Business Laws Past Year Question Paper (Paper-2) - June 2024 (Answer Key) | Business Laws for CA Foundation PDF Download

 Page 1


SUGGESTED ANSWER JUNE 2024 
FOUNDATION EXAMINATION
Page 2


SUGGESTED ANSWER JUNE 2024 
FOUNDATION EXAMINATION
PAPER – 2: BUSINESS LAWS  
Question No. 1 is compulsory. 
Attempt any four questions from the remaining five questions. 
Working notes should form part of the answers 
Question 1 
(a) R owns an electronics store. P visited the store to buy a water purifier priced 
at `54,000/-. He specifically requested R for a purifier with a copper filter. 
As P wanted to buy the purifier on credit, with the intention of paying in 9 
equal monthly instalments, R demands a guarantor for the transaction. S (a 
friend of P) came forward and gave the guarantee for payment of water 
purifier. R sold P, a water purifier of a specific brand. P made payment for 4 
monthly instalments and after that became insolvent. Explain with 
reference to the Indian Contract Act, 1872, the liability of S as a guarantor 
to pay the balance price of water purifier to R. 
 What will be your answer, if R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter? Neither P nor S 
was aware of this fact and upon discovering the truth, P refused to pay the 
price. In response to P's refusal, R filed the suit against S, the guarantor. 
Explain with reference to the Indian Contract Act 1872, whether S is liable 
to pay the balance price of water purifier to R? (7 Marks) 
(b) A company, ABC limited as on 31.03.2023 had a paid-up capital of ` 1 lakh 
(10,000 equity shares of ` 10 each). In June 2023, ABC limited had issued 
additional 10,000 equity shares of ` 10 each which was fully subscribed. 
Out of 10,000 shares, 5,000 of these shares were issued to XYZ private 
limited company. XYZ is a holding company of PQR private limited by 
having control over the composition of its board of directors. 
 Now, PQR private limited claims the status of being a subsidiary of ABC 
limited as being a subsidiary of its subsidiary i.e. XYZ private limited. 
Examine the validity of the claim of PQR private limited. 
Page 3


SUGGESTED ANSWER JUNE 2024 
FOUNDATION EXAMINATION
PAPER – 2: BUSINESS LAWS  
Question No. 1 is compulsory. 
Attempt any four questions from the remaining five questions. 
Working notes should form part of the answers 
Question 1 
(a) R owns an electronics store. P visited the store to buy a water purifier priced 
at `54,000/-. He specifically requested R for a purifier with a copper filter. 
As P wanted to buy the purifier on credit, with the intention of paying in 9 
equal monthly instalments, R demands a guarantor for the transaction. S (a 
friend of P) came forward and gave the guarantee for payment of water 
purifier. R sold P, a water purifier of a specific brand. P made payment for 4 
monthly instalments and after that became insolvent. Explain with 
reference to the Indian Contract Act, 1872, the liability of S as a guarantor 
to pay the balance price of water purifier to R. 
 What will be your answer, if R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter? Neither P nor S 
was aware of this fact and upon discovering the truth, P refused to pay the 
price. In response to P's refusal, R filed the suit against S, the guarantor. 
Explain with reference to the Indian Contract Act 1872, whether S is liable 
to pay the balance price of water purifier to R? (7 Marks) 
(b) A company, ABC limited as on 31.03.2023 had a paid-up capital of ` 1 lakh 
(10,000 equity shares of ` 10 each). In June 2023, ABC limited had issued 
additional 10,000 equity shares of ` 10 each which was fully subscribed. 
Out of 10,000 shares, 5,000 of these shares were issued to XYZ private 
limited company. XYZ is a holding company of PQR private limited by 
having control over the composition of its board of directors. 
 Now, PQR private limited claims the status of being a subsidiary of ABC 
limited as being a subsidiary of its subsidiary i.e. XYZ private limited. 
Examine the validity of the claim of PQR private limited. 
 FOUNDATION EXAMINATION: JUNE 2024 
 
