaning of divisible profits -(ii) Meaning of divisible profits -(ii) Meaning of divisible profits -(ii) Meaning of divisible profits - All the profits of the company cannot be said tobe divisible. Only those profits, which can legally be distributed to the shareholders ofthe company in the form of dividend, are called as divisible profits.

According to section 205, dividends may be declared only out of

current profits;

past reserves created out of profit or


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out of moneys provided by the Central or State Govt. for this purpose in pursuanceof a guarantee given by such Government.

Dividend should not be declared out of the securities premium account or thecapital redemption reserve account or revaluation reserve or out of profit on issue offorfeited shares or out of profit earned prior to the incorporation of the company.

Dividend should be declared only after providing for depreciation for the currentDividend should be declared only after providing for depreciation for the currentDividend should be declared only after providing for depreciation for the currentDividend should be declared only after providing for depreciation for the currentDividend should be declared only after providing for depreciation for the currentyear and arrears of depreciation if anyyear and arrears of depreciation if anyyear and arrears of depreciation if anyyear and arrears of depreciation if anyyear and arrears of depreciation if any. . . . . Dividend may, however, be paid withoutproviding for depreciation with the prior permission of the Central Government.

In case of loss in any previous financial year or years, an amount of such lossor depreciation for that year or those years whichever is less is required toset-off against the profits of the current year.

HoweverHoweverHoweverHoweverHowever, before declaring dividends, section 205(2A) requires that a, before declaring dividends, section 205(2A) requires that a, before declaring dividends, section 205(2A) requires that a, before declaring dividends, section 205(2A) requires that a, before declaring dividends, section 205(2A) requires that acompany must transfer a prescribed percentage of its profits to its reserves.company must transfer a prescribed percentage of its profits to its reserves.company must transfer a prescribed percentage of its profits to its reserves.company must transfer a prescribed percentage of its profits to its reserves.company must transfer a prescribed percentage of its profits to its reserves.It may be noted that no transfer to reserves is required if the rate of dividendproposed is 10% or less. Normally amount transferred to reserves should notexceed 10% of current profits. However, a company can make transfer ofmore than 10% to reserves voluntarily provided it ensures the minimumdistribution specified in Rule 3 of the Companies (Transfer of Profits to Reserves)Rules, 1975.

TTTTTransfer of profits to reserve before declaring dividendransfer of profits to reserve before declaring dividendransfer of profits to reserve before declaring dividendransfer of profits to reserve before declaring dividendransfer of profits to reserve before declaring dividend

Before any dividend is declared or paid by a company for any financial yearout of the profits of the company for that year, certain percentage of profitsnot exceeding 10%, as may be prescribed by Central Government, will betransferred to the reserves of the company. The company may, however,voluntarily transfer a higher percentage of its profits to the reserves.Thepercentage of profits which have to be compulsorily transferred to reservesbefore declaration of dividend have been prescribed as under the Companies(Transfer of Profits to Reserves) Rules 1975:


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If the proposed dividend does not exceed 10% then there is no statutory obligationto transfer any amount to reserves out of current profits.

(iii) Dividend on preference shares(iii) Dividend on preference shares(iii) Dividend on preference shares(iii) Dividend on preference shares(iii) Dividend on preference shares - The distinguishing feature of a preferenceshare is that its holder is entitled to a dividend of a fixed amount or at a fixed rate. Thedividend on preference shares is payable before any dividend is paid on the ordinaryshares. However, dividend on preference shares is payable before any dividend can bepaid only if the company has earned sufficient profits. Arrears of dividend on cumulativepreference shares should be paid before paying any dividend on equity shares.

(iv) Dividend on equity share(iv) Dividend on equity share(iv) Dividend on equity share(iv) Dividend on equity share(iv) Dividend on equity share - Equity shareholders are entitled to be paid adividend on their shares only after all preference dividends have been paid to date.However, equity shareholders are compensated in terms of generally higher dividendand the voting power at general meeting.

(v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend - Dividend should be declared only on therecommendation of the Board. Dividend should be declared only at an Annual GeneralMeeting. Members may declare a lower of rate dividend than what is recommended bythe Board but have no power to increase the amount or rate of dividend recommendedby the Board.

If redeemable preference shares have not been redeemed on the due date, noDividend should be declared on equity shares until such preference shares are redeemed.

(vi) P(vi) P(vi) P(vi) P(vi) Payment of dividendayment of dividendayment of dividendayment of dividendayment of dividend - According to section 206, dividend shall be paid only tothe registered holder of shares or to his order or to his bankers or to the bearer of a

RRRRRate of proposed dividend as toate of proposed dividend as toate of proposed dividend as toate of proposed dividend as toate of proposed dividend as topaid up capitalpaid up capitalpaid up capitalpaid up capitalpaid up capital

Minimum Amount to betransferred to reserves out ofcurrent profits.

(a) Where it exceeds 10% butdoes not exceed 12.5%

(a) 2.5% of current profits

(b) Where it exceeds 12.5% butdoes not exceed 15%

(b) 5% of current profits

(c) Where it exceeds 15% butdoes not exceed 20%

(c) 7.5% of current profits

(d) Where it exceeds 20% (d) 10% of current profits


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share warrant. Where shares have been sold but not yet registered, the dividend shallbe paid to the transferee only in case the transferor gives a mandate in writing to thateffect. Otherwise, the dividend in respect of such shares shall be transferred to the‘unpaid dividend account‘.

Dividend shall be payable only in cash or by cheque or warrant sent through post.Dividend should not be paid in kind. However, capitalisation of profits or reserves of acompany for the purpose of issuing fully paid up bonus share is not prohibited.

(vii) T(vii) T(vii) T(vii) T(vii) Time limit ime limit ime limit ime limit ime limit - The amount of dividend after deducting tax at source should bedeposited in a separate bank account within 5 days 5 days 5 days 5 days 5 days from the date of declaration ofDividend unless the Dividend has been paid within that period. Dividend should bepaid out of such bank account within 30 days 30 days 30 days 30 days 30 days of declaration. Thus, dividend should bepaid within 30 days of declaration.

Failure to pay dividend (i.e. posting of dividend warrant), within the prescribedperiod of thirty days will result in every director of the company who is knowingly a partyto the default punishable with imprisonment which may extend to three years and withfine of Rs. 1,000 for every day during which the default continues. The defaultingcompany shall also pay simple interest @18% per annum during the period for whichsuch default continues.( Section 207)

(viii)(viii)(viii)(viii)(viii) Dividend Mandate Dividend Mandate Dividend Mandate Dividend Mandate Dividend Mandate - The shareholders who desire that their dividend be crediteddirect to their bank accounts have to make the request in prescribed form supplied bythe company. The aforesaid form when duly filled and sent to the company is known as‘Dividend Mandate’. It authorises the company to pay dividend direct to the shareholders’bank.

(ix) Unpaid and unclaimed dividend(ix) Unpaid and unclaimed dividend(ix) Unpaid and unclaimed dividend(ix) Unpaid and unclaimed dividend(ix) Unpaid and unclaimed dividend - There may be cases where a dividend hasbeen declared by a company but has not been paid or claimed within thirty days fromthe date of the declaration to any shareholder entitled to the payment of the dividend.In such cases, section 205A provides that the company shall within seven daysseven daysseven daysseven daysseven days from thedate of expiry of the said period of thirty days transfer the amount of dividend, whichremains unpaid or unclaimed to a special account special account special account special account special account called “Unpaid dividend account of……….. Ltd.” The account must be opened by the company in that behalf in anyscheduled bank.

Investor Education and Protection Fund: In case of default in transferring the unpaidor unclaimed dividend to the said account, the company shall pay interest from thedate of default at the rate of twelve per cent per annum. Any amount transferred to the


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unpaid dividend account but remaining unpaid or unclaimed for a period of sevenyears from the date of such transfer must be transferred by the company to the InvestorEducation and Protection Fund. The amount credited to the said fund shall be utilisedfor promotion of investors’ awareness and protection of the interests of the investors inaccordance with the rules as may be prescribed. However, no payment shall be madeto any investor in respect of any of his claims.

Before transferring any amount to the investor education and protection fund, thecompany should give individual intimation to the Shareholders in respect of whom theamount is being transferred, at least 6 months 6 months 6 months 6 months 6 months before the due date of such transfer.

(x) P(x) P(x) P(x) P(x) Payment of dividend out of capitalayment of dividend out of capitalayment of dividend out of capitalayment of dividend out of capitalayment of dividend out of capital - Dividends are not allowed to be declaredout of capital. Even where the Memorandum or Articles give power to the company topay dividend out of capital, such a power shall be invalid. The only situation where areturn on investment may be allowed out of capital is where interest is paid out ofcapital, on the shares of the company, with the previous approval of the CentralGovernment under section 208.

(xi) Check(xi) Check(xi) Check(xi) Check(xi) Check-list for payment of dividend:--list for payment of dividend:--list for payment of dividend:--list for payment of dividend:--list for payment of dividend:- What are the precautions to be taken andprocedures to be followed by the company if it intends to pay dividend? Here is thecheck-list:

SectionSectionSectionSectionSection Checklist Checklist Checklist Checklist Checklist

To pass a resolution in the Board meeting and also in the AGM by an ordinaryresolution by simple majority.

205 (1A) The amount of dividend to be deposited in a separate bank account within fivedays of AGM in which it is approved.

205 (1A) The interim dividend should be deposited in a separate bank account withinfive days of the Board Meeting. The interim dividend declared by a companyshould be confirmed in the next AGM.

205 (5)(b) The dividend should be paid to the shareholders by cheque of warrant within30 days of declaration. The amount of dividend should be rounded off to thenearest rupee.

206A Pending registration of transfer of shares, dividend amount should be held inabeyance. The company must transfer such dividend amounts to the specialaccount referred to in section 205A unless the registered shareholder has advisedotherwise.


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Let us Revise Dividends

i) There are two statements given in each of the items below. In some cases, bothof them are true statements and in some others, only one is the true statement. Pleaseidentify the TRUE statements.

Q.1

S-1: The term ‘dividend’ is defined in the Companies Act.

S-2: Dividends are the profits of a Company dividend amongst the shareholders inproportion to their shares and in accordance with their rights as shareholders.

Q.2

S-1: Dividend is payable only to the registered shareholders, to their order or to theirbankers.

S-2: Dividend on equity shares should be paid in accordance with the rights of therespective classes of shares.

SectionSectionSectionSectionSection Checklist Checklist Checklist Checklist Checklist

I. Tax Act The dividend tax under the Income-tax Act should be deposited on time asintroduced by Finance Act, 2003.

205A(1) Dividend remaining unpaid or unclaimed should be transferred to a specialaccount called “Unpaid dividend account of ……….. Ltd.” within 7 days fromthe date of expiry of thirty days from the date of declaration. The above accountmay be with any scheduled bank and can be either a current account or fixeddeposit account.

205A(5) Unclaimed or unpaid dividend for a period of 7 years should be transferred toInvestor Education and Protection Fund.

205(1)(C) If the company wants to declare dividend before providing depreciation, theapproval of central Government should be obtained.

Likewise, central Government’s permission will be required if the companywants to declare dividend out of reserves of the company.


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Q.3

S-1: Dividend can be declared only at a general meeting.

S-2: Right to dividend arises only after its declaration.

Q.4

S-1: Dividends are payable only out of distributable profits

S-2: Distributable profits are to be arrived at after

a) Providing for depreciation, and b) Transferring to the reserves.

Q.5

S-1: Transfer of profits to reserves is not obligatory if the dividend proposed is 10% orless.

S-2: Voluntary transfer to the reserves of a percentage higher than 10% of the profit isallowed.

Q.6

S-1: Declaration of additional or further dividend is not permissible.

S-2: Final dividend once declared cannot be revoked.

Q.7

S-1: Dividend should be distributed within 30 days from the date of declaration.

S-2: The amount of dividend should be deposited in a separate bank account withinfive days from the date of declaration of dividend.

Q.8

S-1: “Dividend warrant” and “Dividend mandate” are two different things.

S-2: Dividend is payable only in cash, cheque or by dividend warrant and not in kind.

Q.9

S-1: Interim dividend is the dividend declared between two general meetings by theDirectors is exercise of the specific power given under the Articles.

S-2: The general meeting may super cede the decision of the Directors to pay interimdividend and rescind its declaration before payment is made.


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Q.10

S-1: Posting of dividend warrant within 30 days will be taken as compliance with therequirement of distribution within 30 days.

S-2: Bonus shares are income for Income-tax purpose.

Q.11

S-1: The term “unclaimed dividend” and “unpaid dividend” means the same thing.

S-2: Dividends remaining unpaid should be transferred to the Special Dividend Accountwith a scheduled bank and, if remaining still unpaid for three years from the dateof transfer to that Account, to the Investor, Education and Protection Fund.

Q.12

S-1: The Directors of a Company can be compelled by the Shareholders in a GeneralMeeting to declare interim or final dividend.

S-2: A Company which has failed to comply with the provisions regarding redemptionof preference shares may also declare dividend even when such failure continues.

Q.13

S-1: In the event of inadequacy or absence of profits in any year, dividend may bedeclared for that year out of the accumulated profits of the earlier years, whichstand transferred to the reserves.

S-2: Such declaration is subject to certain conditions and also the Central Government’sapproval.

Q.14

S-1: Dividend when declared is an ordinary unsecured debt of the company to itsshareholders.

S-2: When the company goes into liquidation the declared dividend will rank withother debts due to the creditors

Q.15

S-1: Calls in arrears and any other sum due from a shareholder can be adjustedagainst dividend payable to the shareholder.

S-2: Arrears of Dividend on cumulative preference shares should be paid before anydividend on equity shares.


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QUESTION BANK

I. FAQs’

1. List out any five statutory books and registers to be maintained under the CompaniesAct, 1956.

2. What is annual return?

3. Distinguish between interim dividend and final dividend.

4. Explain the law relating to declaration and payment of and final dividend. Can allcompanies declare dividend?

5. Can dividend be declared out of profits? Subject to what conditions dividend canbe paid out of reserves?

6. Briefly explain: “No depreciation, no dividend.”

7. Can a company keep its registers and returns at a place other than the registeredoffice?

8. State the legal provisions relating to disposal of unpaid and unclaimed dividend.

9. How is an auditor of a company appointed?

10. Who are the persons who can inspect books of accounts? Can a shareholderinspect books of accounts?

11. What do you understand by the term “Cost Audit?”

12. What Books of Accounts are required to be maintained by a company? Who arethe persons responsible for ensuring proper maintenance of Books of Account?

13. Examine with reference to the provisions of the Companies Act, 1956 : the personswho have the right to inspect such books.

