Mock Test: Business Laws and Business Correspondence & Reporting(Paper-2) Answers - Series-II(May 20 | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

 Page 1


1 
MOCK TEST PAPER  2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  Section 10 of Indian Contract Act, 1872 laid done the essential elements of a valid contract. One of 
the essential elements of valid contract is free consent. Consent is an express willingness or giving 
voluntary permission or agreeing to something. Section 13 further clarify" two or more persons are 
said to consent when they agree upon the same thing in the same sense" 
In the present case, both the parties have given a free consent but they are not consenting for 
the same thing in the same sense. Mr. Joy wants to sell flat no. 101 and Mr. Roy has agreed the 
contract thinking that it's flat no. 102. 
Hence, the agreement would be invalidated at the inception (beginning) stage itself because both 
the parties did not agree about a thing (sale of flat) in the same sense. Hence, both the parties 
did not have mutual consent for the contract; therefore it is not a valid contract. 
(ii)   According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any other 
company (that is to say the holding company), means a company in which the holding 
company—  
(i)  controls the composition of the Board of Directors; or  
(ii)  exercises or controls more than one-half of the total voting power either at its own or 
together with one or more of its subsidiary companies:  
For the purposes of this section —  
(i)  the composition of a company’s Board of Directors shall be deemed to be controlled by 
another company if that other company by exercise of some power exercisable by it at its 
discretion can appoint or remove all or a majority of the directors;  
(ii)  the expression “company” includes anybody corporate;  
It is to be noted that Preference share capital will also be considered if preference shareholders 
have same voting rights as equity shareholders. 
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of 
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan 
Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram 
Private Limited.  
As in the given problem it is not clear that whether Preference Shares are having voting rights or 
not, it can be taken that there is no voting right with these shares. On the basis of provisions of 
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity 
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private 
Limited does not exercises or controls more than one-half of the total voting power in Ram 
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited. 
(iii)  Caveat Emptor: In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer 
beware’. When sellers display their goods in the open market, it is for the buyers to make a 
proper selection or choice of the goods. If the goods turn out to be defective, he c annot hold the 
Page 2


1 
MOCK TEST PAPER  2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  Section 10 of Indian Contract Act, 1872 laid done the essential elements of a valid contract. One of 
the essential elements of valid contract is free consent. Consent is an express willingness or giving 
voluntary permission or agreeing to something. Section 13 further clarify" two or more persons are 
said to consent when they agree upon the same thing in the same sense" 
In the present case, both the parties have given a free consent but they are not consenting for 
the same thing in the same sense. Mr. Joy wants to sell flat no. 101 and Mr. Roy has agreed the 
contract thinking that it's flat no. 102. 
Hence, the agreement would be invalidated at the inception (beginning) stage itself because both 
the parties did not agree about a thing (sale of flat) in the same sense. Hence, both the parties 
did not have mutual consent for the contract; therefore it is not a valid contract. 
(ii)   According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any other 
company (that is to say the holding company), means a company in which the holding 
company—  
(i)  controls the composition of the Board of Directors; or  
(ii)  exercises or controls more than one-half of the total voting power either at its own or 
together with one or more of its subsidiary companies:  
For the purposes of this section —  
(i)  the composition of a company’s Board of Directors shall be deemed to be controlled by 
another company if that other company by exercise of some power exercisable by it at its 
discretion can appoint or remove all or a majority of the directors;  
(ii)  the expression “company” includes anybody corporate;  
It is to be noted that Preference share capital will also be considered if preference shareholders 
have same voting rights as equity shareholders. 
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of 
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan 
Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram 
Private Limited.  
As in the given problem it is not clear that whether Preference Shares are having voting rights or 
not, it can be taken that there is no voting right with these shares. On the basis of provisions of 
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity 
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private 
Limited does not exercises or controls more than one-half of the total voting power in Ram 
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited. 
(iii)  Caveat Emptor: In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer 
beware’. When sellers display their goods in the open market, it is for the buyers to make a 
proper selection or choice of the goods. If the goods turn out to be defective, he c annot hold the 
2 
seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is 
not bound to disclose the defects in the goods which he is selling.  
The doctrine of Caveat Emptor is subject to the following exceptions: 
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular 
purpose for which the goods are required, so as to show that he relies on the seller’s skill or 
judgment and the goods are of a description which is in the course of seller’s business to 
supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose 
[Section 16 (1) of the Sale of Goods Act, 1930]. 
