Sample Paper Series- I, Solution | Business Laws for CA Foundation PDF Download

 Page 1


1 
Test Series: March, 2019 
MOCK TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2A: BUSINESS LAWS  
ANSWERS 
1. (a)  Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final 
expression of willingness by the offeror to be bound by his offer should the party chooses to accept 
it. Where a party, without expressing his final willingness, proposes certain terms on which he is 
willing to negotiate, he does not make an offer, but invites only the other party to make an offer on 
those terms. This is the basic distinction between offer and invitation to offer. 
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in 
no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. 
Prakash by selecting some articles and approaching the cashier for payment simply made an offer 
to buy the articles selected by her. If the cashier does not accept the price, the interested buyer 
cannot compel him to sell.  
(b)  Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders 
are deemed to have notice of the internal affairs of the company. For instance, if an act is 
authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed 
formalities for doing that act have been observed. 
The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other officers 
of the company are validly performed, if they are within the scope of their apparent authority. So 
long as an act is valid under the articles, if done in a particular manner, an outsider dealing with 
the company is entitled to assume that it has been done in the manner required. 
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same 
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive 
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods 
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company. 
(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession from one 
person to another [Section 2(2) of the Sale of Goods Act, 1930]. As a general rule, delivery of 
goods may be made by doing anything, which has the effect of putting the goods in the possession 
of the buyer, or any person authorized to hold them on his behalf.  
Forms of delivery: Following are the kinds of delivery for transfer of possession:  
(i) Actual delivery: When the goods are physically delivered to the buyer. 
(ii) Constructive delivery: When it is effected without any change in the custody or actual 
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., 
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s 
request. 
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something 
else, i.e., delivery of goods in the course of transit may be made by handing over documents 
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a 
warehouse containing the goods is handed over to buyer. 
© The Institute of Chartered Accountants of India
Page 2


1 
Test Series: March, 2019 
MOCK TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2A: BUSINESS LAWS  
ANSWERS 
1. (a)  Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final 
expression of willingness by the offeror to be bound by his offer should the party chooses to accept 
it. Where a party, without expressing his final willingness, proposes certain terms on which he is 
willing to negotiate, he does not make an offer, but invites only the other party to make an offer on 
those terms. This is the basic distinction between offer and invitation to offer. 
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in 
no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. 
Prakash by selecting some articles and approaching the cashier for payment simply made an offer 
to buy the articles selected by her. If the cashier does not accept the price, the interested buyer 
cannot compel him to sell.  
(b)  Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders 
are deemed to have notice of the internal affairs of the company. For instance, if an act is 
authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed 
formalities for doing that act have been observed. 
The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other officers 
of the company are validly performed, if they are within the scope of their apparent authority. So 
long as an act is valid under the articles, if done in a particular manner, an outsider dealing with 
the company is entitled to assume that it has been done in the manner required. 
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same 
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive 
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods 
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company. 
(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession from one 
person to another [Section 2(2) of the Sale of Goods Act, 1930]. As a general rule, delivery of 
goods may be made by doing anything, which has the effect of putting the goods in the possession 
of the buyer, or any person authorized to hold them on his behalf.  
Forms of delivery: Following are the kinds of delivery for transfer of possession:  
(i) Actual delivery: When the goods are physically delivered to the buyer. 
(ii) Constructive delivery: When it is effected without any change in the custody or actual 
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., 
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s 
request. 
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something 
else, i.e., delivery of goods in the course of transit may be made by handing over documents 
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a 
warehouse containing the goods is handed over to buyer. 
© The Institute of Chartered Accountants of India
2 
2. (a)  An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory 
Breach. The law in this regard has very well summed up in Frost v. Knight and Hochster v. Dela 
Tour:  
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as 
follows: "When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but 
words or conduct, his acquiescence in its continuance."  
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of 
performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party 
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform 
his part of the, contract and can also take advantage of any supervening impossibility which 
may have the effect of discharging the contract.  
