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CMA Foundation Paper 1 (FBLC) study materials
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CMA Foundation Paper 1 (FBLC) practice questions

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Question 1Fundamentals of Business Laws

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. Consensus between parties
  2. Lawful object
  3. Enforceability by law Correct answer.
  4. Offer and acceptance

Explanation

Section 2(h) defines a contract as an agreement enforceable by law, so enforceability is the distinguishing element. Every agreement arises from offer and acceptance producing consensus, and lawful object is needed for enforceability rather than being the feature that separates agreement from contract.

Question 2Fundamentals of Business Laws

A offers to sell his car to B for ₹5,00,000 and states that the offer will remain open for seven days. Before those seven days expire, A revokes the offer. Which statement reflects the legal position under the Indian Contract Act, 1872?

  1. The revocation is valid only after B rejects the offer in writing
  2. The revocation is void because the offer was stated to be open for seven days
  3. The revocation is valid unless B paid consideration for keeping the offer open Correct answer.
  4. The revocation is invalid because A must give reasonable notice of revocation

Explanation

A promise to keep an offer open is binding only when supported by consideration, as in a standard option contract. Without such consideration, the offeror may revoke before acceptance, and communication of revocation must reach the offeree before acceptance but need not wait for seven days.

Question 3Fundamentals of Business Laws

Which type of contract arises where one party has already performed his obligation and the other party's obligation is still outstanding?

  1. Unenforceable contract
  2. Executed contract
  3. Unilateral contract Correct answer.
  4. Voidable contract

Explanation

A unilateral contract is one where only one party has to perform at the time it becomes enforceable, the other having already performed. An executed contract is one where both parties have fully performed, while voidable and unenforceable contracts describe validity rather than the state of performance.

Question 4Fundamentals of Business Laws

An agreement is made without any consideration. Which of the following would still be enforceable under the Indian Contract Act, 1872?

  1. A promise by a debtor to repay a time-barred debt
  2. A promise to make a gift of immovable property
  3. A promise made out of natural love to a stranger
  4. A promise to pay for past voluntary services rendered to the promisor Correct answer.

Explanation

Section 25(2) makes a promise to compensate a person who has already voluntarily done something for the promisor enforceable even without consideration. A time-barred debt requires a written and signed promise under Section 25(3), and promises to strangers or pure gifts lack the statutory exceptions.

Question 5Fundamentals of Business Laws

A minor enters into a contract for the purchase of a bicycle and pays the price. Which statement correctly states the legal position?

  1. The contract is enforceable once the minor attains majority
  2. The agreement is void and the minor can recover the price paid Correct answer.
  3. The contract is voidable at the minor's option
  4. The contract is valid because the minor paid consideration

Explanation

An agreement with a minor is void ab initio under Indian law, and the minor is entitled to restitution of money paid because the contract never existed. The agreement does not become enforceable on attaining majority unless there is a fresh promise supported by consideration.

Question 6Fundamentals of Business Laws

A contract is caused by coercion. What is the effect on the contract?

  1. The contract is unenforceable by either party
  2. The contract is void ab initio
  3. The contract remains valid but the coerced party gets damages
  4. The contract is voidable at the option of the aggrieved party Correct answer.

Explanation

Section 19 provides that an agreement caused by coercion, undue influence, fraud or misrepresentation is voidable at the option of the party whose consent was so caused. The aggrieved party may rescind or insist on performance on terms, but the contract is not automatically void.

Question 7Fundamentals of Business Laws

Which of the following agreements is expressly declared void under the Indian Contract Act, 1872?

  1. Agreement in restraint of legal proceedings Correct answer.
  2. Agreement to pay a debt by instalments
  3. Agreement to employ a person for a fixed term
  4. Agreement to sell goods at a future price

Explanation

Section 28 declares agreements in restraint of legal proceedings void because they restrict a party's right to enforce legal rights in ordinary courts. The remaining agreements are ordinary commercial arrangements that are lawful and enforceable.

Question 8Fundamentals of Business Laws

A agrees to sell to B a horse which, unknown to both parties, had already died at the time of the agreement. What is the status of the agreement?

