Mock Test: Business Laws and Business Correspondence & Reporting(Paper-2) Answers-Series-II(Dec. 22) | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


1 
 PAPER – 2: BUSINESS LAWS & BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A – BUSINESS LAWS 
ANSWERS 
1. (a)  Joint promisors (Section 42 of the Indian Contract Act, 1872) 
 When two or more persons have made a joint promise, then unless a contrary intention appears 
by the contract, all such persons must jointly fulfil the promise.  
 Any one of joint promisors may be compelled to perform (Section 43) 
 As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
 If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
 In the instant case, A, B, C and D have jointly promised to pay ` 6,00,000 to F. B and C become 
insolvent. B was unable to pay any amount and C could pay only ` 50,000. A is compelled to pay 
the whole amount to F.  
 Hence, A is entitled to receive ` 50,000 from C and ` 2,75,000 from D, as worked out below: 
 From C ` 50,000= (C’s Liability ` 1,50,000 Less: Amount he could not pay ` 1,00,000).  
 From D ` 2,75,000= (D’s Liability `1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.  
` 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ` 50,000) In other words, equal proportion 
i.e., ` 5,50,000 (i.e.`6,00,000-`50,000) / 2.   
 Thus, total amount A can receive from C and D comes to `3,25,000 (50,000+2,75,000) 
(b) As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen 
and resident in India (person who stayed in India for a period of not less than 120 days during 
immediately preceding financial year) –  
- Shall be eligible to incorporate an OPC 
- Shall be a nominee for the sole member. 
 In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding 
financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to 
incorporate an OPC. 
 Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and 
his stay in India during the immediately preceding financial year is more than 120 days, he is a 
foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the 
memorandum. 
(c) Risk prima facie passes with property (Section 26 of the Sale of Goods Act, 1930)  
 According to Section 26, 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 the buyer’s risk whether delivery has been made or not. 
 It is provided that, where delivery has been delayed because of the fault of either buyer or seller, 
the goods are at the risk of the party in fault as regards any loss which might not have occurred 
but for such fault. 
© The Institute of Chartered Accountants of India
Page 2


1 
 PAPER – 2: BUSINESS LAWS & BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A – BUSINESS LAWS 
ANSWERS 
1. (a)  Joint promisors (Section 42 of the Indian Contract Act, 1872) 
 When two or more persons have made a joint promise, then unless a contrary intention appears 
by the contract, all such persons must jointly fulfil the promise.  
 Any one of joint promisors may be compelled to perform (Section 43) 
 As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
 If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
 In the instant case, A, B, C and D have jointly promised to pay ` 6,00,000 to F. B and C become 
insolvent. B was unable to pay any amount and C could pay only ` 50,000. A is compelled to pay 
the whole amount to F.  
 Hence, A is entitled to receive ` 50,000 from C and ` 2,75,000 from D, as worked out below: 
 From C ` 50,000= (C’s Liability ` 1,50,000 Less: Amount he could not pay ` 1,00,000).  
 From D ` 2,75,000= (D’s Liability `1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.  
` 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ` 50,000) In other words, equal proportion 
i.e., ` 5,50,000 (i.e.`6,00,000-`50,000) / 2.   
 Thus, total amount A can receive from C and D comes to `3,25,000 (50,000+2,75,000) 
(b) As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen 
and resident in India (person who stayed in India for a period of not less than 120 days during 
immediately preceding financial year) –  
- Shall be eligible to incorporate an OPC 
- Shall be a nominee for the sole member. 
 In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding 
financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to 
incorporate an OPC. 
 Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and 
his stay in India during the immediately preceding financial year is more than 120 days, he is a 
foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the 
memorandum. 
(c) Risk prima facie passes with property (Section 26 of the Sale of Goods Act, 1930)  
 According to Section 26, 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 the buyer’s risk whether delivery has been made or not. 
 It is provided that, where delivery has been delayed because of the fault of either buyer or seller, 
the goods are at the risk of the party in fault as regards any loss which might not have occurred 
but for such fault. 
© The Institute of Chartered Accountants of India
2 
 Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer 
as bailee of the goods of the other party.  
