Mock Test: Business Laws & Business Correspondence & Reporting (Paper-2) Ans.- Series-II (Dec. 2023) | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


1 
MOCK TEST PAPER - 2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
Answers 
1. (a)  Section 2(i) of Indian Contract Act, 1872 provides that an agreement which is enforceable by law 
at the option of one or more parties thereto, but not at the option of the other or others is a voidable 
contract. Further, when a party to a contract promise to perform a work within a specified time, 
could not perform with in that time, the contract is voidable at the option of the promisee. If promisee 
has received any benefit, he must return to promisor. 
 In the given problem, the contract is voidable at the option of Mr. Nikhil as work is not completed 
within the time agreed in the contract. Further, Mr. Nikhil is not liable to pay the cost incurred by 
M/s Sherry Fine Interiors as that cost did not provide any benefit to him and he has to appoint a 
new interior designer.    
(b)  Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 
means a company, other than a public company—  
(i) paid-up share capital of which does not exceed ` 4 crore or such higher amount as may be 
prescribed which shall not be more than ` 10 crore; and 
(ii)  turnover of which as per profit and loss account for the immediately preceding financial year 
does not exceed ` 40 Crore or such higher amount as may be prescribed which shall not be 
more than ` 100 crore.  
Exceptions: This clause shall not apply to: 
(A)  a holding company or a subsidiary company;  
(B)   a company registered under section 8; or 
(C) a company or body corporate governed by any special Act. 
In the instant case, since the paid-up capital of ABC Private Limited is ` 35 Lakhs and turnover is 
` 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-
up share capital as well as turnover are fulfilled by the Company. 
(c) Sale of unascertained goods and Appropriation [Section 23(1) of the Sale of Goods Act, 
1930] 
 Where there is a contract for the sale of unascertained goods by description and goods of that 
description are in a deliverable state are unconditionally appropriated to the contract, either by the 
seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the 
goods thereupon passes to the buyer.  
 Whereas, Appropriation of goods involves selection of goods with the intention of using them in 
performance of the contract and with the mutual consent of the seller and the buyer. 
The essentials elements are: 
(a) There is a contract for the sale of unascertained or future goods. 
(b) The goods should conform to the description and quality stated in the contract.  
(c) The goods must be in a deliverable state. 
Page 2


1 
MOCK TEST PAPER - 2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
Answers 
1. (a)  Section 2(i) of Indian Contract Act, 1872 provides that an agreement which is enforceable by law 
at the option of one or more parties thereto, but not at the option of the other or others is a voidable 
contract. Further, when a party to a contract promise to perform a work within a specified time, 
could not perform with in that time, the contract is voidable at the option of the promisee. If promisee 
has received any benefit, he must return to promisor. 
 In the given problem, the contract is voidable at the option of Mr. Nikhil as work is not completed 
within the time agreed in the contract. Further, Mr. Nikhil is not liable to pay the cost incurred by 
M/s Sherry Fine Interiors as that cost did not provide any benefit to him and he has to appoint a 
new interior designer.    
(b)  Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 
means a company, other than a public company—  
(i) paid-up share capital of which does not exceed ` 4 crore or such higher amount as may be 
prescribed which shall not be more than ` 10 crore; and 
(ii)  turnover of which as per profit and loss account for the immediately preceding financial year 
does not exceed ` 40 Crore or such higher amount as may be prescribed which shall not be 
more than ` 100 crore.  
Exceptions: This clause shall not apply to: 
(A)  a holding company or a subsidiary company;  
(B)   a company registered under section 8; or 
(C) a company or body corporate governed by any special Act. 
In the instant case, since the paid-up capital of ABC Private Limited is ` 35 Lakhs and turnover is 
` 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-
up share capital as well as turnover are fulfilled by the Company. 
(c) Sale of unascertained goods and Appropriation [Section 23(1) of the Sale of Goods Act, 
1930] 
 Where there is a contract for the sale of unascertained goods by description and goods of that 
description are in a deliverable state are unconditionally appropriated to the contract, either by the 
seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the 
goods thereupon passes to the buyer.  
 Whereas, Appropriation of goods involves selection of goods with the intention of using them in 
performance of the contract and with the mutual consent of the seller and the buyer. 
The essentials elements are: 
(a) There is a contract for the sale of unascertained or future goods. 
