Month: December 2020

Management Notes

Insolvency and Bankruptcy Code 2016

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The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive law introduced in India to address issues of insolvency and bankruptcy in a time-bound and efficient manner. Prior to the IBC, India lacked a uniform legal framework to address corporate insolvency, leading to delayed and often ineffective resolutions. The IBC aims to provide a structured process for resolving corporate insolvency, improving the ease of doing business, and enhancing the credit culture in India.

Background and Objectives:

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to consolidate and amend the existing laws relating to insolvency and bankruptcy. It aims to:

  • Provide a time-bound process for resolving insolvency of individuals and businesses.
  • Improve the overall business environment by addressing issues such as non-performing assets (NPAs) and corporate debt.
  • Promote entrepreneurship by offering a clean slate to viable businesses that face insolvency.
  • Protect the interests of creditors and other stakeholders while providing an opportunity for companies in distress to restructure.

The IBC combines various laws and procedures related to insolvency and bankruptcy into one comprehensive code. It also introduces mechanisms for resolving insolvency both for individuals and corporate entities, ensuring transparency, accountability, and fairness in the process.

Features of the Insolvency and Bankruptcy Code, 2016:

  1. Insolvency Resolution Process: The IBC sets out a clear, standardized process for insolvency resolution. It is divided into three primary parts:
    • Corporate Insolvency Resolution Process (CIRP): A process for resolving insolvency of companies and limited liability partnerships (LLPs). The process is initiated by creditors, who can file a petition with the National Company Law Tribunal (NCLT).
    • Individual Insolvency Resolution Process (IIRP): For individuals and partnership firms, the IBC provides a process to address insolvency situations.
    • Liquidation: In cases where a resolution plan fails, the company may undergo liquidation, where its assets are sold to settle outstanding debts.
  2. Time-Bound Process: The IBC mandates that the insolvency process be completed within 180 days (extendable by another 90 days). This is to ensure that resolution or liquidation occurs without unnecessary delays. The time-bound nature of the process is crucial in preserving the value of distressed assets and ensuring a quicker recovery for creditors.
  3. Resolution Professional: During the insolvency resolution process, an external expert known as a “Resolution Professional” is appointed. The Resolution Professional manages the affairs of the company and works with creditors and other stakeholders to come up with a resolution plan that maximizes the recovery value of the company. The professional is responsible for overseeing the process and ensuring that the interests of all parties are protected.
  4. Committee of Creditors (CoC): The IBC establishes a Committee of Creditors, composed of financial creditors, which has the power to approve or reject resolution plans. The CoC plays a central role in the insolvency process, and their decision is binding on the debtor company. The committee also oversees the role of the Resolution Professional.
  5. Insolvency and Bankruptcy Board of India (IBBI): The IBBI is the regulatory authority responsible for overseeing the functioning of the insolvency and bankruptcy framework. It is tasked with laying down the regulations and ensuring that professionals involved in the process, including Resolution Professionals and Insolvency Professionals, adhere to the standards set by the law.
  6. Creditor’s Hierarchy and Recovery Process: The IBC provides a clear hierarchy of creditors during the resolution process. Secured creditors (such as banks) are given priority, followed by unsecured creditors. Shareholders, however, are the last in line when it comes to recovery. This ensures that creditors’ interests are prioritized in the distribution of proceeds from asset sales.
  7. Adjudicating Authorities: The National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) are the primary adjudicating authorities under the IBC. The NCLT resolves disputes related to the corporate insolvency process, while the DRT is responsible for individual insolvency matters. Appeals can be filed with the National Company Law Appellate Tribunal (NCLAT) and the Appellate Tribunal for Debt Recovery.
  8. Cross-Border Insolvency: The IBC allows for cooperation between Indian courts and foreign courts in cases involving cross-border insolvencies. This ensures that assets held by an Indian company abroad or foreign creditors can participate in the insolvency proceedings. This provision helps multinational companies and foreign creditors resolve insolvency issues efficiently.

Advantages of the Insolvency and Bankruptcy Code:

  • Faster Resolution:

IBC ensures quicker resolution of insolvency cases compared to earlier methods. With a fixed timeline, the process helps to minimize delays.

  • Improved Credit Market:

IBC has led to a cleaner and more transparent credit market by providing a legal framework that ensures quicker recovery of debts and reducing defaults.

  • Higher Recovery Rate:

Creditors can expect a higher recovery rate compared to the earlier approach, where a significant portion of their debt went unpaid due to prolonged legal battles.

  • Reduction in Non-Performing Assets (NPAs):

The introduction of IBC has contributed to the reduction of NPAs in the banking sector, improving the financial health of banks and financial institutions.

  • Promotes Entrepreneurship:

By offering a mechanism for revival, the IBC allows businesses to restructure their operations rather than be forced into liquidation. This encourages entrepreneurship and reduces the fear of failure.

