Business Laws Model Test Paper - 2 (Answers) | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 2 
FOUNDATION COURSE 
Paper 2: Business Laws (100 Marks) 
1. (i)  (a) Claim for necessaries supplied to persons incapable of
contracting (Section 68 of the Indian Contract Act, 1872): 
If a person, incapable of entering into a contract, or anyone whom he 
is legally bound to support, is supplied by another person with 
necessaries suited to his condition in life, the person who has furnished 
such supplies is entitled to be reimbursed from the property of such 
incapable person.  
In the instant case, Mr. M supplied the food and other necessaries to 
Mr. Y (who lost his mental balance) and Mr. Y’s grandmother (incapable 
of walking and dependent upon Mr. Y), hence, Mr. M will succeed in 
filing the suit to recover money. 
(b) Supplier is entitled to be reimbursed from the property of such
incapable person. Hence, the maximum amount of money that can be
recovered by Mr. M is ` 15 Lakhs and this amount can be recovered
from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from
the house of Y’s Parents. (Assumption: Y has inherited the house
property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the
above provisions will also apply to the medical treatment given to the
grandmother as Y is legally bound to support his grandmother.
(ii) According to Section 2(68) of the Companies Act, 2013, “Private company”
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and 
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
(a) Following the provisions of Section 2(68), 25 members were
employees of the company but not during present membership
648
Page 2


ANSWERS OF MODEL TEST PAPER 2 
FOUNDATION COURSE 
Paper 2: Business Laws (100 Marks) 
1. (i)  (a) Claim for necessaries supplied to persons incapable of
contracting (Section 68 of the Indian Contract Act, 1872): 
If a person, incapable of entering into a contract, or anyone whom he 
is legally bound to support, is supplied by another person with 
necessaries suited to his condition in life, the person who has furnished 
such supplies is entitled to be reimbursed from the property of such 
incapable person.  
In the instant case, Mr. M supplied the food and other necessaries to 
Mr. Y (who lost his mental balance) and Mr. Y’s grandmother (incapable 
of walking and dependent upon Mr. Y), hence, Mr. M will succeed in 
filing the suit to recover money. 
(b) Supplier is entitled to be reimbursed from the property of such
incapable person. Hence, the maximum amount of money that can be
recovered by Mr. M is ` 15 Lakhs and this amount can be recovered
from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from
the house of Y’s Parents. (Assumption: Y has inherited the house
property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the
above provisions will also apply to the medical treatment given to the
grandmother as Y is legally bound to support his grandmother.
(ii) According to Section 2(68) of the Companies Act, 2013, “Private company”
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and 
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
(a) Following the provisions of Section 2(68), 25 members were
employees of the company but not during present membership
648
which was started from 1st December 2016 i.e. after the date on 
which these 25 members were ceased to the employee in 
Jagannath Oils Limited. Hence, they will be considered as 
members for the purpose of the limit of 200 members. The company 
is required to reduce the number of members before converting it 
into a private company. 
(b)  On the other hand, if those 25 members ceased to be an employee 
on 28
th
 June 2017, they were employee at the time of getting 
present membership. Hence, they will not be counted as members 
for the purpose of the limit of 200 members and the total number of 
members for the purpose of this sub-section will be 195. Therefore, 
Jagannath Oils Limited is not required to reduce the number of 
members before converting it into a private company. 
 (iii) (a)  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. 
(b) Minor as a partner: A minor is not competent to contract. Hence, a 
person who is a minor 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. 
2. (i)  As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract 
of sale, the property in the goods is transferred from the seller to the buyer, 
the contract is called a sale, but where the transfer of the property in the 
goods is to take place at a future time or subject to some condition 
thereafter to be fulfilled, the contract is called an agreement to sell and as 
per Section 4(4), an agreement to sell becomes a sale when the time 
elapses or the conditions are fulfilled subject to which the property in the 
goods is to be transferred. 
