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CA Foundation Paper 4 study materials
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CA Foundation Paper 4 practice questions

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Question 1Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, which of the following is essential for a valid contract but is not required for a mere agreement?

  1. Free consent of the parties
  2. Offer and acceptance
  3. Lawful consideration
  4. Enforceability by law Correct answer.

Explanation

Section 2(h) defines a contract as an agreement enforceable by law, so enforceability is the element that converts an agreement into a contract. Offer, acceptance, consideration and free consent are components of an agreement itself, but the agreement only becomes a contract when the law will enforce it.

Question 2Paper 4 (subject areas not enumerated in the source)

A offers to sell his car to B for Rs. 5,00,000 and B replies, "I accept, provided you deliver it with a new music system." In law this reply is:

  1. An acceptance conditional only on performance
  2. A counter-offer that rejects the original offer Correct answer.
  3. A mere inquiry that keeps the original offer alive
  4. A valid acceptance creating a binding contract

Explanation

Acceptance must be absolute and unqualified under Section 7 of the Indian Contract Act. A reply that adds a new term is a counter-offer, which operates as a rejection of the original offer and destroys it, so the original offer can no longer be accepted unless renewed.

Question 3Paper 4 (subject areas not enumerated in the source)

Which of the following persons is competent to contract under Section 11 of the Indian Contract Act, 1872?

  1. A person disqualified by a court decree from contracting
  2. A person who has attained majority and is of sound mind Correct answer.
  3. A person of unsound mind during a lucid interval only
  4. A minor who has been emancipated by his guardian

Explanation

Section 11 requires that a person be of the age of majority, of sound mind, and not disqualified from contracting by any law. A person who satisfies all three conditions is competent, and majority plus soundness of mind is the core statutory test.

Question 4Paper 4 (subject areas not enumerated in the source)

An agreement is voidable at the option of the aggrieved party when consent is caused by:

  1. Failure of a condition precedent
  2. Bilateral mistake of fact
  3. Coercion or undue influence Correct answer.
  4. Mistake as to Indian law

Explanation

Sections 19 and 19A provide that agreements whose consent is caused by coercion, undue influence, fraud or misrepresentation are voidable at the option of the party whose consent was so caused. Bilateral mistake of fact and mistake of law make an agreement void rather than voidable.

Question 5Paper 4 (subject areas not enumerated in the source)

A contract of insurance is a classic example of:

  1. An agreement by way of wager excluded by statute
  2. A contract of guarantee
  3. A wagering agreement
  4. A contract of indemnity Correct answer.

Explanation

Insurance contracts are contracts of indemnity because the insurer undertakes to make good the actual loss suffered by the insured, subject to the sum insured. They are not wagers because the insured has an insurable interest and the object is protection against loss, not speculation.

Question 6Paper 4 (subject areas not enumerated in the source)

Which of the following is a necessary ingredient of a contract of bailment under the Indian Contract Act?

  1. Transfer of ownership of goods to the bailee
  2. Consideration in the form of money only
  3. Delivery of goods for a specific purpose with an obligation to return Correct answer.
  4. A written and registered instrument

Explanation

Section 148 defines bailment as delivery of goods by one person to another for some purpose, upon a contract that they shall be returned or disposed of when the purpose is accomplished. Ownership remains with the bailor, and no particular form or money consideration is required.

Question 7Paper 4 (subject areas not enumerated in the source)

A negotiable instrument that is transferred by mere delivery without any endorsement is:

  1. A demand draft payable to order
  2. A cheque crossed account payee
  3. A bearer instrument Correct answer.
  4. An order instrument

Explanation

A bearer instrument is transferable by mere delivery, and under the Negotiable Instruments Act, 1881 no endorsement is necessary. An order instrument, by contrast, requires endorsement followed by delivery for valid negotiation.

Question 8Paper 4 (subject areas not enumerated in the source)

Which of the following is a characteristic of a promissory note under the Negotiable Instruments Act, 1881?

