Business Laws Model Test Paper - 8 (Answers) | Mock Tests & Past Year Papers for CA Foundation PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 8 
FOUNDATION COURSE 
PAPER – 2: BUSINESS LAWS 
ANSWERS 
1. (a) (i) The general rule is that an agreement made without consideration 
is void (Section 25 of the Indian Contract Act, 1872).  
However, in the following case, the agreement though made 
without consideration, will be valid and enforceable. 
Charity: If a promisee undertakes the liability on the promise of the 
person to contribute to charity, there the contract shall be valid.  
In the instant case, Mr. A can claim 1.5 lakh from Mr. S. 
(ii) According to Section 69 of the Indian Contract Act, 1872, a person
who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his
contractual obligation. Hence, Mr. M is entitled to be reimbursed
? 50,000 from Mr. L.
(b) (i) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company
may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ? 1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]:
It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through
an agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
725
Page 2


ANSWERS OF MODEL TEST PAPER 8 
FOUNDATION COURSE 
PAPER – 2: BUSINESS LAWS 
ANSWERS 
1. (a) (i) The general rule is that an agreement made without consideration 
is void (Section 25 of the Indian Contract Act, 1872).  
However, in the following case, the agreement though made 
without consideration, will be valid and enforceable. 
Charity: If a promisee undertakes the liability on the promise of the 
person to contribute to charity, there the contract shall be valid.  
In the instant case, Mr. A can claim 1.5 lakh from Mr. S. 
(ii) According to Section 69 of the Indian Contract Act, 1872, a person
who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his
contractual obligation. Hence, Mr. M is entitled to be reimbursed
? 50,000 from Mr. L.
(b) (i) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company
may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ? 1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]:
It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through
an agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
725
As Mike LLC is incorporated in Singapore and having a place of 
business in Pune, India, it is a foreign Company. 
(c) Section 29 of the Indian Partnership Act, 1932 provides that a share in
a partnership is transferable like any other property, but as the
partnership relationship is based on mutual confidence, the assignee of
a partner’s interest by sale, mortgage or otherwise cannot enjoy the
same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not
entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the 
transferring partner, and he is bound to accept the profits as agreed 
to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring
partner, the transferee will be entitled, against the remaining
partners:
(a) to receive the share of the assets of the firm to which the
transferring partner was entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a 
firm without the consent of all the partners. A partner cannot by 
transferring his own interest, make anybody else a partner in his place, 
unless the other partners agree to accept that person as a partner. At 
the same time, a partner is not debarred from transferring his interest. A 
partner’s interest in the partnership can be regarded as an existing 
interest and tangible property which can be assigned.  
2. (a)  Ascertainment of price (Section 9 of the Sale of Goods Act, 1930):
By virtue of Section 9, the price in a contract of sale may be- 
(1) fixed by the contract, or
(2) agreed to be fixed in a manner provided by the contract, e.g., by a
valuer, or
(3) determined by the course of dealing between the parties.
Agreement to sell at valuation (Section 10):  
Section 10 provides for the determination of price by a third party. 
1. Where there is an agreement to sell goods on the terms that price
is to be fixed by the valuation of a third party and that third party
726
Page 3


ANSWERS OF MODEL TEST PAPER 8 
FOUNDATION COURSE 
PAPER – 2: BUSINESS LAWS 
ANSWERS 
1. (a) (i) The general rule is that an agreement made without consideration 
is void (Section 25 of the Indian Contract Act, 1872).  
However, in the following case, the agreement though made 
without consideration, will be valid and enforceable. 
Charity: If a promisee undertakes the liability on the promise of the 
person to contribute to charity, there the contract shall be valid.  
In the instant case, Mr. A can claim 1.5 lakh from Mr. S. 
(ii) According to Section 69 of the Indian Contract Act, 1872, a person
who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his
contractual obligation. Hence, Mr. M is entitled to be reimbursed
? 50,000 from Mr. L.
(b) (i) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company
may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ? 1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]:
It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through
an agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
725
As Mike LLC is incorporated in Singapore and having a place of 
business in Pune, India, it is a foreign Company. 
