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III IC-89 practice questions

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Question 1Domain content not stated in the retrieved source

Under the Indian Contract Act, 1872, which of the following agreements is expressly declared void because it restrains a person from carrying on a lawful profession, trade or business?

  1. An agreement between two traders dividing the markets between them for an indefinite period Correct answer.
  2. An agreement by a seller of goodwill not to carry on a similar business within specified local limits
  3. A partnership agreement not to compete with the firm during the term of the partnership
  4. An agreement to share profits of a business between partners

Explanation

Section 27 of the Indian Contract Act, 1872 declares every agreement by which anyone is restrained from exercising a lawful profession, trade or business void. The only statutory exceptions are the sale of goodwill under Section 27 and the partnership exceptions under Sections 11(2) and 36 of the Partnership Act. Market-sharing arrangements that go beyond a reasonable goodwill restriction are void.

Question 2Domain content not stated in the retrieved source

A contract of insurance is recognised as a contract of the utmost good faith. Which duty does this impose on the proposer?

  1. A duty to disclose all material facts within the proposer's knowledge, whether or not asked Correct answer.
  2. A duty to disclose facts only after the policy is issued
  3. A duty to disclose only those facts the insurer specifically asks about in the proposal form
  4. A duty to disclose facts only if the insurer proves fraud

Explanation

Insurance is a contract uberrimae fidei, so the proposer must volunteer every material fact that would influence the insurer's decision on premium or acceptance. The duty is higher than the ordinary rule of caveat emptor and is not confined to the questions in the proposal form. Non-disclosure of a material fact renders the policy voidable at the insurer's option.

Question 3Domain content not stated in the retrieved source

In a contract of guarantee, when does the surety's liability arise?

  1. Only after the principal debtor is adjudicated insolvent
  2. Only after the creditor has exhausted all remedies against the principal debtor
  3. Immediately upon the principal debtor's default, unless the contract provides otherwise Correct answer.
  4. Only after the creditor obtains a decree against the principal debtor

Explanation

Section 128 of the Indian Contract Act, 1872 makes the surety's liability co-extensive with that of the principal debtor unless the contract otherwise provides. The creditor may proceed against the surety immediately on default without first suing the debtor. A contrary clause must be expressly agreed.

Question 4Domain content not stated in the retrieved source

Which of the following is a characteristic feature that distinguishes a company from a partnership?

  1. Both require a minimum of two members
  2. A company has a separate legal personality distinct from its members Correct answer.
  3. A company's members are agents of the company for its business
  4. Both have perpetual succession

Explanation

On incorporation, a company becomes a body corporate with a legal personality separate from its members, as established in Salomon v Salomon. This separate personality underpins limited liability and the company's own capacity to own property and sue. A partnership firm, in contrast, has no legal personality distinct from its partners.

Question 5Domain content not stated in the retrieved source

A cheque is presented for payment six months after its date. What is the position under the Negotiable Instruments Act, 1881?

  1. The cheque is valid for three years from the date it bears
  2. The cheque is valid indefinitely until it is cancelled by the drawer
  3. The cheque is valid for six months from the date it bears, and a bank may dishonour it after that period Correct answer.
  4. The cheque is valid only for thirty days from the date it bears

Explanation

A cheque is valid for three months from the date it bears under Section 138 read with the proviso, and banks treat it as valid for six months for payment purposes. A bank is entitled to dishonour a cheque presented after this period. The drawer's liability on the underlying debt is not extinguished, but the instrument itself becomes stale.

Question 6Domain content not stated in the retrieved source

Which type of resolution must be passed for a company to alter its articles of association in a manner that converts a public company into a private company?

  1. A special resolution Correct answer.
  2. A resolution by the board of directors alone
  3. An ordinary resolution
  4. A resolution by the creditors' committee

Explanation

Conversion of a public company into a private company requires a special resolution and, under the Companies Act, 2013, approval of the Central Government. Alteration of articles generally requires a special resolution under Section 14. The higher threshold protects minority shareholders whose rights may be affected.

Question 7Domain content not stated in the retrieved source

An agent appoints a sub-agent without the authority of the principal. What is the legal consequence?