  1. It requires acceptance by the drawee
  2. It is made by the debtor and contains an unconditional promise to pay Correct answer.
  3. It contains an unconditional order to pay
  4. It is always drawn on a specified banker

Explanation

Section 4 defines a promissory note as an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person or to the bearer. The maker is the debtor, and no acceptance by a drawee is contemplated.

Question 9Paper 4 (subject areas not enumerated in the source)

The maximum number of partners in a partnership firm governed by the Companies Act, 2013 (as amended) is:

  1. 100
  2. 20
  3. 50 Correct answer.
  4. 10

Explanation

The Companies Act, 2013, as amended, prescribes a maximum of 50 partners in a partnership firm, with the limit of 100 relating to the number of partners in an LLP and members in a company. The earlier ceiling of 20 partners under the Companies Act, 1956 no longer governs.

Question 10Paper 4 (subject areas not enumerated in the source)

In the absence of a partnership deed, how are the profits of a partnership firm shared among partners?

  1. In proportion to time devoted to the business
  2. In proportion to capital contributed
  3. Equally Correct answer.
  4. As decided by the senior-most partner

Explanation

Section 13 of the Indian Partnership Act, 1932 provides that in the absence of a contract to the contrary, partners are entitled to share profits equally. Capital contribution and time devoted do not alter this default rule unless the deed provides otherwise.

Question 11Paper 4 (subject areas not enumerated in the source)

A partner who, without authority, does an act that is not within the ordinary course of the firm's business:

  1. Does not bind the firm unless it is customary in that business Correct answer.
  2. Binds the firm if the partner acted in good faith
  3. Binds the firm because all partners are agents
  4. Binds the firm only if the act is in writing

Explanation

Section 19 of the Indian Partnership Act provides that the implied authority of a partner does not extend to acts outside the ordinary course of the business, unless usage or custom of the particular trade permits them. Such an act therefore does not bind the firm.

Question 12Paper 4 (subject areas not enumerated in the source)

The principle that a company has a legal personality distinct from its members was laid down in:

  1. Ashbury Railway Carriage & Iron Co. Ltd. v. Riche
  2. Foss v. Harbottle
  3. Salomon v. Salomon & Co. Ltd. Correct answer.
  4. Royal British Bank v. Turquand

Explanation

Salomon v. Salomon & Co. Ltd. established that on incorporation a company becomes a separate legal person distinct from its shareholders, so the debts of the company are its own. The other cases deal with indoor management, the proper plaintiff rule and ultra vires respectively.

Question 13Paper 4 (subject areas not enumerated in the source)

The doctrine of indoor management permits an outsider dealing with a company to:

  1. Enforce an ultra vires transaction against the company
  2. Assume that internal procedures have been duly complied with Correct answer.
  3. Ignore the memorandum and articles of association
  4. Inspect the minutes of the board of directors

Explanation

The rule in Royal British Bank v. Turquand allows an outsider to presume that the internal requirements and procedures of the company have been properly observed. The outsider cannot, however, rely on this where the transaction is ultra vires or where he had notice of the irregularity.

Question 14Paper 4 (subject areas not enumerated in the source)

Which document of a company is described as its charter and governs the relationship between the company and the outside world?

  1. Memorandum of Association Correct answer.
  2. Articles of Association
  3. Prospectus
  4. Board resolution

Explanation

The memorandum of association is the charter of the company that defines its name, objects, registered office and liability, and fixes the scope of its dealings with outsiders. The articles regulate internal management, while a prospectus invites the public to subscribe and a board resolution is a decision of directors.

Question 15Paper 4 (subject areas not enumerated in the source)

In the context of the Sale of Goods Act, 1930, where goods are sold by description, there is an implied condition that the goods shall:

  1. Correspond with the description Correct answer.
  2. Be fit for every conceivable purpose
  3. Be delivered at the buyer's residence
  4. Be of merchantable quality irrespective of price

Explanation

Section 15 of the Sale of Goods Act implies a condition that where goods are sold by description, they must correspond with the description given. Fitness for purpose and merchantable quality operate under Section 16 only where the specified conditions, such as reliance on the seller's skill, are satisfied.

