Mock Test: Business Laws & Business Correspondence and Reporting(Paper-2) Answers - May 2023 | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


1 
 
MOCK TEST PAPER - 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  An invitation to offer is different from offer. Quotations, menu cards, price tags, 
advertisements in newspaper for sale are not offer. These are merely invitations to public to 
make an offer.  An invitation to offer is an act precedent to making an offer. Acceptance of an 
invitation to an offer does not result in the contract and o nly an offer emerges in the process of 
negotiation. 
 In the instant case, Ashwin reaches to super market and selects a Air Conditioner with a 
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that 
discount is closed from today and request to make full payment. But Ashwin insists to purchase 
at discounted price. 
 On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It is 
merely an invitation to offer. Hence, it is the Ashwin who is making the offer not the super market. 
Cashier has right to reject the Ashwin’s offer. Therefore, Ashwin cannot enforce cashier to sell at 
discounted price.  
 (ii) Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
Doctrine of Constructive Notice. The Doctrine of Constructive Notice does not mean that 
outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act 
is authorised by the Articles or Memorandum, an outsider is entitled to assume that all the 
detailed formalities for doing that act have been observed.  
 The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other 
officers of the company are validly performed, if they are within the scope of their apparent 
authority. So long as an act is valid under the articles, if done in a particular manner, an outsider 
dealing with the company is entitled to assume that it has been done in the manner required.  
 In the given question, Mr. Mohan has made payment to Mr. Ramesh and he (Mr. Ramesh) gave 
to receipt of the same to Mr. Mohan. Thus, it will be rightful on part of Mr. Mohan to assume that 
Mr. Ramesh was also authorised to receive money on behalf of the company. Hence, Mr. Mohan 
will be free from liability for payment of goods purchased from Sunflower Limited, as he has paid 
amount due to an employee of the company.  
 (iii)  (a) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He 
agrees to sell 50 bales and these bales were selected and set aside. On selection, the 
goods becomes ascertained. In this case, the contract is for the sale of ascerta ined goods, 
as the cotton bales to be sold are identified and agreed after the formation of the contract.   
(b) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his 
shop, it is a sale of existing but unascertained goods because it is not known which packet 
is to be delivered.   
(c) T agrees to sell to S all the apples which will be produced in his garden in the year 2023. It 
is contract of sale of future goods, amounting to 'an agreement to sell.'  
 
© The Institute of Chartered Accountants of India
Page 2


1 
 
MOCK TEST PAPER - 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  An invitation to offer is different from offer. Quotations, menu cards, price tags, 
advertisements in newspaper for sale are not offer. These are merely invitations to public to 
make an offer.  An invitation to offer is an act precedent to making an offer. Acceptance of an 
invitation to an offer does not result in the contract and o nly an offer emerges in the process of 
negotiation. 
 In the instant case, Ashwin reaches to super market and selects a Air Conditioner with a 
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that 
discount is closed from today and request to make full payment. But Ashwin insists to purchase 
at discounted price. 
 On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It is 
merely an invitation to offer. Hence, it is the Ashwin who is making the offer not the super market. 
Cashier has right to reject the Ashwin’s offer. Therefore, Ashwin cannot enforce cashier to sell at 
discounted price.  
 (ii) Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
Doctrine of Constructive Notice. The Doctrine of Constructive Notice does not mean that 
outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act 
is authorised by the Articles or Memorandum, an outsider is entitled to assume that all the 
detailed formalities for doing that act have been observed.  
 The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other 
officers of the company are validly performed, if they are within the scope of their apparent 
authority. So long as an act is valid under the articles, if done in a particular manner, an outsider 
dealing with the company is entitled to assume that it has been done in the manner required.  
 In the given question, Mr. Mohan has made payment to Mr. Ramesh and he (Mr. Ramesh) gave 
to receipt of the same to Mr. Mohan. Thus, it will be rightful on part of Mr. Mohan to assume that 
Mr. Ramesh was also authorised to receive money on behalf of the company. Hence, Mr. Mohan 
will be free from liability for payment of goods purchased from Sunflower Limited, as he has paid 
amount due to an employee of the company.  
 (iii)  (a) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He 
agrees to sell 50 bales and these bales were selected and set aside. On selection, the 
goods becomes ascertained. In this case, the contract is for the sale of ascerta ined goods, 
as the cotton bales to be sold are identified and agreed after the formation of the contract.   
(b) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his 
shop, it is a sale of existing but unascertained goods because it is not known which packet 
is to be delivered.   
(c) T agrees to sell to S all the apples which will be produced in his garden in the year 2023. It 
is contract of sale of future goods, amounting to 'an agreement to sell.'  
 
