Business Laws Model Test Paper - 1 (Answers) | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS 
1. (a)  According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade 
or business of any kind, is to that extent void. But this rule is subject to 
the following exceptions, namely, where a person sells the goodwill of a 
business and agrees with the buyer to refrain from carrying on a similar 
business, within specified local limits, so long as the buyer or his 
successor in interest carries on a like business therein, such an 
agreement is valid. The local limits within which the seller of the goodwill 
agrees not to carry on similar business must be reasonable. 
In the instant case, Kashish sold his running business of artificial 
jewellery to Naman and promises, not to carry on the business of artificial 
jewellery and real diamond jewellery in that area and for a period of next 
one year but just after two months, Kashish opened a show room of real 
diamond jewellery. Naman sued Kashish for closing the business of real 
diamond business as it was against the agreement. 
As exceptions to section 27 is applicable to similar business only, 
agreement between Naman and Kashish will not be applicable on 
business of real diamond jewellery. Hence, Kashish can continue his 
business of real diamond jewellery.  
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section — 
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
636
Page 2


ANSWERS OF MODEL TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS 
1. (a)  According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade 
or business of any kind, is to that extent void. But this rule is subject to 
the following exceptions, namely, where a person sells the goodwill of a 
business and agrees with the buyer to refrain from carrying on a similar 
business, within specified local limits, so long as the buyer or his 
successor in interest carries on a like business therein, such an 
agreement is valid. The local limits within which the seller of the goodwill 
agrees not to carry on similar business must be reasonable. 
In the instant case, Kashish sold his running business of artificial 
jewellery to Naman and promises, not to carry on the business of artificial 
jewellery and real diamond jewellery in that area and for a period of next 
one year but just after two months, Kashish opened a show room of real 
diamond jewellery. Naman sued Kashish for closing the business of real 
diamond business as it was against the agreement. 
As exceptions to section 27 is applicable to similar business only, 
agreement between Naman and Kashish will not be applicable on 
business of real diamond jewellery. Hence, Kashish can continue his 
business of real diamond jewellery.  
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section — 
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
636
(a) On the basis of provisions of Section 2(87) and facts of the
given problem, Shadow Evening Private Limited is holding
one – half of total equity paid up share capital of Darshan
Photographs Private Limited. Therefore, Darshan
Photographs Private Limited cannot be considered as
subsidiary company of Shadow Evening Private Limited as for
being subsidiary company other company should control more
than one – half of the total voting power.
(b) Answer would remain same even if Shadow Evening Private
Limited is also holding 5,000 preference shares as they do not
have voting rights.
(c) Definition of Partnership: 'Partnership' is the relation between persons
who have agreed to share the profits of a business carried on by all or
any of them acting for all. (Section 4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Profits
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP 
The definition of the partnership contains the following five elements 
which must co-exist before a partnership can come into existence: 
1. Association of two or more persons: Partnership is an
association of 2 or more persons. Again, only persons recognized
by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot
be a partner. Again, a minor cannot be a partner in a firm, but with
the consent of all the partners, may be admitted to the benefits of
partnership.
2. Agreement: It may be observed that partnership must be the result
of an agreement between two or more persons. There must be an
agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the
nature of the partnership is voluntary and contractual. An
agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose,
the term 'business' includes every trade, occupation and
profession. The existence of business is essential. Secondly, the
637
Page 3


ANSWERS OF MODEL TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS 
1. (a)  According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade 
or business of any kind, is to that extent void. But this rule is subject to 
the following exceptions, namely, where a person sells the goodwill of a 
business and agrees with the buyer to refrain from carrying on a similar 
business, within specified local limits, so long as the buyer or his 
successor in interest carries on a like business therein, such an 
agreement is valid. The local limits within which the seller of the goodwill 
agrees not to carry on similar business must be reasonable. 
In the instant case, Kashish sold his running business of artificial 
jewellery to Naman and promises, not to carry on the business of artificial 
jewellery and real diamond jewellery in that area and for a period of next 
one year but just after two months, Kashish opened a show room of real 
diamond jewellery. Naman sued Kashish for closing the business of real 
diamond business as it was against the agreement. 
As exceptions to section 27 is applicable to similar business only, 
agreement between Naman and Kashish will not be applicable on 
business of real diamond jewellery. Hence, Kashish can continue his 
business of real diamond jewellery.  
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section — 
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
636
(a) On the basis of provisions of Section 2(87) and facts of the
given problem, Shadow Evening Private Limited is holding
one – half of total equity paid up share capital of Darshan
Photographs Private Limited. Therefore, Darshan
Photographs Private Limited cannot be considered as
subsidiary company of Shadow Evening Private Limited as for
being subsidiary company other company should control more
than one – half of the total voting power.