  1. The principal must ratify the appointment within thirty days
  2. The sub-agent becomes the agent of the principal automatically
  3. The principal is not bound by the acts of the sub-agent, and the agent alone is responsible to the principal and to the sub-agent Correct answer.
  4. The principal is bound by the sub-agent's acts as if the sub-agent were appointed with authority

Explanation

Section 193 of the Indian Contract Act, 1872 provides that where an agent appoints a sub-agent without authority, the principal is not represented by the sub-agent and is not bound by its acts. The agent is responsible to the principal for the sub-agent's acts. The sub-agent is responsible to the agent alone.

Question 8Domain content not stated in the retrieved source

Which of the following best describes the doctrine of indoor management?

  1. Directors of a company are liable for all internal irregularities
  2. Persons dealing with a company may assume that internal procedures have been complied with, provided the act is within the apparent authority of the company Correct answer.
  3. Persons dealing with a company must inquire into the internal proceedings of the company
  4. A company cannot be bound by any act not authorised by its memorandum

Explanation

The doctrine, associated with Royal British Bank v Turquand, protects outsiders who deal with a company in good faith. They may assume that internal procedures have been complied with, provided the transaction is within the company's powers and the officer's apparent authority. It complements the constructive notice of registered documents.

Question 9Domain content not stated in the retrieved source

A person signs a promissory note as a maker but adds the words 'signed as surety' below the signature. How is the person's liability determined under the Negotiable Instruments Act, 1881?

  1. The person is liable as a maker, and the added description does not alter that liability Correct answer.
  2. The note is void because the capacity is not stated in the body
  3. The person is discharged because the capacity is ambiguous
  4. The person is liable only as a surety and can require the creditor to proceed against another party first

Explanation

Section 26 of the Negotiable Instruments Act, 1881 provides that a person signing an instrument is liable as maker or acceptor, as the case may be, and any description added to the signature does not exempt that person from liability. The description is treated as surplusage. A maker cannot claim the benefit of a surety's defences merely by describing himself as surety.

Question 10Domain content not stated in the retrieved source

Which of the following is an essential element of a valid acceptance under the Indian Contract Act, 1872?

  1. Acceptance must be made in writing in all cases
  2. Acceptance must be absolute and unqualified Correct answer.
  3. Acceptance may be implied from the silence of the offeree
  4. Acceptance may be made after the offer has lapsed if the offeror is silent

Explanation

Section 7 of the Indian Contract Act, 1872 requires acceptance to be absolute and unqualified to conclude a contract. A conditional or varying acceptance operates as a counter-offer. Acceptance must also be expressed in the manner prescribed or in some usual and reasonable manner.

Question 11Domain content not stated in the retrieved source

A director of a company uses confidential information obtained in board meetings to purchase shares for personal gain. Which duty has the director breached?

  1. The fiduciary duty not to make secret profits from the position Correct answer.
  2. The duty to attend board meetings
  3. The statutory duty to disclose shareholding to the registrar
  4. The duty to act in good faith only

Explanation

Directors occupy a fiduciary position and must not use their office or information obtained through it to make a personal profit. This is the no-conflict and no-profit rule, reflected in Sections 166 and 184 of the Companies Act, 2013. Any secret profit is held on constructive trust for the company.

Question 12Domain content not stated in the retrieved source

Which of the following statements about a 'holder in due course' under the Negotiable Instruments Act, 1881 is correct?

  1. A holder in due course is any person who holds the instrument, whether or not consideration was paid
  2. A holder in due course obtains the instrument in good faith and for consideration, before maturity and without notice of any defect in the transferor's title Correct answer.
  3. A holder in due course is liable on the instrument to all prior parties
  4. A holder in due course must have obtained the instrument after it became overdue

Explanation

Section 9 of the Negotiable Instruments Act, 1881 defines a holder in due course as a person who obtains the instrument for consideration, in good faith, before maturity, and without notice of any defect in the transferor's title. Such a holder takes the instrument free from many personal defences. The status confers privileges rather than liabilities.

Question 13Domain content not stated in the retrieved source

A contract is entered into by a minor for the purchase of a bicycle. Which statement correctly describes the position?

  1. The contract is void ab initio, and the minor cannot be held liable on it Correct answer.
  2. The contract is voidable at the minor's option
  3. The contract is valid and enforceable against the minor
  4. The contract is valid if the minor's guardian consents in writing

Explanation

Under Section 11 of the Indian Contract Act, 1872, a minor is not competent to contract, and the agreement is void ab initio as held in Mohori Bibee v Dharmodas Ghose. The minor cannot be sued on the contract, though the minor's estate may in certain cases be liable for necessaries under Section 68. A guardian's consent does not make the minor competent.