Management Notes

Removal of Name of the Company from Registrar of Companies

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Removal by the registrar

The Companies Registrar can strike-off or remove a company name if he or she has a reasonable cause to think of:

  • An organization fails to start its business within a year of its incorporation
  • The memorandum subscribers have not reimbursed the subscription within 180-days from the company’s incorporation and a declaration regarding that effect has not been filed
  • An organization has not yet been carrying on any operation or business for a time period of about two years immediately prior to the financial years without making an application for the getting the status of a dormant company

Removal Notice

The notice issued for removal would be officially published in the Gazette for the knowledge of general public. During the expiry of time given in the notice, the Company Registrar will remove the organization name from MCA database followed by publishing a notice in the Official Gazette. Once the notice gets published in the Gazette officially, the company will stand dissolved. Even though the company will be dissolved as above mentioned, the tribunal would still have power for winding up an organization whose name was removed from the companies register.

Restriction on Removal application

An application for striking-off the company’s name would not be made in the preceding three months if the company has:

  • Altered its name or even moved its registered office address from one state to another in India
  • Made a disposal of the value of property or rights being held by it for gain disposal at the time of actual course of trading or even carrying on the business
  • Make an application to tribunal for getting approval of an arrangement or compromise without the matter to be concluded
  • Organization has been wound up under the Chapter XX of Companies Act, 2013 in case voluntarily or even by the Tribunal

Removal of company’s name from MCA database on the suo-moto basis

Removal of company’s name from the register of companies on suo-moto basis is possible where the Registrar has reason to believe that:

(a) the company has failed in commencing its business within the first year of its incorporation; or

(b) the company isn’t carrying on any operation or business for a period of 2 immediately preceding FY (financial years) and has applied within that period for acquiring the dormant company status under section 455,

The registrar shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.”

The Registrar may remove the company’s name from the companies register in terms of the Act of Section 248:

Provided that the following categories of the organization should not be striking-off from the company’s register under the rule 4, namely:

  • Listed companies
  • Companies, which have been delisted because of non-compliance of listing agreement or listing regulations or other statutory laws
  • Companies, where investigation or inspection has been ordered and carried out or actions, which were completed yet prosecutions arising out of such investigation or inspection pending in the court
  • Vanishing companies
  • Companies whose compounding application is pending before the competent authority to compound the offenses being committed by the organization or its officers in default
  • Companies against that any prosecution of an offense is found to be pending in any court
  • Companies where notifications under Companies Act 1956, section 234 or section 207 or section 206 of the act is issued by the inspector or registrar. A Pending report under section 208 is submitted or even following the instructions regarding any prosecution emerging out of such scrutiny or inquiry if any.
  • Companies that have accepted deposits from public that are outstanding
  • Companies registered under Section 25 of the Old Companies Act, or Section 8 of the Companies Act 2013.
  • Companies having charges that are pending for the satisfaction

Voluntary application by company for striking off the name from the register of roc

Who can make application : Any company( other than Section 8 company (non-profit organization) may as per section 248(2) of the Act , may voluntarily make an application for striking off the name of the Company from the Register of companies maintained by ROC, after extinguishing all its liabilities , by obtaining approval of 75%  members in terms of paid up share capital or consent by way of special resolution on any of the ground that it has not started or commenced its business or it is not carrying on business or operation for a period of two immediately preceding financial years and not made any application for obtaining the status of the company as a dormant company.

A Company which is regulated under a special Act is required to obtain approval of the regulatory body constituted or established under that Act.

Undertakings by Directors and Discharge of Liabilities

 Before passing an order for dissolution, RoC shall satisfy himself that sufficient provision has been made for the payment or discharge of all its liabilities within a reasonable time and has obtained necessary undertakings from the Managing Director, Director or other person in charge of the management of the Company.

The Liability of every Director, manager or other officer and of every member of the Company shall continue even after the Company is dissolved and it may be enforced.

The assets of the Company shall be made available for the payment or discharge of all its liabilities and obligations even after the order removing the name of the Company from the register of Companies.

Objections or suggestions: ROC shall intimate to the authorities having jurisdiction over the Company for seeking objections within 30 days from the date of issue of the letter of intimation to:

a) Income tax authorities

b) Central exercise authority

c) Service tax authority

If no Objection is received from the aforesaid authorities within 30 days, then it shall be presumed that they have no objections to the striking off.

Dissolution of Company: If ROC has not received any objection, then after the expiry of the period specified in the notice shall strike off the name of the Company and publish a notice in form STK-7 in official Gazette, upon such publication Company shall stand dissolve and same shall also be placed on the official website of MCA.

Application or forms pending before central government: Any application for striking off or Form FTE filed with RoC prior to the commencement of these rules is pending or not disposed of, such application shall be disposed in accordance with the rules made under the Companies Act, 1956.