Question 16Paper 4 (subject areas not enumerated in the source)

The rule of caveat emptor in the Sale of Goods Act, 1930 is subject to exceptions, one of which arises where:

  1. The goods are bought at a public auction
  2. The seller makes a false representation of fact which the buyer relies upon Correct answer.
  3. The buyer examines the goods before purchase
  4. The buyer is a dealer in the same goods

Explanation

Caveat emptor, meaning let the buyer beware, does not protect a seller who makes a false representation of fact that induces the buyer's reliance, since this amounts to fraud or misrepresentation. The other situations tend to strengthen rather than displace the doctrine.

Question 17Paper 4 (subject areas not enumerated in the source)

Under the Consumer Protection Act, 2019, a complaint relating to an unfair trade practice may be filed before the District Commission where the value of the goods or services paid as consideration does not exceed:

  1. Rs. 1 crore
  2. Rs. 2 crore
  3. Rs. 20 lakh
  4. Rs. 50 lakh Correct answer.

Explanation

The Consumer Protection Act, 2019, as amended, confers jurisdiction on the District Commission where the consideration paid does not exceed Rs. 50 lakh, with the State Commission covering the range above that up to Rs. 2 crore and the National Commission above Rs. 2 crore.

Question 18Paper 4 (subject areas not enumerated in the source)

A consumer, as defined under the Consumer Protection Act, 2019, includes a person who buys goods:

  1. For a commercial purpose
  2. For personal use and consumption Correct answer.
  3. For manufacturing other goods for sale
  4. For resale in the ordinary course of business

Explanation

Section 2(7) of the Consumer Protection Act, 2019 defines a consumer as a person who buys goods or hires services for consideration, but excludes purchases made for resale or for a commercial purpose. Buying for personal use and consumption therefore falls squarely within the definition.

Question 19Paper 4 (subject areas not enumerated in the source)

Under the Indian Partnership Act, 1932, the registration of a firm is:

  1. Optional, but non-registration attracts statutory disabilities Correct answer.
  2. Required only for firms dealing in immovable property
  3. Compulsory only for firms with more than ten partners
  4. Compulsory from the date of formation

Explanation

Registration of a partnership firm is optional in India, but Section 69 imposes disabilities on an unregistered firm, such as inability to enforce contractual rights in court against third parties. The firm and its partners remain subject to those consequences until registration is effected.

Question 20Paper 4 (subject areas not enumerated in the source)

Which of the following statements about a minor's agreement under the Indian Contract Act is correct?

  1. It becomes enforceable on the minor attaining majority without fresh consideration
  2. It is void ab initio Correct answer.
  3. It is valid if ratified by the guardian
  4. It is voidable at the minor's option on attaining majority

Explanation

An agreement with a minor is void ab initio, as held in Mohori Bibee v. Dharmodas Ghose, because a minor lacks capacity to contract under Section 11. Ratification after majority does not validate it, and fresh consideration is required for a new valid contract.

Question 21Paper 4 (subject areas not enumerated in the source)

A bill of exchange must be presented for acceptance, and the party on whom it is drawn is known as the:

  1. Endorser
  2. Drawer
  3. Drawee Correct answer.
  4. Payee

Explanation

In a bill of exchange the drawer makes the order, the drawee is the person on whom it is drawn and who accepts it, and the payee is the person to whom payment is to be made. The drawee becomes the acceptor on signing acceptance.

Question 22Paper 4 (subject areas not enumerated in the source)

A cheque that bears on its face two parallel transverse lines with the words "Account Payee" is:

  1. An account payee crossing that restricts collection to the payee's account Correct answer.
  2. A special crossing restricted to the named banker
  3. A general crossing that allows any holder to collect
  4. An endorsement in blank

Explanation

An account payee crossing directs the collecting banker to credit the proceeds only to the account of the payee named in the instrument. It is a restrictive crossing that protects the true owner and prevents collection by other parties.