Question 14Domain content not stated in the retrieved source

Which of the following is required for a valid pledge under the Indian Contract Act, 1872?

  1. Registration of the pledge with the registrar of companies in all cases
  2. Approval of the pledge by the pawnor's creditors
  3. Delivery of possession of the goods to the pawnee, either actual or constructive Correct answer.
  4. A written instrument attested by two witnesses

Explanation

Section 172 of the Indian Contract Act, 1872 defines pledge as the bailment of goods as security for payment of a debt or performance of a promise. Delivery of possession, actual or constructive, is essential. Without delivery, the transaction is at most a charge or an agreement to pledge.

Question 15Domain content not stated in the retrieved source

A company issues a prospectus containing a misleading statement about its profitability. An investor subscribes to shares relying on it. What remedy is available under the Companies Act, 2013?

  1. Rescission of the allotment and damages against the company and persons responsible for the prospectus Correct answer.
  2. Only a criminal prosecution of the directors
  3. An automatic winding up of the company
  4. No remedy, because the investor is presumed to have read the memorandum

Explanation

Sections 34 and 35 of the Companies Act, 2013 provide for civil and criminal liability for misstatements in a prospectus. A person who subscribes relying on a misleading prospectus may claim rescission and damages from the company, directors, promoters and experts responsible. Criminal prosecution is an additional, not exclusive, consequence.

Question 16Domain content not stated in the retrieved source

Which of the following constitutes 'goods' under the Sale of Goods Act, 1930?

  1. Stock and shares, growing crops and things attached to or forming part of the land agreed to be severed Correct answer.
  2. Immovable property
  3. Electricity and services
  4. Money and actionable claims

Explanation

Section 2(7) of the Sale of Goods Act, 1930 defines goods as every kind of movable property other than actionable claims and money. It expressly includes stock and shares, growing crops, grass and things attached to or forming part of the land agreed to be severed before sale. Immovable property and services fall outside the definition.

Question 17Domain content not stated in the retrieved source

In a sale of goods, the property in specific goods passes to the buyer at the time the contract is made, irrespective of payment or delivery, unless a contrary intention appears. Which section embodies this rule?

  1. Section 25 of the Sale of Goods Act, 1930
  2. Section 23 of the Sale of Goods Act, 1930
  3. Section 20 of the Sale of Goods Act, 1930 Correct answer.
  4. Section 18 of the Sale of Goods Act, 1930

Explanation

Section 20 of the Sale of Goods Act, 1930 provides that in an unconditional contract for the sale of specific goods in a deliverable state, property passes when the contract is made. Payment and delivery are not conditions precedent to the passing of property. Sections 18, 23 and 25 deal with different situations.

Question 18Domain content not stated in the retrieved source

Which of the following is a valid mode of dissolution of a partnership firm without the intervention of the court?

  1. Dissolution by the sale of a partner's private assets
  2. Dissolution by the admission of a new partner
  3. Dissolution by the expiry of the term of the firm where constituted for a fixed term Correct answer.
  4. Dissolution by the insanity of a partner without notice to others

Explanation

Section 42 of the Indian Partnership Act, 1932 provides for dissolution by expiry of the term or completion of the venture where the firm was constituted for a fixed term or particular adventure. Other modes include mutual agreement, notice, and certain contingencies. Admission of a partner does not dissolve the firm but reconstitutes it.

Question 19Domain content not stated in the retrieved source

A promissory note is made payable to 'A or bearer'. What is the legal character of this instrument?

  1. It is a cheque
  2. It is a valid promissory note payable to bearer
  3. It is invalid because a promissory note cannot be made payable to bearer Correct answer.
  4. It is a bill of exchange

Explanation

Section 4 of the Negotiable Instruments Act, 1881 requires a promissory note to contain an unconditional undertaking to pay a certain sum to a certain person or to the bearer of the instrument. However, the Reserve Bank of India Act prohibits issue of bearer promissory notes except in limited cases, and such an instrument is not a valid promissory note. The correct answer reflects the statutory prohibition on bearer promissory notes.

Question 20Domain content not stated in the retrieved source

Which of the following statements about the doctrine of ultra vires in company law is correct?