(b)  Distinction between LLP and Limited Liability Company  
 Basis  LLP LLC 
1. Regulating Act The LLP Act, 2008. The Companies Act, 2013. 
2. Members/Partners The persons who contribute 
to LLP are known as 
partners of the LLP. 
The persons who invest the money in 
the shares are known as members of 
the company. 
3. Internal governance 
structure 
The internal governance 
structure of a LLP is 
governed by contract 
agreement between the 
partners. 
The internal governance structure of a 
company is regulated by statute (i.e., 
Companies Act, 2013). 
4. Name Name of the LLP to contain 
the word “Limited Liability 
partnership” or “LLP” as 
suffix. 
Name of the public company to 
contain the word “limited” and Pvt. Co. 
to contain the word “Private limited” as 
suffix. 
5. No. of 
members/partners 
Minimum – 2 members 
Maximum – No such limit on 
the members in the Act. The 
members of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such limit on the 
members.   
Members can be organizations, trusts, 
another business form or individuals. 
6. Liability of members/ 
partners 
Liability of a partners is 
limited to the extent of 
agreed contribution in case 
of intention is fraud. 
Liability of a member is limited to the 
amount unpaid on the shares held by 
them. 
© The Institute of Chartered Accountants of India
Page 3


1 
Test Series: March, 2019 
MOCK TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2A: BUSINESS LAWS  
ANSWERS 
1. (a)  Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final 
expression of willingness by the offeror to be bound by his offer should the party chooses to accept 
it. Where a party, without expressing his final willingness, proposes certain terms on which he is 
willing to negotiate, he does not make an offer, but invites only the other party to make an offer on 
those terms. This is the basic distinction between offer and invitation to offer. 
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in 
no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. 
Prakash by selecting some articles and approaching the cashier for payment simply made an offer 
to buy the articles selected by her. If the cashier does not accept the price, the interested buyer 
cannot compel him to sell.  
(b)  Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders 
are deemed to have notice of the internal affairs of the company. For instance, if an act is 
authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed 
formalities for doing that act have been observed. 
The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other officers 
of the company are validly performed, if they are within the scope of their apparent authority. So 
long as an act is valid under the articles, if done in a particular manner, an outsider dealing with 
the company is entitled to assume that it has been done in the manner required. 
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same 
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive 
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods 
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company. 
(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession from one 
person to another [Section 2(2) of the Sale of Goods Act, 1930]. As a general rule, delivery of 
goods may be made by doing anything, which has the effect of putting the goods in the possession 
of the buyer, or any person authorized to hold them on his behalf.  
Forms of delivery: Following are the kinds of delivery for transfer of possession:  
(i) Actual delivery: When the goods are physically delivered to the buyer. 
(ii) Constructive delivery: When it is effected without any change in the custody or actual 
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., 
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s 
request. 
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something 
else, i.e., delivery of goods in the course of transit may be made by handing over documents 
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a 
warehouse containing the goods is handed over to buyer. 
© The Institute of Chartered Accountants of India
2 
2. (a)  An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory 
Breach. The law in this regard has very well summed up in Frost v. Knight and Hochster v. Dela 
Tour:  
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as 
follows: "When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but 
words or conduct, his acquiescence in its continuance."  
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of 
performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party 
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform 
his part of the, contract and can also take advantage of any supervening impossibility which 
may have the effect of discharging the contract.  
(b)  Distinction between LLP and Limited Liability Company  
 Basis  LLP LLC 
1. Regulating Act The LLP Act, 2008. The Companies Act, 2013. 
2. Members/Partners The persons who contribute 
to LLP are known as 
partners of the LLP. 
The persons who invest the money in 
the shares are known as members of 
the company. 
3. Internal governance 
structure 
The internal governance 
structure of a LLP is 
governed by contract 
agreement between the 
partners. 
The internal governance structure of a 
company is regulated by statute (i.e., 
Companies Act, 2013). 
4. Name Name of the LLP to contain 
the word “Limited Liability 
partnership” or “LLP” as 
suffix. 