(b) Answer would remain same even if Shadow Evening Private
Limited is also holding 5,000 preference shares as they do not
have voting rights.
(c) Definition of Partnership: 'Partnership' is the relation between persons
who have agreed to share the profits of a business carried on by all or
any of them acting for all. (Section 4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Profits
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP 
The definition of the partnership contains the following five elements 
which must co-exist before a partnership can come into existence: 
1. Association of two or more persons: Partnership is an
association of 2 or more persons. Again, only persons recognized
by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot
be a partner. Again, a minor cannot be a partner in a firm, but with
the consent of all the partners, may be admitted to the benefits of
partnership.
2. Agreement: It may be observed that partnership must be the result
of an agreement between two or more persons. There must be an
agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the
nature of the partnership is voluntary and contractual. An
agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose,
the term 'business' includes every trade, occupation and
profession. The existence of business is essential. Secondly, the
637
motive of the business is the "acquisition of gains" which leads to 
the formation of partnership. Therefore, there can be no partnership 
where there is no intention to carry on the business and to share 
the profit thereof. 
4. Agreement to share profits: The sharing of profits is an essential
feature of partnership. There can be no partnership where only one
of the partners is entitled to the whole of the profits of the business.
Partners must agree to share the profits in any manner they
choose. But an agreement to share losses is not an essential
element. It is open to one or more partners to agree to share all the
losses. However, in the event of losses, unless agreed otherwise,
these must be borne in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The
business must be carried on by all the partners or by anyone or
more of the partners acting for all. This is the cardinal principle of
the partnership Law. In other words, there should be a binding
contract of mutual agency between the partners. An act of one
partner in the course of the business of the firm is in fact an act of
all partners. Each partner carrying on the business is the principal
as well as the agent for all the other partners. He is an agent in so
far as he can bind the other partners by his acts and he is a principal
to the extent that he is bound by the act of other partners. It may
be noted that the true test of partnership is mutual agency rather
than sharing of profits. If the element of mutual agency is absent,
then there will be no partnership.
2. (a)   By virtue of Section 9 of the Sale of Goods Act, 1930, the price in the
contract of sale may be fixed by the contract, or agreed to be fixed in a 
manner provided by the contract, e.g., by a valuer, or determined by the 
course of dealings between the parties. 
Further, section 10 provides for the determination of price by a third party 
in the following manner:  
(a) Where there is an agreement to sell goods on the terms that price
has to be fixed by the third party and he either does not or cannot
make such valuation, the agreement will be void.
(b) In case the third party is prevented by the default of either party
from fixing the price, the party at fault will be liable to the damages
to the other party who is not at fault.
(c) However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.
In the instant case, Kapil contracted Rahul to purchase 1000 litres of 
mustard oil at the price fixed by Akhilesh. After, Rahul delivered 600 litres 
Akhilesh denied fixing the price of mustard oil. Rahul demanded back 
the oil already delivered and cancel the delivery of 400 litres. Kapil sued 
Rahul for non-delivery of remaining 400 litres mustard oil. 
638
Page 4


ANSWERS OF MODEL TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS 
1. (a)  According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade 
or business of any kind, is to that extent void. But this rule is subject to 
the following exceptions, namely, where a person sells the goodwill of a 
business and agrees with the buyer to refrain from carrying on a similar 
business, within specified local limits, so long as the buyer or his 
successor in interest carries on a like business therein, such an 
agreement is valid. The local limits within which the seller of the goodwill 
agrees not to carry on similar business must be reasonable. 
In the instant case, Kashish sold his running business of artificial 
jewellery to Naman and promises, not to carry on the business of artificial 
jewellery and real diamond jewellery in that area and for a period of next 
one year but just after two months, Kashish opened a show room of real 
diamond jewellery. Naman sued Kashish for closing the business of real 
diamond business as it was against the agreement. 
As exceptions to section 27 is applicable to similar business only, 
agreement between Naman and Kashish will not be applicable on 
business of real diamond jewellery. Hence, Kashish can continue his 
business of real diamond jewellery.  
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section — 
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
636
(a) On the basis of provisions of Section 2(87) and facts of the
given problem, Shadow Evening Private Limited is holding
one – half of total equity paid up share capital of Darshan
Photographs Private Limited. Therefore, Darshan
Photographs Private Limited cannot be considered as
subsidiary company of Shadow Evening Private Limited as for
being subsidiary company other company should control more
than one – half of the total voting power.