14. Explain the composition and function of audit committee.

15. The Companies Act, 1956, provides that a copy of the balance sheet which is tobe laid before the company in general meeting, must be sent before the meeting,to certain persons; as such a copy must be accompanied by certain documents.State —————

(i) To whom a copy of the balance sheet must be sent before the meeting?

(ii) What documents must accompany the balance sheet?

(iii) Who are authorised to authenticate the balance sheet?


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II. CASE STUDIES

1. The Board of Director of Nagpur Industries Ltd. decide to prepare balance sheet& Profit and Loss account for a financial year exceeding 12 months?

(Hint: As per sec. 210, a FY may exceed 12 months, but it shall not exceed 15months (or 18 months, if special permission of registrar is obtained). ThereforeB?S and P&L account may be prepared for a period exceeding 12 months.)

2. The Board of Directors of Vidharbha Industries Ltd. decide to revise the accountswhich have already been adopted by the shareholders in annual general meeting.Advise.

(Hint: Rectification or revision of accounts after they have been adopted at theAGM should not be permitted under any circumstances. However, the Departmentof Company Affairs has permitted revision of annual accounts for meeting thetechnical requirements of taxation laws or of any other law if such revision willresult in true and fair view.

3. Examine the possibilities of filing of unaudited balance sheet with the registrar ofcompanies.

(Hint: unaudited B/S and P&L cannot be filed with the ROC. Sec 216, 218, 219and 220 require that B/S shall be accompanied by the auditor’s report. As such,where the accounts are not audited or audit report is not attached to the B/S, itwould result in contravention of these sections.

4. The profit and loss account and balance sheet of Maharashtra Steel Ltd. havebeen signed by two directors P and Q. The Board consist of a third director M,who is also the managing director. The company has also employed a full timecompany secretary. Examine whether the authentication of the balance sheet is asper law.

(Hint: The B/S and P&L account must be signed by two directors one of whomshall be MD and also by company secretary if there is any.(Sec. 215) in the givencase sec. 215 is violated since it is not signed by the MD or the company secretary.

5. Can a person holding any security of a company be appointed as an auditor ofthat company? What will be the position, if his relative holds such securities?

(Hint: A person holding any security of a company shall not be qualified for beingappointed as an auditor of that company. The expression ‘security’ for this purpose


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means any instrument which carries voting rights [Sec 226(3)(e)]/ However, ifsecurity is held by a relative of an auditor, the above clause is not attracted. But,the auditor must disclose his interest in his report.

6. What is the liability of an auditor for failure to point out in his report that dividendis paid out of sale of the company’s real estate?

(Hint: The auditor who is a party to payment of improper dividend is liable formisfeasance, and also to make good the loss caused to the company.

7. The shareholders of ABC Ltd. at the annual general meeting unanimously resolvedfor payment of dividend though the Board of Directors did not recommend paymentof any dividend. Is the company bound to give dividend

(Hint: No, dividend can be declared by shareholders only when the directors sorecommend.)


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CHAPTER - XIV

INSPECTION, INVESTIGATION ANDWINDING UP


14.1 Inspection & Investigation

14.2 Winding up

14.1 Inspection & Investigation of the Affairs of a Company

What do you mean by investigation?

What are the different types of investigation that may be carriedout by the Central Government?

What is the required number of members who may apply forinvestigation?

In the recent past, certain grave malpractices followed deliberatelyby US companies like Enron, Worldcom, Xerox and Qwest have sentshock waves throughout the corporate world. The net result of themalpractices was that the shareholders and the public at large werekept in the dark about the true financial position of the company andhad to suffer losses

An attempt has been made to analyse the provisions of theCompanies Act, relating to inspection and investigation under thefollowing four heads:

1. Inspection of books of account, etc. of Companies (Section 209A)

2. Power of Registrar to call for information or explanation (Section234)

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3. Seizure of Documents by Registrar (Section 234A); and

4. Investigation (Section 235 to 251)

1. Inspection of books of account, etc., of Companies (Section 209A)

i) What is inspected?

Books of account and other books and papers (as per section 2(8) books andpapers’ includes accounts, deeds, vouchers, writings and documents). Thus, inspectioncover all records and registers statutorily required to be maintained by the company.

ii) Who can conduct the inspection?

a) The Registrar of companies, or

b) Any government officer authorized by the Central Government, or

c) Any officer of the Securities and Exchange Board of India authorised by it. Officersof the Securities and Exchange Board of India can exercise these powers only withrespect to matters covered in section 55A i.e., matters pertaining to issue andtransfer of securities and non payment of dividend.

iii) Why inspection?

a) To ensure that the books are maintained as required by law.

b) To ensure that company is being run in accordance with rules and regulation.

c) To inquire whether further investigation is required.

The Director of Inspection & Investigation heads the Inspection DirectorateInspection DirectorateInspection DirectorateInspection DirectorateInspection Directoratein the Ministry of Corporate Affairs at its head quarters at New Delhi. Ateach of the Regional Directorate at Mumbai, Noida, Kolkata and Chennai,the Joint Director of Inspection heads the Regional Inspection team. TheMinistry of Corporate Affairs has given guidelines to the inspecting officialsand has prescribed the format in which they have to give the inspectionreport.

The Director of Inspection & Investigation goes through the reports anddirects the action to be taken either through the agency of Regional Directoror the Registrar of Companies. In some matters, the Regional Director himselfor the ROCs issues show cause notices on the violation of law pointed inthe inspection report.

INSPECTION, INVESTIGATION AND WINDING UP

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iv) Other points

a) Inspection may be conducted without giving any prior notice to the company.

b) Inspection must be carried out during the business hours of the company.

c) In addition to books, the Inspecting Authorities can also inspect deeds, vouchers,writings, documents, etc.

d) Inspection is much narrow in scope when compared to investigation. Hence, theinspecting authorities are not supposed to make roving inquiries about the workingof the company.

e) Directors, officers and employees of the company shall produce books and otherpapers to the inspecting authorities and furnish the required information on time.

f) Directors, officers and employees of the company shall extend reasonableassistance to the Inspecting Authorities during the course of their inspection.

v) Powers/duties of inspecting authorities

a) The inspecting authorities shall have the powers of civil court under Civil ProcedureCode while trying the suit. The Inspecting Officer will have all the powers ofRegistrar of Companies in relation to the making of inquiries. They can takecopies of the books or place marks of identification thereon.

b) During the course of inspection they can exercise the following powers that arevested in civil courts.

Discovery and production of books of account and other documents at suchplace and at such time as may be specified.

Summoning and enforcing attendance of persons and examining them onoath.

Inspecting any books, registers or other documents of the company at anyplace.

c) Report of Inspecting authorities. The inspecting authority shall give its report tothe Central Government. Government can take appropriate action on the report.It may be noted that neither the company is entitled to a copy of the inspectionreport nor is the inspection report a public document. The inspection u/s 209A isa routing inspection.


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vi) Penalties

a) Any person who gives a false statement to the inspecting authority shall be liableto fine and prosecution. (section 629).

b) Any person who does not comply with the requirements of section 209A shall beliable for fine upto Rs. 50,000 and also with imprisonment upto one year.[section 209A(8)].

c) A director who is convicted of an offence under this section, shall be deemed tohave vacated his office forthwith and shall be disqualified from holding suchoffice in any company for the next five years. [section 209A(9)].

2. Powers of Registrar of companies to call for information (Section 234)

i) When does the Registrar of Companies invoke these powers?

a. Suo motu: While perusing any document filed by a company, if the Registrarrequires additional information, he may order the company to producesuch additional information or an explanation that he thinks fit within thetime stipulated by him. The power to call for information is “with respect toany matter to which such document purports to relate”.

b. On a representation made to him by a creditor or a contributory or any otherinterested person on any of the following grounds:

the business of the company is carried on to defraud the creditors or anyother person dealing with the company; or

the business of the company is carried out for a fraudulent or unlawfulpurpose.

The Registrar of Companies may call upon the company to furnish the requisiteinformation and explanation. Registrar can issue order for production of books andpapers within prescribed time as he considers necessary [section 234(3A)]. Upon receiptof such an order, the directors and other officers are duty-bound to produce theinformation and explanation called for. If upon inquiry, the Registrar of Companies issatisfied that any representation on which he took action under this provision was frivolousor vexatious, he shall disclose the name of the informant to the company.

ii) Default and consequences

a. If such information is not furnished within the specified time or if after perusal ofsuch information or explanation or books and paper produced, the Registrar is of


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the opinion that the document referred to in section 209A(1), together with suchinformation or explanation or such books and papers:

discloses an unsatisfactory state of affairs or

does not disclose a full and fair statement of any matter to which the documentpurports to relate, the Registrar of Companies shall report the matter inwriting to the Central Government.

The Registrar is empowered to prefer a complaint to the police where organizableoffences punishable under section 406 and 409 (criminal breach of trust) of the IndianPenal Code are suspected – M. Vaidyanathan v. Sub-Divisional Magistrate (1957) 27Comp. Cas. 97 (Mad).

b. If the company or its officials refuses or neglects to furnish information orexplanation they will be liable for fine upto Rs. 5,000 and further fine of Rs. 500per day [section 234(4)(a)]. The Registrar of Companies can approach the Court,and the Court may direct the company to produce the books, etc., before theRegistrar of Companies

iii) Applicability to foreign companies

These provisions shall apply in relation to documents that are to be filed by aforeign company in India with the Registrar(s) of Companies

3. Seizure of documents by Registrar of Companies (Section 234A)

i) Grounds: Where the Registrar of Companies has reasonable grounds to believethat the books and papers of a company may be destroyed, mutilated, altered,falsified or secreted, he may apply to the Magistrate of the First Class for an orderto seize such books and papers.

ii) Course of action

a. On receipt of an order from the Magistrate, the Registrar of Companies can:

Enter the place or places where the books, etc., are kept;

Search those places; and

Seize such books and papers as he considers necessary.

b. He can take copies or extracts from them or place marks of identification onthem in any manner, as he thinks fir.


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iii) Return of books / papers within 30days: Registrar of Companies shallreturn the books, etc., within 30 daysand inform that matter to theMagistrate.

4. Investigation

The Central Government reserves itsright to investigate companies, especiallyin cases of alleged fraud or oppression ofminority shareholders. The following threetypes of investigation can take place:

i) Investigation into the affairs ofcompanies (sections 235 & 237)

ii) Investigation into the affairs of relatedcompanies/persons (section 239)

iii) Investigation into the ownership ofcompanies (section 247).

4.1 Investigation into affairs ofcompanies

This can be studied under two heads:

Mandatory Powers

Discretionary Powers

4.1a Mandatory powers

i) Appointment under section 237(a) –The Central Government shallappoint one or more inspectors toinvestigate into the affairs of thecompany and to report thereon if:

a. the company by specialresolution [section 237(a)(I)]; or

b. the court by an order [section237(a)(ii)] declare that the affairs

Govt. orders probe against IspatGovt. orders probe against IspatGovt. orders probe against IspatGovt. orders probe against IspatGovt. orders probe against Ispat

New Delhi; The government hasordered a probe against steel giant IspatIndustries for alleged exposure to Rs. 8,500crore of public funds, erosion of networthand high accumulated losses, highly pacedofficial sources said on Tuesday.

The investigation has been orderedunder section 235 of the Companies Act(investigation into a company’s affairs) andthe case has been referred by the departmentof company affairs to Serious FraudsInvestigation Office (SFIO), they said. Whencontacted an Ispat Industries spokespersondeclined to comment on the issue whereasits executive director finance Anil Surekhawas out of the country and also declined tocomment.

SFIO, set up to look into large-scalefraud and misappropriation of funds bycompanies takes up only those cases whichDCA refers have ordered an investigationunder section 235 of the Companies Actagainst Ispat Industries and the case hasbeen referred to the SFIO. ‘The probe isbeing ordered because of the company’sexposure of Rs. 8500 crore of public funds,erosion of net worth and high accumulatedlosses’ the sources added

Sources said while DCA ordered theprobe about a week back, the order isawaiting a nod from the finance minister.

Since the SFIO was set up late last yearIspat is the fifth case to be referred to it forthorough investigation. Daewoo Motors,DSQ Software, Design Auto and BenonzaBiotech are the other cases already beingprobed by SFIO, sources said PTI.

(Time of India dtd. 10-02-2004)


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of the company ought to be investigated by an inspector appointed by theCentral Government.

The Court cannot appoint directly inspectors u/s 237(a)(ii) to investigate theaffairs of the company but only make a declaration that the affairs of thecompany ought to be investigated by an inspector(s) appointed by the CentralGovernment. Once such an order is passed it is mandatory for the CentralGovernment to conduct such investigation by appointing competent personsas inspectors.

4.1b Discretionary powers [Section 235(1)]

Sec. 235 enables the Central Government and the Company Law Board to appointinspectors for investigation in the following cases:

i) On a report of ROn a report of ROn a report of ROn a report of ROn a report of Registrar of Companies under section 234(6)egistrar of Companies under section 234(6)egistrar of Companies under section 234(6)egistrar of Companies under section 234(6)egistrar of Companies under section 234(6) –– The CentralGovernment may appoint one or more competent persons to investigate into theaffairs of the company if a report has been made to it by the Registrar of Companiesthat a document filed with him discloses an unsatisfactory state of affairs or doesnot disclose full and fair statement of matter to which it purports to.

ii) Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB –––––

On a declaration being made by the CLB that the affairs of the company ought tobe investigated, the Central Government shall appoint one or more competentinspectors to investigate into the affairs of the company and to report thereon insuch manner as the Central Government may direct.

When will CLB make such a declaration?

For this purpose the following members can apply to the CLB:

i) Where the company has share capital

Not less than 200 members or Members holding not less than 1/10th ofthe total voting power therein.

ii) Where the company does not have share capital

Not less than 1/5th of the persons in the company’s register of members.

Before making a declaration as aforesaid, the CLB may give the parties concernedan opportunity of being heard.


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The application by members mentioned above should be supported by necessaryevidence to show that the applicants have good and sufficient reasons for requiringinvestigation. The Central Government may, before appointing the inspectors, requirethe applicants to give security not exceeding Rs. 1000 to meet the costs of investigation(section 236).

iii) Based on the opinion of the CLB – [Section 237(b)] –

The Central Government may appoint one or more competent persons as inspectorsto investigate he affairs of the company if in the opinion the CLB, there are circumstancessuggesting:

a. Fraud, etc., in any of the manner given below:

the business of the company is conducted to defraud its members, creditors,or other persons or

the business of the company is conducted for a fraudulent or unlawful purposeor oppressive to any member or

the company was formed for any unlawful or fraudulent purpose.

b. Persons connected with the formation or management of the company have beenfound guilty of fraud, misfeasance or other misconduct towards the company orany of its members.

c. The members of the company are deprived of any information, which they areentitled to, including particulars of commission, if any, payable to managing orother director or manager.