 
SUGGESTED ANSWER 
2 
 State the relationship if any, between ABC limited & XYZ private limited as 
per the provisions of the Companies Act, 2013.  (7 Marks) 
(c) The Indian Partnership Act does not make the registration of firms 
compulsory, yet the consequences or disabilities of non-registration have a 
persuasive pressure for their registration. Still, there are come cases where 
non-registration of firm does not affect certain rights. Explain with 
reference to the provisions of the Indian Partnership Act, 1932.  (6 Marks) 
Answer  
(a) As per section 126 of the Indian Contract Act, 1872, the contract of 
guarantee is defined as a contract to perform the promise or discharge 
the liability of a third person in case of his default.  
 In this case, S has given a guarantee for P's payment obligation towards R. 
When P defaulted after making four monthly instalments and became 
insolvent, S's liability as a guarantor will come into existence.  
 According to Section 128 of the Act, the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided 
by the contract. 
 Since P failed to pay the remaining instalments due to insolvency, S, as 
the guarantor, is liable to pay the balance price of the water purifier to R. 
In the given situation, S will have to pay the balance amount of ` 30,000 
to R. [54,000-(4x6,000)] 
 In the second situation, R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter; this changes the 
situation significantly. 
 According to Section 142 of the Act, any guarantee which has been 
obtained by means of misrepresentation made by the creditor, or with his 
knowledge and assent, concerning a material part of the transaction, is 
invalid. Here, guarantee is obtained by means of misrepresentation made 
by the creditor (R), and therefore the guarantee is invalid.  
 Furthermore, under Section 143, any guarantee which the creditor has 
obtained by means of keeping silence as to material circumstances, is 
invalid. 
Page 4


SUGGESTED ANSWER JUNE 2024 
FOUNDATION EXAMINATION
PAPER – 2: BUSINESS LAWS  
Question No. 1 is compulsory. 
Attempt any four questions from the remaining five questions. 
Working notes should form part of the answers 
Question 1 
(a) R owns an electronics store. P visited the store to buy a water purifier priced 
at `54,000/-. He specifically requested R for a purifier with a copper filter. 
As P wanted to buy the purifier on credit, with the intention of paying in 9 
equal monthly instalments, R demands a guarantor for the transaction. S (a 
friend of P) came forward and gave the guarantee for payment of water 
purifier. R sold P, a water purifier of a specific brand. P made payment for 4 
monthly instalments and after that became insolvent. Explain with 
reference to the Indian Contract Act, 1872, the liability of S as a guarantor 
to pay the balance price of water purifier to R. 
 What will be your answer, if R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter? Neither P nor S 
was aware of this fact and upon discovering the truth, P refused to pay the 
price. In response to P's refusal, R filed the suit against S, the guarantor. 
Explain with reference to the Indian Contract Act 1872, whether S is liable 
to pay the balance price of water purifier to R? (7 Marks) 
(b) A company, ABC limited as on 31.03.2023 had a paid-up capital of ` 1 lakh 
(10,000 equity shares of ` 10 each). In June 2023, ABC limited had issued 
additional 10,000 equity shares of ` 10 each which was fully subscribed. 
Out of 10,000 shares, 5,000 of these shares were issued to XYZ private 
limited company. XYZ is a holding company of PQR private limited by 
having control over the composition of its board of directors. 
 Now, PQR private limited claims the status of being a subsidiary of ABC 
limited as being a subsidiary of its subsidiary i.e. XYZ private limited. 
Examine the validity of the claim of PQR private limited. 
 FOUNDATION EXAMINATION: JUNE 2024 
 
 
SUGGESTED ANSWER 
2 
 State the relationship if any, between ABC limited & XYZ private limited as 
per the provisions of the Companies Act, 2013.  (7 Marks) 
(c) The Indian Partnership Act does not make the registration of firms 
compulsory, yet the consequences or disabilities of non-registration have a 
persuasive pressure for their registration. Still, there are come cases where 
non-registration of firm does not affect certain rights. Explain with 
reference to the provisions of the Indian Partnership Act, 1932.  (6 Marks) 
Answer  
(a) As per section 126 of the Indian Contract Act, 1872, the contract of 
guarantee is defined as a contract to perform the promise or discharge 
the liability of a third person in case of his default.  
 In this case, S has given a guarantee for P's payment obligation towards R. 
When P defaulted after making four monthly instalments and became 
insolvent, S's liability as a guarantor will come into existence.  
 According to Section 128 of the Act, the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided 
by the contract. 
 Since P failed to pay the remaining instalments due to insolvency, S, as 
the guarantor, is liable to pay the balance price of the water purifier to R. 
In the given situation, S will have to pay the balance amount of ` 30,000 
to R. [54,000-(4x6,000)] 
 In the second situation, R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter; this changes the 
situation significantly. 
 According to Section 142 of the Act, any guarantee which has been 
obtained by means of misrepresentation made by the creditor, or with his 
knowledge and assent, concerning a material part of the transaction, is 
invalid. Here, guarantee is obtained by means of misrepresentation made 
by the creditor (R), and therefore the guarantee is invalid.  
 Furthermore, under Section 143, any guarantee which the creditor has 
obtained by means of keeping silence as to material circumstances, is 
invalid. 
 BUSINESS LAWS 
 