Publication of Notice: The Notice under sub-section (1) and (2) of section 248 shall be published in Form STK-5 or 5A (Notification dated 12th April, 2017) (in case notice for strike off received from ROC) and Form STK-6 (Voluntary strike off) which shall be:

a) Placed on official website of MCA.

b) Published in official Gazette.

c) Published in English language in a leading English Newspaper and in vernacular language in a leading vernacular language newspaper, having wide circulation in the State where the Registered Office of the Company is situated.

 In case of voluntary winding up an application for striking off shall also be placed on the website of the Company till the Disposal of such application.

Management Notes

Definition and Types of Goods of Sales of Goods Act, 1930

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‘Goods’ is defined as per Section 2(7) of the ‘Act’ as. “Every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”

“Every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale will be considered goods”

As you can see, shares and stocks are also defined as goods by the Act. The term actionable claims mean those claims which are eligible to be enforced or initiated by a suit or legal action. This means that those claims where an action such as recovery by auction, suit, refunds etc. could be initiated to recover or realize the claim.

We say that goods are in a deliverable state when their condition is such that the buyer would, under the contract, be bound to take delivery of these goods. Goods may be further understood in the following subtypes:

Existing Goods

The goods that are referred to in the contract of sale are termed as existing goods if they are present (in existence) at the time of the contract. In sec 6 of the Act, the existing goods are those goods which are in the legal possession or are owned by the seller at the time of the formulation of the contract of sale. The existing goods are further of the following types:

A) Specific Goods

According to the sec 2(14) of the Act, these are those goods that are “identified and agreed upon” when the contract of sale is formed. For example, you want to sell your mobile phone online. You put an advertisement with its picture and information. A buyer agrees to the sale and a contract is formed. The mobile, in this case, is specific good.

B) Ascertained Goods:

This is a type not defined by the law but by the judicial interpretation. This term is used for specific goods which have been selected from a larger set of goods.

C) Unascertained Goods:

These are the goods that have not been specifically identified but have rather been left to be selected from a larger group. For example, from your 500 apples, you decide to sell 200 apples but you don’t specify which ones you want to sell. A seller will have the liberty to choose any 200 apples from the lot. These are thus the unascertained goods.

Future Goods

In sec 2(6) of the Act, future goods have been defined as the goods that will either be manufactured or produced or acquired by the seller at the time the contract of sale is made. The contract for the sale of future goods will never have the actual sale in it, it will always be an agreement to sell.

For example, you have an apple orchard with apples in it. You agree to sell 1000 apples to a buyer after the apples ripe. This is a sale that has to occur in the future but the goods have been identified already and the agreement made. Such goods are known as future goods.

Contingent Goods

Contingent goods are actually a subtype of future goods in the sense that in contingent goods the actual sale is to be done in the future. These goods are part of a sale contract that has some contingency clause in it. For example, if you sell your apples from your orchard when the trees are yet to produce apples, the apples are a contingent good. This sale is dependent on the condition that the trees are able to produce apples, which may not happen.

Delivery

The delivery of goods signifies the voluntary transfer of possession from one person to another. The objective or the end result of any such process which results in the goods coming into the possession of the buyer is a delivery process. The delivery could occur even when the goods are transferred to a person other than the buyer but who is authorized to hold the goods on behalf of the buyer.

There are various forms of delivery as follows:

  • Actual Delivery: If the goods are physically given into the possession of the buyer, the delivery is an actual delivery.
  • Constructive delivery: The transfer of goods can be done even when the transfer is affected without a change in the possession or custody of the goods. For example, a case of the delivery by attornment or acknowledgment will be a constructive delivery. If you pick up a parcel on behalf of your friend and agree to hold on to it for him, it is a constructive delivery.
  • Symbolic delivery: This kind of delivery involves the delivery of a thing in token of a transfer of some other thing. For example, the key of the godowns with the goods in it, when handed over to the buyer will constitute a symbolic delivery.

The Document of Title to Goods

From the Sec 2(4) of the act, we can say that this “includes the bill of lading, dock-warrant, warehouse keeper’s certificate, railway receipt, multimodal transport document, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.”

  • Mercantile Agent [Section 2(9)]

Mercantile agent is someone who has authority in the customary course of business, either to sell or consign goods under the contract on behalf of the one or both of the parties. Examples include auctioneers, brokers, factors etc.

  • Property [Section 2(11)]

In the Act, property means ‘ownership’ or the general property i.e. all ownership right of the goods. A sale constitutes the transfer of ownership of goods by the seller to the buyer or an agreement of the same.

  • Insolvent [Section 2(8)]

The Act defines an insolvent person as someone who ceases to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether he has committed an act of insolvency or not.

  • Price [Section 2(10)]

In the Act, the price is defined as the money consideration for a sale of goods.