(a) On the basis of the above provisions and facts given in the question, it 
can be said that there is an agreement to sell between Sonal and 
Jeweller and not a sale. Even though the payment was made by Sonal, 
the property in goods can be transferred only after the fulfilment of 
conditions fixed between the buyer and the seller. As due to Ruby 
649
Page 3


ANSWERS OF MODEL TEST PAPER 2 
FOUNDATION COURSE 
Paper 2: Business Laws (100 Marks) 
1. (i)  (a) Claim for necessaries supplied to persons incapable of
contracting (Section 68 of the Indian Contract Act, 1872): 
If a person, incapable of entering into a contract, or anyone whom he 
is legally bound to support, is supplied by another person with 
necessaries suited to his condition in life, the person who has furnished 
such supplies is entitled to be reimbursed from the property of such 
incapable person.  
In the instant case, Mr. M supplied the food and other necessaries to 
Mr. Y (who lost his mental balance) and Mr. Y’s grandmother (incapable 
of walking and dependent upon Mr. Y), hence, Mr. M will succeed in 
filing the suit to recover money. 
(b) Supplier is entitled to be reimbursed from the property of such
incapable person. Hence, the maximum amount of money that can be
recovered by Mr. M is ` 15 Lakhs and this amount can be recovered
from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from
the house of Y’s Parents. (Assumption: Y has inherited the house
property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the
above provisions will also apply to the medical treatment given to the
grandmother as Y is legally bound to support his grandmother.
(ii) According to Section 2(68) of the Companies Act, 2013, “Private company”
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and 
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
(a) Following the provisions of Section 2(68), 25 members were
employees of the company but not during present membership
648
which was started from 1st December 2016 i.e. after the date on 
which these 25 members were ceased to the employee in 
Jagannath Oils Limited. Hence, they will be considered as 
members for the purpose of the limit of 200 members. The company 
is required to reduce the number of members before converting it 
into a private company. 
(b)  On the other hand, if those 25 members ceased to be an employee 
on 28
th
 June 2017, they were employee at the time of getting 
present membership. Hence, they will not be counted as members 
for the purpose of the limit of 200 members and the total number of 
members for the purpose of this sub-section will be 195. Therefore, 
Jagannath Oils Limited is not required to reduce the number of 
members before converting it into a private company. 
 (iii) (a)  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. 
(b) Minor as a partner: A minor is not competent to contract. Hence, a 
person who is a minor 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. 
2. (i)  As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract 
of sale, the property in the goods is transferred from the seller to the buyer, 
the contract is called a sale, but where the transfer of the property in the 
goods is to take place at a future time or subject to some condition 
thereafter to be fulfilled, the contract is called an agreement to sell and as 
per Section 4(4), an agreement to sell becomes a sale when the time 
elapses or the conditions are fulfilled subject to which the property in the 
goods is to be transferred. 
(a) On the basis of the above provisions and facts given in the question, it 
can be said that there is an agreement to sell between Sonal and 
Jeweller and not a sale. Even though the payment was made by Sonal, 
the property in goods can be transferred only after the fulfilment of 
conditions fixed between the buyer and the seller. As due to Ruby 
649
Stones, the original design is disturbed, bangles are not in original 
position. Hence, Sonal has the right to avoid the agreement to sell and 
can recover the price paid. 
(b) If Jeweller offers to bring the bangles in original position by repairing, 
he cannot charge extra cost from Sonal. Even though he has to bear 
some expenses for repair; he cannot charge it from Sonal. 
(ii)  Corporate Veil: Corporate Veil refers to a legal concept whereby the 
company is identified separately from the members of the company. 
 The term Corporate Veil refers to the concept that members of a company 
are shielded from liability connected to the company’s actions. If the 
company incurs any debts or contravenes any laws, the corporate veil 
concept implies that members should not be liable for those errors. In other 
words, they enjoy corporate insulation.  
 Thus, the shareholders are protected from the acts of the company.  
 However, under certain exceptional circumstances the courts lift or pierce 
the corporate veil by ignoring the separate entity of the company and the 
promoters and other persons who have managed and controlled the affairs 
of the company. Thus, when the corporate veil is lifted by the courts, the 
promoters and persons exercising control over the affairs of the company 
are held personally liable for the acts and debts of the company. 