2. Goods purchased under patent or brand name:  In case where the goods are purchased 
under its patent name or brand name, there is no implied condition that the goods shall be 
fit for any particular purpose [Section 16(1)]. 
3. Goods sold by description: Where the goods are sold by description there is an implied 
condition that the goods shall correspond with the description [Section 15]. If it is not so, 
then seller is responsible. 
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller 
who deals in goods of that description there is an implied condition that the goods shall be 
of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer 
has examined the goods, this rule shall apply if the defects were such which ought to have 
not been revealed by ordinary examination [Section 16(2)]. 
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does 
not apply if the bulk does not correspond with the sample [Section 17]. 
6. Goods by sample as well as description: Where the goods are bought by sample as well 
as description, the rule of Caveat Emptor is not applicable in case the goods do not 
correspond with both the sample and description or either of the condition [Section 15]. 
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular 
purpose may be annexed by the usage of trade and if the seller deviates from that, this rule 
of Caveat Emptor is not applicable [Section 16(3)]. 
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by 
making some misrepresentation or fraud and the buyer relies on it or when the seller 
actively conceals some defect in the goods so that the same could not be discovered by the 
buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a 
case the buyer has a right to avoid the contract and claim damages. 
2. (i) (a) An agreement comes into existence when one party makes a proposal or offer to the other 
party and that other party gives his acceptance to it. A contract is an agreement enforceable 
by law. It means that to become a contract, an agreement must give rise to a legal 
obligation i.e. duly enforceable by law. If an agreement is incapable of creating a duly 
enforceable by law, it is not a contract. There can be agreements which are not enforceable 
by law, such as social, moral or religious agreements. The agreement is a wider term than 
the contract. All agreements need not necessarily become contracts but all contracts shall 
always be agreements.  
 All agreements are not contracts: When there is an agreement between the parties and they 
do not intend to create a legal relationship, it is not a contract.  
 All contracts are agreements: For a contract there must be two things (a) an agreement and 
(b) enforceability by law. Thus, existence of an agreement is a pre-requisite existence of a 
contract. Therefore, it is true to say that all contracts are agreements.  
Page 3


1 
MOCK TEST PAPER  2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  Section 10 of Indian Contract Act, 1872 laid done the essential elements of a valid contract. One of 
the essential elements of valid contract is free consent. Consent is an express willingness or giving 
voluntary permission or agreeing to something. Section 13 further clarify" two or more persons are 
said to consent when they agree upon the same thing in the same sense" 
In the present case, both the parties have given a free consent but they are not consenting for 
the same thing in the same sense. Mr. Joy wants to sell flat no. 101 and Mr. Roy has agreed the 
contract thinking that it's flat no. 102. 
Hence, the agreement would be invalidated at the inception (beginning) stage itself because both 
the parties did not agree about a thing (sale of flat) in the same sense. Hence, both the parties 
did not have mutual consent for the contract; therefore it is not a valid contract. 
(ii)   According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any other 
company (that is to say the holding company), means a company in which the holding 
company—  
(i)  controls the composition of the Board of Directors; or  
(ii)  exercises or controls more than one-half of the total voting power either at its own or 
together with one or more of its subsidiary companies:  
For the purposes of this section —  
(i)  the composition of a company’s Board of Directors shall be deemed to be controlled by 
another company if that other company by exercise of some power exercisable by it at its 
discretion can appoint or remove all or a majority of the directors;  
(ii)  the expression “company” includes anybody corporate;  
It is to be noted that Preference share capital will also be considered if preference shareholders 
have same voting rights as equity shareholders. 
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of 
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan 
Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram 
Private Limited.  
As in the given problem it is not clear that whether Preference Shares are having voting rights or 
not, it can be taken that there is no voting right with these shares. On the basis of provisions of 
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity 
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private 
Limited does not exercises or controls more than one-half of the total voting power in Ram 
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited. 
(iii)  Caveat Emptor: In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer 
beware’. When sellers display their goods in the open market, it is for the buyers to make a 
proper selection or choice of the goods. If the goods turn out to be defective, he c annot hold the 
2 
seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is 
not bound to disclose the defects in the goods which he is selling.  
The doctrine of Caveat Emptor is subject to the following exceptions: 
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular 
purpose for which the goods are required, so as to show that he relies on the seller’s skill or 
judgment and the goods are of a description which is in the course of seller’s business to 
supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose 
[Section 16 (1) of the Sale of Goods Act, 1930]. 