Name of the public company to 
contain the word “limited” and Pvt. Co. 
to contain the word “Private limited” as 
suffix. 
5. No. of 
members/partners 
Minimum – 2 members 
Maximum – No such limit on 
the members in the Act. The 
members of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such limit on the 
members.   
Members can be organizations, trusts, 
another business form or individuals. 
6. Liability of members/ 
partners 
Liability of a partners is 
limited to the extent of 
agreed contribution in case 
of intention is fraud. 
Liability of a member is limited to the 
amount unpaid on the shares held by 
them. 
© The Institute of Chartered Accountants of India
3 
7. Management The business of the 
company managed by the 
partners including the 
designated partners 
authorized in the 
agreement. 
The affairs of the company are 
managed by board of directors elected 
by the shareholders. 
8. Minimum number of 
directors/designated 
partners 
Minimum 2 designated 
partners. 
Pvt. Co. – 2 directors 
Public co. – 3 directors 
3. (a)  (i) Rights which can be enjoyed by a minor partner: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii)  He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing 
his connection with the firm, and not otherwise. 
(iv) On attaining majority, he may within 6 months elect to become a partner or not to become 
a partner. If he elects to become a partner, then he is entitled to the share to which he 
was entitled as a minor. If he does not, then his share is not liable for any acts of the 
firm after the date of the public notice served to that effect. 
  (ii) (1)  Liabilities of a minor partner before attaining majority: 
(a) The liability of the minor is confined only to the extent of his share in the profits and 
the property of the firm. 
(b) Minor has no personal liability for the debts of the firm incurred during his minority. 
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share 
in the firm vests in the Official Receiver/Assignee. 
(2) Liabilities of a minor partner after attaining majority: Within 6 months of his attaining 
majority or on his obtaining knowledge that he had been admitted to the benefits of 
partnership, whichever date is later, the minor partner has to decide whether he shall 
remain a partner or leave the firm. 
Where he has elected not to become partner he may give public notice that he has 
elected not to become partner and such notice shall determine his position as regards 
the firm. If he fails to give such notice he shall become a partner in the firm on the expiry 
of the said six months. 
(b)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.  
Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it. 
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of 
sugar, the event of flood occurred which made it impossible to deliver the sugar within the stipulated 
time. Thus, the promise in question became void. Further, Mr. X has to pay back the amount of Rs. 
50,000 that he received from Mr. Y as an advance for the supply of sugar within the stipulated time. 
Hence, the contention of Mr. Y is correct. 
 
© The Institute of Chartered Accountants of India
Page 4


1 
Test Series: March, 2019 
MOCK TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2A: BUSINESS LAWS  
ANSWERS 
1. (a)  Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final 
expression of willingness by the offeror to be bound by his offer should the party chooses to accept 
it. Where a party, without expressing his final willingness, proposes certain terms on which he is 
willing to negotiate, he does not make an offer, but invites only the other party to make an offer on 
those terms. This is the basic distinction between offer and invitation to offer. 
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in 
no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. 
Prakash by selecting some articles and approaching the cashier for payment simply made an offer 
to buy the articles selected by her. If the cashier does not accept the price, the interested buyer 
cannot compel him to sell.  
(b)  Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders 
are deemed to have notice of the internal affairs of the company. For instance, if an act is 
authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed 
formalities for doing that act have been observed. 
The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other officers 
of the company are validly performed, if they are within the scope of their apparent authority. So 
long as an act is valid under the articles, if done in a particular manner, an outsider dealing with 
the company is entitled to assume that it has been done in the manner required. 
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same 
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive 
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods 
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company. 
(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession from one 
person to another [Section 2(2) of the Sale of Goods Act, 1930]. As a general rule, delivery of 
goods may be made by doing anything, which has the effect of putting the goods in the possession 
of the buyer, or any person authorized to hold them on his behalf.  
Forms of delivery: Following are the kinds of delivery for transfer of possession:  
(i) Actual delivery: When the goods are physically delivered to the buyer. 
(ii) Constructive delivery: When it is effected without any change in the custody or actual 
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., 
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s 
request. 