  1. Voidable at B's option
  2. Contingent, because the death was uncertain
  3. Valid, because A must compensate B
  4. Void, because the subject matter did not exist Correct answer.

Explanation

Section 20 makes an agreement void where both parties are under a mistake as to a matter of fact essential to the agreement. Since the horse was already dead, the subject matter did not exist and the agreement is void.

Question 9Fundamentals of Business Laws

A contract requires performance within a reasonable time but does not fix any date. Which rule applies?

  1. The promisor may choose any time he wishes
  2. The contract is void for uncertainty
  3. Performance must be within a reasonable time as determined by the court Correct answer.
  4. The promisee may fix the time unilaterally

Explanation

Section 46 provides that where a contract does not specify a time for performance, the obligation must be performed within a reasonable time. What is reasonable is a question of fact decided by the court in the circumstances of the case.

Question 10Fundamentals of Business Laws

A owes B ₹50,000. A, B and C agree that C will pay the debt to B and A will be discharged. This arrangement is known as:

  1. Alteration
  2. Rescission
  3. Novation Correct answer.
  4. Remission

Explanation

Novation under Section 62 occurs when the parties substitute a new contract or a new party in place of the old one, discharging the original obligation. Here C replaces A, so the original contract is extinguished and a new one arises.

Question 11Fundamentals of Business Laws

A party to a contract prevents the other party from performing it. What is the consequence under the Indian Contract Act, 1872?

  1. The preventing party cannot claim performance and is liable for damages Correct answer.
  2. Both parties are discharged without liability
  3. The contract becomes void automatically
  4. The performing party is liable for non-performance

Explanation

Section 53 provides that where one party prevents performance by the other, the party so preventing cannot claim the benefit of the contract and is liable to compensate the other for loss. The non-prevented party is excused from performance.

Question 12Fundamentals of Business Laws

Which of the following is a remedy available only to a party who has performed or is ready and willing to perform the contract?

  1. Specific performance Correct answer.
  2. Rescission
  3. Damages
  4. Quantum meruit

Explanation

Specific performance under the Specific Relief Act, 1963 requires the claimant to show readiness and willingness to perform his part of the contract. Damages, rescission and quantum meruit may be claimed in other situations, including where the claimant has not fully performed.

Question 13Fundamentals of Business Laws

A contract contains a clause that fixes ₹5,00,000 as the amount payable on breach, regardless of the actual loss suffered. How will a court treat this clause?

  1. It is void because parties cannot fix damages
  2. It is a penalty and the court awards only reasonable compensation Correct answer.
  3. It is a valid liquidated damages clause enforceable in full
  4. It is enforceable only if the actual loss equals the fixed sum

Explanation

Under Section 74, a sum named in the contract is treated as the maximum amount the court may award, and the court awards only reasonable compensation not exceeding that sum. Indian law does not distinguish liquidated damages from penalty in the English manner.

Question 14Fundamentals of Business Laws

Under the Sale of Goods Act, 1930, when does property in specific or ascertained goods pass to the buyer?

  1. When the parties intend it to pass Correct answer.
  2. On the signing of the invoice
  3. On payment of the price
  4. On delivery of the goods

Explanation

Section 19 provides that in a contract for the sale of specific or ascertained goods, property passes when the parties intend it to pass. The intention is ascertained from the terms of the contract, the conduct of the parties and the circumstances of the case.

Question 15Fundamentals of Business Laws

A sells and delivers a car to B on credit without retaining any right of disposal. A then becomes insolvent before receiving payment. Who bears the loss?

  1. B, because property passed on sale Correct answer.
  2. The Official Receiver, because A is insolvent
  3. A, because the price is unpaid
  4. Both equally, because credit was given

Explanation

Where property in the goods has passed to the buyer, the goods are at the buyer's risk, and the seller's remedy is to sue for the price as an unsecured creditor. The unpaid seller's lien is lost once possession is delivered without a right of disposal.

Question 16Fundamentals of Business Laws

Which of the following is a condition in a contract of sale of goods?