2. Goods purchased under patent or brand name:  In case where the goods are purchased 
under its patent name or brand name, there is no implied condition that the goods shall be 
fit for any particular purpose [Section 16(1)]. 
3. Goods sold by description: Where the goods are sold by description there is an implied 
condition that the goods shall correspond with the description [Section 15]. If it is not so, 
then seller is responsible. 
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller 
who deals in goods of that description there is an implied condition that the goods shall be 
of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer 
has examined the goods, this rule shall apply if the defects were such which ought to have 
not been revealed by ordinary examination [Section 16(2)]. 
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does 
not apply if the bulk does not correspond with the sample [Section 17]. 
6. Goods by sample as well as description: Where the goods are bought by sample as well 
as description, the rule of Caveat Emptor is not applicable in case the goods do not 
correspond with both the sample and description or either of the condition [Section 15]. 
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular 
purpose may be annexed by the usage of trade and if the seller deviates from that, this rule 
of Caveat Emptor is not applicable [Section 16(3)]. 
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by 
making some misrepresentation or fraud and the buyer relies on it or when the seller 
actively conceals some defect in the goods so that the same could not be discovered by the 
buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a 
case the buyer has a right to avoid the contract and claim damages. 
2. (i) (a) An agreement comes into existence when one party makes a proposal or offer to the other 
party and that other party gives his acceptance to it. A contract is an agreement enforceable 
by law. It means that to become a contract, an agreement must give rise to a legal 
obligation i.e. duly enforceable by law. If an agreement is incapable of creating a duly 
enforceable by law, it is not a contract. There can be agreements which are not enforceable 
by law, such as social, moral or religious agreements. The agreement is a wider term than 
the contract. All agreements need not necessarily become contracts but all contracts shall 
always be agreements.  
 All agreements are not contracts: When there is an agreement between the parties and they 
do not intend to create a legal relationship, it is not a contract.  
 All contracts are agreements: For a contract there must be two things (a) an agreement and 
(b) enforceability by law. Thus, existence of an agreement is a pre-requisite existence of a 
contract. Therefore, it is true to say that all contracts are agreements.  
3 
 Thus, we can say that there can be an agreement without it becoming a contract, but we 
can’t have a contract without an agreement.  
(ii) As per Section 17 of Indian Contract Act, 1872 , “A false representation of material facts when 
made intentionally to deceive the other party to induce him to enter into a contract is termed as a 
fraud.” Section 17(2) further states about active concealment .When a party intentionally 
conceals or hides some material facts from the other party and makes sure that the other party is 
not able to know the truth, in fact makes the other party believe something which is false, then a 
fraud is committed. In case a fraud is committed, the aggrieved party gets the right to rescind the 
contract. (Section 19). If the aggrieved party has obtained some benefits in such a contract 
(caused by fraud), then all such benefits should be restored or returned back. And if aggrieved 
party has suffered any losses, it should be compensated by the other party. 
On the basis of above provisions and facts of the case, in case a fraud is committed by one 
party, the contract becomes voidable at the option of the aggrieved party. Hence, Karan can 
rescind the contract and claim compensation for the loss suffered due to fraud done by Mr. X. 
(iii)  Designated Partner [Section 2(j)]: “Designated partner” means any partner designated as such 
pursuant to section 7. 
 According to section 7 of the LLP Act, 2008:   
(i) Every LLP shall have at least two designated partners who are individuals and at least one 
of them shall be a resident in India. 
(ii)  If in LLP, all the partners are bodies corporate or in which one or more partners are 
individuals and bodies corporate, at least two individuals who are partners of such LLP or 
nominees of such bodies corporate shall act as designated partners.  
3. (i)   
Basis Partnership Joint Stock Company 
Legal status A firm is not legal entity i.e. it 
has no legal personality 
distinct from the personalities 
of its constituent members. 
A company is a separate legal 
entity distinct from its members 
(Salomon v. Salomon). 
Agency In a firm, every partner is an 
agent of the other partners as 
well as of the firm. 
In a company, a member is not 
an agent of the other members 
or of the company, his actions 
do not bind either. 
Distribution of profits The profits of the firm must be 
distributed among the partners 
according to the terms of the 
partnership deed. 