2. (a)  Under following circumstances, the contracts need not be performed with the consent of both 
the parties: 
(i)  Novation: Where the parties to a contract substitute a new contract for the old, it is called 
novation. A contract in existence may be substituted by a new contract either between the 
same parties or between different parties the consideration mutually being the discharge of 
old contract. Novation can take place only by mutual agreement between the parties.  On 
novation, the old contract is discharged and consequently it need not be performed. (Section 
62 of the Indian Contract Act, 1872) 
(ii)  Rescission: A contract is also discharged by recission. When the parties to a contract agree 
to rescind it, the contract need not be performed. (Section 62) 
(iii)  Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, 
with the result that it need not be performed. In other words, a contract is also discharged by 
alteration. (Section 62) 
(iv)  Remission: Every promisee may dispense with or remit, wholly or in part, the performance 
of the promise made to him, or may extend the time for such performance or may accept 
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by 
remission. (Section 63) 
(v)  Rescinds voidable contract: When a person at whose option a contract is voidable rescinds 
it, the other party thereto need not perform any promise therein contained in which he is the 
promisor. 
(vi)  Neglect of promisee: If any promisee neglects or refuses to afford the promisor reasonable 
facilities for the performance of his promise, the promisor is excused by such neglect or 
refusal as to any non-performance caused thereby. (Section 67) 
(b)  LLP gives the benefits of limited liability of a company and the flexibility of a partnership  
 Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of 
the LLP, but not of other partners (Section 26 of the LLP Act, 2008).  The liability of the partners 
will be limited to their agreed contribution in the LLP, while the LLP itself will be liable for the full 
extent of its assets.   
 Flexibility of a partnership: The LLP allows its members the flexibility of organizing their internal 
structure as a partnership based on a mutually arrived agreement. The LLP form enables 
entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific 
and technical disciplines, to form commercially efficient vehicles suited to their requirements. 
Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises 
and for investment by venture capital.  
3. (a) Definition of Partnership: 'Partnership' is the relation between persons who have agreed to share the 
profits of a business carried on by all or any of them acting for all. (Section 4 of the Indian Partnership 
Act, 1932) 
 The definition of the partnership contains the following five elements which must co -exist before a 
partnership can come into existence: 
1. Association of two or more persons 
© The Institute of Chartered Accountants of India
Page 3


1 
 PAPER – 2: BUSINESS LAWS & BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A – BUSINESS LAWS 
ANSWERS 
1. (a)  Joint promisors (Section 42 of the Indian Contract Act, 1872) 
 When two or more persons have made a joint promise, then unless a contrary intention appears 
by the contract, all such persons must jointly fulfil the promise.  
 Any one of joint promisors may be compelled to perform (Section 43) 
 As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
 If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
 In the instant case, A, B, C and D have jointly promised to pay ` 6,00,000 to F. B and C become 
insolvent. B was unable to pay any amount and C could pay only ` 50,000. A is compelled to pay 
the whole amount to F.  
 Hence, A is entitled to receive ` 50,000 from C and ` 2,75,000 from D, as worked out below: 
 From C ` 50,000= (C’s Liability ` 1,50,000 Less: Amount he could not pay ` 1,00,000).  
 From D ` 2,75,000= (D’s Liability `1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.  
` 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ` 50,000) In other words, equal proportion 
i.e., ` 5,50,000 (i.e.`6,00,000-`50,000) / 2.   
 Thus, total amount A can receive from C and D comes to `3,25,000 (50,000+2,75,000) 
(b) As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen 
and resident in India (person who stayed in India for a period of not less than 120 days during 
immediately preceding financial year) –  
- Shall be eligible to incorporate an OPC 
- Shall be a nominee for the sole member. 
 In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding 
financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to 
incorporate an OPC. 
 Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and 
his stay in India during the immediately preceding financial year is more than 120 days, he is a 
foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the 
memorandum. 
(c) Risk prima facie passes with property (Section 26 of the Sale of Goods Act, 1930)  
 According to Section 26, 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 the buyer’s risk whether delivery has been made or not. 
 It is provided that, where delivery has been delayed because of the fault of either buyer or seller, 
the goods are at the risk of the party in fault as regards any loss which might not have occurred 
but for such fault. 
© The Institute of Chartered Accountants of India
2 
 Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer 
as bailee of the goods of the other party.  