(c) Section 29 of the Indian Partnership Act, 1932 provides that a share in
a partnership is transferable like any other property, but as the
partnership relationship is based on mutual confidence, the assignee of
a partner’s interest by sale, mortgage or otherwise cannot enjoy the
same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not
entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the 
transferring partner, and he is bound to accept the profits as agreed 
to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring
partner, the transferee will be entitled, against the remaining
partners:
(a) to receive the share of the assets of the firm to which the
transferring partner was entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a 
firm without the consent of all the partners. A partner cannot by 
transferring his own interest, make anybody else a partner in his place, 
unless the other partners agree to accept that person as a partner. At 
the same time, a partner is not debarred from transferring his interest. A 
partner’s interest in the partnership can be regarded as an existing 
interest and tangible property which can be assigned.  
2. (a)  Ascertainment of price (Section 9 of the Sale of Goods Act, 1930):
By virtue of Section 9, the price in a contract of sale may be- 
(1) fixed by the contract, or
(2) agreed to be fixed in a manner provided by the contract, e.g., by a
valuer, or
(3) determined by the course of dealing between the parties.
Agreement to sell at valuation (Section 10):  
Section 10 provides for the determination of price by a third party. 
1. Where there is an agreement to sell goods on the terms that price
is to be fixed by the valuation of a third party and that third party
726
either does not or cannot make such valuation, the agreement is 
thereby avoided. 
However, a buyer who has received and appropriated the goods, 
must pay a reasonable price for them. 
2. In case the third party is prevented from making the valuation by
the default of either party, the party not at fault may maintain a suit
for damages against the party in fault.
(i) In the instant case, Priya handed over the keys of her two-
wheeler to Sony and it was decided between them that price
of the vehicle will be fixed by Priya’s father. However, Priya’s
father refused to fix the price as he did not want Priya to sell
her vehicle. As the keys have already been handed over to
Sony, Priya cannot take back the keys from Sony and Sony
shall pay reasonable price to Priya for the two-wheeler.
(ii) If Priya had not handed over the vehicle to Sony, the contract
could have been avoided as Priya’s father refused to fix the
price of the vehicle.
(b) One Person Company (OPC) [Section 2(62) of the Companies Act,
2013]: The Act defines one person company (OPC) as a company which
has only one person as a member.
Rules regarding its membership:
? Only one person as member.
? The memorandum of OPC shall indicate the name of the other
person, who shall, in the event of the subscriber’s death or his
incapacity to contract, become the member of the company.
? The other person  whose name  is  given  in  the  memorandum
shall  give his  prior written consent in prescribed  form and  the
same shall be filed with Registrar of companies at the time of
incorporation of the company along with its e-memorandum and e-
articles.
? Such other person may be given the right to withdraw his consent.
? The member of OPC may at any time change the name of such
other person by giving notice to the company and the  company
shall  intimate  the  same  to  the Registrar.
? Any such change in the name of the person shall not be deemed to
be an alteration of the memorandum.
? Only a natural person who is an Indian citizen whether resident in
India or otherwise and has stayed in India for a period of not less
than 120 days during the immediately preceding financial year-
? shall be eligible to incorporate a OPC;
? shall be a nominee for the sole member of a OPC.
727
Page 4


ANSWERS OF MODEL TEST PAPER 8 
FOUNDATION COURSE 
PAPER – 2: BUSINESS LAWS 
ANSWERS 
1. (a) (i) The general rule is that an agreement made without consideration 
is void (Section 25 of the Indian Contract Act, 1872).  
However, in the following case, the agreement though made 
without consideration, will be valid and enforceable. 
Charity: If a promisee undertakes the liability on the promise of the 
person to contribute to charity, there the contract shall be valid.  
In the instant case, Mr. A can claim 1.5 lakh from Mr. S. 
(ii) According to Section 69 of the Indian Contract Act, 1872, a person
who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his
contractual obligation. Hence, Mr. M is entitled to be reimbursed
? 50,000 from Mr. L.
(b) (i) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company
may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ? 1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]:
It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through
an agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
725
As Mike LLC is incorporated in Singapore and having a place of 
business in Pune, India, it is a foreign Company. 
(c) Section 29 of the Indian Partnership Act, 1932 provides that a share in
a partnership is transferable like any other property, but as the
partnership relationship is based on mutual confidence, the assignee of
a partner’s interest by sale, mortgage or otherwise cannot enjoy the
same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not
entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the 
transferring partner, and he is bound to accept the profits as agreed 
to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring
partner, the transferee will be entitled, against the remaining
partners:
(a) to receive the share of the assets of the firm to which the
transferring partner was entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a 
firm without the consent of all the partners. A partner cannot by 
transferring his own interest, make anybody else a partner in his place, 
unless the other partners agree to accept that person as a partner. At 
the same time, a partner is not debarred from transferring his interest. A 
partner’s interest in the partnership can be regarded as an existing 
interest and tangible property which can be assigned.  