  • Quality of Goods

In Sec 2(12) of the Act, the quality of goods is referred to as their state or condition.

Management Notes

Person, Goods, Service

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Person or Consumer

Buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who ‘hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purposes.

(i) One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment

(ii) It includes any user of such goods other than the person who actually buys goods and such use is made with the approval of the purchaser.

EXCEPTION: A person is not a consumer if he purchases goods for commercial or resale purposes. However, the word “commercial” does not include use by consumer of goods bought and used by him exclusively for the purpose of earning his livelihood, by means of self-employment.

For the purpose of “services”, a “consumer” means a person belonging to the following categories:

(i) One who hires or avails of any service or services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment

(ii) It includes any beneficiary of such service other than the one who actually hires or avails of the service for consideration and such services are availed with the approval of such person.

Example of services includes: banking, insurance, transport, processing, housing construction, supply of electrical energy, entertainment, board or lodging etc.

Services as per sec 2(1)(o) of Consumer Protection Act, and MRTP Act means and includes banking, financing, insurance, transport, processing, supply of electric energy, board or lodging or both, entertainment, amusement or purveying of news or other information. Exclusion- those rendered free of charge or personal services.

Goods

For the purpose of “goods”, a consumer means a person belonging to the following categories:

(i) One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment

(ii) It includes any user of such goods other than the person who actually buys goods and such use is made with the approval of the purchaser.

Services

“2(l)(o) ‘Service‘ means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or loding or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service“.

Characteristics of Services:

(i) Two party process:

there has to be a service provider and service recipient.

(ii) It has to be intangible and invisible, i.e., it cannot be seen or touched.

Management Notes

Communication of Offer and Acceptance, Revocation and mode of revocation of offer and acceptance

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Offer:

An offer is a clear and definite proposal made by one party (known as the offeror) to another party (called the offeree), indicating a willingness to enter into a contract on specific terms. It is the first step in the formation of a contract and creates the power of acceptance in the offeree.

According to Section 2(a) of the Indian Contract Act, 1872, an offer or proposal is when one person signifies to another their willingness to do or abstain from doing something, with the intention of obtaining the assent of the other person to such act or abstinence.

The offer must be communicated to the offeree to be effective, enabling the offeree to decide whether to accept or reject it. It must be certain and definite, leaving no ambiguity about the terms involved. The offeror must also intend to be legally bound once the offer is accepted.

Offers may be express, clearly stated verbally or in writing, or implied, inferred from the conduct or circumstances. They can also be specific, directed to a particular person, or general, made to the public at large.

Acceptance:

Acceptance is the unequivocal expression of assent by the offeree to the terms of the offer made by the offeror. It is a crucial element in the formation of a contract, as it signifies the offeree’s agreement to be bound by the offer, leading to the creation of a legally enforceable agreement.

Section 2(b) of the Indian Contract Act, 1872 defines acceptance as the assent given by the person to whom the proposal (offer) is made. For acceptance to be valid, it must correspond exactly to the terms of the offer without any modifications — this is known as the “mirror image rule.” Any change in terms amounts to a counter-offer, not acceptance.

Acceptance must be communicated to the offeror in the manner prescribed, or if no specific method is stated, then in a reasonable way. It can be express (by words, spoken or written) or implied (by conduct).

Acceptance must occur within the time specified in the offer or within a reasonable time if no duration is mentioned. Once acceptance is effectively communicated, the contract comes into existence. However, acceptance made after the offer is revoked or expired is invalid.

Communication of Offer:

The communication of an offer is the process by which the offeror conveys their willingness to enter into a contract to the offeree. According to Section 4 of the Indian Contract Act, 1872, the communication of an offer is complete when it comes to the knowledge of the person to whom it is made — that is, when the offeree becomes aware of it.

For a valid contract to arise, the offer must be properly communicated so the offeree can make an informed decision to accept or reject it. Until the offeree knows about the offer, there can be no acceptance, and thus, no contract. This is important to avoid misunderstandings or disputes later.

The communication can be done by direct methods such as spoken words, letters, emails, or even conduct, depending on the situation. For example, in a general offer (like a public advertisement), the offer is considered communicated when it is publicized.

In face-to-face conversations or phone calls, the communication is instantaneous. However, when sent by post or email, the timing depends on when the offeree actually receives and reads the offer.

Effective communication ensures that both parties are aware of their obligations and rights before entering a contract.

Steps in Communication of Offer:

Step 1. Formulation of the Offer

The first step is the formulation of the offer by the offeror. This involves the offeror deciding on the precise terms and conditions they are willing to propose, whether it is to do something or abstain from doing something. The offer must show clear intent to be legally bound if accepted, and it should not be vague or uncertain. A properly formulated offer sets the foundation for effective communication and helps avoid confusion or disputes later.