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something 
else, i.e., delivery of goods in the course of transit may be made by handing over documents 
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a 
warehouse containing the goods is handed over to buyer. 
© The Institute of Chartered Accountants of India
2 
2. (a)  An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory 
Breach. The law in this regard has very well summed up in Frost v. Knight and Hochster v. Dela 
Tour:  
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as 
follows: "When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but 
words or conduct, his acquiescence in its continuance."  
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of 
performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party 
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform 
his part of the, contract and can also take advantage of any supervening impossibility which 
may have the effect of discharging the contract.  
(b)  Distinction between LLP and Limited Liability Company  
 Basis  LLP LLC 
1. Regulating Act The LLP Act, 2008. The Companies Act, 2013. 
2. Members/Partners The persons who contribute 
to LLP are known as 
partners of the LLP. 
The persons who invest the money in 
the shares are known as members of 
the company. 
3. Internal governance 
structure 
The internal governance 
structure of a LLP is 
governed by contract 
agreement between the 
partners. 
The internal governance structure of a 
company is regulated by statute (i.e., 
Companies Act, 2013). 
4. Name Name of the LLP to contain 
the word “Limited Liability 
partnership” or “LLP” as 
suffix. 
Name of the public company to 
contain the word “limited” and Pvt. Co. 
to contain the word “Private limited” as 
suffix. 
5. No. of 
members/partners 
Minimum – 2 members 
Maximum – No such limit on 
the members in the Act. The 
members of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such limit on the 
members.   
Members can be organizations, trusts, 
another business form or individuals. 
6. Liability of members/ 
partners 
Liability of a partners is 
limited to the extent of 
agreed contribution in case 
of intention is fraud. 
Liability of a member is limited to the 
amount unpaid on the shares held by 
them. 
© The Institute of Chartered Accountants of India
3 
7. Management The business of the 
company managed by the 
partners including the 
designated partners 
authorized in the 
agreement. 
The affairs of the company are 
managed by board of directors elected 
by the shareholders. 
8. Minimum number of 
directors/designated 
partners 
Minimum 2 designated 
partners. 
Pvt. Co. – 2 directors 
Public co. – 3 directors 
3. (a)  (i) Rights which can be enjoyed by a minor partner: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii)  He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing 
his connection with the firm, and not otherwise. 
(iv) On attaining majority, he may within 6 months elect to become a partner or not to become 
a partner. If he elects to become a partner, then he is entitled to the share to which he 
was entitled as a minor. If he does not, then his share is not liable for any acts of the 
firm after the date of the public notice served to that effect. 
  (ii) (1)  Liabilities of a minor partner before attaining majority: 
(a) The liability of the minor is confined only to the extent of his share in the profits and 
the property of the firm. 
(b) Minor has no personal liability for the debts of the firm incurred during his minority. 
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share 
in the firm vests in the Official Receiver/Assignee. 
(2) Liabilities of a minor partner after attaining majority: Within 6 months of his attaining 
majority or on his obtaining knowledge that he had been admitted to the benefits of 
partnership, whichever date is later, the minor partner has to decide whether he shall 
remain a partner or leave the firm. 
Where he has elected not to become partner he may give public notice that he has 
elected not to become partner and such notice shall determine his position as regards 
the firm. If he fails to give such notice he shall become a partner in the firm on the expiry 
of the said six months. 
(b)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.  
Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it. 
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of 
sugar, the event of flood occurred which made it impossible to deliver the sugar within the stipulated 
time. Thus, the promise in question became void. Further, Mr. X has to pay back the amount of Rs. 
50,000 that he received from Mr. Y as an advance for the supply of sugar within the stipulated time. 
Hence, the contention of Mr. Y is correct. 
 
© The Institute of Chartered Accountants of India
4 
4. (a)  Unpaid Seller: According to Section 45 of the Sale of Goods Act, 1930 the seller of goods is 
deemed to be an ‘Unpaid Seller’ when- 
(a) the whole of the price has not been paid or tendered.  