(b) The goods should conform to the description and quality stated in the contract.  
(c) The goods must be in a deliverable state. 
2 
(d) The goods must be unconditionally (as distinguished from an intention to appropriate) 
appropriated to the contract either by delivery to the buyer or his agent or the carrier. 
(e) The appropriation must be made by: 
(i) the seller with the assent of the buyer; or 
(ii) the buyer with the assent of the seller.  
(f) The assent may be express or implied. 
(g) The assent may be given either before or after appropriation. 
2. (a) Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third 
party; but the third party cannot sue on contract. Only a person who is party to a contract can sue 
on it. 
 The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity 
of contract”, is however, subject to certain exceptions. In other words, even a stranger to a 
contract may enforce a claim in the following cases: 
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a 
party to the contract between the settler and the trustee. 
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, 
the members of family who originally had not been parties to the settlement, may enforce the 
agreement. 
(3) In the case of certain marriage contracts/arrangements, a provision may be made for the 
benefit of a person, who may file a suit though he is not a party to the agreement. 
(4) In the case of assignment of a contract, when the benefit under a contract has been 
assigned, the assignee can enforce the contract but such assignment should not involve any 
personal skill. 
(5) Acknowledgement or estoppel – Where the promisor by his conduct acknowledges himself 
as an agent of the third party, it would result into a binding obligation towards third party.  
(6) In the case of covenant running with the land, the person who purchases land with notice 
that the owner of land is bound by certain duties affecting land, the covenant affecting the 
land may be enforced by the successor of the seller. 
(7) Contracts entered into through an agent: The principal can enforce the contracts entered 
by his agent where the agent has acted within the scope of his authority and in the name of 
the principal. 
(b) Unlimited liability in case of fraud (Section 30 of the Limited Liability Partnership Act, 2008):  
(1)  In case of fraud: 
• In the event of an act carried out by a LLP, or any of its partners,  
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent 
purpose,  
• the liability of the LLP and partners who acted with intent to defraud creditors or for any 
fraudulent purpose,  
• shall be unlimited for all or any of the debts or other liabilities of the LLP.  
 However, in case any such act is carried out by a partner, the LLP is liable to the same extent 
as the partner, unless it is established by the LLP that such act was without the knowledge or 
the authority of the LLP.  
Page 3


1 
MOCK TEST PAPER - 2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
Answers 
1. (a)  Section 2(i) of Indian Contract Act, 1872 provides that an agreement which is enforceable by law 
at the option of one or more parties thereto, but not at the option of the other or others is a voidable 
contract. Further, when a party to a contract promise to perform a work within a specified time, 
could not perform with in that time, the contract is voidable at the option of the promisee. If promisee 
has received any benefit, he must return to promisor. 
 In the given problem, the contract is voidable at the option of Mr. Nikhil as work is not completed 
within the time agreed in the contract. Further, Mr. Nikhil is not liable to pay the cost incurred by 
M/s Sherry Fine Interiors as that cost did not provide any benefit to him and he has to appoint a 
new interior designer.    
(b)  Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 
means a company, other than a public company—  
(i) paid-up share capital of which does not exceed ` 4 crore or such higher amount as may be 
prescribed which shall not be more than ` 10 crore; and 
(ii)  turnover of which as per profit and loss account for the immediately preceding financial year 
does not exceed ` 40 Crore or such higher amount as may be prescribed which shall not be 
more than ` 100 crore.  
Exceptions: This clause shall not apply to: 
(A)  a holding company or a subsidiary company;  
(B)   a company registered under section 8; or 
(C) a company or body corporate governed by any special Act. 
In the instant case, since the paid-up capital of ABC Private Limited is ` 35 Lakhs and turnover is 
` 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-
up share capital as well as turnover are fulfilled by the Company. 
(c) Sale of unascertained goods and Appropriation [Section 23(1) of the Sale of Goods Act, 
1930] 
 Where there is a contract for the sale of unascertained goods by description and goods of that 
description are in a deliverable state are unconditionally appropriated to the contract, either by the 
seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the 
goods thereupon passes to the buyer.  
 Whereas, Appropriation of goods involves selection of goods with the intention of using them in 
performance of the contract and with the mutual consent of the seller and the buyer. 
The essentials elements are: 
(a) There is a contract for the sale of unascertained or future goods. 
(b) The goods should conform to the description and quality stated in the contract.  