  1. An act outside the objects clause is valid if approved by the board
  2. An act outside the objects clause is valid if the third party acted in good faith
  3. An act outside the objects clause is voidable at the option of the directors
  4. An act outside the objects clause of the memorandum is void and cannot be ratified even by unanimous shareholder approval Correct answer.

Explanation

The doctrine of ultra vires holds that acts beyond the company's stated objects are void and cannot be ratified by shareholders, since the company has no capacity to do them. The doctrine protects shareholders and creditors by confining the company's activities to its objects. Good faith of the third party does not cure the lack of capacity.

Question 21Domain content not stated in the retrieved source

A buyer discovers that goods delivered are not of the description contracted for. Which right is available to the buyer under the Sale of Goods Act, 1930?

  1. A right to reject the goods and repudiate the contract Correct answer.
  2. A right to retain the goods and pay half the price
  3. A right to claim damages only, with no right to reject
  4. A right to compel the seller to deliver substitute goods in all cases

Explanation

Section 13 of the Sale of Goods Act, 1930 implies a condition that goods sold by description correspond with the description. Breach of a condition entitles the buyer to reject the goods and repudiate the contract, in addition to damages. The buyer may instead elect to treat the breach as a breach of warranty.

Question 22Domain content not stated in the retrieved source

Which of the following is an example of a quasi-contract under the Indian Contract Act, 1872?

  1. A contract formed by offer and acceptance
  2. A contract of agency
  3. A claim for money paid by mistake to another person Correct answer.
  4. A contract of guarantee

Explanation

Section 72 of the Indian Contract Act, 1872 imposes a liability to repay money paid by mistake or coercion, treating it as a quasi-contract. Quasi-contracts are obligations imposed by law irrespective of agreement, based on unjust enrichment. Contracts of guarantee and agency arise from agreement and are not quasi-contracts.

Question 23Domain content not stated in the retrieved source

A company wishes to reduce its share capital. Which procedure is required under the Companies Act, 2013?

  1. A special resolution and confirmation by the National Company Law Tribunal Correct answer.
  2. An ordinary resolution and approval of the registrar only
  3. A board resolution alone
  4. Approval of the Securities and Exchange Board of India in all cases

Explanation

Reduction of share capital under Section 66 of the Companies Act, 2013 requires a special resolution of members and an application to the National Company Law Tribunal for confirmation. The Tribunal may direct notice to creditors and settle their claims. The procedure protects creditors against unauthorised return of capital.

Question 24Domain content not stated in the retrieved source

Which of the following correctly describes the rule in Foss v Harbottle?

  1. Where a wrong is done to a company, the proper plaintiff is the company itself Correct answer.
  2. Any shareholder may sue for wrongs done to the company without restriction
  3. A minority shareholder can always challenge an irregular act of the majority
  4. Directors are personally liable to shareholders for all losses

Explanation

Foss v Harbottle establishes that where a wrong is done to a company, the proper plaintiff is the company, and the court will not interfere in internal management. Exceptions include fraud on the minority, acts requiring a special resolution, and ultra vires acts. The rule reflects the majority-rule principle.

Question 25Domain content not stated in the retrieved source

A person who is not a partner but who represents himself as a partner is liable as a partner to persons who deal with the firm on the faith of that representation. This is known as:

  1. Partnership at will
  2. Partnership by estoppel Correct answer.
  3. Particular partnership
  4. Dormant partnership

Explanation

Section 28 of the Indian Partnership Act, 1932 codifies partnership by estoppel, also called holding out. A person who by words or conduct represents himself as a partner is liable to those who give credit to the firm on the faith of the representation. The liability continues until the representation is withdrawn with notice.

Question 26Domain content not stated in the retrieved source

Under the Companies Act, 2013, a private company must have at minimum how many directors on its board?

  1. Two directors Correct answer.
  2. Seven directors
  3. One director
  4. Three directors

Explanation

Section 149(1) requires every company to have a board of at least three directors, but a private company may be constituted with a minimum of two directors. One director is permitted only for a One Person Company, and seven is the minimum for a public company.

Question 27Domain content not stated in the retrieved source

A cheque is presented to the drawee bank six months and ten days after the date it bears. What is the bank's correct course of action under the Negotiable Instruments Act, 1881?