(b) a bill of exchange or other negotiable instrument has been received as conditional payment, 
and it has been dishonoured.  
Right of stoppage of goods in transit 
When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent, 
he can exercise this right by asking the carrier to return the goods back, or not to deliver the goods 
to the buyer. 
However, the right of stoppage in transit is exercised only when the following conditions are fulfilled: 
(a) The seller must be unpaid. 
(b) The seller must have parted with the possession of goods. 
(c) The goods must be in the course of transit. 
(d) The buyer must have become insolvent. 
(e) The right is subject to provisions of the Act. 
(b)  According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may, by contract 
between the partners, extend or restrict implied authority of any partners. 
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls 
within his implied authority binds the firm, unless the person with whom he is dealing knows of the 
restriction or does not know or believe that partner to be a partner. 
The implied authority of a partner may be extended or restricted by contract between the partners. 
Under the following conditions, the restrictions imposed on the implied authority of a partner by 
agreement shall be effective against a third party: 
1.  The third party knows above the restrictions, and 
2.  The third party does not know that he is dealing with a partner in a firm. 
Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold them 
to a third party and M was also ignorant about the agreement entered into by the partners about 
the change in their role. M also is not aware that he is dealing with a partner in a firm. Therefore, 
M on the basis of knowledge of implied authority of A, can recover money from the firm. 
But in the second situation, if M was having knowledge about the agreement, he cannot recover 
money from the firm. 
5. (a) Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the goods remain 
at the seller’s risk until the property therein is transferred to the buyer, but when the property therein 
is transferred to the buyer, the goods are at buyer’s risk whether delivery has been made or not. 
Further Section 18 read with Section 23 of the Act provides that in a contract for the sale of 
unascertained goods, no property in the goods is transferred to the buyer, unless and until the 
goods are ascertained and where there is contract for the sale of unascertained or future goods by 
description, and goods of that description and in a deliverable state are unconditionally 
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with 
the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may 
be express or implied. Applying the aforesaid law to the facts of the case in hand, it is clear that 
Mr. Samuel has the right to select the good out of the bulk and he has sent his men for same 
purpose. 
© The Institute of Chartered Accountants of India
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1 
Test Series: March, 2019 
MOCK TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2A: BUSINESS LAWS  
ANSWERS 
1. (a)  Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final 
expression of willingness by the offeror to be bound by his offer should the party chooses to accept 
it. Where a party, without expressing his final willingness, proposes certain terms on which he is 
willing to negotiate, he does not make an offer, but invites only the other party to make an offer on 
those terms. This is the basic distinction between offer and invitation to offer. 
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in 
no sense an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. 
Prakash by selecting some articles and approaching the cashier for payment simply made an offer 
to buy the articles selected by her. If the cashier does not accept the price, the interested buyer 
cannot compel him to sell.  
(b)  Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders 
are deemed to have notice of the internal affairs of the company. For instance, if an act is 
authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed 
formalities for doing that act have been observed. 
The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other officers 
of the company are validly performed, if they are within the scope of their apparent authority. So 
long as an act is valid under the articles, if done in a particular manner, an outsider dealing with 
the company is entitled to assume that it has been done in the manner required. 
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same 
to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive 
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods 
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company. 
(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession from one 
person to another [Section 2(2) of the Sale of Goods Act, 1930]. As a general rule, delivery of 
goods may be made by doing anything, which has the effect of putting the goods in the possession 
of the buyer, or any person authorized to hold them on his behalf.  
Forms of delivery: Following are the kinds of delivery for transfer of possession:  
(i) Actual delivery: When the goods are physically delivered to the buyer. 
(ii) Constructive delivery: When it is effected without any change in the custody or actual 
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., 
where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s 
request. 
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something 
else, i.e., delivery of goods in the course of transit may be made by handing over documents 
of title to goods, like bill of lading or railway receipt or delivery orders or the key of a 
warehouse containing the goods is handed over to buyer. 