 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: 
(i) To determine the character of the company i.e. to find out whether co-
enemy or friend. 
(ii) To protect revenue/tax 
(iii) To avoid a legal obligation 
(iv) Formation of subsidiaries to act as agents 
(v) Company formed for fraud/improper conduct or to defeat law 
 Based on the above provisions and leading case law of Gilford Motor Co. 
Vs Horne, the company PQR Limited was created to avoid the legal 
obligation arising out of the contract, therefore that employee Mr. Karan 
and the company PQR Limited created by him should be treated as one 
and thus veil between the company and that person shall be lifted. Karan 
has formed the company only for fraud/improper conduct or to defeat the 
law. Hence, he shall be personally held liable for the acts of the company. 
(iii)  Distinction between Limited Liability Partnership (LLP) and 
Limited Liability Company (LLC)  
S. 
No. 
Basis  Limited Liability 
Partnership (LLP) 
Limited Liability 
Company (LLC) 
1. Regulating 
Act 
The LLP Act, 2008. The Companies Act, 
2013. 
650
Page 4


ANSWERS OF MODEL TEST PAPER 2 
FOUNDATION COURSE 
Paper 2: Business Laws (100 Marks) 
1. (i)  (a) Claim for necessaries supplied to persons incapable of
contracting (Section 68 of the Indian Contract Act, 1872): 
If a person, incapable of entering into a contract, or anyone whom he 
is legally bound to support, is supplied by another person with 
necessaries suited to his condition in life, the person who has furnished 
such supplies is entitled to be reimbursed from the property of such 
incapable person.  
In the instant case, Mr. M supplied the food and other necessaries to 
Mr. Y (who lost his mental balance) and Mr. Y’s grandmother (incapable 
of walking and dependent upon Mr. Y), hence, Mr. M will succeed in 
filing the suit to recover money. 
(b) Supplier is entitled to be reimbursed from the property of such
incapable person. Hence, the maximum amount of money that can be
recovered by Mr. M is ` 15 Lakhs and this amount can be recovered
from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from
the house of Y’s Parents. (Assumption: Y has inherited the house
property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the
above provisions will also apply to the medical treatment given to the
grandmother as Y is legally bound to support his grandmother.
(ii) According to Section 2(68) of the Companies Act, 2013, “Private company”
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and 
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
(a) Following the provisions of Section 2(68), 25 members were
employees of the company but not during present membership
648
which was started from 1st December 2016 i.e. after the date on 
which these 25 members were ceased to the employee in 
Jagannath Oils Limited. Hence, they will be considered as 
members for the purpose of the limit of 200 members. The company 
is required to reduce the number of members before converting it 
into a private company. 
(b)  On the other hand, if those 25 members ceased to be an employee 
on 28
th
 June 2017, they were employee at the time of getting 
present membership. Hence, they will not be counted as members 
for the purpose of the limit of 200 members and the total number of 
members for the purpose of this sub-section will be 195. Therefore, 
Jagannath Oils Limited is not required to reduce the number of 
members before converting it into a private company. 
 (iii) (a)  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. 
(b) Minor as a partner: A minor is not competent to contract. Hence, a 
person who is a minor 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. 
2. (i)  As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract 
of sale, the property in the goods is transferred from the seller to the buyer, 
the contract is called a sale, but where the transfer of the property in the 
goods is to take place at a future time or subject to some condition 
thereafter to be fulfilled, the contract is called an agreement to sell and as 
per Section 4(4), an agreement to sell becomes a sale when the time 
elapses or the conditions are fulfilled subject to which the property in the 
goods is to be transferred. 
(a) On the basis of the above provisions and facts given in the question, it 
can be said that there is an agreement to sell between Sonal and 
Jeweller and not a sale. Even though the payment was made by Sonal, 
the property in goods can be transferred only after the fulfilment of 
conditions fixed between the buyer and the seller. As due to Ruby 
649
Stones, the original design is disturbed, bangles are not in original 
position. Hence, Sonal has the right to avoid the agreement to sell and 
can recover the price paid. 