(b) Answer would remain same even if Shadow Evening Private
Limited is also holding 5,000 preference shares as they do not
have voting rights.
(c) Definition of Partnership: 'Partnership' is the relation between persons
who have agreed to share the profits of a business carried on by all or
any of them acting for all. (Section 4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Profits
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP 
The definition of the partnership contains the following five elements 
which must co-exist before a partnership can come into existence: 
1. Association of two or more persons: Partnership is an
association of 2 or more persons. Again, only persons recognized
by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot
be a partner. Again, a minor cannot be a partner in a firm, but with
the consent of all the partners, may be admitted to the benefits of
partnership.
2. Agreement: It may be observed that partnership must be the result
of an agreement between two or more persons. There must be an
agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the
nature of the partnership is voluntary and contractual. An
agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose,
the term 'business' includes every trade, occupation and
profession. The existence of business is essential. Secondly, the
637
motive of the business is the "acquisition of gains" which leads to 
the formation of partnership. Therefore, there can be no partnership 
where there is no intention to carry on the business and to share 
the profit thereof. 
4. Agreement to share profits: The sharing of profits is an essential
feature of partnership. There can be no partnership where only one
of the partners is entitled to the whole of the profits of the business.
Partners must agree to share the profits in any manner they
choose. But an agreement to share losses is not an essential
element. It is open to one or more partners to agree to share all the
losses. However, in the event of losses, unless agreed otherwise,
these must be borne in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The
business must be carried on by all the partners or by anyone or
more of the partners acting for all. This is the cardinal principle of
the partnership Law. In other words, there should be a binding
contract of mutual agency between the partners. An act of one
partner in the course of the business of the firm is in fact an act of
all partners. Each partner carrying on the business is the principal
as well as the agent for all the other partners. He is an agent in so
far as he can bind the other partners by his acts and he is a principal
to the extent that he is bound by the act of other partners. It may
be noted that the true test of partnership is mutual agency rather
than sharing of profits. If the element of mutual agency is absent,
then there will be no partnership.
2. (a)   By virtue of Section 9 of the Sale of Goods Act, 1930, the price in the
contract of sale may be fixed by the contract, or agreed to be fixed in a 
manner provided by the contract, e.g., by a valuer, or determined by the 
course of dealings between the parties. 
Further, section 10 provides for the determination of price by a third party 
in the following manner:  
(a) Where there is an agreement to sell goods on the terms that price
has to be fixed by the third party and he either does not or cannot
make such valuation, the agreement will be void.
(b) In case the third party is prevented by the default of either party
from fixing the price, the party at fault will be liable to the damages
to the other party who is not at fault.
(c) However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.
In the instant case, Kapil contracted Rahul to purchase 1000 litres of 
mustard oil at the price fixed by Akhilesh. After, Rahul delivered 600 litres 
Akhilesh denied fixing the price of mustard oil. Rahul demanded back 
the oil already delivered and cancel the delivery of 400 litres. Kapil sued 
Rahul for non-delivery of remaining 400 litres mustard oil. 
638
On the basis of above provisions and facts, Kapil is liable to pay a 
reasonable price of 600 litres while for remaining 400 litres, contract may 
be avoided. 
(b) Doctrine of ultra vires:
The meaning of the term ultra vires is simply “beyond (their) powers”.
The legal phrase “ultra vires” is applicable only to acts done in excess of
the legal powers of the doers. This presupposes that the powers in their
nature are limited. To an ordinary citizen, the law permits whatever does
the law not expressly forbid. It is a fundamental rule of Company Law
that the objects of a company as stated in its memorandum can be
departed from only to the extent permitted by the Act, thus far and no
further [Ashbury Railway Company Ltd. vs. Riche].
In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the
company is wholly void and inoperative in law and is therefore not
binding on the company. On this account, a company can be restrained
from employing its fund for purposes other than those sanctioned by the
memorandum. Likewise, it can be restrained from carrying on a trade
different from the one it is authorised to carry on.
Consequences of ‘ultra vires’ acts of the company:
The impact of the doctrine of ultra vires is that a company can neither be
sued on an ultra vires transaction, nor can it sue on it. Since the
memorandum is a “public document”, it is open to public inspection.
Therefore, when one deals with a company one is deemed to know about
the powers of the company. If in spite of this one enters into a transaction
which is ultra vires the company, he/she cannot enforce it against the
company.
An act which is ultra vires the company being void, cannot be ratified by
the shareholders of the company.
However, some ultra vires act can be regularised by ratifying them
subsequently. For instance, if the act is ultra vires the power of the
directors, the shareholders can ratify it; if it is ultra vires the articles of
the company, the company can alter the articles; if the act is within the
power of the company but is done irregularly, shareholders can validate
such acts.