© The Institute of Chartered Accountants of India
2 
2. (a)  An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory 
Breach. The law in this regard has very well summed up in Frost v. Knight and Hochster v. Dela 
Tour:  
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as 
follows: "When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but 
words or conduct, his acquiescence in its continuance."  
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of 
performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other party 
as well as his own, and the guilty party, if he so decides on re-consideration, may still perform 
his part of the, contract and can also take advantage of any supervening impossibility which 
may have the effect of discharging the contract.  
(b)  Distinction between LLP and Limited Liability Company  
 Basis  LLP LLC 
1. Regulating Act The LLP Act, 2008. The Companies Act, 2013. 
2. Members/Partners The persons who contribute 
to LLP are known as 
partners of the LLP. 
The persons who invest the money in 
the shares are known as members of 
the company. 
3. Internal governance 
structure 
The internal governance 
structure of a LLP is 
governed by contract 
agreement between the 
partners. 
The internal governance structure of a 
company is regulated by statute (i.e., 
Companies Act, 2013). 
4. Name Name of the LLP to contain 
the word “Limited Liability 
partnership” or “LLP” as 
suffix. 
Name of the public company to 
contain the word “limited” and Pvt. Co. 
to contain the word “Private limited” as 
suffix. 
5. No. of 
members/partners 
Minimum – 2 members 
Maximum – No such limit on 
the members in the Act. The 
members of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such limit on the 
members.   
Members can be organizations, trusts, 
another business form or individuals. 
6. Liability of members/ 
partners 
Liability of a partners is 
limited to the extent of 
agreed contribution in case 
of intention is fraud. 
Liability of a member is limited to the 
amount unpaid on the shares held by 
them. 
© The Institute of Chartered Accountants of India
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7. Management The business of the 
company managed by the 
partners including the 
designated partners 
authorized in the 
agreement. 
The affairs of the company are 
managed by board of directors elected 
by the shareholders. 
8. Minimum number of 
directors/designated 
partners 
Minimum 2 designated 
partners. 
Pvt. Co. – 2 directors 
Public co. – 3 directors 
3. (a)  (i) Rights which can be enjoyed by a minor partner: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii)  He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing 
his connection with the firm, and not otherwise. 
(iv) On attaining majority, he may within 6 months elect to become a partner or not to become 
a partner. If he elects to become a partner, then he is entitled to the share to which he 
was entitled as a minor. If he does not, then his share is not liable for any acts of the 
firm after the date of the public notice served to that effect. 
  (ii) (1)  Liabilities of a minor partner before attaining majority: 
(a) The liability of the minor is confined only to the extent of his share in the profits and 
the property of the firm. 
(b) Minor has no personal liability for the debts of the firm incurred during his minority. 
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share 
in the firm vests in the Official Receiver/Assignee. 
(2) Liabilities of a minor partner after attaining majority: Within 6 months of his attaining 
majority or on his obtaining knowledge that he had been admitted to the benefits of 
partnership, whichever date is later, the minor partner has to decide whether he shall 
remain a partner or leave the firm. 
Where he has elected not to become partner he may give public notice that he has 
elected not to become partner and such notice shall determine his position as regards 
the firm. If he fails to give such notice he shall become a partner in the firm on the expiry 
of the said six months. 
(b)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.  
Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it. 
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of 
sugar, the event of flood occurred which made it impossible to deliver the sugar within the stipulated 
time. Thus, the promise in question became void. Further, Mr. X has to pay back the amount of Rs. 
50,000 that he received from Mr. Y as an advance for the supply of sugar within the stipulated time. 
Hence, the contention of Mr. Y is correct. 
 
© The Institute of Chartered Accountants of India
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4. (a)  Unpaid Seller: According to Section 45 of the Sale of Goods Act, 1930 the seller of goods is 
deemed to be an ‘Unpaid Seller’ when- 
(a) the whole of the price has not been paid or tendered.  
(b) a bill of exchange or other negotiable instrument has been received as conditional payment, 
and it has been dishonoured.  
Right of stoppage of goods in transit 
When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent, 
he can exercise this right by asking the carrier to return the goods back, or not to deliver the goods 
to the buyer. 