  1. A stipulation collateral to the main purpose of the contract
  2. A warranty of merchantable quality
  3. A stipulation essential to the main purpose of the contract Correct answer.
  4. A promise to pay the price by instalments

Explanation

Section 12 distinguishes conditions, which are essential to the main purpose of the contract and whose breach gives a right to repudiate, from warranties, which are collateral. A condition therefore goes to the root of the contract.

Question 17Fundamentals of Business Laws

An unpaid seller who is in possession of the goods may exercise which right against the goods when the buyer becomes insolvent?

  1. Right to sue for the price only
  2. Right to rescind the contract only
  3. Right of lien and right of resale Correct answer.
  4. Right of stoppage in transit only

Explanation

Under the Sale of Goods Act, an unpaid seller in possession may exercise a lien over the goods and may resell them after giving notice where the buyer defaults. Stoppage in transit applies only after the seller has parted with possession.

Question 18Fundamentals of Business Laws

Under the Negotiable Instruments Act, 1881, a promissory note must contain which of the following?

  1. A direction to a drawee to accept the instrument
  2. An unconditional undertaking to pay a certain sum Correct answer.
  3. An order to a bank to pay a third party
  4. A conditional promise to pay on the happening of an event

Explanation

Section 4 requires a promissory note to contain an unconditional undertaking, signed by the maker, to pay a certain sum in money to or to the order of a certain person. A conditional promise or an order to another person would not qualify.

Question 19Fundamentals of Business Laws

A bill of exchange is drawn by X on Y in favour of Z. Y writes 'accepted' and signs on the bill. What is Y's liability?

  1. Y is the acceptor and is primarily liable to pay the bill Correct answer.
  2. Y is the endorser and is liable only to Z
  3. Y is the drawer and is liable only if X defaults
  4. Y incurs no liability because acceptance is voluntary

Explanation

By accepting the bill, the drawee becomes the acceptor and undertakes to pay it according to its tenor. The acceptor is the principal debtor on the instrument, while the drawer becomes liable only on default of the acceptor.

Question 20Fundamentals of Business Laws

Which of the following persons cannot be a holder in due course of a negotiable instrument?

  1. A person who acquires the instrument after maturity Correct answer.
  2. A person who takes the instrument in good faith
  3. A payee who receives the instrument before it falls due
  4. A person who acquires the instrument for consideration before maturity

Explanation

Section 9 requires a holder in due course to obtain the instrument for consideration, before maturity and in good faith and without notice of any defect in title. A person acquiring the instrument after maturity is a holder but not a holder in due course.

Question 21Fundamentals of Business Laws

Under the Indian Partnership Act, 1932, which of the following is a consequence of registration of a firm?

  1. The firm acquires a separate legal personality
  2. The firm becomes a body corporate
  3. The firm can enforce its rights in a court of law Correct answer.
  4. The partners' liability becomes limited

Explanation

Registration under the Partnership Act enables a firm to enforce its contractual rights in court against third parties; an unregistered firm suffers from certain disabilities. Registration does not create a separate legal entity, and partners' liability remains unlimited.

Question 22Fundamentals of Business Laws

A and B are partners in a firm. A, without the consent of B, borrows money in the firm's name for his personal business. What is B's liability?

  1. B is not liable because the borrowing was outside the scope of the firm's business Correct answer.
  2. B is liable only to the extent of his capital contribution
  3. B is liable only if the lender proves good faith
  4. B is liable because all partners are jointly and severally liable for all acts

Explanation

Under Section 18, a partner is the agent of the firm only for acts done in the ordinary course of the firm's business. A borrowing for personal business is outside the scope of the firm's business, so B is not bound by that act.

Question 23Fundamentals of Business Laws

Under the Limited Liability Partnership Act, 2008, which of the following is correct?

  1. The LLP has perpetual succession and a legal entity separate from its partners Correct answer.
  2. The LLP dissolves on the retirement of any designated partner
  3. The partners of an LLP have unlimited liability for the LLP's debts
  4. An LLP cannot own property in its own name

Explanation

Section 3 of the LLP Act confers on an LLP the status of a body corporate with perpetual succession and a legal entity separate from its partners. The liability of partners is limited to their agreed contribution, and the LLP may hold property in its own name.