(c) 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.  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
639
Page 5


ANSWERS OF MODEL TEST PAPER 1 
FOUNDATION COURSE 
PAPER 2: BUSINESS LAWS 
1. (a)  According to Section 27 of Indian Contract Act, 1872, an agreement by
which any person is restrained from exercising a lawful profession, trade 
or business of any kind, is to that extent void. But this rule is subject to 
the following exceptions, namely, where a person sells the goodwill of a 
business and agrees with the buyer to refrain from carrying on a similar 
business, within specified local limits, so long as the buyer or his 
successor in interest carries on a like business therein, such an 
agreement is valid. The local limits within which the seller of the goodwill 
agrees not to carry on similar business must be reasonable. 
In the instant case, Kashish sold his running business of artificial 
jewellery to Naman and promises, not to carry on the business of artificial 
jewellery and real diamond jewellery in that area and for a period of next 
one year but just after two months, Kashish opened a show room of real 
diamond jewellery. Naman sued Kashish for closing the business of real 
diamond business as it was against the agreement. 
As exceptions to section 27 is applicable to similar business only, 
agreement between Naman and Kashish will not be applicable on 
business of real diamond jewellery. Hence, Kashish can continue his 
business of real diamond jewellery.  
(b) According to Section 2(87) of Companies Act, 2013 “subsidiary
company” in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
For the purposes of this section — 
(I) the composition of a company’s Board of Directors shall be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(II) the expression “company” includes any body corporate;
It is to be noted that Preference share capital will also be
considered if preference shareholders have same voting rights as
equity shareholders.
In the instant case, Darshan Photographs Private Limited is having
paid-up capital of ` 1 Crores in the form of 50,000 Equity Shares of
` 100 each and 50,000 Preference Shares of ` 100 each. Shadow
Evening Private Limited is holding 25,000 Equity Shares in Darshan
Photographs Private Limited.
636
(a) On the basis of provisions of Section 2(87) and facts of the
given problem, Shadow Evening Private Limited is holding
one – half of total equity paid up share capital of Darshan
Photographs Private Limited. Therefore, Darshan
Photographs Private Limited cannot be considered as
subsidiary company of Shadow Evening Private Limited as for
being subsidiary company other company should control more
than one – half of the total voting power.
(b) Answer would remain same even if Shadow Evening Private
Limited is also holding 5,000 preference shares as they do not
have voting rights.
(c) Definition of Partnership: 'Partnership' is the relation between persons
who have agreed to share the profits of a business carried on by all or
any of them acting for all. (Section 4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements
which must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Profits
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP 
The definition of the partnership contains the following five elements 
which must co-exist before a partnership can come into existence: 
1. Association of two or more persons: Partnership is an
association of 2 or more persons. Again, only persons recognized
by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot
be a partner. Again, a minor cannot be a partner in a firm, but with
the consent of all the partners, may be admitted to the benefits of
partnership.
2. Agreement: It may be observed that partnership must be the result
of an agreement between two or more persons. There must be an
agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the
nature of the partnership is voluntary and contractual. An
agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose,
the term 'business' includes every trade, occupation and
profession. The existence of business is essential. Secondly, the
637
motive of the business is the "acquisition of gains" which leads to 
the formation of partnership. Therefore, there can be no partnership 
where there is no intention to carry on the business and to share 
the profit thereof. 
4. Agreement to share profits: The sharing of profits is an essential
feature of partnership. There can be no partnership where only one
of the partners is entitled to the whole of the profits of the business.
Partners must agree to share the profits in any manner they
choose. But an agreement to share losses is not an essential
element. It is open to one or more partners to agree to share all the
losses. However, in the event of losses, unless agreed otherwise,
these must be borne in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The
business must be carried on by all the partners or by anyone or
more of the partners acting for all. This is the cardinal principle of
the partnership Law. In other words, there should be a binding
contract of mutual agency between the partners. An act of one
partner in the course of the business of the firm is in fact an act of
all partners. Each partner carrying on the business is the principal
as well as the agent for all the other partners. He is an agent in so
far as he can bind the other partners by his acts and he is a principal
to the extent that he is bound by the act of other partners. It may
be noted that the true test of partnership is mutual agency rather
than sharing of profits. If the element of mutual agency is absent,
then there will be no partnership.
2. (a)   By virtue of Section 9 of the Sale of Goods Act, 1930, the price in the
contract of sale may be fixed by the contract, or agreed to be fixed in a 
manner provided by the contract, e.g., by a valuer, or determined by the 
course of dealings between the parties. 