There is no such compulsion to 
distribute its profits among its 
members. Some portion of the 
profits, but generally not the 
entire profit, become 
distributable among the 
shareholders only when 
dividends are declared. 
Extent of liability In a partnership, the liability of 
the partners is unlimited. This 
means that each partner is 
liable for debts of a firm 
incurred in the course of the 
business of the firm and these 
debts can be recovered from 
In a company limited by shares, 
the liability of a shareholder is 
limited to the amount, if any, 
unpaid on his shares, but in the 
case of a guarantee company, 
the liability is limited to the 
amount for which he has agreed 
Page 4


1 
MOCK TEST PAPER  2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  Section 10 of Indian Contract Act, 1872 laid done the essential elements of a valid contract. One of 
the essential elements of valid contract is free consent. Consent is an express willingness or giving 
voluntary permission or agreeing to something. Section 13 further clarify" two or more persons are 
said to consent when they agree upon the same thing in the same sense" 
In the present case, both the parties have given a free consent but they are not consenting for 
the same thing in the same sense. Mr. Joy wants to sell flat no. 101 and Mr. Roy has agreed the 
contract thinking that it's flat no. 102. 
Hence, the agreement would be invalidated at the inception (beginning) stage itself because both 
the parties did not agree about a thing (sale of flat) in the same sense. Hence, both the parties 
did not have mutual consent for the contract; therefore it is not a valid contract. 
(ii)   According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any other 
company (that is to say the holding company), means a company in which the holding 
company—  
(i)  controls the composition of the Board of Directors; or  
(ii)  exercises or controls more than one-half of the total voting power either at its own or 
together with one or more of its subsidiary companies:  
For the purposes of this section —  
(i)  the composition of a company’s Board of Directors shall be deemed to be controlled by 
another company if that other company by exercise of some power exercisable by it at its 
discretion can appoint or remove all or a majority of the directors;  
(ii)  the expression “company” includes anybody corporate;  
It is to be noted that Preference share capital will also be considered if preference shareholders 
have same voting rights as equity shareholders. 
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of 
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan 
Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram 
Private Limited.  
As in the given problem it is not clear that whether Preference Shares are having voting rights or 
not, it can be taken that there is no voting right with these shares. On the basis of provisions of 
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity 
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private 
Limited does not exercises or controls more than one-half of the total voting power in Ram 
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited. 
(iii)  Caveat Emptor: In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer 
beware’. When sellers display their goods in the open market, it is for the buyers to make a 
proper selection or choice of the goods. If the goods turn out to be defective, he c annot hold the 
2 
seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is 
not bound to disclose the defects in the goods which he is selling.  
The doctrine of Caveat Emptor is subject to the following exceptions: 
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular 
purpose for which the goods are required, so as to show that he relies on the seller’s skill or 
judgment and the goods are of a description which is in the course of seller’s business to 
supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose 
[Section 16 (1) of the Sale of Goods Act, 1930]. 
2. Goods purchased under patent or brand name:  In case where the goods are purchased 
under its patent name or brand name, there is no implied condition that the goods shall be 
fit for any particular purpose [Section 16(1)]. 
3. Goods sold by description: Where the goods are sold by description there is an implied 
condition that the goods shall correspond with the description [Section 15]. If it is not so, 
then seller is responsible. 
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller 
who deals in goods of that description there is an implied condition that the goods shall be 
of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer 
has examined the goods, this rule shall apply if the defects were such which ought to have 
not been revealed by ordinary examination [Section 16(2)]. 
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does 
not apply if the bulk does not correspond with the sample [Section 17]. 
6. Goods by sample as well as description: Where the goods are bought by sample as well 
as description, the rule of Caveat Emptor is not applicable in case the goods do not 
correspond with both the sample and description or either of the condition [Section 15]. 
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular 
purpose may be annexed by the usage of trade and if the seller deviates from that, this rule 
of Caveat Emptor is not applicable [Section 16(3)]. 
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by 
making some misrepresentation or fraud and the buyer relies on it or when the seller 
actively conceals some defect in the goods so that the same could not be discovered by the 
buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a 
case the buyer has a right to avoid the contract and claim damages. 
2. (i) (a) An agreement comes into existence when one party makes a proposal or offer to the other 
party and that other party gives his acceptance to it. A contract is an agreement enforceable 
by law. It means that to become a contract, an agreement must give rise to a legal 
obligation i.e. duly enforceable by law. If an agreement is incapable of creating a duly 
enforceable by law, it is not a contract. There can be agreements which are not enforceable 
by law, such as social, moral or religious agreements. The agreement is a wider term than 
the contract. All agreements need not necessarily become contracts but all contracts shall 
always be agreements.  