2. (a)  Ascertainment of price (Section 9 of the Sale of Goods Act, 1930):
By virtue of Section 9, the price in a contract of sale may be- 
(1) fixed by the contract, or
(2) agreed to be fixed in a manner provided by the contract, e.g., by a
valuer, or
(3) determined by the course of dealing between the parties.
Agreement to sell at valuation (Section 10):  
Section 10 provides for the determination of price by a third party. 
1. Where there is an agreement to sell goods on the terms that price
is to be fixed by the valuation of a third party and that third party
726
either does not or cannot make such valuation, the agreement is 
thereby avoided. 
However, a buyer who has received and appropriated the goods, 
must pay a reasonable price for them. 
2. In case the third party is prevented from making the valuation by
the default of either party, the party not at fault may maintain a suit
for damages against the party in fault.
(i) In the instant case, Priya handed over the keys of her two-
wheeler to Sony and it was decided between them that price
of the vehicle will be fixed by Priya’s father. However, Priya’s
father refused to fix the price as he did not want Priya to sell
her vehicle. As the keys have already been handed over to
Sony, Priya cannot take back the keys from Sony and Sony
shall pay reasonable price to Priya for the two-wheeler.
(ii) If Priya had not handed over the vehicle to Sony, the contract
could have been avoided as Priya’s father refused to fix the
price of the vehicle.
(b) One Person Company (OPC) [Section 2(62) of the Companies Act,
2013]: The Act defines one person company (OPC) as a company which
has only one person as a member.
Rules regarding its membership:
? Only one person as member.
? The memorandum of OPC shall indicate the name of the other
person, who shall, in the event of the subscriber’s death or his
incapacity to contract, become the member of the company.
? The other person  whose name  is  given  in  the  memorandum
shall  give his  prior written consent in prescribed  form and  the
same shall be filed with Registrar of companies at the time of
incorporation of the company along with its e-memorandum and e-
articles.
? Such other person may be given the right to withdraw his consent.
? The member of OPC may at any time change the name of such
other person by giving notice to the company and the  company
shall  intimate  the  same  to  the Registrar.
? Any such change in the name of the person shall not be deemed to
be an alteration of the memorandum.
? Only a natural person who is an Indian citizen whether resident in
India or otherwise and has stayed in India for a period of not less
than 120 days during the immediately preceding financial year-
? shall be eligible to incorporate a OPC;
? shall be a nominee for the sole member of a OPC.
727
? No person shall be eligible to incorporate more than one OPC or
become nominee in more than one such company.
? No minor shall become member or nominee of the OPC or can hold
share with beneficial interest.
OPC cannot be incorporated or converted into a company under
section 8 of the Act. Though it may be converted to private or public
companies in certain cases.
(c) Body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a
LLP is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners and shall have perpetual
succession. Therefore, any change in the partners of a LLP shall not
affect the existence, rights or liabilities of the LLP.
Section 3 of LLP Act, 2008, provides that a LLP is a body corporate
formed and incorporated under this Act and is a legal entity separate
from that of its partners.
Mutual Agency: No partner is liable on account of the independent or
un-authorized actions of other partners, thus individual partners are
shielded from joint liability created by another partner’s wrongful
business decisions or misconduct. In other words, all partners will be the
agents of the LLP alone.  No one partner can bind the other partner by
his acts.
Foreign LLPs: Section 2(1)(m) defines foreign limited liability
partnership “as a limited liability partnership formed, incorporated, or
registered outside India which established as place of business within
India”. Foreign LLP can become a partner in an Indian LLP.
Artificial Legal Person: A LLP is an artificial legal person because it is
created by a legal process and is clothed with all rights of an individual.
It can do everything which any natural person can do, except of course
that, it cannot be sent to jail, cannot take an oath, cannot marry or get
divorce nor can it practice a learned profession like CA or Medicine. A
LLP is invisible, intangible, immortal (it can be dissolved by law alone)
but not fictitious because it really exists.
3. (a) (i) Section 40 of the Indian Partnership Act, 1932, gives right to the 
partners to dissolve the partnership by agreement with the consent 
of all the partners or in accordance with a contract between the 
partners. ‘Contract between the partners’ means a contract already 
made. 