(b) If Jeweller offers to bring the bangles in original position by repairing, 
he cannot charge extra cost from Sonal. Even though he has to bear 
some expenses for repair; he cannot charge it from Sonal. 
(ii)  Corporate Veil: Corporate Veil refers to a legal concept whereby the 
company is identified separately from the members of the company. 
 The term Corporate Veil refers to the concept that members of a company 
are shielded from liability connected to the company’s actions. If the 
company incurs any debts or contravenes any laws, the corporate veil 
concept implies that members should not be liable for those errors. In other 
words, they enjoy corporate insulation.  
 Thus, the shareholders are protected from the acts of the company.  
 However, under certain exceptional circumstances the courts lift or pierce 
the corporate veil by ignoring the separate entity of the company and the 
promoters and other persons who have managed and controlled the affairs 
of the company. Thus, when the corporate veil is lifted by the courts, the 
promoters and persons exercising control over the affairs of the company 
are held personally liable for the acts and debts of the company. 
 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: 
(i) To determine the character of the company i.e. to find out whether co-
enemy or friend. 
(ii) To protect revenue/tax 
(iii) To avoid a legal obligation 
(iv) Formation of subsidiaries to act as agents 
(v) Company formed for fraud/improper conduct or to defeat law 
 Based on the above provisions and leading case law of Gilford Motor Co. 
Vs Horne, the company PQR Limited was created to avoid the legal 
obligation arising out of the contract, therefore that employee Mr. Karan 
and the company PQR Limited created by him should be treated as one 
and thus veil between the company and that person shall be lifted. Karan 
has formed the company only for fraud/improper conduct or to defeat the 
law. Hence, he shall be personally held liable for the acts of the company. 
(iii)  Distinction between Limited Liability Partnership (LLP) and 
Limited Liability Company (LLC)  
S. 
No. 
Basis  Limited Liability 
Partnership (LLP) 
Limited Liability 
Company (LLC) 
1. Regulating 
Act 
The LLP Act, 2008. The Companies Act, 
2013. 
650
2. Members/Par
tners 
The persons who 
contribute to LLP are 
known as partners of 
the LLP. 
The persons who invest 
the money in the shares 
are known as members 
of the company. 
3. Internal 
governance 
structure 
The internal 
governance structure 
of a LLP is governed 
by agreement 
between the partners. 
The internal governance 
structure of a company 
is regulated by statute 
(i.e., Companies Act, 
2013) read with its 
Memorandum of 
Association and Articles 
of Association.  
4. Name Name of the LLP to 
contain the word 
“Limited Liability 
partnership” or “LLP” 
as suffix. 
Name of the public 
company to contain the 
word “limited” and Pvt. 
Co. to contain the word 
“Private limited” as 
suffix. 
5. No. of 
members/ 
partners 
Minimum – 2 partners  
Maximum – No such 
limit on the partners in 
the Act. The partners 
of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such 
limit on the members.   
Members can be 
organizations, trusts, 
another business form 
or individuals. 
6. Liability of 
members/ 
partners 
Liability of a partners 
is limited to the extent 
of agreed contribution. 
Liability of a member is 
limited to the amount 
unpaid on the shares 
held by them. 
7. Management The business of the 
LLP managed by the 
partners including the 
designated partners 
authorized in the 
agreement. 
The affairs of the 
company are managed 
by board of directors 
elected by the 
shareholders. 
8. Minimum 
number of 
directors/des
ignated 
partners 
2 designated partners. Pvt. Co. – 2 directors 
Public Co. – 3 directors 
  
651
Page 5


ANSWERS OF MODEL TEST PAPER 2 
FOUNDATION COURSE 
Paper 2: Business Laws (100 Marks) 
1. (i)  (a) Claim for necessaries supplied to persons incapable of
contracting (Section 68 of the Indian Contract Act, 1872): 
If a person, incapable of entering into a contract, or anyone whom he 
is legally bound to support, is supplied by another person with 
necessaries suited to his condition in life, the person who has furnished 
such supplies is entitled to be reimbursed from the property of such 
incapable person.  