The CLB can form an opinion as aforesaid, even based on a complaint receivedfrom a single shareholder irrespective of the fact that he didn’t have the requisite numberof shares as mentioned in section 235(2). The reason is that sections 235(2) and237(b) are two independent provisions.

Thus, the powers to appoint inspectors and to conduct investigation is vested withCentral Government, whereas the power to consider application made by the membersvests with the Company Law Board.

Instances where investigation orders were passed

Where a company, for an unreasonable time does not send to its members theannual accounts and reports as required by the Act – Miles Aircraft Ltd., In re91948) 18 Comp. Cas. 250 (Ch. D).


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Where a dividend paying company immediately turns into a loss making company– Miles Aircraft Ltd. (supra)

In spite of keeping large sums of money in reserves, a company consistentlyreduces shareholders’ dividend from about Rs. 37 to Rs. 10 per share within twoyears – Ashoka Marketing Ltd. v. Union of India (1966) 1 Comp. LJ 267 (Cal).

Where a foreign shareholder of a company complained of diversion of its funds,discrepancies in its share capital account and failure to have its statutory auditdone and the audited accounts presented before the general body for severalyears – Eshwar Usha Corporation v. Richimen Silks Ltd. (1999) 34 CLA 236 (CLB).

The government has ordered a probe against steel giant Ispat Industries for allegedexposure to Rs. 8,500 crore of public funds, erosion of networth and highaccumulated losses. (Times of India dtd. 10-02-2004).

14.2 Winding- Up

Winding up of a company is the process whereby its life is ended and its propertyadministered for the benefit of its creditors and members. An administrator, called a‘liquidator’, is appointed and he takes control of the company. The liquidator collectsits assets, pays its debt and finally distributes any surplus among the members inaccordance with their respective rights.

Modes of WModes of WModes of WModes of WModes of Winding up -inding up -inding up -inding up -inding up - A company may be would up in any one of the two ways,

1. Compulsory winding up (sec. 433 to 483);

2. Voluntary winding up (sec. 489 to 509);

3. Voluntary winding up subject to the supervision of the court (sec. 522 to 527)

1. W1. W1. W1. W1. Winding up by the Court/Compulsory Winding up by the Court/Compulsory Winding up by the Court/Compulsory Winding up by the Court/Compulsory Winding up by the Court/Compulsory Winding upinding upinding upinding upinding up - Winding up be the Courtmay be ordered in cases mentioned in section 433.

Section 433 provides that a company may be wound up by the Court:

(a) WWWWWinding up by special resolution: inding up by special resolution: inding up by special resolution: inding up by special resolution: inding up by special resolution: if the company has, by special resolution, soresolved;

(b) Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: if default ismade in delivering the statutory report to the Registrar or in holding the statutorymeeting, where applicable;


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(c) FFFFFailure to commence business: ailure to commence business: ailure to commence business: ailure to commence business: ailure to commence business: if the company does not commence its businesswithin a year from its incorporation, or suspend its business for a whole year,

(d) RRRRReduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: if the number of membersis reduced, in the case of a public company, below 7, and in the case or a privatecompany, below 2;

(e) Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: if the company is unable to pay its debts;

(f) Just and equitable: Just and equitable: Just and equitable: Just and equitable: Just and equitable: if the court is of the opinion that it is just and equitable thatthe company should be wound up. Disappearance of substratum, objects of thecompany becoming illegal, information of a company to perpetuate a fraud,deadlock in management, where company never had any real business, oppressionof the minority have been held to be falling under just and equitable groundcontemplated under section 433.

The Companies (Second Amendment) Act, 2002 has added following three moreclauses under which the NCLT may order winding-up. (the Amendment Act is yet to benotified)

(g) if the company has made a default in filing with the Registrar its balance sheetand profit and loss account or annual return for any five consecutive financialyears;

(h) if the company has acted against the interests of the sovereignty and integrity ofIndia, the security of the State, friendly relations with foreign States, public order,decency or morality;

(i) if the Tribunal is of the opinion that the company should be wound up under thecircumstances specified in section 424G.(As per section 424G, Tribunal can orderwinding up, if it is of the opinion that the sick industrial company is unlikely torevive.)

When Company deemed unable to pay its debts (section 434) – When Company deemed unable to pay its debts (section 434) – When Company deemed unable to pay its debts (section 434) – When Company deemed unable to pay its debts (section 434) – When Company deemed unable to pay its debts (section 434) – Presently, acreditor can file winding up petition if the company is indebted in sum exceeding Rs.500.(exceeding one lakh rupees by the Second Amendment Act) Similarly, if anyexecution or decree issued by court in favour of a creditor is returned unsatisfied inwhole or part, company will be deemed unable to pay its debts. [section 434].


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PPPPPractice in America: ractice in America: ractice in America: ractice in America: ractice in America: Bankruptcy cases in USA are taken up speedily unlikeIndia, where it takes years to complete the liquidation process. A sick unitcan file petition either under chapter 7 or 11 of Bankruptcy Act. Petitionunder chapter 7 leads to liquidation, whereas petition under chapter 11leads to rehabilitation. Chapter 11 allows the company to continue itsbusiness and restructure its operations as per laid down criteria.

Who may petitionWho may petitionWho may petitionWho may petitionWho may petition – (Sec.439) Petition for the compulsory winding up of the companymay be presented by:

i) the company itself, or

ii) any creditor or creditors, including any contingent or prospective creditor orcreditors; or

iii) a contributory or contributories; or

iv) any combination of creditors, company or contributories acting jointly or separately; or

v) the Registrar; or

vi) any person authorised by the Central Government as per section 243; or

vii) the official Liquidator

viii) Central or State government under clause (h)

Commencement of WCommencement of WCommencement of WCommencement of WCommencement of Winding up –inding up –inding up –inding up –inding up – (Sec. 441) The winding up of a company by thecourt shall be deemed to commence at the time of the presentation of the petition forthe winding up

Appointment of Liquidator – Appointment of Liquidator – Appointment of Liquidator – Appointment of Liquidator – Appointment of Liquidator – At any time after the presentation of a winding uppetition and before the making of a winding up order, the Court may appoint theOfficial Liquidator to be the liquidator provisionally. On such appointment, he is calledthe provisional liquidator. On a winding up order being made, the Official Liquidatorshall become the liquidator of the company. He shall cease to hold office as provisionalliquidator. (Section 450) The object of appointment is protection and preservation ofthe company’s assets.

Consequences of WConsequences of WConsequences of WConsequences of WConsequences of Winding up order –inding up order –inding up order –inding up order –inding up order – (Sec. 444 to 447) The consequences of thewinding up order by the Court shall be:


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(I) firstly, an intimation shall be caused to be sent by the Court to the Official Liquidatorand the Registrar,

(II) secondly, the petitioner and the company must also file with the Registrar within30 days a certified copy of the order,

(III) thirdly, the winding up of the order is deemed to be a notice of discharge to theOfficers and employees of the company, except when the business of the companyis continued;

(IV) fourthly, all actions and suits against the company are stayed except to the extentthe Tribunal grants leave;

(V) fifthly, the order operators in the interests of all the creditors and all thecontributories, no matter who in fact asked for it;

(VI) sixthly, the Official Liquidator becomes the liquidator of the company and takespossession and control of the assets of the company;

(VII) seventhly, all the powers of the Board of directors cease and the same are thenexercisable by the liquidator except for exceptions provided in section491 and505;

(VIII) eighthly, on the commencement of the winding up, the limitation remainssuspended in favour of the company till one year after the winding up order ismade.

Statement of affairs :Statement of affairs :Statement of affairs :Statement of affairs :Statement of affairs :The company shall submit within prescribed time a statementof affairs to the official liquidator. The statement of affairs contains details of the assets,debts and liabilities of the company. (Sec. 454)

Where the affairs of a company have been completely wound up, the court maymake order of dissolution. The company shall be dissolved from the date of the orderof the court.

WWWWWinding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: A winding up order does not by itself, putan end to the company’s existence. Its existence comes to an end after anorder for its dissolution is passed by the Court, however, in a scheme ofamalgamation the transferor company can be dissolved by an order of theCourt passed under section 394(1)(iv), without following the process ofwinding up.


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2. V2. V2. V2. V2. Voluntary Woluntary Woluntary Woluntary Woluntary Winding up –inding up –inding up –inding up –inding up – (Section 484 to 487) Winding up by the members orcreditors 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 theiraffairs without going to the court. They may, however, apply, to the court for directionsor orders if and when necessary.

As per section 484, a company may be wound up voluntarily by passing an ordinaryordinaryordinaryordinaryordinaryresolutionresolutionresolutionresolutionresolution in general meeting where eithereithereithereithereither the period fixed by the articles for the durationof the company has expired or the event has occurred on which under the articles thecompany is to be dissolved.

In any other case, the company may resolve to be wound up voluntarily by passinga special resolutionspecial resolutionspecial resolutionspecial resolutionspecial resolution in general body meeting of shareholders.

A voluntary winding up is deemed to commence from the time the resolution forvoluntary winding up is passed.

Consequences of VConsequences of VConsequences of VConsequences of VConsequences of Voluntary Woluntary Woluntary Woluntary Woluntary Windingindingindingindinginding-up --up --up --up --up - From the commencement of the windingup, the company shall cease to carry on its business except so far as may be requiredto secure a beneficial winding up of the company. All the powers of the Board ofdirectors, managing director or manager shall cease except:

(a) for the purpose of giving notice to the Registrar about the name(s) of the liquidator(s)appointed, or

(b) insofar as the company in general meeting or the liquidator(s) may sanction thecontinuance of their powers. Further, all transfer of shares and alterations in thestatus of members, made after the commencement, are void unless sanctionedby the liquidator. Besides, the winding up resolution operates as notice of dischargeto the employees of the company except where the liquidation is for the purposeof reconstruction or where the business is continued by the liquidator for thebeneficial winding up of the company.

TTTTTypes of Vypes of Vypes of Vypes of Vypes of Voluntary Woluntary Woluntary Woluntary Woluntary Winding up -inding up -inding up -inding up -inding up - Voluntary winding up may be of two types, namely,

(a) Members’ voluntary winding up (sec. 489 to 498);

(b) Creditors’ voluntary winding up (sec. 499 to 509.


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Members’ VMembers’ VMembers’ VMembers’ VMembers’ Voluntary Woluntary Woluntary Woluntary Woluntary Winding upinding upinding upinding upinding up - - - - - Members’ voluntary winding up is possible onlyin case of solvent companiessolvent companiessolvent companiessolvent companiessolvent companies. To ensure that the company being would up is solvent,section 488 requires the Board of directors to make a declaration to the effect that thecompany has no debts, or that it will be able to pay its debts in full within such periodnot exceeding three years from the commencement of the winding up as may be specifiedin the declaration. This declaration is called as ‘‘‘‘‘declaration of solvencydeclaration of solvencydeclaration of solvencydeclaration of solvencydeclaration of solvency‘‘‘‘‘. In order to beeffective, this declaration must be made within 5 weeks within 5 weeks within 5 weeks within 5 weeks within 5 weeks immediately preceding thedate of passing of the winding up resolution by the members; delivered to the Registrarfor filing; and must be accompanied by a copy of the report of the auditors of thecompany on the profit and loss account prepared since the date of the last such accountto a date immediately preceding the declaration, as may be practicable and the balancesheet of the company made out as on the last mentioned date.

Creditors’ voluntary winding upCreditors’ voluntary winding upCreditors’ voluntary winding upCreditors’ voluntary winding upCreditors’ voluntary winding up - - - - - Where the Board of directors does not file adeclaration as to solvency of the company, the voluntary winding up is called ‘the‘the‘the‘the‘theCreditorsCreditorsCreditorsCreditorsCreditors‘‘‘‘‘ voluntary winding up.

Difference:

(a) Only a solvent company can advantage of members voluntary winding up.Creditors voluntary winding up is resorted to by insolvent companies.

(b) Declaration of solvency must be filed if the company intends to take the advantageof members’ voluntary winding up. However, no declaration of solvency can befiled in case of creditors’ voluntary winding up.

(c) Whereas, in the case of members’ winding up, the liquidator is appointed by themembers exclusively. In the case of creditors’ winding up, if the members andcreditors nominate two different persons as liquidators, creditors’ nominee shallbecome the liquidator of the company.

(d) Besides, in the case of creditors’ winding up, if the creditors so wish, a ‘committeeof inspection’ may be appointed to work along with the liquidator(s).

(e) Another difference between the two relates to the fixation of the liquidation’sremuneration. Whereas in case of members’ voluntary winding up, theremuneration of liquidator is fixed by the members, the same is to be fixed by thecommittee of inspection, if any, or by the creditors in case of creditors’ voluntarywinding up.


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3. Voluntary winding up subject to the supervision of the court (Sec. 522to 527)

Winding up subject to supervision of the Court implies voluntary winding up whichis conducted under the supervision of the Court. As such, the winding up commenceswhen the company passes a resolution for voluntary winding up, but is continued underthe supervision of the court. Generally, the Court would make such an order when it issatisfied that –

(a) the liquidator is negligent;

(b) the liquidator is guilty of partiality;

(c) the rules of winding up have been violated;

(d) the powers of the liquidator are insufficient for the purposes of winding up; or

(e) the voluntary winding up is likely to prejudice the shareholders or that someundue benefit will result to the shareholders.

Note: Note: Note: Note: Note: Provision in respect of winding up under supervision of Court have beendeleted vide Companies (Second Amendment) Act, 2002 which is yet to be implemented.

Contributory -Contributory -Contributory -Contributory -Contributory - the term ‘contributory‘ is defined under section 428 to mean everyperson liable to contribute to the assets of a company in the event of its being woundup. The expression includes the holder of any shares, which are fully paid up.

Thus every member becomes a contributory is not to be regarded as a member.Only those contributories shall be regarded as members whose names are entered inthe register of members. The persons who may be held liable as contributories includepresent and past members, directors and managers whose liability is unlimited, legalrepresentatives of a deceased member, assignee of a contributory, liquidator of bodycorporate member and subscribers to the memorandum.

A past member shall however be not liable to contribute if he ceased to be amember for one year or more before the commencement of the winding up.

Defunct Company -Defunct Company -Defunct Company -Defunct Company -Defunct Company - A defunct company means a company which never commencedbusiness or which is not carrying on business and has either no assets or has suchassets as shall not be sufficient to meet the costs of liquidation. However, a company isnot considered as defunct if the cessation of business is due to the conduct of windingup. Also, the mere reduction of members below the statutory minimum does not render


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a company defunct. Under section 560 a defunct company can be dissolved withoutgoing through the process of winding up by following a procedure stated under thesaid section.

Section 560 also provides for the restoration of a company’s name previouslystruck off the register. However, the application must be made by the company, memberor creditor before the expiry of 20 years. The effect of an order of restoration shall bethat the company shall be deemed to have continued in existence as if its name had notbeen struck off.