Also, according to section 44, the Court may, at the suit of a 
partner, may dissolve a firm on various grounds including where 
the business of the firm cannot be carried on except at a loss (in 
future also).  
In the instant case, P wants to continue the partnership business 
despite the losses incurred over the past four years and Q and R 
728
Page 5


ANSWERS OF MODEL TEST PAPER 8 
FOUNDATION COURSE 
PAPER – 2: BUSINESS LAWS 
ANSWERS 
1. (a) (i) The general rule is that an agreement made without consideration 
is void (Section 25 of the Indian Contract Act, 1872).  
However, in the following case, the agreement though made 
without consideration, will be valid and enforceable. 
Charity: If a promisee undertakes the liability on the promise of the 
person to contribute to charity, there the contract shall be valid.  
In the instant case, Mr. A can claim 1.5 lakh from Mr. S. 
(ii) According to Section 69 of the Indian Contract Act, 1872, a person
who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
In the instant case, Mr. M paid the electricity bill to avoid the
disconnection that was pending due to Mr. L's failure to fulfil his
contractual obligation. Hence, Mr. M is entitled to be reimbursed
? 50,000 from Mr. L.
(b) (i) According to Section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company
may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
In the instant case, XYZ Ltd. has made a significant accounting
transaction (down payment of ? 1 crore for plant and machinery), it
does not meet the criteria of a dormant company under Section 455
of the Companies Act, 2013.
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]:
It means any company or body corporate incorporated outside India
which—
(i) has a place of business in India whether by itself or through
an agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
725
As Mike LLC is incorporated in Singapore and having a place of 
business in Pune, India, it is a foreign Company. 
(c) Section 29 of the Indian Partnership Act, 1932 provides that a share in
a partnership is transferable like any other property, but as the
partnership relationship is based on mutual confidence, the assignee of
a partner’s interest by sale, mortgage or otherwise cannot enjoy the
same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not
entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the 
transferring partner, and he is bound to accept the profits as agreed 
to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring
partner, the transferee will be entitled, against the remaining
partners:
(a) to receive the share of the assets of the firm to which the
transferring partner was entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a 
firm without the consent of all the partners. A partner cannot by 
transferring his own interest, make anybody else a partner in his place, 
unless the other partners agree to accept that person as a partner. At 
the same time, a partner is not debarred from transferring his interest. A 
partner’s interest in the partnership can be regarded as an existing 
interest and tangible property which can be assigned.  
2. (a)  Ascertainment of price (Section 9 of the Sale of Goods Act, 1930):
By virtue of Section 9, the price in a contract of sale may be- 
(1) fixed by the contract, or
(2) agreed to be fixed in a manner provided by the contract, e.g., by a
valuer, or
(3) determined by the course of dealing between the parties.
Agreement to sell at valuation (Section 10):  
Section 10 provides for the determination of price by a third party. 
1. Where there is an agreement to sell goods on the terms that price
is to be fixed by the valuation of a third party and that third party
726
either does not or cannot make such valuation, the agreement is 
thereby avoided. 
However, a buyer who has received and appropriated the goods, 
must pay a reasonable price for them. 
2. In case the third party is prevented from making the valuation by
the default of either party, the party not at fault may maintain a suit
for damages against the party in fault.
(i) In the instant case, Priya handed over the keys of her two-
wheeler to Sony and it was decided between them that price
of the vehicle will be fixed by Priya’s father. However, Priya’s
father refused to fix the price as he did not want Priya to sell
her vehicle. As the keys have already been handed over to
Sony, Priya cannot take back the keys from Sony and Sony
shall pay reasonable price to Priya for the two-wheeler.
(ii) If Priya had not handed over the vehicle to Sony, the contract
could have been avoided as Priya’s father refused to fix the
price of the vehicle.
(b) One Person Company (OPC) [Section 2(62) of the Companies Act,
2013]: The Act defines one person company (OPC) as a company which
has only one person as a member.
Rules regarding its membership:
? Only one person as member.
? The memorandum of OPC shall indicate the name of the other
person, who shall, in the event of the subscriber’s death or his
incapacity to contract, become the member of the company.
? The other person  whose name  is  given  in  the  memorandum
shall  give his  prior written consent in prescribed  form and  the
same shall be filed with Registrar of companies at the time of
incorporation of the company along with its e-memorandum and e-
articles.
? Such other person may be given the right to withdraw his consent.