Step 2. Mode of Communication Chosen

Once the offer is ready, the offeror selects a mode of communication — oral, written, electronic, or by conduct — to transmit the offer to the offeree. The choice depends on the context and the relationship between the parties. For example, offers can be made face-to-face, over the phone, via email, or through letters. The selected mode must ensure the offeree receives the offer clearly and unambiguously, enabling them to make a proper decision.

Step 3. Dispatching or Sending the Offer

The next step is the dispatch or sending of the offer through the chosen medium. This action marks the offeror’s attempt to communicate willingness to enter into a contract. For instance, mailing a letter, sending an email, or delivering a verbal message all represent dispatching the offer. Importantly, the offeror must take reasonable steps to ensure the offer reaches the offeree. Simply writing or preparing the offer is not enough; it must be actively sent out.

Step 4. Receipt of the Offer by the Offeree

According to Section 4 of the Indian Contract Act, the communication of the offer is complete when the offeree receives the offer. It is not enough that the offeror has sent it; the offeree must actually come to know of it. For example, a letter must be delivered and read, or an email must reach the inbox and be accessed. Until the offeree knows about the offer, they cannot act on it or accept it.

Step 5. Understanding the Terms of the Offer

After receiving the offer, the offeree must understand the terms and conditions of the proposal. This step is crucial, as a misunderstanding or misinterpretation could lead to disputes or an invalid agreement. The offeror should ensure that the language used is clear, specific, and unambiguous, leaving no room for doubt. The offeree, on their part, should carefully read or listen to the offer details before making any decision regarding acceptance or rejection.

Step 6. Clarification or Inquiries

Sometimes, after receiving the offer, the offeree may have questions or need clarifications before proceeding. This is an optional but practical step where the offeree seeks additional details to fully understand the offer. For example, they may ask for clarification on pricing, timelines, or obligations. While this does not constitute acceptance or rejection, it is part of the communication process, ensuring both parties are aligned and reducing the risk of later conflicts or misunderstandings.

Step 7. Decision by the Offeree to Accept or Reject

Finally, after receiving and understanding the offer, the offeree must make a decision — either to accept, reject, or make a counteroffer. This decision concludes the communication process from the offeror’s side and transitions into the communication of acceptance or rejection. The offeree’s response determines whether a valid contract will be formed. Without the initial steps of clear offer communication, the offeree would not be in a position to decide meaningfully.

Communication of Acceptance:

Communication of acceptance is a crucial step in forming a valid contract under the Indian Contract Act, 1872. It refers to the process by which the offeree conveys their assent or agreement to the terms of the offer back to the offeror. Without proper communication, the acceptance is not legally recognized, and no binding contract is formed.

According to Section 4 of the Act, the communication of acceptance is complete:

  • As against the proposer (offeror) when the acceptance is put in a course of transmission, so it is beyond the power of the acceptor (for example, when the acceptance letter is posted);

  • As against the acceptor (offeree) when it actually comes to the knowledge of the proposer (for example, when the proposer receives the acceptance letter).

This means that once the offeree has done everything required to communicate acceptance, the contract is binding, even if the proposer has not yet received the communication. However, until the acceptance reaches the proposer, the offeree can revoke it.

Proper communication ensures both parties are aware of the binding agreement, reducing misunderstandings. The method of communication can be express (spoken or written) or implied, depending on the nature of the transaction.

In modern times, communication can occur via letters, email, phone, or even messaging apps, but it must follow any conditions specified in the offer.

Steps in Communication of Acceptance:

  • Understanding the Offer

Before communicating acceptance, the offeree must fully understand the terms of the offer. This means carefully reviewing the proposal, including obligations, timelines, and conditions, to ensure they agree with what’s being proposed. Without clear understanding, acceptance may be invalid, or it might lead to disputes. The offeree must confirm that the offer aligns with their expectations and capabilities before moving forward to acceptance, as this marks the transition from mere negotiation to legal commitment.

  • Decision to Accept

Once the offer is understood, the offeree must consciously make a decision to accept. This is the moment of internal agreement when the offeree decides to bind themselves to the terms of the offer. This decision must be absolute and unconditional — any changes or modifications would constitute a counteroffer, not acceptance. The decision-making step is critical, as acceptance must exactly mirror the offer for a valid contract to arise under the “mirror image rule.”

  • Choosing the Mode of Communication

The offeree must then choose the appropriate mode of communication for acceptance. This could be oral, written, electronic, or any other mode specified by the offeror. If the offeror has prescribed a particular mode (for example, acceptance only by email), the offeree must comply with it. If no mode is specified, then the offeree should use a reasonable or customary method for such transactions to ensure the acceptance is valid and properly communicated.

  • Dispatching the Acceptance

Once the mode is selected, the offeree must dispatch or send the acceptance. This could mean mailing a letter, sending an email, making a phone call, or verbally communicating agreement in person. As per Section 4 of the Indian Contract Act, communication of acceptance is complete against the proposer when it is put in the course of transmission and out of the power of the acceptor. This marks the point where the acceptor has done their part.