NOTE: In a scheme of amalgamation, a company may be dissolved without winding-up.

QUESTION BANK

I. FAQs’

1. What registers of a company can be inspected by its members?

2. Explain the difference between ‘Inspection’ and ‘Investigation’ under provision ofthe Companies Act, 1956.

3. State the circumstances on the basis of which Central Government may orderinvestigation into the affairs of a company.

4. When (i) may; and (ii) must the Central Government order investigation into theaffairs of a company?

5. What do you understand by winding-up of a company?

What are the various modes of winding-up?

6. When can a company be wound-up by the Court?

7. What are the consequences of a winding-up order by the Court?

8. Write short notes on ‘Declaration of Solvency’

9. Distinguish between : Members’ winding-up and creditors’ winding-up.

10. Explain the circumstances in which a company may be wound up by the Court onthe ground that the company is unable to pay its debts.

11. What are the circumstances in which a company may be wound up on the groundthat it is ‘just and equitable’ to wind up a company?

12. Distinguish between winding-up and dissolution of a company.


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II. CASE STUDIES

1. The Central Government appointed inspectors under section 237(b) to investigatethe affairs of the company on the following grounds:

(a) Delay, bungling and faulty planning, entailing double expenditure to installthe plant.

(b) Continuous losses wiping out one-third of the share capital.

(c) Shares quoted at half the face value.

(d) Some eminent directors severed their connections with the company.

The company challenges the order of the Central Government:

(i) Discuss whether the appointment is proper.

(ii) What are the grounds on which the Central Government may suo motu (onits own) appoint inspectors?

(Hint: Part (ii) should in fact be answered first. Under section 237(b), the CentralGovernment may appoint inspectors only on grounds stated thereunder.Accordingly, in the given problem, appointment of the Inspector on the four givengrounds is improper since they are in variance with the grounds stated undersection 237(b).

2. Golden Tea Estates Ltd. had taken a term loan of Rs. 50 lakh from a bank securedby some of its assets. The company has defaulted in the matter of payment of twoinstalments to term loan amounting to Rs. 5 lakhs as per the terms of the loanagreement. The bank filed winding up petition in the court. The company opposedthe petition for winding up on the ground that it has employed 500 workers, paidtheir salaries regularly and that it has paid all the taxes due to the Government.The company requested for some time to repay the loan instalments. The companyis also supported by some major creditors. Explain the circumstances under whicha company be ordered to be wound up by the court on the ground of inability topay its debts and whether the bank will succeed in this case.

(Hint: Bank will not succeed)

3. Veer Ltd. has a subsidiary company Zara Ltd. which is formed to carryout some ofthe objectives of Veer Ltd. Veer Ltd. suspended one of its several businesses bypassing a resolution at the company’s extraordinary general meeting with effectfrom 1st January, 2006. The business so suspended continued to be suspended


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until November 2004. On 1st December, 2006, a group of shareholders of VeerLtd. filed a petition in the court for winding up of the company on the ground ofsuspension of business by the company. Having regard to the provisions of theCompanies Act, 1956, decide–

a. Whether the shareholders’ contention is tenable?

b. What would be your answer in case Veer Ltd. has suspended all its business?

c. Can shareholders of Zara Ltd. file a petition in the court for winding-up oftheir company on the ground that the holding company, viz., Veer Ltd. hassuspended its entire business though Zara Ltd. has not suspended any of itsbusiness?

(Hints: (i) No; (ii)If all the businesses remain suspended for a whole year, thenVeer Ltd. may be would up at the discretion of the court, (iii) No

4. Company was incorporated for the purpose of manufacturing machine tools,implements, etc. It spent a substantial part of its subscribed capital on fixed assets.It borrowed a sum of Rs. 30 lakhs from a bank for providing working capital. Asthe company was unable to pay back this loan otherwise, the stock-in-trade,plant and machinery and all the fixed assets of the company were sold out inexecution of a decree obtained by the bank, leaving no surplus for the company.

Would it be just and equitable to wind up the company in the circumstances?

(Hint: In a case where the subject-matter (substratum) of the company has goneor the objects for which the company was incorporated have substantially failed,it was held in re Kaithal General Mills Co. Ltd. [1951] 31 Comp. Cas 461 that itshall be just and equitable to wind up the company. The substratum of the companyis deemed to have gone in such a case.

Thus, the company in question may be wound up on just and equitable groundssince its substratum is gone.

5. Y Estates Ltd. was incorporated with the object of development land for residentialhouses as well as purchase and sale of flats. It had, therefore, purchased 5 acresof land near the airport at Calcutta. But Government acquired the same fordefence purposes. The company would not replace the land as the prices of landof other places were prohibitive.

What will be the decision of the court in the following cases:

(i) The company suspends its business for a whole year?


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(ii) The company fails to resume its operations (business) for 5 years and theprospects seemed gloomy?

(Hint: (i) The court may refuse to grant winding-up order, Suspension of businessfor a whole year is a ground under section 433(c) seeking winding-up by the courtbut the power of the Court in this regard is discretionary. The Court shall refusewinding-up on this ground if the intention of the company not to resume its businessis absent. Thus, in the given case, winding-up order shall not be issued. Similardecision was given under similar circumstances in the case of Murlidhar v. BengalSteamship Co. Ltd. AIR 1920 Cal. 722. (ii) Where the company fails to resume itsoperations for 5 years and prospects also seem gloomy, the Court may order thewinding-up of the company – [Rupa Bharati Ltd. v. Registrar of Companies [1969]Comp. L.J. 290].


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Dr. K.V. S. SarmaProfessor of Law


PART V

LAW OF PARTNERSHIP

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THE INDIANPARTNERSHIP ACT, 1932

The Act contains 74 sections. These 74 sections are divided into 8 chapters. TheLaw of Partnership originally formed part of the Indian Contract Act. 1872. It wascontained in Chapter XI, Ss. 239 to 266 of the Act. This chapter was repealed and wasreplaced by a separate Act, the Indian Partnership Act in 1932.

Chapter-I - Preliminary- ss.1, 2, 3.

Chapter-II - The Nature of Partnership-ss. 4-8

Chapter-III - Relations of Partners to One Another-ss. 9-17

Chapter-IV - Relations of Partners to Third Parties-ss. 18-30

Chapter-V - Incoming and Outgoing Partners-ss.31-38

Chapter-VI - Dissolution of a Firm-ss. 39-55

Chapter-VII - Registration of Firms-ss. 56-71

Chapter-VIII - Supplemental-ss. 72, 73, 74

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CHAPTER - I

PRELIMINARY

S.1. Short Title, Extent and Commencement

1) This Act may be called the Indian Partnership Act, 1932.

2) It extends to whole of India except the State of Jammu and Kashmir.

S.2: Interpretation Clause

In this Act, unless there is anything repugnant in the subject or context:

a) An “act of a firm” means any act or omission by all the partners, orby any partner or agent of the firm, which gives rise to a rightenforceable by or against the firm.

b) “business” includes every trade, occupation and profession;

c) “Prescribed” means prescribed by rules made under the Act.

d) Expressions used but not defined in this Act and defined in theIndian Contract Act, 1872, shall have the meanings assigned tothem in that Act.

S.3. Application of Provisions of Act IX of 1872

The unrepealed provisions of the Indian Contract Act, 1872, save inso far as they are inconsistent with the express provisions of this Act, shallcontinue to apply to firms.

On various occasions it was held that chapter XI of the Indian ContractAct was not exhaustive; hence this Act was enacted.

The Indian Partnership Act is based mainly on the English law andincorporates many of its provisions. Though the law relating to partnershipis contained in this separate enactment, many of the general principlesof contract in the Indian Contract Act, continue to be applicable topartnership transactions and firms.

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CHAPTER - II

THE NATURE OF ‘PARTNERSHIP’

S.4: Definition of “Partnership”

“Partnership” is the relation between persons who have agreed toshare the profits of a business carried on by all or any of them acting forall”.

“Partner”, “Firm” and “Firm name”:-Persons who have entered intopartnership with one another are called individually “Partners” andcollectively “a firm”, and the name under which their business carriedon is called the “firm-name”.

It is very difficult to give a precise definition of the term partnership.Some regard ‘partnership’ as a relation between persons; others speakof it, as an association between two or more persons for a certain purpose;still some others regard it as a group of persons between whom a certainrelation exists. To avoid such confusion, the present Act uses the word‘partnership’ in the sense of relationship.

Essential Elements of Partnership:-

From the definition of partnership, as given above, it is clear that thefollowing are the essential elements in partnership:-

1) Partnership is an association of two or more persons.

2) Partnership is the result of an agreement entered into by all thepersons concerned.

3) Partnership is organized to carry on some business.

4) The agreement must be to share the profits of the business.

5) Such business must be carried on by all or any of them acting forall.

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Essentials of Partnership:-

1) Relation between Partners:-

The partnership is an association between two or more persons. Thus, there can beno partnership consisting of a single individual. Only persons recognized by law canenter into an agreement of partnership. There must exist a partnership of two adults,before a minor can be admitted to the benefits of a partnership. The Partnership Actdoes not say anything about the maximum number of partners. But section 11 of theCompanies Act, 1956 fixes the maximum number of partners at 10 for a partnershipcarrying on banking business and at 20 for a partnership carrying on any other business.

In M. Kasam v. Commissioner of Income Tax ILR 1937(2) Cal.160 “It is essential inorder to constitute a partnership that there should be a plurality of persons. Just as noman can contract with himself, similarly no man can become a partner with himself”

A Partnership has its source in a contract. It is not a creature of law arising fromstatus such as a Hindu Joint family trading firm.

In Chedilal v. C.I.T AIR 1942 Oudh 100, it was pointed out “A Hindu Joint Familypartnership is outside the provisions of the partnership Act, the rights and liabilities ofthe coparceners being governed by the Hindu Law. The Hindu Joint Family partnershipis not based on agreement but rests on status; it is a creature of “Hindu Law”

In Haji Isa v. Sarnbai, AIR Nag. 324, it was observed that “an agreement is sinequa non of every partnership which may be oral or in writing, may be expressed orimplied. It has thus been held that a partnership need not necessarily be express; it canarise by mutual understanding evidenced by consistent course of conduct and by theexpress admission of the parties concerned.

In Mahabir Cold Storage v. CIT AIR 1991 SC 1357, it was pointed out: “under theIndian Partnership Act, 1932, the partnership firm registered there under is neither aperson nor a legal entity. It is merely a collective name for the individual members ofthe partnership. A firm as such cannot be a partner in another firm though its Partnersmay be partners in another firm in their individual capacity”.

2) Agreement:-

There must be an agreement entered into by all the persons concerned. Anagreement is an essential ingredient; without it no partnership can come into existence.


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Members of Joint Hindu Family carrying on a family business as such are not partnersfor their relation arises not from any agreement but from status. This is clearly laid downin section 5 of the Act.The agreement which forms the basis of partnership may beeither express or implied. It may be in writing or formed verbally, or by conduct.

3) Business:-

To constitute a partnership, the parties must have agreed to carry on a business.Where there is no business to be done, there can be no question of partnership. ‘Business’here includes any trade, occupation or profession. It means any activity which if successfulwould result in profit. Mere holding of property in common does not create partnership.

It is not necessary that the business should consist of a long and permanentundertaking. A partnership may be constituted for the execution of a single businessventure. Thus where two persons agreed to produce a film and share the profits ofhiring it out, it was held that the agreement constituted a partnership.

4) Agreement to Share Profits of Business:-

The next essential element of partnership is that there must be an agreement toshare the profits of a business. The sharing of profits is an essential feature of partnershipand there would be no partnership where only one of the partners is entitled to thewhole of the profits of the business. The partners may agree to share the profits in anymanner they like. It is essential that what are shared are the profits of the business in thesense of the net gain resulting after payment of all outgoings. Thus, if a share is payableout of gross returns the recipient would not be a partner in the business.

The agreements to share the profits are essential, but it is not necessary that thepartners should agree to share losses. It is open to one or more partners to agree toshare all the losses.

Though sharing in the profits of a business is essential to constitute partnership, itdoes not follow that every one who participates in the profits of a business is a partner.In any such case he cannot be regarded as a partner unless where the business can besaid to have been conducted on his behalf. An assistant who receives a salary and alsoa share of the profits does not become a partner by the mere fact that he receives ashare of the profits.

The contract which gives rise to a partnership has to provide for the sharing ofprofits among the partners. Profits mean the net return after deduction of all expenses.


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Suppose a theatre-owner and a theatrical company enter into an agreement bywhich the theatre owner will provide the stage and look to advertisement while thetheatrical company will provide the actors and the gross returns are to be shared betweenthem in the proportion of 60% and 40%, such a contract does not make the owner ofthe theatre and the managers of the theatrical company partners. It was so held in Coxv.Coulson (1916) 2 K.B177.

A debtor assigned his business to trustees for the benefit of his creditors. Thetrustees carried on the business with the object of paying of the creditors out of theprofits of the business. It was held that the creditors were not partners in the business. Itwas so held in Cox v. Hickman (1861) 8 H.L.C.268.

5) Mutual Agency: -

The business should be carried on by all or any of the partners acting for all ofthem. The decisive test for determining whether or not an association of personsconstitutes a partnership is to consider whether each of them is or is not an agent of allthe others. It is only when there is such mutual agency that a partnership arises. So thebusiness must be carried on by all the partners or some of them acting for all. In otherwords there should be a binding contract of mutual agency between the partners. It isthis element of agency which distinguished partnership from various other relationsmany of which are considered in section 6 of the Act. The essential characteristic of afirm is that each partner is a representative of the other partners. Each of the partners isan agent and a principal. He is an agent in so far as he can bind the other partners byhis acts within the scope of the partnership business and he is a principal to the extentthat he is bound by the act of the other partners. This indicates that if this essentialelement of agency is lacking, the relation of partnership can not be said to exist. Whatis essential is that the business must be carried on, on behalf of all the partners.

As was said in Emperor v. Jwala Prasad, (1923) 45 All. 642 – “The law of partnershipis a branch of the law of agency. Group of co-owner merely collecting rent from theproperty without the fact of carrying on any business by or all of them is not partnershipand the co-ownership could be terminated by partition. A mere executory agreement ofpartnership will not make the parties partners till they actually start business. (Dickmanv. Valpy) (1829) 109 ER 399.