© The Institute of Chartered Accountants of India
2 
2. (i) An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
 Effect of Anticipatory Breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as rescinded and sue the other party for damages for breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time 
of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other 
party as well as his own, and the guilty party, if he so decides on re -consideration, may still 
perform his part of the contract and can also take advantage of any supervening 
impossibility which may have the effect of discharging the contract.  
(ii)  LLP is an alternative corporate business form that 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. (i)  A minor cannot be bound by a contract because a minor’s contract is void and not merely 
voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded 
on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be a dmitted to 
the benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other words, 
he can be validly given a share in the partnership profits. When this has been done and it can be 
done with the consent of all the partners then the rights of such a partner will be governed under 
Section 30 as follows: 
  Rights: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii) He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing his 
connection with the firm, and not otherwise. 
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a 
partner. If he elects to become a partner, then he is entitled to the share to which he was 
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after 
the date of the public notice served to that effect. 
 
© The Institute of Chartered Accountants of India
Page 3


1 
 
MOCK TEST PAPER - 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  An invitation to offer is different from offer. Quotations, menu cards, price tags, 
advertisements in newspaper for sale are not offer. These are merely invitations to public to 
make an offer.  An invitation to offer is an act precedent to making an offer. Acceptance of an 
invitation to an offer does not result in the contract and o nly an offer emerges in the process of 
negotiation. 
 In the instant case, Ashwin reaches to super market and selects a Air Conditioner with a 
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that 
discount is closed from today and request to make full payment. But Ashwin insists to purchase 
at discounted price. 
 On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It is 
merely an invitation to offer. Hence, it is the Ashwin who is making the offer not the super market. 
Cashier has right to reject the Ashwin’s offer. Therefore, Ashwin cannot enforce cashier to sell at 
discounted price.  
 (ii) Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
Doctrine of Constructive Notice. The Doctrine of Constructive Notice does not mean that 
outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act 
is authorised by the Articles or Memorandum, an outsider is entitled to assume that all the 
detailed formalities for doing that act have been observed.  
 The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other 
officers of the company are validly performed, if they are within the scope of their apparent 
authority. So long as an act is valid under the articles, if done in a particular manner, an outsider 
dealing with the company is entitled to assume that it has been done in the manner required.  
 In the given question, Mr. Mohan has made payment to Mr. Ramesh and he (Mr. Ramesh) gave 
to receipt of the same to Mr. Mohan. Thus, it will be rightful on part of Mr. Mohan to assume that 
Mr. Ramesh was also authorised to receive money on behalf of the company. Hence, Mr. Mohan 
will be free from liability for payment of goods purchased from Sunflower Limited, as he has paid 
amount due to an employee of the company.  
 (iii)  (a) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He 
agrees to sell 50 bales and these bales were selected and set aside. On selection, the 
goods becomes ascertained. In this case, the contract is for the sale of ascerta ined goods, 
as the cotton bales to be sold are identified and agreed after the formation of the contract.   
(b) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his 
shop, it is a sale of existing but unascertained goods because it is not known which packet 
is to be delivered.   
(c) T agrees to sell to S all the apples which will be produced in his garden in the year 2023. It 
is contract of sale of future goods, amounting to 'an agreement to sell.'  
 
© The Institute of Chartered Accountants of India
2 
2. (i) An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
 Effect of Anticipatory Breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as rescinded and sue the other party for damages for breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time 
of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other 
party as well as his own, and the guilty party, if he so decides on re -consideration, may still 
perform his part of the contract and can also take advantage of any supervening 
impossibility which may have the effect of discharging the contract.  
(ii)  LLP is an alternative corporate business form that 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. (i)  A minor cannot be bound by a contract because a minor’s contract is void and not merely 
voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded 
on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be a dmitted to 
the benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other words, 
he can be validly given a share in the partnership profits. When this has been done and it can be 
done with the consent of all the partners then the rights of such a partner will be governed under 
Section 30 as follows: 
  Rights: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii) He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing his 
connection with the firm, and not otherwise. 
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a 
partner. If he elects to become a partner, then he is entitled to the share to which he was 
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after 
the date of the public notice served to that effect. 
 
