CMA Inter Paper 5: Business Laws and Ethics common mistakes
CMA Inter Paper 5: Business Laws and Ethics · Understand the traps and how to avoid them.
Treating a contract with a minor as simply 'void' and answering questions on restitution and necessaries on that basis, instead of classifying it as void ab initio with the Mohori Bibee exception for necessaries under Section 68.
Coaching summaries compress the minor's agreement into one word ('void'), so candidates never learn the separate tracks for necessaries, beneficial contracts, and restitution on fraudulent misrepresentation of age.
What to do instead
Build a one-page decision tree for minor's agreements: (1) Is it for necessaries? Apply Section 68 against the minor's estate only. (2) Is it a contract of apprenticeship or for the minor's benefit? Enforceable. (3) Otherwise void ab initio, no ratification on attaining majority, and no estoppel against a minor. Practise three fact patterns per branch.
Answering consideration questions by saying 'past consideration is no consideration' without distinguishing English law from the Indian position under Section 2(d) and Section 25(2).
Candidates memorise the English rule from textbooks and never notice that Indian law expressly recognises past voluntary services as valid consideration, especially in guarantee and agency fact patterns.
What to do instead
Maintain a two-column table of English vs Indian positions on past consideration, privity of contract, and consideration in guarantee. Quote the statutory provision in every answer, not just the doctrine.
Confusing a contract of guarantee with a contract of indemnity when a third party is involved, and applying Sections 133 to 139 (surety's discharge) to an indemnity clause.
Both involve three parties and a secondary obligation, and exam fact patterns deliberately use words like 'assure', 'hold harmless', and 'on default' to blur the line.
What to do instead
Apply a two-question test: Is there an existing primary liability of a third person that the surety undertakes to answer for? If yes, it is guarantee (three parties, Sections 126 to 147). If the promisor's liability is original and contingent on loss, it is indemnity (two parties, Sections 124 and 125). Then check whether the surety's consent was obtained by misrepresentation, concealment, or whether the creditor released or altered the principal debtor's terms, which discharges the surety under Sections 133 to 139.
Stating that in a sale, risk passes with delivery, and in an agreement to hire-purchase the property passes immediately, without applying Sections 20 to 26 of the Sale of Goods Act, 1930.
The general commercial intuition that 'whoever holds the goods bears the risk' overrides the statutory rule that risk prima facie passes with property, not possession.
What to do instead
Learn the Section 26 rule and its exceptions (delayed delivery caused by one party, and the trade custom or express agreement to the contrary). For unascertained goods, apply Section 23 (property passes on appropriation) and Section 18 for specific goods in a deliverable state. Practise with a fact pattern where goods are damaged in the seller's warehouse after property has passed.
Describing a holder in due course under the Negotiable Instruments Act, 1881 as anyone who receives an instrument, ignoring the requirement of consideration and of taking the instrument before maturity and without notice of defect.
The everyday meaning of 'holder' and 'holder in due course' is the same, so candidates skip Section 9 and Section 118 presumptions.
What to do instead
Write out Section 9 (holder in due course) as a checklist: holder for consideration, obtained before maturity, in good faith, without notice of defect in title, and after the instrument became negotiable. Then contrast with Section 8 (holder) and the Section 118 presumptions, and practise a question where the instrument was taken after maturity.
Answering a partnership question by treating a minor admitted to the benefits of partnership as personally liable for the firm's debts, or by saying registration of a firm is compulsory.
The LLP and company concepts of limited liability are mentally applied to a general partnership, and the Section 69 consequences of non-registration are confused with a mandatory requirement.
What to do instead
Fix three points: registration under the Indian Partnership Act, 1932 is optional but non-registration bars suit under Section 69; a minor admitted under Section 30 shares in property and profits but is personally liable only for obligations arising after attaining majority if he elects to become a partner; and every partner is jointly and severally liable under Section 25. Under the LLP Act, 2008, contrast the designated partner's liability for non-compliance with the LLP's limited liability.
Confusing the abridged prospectus, the shelf prospectus, and the red herring prospectus, and applying the wrong contents or validity period when a company makes a public issue.
The three are taught together as 'types of prospectus' and candidates memorise names without the triggering condition or validity period for each.
What to do instead
Make a table with columns: instrument, when used, statutory provision, contents, validity. Include the abridged prospectus under Section 2(1) and the Companies (Prospectus and Allotment of Securities) Rules, the shelf prospectus under Section 31 (validity 12 months and the information memorandum), and the red herring prospectus under Section 32. Also note the 90-day limit for allotment and the refund rule under Section 39.
Calculating dividend and interim dividend answers without checking the Section 123 conditions on free reserves, the depreciation set-off, and the default rule on unpaid dividend accounts.
Candidates treat dividend as an arithmetic question and skip the statutory preconditions, so the final figure is wrong even when the arithmetic is right.
What to do instead
Before computing any dividend, write the three Section 123 gates: depreciation for the current and preceding years must be provided, the amount must be transferred to reserves as prescribed, and the rate must not exceed the average of the three preceding years without Central Government approval. Then check the Section 124 rule for transferring unpaid or unclaimed dividend to the Unpaid Dividend Account within seven days.
Treating the Factories Act, 1948 and the Payment of Wages Act, 1936 as interchangeable on working hours, overtime, and deduction limits, and quoting the wrong ceiling.
Both statutes regulate wages and hours, and the numeric thresholds (hours, overtime rate, deduction percentages) are memorised without the statute they belong to.
What to do instead
Create a numeric comparison sheet: Factories Act weekly and daily hours, rest intervals, overtime at twice the ordinary rate, and the annual leave formula; Payment of Wages Act deduction limits (for example, fines, absence from duty, and the overall 50 percent cap, with the 75 percent cap for cooperative society or insurance payments). Practise one mixed fact pattern and label each provision with its statute and section.
Answering business ethics and corporate governance questions with generic statements about honesty and transparency, without naming the specific governance mechanism, committee, or statutory provision.
Ethics is perceived as an opinion-based domain, so candidates write moral essays instead of applying the framework to the facts.
What to do instead
Anchor every ethics answer to a named mechanism: the board's composition and independent directors, the audit committee, the whistle-blower policy, related-party transaction approval, or the code of conduct. Structure the answer as identification of the ethical issue, the applicable principle or provision, the stakeholders affected, and the recommended action with its consequence.