  1. Return it as it is time-barred after three months
  2. Honour it, since cheques never become stale
  3. Refuse payment, as a cheque is valid for three months from its date Correct answer.
  4. Return it only if the drawer has insufficient funds

Explanation

A cheque is valid for three months from the date it bears, and a bank that pays a stale cheque does so at its own risk. Presenting it beyond that period entitles the bank to refuse payment regardless of the drawer's balance.

Question 28Domain content not stated in the retrieved source

Which body is empowered under the Companies Act, 2013 to approve a scheme of merger or amalgamation between two domestic companies?

  1. The Registrar of Companies
  2. The board of directors acting alone
  3. The National Company Law Tribunal Correct answer.
  4. The Ministry of Corporate Affairs

Explanation

Compromise, arrangement, and amalgamation schemes are sanctioned by the National Company Law Tribunal on application under the relevant sections of the Act. The board merely initiates the scheme and the Registrar performs administrative functions.

Question 29Domain content not stated in the retrieved source

A firm's partnership deed is silent on the sharing of profits. How must the profits of the firm be divided among the partners?

  1. As directed by the managing partner
  2. According to the seniority of the partners
  3. In proportion to the capital contributed
  4. Equally among all partners Correct answer.

Explanation

In the absence of an agreement, profits and losses are shared equally among the partners, irrespective of the capital each has contributed. Capital contribution does not by itself determine profit sharing.

Question 30Domain content not stated in the retrieved source

What is the maximum period for which an interim dividend declared by a company must be paid to shareholders?

  1. Fifteen days from the declaration
  2. Seven days from the declaration
  3. Thirty days from the declaration Correct answer.
  4. Forty-five days from the declaration

Explanation

Under Section 127 of the Companies Act, 2013, dividends must be paid within thirty days of the declaration. Failure to do so exposes the company and its officers to penalties.

Question 31Domain content not stated in the retrieved source

A person who supplies goods to a company on credit deals with the company's managing director in good faith. The articles, unknown to the supplier, restrict the managing director's borrowing powers. Which rule protects the supplier?

  1. The doctrine of part performance
  2. The doctrine of indoor management Correct answer.
  3. The rule against perpetuity
  4. The rule in Foss v Harbottle

Explanation

The doctrine of indoor management, also called the Turquand rule, allows an outsider dealing in good faith to assume that internal procedures and restrictions have been properly complied with. The supplier is therefore not bound by an internal limitation of which it was unaware.

Question 32Domain content not stated in the retrieved source

Which of the following is a 'negotiable instrument' within the meaning of the Negotiable Instruments Act, 1881?

  1. A fixed deposit receipt
  2. A warehouse receipt
  3. A share certificate issued by a company
  4. A bill of exchange Correct answer.

Explanation

Section 13 of the Act recognises only three negotiable instruments: promissory notes, bills of exchange, and cheques. Share certificates, deposit receipts, and warehouse receipts are documents of title but are not negotiable instruments.

Question 33Domain content not stated in the retrieved source

A contract of insurance is described as one of utmost good faith. Which duty does this impose on the insured?

  1. To pay premiums before the policy period begins
  2. To appoint a nominee at the time of proposal
  3. To renew the policy annually
  4. To disclose all material facts relevant to the risk Correct answer.

Explanation

Insurance law requires the proposer to volunteer every material fact that would influence the insurer's decision to accept or rate the risk. Non-disclosure or misrepresentation of such facts renders the policy voidable.

Question 34Domain content not stated in the retrieved source

A promissory note is executed by two persons, one of whom signs only as a surety for the other. What is the liability of the surety under the Negotiable Instruments Act, 1881?

  1. He is liable jointly and severally with the principal maker Correct answer.
  2. He is not liable because he is a surety
  3. He is liable only to the extent of half the amount
  4. He is liable only if the principal maker defaults

Explanation

A person who signs a negotiable instrument is a party to it and is liable thereon jointly and severally with the other parties. The addition of a description such as 'surety' does not reduce or condition that liability as against a holder.

Question 35Domain content not stated in the retrieved source

A company's articles provide that the board may invest surplus funds only in government securities. The board instead invests in equity shares, and the investment is later challenged. What is the position?

  1. The investment is voidable at the option of the company
  2. The investment is valid if ratified by the shareholders
  3. The investment is void as it exceeds the powers conferred by the articles Correct answer.
  4. The investment is valid because the board has residuary powers

Explanation

Where the articles expressly restrict the board's power, an act outside that restriction is ultra vires the company and void. Shareholder ratification cannot cure an act that the articles prohibit.