2. (a)  Under following circumstances, the contracts need not be performed with the consent of both 
the parties: 
(i)  Novation: Where the parties to a contract substitute a new contract for the old, it is called 
novation. A contract in existence may be substituted by a new contract either between the 
same parties or between different parties the consideration mutually being the discharge of 
old contract. Novation can take place only by mutual agreement between the parties.  On 
novation, the old contract is discharged and consequently it need not be performed. (Section 
62 of the Indian Contract Act, 1872) 
(ii)  Rescission: A contract is also discharged by recission. When the parties to a contract agree 
to rescind it, the contract need not be performed. (Section 62) 
(iii)  Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, 
with the result that it need not be performed. In other words, a contract is also discharged by 
alteration. (Section 62) 
(iv)  Remission: Every promisee may dispense with or remit, wholly or in part, the performance 
of the promise made to him, or may extend the time for such performance or may accept 
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by 
remission. (Section 63) 
(v)  Rescinds voidable contract: When a person at whose option a contract is voidable rescinds 
it, the other party thereto need not perform any promise therein contained in which he is the 
promisor. 
(vi)  Neglect of promisee: If any promisee neglects or refuses to afford the promisor reasonable 
facilities for the performance of his promise, the promisor is excused by such neglect or 
refusal as to any non-performance caused thereby. (Section 67) 
(b)  LLP gives the benefits of limited liability of a company and the flexibility of a partnership  
 Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of 
the LLP, but not of other partners (Section 26 of the LLP Act, 2008).  The liability of the partners 
will be limited to their agreed contribution in the LLP, while the LLP itself will be liable for the full 
extent of its assets.   
 Flexibility of a partnership: The LLP allows its members the flexibility of organizing their internal 
structure as a partnership based on a mutually arrived agreement. The LLP form enables 
entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific 
and technical disciplines, to form commercially efficient vehicles suited to their requirements. 
Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises 
and for investment by venture capital.  
3. (a) Definition of Partnership: 'Partnership' is the relation between persons who have agreed to share the 
profits of a business carried on by all or any of them acting for all. (Section 4 of the Indian Partnership 
Act, 1932) 
 The definition of the partnership contains the following five elements which must co -exist before a 
partnership can come into existence: 
1. Association of two or more persons 
© The Institute of Chartered Accountants of India
3 
2. Agreement 
3. Business 
4. Agreement to share Profits 
5. Business carried on by all or any of them acting for all 
 ELEMENTS OF PARTNERSHIP 
 The definition of the partnership contains the following five elements which must co-exist before a 
partnership can come into existence: 
1.  Association of two or more persons: Partnership is an association of 2 or more persons. 
Again, only persons recognized by law can enter into an agreement of partnership. Therefore, 
a firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a 
minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted 
to the benefits of partnership. 
 The Partnership Act is silent about the maximum number of partners but Section 464 of the 
Companies Act, 2013 read with the relevant Rules has now put a limit of 50 partners in any 
association / partnership firm. 
2.  Agreement: It may be observed that partnership must be the result of an agreement between 
two or more persons. There must be an agreement entered into by all the persons concerned. 
This element relates to voluntary contractual nature of partnership. Thus, the nature of the 
partnership is voluntary and contractual. An agreement from which relationship of Partnership 
arises may be express. It may also be implied from the act done by partners and from a 
consistent course of conduct being followed, showing mutual understanding between them. It 
may be oral or in writing. 
3.  Business: In this context, we will consider two propositions. First, there must exist a 
business. For the purpose, the term 'business' includes every trade, occupation and 
profession. The existence of business is essential. Secondly, the motive of the business is 
the "acquisition of gains" which leads to the formation of partnership. Therefore, there can be 
no partnership where there is no intention to carry on the business and to share the profit 
thereof. 
4.  Agreement to share profits: The sharing of profits is an essential feature of partnership. 
There can be no partnership where only one of the partners is entitled to the whole of the 
profits of the business. Partners must agree to share the profits in any manner they choose. 
But an agreement to share losses is not an essential element. It is open to one or more 
partners to agree to share all the losses. However, in the event of losses, unless agreed 
otherwise, these must be borne in the profit-sharing ratio. 
5.  Business carried on by all or any of them acting for all: The business must be carried on 
by all the partners or by anyone or more of the partners acting for all. This is the cardinal 
principle of the partnership Law. In other words, there should be a binding con tract of mutual 
agency between the partners. An act of one partner in the course of the business of the firm 
is in fact an act of all partners. Each partner carrying on the business is the principal as well 
as the agent for all the other partners. He is an agent in so far as he can bind the other 
partners by his acts and he is a principal to the extent that he is bound by the act of other 
partners. It may be noted that the true test of partnership is mutual agency rather than sharing 
of profits. If the element of mutual agency is absent, then there will be no partnership. 