Question 24Fundamentals of Business Laws

Which of the following is a characteristic feature of a company incorporated under the Companies Act, 2013?

  1. Dissolution on the death of a majority shareholder
  2. Separate legal entity with perpetual succession Correct answer.
  3. Unlimited liability of members
  4. Absence of a common seal as a mark of identity

Explanation

A company is a body corporate with a separate legal entity and perpetual succession, meaning it survives changes in membership. Members' liability is limited, and the company continues until wound up under the Act.

Question 25Fundamentals of Business Laws

Under the Companies Act, 2013, which document governs the internal management of a company?

  1. Prospectus
  2. Certificate of Incorporation
  3. Articles of Association Correct answer.
  4. Memorandum of Association

Explanation

The Articles of Association contain the regulations for the internal management of the company, including the conduct of meetings and the powers of directors. The Memorandum governs the company's relationship with the outside world and defines its objects.

Question 26Fundamentals of Business Laws

Under the Indian Contract Act, 1872, which element is essential for an agreement to become a valid contract?

  1. Lawful consideration and lawful object Correct answer.
  2. Registration with the registrar of contracts
  3. Payment of stamp duty on the agreement
  4. Approval by a notary public

Explanation

Section 10 of the Indian Contract Act, 1872 provides that agreements become contracts when made by free consent of parties competent to contract, for a lawful consideration and with a lawful object, and not expressly declared void. Notarisation, registration and stamping are separate formalities and are not the statutory test of validity.

Question 27Fundamentals of Business Laws

A minor enters into a contract for the purchase of a bicycle and pays part of the price. What is the legal position of such an agreement under Indian contract law?

  1. It is voidable at the minor's option
  2. It is a valid contract binding both parties
  3. It is void ab initio Correct answer.
  4. It becomes valid when the minor attains majority

Explanation

An agreement with a person who is not competent to contract, including a minor, is void from the beginning (void ab initio). A minor's agreement creates no legal obligation, though the minor may be liable in restitution or under quasi-contract for necessaries supplied. Ratification on attaining majority does not validate the earlier void agreement.

Question 28Fundamentals of Business Laws

A offers to sell his motorcycle to B and states that the offer will remain open for seven days. Before B replies, A withdraws the offer and communicates the withdrawal to B. What is the effect?

  1. The offer lapses because withdrawal was communicated before acceptance Correct answer.
  2. B may still accept and bind A within the seven days
  3. The offer survives because the stated seven-day period has not expired
  4. The withdrawal is ineffective unless it is in writing

Explanation

Under the Indian Contract Act, 1872, a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, provided the revocation is communicated. A fixed period for keeping the offer open does not prevent revocation unless it is a separate binding contract supported by consideration. Communication of the withdrawal ends the offer.

Question 29Fundamentals of Business Laws

Which type of contract is enforceable only at the option of the aggrieved party because consent was obtained by undue influence?

  1. A contingent contract
  2. A voidable contract Correct answer.
  3. An unenforceable contract
  4. A void contract

Explanation

When consent is caused by undue influence, the contract is voidable at the option of the party whose consent was so caused. That party may rescind the contract or insist that it be performed on fair terms. A void contract has no legal effect at all, while an unenforceable contract is valid but cannot be enforced for want of some formality.

Question 30Fundamentals of Business Laws

A, a trader, supplies goods to B on the assurance that B will pay within 30 days. B never intends to pay and makes the promise knowing it cannot be fulfilled. What is the nature of B's conduct?

  1. Innocent misrepresentation
  2. Fraudulent misrepresentation Correct answer.
  3. Mistake of fact
  4. Undue influence

Explanation

A false statement made knowingly, without belief in its truth, or recklessly as to its truth, with the intent that the other party should act on it, amounts to fraud under the Indian Contract Act, 1872. A promise made with no intention of performing it falls within fraudulent misrepresentation. The aggrieved party may rescind the contract and claim damages.

Question 31Fundamentals of Business Laws

Which of the following is a quasi-contractual obligation recognised under the Indian Contract Act, 1872?