(c) The goods must be in a deliverable state. 
2 
(d) The goods must be unconditionally (as distinguished from an intention to appropriate) 
appropriated to the contract either by delivery to the buyer or his agent or the carrier. 
(e) The appropriation must be made by: 
(i) the seller with the assent of the buyer; or 
(ii) the buyer with the assent of the seller.  
(f) The assent may be express or implied. 
(g) The assent may be given either before or after appropriation. 
2. (a) Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third 
party; but the third party cannot sue on contract. Only a person who is party to a contract can sue 
on it. 
 The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity 
of contract”, is however, subject to certain exceptions. In other words, even a stranger to a 
contract may enforce a claim in the following cases: 
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a 
party to the contract between the settler and the trustee. 
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, 
the members of family who originally had not been parties to the settlement, may enforce the 
agreement. 
(3) In the case of certain marriage contracts/arrangements, a provision may be made for the 
benefit of a person, who may file a suit though he is not a party to the agreement. 
(4) In the case of assignment of a contract, when the benefit under a contract has been 
assigned, the assignee can enforce the contract but such assignment should not involve any 
personal skill. 
(5) Acknowledgement or estoppel – Where the promisor by his conduct acknowledges himself 
as an agent of the third party, it would result into a binding obligation towards third party.  
(6) In the case of covenant running with the land, the person who purchases land with notice 
that the owner of land is bound by certain duties affecting land, the covenant affecting the 
land may be enforced by the successor of the seller. 
(7) Contracts entered into through an agent: The principal can enforce the contracts entered 
by his agent where the agent has acted within the scope of his authority and in the name of 
the principal. 
(b) Unlimited liability in case of fraud (Section 30 of the Limited Liability Partnership Act, 2008):  
(1)  In case of fraud: 
• In the event of an act carried out by a LLP, or any of its partners,  
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent 
purpose,  
• the liability of the LLP and partners who acted with intent to defraud creditors or for any 
fraudulent purpose,  
• shall be unlimited for all or any of the debts or other liabilities of the LLP.  
 However, in case any such act is carried out by a partner, the LLP is liable to the same extent 
as the partner, unless it is established by the LLP that such act was without the knowledge or 
the authority of the LLP.  
3 
(2) Punishment: Where any business is carried on with such intent or for such purpose as 
mentioned in sub-section (1), every person who was knowingly a party to the carrying on of 
the business in the manner aforesaid shall be punishable with  
• imprisonment for a term up to 5 years and  
• with fine which shall not be less than ` 50,000, but which may extend to ` 5 Lakhs.  
(3) Compensations on commission of fraud: Where a LLP or any partner or designated partner 
or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then 
without prejudice to any criminal proceedings which may arise under any law for the time 
being in force, the LLP and any such partner or designated partner or employee shall be liable 
to pay compensation to any person who has suffered any loss or damage by reason of such 
conduct. 
 However, such LLP shall not be liable if any such partner or designated partner or employee 
has acted fraudulently without knowledge of the LLP.  
3. (a) (i)  Partnership for a fixed period (Indian Partnership Act, 1932): Where a provision is made 
by a contract for the duration of the partnership, the partnership is called ‘partnership for a 
fixed period’.  It is a partnership created for a particular period of time.  Such a partnership 
comes to an end on the expiry of the fixed period. 
(ii) Minor as a partner: A minor is not competent to contract. Hence, a person who is a minor 
according to the law to which he is subject may not be a partner in a firm, but with the consent 
of all the partners for the time being, he may be admitted to the benefits of partnership. 
Rights of a minor in a partnership firm: 
(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. 
(b)  According to Section 11 of Indian Contract Act, 1872, a contract with minor is void-ab-initio. A minor 
cannot be enforced to pay off his liabilities. Parents or guardians of minor are also not liable for 
any contract entered by minor. However, a minor is liable for supplies of necessaries out of his 
assets. Minor is not personally liable even for necessaries. 
 In the instant case, M/s Surjewala & sons file a suit against Ayush for recovery of ` 80,000 out of 
his assets who purchased 10 fancy coats for the wedding ceremony of his sister on credit from  
M/s Surjewala & sons. 
 On the basis of the facts of the problem, coats were not necessary items for Ayush. Hence, his 
assets cannot be attached for payment of price of coats. Therefore, M/s Surjewala & sons cannot 
claim ` 80,000 from Ayush. 