© The Institute of Chartered Accountants of India
Page 4


1 
 PAPER – 2: BUSINESS LAWS & BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A – BUSINESS LAWS 
ANSWERS 
1. (a)  Joint promisors (Section 42 of the Indian Contract Act, 1872) 
 When two or more persons have made a joint promise, then unless a contrary intention appears 
by the contract, all such persons must jointly fulfil the promise.  
 Any one of joint promisors may be compelled to perform (Section 43) 
 As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
 If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
 In the instant case, A, B, C and D have jointly promised to pay ` 6,00,000 to F. B and C become 
insolvent. B was unable to pay any amount and C could pay only ` 50,000. A is compelled to pay 
the whole amount to F.  
 Hence, A is entitled to receive ` 50,000 from C and ` 2,75,000 from D, as worked out below: 
 From C ` 50,000= (C’s Liability ` 1,50,000 Less: Amount he could not pay ` 1,00,000).  
 From D ` 2,75,000= (D’s Liability `1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.  
` 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ` 50,000) In other words, equal proportion 
i.e., ` 5,50,000 (i.e.`6,00,000-`50,000) / 2.   
 Thus, total amount A can receive from C and D comes to `3,25,000 (50,000+2,75,000) 
(b) As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen 
and resident in India (person who stayed in India for a period of not less than 120 days during 
immediately preceding financial year) –  
- Shall be eligible to incorporate an OPC 
- Shall be a nominee for the sole member. 
 In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding 
financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to 
incorporate an OPC. 
 Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and 
his stay in India during the immediately preceding financial year is more than 120 days, he is a 
foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the 
memorandum. 
(c) Risk prima facie passes with property (Section 26 of the Sale of Goods Act, 1930)  
 According to Section 26, 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 the buyer’s risk whether delivery has been made or not. 
 It is provided that, where delivery has been delayed because of the fault of either buyer or seller, 
the goods are at the risk of the party in fault as regards any loss which might not have occurred 
but for such fault. 
© The Institute of Chartered Accountants of India
2 
 Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer 
as bailee of the goods of the other party.  
2. (a)  Under following circumstances, the contracts need not be performed with the consent of both 
the parties: 
(i)  Novation: Where the parties to a contract substitute a new contract for the old, it is called 
novation. A contract in existence may be substituted by a new contract either between the 
same parties or between different parties the consideration mutually being the discharge of 
old contract. Novation can take place only by mutual agreement between the parties.  On 
novation, the old contract is discharged and consequently it need not be performed. (Section 
62 of the Indian Contract Act, 1872) 
(ii)  Rescission: A contract is also discharged by recission. When the parties to a contract agree 
to rescind it, the contract need not be performed. (Section 62) 
(iii)  Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, 
with the result that it need not be performed. In other words, a contract is also discharged by 
alteration. (Section 62) 
(iv)  Remission: Every promisee may dispense with or remit, wholly or in part, the performance 
of the promise made to him, or may extend the time for such performance or may accept 
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by 
remission. (Section 63) 
(v)  Rescinds voidable contract: When a person at whose option a contract is voidable rescinds 
it, the other party thereto need not perform any promise therein contained in which he is the 
promisor. 
(vi)  Neglect of promisee: If any promisee neglects or refuses to afford the promisor reasonable 
facilities for the performance of his promise, the promisor is excused by such neglect or 
refusal as to any non-performance caused thereby. (Section 67) 
(b)  LLP gives the benefits of limited liability of a company and the flexibility of a partnership  
 Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of 
the LLP, but not of other partners (Section 26 of the LLP Act, 2008).  The liability of the partners 
will be limited to their agreed contribution in the LLP, while the LLP itself will be liable for the full 
extent of its assets.   
 Flexibility of a partnership: The LLP allows its members the flexibility of organizing their internal 
structure as a partnership based on a mutually arrived agreement. The LLP form enables 
entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific 
and technical disciplines, to form commercially efficient vehicles suited to their requirements. 
Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises 
and for investment by venture capital.  