  1. A supply of necessaries to a person incapable of contracting Correct answer.
  2. A promise to make a gift to a relative
  3. An agreement to share profits of a business
  4. A claim for damages for breach of contract

Explanation

Quasi-contracts are obligations imposed by law where there is no actual contract, to prevent unjust enrichment. Section 68 covers the supply of necessaries to a person incapable of contracting, such as a minor or a person of unsound mind, and the supplier is entitled to reimbursement from that person's property. The other options involve promises or agreements rather than restitutionary obligations.

Question 32Fundamentals of Business Laws

A agrees to sell his house to B if B obtains a housing loan sanctioned by a bank within three months. B's loan application is rejected and no sanction is granted. What happens to the contract?

  1. It is automatically renewed for a further period
  2. It becomes voidable at A's option
  3. It becomes void when the event becomes impossible Correct answer.
  4. It remains valid and B must arrange funds otherwise

Explanation

A contingent contract to do or not to do something if an uncertain future event happens cannot be enforced until that event occurs. If the event becomes impossible, the contract becomes void under the Indian Contract Act, 1872. The rejection of the loan makes the agreed event impossible, so the contract ceases to have effect.

Question 33Fundamentals of Business Laws

A contract of sale of goods under the Sale of Goods Act, 1930 is best described as which of the following?

  1. A contract by which the seller transfers or agrees to transfer ownership in goods to the buyer for a price Correct answer.
  2. A contract by which the seller appoints the buyer as an agent to sell goods
  3. A contract by which the seller pledges goods as security for a loan
  4. A contract by which the seller lets goods on hire to the buyer for periodic payments

Explanation

Section 4 of the Sale of Goods Act, 1930 defines a contract of sale as one by which the seller transfers or agrees to transfer the property in goods to the buyer for a price. Where the transfer is to take place at a future time or subject to conditions, it is an agreement to sell. Hire purchase, pledge and agency are distinct transactions outside this definition.

Question 34Fundamentals of Business Laws

A sells 100 bags of rice to B, the bags not being identified or separated at the time of the contract. When does property in the goods pass to B under the Sale of Goods Act, 1930?

  1. When the contract is signed
  2. When the buyer takes physical delivery
  3. When the price is fully paid
  4. When the goods are unconditionally appropriated to the contract with the assent of the other party Correct answer.

Explanation

For unascertained goods, no property can pass until the goods are ascertained. Section 23 of the Sale of Goods Act, 1930 provides that property passes when goods of that description are unconditionally appropriated to the contract, either by the seller with the buyer's assent or by the buyer with the seller's assent. Payment and delivery are not decisive tests.

Question 35Fundamentals of Business Laws

Under the Sale of Goods Act, 1930, which of the following amounts to an implied condition as to fitness for a particular purpose?

  1. The buyer makes known the particular purpose to the seller and relies on the seller's skill, and the goods are of a description the seller supplies in the course of business Correct answer.
  2. The buyer buys goods under their trade name
  3. The buyer pays the price in advance
  4. The buyer examines the goods and buys them after inspection

Explanation

Section 16 of the Sale of Goods Act, 1930 implies a condition that goods are reasonably fit for a particular purpose when the buyer makes the purpose known to the seller, relies on the seller's skill or judgment, and the goods are of a description supplied by the seller in the course of business. This implied condition does not apply where the buyer buys under a patent or trade name.

Question 36Fundamentals of Business Laws

A delivers a refrigerator to B on 'sale or return' and allows B seven days to decide. B does not communicate any decision within the seven days. What is the consequence under the Sale of Goods Act, 1930?

  1. B is deemed to have adopted the sale Correct answer.
  2. The transaction becomes a pledge
  3. The goods are deemed returned to A
  4. The contract lapses automatically

Explanation

Where goods are delivered to a buyer on approval or 'on sale or return', the property passes to the buyer when the buyer signifies approval or acceptance, or does any act adopting the transaction. If the buyer retains the goods beyond the fixed period without giving notice of rejection, the sale is deemed to have been adopted. The buyer therefore becomes liable for the price.

Question 37Fundamentals of Business Laws

Under the Negotiable Instruments Act, 1881, which of the following is an essential characteristic of a cheque?