4. (a) If the seller commits a breach of contract, the buyer gets the following rights against the seller: 
1. Damages for non-delivery [Section 57 of the Sale of Goods Act, 1930]: Where the seller 
wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller 
for damages for non-delivery. 
Page 4


1 
MOCK TEST PAPER - 2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
Answers 
1. (a)  Section 2(i) of Indian Contract Act, 1872 provides that an agreement which is enforceable by law 
at the option of one or more parties thereto, but not at the option of the other or others is a voidable 
contract. Further, when a party to a contract promise to perform a work within a specified time, 
could not perform with in that time, the contract is voidable at the option of the promisee. If promisee 
has received any benefit, he must return to promisor. 
 In the given problem, the contract is voidable at the option of Mr. Nikhil as work is not completed 
within the time agreed in the contract. Further, Mr. Nikhil is not liable to pay the cost incurred by 
M/s Sherry Fine Interiors as that cost did not provide any benefit to him and he has to appoint a 
new interior designer.    
(b)  Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 
means a company, other than a public company—  
(i) paid-up share capital of which does not exceed ` 4 crore or such higher amount as may be 
prescribed which shall not be more than ` 10 crore; and 
(ii)  turnover of which as per profit and loss account for the immediately preceding financial year 
does not exceed ` 40 Crore or such higher amount as may be prescribed which shall not be 
more than ` 100 crore.  
Exceptions: This clause shall not apply to: 
(A)  a holding company or a subsidiary company;  
(B)   a company registered under section 8; or 
(C) a company or body corporate governed by any special Act. 
In the instant case, since the paid-up capital of ABC Private Limited is ` 35 Lakhs and turnover is 
` 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-
up share capital as well as turnover are fulfilled by the Company. 
(c) Sale of unascertained goods and Appropriation [Section 23(1) of the Sale of Goods Act, 
1930] 
 Where there is a contract for the sale of unascertained goods by description and goods of that 
description are in a deliverable state are unconditionally appropriated to the contract, either by the 
seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the 
goods thereupon passes to the buyer.  
 Whereas, Appropriation of goods involves selection of goods with the intention of using them in 
performance of the contract and with the mutual consent of the seller and the buyer. 
The essentials elements are: 
(a) There is a contract for the sale of unascertained or future goods. 
(b) The goods should conform to the description and quality stated in the contract.  
(c) The goods must be in a deliverable state. 
2 
(d) The goods must be unconditionally (as distinguished from an intention to appropriate) 
appropriated to the contract either by delivery to the buyer or his agent or the carrier. 
(e) The appropriation must be made by: 
(i) the seller with the assent of the buyer; or 
(ii) the buyer with the assent of the seller.  
(f) The assent may be express or implied. 
(g) The assent may be given either before or after appropriation. 
2. (a) Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third 
party; but the third party cannot sue on contract. Only a person who is party to a contract can sue 
on it. 
 The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity 
of contract”, is however, subject to certain exceptions. In other words, even a stranger to a 
contract may enforce a claim in the following cases: 
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a 
party to the contract between the settler and the trustee. 
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, 
the members of family who originally had not been parties to the settlement, may enforce the 
agreement. 
(3) In the case of certain marriage contracts/arrangements, a provision may be made for the 
benefit of a person, who may file a suit though he is not a party to the agreement. 
(4) In the case of assignment of a contract, when the benefit under a contract has been 
assigned, the assignee can enforce the contract but such assignment should not involve any 
personal skill. 
(5) Acknowledgement or estoppel – Where the promisor by his conduct acknowledges himself 
as an agent of the third party, it would result into a binding obligation towards third party.  
(6) In the case of covenant running with the land, the person who purchases land with notice 
that the owner of land is bound by certain duties affecting land, the covenant affecting the 
land may be enforced by the successor of the seller. 
(7) Contracts entered into through an agent: The principal can enforce the contracts entered 
by his agent where the agent has acted within the scope of his authority and in the name of 
the principal. 
(b) Unlimited liability in case of fraud (Section 30 of the Limited Liability Partnership Act, 2008):  
(1)  In case of fraud: 
• In the event of an act carried out by a LLP, or any of its partners,  
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent 
purpose,  
• the liability of the LLP and partners who acted with intent to defraud creditors or for any 
fraudulent purpose,  
• shall be unlimited for all or any of the debts or other liabilities of the LLP.  