 All agreements are not contracts: When there is an agreement between the parties and they 
do not intend to create a legal relationship, it is not a contract.  
 All contracts are agreements: For a contract there must be two things (a) an agreement and 
(b) enforceability by law. Thus, existence of an agreement is a pre-requisite existence of a 
contract. Therefore, it is true to say that all contracts are agreements.  
3 
 Thus, we can say that there can be an agreement without it becoming a contract, but we 
can’t have a contract without an agreement.  
(ii) As per Section 17 of Indian Contract Act, 1872 , “A false representation of material facts when 
made intentionally to deceive the other party to induce him to enter into a contract is termed as a 
fraud.” Section 17(2) further states about active concealment .When a party intentionally 
conceals or hides some material facts from the other party and makes sure that the other party is 
not able to know the truth, in fact makes the other party believe something which is false, then a 
fraud is committed. In case a fraud is committed, the aggrieved party gets the right to rescind the 
contract. (Section 19). If the aggrieved party has obtained some benefits in such a contract 
(caused by fraud), then all such benefits should be restored or returned back. And if aggrieved 
party has suffered any losses, it should be compensated by the other party. 
On the basis of above provisions and facts of the case, in case a fraud is committed by one 
party, the contract becomes voidable at the option of the aggrieved party. Hence, Karan can 
rescind the contract and claim compensation for the loss suffered due to fraud done by Mr. X. 
(iii)  Designated Partner [Section 2(j)]: “Designated partner” means any partner designated as such 
pursuant to section 7. 
 According to section 7 of the LLP Act, 2008:   
(i) Every LLP shall have at least two designated partners who are individuals and at least one 
of them shall be a resident in India. 
(ii)  If in LLP, all the partners are bodies corporate or in which one or more partners are 
individuals and bodies corporate, at least two individuals who are partners of such LLP or 
nominees of such bodies corporate shall act as designated partners.  
3. (i)   
Basis Partnership Joint Stock Company 
Legal status A firm is not legal entity i.e. it 
has no legal personality 
distinct from the personalities 
of its constituent members. 
A company is a separate legal 
entity distinct from its members 
(Salomon v. Salomon). 
Agency In a firm, every partner is an 
agent of the other partners as 
well as of the firm. 
In a company, a member is not 
an agent of the other members 
or of the company, his actions 
do not bind either. 
Distribution of profits The profits of the firm must be 
distributed among the partners 
according to the terms of the 
partnership deed. 
There is no such compulsion to 
distribute its profits among its 
members. Some portion of the 
profits, but generally not the 
entire profit, become 
distributable among the 
shareholders only when 
dividends are declared. 
Extent of liability In a partnership, the liability of 
the partners is unlimited. This 
means that each partner is 
liable for debts of a firm 
incurred in the course of the 
business of the firm and these 
debts can be recovered from 
In a company limited by shares, 
the liability of a shareholder is 
limited to the amount, if any, 
unpaid on his shares, but in the 
case of a guarantee company, 
the liability is limited to the 
amount for which he has agreed 
4 
his private property, if the joint 
estate is insufficient to meet 
them wholly. 
to be liable. However, there may 
be companies where the liability 
of members is unlimited. 
Property The firm’s property is that 
which is the “joint estate” of all 
the partners as distinguished 
from the ‘separate’ estate of 
any of them and it does not 
belong to a body distinct in 
law from its members. 
In a company, its property is 
separate from that of its 
members who can receive it 
back only in the form of 
dividends or refund of capital. 
Transfer of shares A share in a partnership 
cannot be transferred without 
the consent of all the partners. 
In a company a shareholder may 
transfer his shares, subject to 
the provisions contained in its 
Articles. In the case of public 
limited companies whose shares 
are quoted on the stock 
exchange, the transfer is usually 
unrestricted. 
Management In the absence of an express 
agreement to the contrary, all 
the partners are entitled to 
participate in the 
management. 
Members of a company are not 
entitled to take part in the 
management unless they are 
appointed as directors, in which 
case they may participate. 
Members, however, enjoy the 
right of attending general 
meeting and voting where they 
can decide certain questions 
such as election of directors, 
appointment of auditors, etc. 