Question 36Domain content not stated in the retrieved source

A partner retires from a firm without giving public notice of the retirement. A creditor who had previously dealt with the firm extends fresh credit to it after the retirement. What is the retiring partner's liability?

  1. He is liable only if the creditor had actual notice of the retirement
  2. He is liable to the creditor as a partner for the fresh credit Correct answer.
  3. He is liable only to the extent of his capital in the firm
  4. He is not liable, as he has ceased to be a partner

Explanation

A retiring partner who fails to give public notice continues to be liable to third parties who deal with the firm without knowledge of the retirement. Liability extends to credit extended by such persons after retirement.

Question 37Domain content not stated in the retrieved source

A buyer agrees to purchase a specified quantity of wheat 'ex ship named S.S. Ganga'. When does the property in the goods pass to the buyer?

  1. When the goods are shipped
  2. When the ship reaches the destination port Correct answer.
  3. When the contract is signed
  4. When the buyer takes physical delivery

Explanation

In a contract for the sale of unascertained or future goods by description, property passes when goods of that description in a deliverable state are unconditionally appropriated to the contract. Where goods are sold ex ship, appropriation occurs when the ship arrives and the goods are available for delivery.

Question 38Domain content not stated in the retrieved source

An unpaid seller who is in possession of goods sold on credit, before the buyer becomes insolvent, may exercise which right when the buyer fails to pay?

  1. A right to sue the carrier for conversion
  2. A right of resale without notice in every case
  3. A right to reclaim the price from the buyer's bankers
  4. A right of lien over the goods Correct answer.

Explanation

An unpaid seller in possession of the goods may retain them until payment, which is the right of lien. Where the buyer is insolvent, a separate right of stoppage in transit may arise once the goods have left the seller's hands.

Question 39Domain content not stated in the retrieved source

A company wishes to appoint an additional director between two annual general meetings. Which authority must pass the resolution?

  1. The board of directors at a board meeting Correct answer.
  2. The Registrar of Companies
  3. The shareholders in general meeting
  4. The audit committee

Explanation

The board may appoint an additional director at any time, but the appointment must be regularised by the shareholders at the next general meeting. The initial appointment is therefore a board function.

Question 40Domain content not stated in the retrieved source

A promissory note is signed by the maker but the amount is left blank. The holder later fills in an amount larger than that agreed. What is the maker's liability to a holder in due course?

  1. He is not liable at all as the instrument was incomplete
  2. He is liable for the amount actually filled in, to a holder in due course Correct answer.
  3. He is liable only if the holder had notice of the agreement
  4. He is liable for the amount originally agreed only

Explanation

Where an instrument is signed and left incomplete, the person signing is liable to a holder in due course for the amount filled in, provided the holder took it without notice of the defect. As against a holder with notice, the maker may plead the limited authority.

Question 41Domain content not stated in the retrieved source

A minor obtains a loan by fraudulently representing that he is of full age. Which statement correctly states the legal position under the Indian Contract Act, 1872?

  1. The lender may enforce the contract as the minor committed fraud
  2. The lender may recover the money as damages for deceit from the minor
  3. The agreement is voidable at the lender's option
  4. The agreement is void and the lender cannot enforce it against the minor Correct answer.

Explanation

An agreement with a minor is void ab initio, and the minor is not liable in contract or in tort arising out of the contract. The lender cannot circumvent this by framing the claim as one for deceit.

Question 42Domain content not stated in the retrieved source

A bailee stores the bailed goods in a place that is unsuitable for them, and they deteriorate. What is the bailee's liability?

  1. Liability only if the bailor had specified the place of storage
  2. Liability for the loss caused by his negligence in storage Correct answer.
  3. Liability limited to the value of the bailee's own goods
  4. No liability, as the bailee took reasonable care generally

Explanation

A bailee must take as much care of the goods bailed as an ordinary prudent person would take of his own goods of similar value. Storing them in unsuitable conditions is negligence, and the bailee is liable for the resulting deterioration.

Question 43Domain content not stated in the retrieved source

A company allots shares to an applicant who has not paid the application money. What is the consequence?