The question as to the existence of a partnership depends on the real intention ofthe parties to be spelt out of the contract, the conduct of the parties, the nature of the


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accounts, and other circumstances of the case. (LalaBaj Nath v. Ram Gopal) ILR (1938)1 Cal. 369; Cox v. Hickman 1860 (11) ER 431

a) Nominal partner:Nominal partner:Nominal partner:Nominal partner:Nominal partner: A Partner who does not contribute any capital or share in profits,but lends his name and credit to the firm is called a nominal partner. A nominalpartner may be held liable to third persons who deal with the firm of the suppositionthat he is a partner.

b) Sleeping partner:Sleeping partner:Sleeping partner:Sleeping partner:Sleeping partner: He is also called ‘dormant partner’. A dormant partner is apartner who is not known as such to the third parties dealing with the firm. He isgenerally one who contributes property without labour and is not known as apartner to third parties. The term ‘sleeping partner’ implies one who is neither anactive partner nor known to the public as a partner. His connection with the firmis concealed with the world.

The distinction between an active and dormant partner exists as regards thirdparties only. A dormant partner is liable for the debts of the firm like an activepartner, but his liability ceases immediately on his retirement. He is not required,unlike other partners, to give a notice on his retirement.

c) PPPPPartner only for profits:artner only for profits:artner only for profits:artner only for profits:artner only for profits: A partner sharing the profits of the business without makinghimself responsible for losses, if any, is called a partner in profits only. He shall,however, be liable to third parties for the acts of the firm. He may not generallyparticipate in the management of the firm.

d) SubSubSubSubSub-P-P-P-P-Partner:artner:artner:artner:artner: A sub-partnership is a partnership within a partnership. It comesinto existence when one of the partners agrees to share the profits derived by himfrom the firm with a stranger. That stranger is called a sub-partner. A sub-partneris not liable for the debts of the firm. He has none of the rights of a partner in thebusiness. A sub-partner can claim the agreed share from the actual partner, buthe can have no right against the main firm.

e) AAAAActual or ostensible partner:ctual or ostensible partner:ctual or ostensible partner:ctual or ostensible partner:ctual or ostensible partner: A partner who is actively engaged in the conduct ofa business is called actual or ostensible partner. Such a partner is an agent of allother partners for the purposes of the business of the firm. He can bind himselfand other partners for the acts done in the ordinary course of the business.

S.5: Partnership not Created by Status

The relation of partnership arises from contract and not from status; and, in particular,the members of a Hindu undivided family carrying on a family business as such, or aBurmese, Buddhist husband and wife carrying business as such, are not partners insuch business.


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Partnership can be distinguished from the following:-

a) PPPPPartnership and Hindu undivided trading family:artnership and Hindu undivided trading family:artnership and Hindu undivided trading family:artnership and Hindu undivided trading family:artnership and Hindu undivided trading family: In Hindu Law, business descendslike any other property upon members of the undivided family. When a jointHindu family takes to trading and the trade is handed down from one generationto the next and so on, it is called a trading family. The interest of the family in thetrade passes by survivorship. But this does not result in a partnership which arisesout of a contract; it is the case of joint ownership in a trading business createdthrough the operation of Hindu Law.

No agreement is necessary to constitute a joint family firm. It is created by operationof law. It is not on the death of any member thereof. A coparcener in a JointHindu Family becomes a member just by birth. In the case of a Joint Hindu Familybusiness it is the manager alone who can take part in the business. The coparcenersare merely owners of property. In Joint Hindu Family the manager and no othercoparcener has an implied authority to contract debts and pledge the propertyfor the ordinary purpose of the family business. In Joint Hindu Family Businessonly the manager is personally liable i.e., his separate property besides his sharein the joint family property is liable. Other members of the family are liable only tothe extent of their interest in the Joint Hindu Family property is liable.

b) PPPPPartnership from Coartnership from Coartnership from Coartnership from Coartnership from Co-----Ownership:Ownership:Ownership:Ownership:Ownership: Co-ownership need not arise from any contract.Thus two persons may inherit property from a deceased relation and thus becomeco-owners irrespective of any agreement between them. One co-owner cangenerally transfer his interest in favour of a third party and make the transferee aco-owner even without the consent of the other co-owners. A partnership, however,cannot arise unless there is mutual agency, each partner being the agent of allthe others. There is no mutual agency in co-ownership.

c) PPPPPartnership and a Joint Stock Company:artnership and a Joint Stock Company:artnership and a Joint Stock Company:artnership and a Joint Stock Company:artnership and a Joint Stock Company: A company incorporated under theCompanies Act, 1956 becomes a juristic person, which can sue and be sued inits own name. A joint stock company continues in spite of the death of itsshareholders. A partnership, however, becomes dissolved by the death of a partner.

S.6: Mode of Determining Existence of Partnership

In determining whether a group of persons is or is not a firm, whether a person is oris not a partner in a firm, regard shall be had to the real relation between the parties, asshown by all relevant facts taken together.


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Explanation I:- The sharing of profits or of gross returns arising from property bypersons holding a joint or common interest in that property does not of itself make suchpersons partners.

Explanation II:- The receipt by a person of a share of the profits of a business, or ofa payment contingent upon the earning of profits or varying with the profits earned bya business, does not of itself make him a partner with the persons carrying on thebusiness; and, in particular, the receipt of such share or payment:-

a) By a lender of money to persons engaged or about to engage in any business,

b) by a servant or agent as remuneration,

c) by the widow or child of a deceased partner, as annuity, or by a previous owner or

d) by a previous owner or part owner of the business, as consideration for the saleof the good will or share thereof, does not of itself make the receiver a partnerwith the persons carrying on the business.

Right to participate in the profits of a business is a strong evidence of the existenceof partnership. So, where a person takes away all the profits of a business carried on bya number of persons, there is no partnership. Where a person actually works in apartnership firm and shares in the profits and losses in a fixed proportion, there is astrong presumption in favour of his being a partner. However, the right to receive ashare of profits is not a conclusive test of partnership. Section 6 enumerates a numberof cases where persons may share in the profits of a business and still may not bepartners.

Creditors jointly advancing money do not become partners even tough they possessa right to share the profits. If a persons acting as servant is to be paid by a share in theprofits and is not to be liable for losses, no partnership is created. The fact that thelender shares in the profits or takes an active interest in the business does not make hima partner. Similarly, an agreement between a trader and his customers, under which thetrader is to distribute a portion of his profits amongst his customers in proportion to thepurchases made by them, does not make a partnership.

Explanation I of section 6 provides that owners of a property do not become partnersmerely by sharing profits or gross returns arising there from. If each owner does nothingmore than take his share of the gross return obtained by the use of the common property,partnership is not created thereby. Thus, if two joint owners of a house let it and dividethe rent equally between themselves they are not partners.


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Explanation II of section 6 clearly adds that the receipt by a person of the share ofthe profits of a business does not of itself make him a partner with the persons carryingon the business.

The leading case on this particular point is Mullow March and Co., v. Court ofWards (1872) L.R. 4 PC 419 The partners of a firm had borrowed large sum of moneyfrom X, a creditor. They agreed to give him a share in the profits and powers in theconduct of the business. Partners could not sell, purchase or consign goods without hisconsent. Privy Council held that X was not a partner as he himself could not purchase orsell on behalf of the firm. He had control over sales and purchases as a measure of asecurity for the loan advanced to the firm.

S.7: Partnership-at-will

Where no provision is made by contract between the partners for the duration ofthe partnership, or for the determination of the partnership, the partnership is ‘partnership-at-will’. It may be dissolved by any partner by giving a notice in writing to all otherpartners of his intention to dissolve the firm. When such a notice is given, the firm isdissolved as from the date mentioned in the notice as the date of dissolution or, if nodate is so mentioned, as from the date of the communication of the notice. (s.43)

Partnership for a fixed term: In this case, the partnership is entered into for a fixedperiod of time. When the fixed period is over, it comes to an end. The partner, may,however, continue to carry on the business after the expiry of the fixed period. In such acase the mutual rights and duties of partners remain the same as they were before theexpiry of fixed period and the partnership becomes partnership-at-will. (s.17(b)).

S.8: Particular Partnership

When a person becomes a partner with another person or persons in a particularadventure, or undertaking, such a partnership is known as “Particular Partnership”. Itcomes to an end as soon as that adventure is completed. If it is continued after thecompletion of that adventure for which it was entered into, it becomes partnership-at-will.


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CHAPTER - III

RELATIONS OF PARTNERS TOONE ANOTHER

S.9:General Duties of Partners

The partners are bound to carry on the business of the firm to thegreatest common advantage, to be just and faithful to each other, andto render true accounts and full information of all things affecting thefirm to any partner or his legal representative. Just like agency, mutualconfidence is the foundation of the partnership relationship.

The utmost good faith is due from every member of partnershiptowards every other member. They have to render true accounts and fullinformation of all things, affecting the firm to any partner or his legalrepresentative.

It is the duty of every partner to indemnify the firm for any loss causedto it by his fraud in the conduct of the business of the firm: Robertson v.Southgate, (1848) 67 ER 1276.

SSSSS.10 .10 .10 .10 .10 of the Act casts an absolute liability to indemnity for loss causedby a partner’s fraud.

SSSSS.11.11.11.11.11 (1) of the Act provides that subject to the provisions of the Act,“the mutual rights and duties of the partners of a firm may be determinedby contract between the partners and such contract may be express orimplied by course of dealing”.

Such contract may be varied by consent of all the partners, and suchconsent may be express or may be implied by a course of dealing.

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S. 11(2) The general rule is that a contract in restraint of trade is void. To this rule,however, some exceptions are recognised in the Partnership Act.

a) In a contract of partnership it may be provided that a partner should not while heremains a partner carry on any business, other than that of the firm.

b) S.55(3): When the goodwill of a firm is sold, the buyer may enter into an agreementwith any partner by which the partner is restrained from carrying on any businesssimilar to that of the firm whose goodwill is sold. Such restraint, however, shouldbe for a specified period and operate within specified local limits.

If the restriction thus imposes is reasonable it can be enforced.

c) S.54: When a firm is dissolved or in anticipation of its dissolution, the partnersmay enter into an agreement by which some or all of them are restrained fromcarrying on a similar business.

Such a restriction should operate only for a specified period and within specifiedlocal limits. If the restrictions are reasonable such agreements are valid.

S.12: The Conduct of the Business

Subject to contract between the partners-

a) Every partner has a right to take part in the conduct of the business

b) every partner is bound to attend diligently to his duties in the conduct of thebusiness;

c) any difference arising as to ordinary matters connected with the business may bedecided by a majority of the partners, and every partner shall have the right toexpress his opinion before the matter is decided, but no change may be made inthe nature of the business without the consent of all the partners; and

d) Every partner has a right to have access to and to inspect and copy any of thebooks of the firm.

a) All the partners have the right to take part in the management of the business.Hall v. Hall (1850) 50 ER 1119: Even the mortgage of the interest of apartner to another partner does not divest the mortgaging partner of his rightof management.

Haramohan v. Sudarsan (1922) 25 CWN 847: But as the section operatesonly in the absence of any contrary agreement, it is open to the partners toagree that some alone shall manage the business.

RELATIONS OF PARTNERS TO ONE ANOTHER

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b) Duty of diligence: - He may be required to use the diligence required of anagent under s. 212 of the Contract Act, 1872

Sasti Kenker v. Man Govindu (1919) Pat.419: It was held that a partner isnot liable for negligence if he can show that he used such skill and judgmentas he possessed in the conduct of the business.

Krishnamachariar v. Sankar Sah (1920) 39 MLJ 257 the refusal and neglecton the part of any one partner to perform the duties undertaken, would givethe others the right to apply for dissolution.

c) Difference of opinion:- Difference arises as to a routine or ordinary matterbetween him and the other partners decision by majority would be necessary,provided that every partner is previously consulted before the final decisionis made and the decision of the majority is arrived at bona fide.

With reference to the special matters, a change in the nature of the businesscannot be made without the consent of all the partners.

Attorney General v. G.N. Rly., Co., (1860) 62 ER 337:- This Rule applieseven where the new business is profitable. No majority can expel any partnerunless the agreement provides such a power.

d) Inspection of firm’s books: - Pickering v. Pickering (1883) 25 Ch.D 247:Every partner may either in person or through an unobjectionable agentinspects and copies the books of the firm.

In Goa Petha v. N.H. Moss (1931) 10 Pat. 792: An Assignee of a partner’sshare has no right during the continuance of the partnership; require anyaccounts of the partnership transactions, or to inspect the account books.He cannot interfere in any way with the management or administration ofthe partnership.

S.13: Mutual Rights and Liabilities

Subject to contract between the partners:-

a) A partner is not entitled to receive remuneration for taking part in the conduct ofthe business;

b) The partners are entitled to share equally in the profits earned, and shall contributeequally to the losses sustained by the firm;


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c) Where a partner is entitled to the interest on the capital subscribed by him, suchinterest shall be payable only out of profits;

d) A partner making, for the purposes of the business, any payment or advancebeyond the amount of capital he has agreed to subscribe is entitled to interestthereon at the rate of six per cent per annum.

e) The firm shall indemnify a partner in respect of payments made and liabilitiesincurred by him-

i) In the ordinary and proper conduct of the business, and

ii) in doing such act, in an emergency, for the purpose of protecting the firmfrom loss, as would be done by a person of ordinary prudence, in his owncase, under similar circumstances; and

f) A partner shall indemnify the firm for any loss caused to it by his willful neglect inthe conduct of the business of the firm.

a) Right to remuneration:- Bentley v. Craven (1852) 52 ER 29: Unless there isa specific agreement, a partner is not entitled to remuneration for his services.But remuneration can be had only in case profits are realized.

b) Equal share of profits and losses: Syres v. Syres, (1876) 1 AC 174 in theabsence of agreement, the presumption is that losses are to be shared equally.

Pitchiah Chettiar v. Subramaniam Chettiar (1934) 40 LW 60: Where theagreement is to share profits in a certain proportion, there may arise apresumption that losses are to be borne in the same proportion.

c) Interest on subscribed capital: - Commissioner of Income-Tax v. Subramanian(1928) 51 Mad.787: In the absence of an express or implied agreement forinterest on capital, no interest can be claimed either during the partnershipor after dissolution of the same.

Where a partner is entitled to the interest on the capital subscribed by him,such interest shall be payable only out of profits;

d) Interest on advance: - Bhola Shah v. CIT (1930) 12 Lah. 88 Amountsadvanced by a partner beyond the capital agreed to be subscribed, aretreated as a loan, and therefore ordinarily carry interest.

e) Contribution and indemnity: - Burden v. Burden (1813) 35 ER 67: That thefirm must reimburse a partner as to payments made or liabilities incurred bysuch partner in the ordinary and proper conduct of the partnership business.


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Pawsey v. Armstrong (1881) 18 Ch.D 698 this right to indemnity subsistseven though the expense may turn out to have been useless provided thesame has been acquiesced in by the other partner.

Barden v. barkus (1862) 45 ER 1098: Where for the preservation of thebusiness or the property of the firm, the partner incurs expenses in anemergency, the firm is bound to reimburse him.

f) Willful neglect of partner: - The partner is bound to indemnify the firm forlosses occasioned by his willful neglect.