Registration Registration is not compulsory 
in the case of partnership.  
A company cannot come into 
existence unless it is registered 
under the Companies Act, 2013. 
Winding up A partnership firm can be 
dissolved at any time if all the 
partners agree.  
A company, being a legal person 
is either wind up by the National 
Company Law Tribunal or its 
name is struck of by the 
Registrar of Companies. 
Number of 
membership 
According to section 464 of 
the Companies Act, 2013, the 
number of partners in any 
association shall not exceed 
100. 
However, the Rule given 
under the Companies 
(Miscellaneous) Rules, 2014 
restrict the present limit to 50. 
A private company may have as 
many as 200 members but not 
less than two and a public 
company may have any number 
of members but not less than 
seven. A private Company can 
also be formed by one person 
known as one person Company. 
Duration of existence Unless there is a contract to 
the contrary, death, retirement 
or insolvency of a partner 
results in the dissolution of the 
firm. 
A company enjoys a perpetual 
succession. 
Page 5


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MOCK TEST PAPER  2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  Section 10 of Indian Contract Act, 1872 laid done the essential elements of a valid contract. One of 
the essential elements of valid contract is free consent. Consent is an express willingness or giving 
voluntary permission or agreeing to something. Section 13 further clarify" two or more persons are 
said to consent when they agree upon the same thing in the same sense" 
In the present case, both the parties have given a free consent but they are not consenting for 
the same thing in the same sense. Mr. Joy wants to sell flat no. 101 and Mr. Roy has agreed the 
contract thinking that it's flat no. 102. 
Hence, the agreement would be invalidated at the inception (beginning) stage itself because both 
the parties did not agree about a thing (sale of flat) in the same sense. Hence, both the parties 
did not have mutual consent for the contract; therefore it is not a valid contract. 
(ii)   According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any other 
company (that is to say the holding company), means a company in which the holding 
company—  
(i)  controls the composition of the Board of Directors; or  
(ii)  exercises or controls more than one-half of the total voting power either at its own or 
together with one or more of its subsidiary companies:  
For the purposes of this section —  
(i)  the composition of a company’s Board of Directors shall be deemed to be controlled by 
another company if that other company by exercise of some power exercisable by it at its 
discretion can appoint or remove all or a majority of the directors;  
(ii)  the expression “company” includes anybody corporate;  
It is to be noted that Preference share capital will also be considered if preference shareholders 
have same voting rights as equity shareholders. 
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of 
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan 
Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram 
Private Limited.  
As in the given problem it is not clear that whether Preference Shares are having voting rights or 
not, it can be taken that there is no voting right with these shares. On the basis of provisions of 
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity 
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private 
Limited does not exercises or controls more than one-half of the total voting power in Ram 
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited. 
(iii)  Caveat Emptor: In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer 
beware’. When sellers display their goods in the open market, it is for the buyers to make a 
proper selection or choice of the goods. If the goods turn out to be defective, he c annot hold the 
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seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is 
not bound to disclose the defects in the goods which he is selling.  
The doctrine of Caveat Emptor is subject to the following exceptions: 
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular 
purpose for which the goods are required, so as to show that he relies on the seller’s skill or 
judgment and the goods are of a description which is in the course of seller’s business to 
supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose 
[Section 16 (1) of the Sale of Goods Act, 1930]. 
2. Goods purchased under patent or brand name:  In case where the goods are purchased 
under its patent name or brand name, there is no implied condition that the goods shall be 
fit for any particular purpose [Section 16(1)]. 
3. Goods sold by description: Where the goods are sold by description there is an implied 
condition that the goods shall correspond with the description [Section 15]. If it is not so, 
then seller is responsible. 
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller 
who deals in goods of that description there is an implied condition that the goods shall be 
of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer 
has examined the goods, this rule shall apply if the defects were such which ought to have 
not been revealed by ordinary examination [Section 16(2)]. 
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does 
not apply if the bulk does not correspond with the sample [Section 17]. 
6. Goods by sample as well as description: Where the goods are bought by sample as well 
as description, the rule of Caveat Emptor is not applicable in case the goods do not 
correspond with both the sample and description or either of the condition [Section 15]. 
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular 
purpose may be annexed by the usage of trade and if the seller deviates from that, this rule 
of Caveat Emptor is not applicable [Section 16(3)]. 