  • Transmission of Acceptance

The next step involves the actual transmission of the acceptance to the offeror. This is the physical or digital movement of the acceptance from the offeree to the offeror, such as a letter traveling through the postal system or an email moving through servers. While dispatch marks the completion on the proposer’s side, transmission ensures that the acceptance is on its way and will soon reach the offeror, fulfilling the final communication requirements under the law.

  • Receipt by the Offeror

Communication of acceptance is complete as against the acceptor when it comes to the knowledge of the offeror. This means the offeror must receive the acceptance — reading the email, opening the letter, or hearing the verbal confirmation. Until the offeror knows of the acceptance, the offeree can revoke it. Once the offeror is informed, the contract becomes binding on both parties, completing the circle of offer and acceptance as required under contract law.

  • Confirmation or Follow-Up (if needed)

While not legally required, in modern business practice, it is often customary to confirm acceptance or follow up after it has been communicated. This ensures both parties are on the same page and helps avoid misunderstandings. For example, sending an acknowledgment email or requesting a confirmation call can provide assurance that the acceptance was received and noted. This extra step, while optional, strengthens the relationship and clarity between contracting parties.

Revocation of Offer:

Revocation means the withdrawal or cancellation of an offer by the offeror before it is accepted. Under Section 5 of the Indian Contract Act, 1872, an offer can be revoked at any time before the communication of acceptance is complete as against the offeror, but not afterward. Once the acceptance is communicated and becomes binding, the offeror can no longer revoke the offer.

Revocation ensures that the offeror retains control over the offer until it turns into a contract. However, this right is limited — the revocation must be communicated effectively to the offeree before they accept the offer.

Modes of Revocation of Offer:

The Indian Contract Act, under Section 6, outlines various modes through which an offer can be revoked. These modes ensure that both parties understand under what circumstances an offer is no longer valid and avoid unnecessary disputes. Below are the key modes of revocation:

  • By Notice of Revocation

An offer can be revoked by the offeror giving clear notice to the offeree, informing them of the withdrawal. This notice can be communicated verbally, in writing, or through any medium that effectively reaches the offeree. The revocation is valid only if it reaches the offeree before they communicate their acceptance. For example, if A offers to sell his bike to B and sends a message withdrawing the offer before B sends his acceptance, the revocation is valid.

  • By Lapse of Time

If the offeror specifies a time limit for acceptance and the offeree does not accept within that period, the offer automatically lapses. Even if no time is specified, if the acceptance is not made within a reasonable time — based on the nature of the offer and the surrounding circumstances — the offer expires. For example, if A offers to sell goods to B stating the offer is open for three days, but B accepts after five days, the offer has lapsed.

  • By Failure of Condition Precedent

If the offer is subject to certain conditions and those conditions are not met, the offer becomes invalid. For example, if A offers to sell his car to B on the condition that B arranges full payment within one week, but B fails to do so, the offer is automatically revoked.

  • By Death or Insanity of Offeror

If the offeror dies or becomes of unsound mind before the acceptance is communicated, and the offeree is aware of this, the offer stands revoked. However, if the offeree accepts the offer without knowing about the offeror’s death or insanity, the contract may still be valid. For example, if A offers to sell property to B but dies before B accepts, and B knows of A’s death, the offer is revoked.

  • By Counter-offer or Rejection

If the offeree rejects the offer outright or makes a counter-offer proposing different terms, the original offer is revoked. A counter-offer is treated as a rejection of the original offer and the proposal of a new offer. For example, if A offers to sell a product for ₹10,000 and B replies offering ₹8,000, this is a counter-offer and effectively cancels the original offer.

  • By Change in Law

If a change in law renders the performance of the offer illegal or impossible, the offer is automatically revoked. For example, if A offers to export a certain good to B, but the government later bans the export of that good, the offer stands revoked.

Revocation of Acceptance:

Revocation of acceptance refers to the withdrawal or cancellation of the acceptance made by the offeree before it becomes binding on the offeror. According to Section 5 of the Indian Contract Act, 1872, an acceptance can be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterward.

This means that once the acceptance is communicated to the offeror and reaches their knowledge, the offeree cannot revoke or cancel it. However, before that point, the offeree retains the right to withdraw their acceptance if they wish to do so.

For example, if A offers to sell a car to B, and B posts a letter of acceptance on Monday but sends a telegram revoking the acceptance on Tuesday which reaches A before the acceptance letter, the revocation is valid.

The key point is the timing — the revocation must reach the offeror before or at the same time as the acceptance becomes effective. Once the acceptance is communicated and comes to the knowledge of the offeror, it creates a binding contract, and revocation is no longer possible.