S.14: The Property of the Firm

Subject to contract between the partners, the property of the firm includes all propertyand rights and interests in property originally brought into the stock of the firm, oracquired, by purchase or otherwise, by or for the firm or for the purposes and in thecourse of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in propertyacquired with money belonging to the firm, are deemed to have been acquired for thefirm.

The real test as to whether any property is partnership property is, among otherthings, the agreement between the parties, and in its absence the circumstances inwhich the property was acquired and the mode in which it has been dealt with by theparties. Furthermore, it is open to partners by agreement among themselves to convertwhat is the joint property of all into the separate property of one or more, and viceversa.

All property thrown into the common stock at the beginning of the partnership andadded thereto during the continuance of the partnership or obtained by means of thepartnership, whether directly by purchase or otherwise by employment in trade belongsto the firm unless the contrary is shown.

Appaya v. Subbarao, ILR (1938) Bom. 102: Property bought with money belongingto the firm is deemed to have been ought on account of the firm.

Boda Narayana Murthy & Sons v. Valluri Venkata suguna (1977) 2 An.W.R 480:That the property used for partnership purposes is not necessarily partnership property.


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Property belonging to a partner does not become partnership property by beingused for purposes of the partnership. There must be some evidence of an intention totreat the property as part of the capital of the business.

The Act has specifically included the goodwill among the property of the firm.

S.15: Application of the Property of the Firm

Subject to contract between the partners, the property of the firm shall be held andused by the partners exclusively for the purposes of the business.

S.16: Personal Profits Earned by Partners

Subject to contract between the partners:-

a) if a partner derives any profit for himself from any transaction of the firm, or fromthe use of the property or business connection of the firm or the firm name, heshall account for that profit and pay it to the firm.

Accountability for private profits:-

i) Transaction of the firm: - For example, a partner is buying or selling for afirm; he cannot sell to it or buy from it, at a profit to himself.

In Bentley v. Craven (1853) 52 ER 29 Where a partner employed to purchasegoods for the firm, supplied at market rate, goods bought by himself whenprices were lower, he was held accountable for the profit made.

Dunne v. English (1874) 18 Eq. 524 where the parties had agreed to buy amine with a view to resale at a profit, and it was arranged that the defendantshould sell it to certain third parties for a sum named, and the profit was tobe divided equally, it was held that the defendant who had secretly sold it formore than the sum named was liable to account for the difference.

ii) Use of partnership property: - No partner shall derive any exclusive advantageby the employment of the partnership property or by engaging in transactionin rivalry with the firm.

In Gardner v. Mc’ Cutcheon (1842) 49 ER 446: Plaintiff and defendant werepart owners of a ship and employed it for the common benefit. But thedefendant, who happened to be also the master of the ship, traded on hisown account and made profit. The court held he was bound to account forit to his partner.


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iii) Use of Business connection of the firm: - In Clegg v. Edmondson (1857) 44ER 593Where, in a case of partnership at will, the managing partners gavenotice of dissolution, and openly renewed the partnership lease, it was heldthat the benefit of the lease renewed also in favour of the other partners.

iv) Use of firm name: - It is not open to a partner to use the firm name infurtherance of his own private purposes. – Awe v. Benham 2 ch. 244.

b) if a partner carries on any business of the same nature as and competing with thatof the firm, he shall account for and pay to the firm all profits made by him in thatbusiness.

S.17: Rights and duties of partners:-

Subject to contract between the partners-

a) After a change in the firm:- Where a change occurs in the constitution of a firm,the mutual rights and duties of the partners in the reconstituted firm remain thesame as they were immediately before the change, as far as may be.

b) After the expiry of the term of the firm, – Where a firm constituted for a fixed termcontinues to carry on business after the expiry of that term, the mutual rights andduties of the partners remain the same as they were before the expiry, so far asthey may be consistent with the incidents of partnership at will; and

c) Where additional undertakings are carried out:- Where a firm constituted to carryout one or more adventures or undertakings carries out other adventures orundertakings, the mutual rights and duties of the partners in respect of the otheradventures or undertakings are the same as those in respect of the originaladventures or undertakings.


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CHAPTER - IV

RELATIONS OF PARTNERS TOTHIRD PARTIES (Ss. 18-30)

S.18: Partner to be Agent of the Firm

Subject to the provisions of this Act, a partner is the agent of the firmfor the purpose of the business of the firm.

Concept of ‘mutual agency’ is the basis or root of the partnership.

Wallace Brothers v. C.I.T. AIR 1948 PC 128: The principle that everypartner is an agent of the other partners and where he has acted withinthe scope of his authority his acts would bind the other partners whowould be his principals in such transactions applies even if one of thepartners is a sleeping partner.

S.22: Mode of doing Act to Bind Firm

In order to bind a firm, an act or instrument done or executed by apartner or other person on behalf of the firm shall be done or executedin the firm name, or in any other manner expressing or implying anintention to bind the firm.

Ordinarily, when a person contracts for another, the fact of agencymay or may not be disclosed. In the latter case, the other party to thecontract has the option to hold the principal liable when he becomesdisclosed.

In case of a partner entering into a contract in his own name, if, inmaking the contract, he was acting as the agent of the firm, the otherpartners will be in the position of undisclosed principals and may thereforebe liable on the contract, though not expressly mentioned.—Beckham v.Darke (1843) 152 ER 823

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In Induri Pattabhirami Reddi v. Kamisetty Ballaiah (1928) 55 MLJ 574: Where twopartners signed in their own names, without qualification, a promissory note, but thepromissory note was stated to be executed by the partnership, it was held that the nameof the firm as the party liable was sufficiently disclosed and that the defendant partnerwhose name did not appear on the face of the instrument was also liable.

Devji v. Magan Lal AIR 1965 SC 139 : where a partner took a lease of premises inhis own name, the S.C. held that he cannot be regarded as having acted on behalf ofthe firm.

Lakshmi Shanker v. Moti Ram (1904) 6 Bom. L.R. 1106: Where, however, moniesborrowed by a partner have been expended for the firm’s benefit, the lender is entitledin equity to the payment of the portion so applied.

Venkatachalapathi v. Ramakrishnayya (1930) Mad. 168: In the case of a negotiableinstrument, as a general rule, where the drawing, acceptance or endorsement has notbeen made expressly by or for the firm, but only personally by a partner, other partnerwill not be liable.

Burn v. Burn (1798) 30 ER 1162: where a partner executes a deed for himself andhis partner in the presence of the latter, it will be operative against the non-executantsalso.

S.19: Implied Authority of Partner as Agent of the Firm: - (1)

Subject to the provisions of section 22, the act of a partner which is done to carryon, in the usual way, business of the kind carried on by the firm, binds the firm.

The authority of a partner to bind the firm conferred by this section is called ‘impliedauthority’.

Essentials: - In order that partner’s acts may bind the firm, the following conditionsmust be satisfied.

1) The act must have been done by the partner in his capacity as a partner. –Babu v.Gokuldas (1930) Mad. 393:

Hepp. V. Dobson (1863) 143 ER 864: Thus an act done by a partner before hebecomes a member of the firm will not bind the firm.

Saville v. Robertson (1792) 100 ER 1264: and Gouthwaite v. Duckworth (1810)104 ER 1264: In both the cases, goods were ordered by a person who had

RELATIONS OF PARTNERS TO THIRD PARTIES (Ss. 18-30)

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agreed to become a partner, and goods were in fact supplied and used for thepartnership adventure. But as the order was given before the partnership wasformed, no liability could be fixed on the other partners.

2) The act must have been done on behalf of the firm and not on the partner’s ownbehalf. –Underwood v. Bank of Liverpool (1924) 1 KB 775:

3) The act must relate to a matter, which is within the scope of the business of thefirm. (For the purposes of the firm)

If the matter is out-side the business of the firm, it must be proved either:

i) that the particular transaction had been authorised or

ii) that the other partners ratified it subsequently.

4) The act must be done in the firm name.

5) The act must be done to carry on the business in the usual way.

Kadiyala Seshagiri Rao v. Kanneganti dosaiah AIR 2000 AP 263 Where apartnership deed expressly states that any business other than the one specified indeed could be carried on with the consent of partners, the Managing Partnerscannot be said to have an implied authority to carry on such business in theabsence of the consent of the partners.

Examples for Implied Authority of Partner:-

a) Accounts: - Fergusson v. Fyffe (1841) 8 ER 49: An account rendered by onepartner in relation to a partnership transaction is deemed equivalent to an accountrendered by the firm.

b) Power to enter into contracts:- Mathura Nath v. Sree Jukla Bageswari (1928) Cal.57: A partner has power to enter into contracts on behalf of the firm, if they arenecessary, or are made in the course of carrying on the business of the firm in theusual way.

c) Power to borrow: - Lane v. Williams (1692) 23 ER 779: “The sudden exigenciesof commerce render it absolutely necessary that a power to borrow should exist inthe members of a trading partnership.”

d) Power to acknowledge debts: - Godwin v. Parton (1880) 42 LT 568: Under theEnglish law, one partner is presumed to be the agent of the others for making partpayments.


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Oriental Bank of commerce v. M/s S.R. Kishore & Co., AIR 1992 Del.174: Anacknowledgment of debt by one partner of the firm shall be binding on all partnersof firm and also sufficient to extend the period of limitation.

e) Power to bind by negotiable instruments:-In a trading partnership as said already,every member of an ordinary trading partnership has implied power to bind thefirm by drawing, accepting or endorsing bills of exchange or by making andindorsing promissory notes in its name, and for the purposes of the firm in theordinary course of business.

f) Non-Trading Partnership: - But with regard to non-trading partnerships, the questionof implied authority depends on the nature of the business of the partnership.

The power to borrow has not been recognised in the case of solicitors, farmers,auctioneers.

g) Power to receive moneys due to firm:- Powell v. Brodhurst (1901) 2 Ch. 160:Where a debt is owing to a firm, payment of a debt to one partner is good asagainst the others also.

Lal Singh v. Dhanna Singh (1928) Lah. 832: It is open to a partner to release:

Henderson v. Wild (1872) 107 ER 1252: One partner can give a valid receipt fora debt due to the firm.

h) Power to pledge: - In General Auction Estate v. Smith (1891) 3 ch. 432 it washeld that power to pledge partnership property is incidental to a power to borrowfor partnership purposes.

i) Power to purchase and sell:- Hyatt v. Hare (1698) 90 ER 543: It has been longsettled that every member of an ordinary trading partnership has implied powerto purchase on the credit of the firm goods necessary for carrying on its businessin the usual way.

j) Among other implied powers of a partner is the power to engage and dismissservants for the business, to insure the firm’s goods and also goods entrusted tothe firm, to engage lawyers to defend actions against the firm.

SSSSS.19(2):.19(2):.19(2):.19(2):.19(2): No implied authority:- In the absence of any usage or custom of trade tothe contrary, the implied authority of a partner does not empower him:-

a) To submit a dispute to arbitration

b) To open a bank account


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c) To compromise a claim

d) To withdraw suits

e) To admit liability

f) To acquire immovable property

g) To transfer immovable property

h) To set off:- A partner has no implied authority to set-off his own separatedebt against the debt due to the firm.

S.20: Extension and Restriction of Partner’s Implied Authority

The partners in a firm may, by contract between the partners, extend or restrict theimplied authority of any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of thefirm, which falls within his implied authority, binds the firm, unless the person withwhom he is dealing knows of the restriction or does not know or believe that partner tobe a partner.

As it is but proper that third parties ought not to be made to suffer on account ofany restriction of the implied authority, the second paragraph provides that such limitationsoperate only where the party affected has notice of it.

S.21: Partner’s Authority in an Emergency

A partner has authority, in an emergency; to do all such acts for the purpose ofprotection of the firm from loss as would be done by a person of ordinary prudence, inhis own case, acting under similar circumstances, and such acts bind the firm.

S.23: Effect of Admissions by a Partner

An admission on representation made by a partner concerning the affairs of thefirm is evidence against the firm, it if is made in the ordinary course of business.

S.24: Effect of Notice to Acting Partner

Notice to a partner who habitually acts in the business of the firm of any matterrelating to the affairs of the firm operates as notice to the firm, except in the case of afraud on the firm committed by or with the consent of that partner.


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S.25: Liability of a Partner for Acts of the Firm

Every partner is liable, jointly with all the other partners and also severally, for allacts of the firm done while he is a partner.

I.T.O, Salem v. Arungiri Chettiar, AIR 1996 SC 2160 under section 25, the liabilityof every partner is both joint and several and there and there cannot be any distinctionbetween continuing partner and retired partner. A partner continues to be liable for theact of the firm done while he was a partner and his liability does not cease merelybecause he ceased to be a partner subsequently.

Appa Dada v. Ramakrishna (1930) 53 Bom. 652: The creditor of a firm may sueany one of the partners or all of them and failure to implead all of them is no defenceto a suit against the third party.Veerappa v. Arunachalam chetty (1924) 47 MLJ 168:Any internal arrangements between the partners, as to the liquidation of certain liabilitywill not be binding on the creditor.

Nilakanth v. Raj and company (1982) Mah.L.J 285 Decree passed against the firmand its partners can be executed against any one of the partners of the firm.

Bhagwati v. Miyan Murat, (1931) 10 Pat. 528: Right to contribution principle isapplicable to the partners of the firm. S. 43(2) of the Contract Act.

S.26: Liability of the Firm for Wrongful Acts of a Partner

Where, by the wrongful act or omission of a partner acting in the ordinary course ofbusiness of a firm, or with the authority of his partners, loss or injury is caused to anythird party, or any penalty is incurred, the firm is liable therefore to the same extent asthe partner.

Liability of firm for partner’s torts: - Lloyd v. grace Smith (1912) AC 716: It is notnecessary that the principal should have derived any benefit by the tortious act.

Collman v. Mills (1897) 1 QB 396: The principal may be liable for the act of hisagent even where the act has been expressly forbidden. This is based on the principleof agency.

Blyth v. Fladgate, (1891) 1 Ch. 337: A firm of solicitors has been held liable fornegligent advice given by one member of the firm.


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S.27: Liability of Firm for Misapplication by Partners

a) a partner acting within his apparent authority receives money or property from athird party and misapplies it, or

b) A firm in the course of its business receives money or property from a third party,and the money or property is misapplied by any of the partners while it is in thecustody of the firm, the firm is liable to make good the loss.

If a partner, in the course of some transaction unconnected with the business of thefirm or not within the scope of such business, obtains money and then misapplied it, thefirm is not liable. Thus in Harman v. Johnson (1853) 118 ER 691: where one of a firmof a solicitors was entrusted with money for investment on mortgage as opportunityoccurred, and he misapplied it, the firm was held not liable because it was not part ofthe business of solicitors to act as scrivener.