  1. The allotment is void, as application money must be received before allotment Correct answer.
  2. The allotment is voidable at the applicant's option
  3. The allotment is valid, and the money becomes a debt
  4. The allotment is valid if the board ratifies it later

Explanation

Under the Companies Act, 2013, a company cannot allot securities unless the application money is received in the prescribed manner. An allotment made without receiving the minimum application money is void.

Question 44Domain content not stated in the retrieved source

A director of a listed company trades in the company's securities while in possession of unpublished price-sensitive information about an upcoming acquisition. Which regulatory framework is primarily attracted?

  1. The Transfer of Property Act, 1882
  2. The Negotiable Instruments Act, 1881
  3. The Indian Partnership Act, 1932
  4. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations Correct answer.

Explanation

Trading on the basis of unpublished price-sensitive information is insider trading, regulated by SEBI's insider trading regulations. These regulations prohibit communication and trading on such information and prescribe penalties.

Question 45Domain content not stated in the retrieved source

An agent receives a secret profit from a third party in connection with a transaction he conducts for the principal. What is the principal's remedy?

  1. The principal may recover the secret profit from the agent Correct answer.
  2. The principal may recover only half the secret profit
  3. The principal may only terminate the agency
  4. The principal has no remedy unless the third party acted fraudulently

Explanation

An agent owes a fiduciary duty to the principal and must not make a secret profit from the agency. If he does, the principal may recover the profit, in addition to any other remedies such as rescission of the transaction.

Question 46Domain content not stated in the retrieved source

A company's articles contain a clause requiring disputes between shareholders and the company to be referred to arbitration. A shareholder sues the company alleging oppression. What is the correct approach?

  1. The suit must be stayed because the arbitration clause is binding
  2. The shareholder must first exhaust arbitration and then sue
  3. The arbitration clause is void for uncertainty
  4. The statutory remedy for oppression prevails over the arbitration clause Correct answer.

Explanation

Rights conferred by statute, such as the remedy against oppression and mismanagement before the Tribunal, cannot be curtailed by a private arbitration agreement in the articles. The statutory forum retains jurisdiction.

Question 47Domain content not stated in the retrieved source

A holder of a bill of exchange endorses it 'without recourse to me'. What is the effect of this endorsement?

  1. The endorser is liable as a surety to subsequent holders
  2. The instrument ceases to be negotiable
  3. The endorser excludes his personal liability on the instrument Correct answer.
  4. The endorsement is invalid as it is conditional

Explanation

A qualified endorsement using words such as 'without recourse' excludes the endorser's personal liability to subsequent holders while preserving the negotiability of the instrument. The endorsee may still transfer the instrument, but cannot hold this endorser liable on dishonour.

Question 48Domain content not stated in the retrieved source

A company issues a prospectus that omits a material fact about a pending tax liability. An investor subscribes and later suffers loss. Which statement best describes the liability of the directors?

  1. They are liable only after a criminal conviction
  2. They are liable only if they personally profited from the omission
  3. They may be liable for the omission unless they can establish a statutory defence Correct answer.
  4. They are not liable because omissions differ from misstatements

Explanation

Directors may be liable for misleading prospectuses, whether by misstatement or material omission, unless they can establish a defence such as non-knowledge and reasonable belief. Lack of personal profit is not a defence.

Question 49Domain content not stated in the retrieved source

A firm is dissolved without winding up its affairs, and a dispute arises over the distribution of assets after payment of third-party debts. How are the assets applied among the partners?

  1. First to advances made by partners, then capital, then profits in the agreed ratio Correct answer.
  2. Equally among all partners regardless of capital or advances
  3. In proportion to their capital contributions, after repaying advances
  4. To the partner who contributed the largest capital

Explanation

On dissolution, firm assets are applied first in paying third-party debts and the costs of realisation, then in repaying advances made by partners, then capital, and any surplus is divided in the profit-sharing ratio. This ordering reflects the partners' rights inter se.

Question 50Domain content not stated in the retrieved source

A person signs a cheque as drawer on behalf of a company without authority. The payee takes the cheque in good faith. What is the signatory's liability?

  1. The cheque is void and no one is liable
  2. The signatory is liable only if the company ratifies the signature
  3. The company alone is liable because the cheque bears its name
  4. The signatory is personally liable to a holder in due course Correct answer.

Explanation

A person who signs an instrument without authority is liable to a holder in due course as if he had been duly authorised. The holder may enforce the instrument against the unauthorised signatory personally.