 However, in case any such act is carried out by a partner, the LLP is liable to the same extent 
as the partner, unless it is established by the LLP that such act was without the knowledge or 
the authority of the LLP.  
3 
(2) Punishment: Where any business is carried on with such intent or for such purpose as 
mentioned in sub-section (1), every person who was knowingly a party to the carrying on of 
the business in the manner aforesaid shall be punishable with  
• imprisonment for a term up to 5 years and  
• with fine which shall not be less than ` 50,000, but which may extend to ` 5 Lakhs.  
(3) Compensations on commission of fraud: Where a LLP or any partner or designated partner 
or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then 
without prejudice to any criminal proceedings which may arise under any law for the time 
being in force, the LLP and any such partner or designated partner or employee shall be liable 
to pay compensation to any person who has suffered any loss or damage by reason of such 
conduct. 
 However, such LLP shall not be liable if any such partner or designated partner or employee 
has acted fraudulently without knowledge of the LLP.  
3. (a) (i)  Partnership for a fixed period (Indian Partnership Act, 1932): Where a provision is made 
by a contract for the duration of the partnership, the partnership is called ‘partnership for a 
fixed period’.  It is a partnership created for a particular period of time.  Such a partnership 
comes to an end on the expiry of the fixed period. 
(ii) Minor as a partner: A minor is not competent to contract. Hence, a person who is a minor 
according to the law to which he is subject may not be a partner in a firm, but with the consent 
of all the partners for the time being, he may be admitted to the benefits of partnership. 
Rights of a minor in a partnership firm: 
(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. 
(b)  According to Section 11 of Indian Contract Act, 1872, a contract with minor is void-ab-initio. A minor 
cannot be enforced to pay off his liabilities. Parents or guardians of minor are also not liable for 
any contract entered by minor. However, a minor is liable for supplies of necessaries out of his 
assets. Minor is not personally liable even for necessaries. 
 In the instant case, M/s Surjewala & sons file a suit against Ayush for recovery of ` 80,000 out of 
his assets who purchased 10 fancy coats for the wedding ceremony of his sister on credit from  
M/s Surjewala & sons. 
 On the basis of the facts of the problem, coats were not necessary items for Ayush. Hence, his 
assets cannot be attached for payment of price of coats. Therefore, M/s Surjewala & sons cannot 
claim ` 80,000 from Ayush. 
4. (a) If the seller commits a breach of contract, the buyer gets the following rights against the seller: 
1. Damages for non-delivery [Section 57 of the Sale of Goods Act, 1930]: Where the seller 
wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller 
for damages for non-delivery. 
4 
2. Suit for specific performance (Section 58): Where the seller commits breach of the contract 
of sale, the buyer can appeal to the court for specific performance. The court can order for 
specific performance only when the goods are ascertained or specific and where damages 
would not be an adequate remedy. 
3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the part of 
the seller, or where the buyer elects to or is forced to treat breach of condition as breach of 
warranty, the buyer is not by reason only of such breach of warranty entitled to reject the 
goods on the basis of such breach of warranty; but the buyer may – 
(i) set up against the seller the breach of warranty in diminution or extinction of the price; 
or 
(ii) sue the seller for damages for breach of warranty. 
4. Repudiation of contract before due date (Section 60): Where either party to a contract of 
sale repudiates the contract before the date of delivery, the other may either treat the contract 
as: 
• subsisting and wait till the date of delivery, or  
• he may treat the contract as rescinded and sue for damages for the breach. 
5. Suit for interest:  
(1)  The buyer is entitled to recover interest or special damages, or to recover the money 
paid where the consideration for the payment of it has failed. 
(2) In the absence of a contract to the contrary, the court may award interest at such rate 
as it thinks fit on the amount of the price to the buyer in a suit by him for the refund of 
the price in a case of a breach of the contract on the part of the seller from the date on 
which the payment was made.  
(b)  According to sub-section (3) of Section 32 of the Indian Partnership Act, 1932, a retiring partner 
along with the continuing partners continue to be liable to any third party for acts of the firm after 
his retirement until public notice of his retirement has been given either by himself or by any other 
partner. But the retired partner will not be liable to any third party if the latter deals with the firm 
without knowing that the former was a partner. 