SUGGESTED ANSWER 
3 
 Here R misrepresented the filter type and both P and S were unaware of 
this fact. The creditor (R) has obtained the guarantee by remaining silent 
as to material circumstances. Therefore, the guarantee obtained from S 
will be considered to be invalid. 
 Consequently, S cannot be held liable to pay the balance price of the 
water purifier to R. 
(b) As per Section 2(46) of the Companies Act, 2013, holding company in 
relation to one or more other companies, means a company of which 
such companies are subsidiary companies.  
 Section 2(87) 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. 
 In the instant case, as on 31.03.2023, ABC Limited had a paid-up capital of 
` 1 lakh (10,000 equity shares of ` 10 each). In June 2023, ABC Limited 
issued additional 10,000 equity shares, which was fully subscribed. Post-
issue, the total paid-up capital of ABC Limited is ` 2 lakhs (20,000 equity 
shares of `10 each).  
 Out of these, 5,000 shares were issued to XYZ Private Limited. Since XYZ 
Private Limited holds only 25% of the shares in ABC Limited, it does not 
have control of more than one-half of the total voting power of ABC 
Limited. Hence, XYZ Private Limited cannot be considered as a subsidiary 
company of ABC Limited in terms of the second criteria stated above, that 
of controlling of voting power. 
 XYZ Private Limited is the holding company of PQR Private Limited by 
having control over the composition of its Board of Directors. But since 
XYZ Private Limited cannot be termed as a subsidiary company of ABC 
Limited, PQR Private Limited cannot claim the status of being a subsidiary 
of ABC Limited in terms of the first criteria, that of controlling of the 
composition of directors. 
Page 5


SUGGESTED ANSWER JUNE 2024 
FOUNDATION EXAMINATION
PAPER – 2: BUSINESS LAWS  
Question No. 1 is compulsory. 
Attempt any four questions from the remaining five questions. 
Working notes should form part of the answers 
Question 1 
(a) R owns an electronics store. P visited the store to buy a water purifier priced 
at `54,000/-. He specifically requested R for a purifier with a copper filter. 
As P wanted to buy the purifier on credit, with the intention of paying in 9 
equal monthly instalments, R demands a guarantor for the transaction. S (a 
friend of P) came forward and gave the guarantee for payment of water 
purifier. R sold P, a water purifier of a specific brand. P made payment for 4 
monthly instalments and after that became insolvent. Explain with 
reference to the Indian Contract Act, 1872, the liability of S as a guarantor 
to pay the balance price of water purifier to R. 
 What will be your answer, if R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter? Neither P nor S 
was aware of this fact and upon discovering the truth, P refused to pay the 
price. In response to P's refusal, R filed the suit against S, the guarantor. 
Explain with reference to the Indian Contract Act 1872, whether S is liable 
to pay the balance price of water purifier to R? (7 Marks) 
(b) A company, ABC limited as on 31.03.2023 had a paid-up capital of ` 1 lakh 
(10,000 equity shares of ` 10 each). In June 2023, ABC limited had issued 
additional 10,000 equity shares of ` 10 each which was fully subscribed. 
Out of 10,000 shares, 5,000 of these shares were issued to XYZ private 
limited company. XYZ is a holding company of PQR private limited by 
having control over the composition of its board of directors. 
 Now, PQR private limited claims the status of being a subsidiary of ABC 
limited as being a subsidiary of its subsidiary i.e. XYZ private limited. 
Examine the validity of the claim of PQR private limited. 
 FOUNDATION EXAMINATION: JUNE 2024 
 