Question 23Paper 4 (subject areas not enumerated in the source)

Under the Companies Act, 2013, the minimum number of members required to form a public company is:

  1. Three
  2. Five
  3. Seven Correct answer.
  4. Two

Explanation

Section 3 of the Companies Act, 2013 provides that a public company may be formed by seven or more persons, a private company by two or more, and a one person company by one person. The minimum of seven reflects the wider public participation contemplated.

Question 24Paper 4 (subject areas not enumerated in the source)

A company issues shares at a price below their face value. This is permissible only when:

  1. The articles authorise it and the issue satisfies Section 54 conditions, including a special resolution Correct answer.
  2. The issue is made to existing members only
  3. The board passes an ordinary resolution
  4. The shares are fully paid up

Explanation

Section 54 of the Companies Act, 2013 permits issue of shares at a discount only when the articles authorise it, the issue is of a class already issued, a special resolution is passed and sanction of the Tribunal is obtained. Issue at discount is otherwise void.

Question 25Paper 4 (subject areas not enumerated in the source)

Which of the following best describes the liability of partners in a general partnership firm?

  1. Joint and several, and unlimited Correct answer.
  2. Limited to the profits earned
  3. Several only, with no joint liability
  4. Limited to their capital contribution

Explanation

Under Section 25 of the Indian Partnership Act, 1932 every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner. The liability is unlimited and extends to the personal assets of the partners.

Question 26Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, a proposal becomes a promise when the person to whom it is made signifies his assent. This assent is known as:

  1. Novation
  2. Consideration
  3. Revocation
  4. Acceptance Correct answer.

Explanation

Section 2(b) provides that when the person to whom a proposal is made signifies his assent, the proposal is said to be accepted, and a proposal when accepted becomes a promise. Acceptance is therefore the act that converts a proposal into a binding promise.

Question 27Paper 4 (subject areas not enumerated in the source)

A contract in which the promisor's obligation depends on the happening of an uncertain future event, such as a payment to be made only if a ship arrives, is classified as:

  1. An illegal contract
  2. A contingent contract Correct answer.
  3. A voidable contract
  4. A wagering contract

Explanation

Section 31 of the Indian Contract Act defines a contingent contract as one to do or not to do something if some event, collateral to the contract, does or does not happen. The obligation is conditional on an uncertain future event, which is precisely the feature described.

Question 28Paper 4 (subject areas not enumerated in the source)

A company's articles of association contain a clause giving the board power to borrow up to Rs. 50 crore. The board borrows Rs. 80 crore from a lender who has inspected only the public documents of the company. Applying the doctrine of indoor management, the lender's claim is:

  1. Valid only if the shareholders ratify the borrowing afterwards
  2. Valid, because the lender was entitled to assume that internal requirements were complied with Correct answer.
  3. Invalid, because borrowing beyond the stated limit is ultra vires the company
  4. Invalid, because the lender failed to inspect the board minutes

Explanation

The doctrine of indoor management, laid down in Royal British Bank v. Turquand, protects an outsider who has notice of the public documents but cannot know whether internal procedures were followed. The lender may assume that the internal limits and procedures were properly observed, so the borrowing binds the company unless the outsider had actual notice of irregularity.

Question 29Paper 4 (subject areas not enumerated in the source)

Under the Sale of Goods Act, 1930, when goods are delivered to a buyer and the buyer wrongfully neglects or refuses to pay for them, the seller's primary remedy is to sue for:

  1. Damages for non-acceptance
  2. Rescission of the contract
  3. Specific performance of the contract
  4. The price of the goods Correct answer.

Explanation

Section 55 entitles the seller to sue for the price once the property in the goods has passed to the buyer who wrongfully neglects or refuses to pay. The action is for the price as a debt rather than for unliquidated damages.

Question 30Paper 4 (subject areas not enumerated in the source)

A person signs a cheque as drawer without knowing that the account had been closed by the bank two months earlier. Which offence under the Negotiable Instruments Act, 1881 is most directly attracted?