Further, section 10 provides for the determination of price by a third party 
in the following manner:  
(a) Where there is an agreement to sell goods on the terms that price
has to be fixed by the third party and he either does not or cannot
make such valuation, the agreement will be void.
(b) In case the third party is prevented by the default of either party
from fixing the price, the party at fault will be liable to the damages
to the other party who is not at fault.
(c) However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.
In the instant case, Kapil contracted Rahul to purchase 1000 litres of 
mustard oil at the price fixed by Akhilesh. After, Rahul delivered 600 litres 
Akhilesh denied fixing the price of mustard oil. Rahul demanded back 
the oil already delivered and cancel the delivery of 400 litres. Kapil sued 
Rahul for non-delivery of remaining 400 litres mustard oil. 
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On the basis of above provisions and facts, Kapil is liable to pay a 
reasonable price of 600 litres while for remaining 400 litres, contract may 
be avoided. 
(b) Doctrine of ultra vires:
The meaning of the term ultra vires is simply “beyond (their) powers”.
The legal phrase “ultra vires” is applicable only to acts done in excess of
the legal powers of the doers. This presupposes that the powers in their
nature are limited. To an ordinary citizen, the law permits whatever does
the law not expressly forbid. It is a fundamental rule of Company Law
that the objects of a company as stated in its memorandum can be
departed from only to the extent permitted by the Act, thus far and no
further [Ashbury Railway Company Ltd. vs. Riche].
In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the
company is wholly void and inoperative in law and is therefore not
binding on the company. On this account, a company can be restrained
from employing its fund for purposes other than those sanctioned by the
memorandum. Likewise, it can be restrained from carrying on a trade
different from the one it is authorised to carry on.
Consequences of ‘ultra vires’ acts of the company:
The impact of the doctrine of ultra vires is that a company can neither be
sued on an ultra vires transaction, nor can it sue on it. Since the
memorandum is a “public document”, it is open to public inspection.
Therefore, when one deals with a company one is deemed to know about
the powers of the company. If in spite of this one enters into a transaction
which is ultra vires the company, he/she cannot enforce it against the
company.
An act which is ultra vires the company being void, cannot be ratified by
the shareholders of the company.
However, some ultra vires act can be regularised by ratifying them
subsequently. For instance, if the act is ultra vires the power of the
directors, the shareholders can ratify it; if it is ultra vires the articles of
the company, the company can alter the articles; if the act is within the
power of the company but is done irregularly, shareholders can validate
such acts.
(c) 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.  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
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arrived agreement. The LLP form enables entrepreneurs, professionals 
and enterprises providing services of any kind or engaged in scientific 
and technical disciplines, to form commercially efficient vehicles suited 
to their requirements. Owing to flexibility in its structure and operation, 
the LLP is a suitable vehicle for small enterprises and for investment by 
venture capital.  
3. (a)  According to Section 13(e) of Indian Partnership Act, 1932, every partner
has the right to be indemnified by the firm in respect of payments made 
and liabilities incurred by him in the ordinary and proper conduct of the 
business of the firm as well as in the performance of an act in an 
emergency for protecting the firm from any loss, if the payments, liability 
and act are such as a prudent man would make, incur or perform in his 
own case, under similar circumstances. 
In the instant case, M/s Aee Bee & Company is doing business of trading 
of plastic bottles. A and B, partners of the firm, authorised A to sell the 
stock of plastic bottles on the condition to sale at the minimum price. In 
case A has to sell at a price less than minimum price, he should first take 
the permission of B. Due to some emergency, A sold the stock at lower 
price to save the firm from loss.  
On the basis of above provisions and facts of the problem given, selling 
by A at a lower price was to save the firm from loss. As the act of A was 
in favour of firm, he was not liable to bear the loss. 
(b) (i) As per section 2(85) of the Companies Act, 2013, Small Company 
means a company, other than a public company:  
(i) paid-up share capital of which does not exceed four crore
rupees, and
(ii) turnover of which as per profit and loss account for the
immediately preceding financial year does not exceed forty
crore rupees:
Provided that nothing in this clause shall 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, as per the last profit and loss account for the 
year ending 31
st
 March, 2023 of Glassware Private Limited, its 
turnover was to the extent of ` 1.80 crore, and paid-up share capital 
was ` 80 lakh. Though Glassware Private Limited, as per the 
turnover and paid-up share capital norms, qualifies for the status of 
a ‘small company’ but it cannot be categorized as a ‘small company’ 
because it is the subsidiary of another company (Tycoon Private 
Limited). 
Hence, the contention of the Company Secretary is correct. 
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