S.28: Holding Out

1) Any one who by words spoken or written or by conduct represents himself, orknowingly permits himself to be represented, to be a partner in a firm, is liable asa partner in that firm to any one who has on the faith of any such representationgiven credit to the firm, whether the person representing himself or represented tobe a partner does or does not know that the representation has reached theperson so giving credit.

2) Where after a partner’s death the business is continued in the old firms name, thecontinued use of that name or of the deceased partner’s name as a part thereofshall not of itself make his legal representative or his estate liable for any act ofthe firm done after his death.

Essentials: -

i) There must be a representation made or suffered to be made by the person‘holding out’.

ii) It must have been relied on by the other person. It is immaterial whether theperson making the representation does or does not know that it has reachedthe person so giving credit.

iii) Credit must have been given to the partnership on the faith of therepresentation.


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iv) A person cannot be liable on the ground of having held himself out, unlesshe did so before the contract on which he is charged with liability was enteredinto.- Baird v. Planque (1858) 175 ER 756.

Newsome v. Coles (1811) 170 ER 1271: Where the representation is not knownto and relied on by the person charging the supposed partner, there is no question ofmisleading and so no estoppel will arise.

S.29: Rights of Transferee of a Partner’s Interest

1) A transfer by a partner of his interest in the firm, either absolute or by mortgage,or by the creation by him of a charge on such interest, does not entitle thetransferee, during the continuance of the firm, to interfere in the conduct of thebusiness, or to require accounts, or to inspect the books of the firm but entitles thetransferee only to receive the share of profits of the transferring partner, and thetransferee shall accept the account of profits agreed to by the partners.

2) If the firm is dissolved or if the transferring partner ceases to be a partner, thetransferee is entitled as against the remaining partners to receive the share of theassets of the firm to which the transferring partner is entitled, and, for the purposeof ascertaining that share, to an accounts as from the date of the dissolution.

Rights of assignee of partner’s interest: - Domaty Narsiah v. Raman Chetty (1899)27 Cal. 93: The assignment is valid as between the immediate parties.

Suganchand v. lukhe (1938) Nag. 182: But the assignee cannot during thecontinuance of the firm interferes in the conduct of the business, or ask for accounts; heis entitled only to receive the assignor’s share of profits.

Addanki Narayanappa v. Bhaskara Krishnappa (1966) SCJ 490: He must acceptthe accounts of profits agreed to by the partners.

Mathura Singh v. Arjun Singh AIR 1979 P & H 40: The assignee would have noright to interfere in the management of the business so long as the business is continuing,but he would be entitled only to the actual profits.

P. Ananda Rao v. G.Raja Rao (1976) 1 An. W.R 338: The transferee does notbecome a partner of the firm: the transferor continues to be a partner along with theother partners. There is no dissolution of the partnership by such transfer.

Public Trustee v. Eldon (1926) 1 ch. 776: On such dissolution, he is entitled to thetransferor’s share of assets and to an account as from the date of dissolution.


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Palariappa Chettiar v. Vaidyanatha Iyer (1969) 82 LW 63: A sub-partner will comewithin the scope of section 29.

Health v. Samsom (1832) 110 ER 420: A transfer of a partner’s share may howeverbe a good ground for dissolution.

Dhanaraju v. Motilal (1929) 52 Mad. 563: The section applies to cases of involuntaryassignment also.

S.30: Minors Admitted to the Benefits of Partnership

(1) Minor admitted to the benefits of partnership:- A person who is a minor accordingto the law to which he is subject may not be a partner in a firm, but, with theconsent of all the partners for the time being, he may be admitted to the benefitsof partnership.

A.A. Khan v. Amer Karim AIR 1952 Mys. 131: That a minor cannot create apartnership.

Devi Ditta v. Than Mal(1933) 142 IC 203: There must be partnership alreadysubsisting, to which he is admitted.

Palaniappa v. Official Assignee (1917) MWN 150: that admission to the benefitsmust be by some definite act such as, by allotment of a share or distribution of profitsor something of an analogous character.

Jaffer Ali v. Standard Bank of South Africa (1928) PC 135: By being admitted tothe benefits the minor incurs no personal liability for any of the obligations of the firm.

(2) Such a minor has a right to such share of the property and of the profits of the firmas may be agreed upon, and he may have access to and inspect and copy any ofthe accounts of the firm.

(3) Such minor’s share is liable for the acts of the firm, but the minor is not personallyliable for any such act.

Liability of minor: - Sanyasi Charan v. Krishnadhan (1922) 49 Cal. 560:

The minor is liable only to the extent of his share, in the partnership and is notpersonally liable for partnership debts.

Official Assignee v. Palaniappa (1918) 41 Mad. 824: The minor’s separate propertycannot be proceeded against for realization of a partnership debt.


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(4) Such minor may not sue the partners for an account or payment of his share ofthe property or profits of the firm, save when severing his connection with the firm,and in such case the amount of his share shall be determined by a valuationmade as far as possible in accordance with the rules contained in section 48.

Provided that all the partners acting together or any partner entitled to dissolvethe firm upon notice to other partners may elect in such suit to dissolve the firm,and thereupon the court shall proceed with the suit as one for dissolution and forsettling accounts between the partners, and the amount of the share of the minorshall be determined along with the shares of the partners.

(5) At any time within six months of his attaining majority, or of his obtaining knowledgethat he had been admitted to the benefits of partnership, whichever date is later,such person may give public notice that he has elected to become or that he haselected not to become a partner in the firm, and such notice shall determine hisposition as regards the firm. Provided that, if he fails to give such notice, he shallbecome a partner in the firm on the expiry of the said six months.

Comments: - That the minor has, on attaining majority, an option of becoming apartner or of severing his connection with it. This option he must exercise by givingnotice of his election. The period within which such notice is to be given is six monthsafter majority or knowledge of admission to the benefits of partnership. Omission togive such notice makes him a partner automatically at the end of the six months.

In C.I.T. v. Shah Mohandas Sadhuram AIR 1966 SC 15: It was observed: first it isclear from S.30 (2) that a minor cannot be held liable for losses. Secondly s.30(3) enables a minor to sever his connection with the firm and if he does so theamount of his share has to be determined in accordance with the rules containedin s.48.There is no difficulty in holding that the severance may be effected onbehalf of a minor by his guardian.

6) Where any person has been admitted as a minor to the benefits of partnership ina firm, the burden of proving the fact that such person had no knowledge of suchadmission until a particular date after the expiry of six months of his attainingmajority shall lie on the persons asserting that fact.

(7) Where such person becomes a partner-

a) his rights and liabilities as a minor continue up to the date on which hebecomes a partner, but he also becomes personally liable to third parties forall acts of the firm done since he was admitted to the benefits of partnership, and


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b) his share in the property and profits of the firm shall be the share to which hewas entitled as a minor.

Comment: - Goode v. Harrison (1821) 106 ER 1147: Harmohan v. Sudarsan(1921) 25 CWN 847: Palaniappa v. Official Assignee (1917) MWN 150:

He becomes personally liable for all the acts of the firm done since the date of hisadmission. This constitutes a wide departure from English Law, under which it wouldappear that the personal liability attaches only to obligations incurred by the firm afterthe minor attaining majority.

• Where such person elects not to become a partner—

a) his rights and liabilities shall continue to be those of a minor under this section upto the date, on which he gives public notice,

b) his share shall not be liable for any acts of the firm done after the date of thenotice, and

c) He shall be entitled to sue the partner for his share of the property and profits inaccordance with sub-section (4) and (9). Nothing in sub-sections (7) and (8) shallaffect the provisions of section 28.


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CHAPTER - V

INCOMING AND OUTGOING PARTNER

S.31: Introduction of a Partner

(1) Subject to contract between partners and to the provisions of s.30, no person shall be introduced as a partner into a firm withoutthe consent of all the existing partners.

(2) Subject to the provisions of section 30, a person who is introducedas a partner into a firm does not thereby become liable for any actof the firm done before he became a partner.

S.32: Retirement of a Partner

(1) A partner may retire: -

a) with the consent of all the partners,

b) in accordance with an express agreement by the partners, or

c) Where the partnership is at will, by giving notice in writing toall the other partners of his intention to retire.

2) A retiring partner may be discharged from any liability to any thirdparty for acts of the firm done before his retirement by an agreementmade by him with such third party and the partners of thereconstituted firm, and such agreement may be implied by courseof dealing between such third party and the reconstituted firm afterhe had knowledge of the retirement.

Sarma v. Phanindranath (1931) 35 CWN 593: Where thearrangement is not with the concurrence of the creditor, thecreditor’s rights against the retiring partner are unaffected.

3) Notwithstanding the retirement of a partner from a firm, he andthe partners continue to be liable as partners to third parties for

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any act done by anys them which would have been an act of the firm if donebefore the retirement, until public notice is given of the retirement: Provided thata retired partner is not liable to any third party who deals with the firm withoutknowing that he was a partner.

4) Notices under sub-section (3) may be given by the retired partner or by anypartner of the reconstituted firm.

S.33: Expulsion of a Partner

(1) A partner may not be expelled from a firm by any majority of the partners, save inthe exercise in good faith of powers conferred by contract between the partners.

(2) The provisions of sub-section (2), (3) and (4) of section 32 shall apply to anexpelled partner as if he were a retired partner.

S.34: Insolvency of a Partner

1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner onthe date on which the order of adjudication is made, whether or not the firm isthereby dissolved.

2) Where under a contract between the partners, the firm is not dissolved by theadjudication of a partner as an insolvent, the estate of a partner so adjudicated isnot liable for any act of the firm and the firm is not liable for any act of theinsolvent, done after the date on which the order of adjudication is made.

S.35: Liability of Estate of Deceased Partner

Where under a contract between the Partners the firm is not dissolved by the deathof a partner, the estate of a deceased partner is not liable for any act of the firm doneafter his death.

S.36: Rights of Outgoing Partner to Carry on Competing Business

1) an outgoing partner may carry on a business competing with that of the firm andhe may advertise such business, but, subject to contract to the contrary, he maynot—

a) Use the firm-name,

b) represent himself as carrying on the business of the firm, or


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c) solicit the custom of persons who were dealing with the firm before he ceasedto be a partner.

2) A partner may make an agreement with his partners that on ceasing to be apartner he will not carry on any business similar to that of the firm within a specifiedperiod or within specified period or within specified local limits; and, notwithstanding any thing contained in section 27 of the Contract Act, such agreementshall be valid if the restrictions imposed are reasonable.

S.37: Right of Outgoing Partner in Certain Cases to Share SubsequentProfits

Where any member of a firm has died or otherwise ceased to be a partner, and thesurviving or continuing partners carry on the business of the firm with the property of thefirm without any final settlement of accounts as between them and to the contrary, theoutgoing partner or his estate is entitled at the option of himself or his representatives tosuch share of the profits made since he ceased to be a partner as may be attributableto the use of his share of the property of the firm or to interest at the rate of six percentper annum on the amount of his share in the property of the firm:

Provided that where by contract between the partners an option is given to survivingor continuing partners to purchase the interest of a deceased or outgoing partner, andthat option is duly exercised, the estate of the deceased partner, or the outgoing partneror his estate, as the case may be, is not entitled to any further or other share of profits;but if any partner assuming to act in exercise of the option does not in all materialrespects comply with the terms thereof, he is liable to account under the foregoingprovisions of this section.

S.38: Revocation of Continuing Guarantee by Change in Firm

A continuing guarantee given to a firm, or to a third party in respect of the transactionsof a firm, is, in the absence of agreement to the contrary, revoked as to future transactionsfrom the date of any change in the constitution of the firm.


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CHAPTER - VI

DISSOLUTION OF A FIRM

S.39: Dissolution of a Firm

The dissolution of partnership between all the partners of a firm iscalled the ‘dissolution of the firm’.

S.40: Dissolution by Agreement

A firm may be dissolved with the consent of all the partners or inaccordance with a contract between the partners.

S.41: Compulsory Dissolution

A firm is dissolved—

a) by the adjudication of all the partners or of all the partners but oneas insolvent, or

b) by the happening of any event which makes it unlawful for thebusiness of the firm to be carried on or for the partners to carry iton in partnership.

Provided that, where more than one separate adventure orundertaking is carried on by the firm, the illegality of one or more shallnot of itself cause the dissolution of the firm in respect of its lawfuladventures and undertakings.

S.42: Dissolution on the Happening of Certain Contingencies

Subject to contract between the partners a firm is dissolved –

a) if constituted for a fixed term, by the expiry of that term;

b) if constituted to carry out one or more adventures or undertakings,by the completion thereof;

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c) by the death of a partner; and

d) by the adjudication of a partner as an insolvent.

Contract to the contrary: -

Sayyed Abdul Hawk v. Vaikuntam (1927)52 MLJ318: The section operates only inthe absence of a contract to the contrary. It has been held that the contracts to thecontrary need not be express.

RamNiwas v. Diwan Chand (1933) Lah.618: The burden of proving a contract tothe contrary is on the party asserting it.

S.43: Dissolution by Notice of Partnership at Will

(1) Where the partnership is at will, the firm may be dissolved by any partner givingnotice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date ofdissolution or, if no date is so mentioned, as from the date of the communicationof the notice.

S.44: Dissolution by the Court

At the suit of a partner, the court may dissolve a firm on any of the followinggrounds, namely:

a) that a partner has become of unsound mind, in which case the suit may bebrought as well by the next friend of the partner who has become of unsoundmind as by any other partner;

b) that a partner, other than the partner suing, has become in any way permanentlyincapable of performing his duties as partner;

c) that a partner, other than the partner suing, is guilty of conduct which is likely toaffect prejudicially the carrying on of the business, regard being had to the natureof the business;

d) that a partner, other than the partner suing, willfully or persistently commits breachof agreements relating to the management of the affairs of the firm or the conductof its business, or otherwise so conducts himself in matters relating to the businessthat it is not reasonably practicable for the other partners to carry on the businessin partnership with him;


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e) that a partner, other than the partner suing, has in any way transferred the wholeof his interest in the firm to a third party, or has allowed his share to be chargedunder the provisions of Rule 49 of Order XXI of the First Schedule to the C.P.C. orhas allowed it to be sold in the recovery of arrears of land-revenue or of any duesrecoverable as arrears of land-revenue due by the partner;

f) that the business of the firm cannot be carried on save at a loss; or

g) on any other ground which renders it just and equitable that the firm should bedissolved.

S.45: Liability for Acts of Partners done after Dissolution

(1) Notwithstanding the dissolution of a firm, the partners continue to be liable assuch to third parties for any act done by any of them which would have been anact of the firm if done before the dissolution, until public notice is given of thedissolution;

Provided that the estate of a partner who dies, or who is adjudicated an insolvent,or of a partner who, not having been known to the person dealing with the firm tobe a partner, retires from the firm, is not liable under this section for acts doneafter the date on which he ceases to be a partner.