© The Institute of Chartered Accountants of India
3 
(ii)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.   
 Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it.  
 In the given question, after Mr. Gaurav and Mr. Vikas have entered into the contract to supply 
100 tons of sugar, the event of flood occurred which made it impossible to deliver the sugar 
within the stipulated time. Thus, the promise in question became void. Further, Mr. Gaurav has to 
pay back the amount of ` 70,000 that he received from Mr. Vikas as an advance for the supply of 
sugar within the stipulated time. Hence, the contention of Mr. Vikas is correct.  
4. (i) In the following cases, a non-owner can convey better title to the bona fide purchaser of goods 
for value: 
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document 
of title to goods would pass a good title to the buyer in the following circumstances; namely;  
(a) If he was in possession of the goods or documents with the consent of the owner; 
(b) If the sale was made by him when acting in the ordinary course of business as a 
mercantile agent; and 
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no 
notice of the fact that the seller had no authority to sell (Proviso to Section 27). 
 Mercantile Agent means an agent having in the customary course of business as such 
agent has authority either to sell goods, or to consign goods for the purposes of sale, or to 
buy goods, or to raise money on the security of goods [Section 2(9)]. 
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has 
the sole possession of them by permission of the co-owners, the property in the goods is 
transferred to any person who buys them from such joint owner in good faith and has not at 
the time of the contract of sale notice that the seller has no authority to sell.  
(3) Sale by a person in possession under voidable contract: A buyer would acquire a good 
title to the goods sold to him by a seller who had obtained possession of the goods under a 
contract voidable on the ground of coercion, fraud, misrepresentation or undue influence 
provided that the contract had not been rescinded until the time of the sale (Section 29). 
(4) Sale by one who has already sold the goods but continues in possession thereof: If a 
person has sold goods but continues to be in possession of them or of the documents of title 
to them, he may sell them to a third person, and if such person obtains the delivery thereof 
in good faith and without notice of the previous sale, he would have good title to them, 
although the property in the goods had passed to the first buyer earlier. A pledge or other 
disposition of the goods or documents of title by the seller in possession are equally valid 
[Section 30(1)].  
(5) Sale by buyer obtaining possession before the property in the goods has vested in 
him: Where a buyer with the consent of the seller obtains possession of the goods before 
the property in them has passed to him, he may sell, pledge or otherwise dispose of the 
goods to a third person, and if such person obtains delivery of the goods in good faith and 
© The Institute of Chartered Accountants of India
Page 4


1 
 
MOCK TEST PAPER - 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  An invitation to offer is different from offer. Quotations, menu cards, price tags, 
advertisements in newspaper for sale are not offer. These are merely invitations to public to 
make an offer.  An invitation to offer is an act precedent to making an offer. Acceptance of an 
invitation to an offer does not result in the contract and o nly an offer emerges in the process of 
negotiation. 
 In the instant case, Ashwin reaches to super market and selects a Air Conditioner with a 
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that 
discount is closed from today and request to make full payment. But Ashwin insists to purchase 
at discounted price. 
 On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It is 
merely an invitation to offer. Hence, it is the Ashwin who is making the offer not the super market. 
Cashier has right to reject the Ashwin’s offer. Therefore, Ashwin cannot enforce cashier to sell at 
discounted price.  
 (ii) Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
Doctrine of Constructive Notice. The Doctrine of Constructive Notice does not mean that 
outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act 
is authorised by the Articles or Memorandum, an outsider is entitled to assume that all the 
detailed formalities for doing that act have been observed.  
 The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other 
officers of the company are validly performed, if they are within the scope of their apparent 
authority. So long as an act is valid under the articles, if done in a particular manner, an outsider 
dealing with the company is entitled to assume that it has been done in the manner required.  
 In the given question, Mr. Mohan has made payment to Mr. Ramesh and he (Mr. Ramesh) gave 
to receipt of the same to Mr. Mohan. Thus, it will be rightful on part of Mr. Mohan to assume that 
Mr. Ramesh was also authorised to receive money on behalf of the company. Hence, Mr. Mohan 
will be free from liability for payment of goods purchased from Sunflower Limited, as he has paid 
amount due to an employee of the company.  
 (iii)  (a) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He 
agrees to sell 50 bales and these bales were selected and set aside. On selection, the 
goods becomes ascertained. In this case, the contract is for the sale of ascerta ined goods, 
as the cotton bales to be sold are identified and agreed after the formation of the contract.   
(b) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his 
shop, it is a sale of existing but unascertained goods because it is not known which packet 
is to be delivered.   
(c) T agrees to sell to S all the apples which will be produced in his garden in the year 2023. It 
is contract of sale of future goods, amounting to 'an agreement to sell.'  
 