In the instant case, Mr. M supplied the food and other necessaries to 
Mr. Y (who lost his mental balance) and Mr. Y’s grandmother (incapable 
of walking and dependent upon Mr. Y), hence, Mr. M will succeed in 
filing the suit to recover money. 
(b) Supplier is entitled to be reimbursed from the property of such
incapable person. Hence, the maximum amount of money that can be
recovered by Mr. M is ` 15 Lakhs and this amount can be recovered
from Mr. Y’s parent’s jewellery amounting to ` 4 Lakhs and rest from
the house of Y’s Parents. (Assumption: Y has inherited the house
property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the
above provisions will also apply to the medical treatment given to the
grandmother as Y is legally bound to support his grandmother.
(ii) According to Section 2(68) of the Companies Act, 2013, “Private company”
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,
shall not be included in the number of members; and 
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
(a) Following the provisions of Section 2(68), 25 members were
employees of the company but not during present membership
648
which was started from 1st December 2016 i.e. after the date on 
which these 25 members were ceased to the employee in 
Jagannath Oils Limited. Hence, they will be considered as 
members for the purpose of the limit of 200 members. The company 
is required to reduce the number of members before converting it 
into a private company. 
(b)  On the other hand, if those 25 members ceased to be an employee 
on 28
th
 June 2017, they were employee at the time of getting 
present membership. Hence, they will not be counted as members 
for the purpose of the limit of 200 members and the total number of 
members for the purpose of this sub-section will be 195. Therefore, 
Jagannath Oils Limited is not required to reduce the number of 
members before converting it into a private company. 
 (iii) (a)  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. 
(b) Minor as a partner: A minor is not competent to contract. Hence, a 
person who is a minor 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. 
2. (i)  As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract 
of sale, the property in the goods is transferred from the seller to the buyer, 
the contract is called a sale, but where the transfer of the property in the 
goods is to take place at a future time or subject to some condition 
thereafter to be fulfilled, the contract is called an agreement to sell and as 
per Section 4(4), an agreement to sell becomes a sale when the time 
elapses or the conditions are fulfilled subject to which the property in the 
goods is to be transferred. 
(a) On the basis of the above provisions and facts given in the question, it 
can be said that there is an agreement to sell between Sonal and 
Jeweller and not a sale. Even though the payment was made by Sonal, 
the property in goods can be transferred only after the fulfilment of 
conditions fixed between the buyer and the seller. As due to Ruby 
649
Stones, the original design is disturbed, bangles are not in original 
position. Hence, Sonal has the right to avoid the agreement to sell and 
can recover the price paid. 
(b) If Jeweller offers to bring the bangles in original position by repairing, 
he cannot charge extra cost from Sonal. Even though he has to bear 
some expenses for repair; he cannot charge it from Sonal. 
(ii)  Corporate Veil: Corporate Veil refers to a legal concept whereby the 
company is identified separately from the members of the company. 
 The term Corporate Veil refers to the concept that members of a company 
are shielded from liability connected to the company’s actions. If the 
company incurs any debts or contravenes any laws, the corporate veil 
concept implies that members should not be liable for those errors. In other 
words, they enjoy corporate insulation.  
 Thus, the shareholders are protected from the acts of the company.  
 However, under certain exceptional circumstances the courts lift or pierce 
the corporate veil by ignoring the separate entity of the company and the 
promoters and other persons who have managed and controlled the affairs 
of the company. Thus, when the corporate veil is lifted by the courts, the 
promoters and persons exercising control over the affairs of the company 
are held personally liable for the acts and debts of the company. 
 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: 
(i) To determine the character of the company i.e. to find out whether co-
enemy or friend. 
(ii) To protect revenue/tax 
(iii) To avoid a legal obligation 
(iv) Formation of subsidiaries to act as agents 
(v) Company formed for fraud/improper conduct or to defeat law 
 Based on the above provisions and leading case law of Gilford Motor Co. 