This provision ensures fairness and clarity, preventing situations where one party is unfairly bound by an acceptance they later decide to withdraw but fail to notify in time. Proper communication plays a critical role in ensuring valid revocation.

Modes of Revocation of Acceptance:

  • Express Revocation

This is when the acceptor clearly communicates their intention to withdraw the acceptance through direct communication. For example, if the acceptor has sent a letter of acceptance but later sends an email or makes a phone call to inform the offeror of their intention to revoke before the letter is received, the revocation is valid. Express revocation can be oral or written, but it must reach the offeror in time.

  • Implied Revocation

Sometimes revocation can happen through implied actions or conduct. If the acceptor performs an act that indicates they no longer intend to go through with the contract, and this action comes to the knowledge of the offeror before the acceptance reaches them, it counts as implied revocation. For example, if the acceptor sells the goods they had earlier accepted to purchase, it shows they no longer wish to accept.

  • Revocation by Faster Mode of Communication

If the acceptance was sent by a slower mode (like postal mail), the revocation can be sent using a faster mode (like telephone, email, or telegram) to ensure it reaches the offeror before or at the same time as the acceptance. For instance, if the acceptor sends a letter of acceptance but follows it up with a quick phone call or email to revoke before the letter is received, the revocation is valid.

  • Revocation by Death or Insanity (under certain cases)

Although death or insanity usually terminates the offer, if the acceptor dies or becomes insane before the acceptance reaches the offeror and the offeror becomes aware of it, the acceptance is effectively revoked. However, if the acceptance has already been communicated, death or insanity does not revoke it.

  • Revocation through Authorized Agent

The revocation of acceptance can also be communicated through an authorized agent. If the acceptor has appointed an agent to handle communication, the agent can validly notify the offeror about the revocation before the acceptance becomes effective.

Management Notes

Types of Contract

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The word Contract was derived from a Latin word Contractum. The word contractum means drawn together. The following are definition with regard to Contract.

Definition of Contract

Agreement creating and defining obligations between the parties is called Contract.: Salmond

Any agreement or promise enforceable at law is called Contract. :Pollock

Agreement upon consideration basis to do or not to do a particular thing is called contract. :Black Stone

Agreement enforceable by law is called contract. :Indian Contract Act, 1872 Sec.2 (h)

In connection with contracts, there are four types of classifications. Types of contracts in contract law are as follows;

  • On the basis of Formation
  • On the basis of Nature of Consideration
  • On the basis of Execution
  • On the basis of Validity

Types of Contracts on the basis of Formation

On this base Contracts can be classified into three groups, namely Express, Implied, Quasi Contracts.

Express Contracts: The Contracts where there is expression or conversation are called Express Contracts. For example: A has offered to sell his house and B has given acceptance. It is Express Contract.

Implied Contract: The Contracts where there is no expression are called implied contracts. Sitting in a Bus can be taken as example to implied contract between passenger and owner of the bus.

Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so, actually there will be no Contractual relations between the partners. Such a Contract which is created by Virtue of law is called Quasi Contract. Sections 68 to 72 of Contract Act read about the situations where court can create Quasi Contract.

  • 68: When necessaries are supplied
  • 69: When expenses of one person are paid by another person.
  • 70: When one party is benefited by the activity of another party.
  • 71: In case of finder of lost tools.
  • 72: When payment is made by mistake or goods are delivered by mistake.

Example: A case on this occasion is Chowal Vs Cooper. In this case A`s husband becomes no more. She is very poor and therefore not capable of meeting even cost of cremation. B, one of her relatives, understands her position and spends his own money for cremation. It is done so without A`s request. Afterwards B claims his amount from A where A refuses to pay. Here court applies Sec. 68 and creates a Quasi Contract between them.

Types of Contracts on the basis of Nature of Consideration

On this base, Contracts are of two types. Namely Bilateral Contracts and Unilateral Contracts.

Bilateral Contracts: If considerations in both directions are to be moved after the contract, it is called Bilateral Contract.

Example: A Contract has got formed between X and Y on 1st Jan, according to which X has to deliver goods to Y on 3rd Jan and Y has to pay amount on 3rd Jan. It is bilateral contract.

Unilateral Contract: If considerations is to be moved in one direction only after the Contract, it is called Unilateral Contract.

Types of Contracts on the basis of Execution

On this base Contracts can be classified into two groups. namely, Executed and Executory Contracts. If performance is completed, it is called executed contract. In case where contractual obligations are to be performed in future, it is called executor contract.

Types of Contracts On the basis of Validity

On this base Contracts can be classified into 5 groups. namely Valid, Void, Voidable, Illegal and Unenforceable Contracts.

Valid: The Contracts which are enforceable in a court of law are called Valid Contracts. To attain Validity the Contract should have certain features like consensus ad idem, Certainty, free consent, two directional consideration, fulfillment of legal formalities, legal obligations, lawful object, capacity of parties, possibility of performance, etc.