© The Institute of Chartered Accountants of India
2 
2. (i) An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
 Effect of Anticipatory Breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as rescinded and sue the other party for damages for breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time 
of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other 
party as well as his own, and the guilty party, if he so decides on re -consideration, may still 
perform his part of the contract and can also take advantage of any supervening 
impossibility which may have the effect of discharging the contract.  
(ii)  LLP is an alternative corporate business form that 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. (i)  A minor cannot be bound by a contract because a minor’s contract is void and not merely 
voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded 
on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be a dmitted to 
the benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other words, 
he can be validly given a share in the partnership profits. When this has been done and it can be 
done with the consent of all the partners then the rights of such a partner will be governed under 
Section 30 as follows: 
  Rights: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii) He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing his 
connection with the firm, and not otherwise. 
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a 
partner. If he elects to become a partner, then he is entitled to the share to which he was 
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after 
the date of the public notice served to that effect. 
 
© The Institute of Chartered Accountants of India
3 
(ii)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.   
 Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it.  
 In the given question, after Mr. Gaurav and Mr. Vikas have entered into the contract to supply 
100 tons of sugar, the event of flood occurred which made it impossible to deliver the sugar 
within the stipulated time. Thus, the promise in question became void. Further, Mr. Gaurav has to 
pay back the amount of ` 70,000 that he received from Mr. Vikas as an advance for the supply of 
sugar within the stipulated time. Hence, the contention of Mr. Vikas is correct.  
4. (i) In the following cases, a non-owner can convey better title to the bona fide purchaser of goods 
for value: 
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document 
of title to goods would pass a good title to the buyer in the following circumstances; namely;  
(a) If he was in possession of the goods or documents with the consent of the owner; 
(b) If the sale was made by him when acting in the ordinary course of business as a 
mercantile agent; and 
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no 
notice of the fact that the seller had no authority to sell (Proviso to Section 27). 
 Mercantile Agent means an agent having in the customary course of business as such 
agent has authority either to sell goods, or to consign goods for the purposes of sale, or to 
buy goods, or to raise money on the security of goods [Section 2(9)]. 
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has 
the sole possession of them by permission of the co-owners, the property in the goods is 
transferred to any person who buys them from such joint owner in good faith and has not at 
the time of the contract of sale notice that the seller has no authority to sell.  
(3) Sale by a person in possession under voidable contract: A buyer would acquire a good 
title to the goods sold to him by a seller who had obtained possession of the goods under a 
contract voidable on the ground of coercion, fraud, misrepresentation or undue influence 
provided that the contract had not been rescinded until the time of the sale (Section 29). 
(4) Sale by one who has already sold the goods but continues in possession thereof: If a 
person has sold goods but continues to be in possession of them or of the documents of title 
to them, he may sell them to a third person, and if such person obtains the delivery thereof 
in good faith and without notice of the previous sale, he would have good title to them, 
although the property in the goods had passed to the first buyer earlier. A pledge or other 
disposition of the goods or documents of title by the seller in possession are equally valid 
[Section 30(1)].  
(5) Sale by buyer obtaining possession before the property in the goods has vested in 
him: Where a buyer with the consent of the seller obtains possession of the goods before 
the property in them has passed to him, he may sell, pledge or otherwise dispose of the 
goods to a third person, and if such person obtains delivery of the goods in good faith and 
© The Institute of Chartered Accountants of India
4 
without notice of the lien or other right of the original seller in respect of the goods, he would 
get a good title to them [Section 30(2)]. 
 However, a person in possession of goods under a ‘hire-purchase’ agreement which gives 
him only an option to buy is not covered within the section unless it amounts to a sale.  
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s 
authority to sell, the transferee will get a good title as against the true owner. But before a 
good title by estoppel can be made, it must be shown that the true owner had actively 
suffered or held out the other person in question as the true owner or as a person 
authorized to sell the goods. 
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or 
stoppage in transit resells the goods, the buyer acquires a good title to the goods as against 
the original buyer [Section 54 (3)]. 
(8) Sale under the provisions of other Acts: 
(i) Sale by an Official Receiver or Liquidator of the Company will give the purchaser a 
valid title. 
(ii) Purchase of goods from a finder of goods will get a valid title under circumstances 
[Section 169 of the Indian Contract Act, 1872] 
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian 
Contract Act, 1872] 
(ii) Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):  
A partner may not be expelled from a firm by a majority of partners except in exercise, in good 
faith, of powers conferred by contract between the partners.   
The test of good faith as required under Section 33(1) includes three things:   
• The expulsion must be in the interest of the partnership.  
• The partner to be expelled is served with a notice.   
• He is given an opportunity of being heard.  
If a partner is otherwise expelled, the expulsion is null and void.   
(a) Action by the partners of M/s ABC & Associates, a partnership firm to expel Mr. P from the 
partnership was justified as he was expelled by approval of the other partners exercised in 
good faith to protect the interest of the partnership against the unauthorized activities 
charged against Mr. P. A proper notice and opportunity of being heard has to be given to 
Mr. P.  
(b) The following are the factors to be kept in mind prior expelling a partner from the firm by 
other partners:  
• the power of expulsion must have existed in a contract between the partners;   
• the power has been exercised by a majority of the partners; and  
• it has been exercised in good faith.   
 