 
SUGGESTED ANSWER 
2 
 State the relationship if any, between ABC limited & XYZ private limited as 
per the provisions of the Companies Act, 2013.  (7 Marks) 
(c) The Indian Partnership Act does not make the registration of firms 
compulsory, yet the consequences or disabilities of non-registration have a 
persuasive pressure for their registration. Still, there are come cases where 
non-registration of firm does not affect certain rights. Explain with 
reference to the provisions of the Indian Partnership Act, 1932.  (6 Marks) 
Answer  
(a) As per section 126 of the Indian Contract Act, 1872, the contract of 
guarantee is defined as a contract to perform the promise or discharge 
the liability of a third person in case of his default.  
 In this case, S has given a guarantee for P's payment obligation towards R. 
When P defaulted after making four monthly instalments and became 
insolvent, S's liability as a guarantor will come into existence.  
 According to Section 128 of the Act, the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided 
by the contract. 
 Since P failed to pay the remaining instalments due to insolvency, S, as 
the guarantor, is liable to pay the balance price of the water purifier to R. 
In the given situation, S will have to pay the balance amount of ` 30,000 
to R. [54,000-(4x6,000)] 
 In the second situation, R sold the water purifier misrepresenting it as 
having a copper filter, while it actually has a normal filter; this changes the 
situation significantly. 
 According to Section 142 of the Act, any guarantee which has been 
obtained by means of misrepresentation made by the creditor, or with his 
knowledge and assent, concerning a material part of the transaction, is 
invalid. Here, guarantee is obtained by means of misrepresentation made 
by the creditor (R), and therefore the guarantee is invalid.  
 Furthermore, under Section 143, any guarantee which the creditor has 
obtained by means of keeping silence as to material circumstances, is 
invalid. 
 BUSINESS LAWS 
 
SUGGESTED ANSWER 
3 
 Here R misrepresented the filter type and both P and S were unaware of 
this fact. The creditor (R) has obtained the guarantee by remaining silent 
as to material circumstances. Therefore, the guarantee obtained from S 
will be considered to be invalid. 
 Consequently, S cannot be held liable to pay the balance price of the 
water purifier to R. 
(b) As per Section 2(46) of the Companies Act, 2013, holding company in 
relation to one or more other companies, means a company of which 
such companies are subsidiary companies.  
 Section 2(87) 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. 
 In the instant case, as on 31.03.2023, ABC Limited had a paid-up capital of 
` 1 lakh (10,000 equity shares of ` 10 each). In June 2023, ABC Limited 
issued additional 10,000 equity shares, which was fully subscribed. Post-
issue, the total paid-up capital of ABC Limited is ` 2 lakhs (20,000 equity 
shares of `10 each).  
 Out of these, 5,000 shares were issued to XYZ Private Limited. Since XYZ 
Private Limited holds only 25% of the shares in ABC Limited, it does not 
have control of more than one-half of the total voting power of ABC 
Limited. Hence, XYZ Private Limited cannot be considered as a subsidiary 
company of ABC Limited in terms of the second criteria stated above, that 
of controlling of voting power. 
 XYZ Private Limited is the holding company of PQR Private Limited by 
having control over the composition of its Board of Directors. But since 
XYZ Private Limited cannot be termed as a subsidiary company of ABC 
Limited, PQR Private Limited cannot claim the status of being a subsidiary 
of ABC Limited in terms of the first criteria, that of controlling of the 
composition of directors. 
 FOUNDATION EXAMINATION: JUNE 2024 
 
 
SUGGESTED ANSWER 
4 
 As per section 2(6) of the Act, Associate Company in relation to another 
company, means a company in which that other company has a 
significant influence, but which is not a subsidiary company of the 
company having such influence and includes a joint venture company.  
 The expression “significant influence” means control of at least twenty per 
cent of total voting power, or control of or participation in business 
decisions under an agreement. 
 In terms of the above provision, the relationship between ABC Limited 
and XYZ Private Limited can be of an Associate Company.  
 Since XYZ Private Limited holds more than 20 percent of voting power in 
ABC Limited, it can be considered as an Associate Company of ABC 
Limited.  
(c) The Indian Partnership Act, 1932 does not make the registration of firms 
compulsory nor does it impose any penalty for non-registration. However, 
under Section 69, non-registration of partnership gives rise to a number 
of disabilities. Although registration of firms is not compulsory, yet the 
consequences or disabilities of non-registration have a persuasive 
pressure for their registration. 
 Exceptions: Non-registration of a firm does not, however affect the 
following rights: 
1.  The right of third parties to sue the firm or any partner. 
2. The right of partners to sue for the dissolution of the firm or for the 
settlement of the accounts of a dissolved firm, or for realization of 
the property of a dissolved firm. 
3. The power of an Official Assignees, Receiver of Court to release the 
property of the insolvent partner and to bring an action. 
4. The right to sue or claim a set-off if the value of suit does not exceed  
` 100 in value. 
5.  The right to suit and proceeding instituted by legal representatives or 
heirs of the deceased partner of a firm for accounts of the firm or to 
realise the property of the firm.