3. (a) Definition of Partnership: 'Partnership' is the relation between persons who have agreed to share the 
profits of a business carried on by all or any of them acting for all. (Section 4 of the Indian Partnership 
Act, 1932) 
 The definition of the partnership contains the following five elements which must co -exist before a 
partnership can come into existence: 
1. Association of two or more persons 
© The Institute of Chartered Accountants of India
3 
2. Agreement 
3. Business 
4. Agreement to share Profits 
5. Business carried on by all or any of them acting for all 
 ELEMENTS OF PARTNERSHIP 
 The definition of the partnership contains the following five elements which must co-exist before a 
partnership can come into existence: 
1.  Association of two or more persons: Partnership is an association of 2 or more persons. 
Again, only persons recognized by law can enter into an agreement of partnership. Therefore, 
a firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a 
minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted 
to the benefits of partnership. 
 The Partnership Act is silent about the maximum number of partners but Section 464 of the 
Companies Act, 2013 read with the relevant Rules has now put a limit of 50 partners in any 
association / partnership firm. 
2.  Agreement: It may be observed that partnership must be the result of an agreement between 
two or more persons. There must be an agreement entered into by all the persons concerned. 
This element relates to voluntary contractual nature of partnership. Thus, the nature of the 
partnership is voluntary and contractual. An agreement from which relationship of Partnership 
arises may be express. It may also be implied from the act done by partners and from a 
consistent course of conduct being followed, showing mutual understanding between them. It 
may be oral or in writing. 
3.  Business: In this context, we will consider two propositions. First, there must exist a 
business. For the purpose, the term 'business' includes every trade, occupation and 
profession. The existence of business is essential. Secondly, the motive of the business is 
the "acquisition of gains" which leads to the formation of partnership. Therefore, there can be 
no partnership where there is no intention to carry on the business and to share the profit 
thereof. 
4.  Agreement to share profits: The sharing of profits is an essential feature of partnership. 
There can be no partnership where only one of the partners is entitled to the whole of the 
profits of the business. Partners must agree to share the profits in any manner they choose. 
But an agreement to share losses is not an essential element. It is open to one or more 
partners to agree to share all the losses. However, in the event of losses, unless agreed 
otherwise, these must be borne in the profit-sharing ratio. 
5.  Business carried on by all or any of them acting for all: The business must be carried on 
by all the partners or by anyone or more of the partners acting for all. This is the cardinal 
principle of the partnership Law. In other words, there should be a binding con tract of mutual 
agency between the partners. An act of one partner in the course of the business of the firm 
is in fact an act of all partners. Each partner carrying on the business is the principal as well 
as the agent for all the other partners. He is an agent in so far as he can bind the other 
partners by his acts and he is a principal to the extent that he is bound by the act of other 
partners. It may be noted that the true test of partnership is mutual agency rather than sharing 
of profits. If the element of mutual agency is absent, then there will be no partnership. 
© The Institute of Chartered Accountants of India
4 
 (b)  (i)  According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract 
who is of the age of majority according to the law to which he is subject and therefore, a minor is 
not competent to contract and any agreement with or by a minor is void from the very beginning. 
A minor cannot ratify it on attaining the majority as the original agreement is void ab initio.  
 According to Section 68 of the Act, a claim for necessaries supplied to a minor is enforceable 
by law.  
 Necessaries mean those things that are essentially needed by a minor. They cannot include 
luxuries or costly or unnecessary articles.  
 In the present case, X, the borrower, was minor at the time of taking the loan, therefore, the 
agreement was void ab initio. Attaining majority thereafter will not validate the contract nor X 
can ratify it. The loan was for personal purposes and not for necessaries supplied to him.  
Hence, the lender cannot file a suit against X for recovery of the loan as it is not enforceable 
by law. 
(ii) As per Section 56 of the Indian Contract Act, 1872 the subsequent or supervening impossibility 
renders the contract void.  Supervening impossibility may take place owing to various 
circumstances as contemplated under that section, one of which is the declaration of war 
subsequent to the contract made. In the instant case the contract when made between J and K 
was valid but afterwards J’s government declares war against the country in which the port is 
situated as a result of which the contract becomes void. Hence, K cannot file a suit against J for 
performance of the contract.    
4. (a) The right against the buyer are as follows: 
1. Suit for price (Section 55 of the Sale of Goods Act, 1930) 
(a) Where under a contract of sale, the property in the goods has passed to the buyer and 
the buyer wrongfully neglects or refuses to pay for the goods according to the terms of 
the contract, the seller may sue him for the price of the goods. [Section 55(1)] 
(b)  Where under a contract of sale, the price is payable on a certain day irrespective of 
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may 
sue him for the price although the property in the goods has not passed and the goods 
have not been appropriated to the contract. [Section 55(2)]. 
2. Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully neglects 
or refuses to accept and pay for the goods, the seller may sue him for damages for non -
acceptance.  
3. Repudiation of contract before due date (Section 60): Where the buyer repudiates the 
contract before the date of delivery, the seller may treat the contract as rescinded and sue 
damages for the breach. This is known as the ‘rule of anticipatory breach of contract’. 
4. Suit for interest [Section 61]: Where there is specific agreement between the seller and the 
buyer as to interest on the price of the goods from the date on which payment becomes due, 
the seller may recover interest from the buyer. If, however, there is no specific agreement to 
this effect, the seller may charge interest on the price when it becomes due from such day as 
he may notify to the buyer. 
 In the absence of a contract to the contrary, the Court may award interest to the seller in a suit by 
him at such rate as it thinks fit on the amount of the price from the date of the tender of the goods 
or from the date on which the price was payable.  
© The Institute of Chartered Accountants of India
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1 
 PAPER – 2: BUSINESS LAWS & BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A – BUSINESS LAWS 
ANSWERS 
1. (a)  Joint promisors (Section 42 of the Indian Contract Act, 1872) 
 When two or more persons have made a joint promise, then unless a contrary intention appears 
by the contract, all such persons must jointly fulfil the promise.  
 Any one of joint promisors may be compelled to perform (Section 43) 
 As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
 If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
 In the instant case, A, B, C and D have jointly promised to pay ` 6,00,000 to F. B and C become 
insolvent. B was unable to pay any amount and C could pay only ` 50,000. A is compelled to pay 
the whole amount to F.  
 Hence, A is entitled to receive ` 50,000 from C and ` 2,75,000 from D, as worked out below: 
 From C ` 50,000= (C’s Liability ` 1,50,000 Less: Amount he could not pay ` 1,00,000).  
 From D ` 2,75,000= (D’s Liability `1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.  
` 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., ` 50,000) In other words, equal proportion 
i.e., ` 5,50,000 (i.e.`6,00,000-`50,000) / 2.   
 Thus, total amount A can receive from C and D comes to `3,25,000 (50,000+2,75,000) 
(b) As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen 
and resident in India (person who stayed in India for a period of not less than 120 days during 
immediately preceding financial year) –  
- Shall be eligible to incorporate an OPC 
- Shall be a nominee for the sole member. 
 In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding 
financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to 
incorporate an OPC. 
 Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and 
his stay in India during the immediately preceding financial year is more than 120 days, he is a 
foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the 
memorandum. 
(c) Risk prima facie passes with property (Section 26 of the Sale of Goods Act, 1930)  
 According to Section 26, 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 the buyer’s risk whether delivery has been made or not. 
 It is provided that, where delivery has been delayed because of the fault of either buyer or seller, 
the goods are at the risk of the party in fault as regards any loss which might not have occurred 
but for such fault. 
© The Institute of Chartered Accountants of India
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 Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer 
as bailee of the goods of the other party.  
2. (a)  Under following circumstances, the contracts need not be performed with the consent of both 
the parties: 
(i)  Novation: Where the parties to a contract substitute a new contract for the old, it is called 
novation. A contract in existence may be substituted by a new contract either between the 
same parties or between different parties the consideration mutually being the discharge of 
old contract. Novation can take place only by mutual agreement between the parties.  On 
novation, the old contract is discharged and consequently it need not be performed. (Section 
62 of the Indian Contract Act, 1872) 
(ii)  Rescission: A contract is also discharged by recission. When the parties to a contract agree 
to rescind it, the contract need not be performed. (Section 62) 
(iii)  Alteration: Where the parties to a contract agree to alter it, the original contract is rescinded, 
with the result that it need not be performed. In other words, a contract is also discharged by 
alteration. (Section 62) 
(iv)  Remission: Every promisee may dispense with or remit, wholly or in part, the performance 
of the promise made to him, or may extend the time for such performance or may accept 
instead of it any satisfaction which he thinks fit. In other words, a contract is discharged by 
remission. (Section 63) 
(v)  Rescinds voidable contract: When a person at whose option a contract is voidable rescinds 
it, the other party thereto need not perform any promise therein contained in which he is the 
promisor. 