 
© The Institute of Chartered Accountants of India
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1 
 
MOCK TEST PAPER - 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
ANSWERS 
1. (i)  An invitation to offer is different from offer. Quotations, menu cards, price tags, 
advertisements in newspaper for sale are not offer. These are merely invitations to public to 
make an offer.  An invitation to offer is an act precedent to making an offer. Acceptance of an 
invitation to an offer does not result in the contract and o nly an offer emerges in the process of 
negotiation. 
 In the instant case, Ashwin reaches to super market and selects a Air Conditioner with a 
discounted price tag of ` 40,000 but cashier denied to sell at discounted price by saying that 
discount is closed from today and request to make full payment. But Ashwin insists to purchase 
at discounted price. 
 On the basis of above provisions and facts, the price tag with Air Conditioner was not offer. It is 
merely an invitation to offer. Hence, it is the Ashwin who is making the offer not the super market. 
Cashier has right to reject the Ashwin’s offer. Therefore, Ashwin cannot enforce cashier to sell at 
discounted price.  
 (ii) Doctrine of Indoor Management:  The Doctrine of Indoor Management is the exception to the 
Doctrine of Constructive Notice. The Doctrine of Constructive Notice does not mean that 
outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act 
is authorised by the Articles or Memorandum, an outsider is entitled to assume that all the 
detailed formalities for doing that act have been observed.  
 The doctrine of Indoor Management is important to persons dealing with a company through its 
directors or other persons. They are entitled to assume that the acts of the directors or other 
officers of the company are validly performed, if they are within the scope of their apparent 
authority. So long as an act is valid under the articles, if done in a particular manner, an outsider 
dealing with the company is entitled to assume that it has been done in the manner required.  
 In the given question, Mr. Mohan has made payment to Mr. Ramesh and he (Mr. Ramesh) gave 
to receipt of the same to Mr. Mohan. Thus, it will be rightful on part of Mr. Mohan to assume that 
Mr. Ramesh was also authorised to receive money on behalf of the company. Hence, Mr. Mohan 
will be free from liability for payment of goods purchased from Sunflower Limited, as he has paid 
amount due to an employee of the company.  
 (iii)  (a) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He 
agrees to sell 50 bales and these bales were selected and set aside. On selection, the 
goods becomes ascertained. In this case, the contract is for the sale of ascerta ined goods, 
as the cotton bales to be sold are identified and agreed after the formation of the contract.   
(b) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his 
shop, it is a sale of existing but unascertained goods because it is not known which packet 
is to be delivered.   
(c) T agrees to sell to S all the apples which will be produced in his garden in the year 2023. It 
is contract of sale of future goods, amounting to 'an agreement to sell.'  
 