 As per the provisions of Section 28, where a man holds himself out as a partner or allows others 
to do it, when in fact he is not a partner, he is liable like a partner in the firm to anyone who on the 
faith of such representation has given credit to the firm. 
 In the instant case, since Mr. R has not given the public notice of his retirement from the partnership 
firm and Mr. S believes that Mr. R is a partner, Mr. R will be liable to Mr. S under the provisions of 
Section 32. 
 Also Mr. E, who has been introduced as a partner of the firm to which Mr. E has not presumably 
denied, will also be liable for the payment of 25 fans supplied to the firm on credit along with other 
partners in terms of the provisions of Section 28 as stated above.  
 Over and above R and E, P and Q being the partners of the firm along with the firm will also be 
held liable to S.  
 Therefore, S can recover the payment from the Firm, P, Q, R and E. 
5. (a) According to the provisions of the Sale of Goods Act, 1930, there are three modes of delivery, (i) 
Actual delivery, (ii) Constructive delivery and (iii) Symbolic delivery.  
Page 5


1 
MOCK TEST PAPER - 2 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 
SECTION A: BUSINESS LAWS 
Answers 
1. (a)  Section 2(i) of Indian Contract Act, 1872 provides that an agreement which is enforceable by law 
at the option of one or more parties thereto, but not at the option of the other or others is a voidable 
contract. Further, when a party to a contract promise to perform a work within a specified time, 
could not perform with in that time, the contract is voidable at the option of the promisee. If promisee 
has received any benefit, he must return to promisor. 
 In the given problem, the contract is voidable at the option of Mr. Nikhil as work is not completed 
within the time agreed in the contract. Further, Mr. Nikhil is not liable to pay the cost incurred by 
M/s Sherry Fine Interiors as that cost did not provide any benefit to him and he has to appoint a 
new interior designer.    
(b)  Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 
means a company, other than a public company—  
(i) paid-up share capital of which does not exceed ` 4 crore or such higher amount as may be 
prescribed which shall not be more than ` 10 crore; and 
(ii)  turnover of which as per profit and loss account for the immediately preceding financial year 
does not exceed ` 40 Crore or such higher amount as may be prescribed which shall not be 
more than ` 100 crore.  
Exceptions: This clause shall not apply to: 
(A)  a holding company or a subsidiary company;  
(B)   a company registered under section 8; or 
(C) a company or body corporate governed by any special Act. 
In the instant case, since the paid-up capital of ABC Private Limited is ` 35 Lakhs and turnover is 
` 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-
up share capital as well as turnover are fulfilled by the Company. 
(c) Sale of unascertained goods and Appropriation [Section 23(1) of the Sale of Goods Act, 
1930] 
 Where there is a contract for the sale of unascertained goods by description and goods of that 
description are in a deliverable state are unconditionally appropriated to the contract, either by the 
seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the 
goods thereupon passes to the buyer.  
 Whereas, Appropriation of goods involves selection of goods with the intention of using them in 
performance of the contract and with the mutual consent of the seller and the buyer. 
The essentials elements are: 
(a) There is a contract for the sale of unascertained or future goods. 
(b) The goods should conform to the description and quality stated in the contract.  
(c) The goods must be in a deliverable state. 
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(d) The goods must be unconditionally (as distinguished from an intention to appropriate) 
appropriated to the contract either by delivery to the buyer or his agent or the carrier. 
(e) The appropriation must be made by: 
(i) the seller with the assent of the buyer; or 
(ii) the buyer with the assent of the seller.  
(f) The assent may be express or implied. 
(g) The assent may be given either before or after appropriation. 
2. (a) Under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third 
party; but the third party cannot sue on contract. Only a person who is party to a contract can sue 
on it. 
 The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity 
of contract”, is however, subject to certain exceptions. In other words, even a stranger to a 
contract may enforce a claim in the following cases: 
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a 
party to the contract between the settler and the trustee. 
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, 
the members of family who originally had not been parties to the settlement, may enforce the 
agreement. 
(3) In the case of certain marriage contracts/arrangements, a provision may be made for the 
benefit of a person, who may file a suit though he is not a party to the agreement. 
(4) In the case of assignment of a contract, when the benefit under a contract has been 
assigned, the assignee can enforce the contract but such assignment should not involve any 
personal skill. 
(5) Acknowledgement or estoppel – Where the promisor by his conduct acknowledges himself 
as an agent of the third party, it would result into a binding obligation towards third party.  