  1. It must be payable after a fixed period of ninety days
  2. It must be accepted by the drawee before payment
  3. It is drawn on a specified banker and payable on demand Correct answer.
  4. It must be stamped with revenue stamps before issue

Explanation

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It is therefore always payable on demand and requires no acceptance. Cheques are exempt from stamp duty under the Act.

Question 38Fundamentals of Business Laws

A bill of exchange is dishonoured by non-payment. The holder fails to give notice of dishonour to an indorser who could have been made liable. What is the effect on that indorser's liability?

  1. The indorser remains fully liable because notice is only a formality
  2. The bill automatically becomes a promissory note
  3. The indorser's liability doubles as a penalty
  4. The indorser is discharged from liability Correct answer.

Explanation

Under the Negotiable Instruments Act, 1881, notice of dishonour must be given to all parties whom the holder seeks to hold liable, other than the maker or acceptor. Failure to give such notice discharges the indorser who is thereby deprived of the opportunity to protect his interest. The holder may still proceed against parties not entitled to notice.

Question 39Fundamentals of Business Laws

Under the Indian Partnership Act, 1932, what is the liability of a partner for the acts of the firm?

  1. It is limited to the capital contributed by that partner
  2. It is joint and several with the other partners Correct answer.
  3. It is excluded once the firm is registered
  4. It arises only if the partner personally authorised the act

Explanation

Section 25 of the Indian Partnership Act, 1932 provides that every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. The liability is unlimited and is not confined to the partner's capital contribution. Registration of the firm does not alter this substantive liability.

Question 40Fundamentals of Business Laws

A partnership firm is not registered. Which of the following disabilities applies to the firm under the Indian Partnership Act, 1932?

  1. The firm cannot enter into any contract with third parties
  2. The firm cannot file a suit to enforce a right arising from a contract against a third party Correct answer.
  3. The partners lose the right to share profits
  4. The firm is dissolved by operation of law

Explanation

Section 69 of the Indian Partnership Act, 1932 imposes disabilities on an unregistered firm, including that no suit to enforce a right arising from a contract may be instituted by or on behalf of the firm against any third party. The firm may still enter into contracts and continues to exist. These disabilities can be removed by subsequent registration.

Question 41Fundamentals of Business Laws

A, B and C are partners. C retires from the firm without giving public notice of retirement. A creditor who had dealt with the firm before C's retirement extends fresh credit to the firm after the retirement. Is C liable?

  1. C is liable only for half of the fresh credit
  2. C is not liable because retirement ends all liability immediately
  3. C is liable to the creditor because no public notice of retirement was given Correct answer.
  4. C is liable only if the creditor proves C signed the new contract

Explanation

Under the Indian Partnership Act, 1932, a retiring partner continues to be liable to third parties for acts of the firm done before retirement and, where no public notice of retirement is given, also for acts done after retirement until notice is given. Public notice may be given by the retiring partner or the continuing partners. The creditor who extended credit without notice of retirement may hold C liable.

Question 42Fundamentals of Business Laws

Under the Limited Liability Partnership Act, 2008, which of the following statements about partners of an LLP is correct?

  1. The LLP must have at least three designated partners
  2. A partner is an agent of the LLP for the business of the LLP Correct answer.
  3. A partner's liability is limited to the amount of his capital contribution
  4. Every partner is personally liable for the debts of the LLP

Explanation

Section 26 of the Limited Liability Partnership Act, 2008 provides that every partner is an agent of the LLP for the business of the LLP. However, a partner is not personally liable for the obligations of the LLP solely by reason of being a partner; liability is limited to the contribution agreed. The Act requires at least two designated partners, one of whom must be resident in India.

Question 43Fundamentals of Business Laws

Which of the following is a consequence of the separate legal personality of a company incorporated under the Companies Act, 2013?

  1. The directors are personally liable for all contracts of the company
  2. The company can own property in its own name and sue and be sued in its own name Correct answer.
  3. The company ceases to exist when a shareholder dies
  4. The company's property is treated as the property of the shareholders

Explanation

On incorporation, a company becomes a body corporate with perpetual succession and a distinct legal personality. It can own property, enter into contracts, and sue and be sued in its own name. Shareholders are distinct from the company, and the company's existence is not affected by changes in membership.