© The Institute of Chartered Accountants of India
2 
2. (i) An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
 Effect of Anticipatory Breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as rescinded and sue the other party for damages for breach of 
contract immediately without waiting until the due date of performance; or 
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time 
of performance and then hold the other party responsible for the consequences of non-
performance. But in this case, he will keep the contract alive for the benefit of the other 
party as well as his own, and the guilty party, if he so decides on re -consideration, may still 
perform his part of the contract and can also take advantage of any supervening 
impossibility which may have the effect of discharging the contract.  
(ii)  LLP is an alternative corporate business form that 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. (i)  A minor cannot be bound by a contract because a minor’s contract is void and not merely 
voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded 
on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be a dmitted to 
the benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other words, 
he can be validly given a share in the partnership profits. When this has been done and it can be 
done with the consent of all the partners then the rights of such a partner will be governed under 
Section 30 as follows: 
  Rights: 
(i)  A minor partner has a right to his agreed share of the profits and of the firm.  
(ii) He can have access to, inspect and copy the accounts of the firm. 
(iii)  He can sue the partners for accounts or for payment of his share but only when severing his 
connection with the firm, and not otherwise. 
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a 
partner. If he elects to become a partner, then he is entitled to the share to which he was 
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after 
the date of the public notice served to that effect. 
 
© The Institute of Chartered Accountants of India
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(ii)  Subsequent or Supervening impossibility (Becomes impossible after entering into 
contract): When performance of promise become impossible or illegal by occurrence of an 
unexpected event or a change of circumstances beyond the contemplation of parties, the contract 
becomes void e.g. change in law etc.   
 Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered 
to be void or when a contract becomes void, any person who has received any advantage under 
such agreement or contract is bound to restore it, or to make compensation for it to the person 
from whom he received it.  
 In the given question, after Mr. Gaurav and Mr. Vikas have entered into the contract to supply 
100 tons of sugar, the event of flood occurred which made it impossible to deliver the sugar 
within the stipulated time. Thus, the promise in question became void. Further, Mr. Gaurav has to 
pay back the amount of ` 70,000 that he received from Mr. Vikas as an advance for the supply of 
sugar within the stipulated time. Hence, the contention of Mr. Vikas is correct.  
4. (i) In the following cases, a non-owner can convey better title to the bona fide purchaser of goods 
for value: 
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document 
of title to goods would pass a good title to the buyer in the following circumstances; namely;  
(a) If he was in possession of the goods or documents with the consent of the owner; 
(b) If the sale was made by him when acting in the ordinary course of business as a 
mercantile agent; and 
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no 
notice of the fact that the seller had no authority to sell (Proviso to Section 27). 
 Mercantile Agent means an agent having in the customary course of business as such 
agent has authority either to sell goods, or to consign goods for the purposes of sale, or to 
buy goods, or to raise money on the security of goods [Section 2(9)]. 
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has 
the sole possession of them by permission of the co-owners, the property in the goods is 
transferred to any person who buys them from such joint owner in good faith and has not at 
the time of the contract of sale notice that the seller has no authority to sell.  
(3) Sale by a person in possession under voidable contract: A buyer would acquire a good 
title to the goods sold to him by a seller who had obtained possession of the goods under a 
contract voidable on the ground of coercion, fraud, misrepresentation or undue influence 
provided that the contract had not been rescinded until the time of the sale (Section 29). 
(4) Sale by one who has already sold the goods but continues in possession thereof: If a 
person has sold goods but continues to be in possession of them or of the documents of title 
to them, he may sell them to a third person, and if such person obtains the delivery thereof 
in good faith and without notice of the previous sale, he would have good title to them, 
although the property in the goods had passed to the first buyer earlier. A pledge or other 
disposition of the goods or documents of title by the seller in possession are equally valid 
[Section 30(1)].  
(5) Sale by buyer obtaining possession before the property in the goods has vested in 
him: Where a buyer with the consent of the seller obtains possession of the goods before 
the property in them has passed to him, he may sell, pledge or otherwise dispose of the 
goods to a third person, and if such person obtains delivery of the goods in good faith and 
© The Institute of Chartered Accountants of India
4 
without notice of the lien or other right of the original seller in respect of the goods, he would 
get a good title to them [Section 30(2)]. 
 However, a person in possession of goods under a ‘hire-purchase’ agreement which gives 
him only an option to buy is not covered within the section unless it amounts to a sale.  
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s 
authority to sell, the transferee will get a good title as against the true owner. But before a 
good title by estoppel can be made, it must be shown that the true owner had actively 
suffered or held out the other person in question as the true owner or as a person 
authorized to sell the goods. 
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or 
stoppage in transit resells the goods, the buyer acquires a good title to the goods as against 
the original buyer [Section 54 (3)]. 
(8) Sale under the provisions of other Acts: 
(i) Sale by an Official Receiver or Liquidator of the Company will give the purchaser a 
valid title. 
(ii) Purchase of goods from a finder of goods will get a valid title under circumstances 
[Section 169 of the Indian Contract Act, 1872] 
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian 
Contract Act, 1872] 
(ii) Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):  
A partner may not be expelled from a firm by a majority of partners except in exercise, in good 
faith, of powers conferred by contract between the partners.   
The test of good faith as required under Section 33(1) includes three things:   
• The expulsion must be in the interest of the partnership.  
• The partner to be expelled is served with a notice.   
• He is given an opportunity of being heard.  
If a partner is otherwise expelled, the expulsion is null and void.   
(a) Action by the partners of M/s ABC & Associates, a partnership firm to expel Mr. P from the 
partnership was justified as he was expelled by approval of the other partners exercised in 
good faith to protect the interest of the partnership against the unauthorized activities 
charged against Mr. P. A proper notice and opportunity of being heard has to be given to 
Mr. P.  
(b) The following are the factors to be kept in mind prior expelling a partner from the firm by 
other partners:  
• the power of expulsion must have existed in a contract between the partners;   
• the power has been exercised by a majority of the partners; and  
• it has been exercised in good faith.   
 