(vi)  Neglect of promisee: If any promisee neglects or refuses to afford the promisor reasonable 
facilities for the performance of his promise, the promisor is excused by such neglect or 
refusal as to any non-performance caused thereby. (Section 67) 
(b)  LLP gives the benefits of limited liability of a company and the flexibility of a partnership  
 Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of 
the LLP, but not of other partners (Section 26 of the LLP Act, 2008).  The liability of the partners 
will be limited to their agreed contribution in the LLP, while the LLP itself will be liable for the full 
extent of its assets.   
 Flexibility of a partnership: The LLP allows its members the flexibility of organizing their internal 
structure as a partnership based on a mutually arrived agreement. The LLP form enables 
entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific 
and technical disciplines, to form commercially efficient vehicles suited to their requirements. 
Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises 
and for investment by venture capital.  
3. (a) Definition of Partnership: 'Partnership' is the relation between persons who have agreed to share the 
profits of a business carried on by all or any of them acting for all. (Section 4 of the Indian Partnership 
Act, 1932) 
 The definition of the partnership contains the following five elements which must co -exist before a 
partnership can come into existence: 
1. Association of two or more persons 
© The Institute of Chartered Accountants of India
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2. Agreement 
3. Business 
4. Agreement to share Profits 
5. Business carried on by all or any of them acting for all 
 ELEMENTS OF PARTNERSHIP 
 The definition of the partnership contains the following five elements which must co-exist before a 
partnership can come into existence: 
1.  Association of two or more persons: Partnership is an association of 2 or more persons. 
Again, only persons recognized by law can enter into an agreement of partnership. Therefore, 
a firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a 
minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted 
to the benefits of partnership. 
 The Partnership Act is silent about the maximum number of partners but Section 464 of the 
Companies Act, 2013 read with the relevant Rules has now put a limit of 50 partners in any 
association / partnership firm. 
2.  Agreement: It may be observed that partnership must be the result of an agreement between 
two or more persons. There must be an agreement entered into by all the persons concerned. 
This element relates to voluntary contractual nature of partnership. Thus, the nature of the 
partnership is voluntary and contractual. An agreement from which relationship of Partnership 
arises may be express. It may also be implied from the act done by partners and from a 
consistent course of conduct being followed, showing mutual understanding between them. It 
may be oral or in writing. 
3.  Business: In this context, we will consider two propositions. First, there must exist a 
business. For the purpose, the term 'business' includes every trade, occupation and 
profession. The existence of business is essential. Secondly, the motive of the business is 
the "acquisition of gains" which leads to the formation of partnership. Therefore, there can be 
no partnership where there is no intention to carry on the business and to share the profit 
thereof. 
4.  Agreement to share profits: The sharing of profits is an essential feature of partnership. 
There can be no partnership where only one of the partners is entitled to the whole of the 
profits of the business. Partners must agree to share the profits in any manner they choose. 
But an agreement to share losses is not an essential element. It is open to one or more 
partners to agree to share all the losses. However, in the event of losses, unless agreed 
otherwise, these must be borne in the profit-sharing ratio. 
5.  Business carried on by all or any of them acting for all: The business must be carried on 
by all the partners or by anyone or more of the partners acting for all. This is the cardinal 
principle of the partnership Law. In other words, there should be a binding con tract of mutual 
agency between the partners. An act of one partner in the course of the business of the firm 
is in fact an act of all partners. Each partner carrying on the business is the principal as well 
as the agent for all the other partners. He is an agent in so far as he can bind the other 
partners by his acts and he is a principal to the extent that he is bound by the act of other 
partners. It may be noted that the true test of partnership is mutual agency rather than sharing 
of profits. If the element of mutual agency is absent, then there will be no partnership. 
© The Institute of Chartered Accountants of India
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 (b)  (i)  According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract 
who is of the age of majority according to the law to which he is subject and therefore, a minor is 
not competent to contract and any agreement with or by a minor is void from the very beginning. 
A minor cannot ratify it on attaining the majority as the original agreement is void ab initio.  
 According to Section 68 of the Act, a claim for necessaries supplied to a minor is enforceable 
by law.  
 Necessaries mean those things that are essentially needed by a minor. They cannot include 
luxuries or costly or unnecessary articles.  
 In the present case, X, the borrower, was minor at the time of taking the loan, therefore, the 
agreement was void ab initio. Attaining majority thereafter will not validate the contract nor X 
can ratify it. The loan was for personal purposes and not for necessaries supplied to him.  
Hence, the lender cannot file a suit against X for recovery of the loan as it is not enforceable 
by law. 