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by 
making some misrepresentation or fraud and the buyer relies on it or when the seller 
actively conceals some defect in the goods so that the same could not be discovered by the 
buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a 
case the buyer has a right to avoid the contract and claim damages. 
2. (i) (a) An agreement comes into existence when one party makes a proposal or offer to the other 
party and that other party gives his acceptance to it. A contract is an agreement enforceable 
by law. It means that to become a contract, an agreement must give rise to a legal 
obligation i.e. duly enforceable by law. If an agreement is incapable of creating a duly 
enforceable by law, it is not a contract. There can be agreements which are not enforceable 
by law, such as social, moral or religious agreements. The agreement is a wider term than 
the contract. All agreements need not necessarily become contracts but all contracts shall 
always be agreements.  
 All agreements are not contracts: When there is an agreement between the parties and they 
do not intend to create a legal relationship, it is not a contract.  
 All contracts are agreements: For a contract there must be two things (a) an agreement and 
(b) enforceability by law. Thus, existence of an agreement is a pre-requisite existence of a 
contract. Therefore, it is true to say that all contracts are agreements.  
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 Thus, we can say that there can be an agreement without it becoming a contract, but we 
can’t have a contract without an agreement.  
(ii) As per Section 17 of Indian Contract Act, 1872 , “A false representation of material facts when 
made intentionally to deceive the other party to induce him to enter into a contract is termed as a 
fraud.” Section 17(2) further states about active concealment .When a party intentionally 
conceals or hides some material facts from the other party and makes sure that the other party is 
not able to know the truth, in fact makes the other party believe something which is false, then a 
fraud is committed. In case a fraud is committed, the aggrieved party gets the right to rescind the 
contract. (Section 19). If the aggrieved party has obtained some benefits in such a contract 
(caused by fraud), then all such benefits should be restored or returned back. And if aggrieved 
party has suffered any losses, it should be compensated by the other party. 
On the basis of above provisions and facts of the case, in case a fraud is committed by one 
party, the contract becomes voidable at the option of the aggrieved party. Hence, Karan can 
rescind the contract and claim compensation for the loss suffered due to fraud done by Mr. X. 
(iii)  Designated Partner [Section 2(j)]: “Designated partner” means any partner designated as such 
pursuant to section 7. 
 According to section 7 of the LLP Act, 2008:   
(i) Every LLP shall have at least two designated partners who are individuals and at least one 
of them shall be a resident in India. 
(ii)  If in LLP, all the partners are bodies corporate or in which one or more partners are 
individuals and bodies corporate, at least two individuals who are partners of such LLP or 
nominees of such bodies corporate shall act as designated partners.  
3. (i)   
Basis Partnership Joint Stock Company 
Legal status A firm is not legal entity i.e. it 
has no legal personality 
distinct from the personalities 
of its constituent members. 
A company is a separate legal 
entity distinct from its members 
(Salomon v. Salomon). 
Agency In a firm, every partner is an 
agent of the other partners as 
well as of the firm. 
In a company, a member is not 
an agent of the other members 
or of the company, his actions 
do not bind either. 
Distribution of profits The profits of the firm must be 
distributed among the partners 
according to the terms of the 
partnership deed. 
There is no such compulsion to 
distribute its profits among its 
members. Some portion of the 
profits, but generally not the 
entire profit, become 
distributable among the 
shareholders only when 
dividends are declared. 
Extent of liability In a partnership, the liability of 
the partners is unlimited. This 
means that each partner is 
liable for debts of a firm 
incurred in the course of the 
business of the firm and these 
debts can be recovered from 
In a company limited by shares, 
the liability of a shareholder is 
limited to the amount, if any, 
unpaid on his shares, but in the 
case of a guarantee company, 
the liability is limited to the 
amount for which he has agreed 
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his private property, if the joint 
estate is insufficient to meet 
them wholly. 
to be liable. However, there may 
be companies where the liability 
of members is unlimited. 
Property The firm’s property is that 
which is the “joint estate” of all 
the partners as distinguished 
from the ‘separate’ estate of 
any of them and it does not 
belong to a body distinct in 
law from its members. 
In a company, its property is 
separate from that of its 
members who can receive it 
back only in the form of 
dividends or refund of capital. 
Transfer of shares A share in a partnership 
cannot be transferred without 
the consent of all the partners. 
In a company a shareholder may 
transfer his shares, subject to 
the provisions contained in its 
Articles. In the case of public 
limited companies whose shares 
are quoted on the stock 
exchange, the transfer is usually 
unrestricted. 