  1. Drawing a cheque on an account with insufficient funds Correct answer.
  2. Making a negotiable instrument without consideration
  3. Forgery of a negotiable instrument
  4. Crossing a cheque improperly

Explanation

Section 138 deals with dishonour of a cheque issued for discharge of a legally enforceable debt or liability where funds are insufficient or the account is closed. Drawing a cheque on an account that has been closed falls within this provision, subject to the statutory notice and period requirements.

Question 31Paper 4 (subject areas not enumerated in the source)

Under the Indian Partnership Act, 1932, a partner who carries on a business of the same nature as that of the firm without the consent of the other partners:

  1. Must account for and pay to the firm all profits made in that business Correct answer.
  2. Forfeits only his share in the firm's existing assets
  3. May retain the profits if the competing business is carried on in his own name
  4. Is liable to be prosecuted for cheating

Explanation

Section 16 imposes a duty on a partner not to carry on a competing business without the consent of the other partners. If he does so, he must account for and pay to the firm all profits made by him in that business.

Question 32Paper 4 (subject areas not enumerated in the source)

Under the Companies Act, 2013, a private company proposes to accept deposits from its members. Which condition must be satisfied?

  1. The company must first convert itself into a public company
  2. The acceptance must be by means of a circular sent to all members disclosing the financial position Correct answer.
  3. The deposit must be accepted only through a scheduled bank
  4. The deposit must be secured by a charge on the promoters' personal assets

Explanation

Section 73 and the Companies (Acceptance of Deposits) Rules, 2014 permit a private company to accept deposits from its members subject to compliance, including issuing a circular to members disclosing the financial position, the credit rating where applicable, and the terms of the deposit. Conversion into a public company is not required.

Question 33Paper 4 (subject areas not enumerated in the source)

A consumer purchases a pressure cooker that bursts on first use and injures him. Under the Consumer Protection Act, 2019, he may claim compensation for the injury before the District Commission. This liability of the manufacturer is best described as:

  1. Product liability Correct answer.
  2. Restrictive trade practice
  3. Deficiency in service
  4. Unfair trade practice

Explanation

Chapter VI of the Consumer Protection Act, 2019 imposes product liability on a product manufacturer or seller for harm caused by a defective product or inadequate warnings. A bursting pressure cooker is a manufacturing defect causing injury, squarely covered by product liability.

Question 34Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, an agreement made without consideration is enforceable when it is:

  1. Expressed in writing and registered, and made out of natural love and affection between parties standing in a near relation Correct answer.
  2. Made orally between two merchants in the ordinary course of business
  3. Supported by a moral obligation alone, without any near relationship
  4. Made by a minor for the benefit of his estate

Explanation

Section 25(1) makes a written and registered agreement enforceable without consideration if it is made out of natural love and affection between parties standing in a near relation to each other. All the stated conditions must be satisfied cumulatively.

Question 35Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, which of the following is a mode of discharge of a contract by operation of law rather than by the act of the parties?

  1. Discharge by tender of performance
  2. Discharge by mutual agreement
  3. Discharge by performance of the contract
  4. Discharge by material alteration of the contract without consent Correct answer.

Explanation

Material alteration of a written contract by one party without the consent of the other discharges the contract by operation of law. Mutual agreement and performance are acts of the parties themselves.

Question 36Paper 4 (subject areas not enumerated in the source)

A company wishes to alter its object clause to enter a new line of business. Under the Companies Act, 2013, the alteration requires:

  1. Approval of the Registrar without any resolution of members
  2. An ordinary resolution and approval of the stock exchange only
  3. A special resolution of the members and filing with the Registrar, with the power to effect changes confined to specified matters Correct answer.
  4. Only a board resolution passed at a board meeting

Explanation

Section 13 permits alteration of the memorandum, including the objects clause, only by a special resolution, subject to the specified matters and to filing with the Registrar. The Registrar may register the alteration and give notice to other regulators as required.

Question 37Paper 4 (subject areas not enumerated in the source)

Under the Companies Act, 2013, a director of a company who is disqualified under Section 164 may continue to act as a director of another company in which he was appointed before the disqualification. This is:

  1. Permitted, because the disqualification applies only to the company that caused it
  2. Permitted, because disqualification takes effect only after the annual general meeting
  3. Not permitted, unless the other company passes a special resolution
  4. Not permitted, because the disqualification operates in respect of all companies Correct answer.