Vs Horne, the company PQR Limited was created to avoid the legal 
obligation arising out of the contract, therefore that employee Mr. Karan 
and the company PQR Limited created by him should be treated as one 
and thus veil between the company and that person shall be lifted. Karan 
has formed the company only for fraud/improper conduct or to defeat the 
law. Hence, he shall be personally held liable for the acts of the company. 
(iii)  Distinction between Limited Liability Partnership (LLP) and 
Limited Liability Company (LLC)  
S. 
No. 
Basis  Limited Liability 
Partnership (LLP) 
Limited Liability 
Company (LLC) 
1. Regulating 
Act 
The LLP Act, 2008. The Companies Act, 
2013. 
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2. Members/Par
tners 
The persons who 
contribute to LLP are 
known as partners of 
the LLP. 
The persons who invest 
the money in the shares 
are known as members 
of the company. 
3. Internal 
governance 
structure 
The internal 
governance structure 
of a LLP is governed 
by agreement 
between the partners. 
The internal governance 
structure of a company 
is regulated by statute 
(i.e., Companies Act, 
2013) read with its 
Memorandum of 
Association and Articles 
of Association.  
4. Name Name of the LLP to 
contain the word 
“Limited Liability 
partnership” or “LLP” 
as suffix. 
Name of the public 
company to contain the 
word “limited” and Pvt. 
Co. to contain the word 
“Private limited” as 
suffix. 
5. No. of 
members/ 
partners 
Minimum – 2 partners  
Maximum – No such 
limit on the partners in 
the Act. The partners 
of the LLP can be 
individuals/or body 
corporate through the 
nominees. 
Private company:  
Minimum – 2 members  
Maximum 200 members  
Public company: 
Minimum – 7 members 
Maximum – No such 
limit on the members.   
Members can be 
organizations, trusts, 
another business form 
or individuals. 
6. Liability of 
members/ 
partners 
Liability of a partners 
is limited to the extent 
of agreed contribution. 
Liability of a member is 
limited to the amount 
unpaid on the shares 
held by them. 
7. Management The business of the 
LLP managed by the 
partners including the 
designated partners 
authorized in the 
agreement. 
The affairs of the 
company are managed 
by board of directors 
elected by the 
shareholders. 
8. Minimum 
number of 
directors/des
ignated 
partners 
2 designated partners. Pvt. Co. – 2 directors 
Public Co. – 3 directors 
  
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3. (i)  (a)  No, this is a case of partnership because no mutual agency relationship 
exist among X and Y. 
(b)  Yes, this is a case of partnership because there is an agreement 
between two firms to combine into one firm.  
(c)  Yes. This is a case of partnership because A & B, co-owners, have 
agreed to conduct a business in common for profit.  
(d)  No, this is not a case of partnership as no charitable association can 
be floated in partnership. 
(e)  No, this is not a case of partnership as they are co-owners and not the 
partners. Further, there exist no business. 
(f)  Yes, this is a case of partnership as there exist the element of doing 
business and sharing of profits equally. 
(g)  No, this is not a case of partnership as there is no intention to carry on 
the business and to share the profits thereof. 
(ii)  Section 2(87) of the Companies Act, 2013 defines “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)  a company shall be deemed to be a subsidiary company of the 
holding company even if the control referred to in sub-clause (i) or 
sub-clause (ii) is of another subsidiary company of the holding 
company;  
(II)  “layer” in relation to a holding company means its subsidiary or 
subsidiaries. 
 In the instant case, BC Private Limited together with its subsidiary KL 
Private Limited is holding 1,60,000 shares (90,000+70,000 
respectively) which is more than one half in nominal value of the Equity 
Share Capital of PQ Private Limited. Hence, PQ Private Limited is 
subsidiary of BC Private Limited. 
 In the second case, the answer will remain the same.  KL Private 
Limited is a holding 1,60,000 shares i.e., more than one half in nominal 
value of the Equity Share Capital of PQ Private Limited (i.e., holding 
more than one half of voting power). Hence, KL Private Limited is 
holding company of PQ Private Company and BC Private Limited is a 
holding company of KL Private Limited.  
 Hence, by virtue of Chain relationship, BC Private Limited becomes the 
holding company of PQ Private Limited. 
(iii)  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. 
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