Question 44Fundamentals of Business Laws

Under the Companies Act, 2013, what is the significance of the memorandum of association of a company?

  1. It governs the internal management of the company
  2. It contains the auditor's report on the financial statements
  3. It records the minutes of board meetings
  4. It sets out the constitution and scope of the company's activities Correct answer.

Explanation

The memorandum of association is the charter of the company and defines its constitution, name, registered office, objects, liability and capital. It establishes the scope of the company's activities and any act beyond its objects may be ultra vires. Internal management is regulated by the articles of association.

Question 45Fundamentals of Business Laws

A company's articles of association contain a clause restricting the transfer of shares, but the restriction is not stated in the memorandum. Is the clause valid?

  1. It is valid if it is consistent with the memorandum and the Companies Act, 2013 Correct answer.
  2. It is invalid because transfer restrictions must be in the memorandum
  3. It is invalid because shares of a company are always freely transferable
  4. It is valid only if approved by the Registrar of Companies

Explanation

The articles of association contain the regulations for internal management, including restrictions on transfer of shares, and they operate as a contract between the company and its members. Such a restriction is valid if it is consistent with the memorandum and the Companies Act, 2013. The memorandum need not contain the restriction.

Question 46Fundamentals of Business Laws

Which of the following is an example of an express contract?

  1. A contract implied from the conduct of the parties
  2. A contract inferred from a course of dealing
  3. A contract imposed by law to prevent unjust enrichment
  4. A contract created by words spoken or written by the parties Correct answer.

Explanation

An express contract is one in which the terms are stated in words, spoken or written, at the time of formation. Implied contracts arise from the conduct of the parties or the circumstances. Quasi-contracts are imposed by law rather than created by agreement.

Question 47Fundamentals of Business Laws

A agrees to sell to B a plot of land for ₹10 lakh. Both parties believe the plot is 200 square metres, but it is actually 150 square metres. What is the position of the agreement?

  1. It is void because both parties were mistaken about a matter of fact essential to the agreement Correct answer.
  2. It is voidable at the option of the seller only
  3. It is enforceable with the buyer paying the full price
  4. It is valid because both parties made the same mistake

Explanation

Under the Indian Contract Act, 1872, an agreement is void where both parties are under a mistake as to a matter of fact essential to the agreement. The area of the plot is essential to the bargain, and the common mistake goes to the substance of the subject matter. The agreement therefore has no legal effect.

Question 48Fundamentals of Business Laws

Under the Indian Contract Act, 1872, what is the effect of a contract that is impossible to perform at the time it is made?

  1. It is void Correct answer.
  2. It is voidable at the option of the promisor
  3. It is valid and enforceable
  4. It becomes valid after six months

Explanation

Section 56 of the Indian Contract Act, 1872 provides that an agreement to do an act impossible in itself is void. A contract may become void on subsequent impossibility, but initial impossibility of the very act agreed renders the agreement void from the outset.

Question 49Fundamentals of Business Laws

A employs B as an agent to sell goods on his behalf. B sells the goods at a price higher than the minimum fixed by A. What is B's duty regarding the excess amount?

  1. B must return the excess to the buyer
  2. B must account for the excess to A Correct answer.
  3. B may retain the excess as a reward
  4. B must share the excess equally with A

Explanation

Under the Indian Contract Act, 1872, an agent is bound to render proper accounts to the principal and to pay to the principal all sums received on the principal's account. Any benefit obtained in the course of the agency belongs to the principal. The agent cannot keep secret profits without the principal's consent.

Question 50Fundamentals of Business Laws

Which of the following is required for a valid ratification of an act done by a person on behalf of another without authority?

  1. The ratification must be made within 24 hours of the act
  2. The act must be ratified with full knowledge of the facts and by a person competent to contract Correct answer.
  3. The ratification must be supported by fresh consideration
  4. The ratification must be registered with the court

Explanation

Ratification under the law of agency requires that the act be done on behalf of the principal, that the principal be in existence and competent to contract, and that the ratification be made with full knowledge of the facts. Valid ratification relates back to the date of the original act. No fresh consideration or registration is required.