Void: A Contract which is not enforceable in a court of law is called Void Contract. If a Contract is deficient in any one or more of the above features (Except free consent and legal formalities). It is called Void Contract.

Voidable: A Contract which is deficient in only free consent, is called Voidable Contract. That means it is a Contract which is made under certain pressure either physical or mental. At the option of suffering party, a voidable contract may become either Valid or Void in future. For example: there is a Contract between A and B where B has forcibly made A involved in the Contract. It is voidable at the option of A.

Illegal: If the contract has unlawful object it is called Illegal Contract.

Unenforceable: A contract which has not properly fulfilled legal formalities is called unenforceable contract. That means unenforceable contract suffers from some technical defect like insufficient stamp etc. After rectification of that technical defect, it becomes enforceable or valid contract.

Void Contracts and Illegal Contracts

All illegal Contracts are void, but all void contracts are not illegal: An illegal Contract will not be implemented by court. So, illegal contract is Void. A void contract may not be illegal because its object may be lawful.

The Contracts which are collateral to illegal contract are void, But the contracts which are collateral to Void contract may be Valid: An illegal makes not only itself Void but also the contracts connected to it. But a contract collateral to void contract may attain Validity because object of main contract is lawful.

Void Contracts and Voidable Contracts

Becoming Valid: A Voidable Contract may become Valid at the option of suffering party. But a Void Contract can never and never become Valid.

Third Party Rights: In case of Voidable Contracts third party may attain rights on concerned property, If the third party gets the property before the Voidable Contracts gets declared as Void. But in case of Void Contract third party cannot get any right.

Management Notes

Balance Sheet of not-for-profit organization

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Even a non-profit organization maintains proper books of accounts. It aims to facilitate simple and convenient calculation of items of income and expenditure and finding the correct position of assets and liabilities of the organization. Let us learn how this balance sheet is made and the accounting treatment of a general fund.

There are several components of the accounting system of non-profit organization. This includes the balance sheet as well.

The balance sheet of non-profit organizations is prepared in the same manner as in the case of business enterprises. Assets of the organization are recorded on the ‘Right-hand side’ and Liabilities on the ‘Left-hand side’. Except for some peculiar transactions, the items are also same. The term ‘Capital’ is nowhere found in the case of non-profit organizations; instead Capital Fund, General Fund or Accumulated Fund is appearing in the Balance Sheet.

The amount of this fund is calculated by deducting the amount of liabilities from the value of assets. In this manner we can say that the method of finding out this fund is exactly same that as of calculating the capital of any business enterprise.

Accounting Treatment of General Fund and Preparation of Balance Sheet

  • Preparation of a balance sheet starts with the general fund. You have to add the respective surplus or deficit in the amount.
  • Further, add life membership fees or legacies at this stage.
  • Put all fixed assets on the asset side of the balance sheet.
  • Showcase the amounts paid in advance and amount due on the assets and liabilities side.
  • Post the closing balances of the assets and liabilities on the respective side of the balance sheet.
  • To calculate the amount of the fund, deduct the value of total liabilities from the value of assets.

The surplus or deficit of the year is adjusted to the fund of previous year. It is worth mentioning that the items which have been capitalized during the current year should also be added. Specific funds created for some specific purposes are shown on the liabilities side. For example, Match Fund, Prize Fund etc. are shown on the liabilities side.

The amounts received on account of these funds, if invested separately, are represented by specific assets in the balance sheet on assets side respectively. For example, Match Fund Investments, Prize Fund Investments etc. are shown on the assets side.

A specimen of Balance Sheet is given below:

Management Notes

Statement of Affairs

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According to Sec. 454, within 21 days of the date of the winding-up order to the appointment of the official liquidator as provisional liquidator, the company has to submit a statement to the official liquidator as to the affairs of the company unless the Court otherwise orders. The statement must be in the prescribed form.

It must be verified by affidavit and must contain the following particulars:

(i) The assets of the company, stating separately the cash in hand and cash at bank and negotiable securities.

(ii) The debts and liabilities of the company;

(iii) Names and addresses of its creditors, stating separately the amount of secured and unsecured debts;

(iv) In the case of secured debts, particularly of the securities held by the creditors, their value and dates on which they were given;

(v) The debts due to the company and names and addresses of the persons from whom they are due and the amount likely to be realized;

(vi) Such further information as may be required by the official liquidator.

Prescribed Form of Statement of Affairs-[Form 57 of the Companies (Court) Rules, 1959] is given:

Form of Statement of Affairs:

Statement as to the affairs of………… Ltd. on the……… day of 20…; being the date of winding-up order appointing provisional liquidator, or the date directed by the official liquidator as the case may be, showing assets of estimated realisable values and liabilities expected to rank.

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