 
© The Institute of Chartered Accountants of India
5 
5. (i)  According to Section 15 of the Sale of Goods Act, 1930, whenever the goods are sold as per 
sample as well as by description, the implied condition is that the goods must correspond to both 
sample as well as description. In case, the goods do not correspond to sample or description, the 
buyer has the right to repudiate the contract. 
 Further under Sale of Goods Act, 1930, when the buyer makes known to the seller, the particular 
purpose for which the goods are required and he relies on his judgment and skill of the seller, it is 
the duty of the seller to supply such goods which are fit for that purpose. 
 In the given case, Mr. Vishal has informed to Mr. Dheeraj that he wanted the washing machine 
for washing woollen clothes. However, the machine which was delivered by Mr. Dheeraj was unfit 
for the purpose for which Mr. Vishal wanted the machine.  
 Based on the above provision and facts of case, there is breach of implied condition as to sample 
as well as description , therefore Mr. Vishal can either repudiate the contract or claim the refund 
of the price paid by him or he may require Mr. Dheeraj to replace the washing machine with 
desired one.   
(ii) The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate fa cade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, 
the courts have discretion to disregard the corporate entity and tax the income in the hands o f the 
appropriate assessee.  
1. The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the 
companies were nothing more than the facade of the assessee himself. Therefore, the 
whole idea of Mr. Rajeev was simply to split his income into three parts with a view to evade 
tax. No other business was done by the company.  
2. The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried on no other business, but was 
created simply as a legal entity to ostensibly receive the dividend and interest and to hand 
them over to the assessee as pretended loans. The same was upheld i n Re Sir Dinshaw 
Maneckjee Petit and Juggilal vs. Commissioner of Income Tax. 
6. (i)   Consideration [Section 2(d) of the Indian Contract Act, 1872] 
“When at the desire of the promisor, the promise or any other person has done, or does or 
abstains from doing of promises to do or abstain from doing something, such an act or 
abstinence or promise is called consideration for the promise”. 
The essential characteristics of a valid consideration are as follows:  
(1) Consideration must move at the desire of the promisor.  
(2) It may proceed from the promisee or any other person on his behalf.  
(3) It may be executed or executory. It may be past, present or future.  
(4) It must be real and have some value in the eyes of law.  
(5) It must not be something which the promisor is already legally bound to do.  
(6) It must not be unlawful, immoral or opposed to public policy.  
© The Institute of Chartered Accountants of India