(2) Notices under sub-section (1) may be given by any partner.

S.46: Right of Partners to have Business wound up after Dissolution:

On the dissolution of a firm every partner or his representative is entitled, as againstall the other partners or their representatives, to have the property of the firm applied inpayment of the debts and liabilities of the firm, and to have the surplus distributedamong the partners or their representatives according to their rights.

S.47: Continuing Authority of Partners for Purposes of Winding up

After the dissolution of a firm, the authority of each partner to bind the firm, and theother mutual rights and obligations of the partners, continue notwithstanding thedissolution, so far as may be necessary to wind up the affairs of the firm and to completetransactions begun but unfinished at the time of the dissolution, but not otherwise;

Provided that the firm is in no case bound by the acts of a partner who has beenadjudicated insolvent; but this proviso does not affect the liability of any person whohas after the adjudication represented himself or knowingly permitted himself to berepresented as a partner of the insolvent.


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S.48: Mode of Settlement of Accounts between Partners

In settling the accounts of a firm after dissolution, the following rules shall, subjectto agreement by the partners, be observed:-

a) losses, including deficiencies of capital, shall be paid first out of profits, next outof capital, and, lastly, if necessary, by the partners individually in the proportionsin which they were entitled to share profits;

b) The assets of the firm including any sums contributed by the partners to make updeficiencies of capital shall be applied in the following manner and order:-

i) in paying the debts of the firm to third parties;

ii) In paying to each partner rateably what is due to him from the firm foradvances as distinguished from capital;

iii ) in paying to each partner rateably what is due to him on account of capital;and

iv) The residue, if any, shall be divided among the partners in the proportions inwhich they were entitled to share profits.

S.49: Payment of Firm Debts and of Separate Debts

Where there are joint debts due from the firm, and also separate debts due fromany partner, the property of the firm shall be applied in the first instance in payment ofthe debts of the firm, and, if there is any surplus, then the share of each partner shall beapplied in payment of his separate debts or paid to him. The separate property of anypartner shall be applied first in the payment of his separate debts, and the surplus (ifany) in the payment of the debts of the firm.

S.50: Personal Profits Earned after Dissolution

Subject to the contract between the partners, the provisions of clause (a) of section16 shall apply to transaction by any surviving partner or by the representatives of adeceased partner, undertaken after the firm is dissolved on account of the death of apartner and before its affairs have been completely wound up;

Provided that where any partner or his representative has bought the goodwill ofthe firm, nothing in this section shall affect his right to use the firm name.


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S.51: Return of Premium on Premature Dissolution

Where a partner has paid a premium on entering into partnership for a fixed term,and the firm is dissolved before the expiration of that term otherwise than by the deathof a partner, he shall be entitled to repayment of the premium or of such part thereof asmay be reasonable, regard being had to the terms upon which he became a partnerand to the length of time during which he was partner unless:-

a) the dissolution is mainly due to his own misconduct; or

b) the dissolution is in pursuance of an agreement containing no provision for thereturn of the premium or any part of it.

S.52: Rights where Partnership Contract is Rescinded for Fraud orMisrepresentation

Where contract creating partnership is rescinded on the ground of the fraud ormisrepresentation of any of the parties thereto, the party entitled to rescind is, withoutprejudice to any other right, entitled:-

a) to a lien on, or a right of retention of, the surplus of the assets of the firm remainingafter the debts of the firm have been paid, for any sum paid by him for thepurchase of a share in the firm and for any capital contributed by him;

b) to rank as a creditor of the firm in respect of any payment made by him towardsthe debts of the firm; and

c) to be indemnified by the partner or partners guilty of the fraud or misrepresentationagainst all the debts of the firm.

S.53: Right to Restrain from Use of Firm Name or Firm Property

After a firm is dissolved, every partner or his representative may, in the absence ofa contract between the partners to the contrary, restrain any other partner or hisrepresentative from carrying on a similar business in the firm name or from using any ofthe property of the firm for his own benefit, until the affairs of the firm have beencompletely wound up;

Provided that where any partner or his representative has bought the goodwill ofthe firm, nothing in this section shall affect his rights to use the firm name.


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S.54: Agreement in Restraint of Trade

Partners may, upon or in anticipation of the dissolution of the firm, make anagreement that some or all of them will not carry on a business similar to that of the firmwithin a specified period or within specified local limits; and notwithstanding anythingcontained in section 27 of the Indian Contract Act, 1872, such agreement shall bevalid if the restrictions imposed are reasonable.

S.55 Sale of Goodwill after Dissolution

1) In settling the accounts of a firm after dissolution, the goodwill shall, subject tocontract between the partners, be included in the assets, and it may be sold eitherseparately or along with other property of the firm.

2) Rights of buyer and seller of goodwill: Where the goodwill of a firm is sold afterdissolution, a partner may carry on a business competing with that of the buyerand he may advertise such business, but, subject to agreement between him andthe buyer, he may not:-

a) use the firm name;

b) represent himself as carrying on the business of the firm; or

c) Solicit the custom of persons who were dealing with the firm before itsdissolution.

3) Agreement in restraint of trade: - Any partner may, upon the sale of the goodwillof a firm, make an agreement with the buyer that such partner will not carry onany business similar to that of the firm within a specified period or within specifiedlocal limits, and, notwithstanding anything contained in section 27 of the IndiaContract Act, 1872 such agreement shall be valid if the restrictions imposed arereasonable.


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CHAPTER - VII

REGISTRATION OF FIRMS

S.56. Power to Exempt from Application of this Chapter

The State Government of any State may, by notification in the OfficialGazette, direct that the provisions of this Chapter shall not apply to thatState or to any part thereof specified in the notification.

S.57. Appointment of Registrars

1) The State Government may appoint Registrars of Firms for thepurposes of this Act, and may define the areas within which theyshall exercise their powers and perform their duties.

2) Every Registrar shall be deemed to be a public servant within themeaning of section 21 of the Indian Penal Code.

S.58. Application for registration:-

1) The Registration of a firm may be effected at any time by sendingby post or delivering to the Registrar of the area in which any placeof business of the firm is situated or proposed to be situated, astatement in the prescribed form and accompanied by theprescribed fee, stating

a) the firm name;

b) the place or principal place of business of the firm;

c) the names of any other places where the firm carries onbusiness;

d) the date when each partner joined the firm;

e) the names in full and permanent addresses of the partners,and

f) the duration of the firm,

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The Statement shall be signed by all the partners, or by their agents speciallyauthorized in this behalf.

2) Each person signing the statement shall also verify it in the manner prescribed.

3) A firm name shall not contain any of the following words, namely:-Crown, Emperor,Empress, Empire, Imperial, King, Queen, Royal or words expressing or implyingthe sanction approval or patronage of Government signifies its consent to the useof such words as part of the firm name by order in writing.

S.59. Registration

When the Registrar is satisfied that the provisions of section 58 have been dulycomplied with, he shall record an entry of the statement in a register called the Registerof Firms, and shall file the statement.

S.60. Recording of alterations in firm name and principal place of business

1) When an alteration is made in the firm name or in the location of the principalplace of business of a registered firm, a statement may be sent to the Registraraccompanied by the prescribed fee, specifying the alteration, and signed andverified in the manner required under s.58.

2) When the Registrar is satisfied that the provisions of sub-section (1) have beenduly complied with, he shall amend that entry relating to the firm in the Register ofFirms in accordance with the statement, and shall file it along with the statement,relating to the firm filed under s.59.

S.61. Noting of Closing and Opening of Branches

When a registered firm discontinues business at any place or begins to carry onbusiness at any place, such place not being its principal place of business, any partneror agent of the firm may send intimation thereof to the Registrar, who shall make a noteof such intimation in the entry relating the firm in the Register of Forms, and shall file theintimation along with the statement relating to the firm filed under s. 59.

S.62. Noting of Changes in Names and Addresses of Partners

When any partner in a registered firm alters his name or permanent address, anintimation of the alteration may be sent by any partner or agent of the firm to theRegistrar, who shall deal with it in the manner provided in section 61.


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S.63. Recording of Changes in and Dissolution of a Firm

1) When a change occurs in the constitution of a registered firm any incoming,continuing or outgoing partner, and when a registered firm is dissolved, any personwho was a partner immediately before the dissolution, or the agent of any suchpartner or person specially authorized in this behalf, may give notice to the Registrarof such change or dissolution, specifying the date thereof, and the Registrar shallmake a record of the notice in the entry relating to the firm in the Register ofFirms, and shall file the notice along with the statement relating to the firm filedunder s.59.

2) Recording of withdrawal of a minor: - When a minor who has been admitted tothe benefits of partnership in a firm attains majority and elects to become or notto become a partner, and the firm is then a registered firm, he, or his agentspecially authorized in this behalf, may give notice to the Registrar that he has orhas not become a partner, and the Registrar shall deal with the notice in themanner provided in sub-section (1).

S.64. Rectification of Mistakes

1) The Registrar shall have power at all times to rectify any mistake in order to beingthe entry in the Register of Firms relating to any firm into conformity with thedocuments relating to that firm filed under this chapter.

2) On application made by all the parties who have signed any document relatingto a firm filed under this Chapter, the Registrar may rectify any mistake in suchdocument or in the record or note thereof made in the Register of Firms.

S.65. Amendment of Register by Order of Court

A court deciding any matter relating to a registered firm may direct that the Registrarshall make any amendment in the entry in the Register of Firms relating to such firmwhich is consequential upon its decisions and the Registrar shall amend the entryaccordingly.

S.66. Inspection of Register and filed Documents

1) The Register of Firms shall be open to inspection by any person on payment ofsuch fee as may be prescribed.

2) All statements, notices and intimations filed under this chapter shall be open toinspection, subject to such conditions and on payment of such fee as may beprescribed.


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S.67. Grant of Copies

The Registrar shall on application furnish to any person, on payment of such fee asmay be prescribed, a copy, certified under his hand, of any entry or portion thereof inthe Register of Firms.

S.68. Rules of Evidence

1) Any statement, intimation or notice recorded or noted in the Register of Firmsshall, as against any person by whom or on whose behalf such statement, intimationor notice was signed, be conclusive proof of any fact therein stated.

2) A certified copy of any entry relating to a firm in the Register of Firms may beproduced in proof of the fact of the registration of such firm, and of the contentsof any statement, intimation or notice recorded or noted therein.

S.69. Effect of non-registration

1) No suit to enforce a right arising from a contract or conferred by this Act shall beinstituted in any court by or on behalf of any person suing as a partner in a firmagainst the firm or any person alleged to be or to have been a partner in the firmunless the firm is registered and the person suing is or has been shown in theRegister of Firms as a partner in the firm.

2) No suit to enforce a right arising from a contract shall be instituted in any court byor on behalf of a firm against any third party unless the firm is registered and thepersons suing are or have been shown in the Register of Firms as partners in thefirm.

3) The provisions of sub-section (1) and (2) shall apply also to a claim of set-off orother proceeding to enforce a right arising from a contract, but shall not affect:-

a) the enforcement of any right to sue for the dissolution of a firm or for accountsof a dissolved firm, or any right or power to realize the property of a dissolvedfirm; or

b) the powers of an official assignee, receiver or court under the PresidencyTowns Insolvency Act, 1909 or the Provincial Towns Insolvency Act, 1920 torealize the property of an insolvent partner.

4) This section shall not apply:-


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a) to firms or to partners in firms which have no place of business in the territoriesto which this Act extends, or whose place of business in the said territoriesare situated in areas to which, by notification under section 56, this chapterdoes not apply; or

b) to any suit or claim of set-off not exceeding one hundred rupees in valuewhich, in the Presidency-towns, is not of a kind specified in section 19 of thePresidency Small Causes Courts Act, 1882 or outside the Presidency Towns,is not of a kind specified in the Second Schedule to the Provincial SmallCauses Courts Act, 1887 or to any proceeding in execution or otherproceeding incidental to or arising from any such suit or claim.

Though the Act does not require the firm to be compulsorily registered nor does itimposes penalties such as are imposed under the English Law, yet the effect of the rulesrelating to the consequences of non-registration is such, as will practically necessitatethe registration of the firm at one time or the other. It may be noted that registration offirms under this Act is distinct from registration of partnership firms under the IncomeTax Act for the purposes of assessment Income Tax.

The following disabilities are imposed during the subsistence of the partnership:-

a) A partner cannot institute a suit against the firm or any partner of the firm toenforce a right arising from a contract or conferred under the partnership Act.

b) The firm cannot sue a third party to enforce a right arising from a contract.

c) In a proceeding instituted against it to enforce a right arising from contract, set offcannot be pleaded by the firm or a partner as the case may be.

The following suits can be maintained even if a firm has not been registered:-

a) suit for accounts of a dissolved firm;

b) suit for dissolution of the firm;

c) suit for realizing the property of a dissolved firm;

d) proceeding by an Official Assignee or Receiver to realize the property of aninsolvent partner;

e) Claim of set off not exceeding Rs. 100/- provided it is not of a small causenature.

Time of Registration:-


NALSAR Pro710

The registration of a firm may be effected at any time by filling an application in theform of a statement, giving the necessary information, with the Registrar of Firms of thearea. As to the time of the registration of a firm, there is no definite provision in the Act.Sec. 69(2), however, lays down that no suit to enforce a right arising from a contractcan be instituted in any court by or on behalf of a firm against any third party unless thefirm is registered and the persons suing are or have been shown in the Register of Firmsas partners in the firm. In other words, no suit by an unregistered firm is maintainableand the only course open to the court is to dismiss it. –Malhotra & Co., Ramesh Mistri,A.I.R. (1971) Punj.212;

The point of time contemplated in sec. 69(2) is the time of the institution of the suit.That is to say, the firm must be a registered firm by the date of the institution of the suit.-Shanker Housing Corporation v. Mohan Devi A.I.R. (1978) Del.255.

This means before any suit is filed in a Law Court, registration must be effected.Subsequent registration does not cure the initial defect at the time of the institution ofthe suit. The right course in such a case is to withdraw the suit from the court, get thefirm registered and then file a fresh suit.

S.70. Penalty for Furnishing False Particulars

Any person who signs any statement, amending statement, notice or intimationunder this Chapter containing any particular which he knows to be false or does notbelieve to be true, or containing particulars which he knows to be incomplete or doesnot believe to be complete, shall be punishable with imprisonment which may extend tothree months, or with fine, or with both.

S.71. Power to Make Rules

1) The State Government may by notification in the Official Gazette make rulesprescribing the fees which shall accompany documents sent to the Registrar ofFirms, or which shall be payable for the inspection of documents in the custody ofthe Registrar of Firms, or for copies from the Register of Firms.


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