(6) In the case of covenant running with the land, the person who purchases land with notice 
that the owner of land is bound by certain duties affecting land, the covenant affecting the 
land may be enforced by the successor of the seller. 
(7) Contracts entered into through an agent: The principal can enforce the contracts entered 
by his agent where the agent has acted within the scope of his authority and in the name of 
the principal. 
(b) Unlimited liability in case of fraud (Section 30 of the Limited Liability Partnership Act, 2008):  
(1)  In case of fraud: 
• In the event of an act carried out by a LLP, or any of its partners,  
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent 
purpose,  
• the liability of the LLP and partners who acted with intent to defraud creditors or for any 
fraudulent purpose,  
• shall be unlimited for all or any of the debts or other liabilities of the LLP.  
 However, in case any such act is carried out by a partner, the LLP is liable to the same extent 
as the partner, unless it is established by the LLP that such act was without the knowledge or 
the authority of the LLP.  
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(2) Punishment: Where any business is carried on with such intent or for such purpose as 
mentioned in sub-section (1), every person who was knowingly a party to the carrying on of 
the business in the manner aforesaid shall be punishable with  
• imprisonment for a term up to 5 years and  
• with fine which shall not be less than ` 50,000, but which may extend to ` 5 Lakhs.  
(3) Compensations on commission of fraud: Where a LLP or any partner or designated partner 
or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then 
without prejudice to any criminal proceedings which may arise under any law for the time 
being in force, the LLP and any such partner or designated partner or employee shall be liable 
to pay compensation to any person who has suffered any loss or damage by reason of such 
conduct. 
 However, such LLP shall not be liable if any such partner or designated partner or employee 
has acted fraudulently without knowledge of the LLP.  
3. (a) (i)  Partnership for a fixed period (Indian Partnership Act, 1932): Where a provision is made 
by a contract for the duration of the partnership, the partnership is called ‘partnership for a 
fixed period’.  It is a partnership created for a particular period of time.  Such a partnership 
comes to an end on the expiry of the fixed period. 
(ii) Minor as a partner: A minor is not competent to contract. Hence, a person who is a minor 
according to the law to which he is subject may not be a partner in a firm, but with the consent 
of all the partners for the time being, he may be admitted to the benefits of partnership. 
Rights of a minor in a partnership firm: 
(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. 
(b)  According to Section 11 of Indian Contract Act, 1872, a contract with minor is void-ab-initio. A minor 
cannot be enforced to pay off his liabilities. Parents or guardians of minor are also not liable for 
any contract entered by minor. However, a minor is liable for supplies of necessaries out of his 
assets. Minor is not personally liable even for necessaries. 
 In the instant case, M/s Surjewala & sons file a suit against Ayush for recovery of ` 80,000 out of 
his assets who purchased 10 fancy coats for the wedding ceremony of his sister on credit from  
M/s Surjewala & sons. 
 On the basis of the facts of the problem, coats were not necessary items for Ayush. Hence, his 
assets cannot be attached for payment of price of coats. Therefore, M/s Surjewala & sons cannot 
claim ` 80,000 from Ayush. 
4. (a) If the seller commits a breach of contract, the buyer gets the following rights against the seller: 
1. Damages for non-delivery [Section 57 of the Sale of Goods Act, 1930]: Where the seller 
wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller 
for damages for non-delivery. 
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2. Suit for specific performance (Section 58): Where the seller commits breach of the contract 
of sale, the buyer can appeal to the court for specific performance. The court can order for 
specific performance only when the goods are ascertained or specific and where damages 
would not be an adequate remedy. 
3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the part of 
the seller, or where the buyer elects to or is forced to treat breach of condition as breach of 
warranty, the buyer is not by reason only of such breach of warranty entitled to reject the 
goods on the basis of such breach of warranty; but the buyer may – 
(i) set up against the seller the breach of warranty in diminution or extinction of the price; 
or 
(ii) sue the seller for damages for breach of warranty. 
4. Repudiation of contract before due date (Section 60): Where either party to a contract of 
sale repudiates the contract before the date of delivery, the other may either treat the contract 
as: 
• subsisting and wait till the date of delivery, or  
• he may treat the contract as rescinded and sue for damages for the breach. 