(ii) As per Section 56 of the Indian Contract Act, 1872 the subsequent or supervening impossibility 
renders the contract void.  Supervening impossibility may take place owing to various 
circumstances as contemplated under that section, one of which is the declaration of war 
subsequent to the contract made. In the instant case the contract when made between J and K 
was valid but afterwards J’s government declares war against the country in which the port is 
situated as a result of which the contract becomes void. Hence, K cannot file a suit against J for 
performance of the contract.    
4. (a) The right against the buyer are as follows: 
1. Suit for price (Section 55 of the Sale of Goods Act, 1930) 
(a) Where under a contract of sale, the property in the goods has passed to the buyer and 
the buyer wrongfully neglects or refuses to pay for the goods according to the terms of 
the contract, the seller may sue him for the price of the goods. [Section 55(1)] 
(b)  Where under a contract of sale, the price is payable on a certain day irrespective of 
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may 
sue him for the price although the property in the goods has not passed and the goods 
have not been appropriated to the contract. [Section 55(2)]. 
2. Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully neglects 
or refuses to accept and pay for the goods, the seller may sue him for damages for non -
acceptance.  
3. Repudiation of contract before due date (Section 60): Where the buyer repudiates the 
contract before the date of delivery, the seller may treat the contract as rescinded and sue 
damages for the breach. This is known as the ‘rule of anticipatory breach of contract’. 
4. Suit for interest [Section 61]: Where there is specific agreement between the seller and the 
buyer as to interest on the price of the goods from the date on which payment becomes due, 
the seller may recover interest from the buyer. If, however, there is no specific agreement to 
this effect, the seller may charge interest on the price when it becomes due from such day as 
he may notify to the buyer. 
 In the absence of a contract to the contrary, the Court may award interest to the seller in a suit by 
him at such rate as it thinks fit on the amount of the price from the date of the tender of the goods 
or from the date on which the price was payable.  
© The Institute of Chartered Accountants of India
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(b) According to Section 29 of the Indian Partnership Act, 1932,  
(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the 
creation by him of a charge on such interest, does not entitle the transferee, during the 
continuance of the firm, to interfere in the conduct of business, or to require accounts, or to 
inspect the books of the firm, but entitles the transferee only to receive the share of profits of 
the transferring partner, and the transferee shall accept the account of profits agreed to by 
the partners. 
(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is 
entitled as against the remaining partners to receive the share of the assets of the firm to 
which the transferring partner is entitled, and, for the purpose of ascertaining that share, to 
an account as from the date of the dissolution. 
In the light of facts of the question and provision of law: 
(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale. 
(ii) On the retirement of the transferring partner (Mr. M), the transferee (Mr. Z) will be entitled, 
against the remaining partners:  
(a) to receive the share of the assets of the firm to which the transferring partner was 
entitled, and  
(b) for the purpose of ascertaining the share,  
 he is entitled to an account as from the date of the dissolution. 
 So, in this case on Mr. M’s retirement, Mr. Z would be entitled to receive the value of Mr. M’s 
share to the extent of ` 6 crore in the firm’s assets. 
5. (a)  As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract of sale, the property in the 
goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of 
the property in the goods is to take place at a future time or subject to some condition thereafter to be 
fulfilled, the contract is called an agreement to sell and as per Section 4(4), an agreement to sell 
becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the 
goods is to be transferred. 
(i) On the basis of above provisions and facts given in the question, it can be said that there is 
an agreement to sell between Sonal and Jeweller and not a sale. Even though the payment 
was made by Sonal, the property in goods can be transferred only after the fulfilment of 
conditions fixed between the buyer and the seller. As due to Ruby Stones, the original design 
is disturbed, bangles are not in original position. Hence, Sonal has right to avoid the 
agreement to sell and can recover the price paid. 
(ii) If Jeweller offers to bring the bangles in original position by repairing, he cannot charge extra 
cost from Sonal. Even though he has to bear some expenses for repair; he cannot charge it 
from Sonal. 
 (b) (i)  Meaning of capital: The term capital has variety of meanings. But in relation to a company limited 
by shares, the term 'capital' means 'share capital'. Share capital means capital of the company 
expressed in terms of rupees divided into shares of fixed amount. 
(ii)  Classification of capital: In the domain of Company Law, the term capital can be classified 
as follows: 
(a)  Nominal or authorised or registered capital:  
 This expression means such capital as is authorised by memorandum of a company to 
be the maximum amount of share capital of the company. 
© The Institute of Chartered Accountants of India