Management In the absence of an express 
agreement to the contrary, all 
the partners are entitled to 
participate in the 
management. 
Members of a company are not 
entitled to take part in the 
management unless they are 
appointed as directors, in which 
case they may participate. 
Members, however, enjoy the 
right of attending general 
meeting and voting where they 
can decide certain questions 
such as election of directors, 
appointment of auditors, etc. 
Registration Registration is not compulsory 
in the case of partnership.  
A company cannot come into 
existence unless it is registered 
under the Companies Act, 2013. 
Winding up A partnership firm can be 
dissolved at any time if all the 
partners agree.  
A company, being a legal person 
is either wind up by the National 
Company Law Tribunal or its 
name is struck of by the 
Registrar of Companies. 
Number of 
membership 
According to section 464 of 
the Companies Act, 2013, the 
number of partners in any 
association shall not exceed 
100. 
However, the Rule given 
under the Companies 
(Miscellaneous) Rules, 2014 
restrict the present limit to 50. 
A private company may have as 
many as 200 members but not 
less than two and a public 
company may have any number 
of members but not less than 
seven. A private Company can 
also be formed by one person 
known as one person Company. 
Duration of existence Unless there is a contract to 
the contrary, death, retirement 
or insolvency of a partner 
results in the dissolution of the 
firm. 
A company enjoys a perpetual 
succession. 
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(ii)  Section 27 of the Indian Contract Act, 1872 provides that any agreement that restrains a person 
from carrying on a lawful trade, profession or business is void agreement.  However, there are 
certain exceptions to this rule. One of the statutory exceptions includes sale of Goodwill. The 
restraint as to sale of goodwill would be a valid restraint provided- 
(i) Where the restraint is to refrain from carrying on a similar business 
(ii) The restrain should be within the specified local limits 
(iii) The restraint should be not to carry on the similar business after sale of goodwill to the 
buyer for a price 
(iv) The restriction should be reasonable. Reasonableness of restriction will depend upon 
number of factors as considered by court. 
In the given case, Rohan has sold the goodwill and there is restraint for not carrying on the same 
business of grocery store. However the restriction imposed on Rohan is unreasonable as he 
cannot carry similar business in whole of India for next 10 years. The restriction on restraint to 
similar kind of trade should be reasonable to make it a valid agreement. Therefore, Rohit cannot 
take any legal action against Rohan as the restriction is unreasonable as per Section 27 of Indian 
Contract Act, 1872. Hence, the agreement made between Rohan and Rohit in restraint of trade is 
void agreement. 
4. (i)  (a) A lien is a right to retain possession of goods until the payment of the price. It is available to the 
unpaid seller of the goods who is in possession of them where- 
(i) the goods have been sold without any stipulation as to credit; 
(ii) the goods have been sold on credit, but the term of credit has expired; 
(iii) the buyer becomes insolvent.  
 The unpaid seller can exercise ‘his right of lien even if the property in goods has passed on 
to the buyer. He can exercise his right even if he is in possession of the goods as agent or 
bailee for the buyer. 
Termination of lien:  An unpaid seller losses his right of lien thereon- 
(i) When he delivers the goods to a carrier or other bailee for the purpose of transmission 
to the buyer without reserving the right of disposal of the goods;  
(ii) When the buyer or his agent lawfully obtains possession of the goods; 
 Yes, he can exercise his right of lien even after he has obtained a decree for the price of 
goods from the court.  
(ii) According to Section 35 of the Indian Partnership Act, 1932, where under a contract between the 
partners,  the firm is not dissolved by the death of a partner, the estate of a deceased partner is 
not liable for any act of the firm done after his death.  
Further, in order that the estate of the deceased partner may be absolved from liability for the 
future obligations of the firm, it is not necessary to give any notice either to the public or the 
persons having dealings with the firm. 
In the light of the facts of the case and provisions of law, since the delivery of furniture was made 
after Jay’s death, his estate would not be liable for the debt of the firm. A suit for goods sold and 
delivered would not lie against the representatives of the deceased partner. This is because 
there was no debt due in respect of the goods in Jay’s lifetime. He was already dead when the 
delivery of goods was made to the firm and also it is not necessary to give any notice either to 
the public or the persons having dealings with the firm on a death of a partner. So, the estate of 
the deceased partner may be absolved from liability for the future obligations of the firm.