However, the right of stoppage in transit is exercised only when the following conditions are fulfilled: 
(a) The seller must be unpaid. 
(b) The seller must have parted with the possession of goods. 
(c) The goods must be in the course of transit. 
(d) The buyer must have become insolvent. 
(e) The right is subject to provisions of the Act. 
(b)  According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may, by contract 
between the partners, extend or restrict implied authority of any partners. 
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls 
within his implied authority binds the firm, unless the person with whom he is dealing knows of the 
restriction or does not know or believe that partner to be a partner. 
The implied authority of a partner may be extended or restricted by contract between the partners. 
Under the following conditions, the restrictions imposed on the implied authority of a partner by 
agreement shall be effective against a third party: 
1.  The third party knows above the restrictions, and 
2.  The third party does not know that he is dealing with a partner in a firm. 
Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold them 
to a third party and M was also ignorant about the agreement entered into by the partners about 
the change in their role. M also is not aware that he is dealing with a partner in a firm. Therefore, 
M on the basis of knowledge of implied authority of A, can recover money from the firm. 
But in the second situation, if M was having knowledge about the agreement, he cannot recover 
money from the firm. 
5. (a) Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the goods remain 
at the seller’s risk until the property therein is transferred to the buyer, but when the property therein 
is transferred to the buyer, the goods are at buyer’s risk whether delivery has been made or not. 
Further Section 18 read with Section 23 of the Act provides that in a contract for the sale of 
unascertained goods, no property in the goods is transferred to the buyer, unless and until the 
goods are ascertained and where there is contract for the sale of unascertained or future goods by 
description, and goods of that description and in a deliverable state are unconditionally 
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with 
the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may 
be express or implied. Applying the aforesaid law to the facts of the case in hand, it is clear that 
Mr. Samuel has the right to select the good out of the bulk and he has sent his men for same 
purpose. 
© The Institute of Chartered Accountants of India
5 
Hence the problem can be answered based on the following two assumptions and the answer will 
vary accordingly. 
(i)  Where the bales have been selected with the consent of the buyer’s representatives: In this 
case, the property in the 60 bales has been transferred to the buyer and goods have been 
appropriated to the contract. Thus, loss arising due to fire in case of 60 bales would be borne 
by Mr. Samuel. As regards 40 bales, the loss would be borne by Mr. Varun, since the goods 
have not been identified and appropriated. 
(ii)  Where the bales have not been selected with the consent of buyer’s representatives. 
 In this case the property in the goods has not been transferred at all and hence the loss of 
100 bales would be borne by Mr. Varun completely. 
(b)  The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore the whole idea of Mr. 
F was simply to split his income into three parts with a view to evade tax. No other business 
was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried on no other business, but was 
created simply as a legal entity to ostensibly receive the dividend and interest and to hand 
them over to the assessee as pretended loans. The same was upheld in Re Sir Dinshaw 
Maneckji Petit AIR 1927 Bom.371 and Juggilal vs. Commissioner of Income Tax AIR (1969) 
SC (932). 
6. (a)  Definition of Consideration-Section 2(d) 
“When at the desire of the promisor, the promise or any other person has done, or does or abstains 
from doing of promises to do or abstain from doing something, such an act or abstinence or promise 
is called consideration for the promise” 
The essential characteristics of a valid consideration are as follows: 
(1) Consideration must move at the desire of the promisor 
(2) It may proceed from the promisee or any other person on his behalf. 
(3) It may be executed or executory. It may be past, present or future. 
(4) It must be real and have some value in the eyes of law.   
(5) It must not be something which the promisor is already legally bound to do. 
(6) It must not be unlawful, immoral or opposed to public policy. 
(7) Inadequacy of consideration does not invalidate the contract. Thus, it need not be 
proportionate to the value of the promise of the other. 
(8) It may comprise of some benefit, profit, right or interest accruing to one or some loss, 
detriment, obligation or responsibility undertaken by the other. 
© The Institute of Chartered Accountants of India