Explanation

Section 167 provides that a director who incurs a disqualification under Section 164 vacates office in all companies in which he holds the office of director. The disqualification is personal and operates across all directorships.

Question 38Paper 4 (subject areas not enumerated in the source)

A firm registered under the Indian Partnership Act, 1932 sells goods to a buyer who fails to pay. The firm sues the buyer. Which statement about the effect of registration is correct?

  1. Registration is compulsory and an unregistered firm is dissolved automatically
  2. Registration enables the firm to enforce its rights in court, but registration is optional Correct answer.
  3. Registration is compulsory and an unregistered firm can never be sued
  4. Registration is optional and has no effect on the firm's right to sue

Explanation

Registration under the Act is optional, but Section 69 denies an unregistered firm the right to enforce its claims in court until it is registered. Registration therefore confers enforceability of contractual and other rights.

Question 39Paper 4 (subject areas not enumerated in the source)

Under the Negotiable Instruments Act, 1881, a person who signs a promissory note as a maker in a representative capacity:

  1. Is personally liable unless he clearly indicates that he signs in a representative capacity Correct answer.
  2. Is never personally liable even if he signs without qualification
  3. Is liable only if the principal is a company
  4. Is always personally liable regardless of the form of signature

Explanation

Section 29 provides that a person signing an instrument in a representative capacity is not personally liable if he discloses that he signs as an agent or representative. If the signature does not indicate the representative character, he becomes personally liable.

Question 40Paper 4 (subject areas not enumerated in the source)

A cheque is drawn in favour of a fictitious payee and endorsed by the drawer himself. Such an instrument is:

  1. Invalid, because a cheque must be drawn in favour of a real person Correct answer.
  2. Valid, because a cheque may be drawn in favour of a fictitious person
  3. Valid only if the bank confirms the payee's identity
  4. Invalid unless the fictitious name is registered with the bank

Explanation

Section 5 defines a bill of exchange and Section 6 a cheque; a cheque may be drawn in favour of a fictitious person under the scheme of the Act, and it becomes bearer if endorsed by the drawer. The Act does not require the payee to be a real, existing person.

Question 41Paper 4 (subject areas not enumerated in the source)

Under the Consumer Protection Act, 2019, the limitation period for filing a complaint before the District Commission is:

  1. One year from the date of purchase
  2. Six months from the date of the invoice
  3. Three years from the date of the defect
  4. Two years from the date on which the cause of action arises Correct answer.

Explanation

Section 69 provides that a complaint must be filed within two years from the date on which the cause of action arises. The Commission may condone delay if the complainant shows sufficient cause.

Question 42Paper 4 (subject areas not enumerated in the source)

Under the Sale of Goods Act, 1930, where the seller delivers a larger quantity than agreed, the buyer may:

  1. Retain the entire quantity without paying for the excess
  2. Accept only the agreed quantity and must pay for the excess at the agreed rate
  3. Reject only the excess and must accept the agreed quantity
  4. Reject the whole, or accept the agreed quantity and reject the rest, or accept the whole Correct answer.

Explanation

Section 37 deals with delivery of a wrong quantity. Where the seller delivers a quantity larger than agreed, the buyer may reject the whole, accept the quantity agreed and reject the rest, or accept the whole and pay at the contract rate for the excess.

Question 43Paper 4 (subject areas not enumerated in the source)

Under the Companies Act, 2013, which of the following persons is eligible to be appointed as an independent director of a listed company?

  1. A person who has no material pecuniary relationship with the company, its promoters or directors Correct answer.
  2. A person whose relative is a key managerial person of the company
  3. A person who is a whole-time director of the company's holding company
  4. A person who has been an employee of the company within the preceding three years

Explanation

Section 149(6) requires an independent director to be a person of integrity with relevant expertise and experience, and to have no material pecuniary relationship with the company, its promoters, directors or holding company. Absence of such a relationship is the central eligibility criterion.