? The member of OPC may at any time change the name of such
other person by giving notice to the company and the  company
shall  intimate  the  same  to  the Registrar.
? Any such change in the name of the person shall not be deemed to
be an alteration of the memorandum.
? Only a natural person who is an Indian citizen whether resident in
India or otherwise and has stayed in India for a period of not less
than 120 days during the immediately preceding financial year-
? shall be eligible to incorporate a OPC;
? shall be a nominee for the sole member of a OPC.
727
? No person shall be eligible to incorporate more than one OPC or
become nominee in more than one such company.
? No minor shall become member or nominee of the OPC or can hold
share with beneficial interest.
OPC cannot be incorporated or converted into a company under
section 8 of the Act. Though it may be converted to private or public
companies in certain cases.
(c) Body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a
LLP is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners and shall have perpetual
succession. Therefore, any change in the partners of a LLP shall not
affect the existence, rights or liabilities of the LLP.
Section 3 of LLP Act, 2008, provides that a LLP is a body corporate
formed and incorporated under this Act and is a legal entity separate
from that of its partners.
Mutual Agency: No partner is liable on account of the independent or
un-authorized actions of other partners, thus individual partners are
shielded from joint liability created by another partner’s wrongful
business decisions or misconduct. In other words, all partners will be the
agents of the LLP alone.  No one partner can bind the other partner by
his acts.
Foreign LLPs: Section 2(1)(m) defines foreign limited liability
partnership “as a limited liability partnership formed, incorporated, or
registered outside India which established as place of business within
India”. Foreign LLP can become a partner in an Indian LLP.
Artificial Legal Person: A LLP is an artificial legal person because it is
created by a legal process and is clothed with all rights of an individual.
It can do everything which any natural person can do, except of course
that, it cannot be sent to jail, cannot take an oath, cannot marry or get
divorce nor can it practice a learned profession like CA or Medicine. A
LLP is invisible, intangible, immortal (it can be dissolved by law alone)
but not fictitious because it really exists.
3. (a) (i) Section 40 of the Indian Partnership Act, 1932, gives right to the 
partners to dissolve the partnership by agreement with the consent 
of all the partners or in accordance with a contract between the 
partners. ‘Contract between the partners’ means a contract already 
made. 
Also, according to section 44, the Court may, at the suit of a 
partner, may dissolve a firm on various grounds including where 
the business of the firm cannot be carried on except at a loss (in 
future also).  
In the instant case, P wants to continue the partnership business 
despite the losses incurred over the past four years and Q and R 
728
are reluctant to continue operating the business due to continuous 
losses. 
Here, P can insist on continuing the business if the partnership 
agreement does not specifically provide such a right to one or more 
partner / partners since Section 40 specifies that with the consent 
of all the partners or in accordance with a contract between the 
partners the firm can be dissolved. 
Options available to Q and R 
Mutual Agreement to Dissolve the Partnership: Q and R can 
propose to P that the partnership be dissolved by mutual 
agreement. If P agrees, the partnership can be dissolved amicably. 
Dissolution by the Court: If P does not agree to dissolve the 
partnership mutually, Q and R can approach the court for an order 
under Section 44.  
(ii) According to Section 25 of the Indian Partnership Act, 1932, every
partner is jointly and severally liable for all acts of the firm done
while he is a partner.
As per section 26, the firm is liable to the same extent as the partner
for any wrongful act or omission of a partner while acting:
(a) in the ordinary course of the business of the firm, or
(b) with the authority of the partners.
Section 27 provides that the firm is liable if a partner, acting within 
the scope of his apparent authority, receives money or property 
from a third party and misapplies it, or if the firm in the course of its 
business receives money or property and the same is misapplied 
while it is in the custody of the firm. 
In the instant case, both A and B are liable to C for the wrongful 
acts committed by B. A cannot avoid liability merely on the grounds 
of being a sleeping partner.  
(b) (i) Under the Companies Act, 2013, a Government company is defined 
in Section 2(45) as a company in which not less than 51% of the 
paid-up share capital is held by: 
• The Central Government, or
• Any State Government or Governments, or
• Partly by the Central Government and partly by one or more
State Governments,
And includes a company which is a subsidiary company of such a 
Government company. 
In the instant case, total Government Shareholding is 40% [i.e. 20% 
(Government of India) + 10% (Government of Tamil Nadu) + 10% 
(Government of Rajasthan)] = 40% 
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