5. Suit for interest:  
(1)  The buyer is entitled to recover interest or special damages, or to recover the money 
paid where the consideration for the payment of it has failed. 
(2) In the absence of a contract to the contrary, the court may award interest at such rate 
as it thinks fit on the amount of the price to the buyer in a suit by him for the refund of 
the price in a case of a breach of the contract on the part of the seller from the date on 
which the payment was made.  
(b)  According to sub-section (3) of Section 32 of the Indian Partnership Act, 1932, a retiring partner 
along with the continuing partners continue to be liable to any third party for acts of the firm after 
his retirement until public notice of his retirement has been given either by himself or by any other 
partner. But the retired partner will not be liable to any third party if the latter deals with the firm 
without knowing that the former was a partner. 
 As per the provisions of Section 28, where a man holds himself out as a partner or allows others 
to do it, when in fact he is not a partner, he is liable like a partner in the firm to anyone who on the 
faith of such representation has given credit to the firm. 
 In the instant case, since Mr. R has not given the public notice of his retirement from the partnership 
firm and Mr. S believes that Mr. R is a partner, Mr. R will be liable to Mr. S under the provisions of 
Section 32. 
 Also Mr. E, who has been introduced as a partner of the firm to which Mr. E has not presumably 
denied, will also be liable for the payment of 25 fans supplied to the firm on credit along with other 
partners in terms of the provisions of Section 28 as stated above.  
 Over and above R and E, P and Q being the partners of the firm along with the firm will also be 
held liable to S.  
 Therefore, S can recover the payment from the Firm, P, Q, R and E. 
5. (a) According to the provisions of the Sale of Goods Act, 1930, there are three modes of delivery, (i) 
Actual delivery, (ii) Constructive delivery and (iii) Symbolic delivery.  
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 Symbolic delivery is a delivery of a thing in token of a transfer of something else, i.e., delivery of 
goods in the course of transit may be made by handing over documents of title to goods, like bill 
of lading or railway receipt or delivery orders or the key of a warehouse containing the goods is 
handed over to buyer.  
 In the instant case, Samar purchased a pre-owned car from “Car Wala 007” which was standing in 
the parking lane just outside of office. After completing the documenting formalities, he received 
the key of car from sales manager of “Car Wala 007”. But when he was coming to parking area for 
picking the car, the car which badly damaged due to fall of the electric poll on the car.  
 On the basis of above provisions and facts, it is clear that handing over the key of car is the 
symbolic delivery of car. Hence, Samar being owner of the car must bear the repair expenses of 
car. 
(b)  Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified 
separately from the members of the company. Due to this, members of a company are shielded 
from liability connected to the company’s actions. 
 Lifting of Corporate Veil: The following are the cases where company law disregards the principle 
of corporate personality or the principle that the company is a legal entity distinct and separate 
from its shareholders or members: 
(1) To determine the character of the company i.e. to find out whether co-enemy or friend: 
It is true that, unlike a natural person, a company does not have mind or conscience; therefore, 
it cannot be a friend or foe. It may, however, be characterised as an enemy company, if its 
affairs are under the control of people of an enemy country. For this purpose, the Court may 
examine the character of the persons who are really at the helm of affairs of the company. 
(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps 
particularly where question of the controlling interest is in issue. Where corporate entity is 
used to evade or circumvent tax, the Court can disregard the corporate identity. 
(3) To avoid a legal obligation: Where it was found that the sole purpose for the formation of 
the company was to use it as a device to reduce the amount to be paid by way of bonus to 
workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction. 
(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded as an 
agent or trustee of its members, or of another company, and may therefore be deemed to 
have lost its individuality in favour of its principal.  Here the principal will be held liable for the 
acts of that company.  
(5) Company formed for fraud/improper conduct or to defeat law: Where the device of 
incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent 
law, to defraud creditors or to avoid legal obligations. 
6. (a) Liquidated damages is a genuine pre-estimate of compensation of damage for certain anticipated 
breach of contract. This estimate is agreed to between parties to avoid at a later date detailed 
calculation and the necessity to convince outside parties. 
 Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and 
has no comparison to the loss suffered by the parties. 
Distinction between liquidated damages and penalty 
 Penalty and liquidated damages have one thing in common that both are payable on the occurrence 
of a breach of contract.  It is very difficult to draw a clear line of distinction between the two but 
certain principles as laid down below may be helpful.