Question 44Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, a contract caused by undue influence is:

  1. Void from the beginning
  2. Valid and enforceable without any remedy
  3. Illegal and punishable
  4. Voidable at the option of the party whose consent was so caused Correct answer.

Explanation

Section 19A provides that a contract induced by undue influence is voidable at the option of the party whose consent was so caused. The court may set it aside or enforce it on such terms as appear just.

Question 45Paper 4 (subject areas not enumerated in the source)

A company registered under the Companies Act, 2013 issues bonus shares to its members. Which condition must be satisfied?

  1. The articles must authorise the issue and the company must have sufficient free reserves, share premium or capital redemption reserve Correct answer.
  2. The issue must be approved by the Registrar of Companies
  3. The bonus shares must be issued at a premium
  4. The company must first pay a dividend of at least ten per cent

Explanation

Section 63 permits a company to issue fully paid bonus shares only if its articles authorise the issue and it has sufficient free reserves, share premium or capital redemption reserve. The shares are issued out of capitalised profits, not by way of a dividend.

Question 46Paper 4 (subject areas not enumerated in the source)

Under the Indian Partnership Act, 1932, a person who lends money to a firm and takes a share of profits as a return on his investment:

  1. Is personally liable as a partner for all debts of the firm
  2. Becomes a partner by operation of law
  3. Is treated as a partner only if the firm is registered
  4. Is not a partner, because he does not carry on the business in common with the others Correct answer.

Explanation

Section 2(b) defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A lender receiving a share of profits as a return on his investment does not thereby carry on the business in common and is not a partner.

Question 47Paper 4 (subject areas not enumerated in the source)

Under the Companies Act, 2013, a company's financial statements must be filed with the Registrar in Form AOC-4 within:

  1. Thirty days from the date of the annual general meeting Correct answer.
  2. Ninety days from the date of the board meeting
  3. One hundred and eighty days from the close of the financial year
  4. Sixty days from the close of the financial year

Explanation

Section 137 requires a copy of the financial statements, along with the required annexures, to be filed with the Registrar within thirty days of the date of the annual general meeting. Where the AGM is not held, filing is required within the period specified by the section.

Question 48Paper 4 (subject areas not enumerated in the source)

Under the Negotiable Instruments Act, 1881, a holder in due course is a person who takes an instrument:

  1. For value, after maturity, with notice of the defect
  2. After maturity, without consideration, in good faith
  3. For value, before maturity, in good faith and without notice of any defect in the transferor's title Correct answer.
  4. By way of gift, before maturity, without notice

Explanation

Section 9 defines a holder in due course as a person who takes a negotiable instrument for consideration, before maturity, in good faith and without notice of any defect in the title of the person transferring it. All these conditions must be satisfied cumulatively.

Question 49Paper 4 (subject areas not enumerated in the source)

A company's articles provide that the board may appoint additional directors up to a specified number. The board appoints additional directors exceeding that number. The appointment is:

  1. Valid, because the board's power is unfettered
  2. Valid, because additional directors do not count towards the board strength
  3. Invalid to the extent it exceeds the limit fixed by the articles Correct answer.
  4. Valid, subject only to the approval of the Registrar

Explanation

Section 161 permits the board to appoint additional directors only if the articles authorise such appointment and the number does not exceed the maximum strength fixed for the board by the articles. An appointment beyond that limit is invalid to the extent of the excess.

Question 50Paper 4 (subject areas not enumerated in the source)

Under the Indian Contract Act, 1872, a surety is discharged from liability when the creditor, without the surety's consent, releases the principal debtor. This rule rests on the principle that:

  1. The surety's liability is co-extensive with that of the principal debtor Correct answer.
  2. The surety is a joint promisor with the creditor
  3. The creditor must always sue the principal debtor first
  4. The surety's liability arises only after the creditor's death

Explanation

Section 134 provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released. This follows from the principle in Section 128 that the surety's liability is co-extensive with that of the principal debtor.