Tag: Arbitration Law

Alteration of share capital

Alteration of Share Capital refers to the changes in the existing capital structure of the firm. A company can alter its share capital only if it is authorized by its Articles of Association. An article of association is the document framed at the time of incorporation of the company to govern its internal affairs.

In case of public company, the shares are being subscribed from the public. So, the limited company has to make alteration of the memorandum of association clause also. There is a capital clause in the memorandum of association that contains the details regarding the amount of share capital that can be raised by the company during its lifetime. The capital clause has to be get altered by the registrar appointed under Companies Act 2013.

SECTION: 61 Way to Alter Share Capital

Section 61 of the Companies Act, 2013 states the five different ways to alter the share capital which are as follows:

Increase in Authorized Capital: Authorized Capital is also known as Registered or Nominal Capital. This is the capital with which company gets incorporated. The company can increase its share capital by altering its capital clause mentioned in the Memorandum of Association.  

Consolidation of Shares: The Company can also alter its share capital by consolidating the smaller denominations shares into larger denominations. In case there is any change regarding voting rights of shareholders results out of the consolidation, the permission of the tribunal or court is compulsory. In case of consolidation of shares, the following journal entry is passed:

Share Capital (Old) A/c    Dr.

     To Share Capital (New) A/c

Variation of share-holder right

Sub Division

A company can also alter its share capital by sub dividing the value of the shares held by the shareholders. Section 61 allows the company to sub-divide its shares of higher denominations into smaller denominations. The company can do so only if it is authorized by the memorandum of association. In case there is sub-division of partly paid-up shares, the condition to be fulfilled is that the difference between the paid-up amount and unpaid amount continues to be the same. This way of alteration of share capital results in the holding of a greater number of shares in the hands of the shareholders with low denomination. The journal entry to be passed in this method is as follows:

Share Capital (Old) A/c    Dr.

     To Share Capital (New) A/c

Consolidation

• Company can consolidate and divide its shares into shares of larger amount only if it is authorized by its Articles of Association and after obtaining approval of members by ordinary resolution. (Section 61(1)
• Company shall ensure that proposed consolidation and division of shares shall not result in change in the voting percentage of shareholders. Otherwise, Company shall be required to approach Tribunal (at present, Company Law Board) seeking permission for proposed consolidation and division of shares resulting in change in the voting percentage of shareholders (Proviso to Section 61(1)(b))
• A company may replace all the existing certificates by new certificates upon consolidation and division of shares subject to compliance with prescribed rules.

Surrender and Reissue/Cancellation

Cancel the unissued shares: the company can also cancel its unissued capital. But this does not leads to alteration of share capital. In this method, no journal entry is passed and no treatment is done in the books of the accounts.

Conversion of shares into stock: The Company can also alter its shares capital by converting the fully paid-up shares into the stock. Stock is the aggregate of fully paid-up shares.  The company can do so only if it is authorized by its articles of association. Also, the company can re convert its stock into shares.

The journal entries to be passed are as follows:

A) Conversion of shares into stock

Equity share capital A/c    Dr.

    To Equity Capital Stock A/c

B) Conversion of stock into shares

Equity Capital Stock A/c     Dr.

     To Equity Share Capital A/c

Reduction of share capital

Bailment is a legal relationship in which the owner of goods (called the bailor) delivers them to another person (called the bailee) for a specific purpose under a contract, with the understanding that the goods will be returned after the purpose is fulfilled or otherwise disposed of according to the bailor’s directions.

Bailment is governed by Sections 148 to 171 of the Indian Contract Act, 1872.

Definition (Section 148)

According to Section 148,

“A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.”

Thus, bailment involves:

• Delivery of goods

• Specific purpose

• Return or disposal of goods as instructed

Features of Bailment:

1. Delivery of Goods
   Only movable goods (not immovable property or money) can be bailed. The delivery can be:

   • Actual delivery: Physical handing over of goods.

   • Constructive delivery: Transfer of possession without actual handover, like handing over keys to a godown.

2. Contract
   Bailment must be based on a contract, express or implied. In some cases (e.g. finder of goods), bailment exists even without a formal agreement.

3. Purpose
   Goods are delivered for a specific objective, such as safekeeping, transportation, or repair.

4. Return of Goods
   The bailee must return the goods or dispose of them as per the bailor’s instructions once the purpose is fulfilled.

Duties of the Bailee:

• Take reasonable care of goods (Section 151)

• Not use goods for unauthorized purposes

• Return goods on time (Section 160)

• Return increase or profit (e.g., baby animals, interest on bonds)

Duties of the Bailor:

• Disclose known faults in goods (Section 150)

• Compensate bailee for losses due to defective goods

• Pay agreed charges or expenses

Types of Bailment

1. Gratuitous Bailment: Bailment without reward (e.g., lending a book to a friend).

2. Bailment for Hire or Reward: Bailment with consideration (e.g., leaving a car with a valet or in a garage for service).

Termination of Bailment:

Bailment ends when:

• The purpose is fulfilled

• The agreed time expires

• The bailee returns the goods

• The bailor demands return (in some cases)

Examples of Bailment:

• Giving clothes to a dry cleaner

• Depositing valuables in a hotel locker

• Lending a bicycle for a day

Pledge

Pledge is a special type of bailment, where goods are delivered by one party to another as security for repayment of a debt or performance of a promise. It is a commonly used concept in banking, lending, and commercial transactions involving collateral.

Pledge is governed by Sections 172 to 179 of the Indian Contract Act, 1872.

Definition (Section 172):

According to Section 172 of the Indian Contract Act:

“The bailment of goods as security for payment of a debt or performance of a promise is called a pledge.”

In this relationship:

• The pawnor (pledgor) is the person who delivers the goods as security.

• The pawnee (pledgee) is the person who receives the goods and holds them until the debt or obligation is fulfilled.

Essentials of a Valid Pledge

1. Delivery of Possession
   There must be delivery of movable goods (not immovable property) by the pawnor to the pawnee. Delivery can be:

   • Actual: Physical handover of goods.

   • Constructive: Symbolic delivery (e.g., handing over documents of title like a warehouse receipt).

2. Purpose – Security for Debt or Promise
   The pledge must be made as security for a debt repayment or the performance of a promise.

3. Return of Goods
   Once the debt is repaid or the promise fulfilled, the pawnee must return the goods to the pawnor.

4. Ownership Retained by Pawnor
   Ownership of the goods remains with the pawnor; only possession is transferred temporarily.

Rights of the Pawnee

1. Right of Retention (Section 173)
   The pawnee can retain the goods pledged until the full payment of the debt or performance of the promise.

2. Right to Recover Expenses (Section 175)
   If the pawnee incurs expenses in preserving or protecting the goods, he can recover those from the pawnor.

3. Right to Sell (Section 176)
   If the pawnor defaults, the pawnee can:

   • Sue for the debt, retaining the goods, or

   • Sell the goods after giving reasonable notice to the pawnor.

Duties of the Pawnee:

• Take reasonable care of the pledged goods.

• Not use goods for unauthorized purposes.

• Return goods upon repayment or performance of the promise.

Rights and Duties of the Pawnor:

• Right to redeem goods before actual sale by the pawnee.

• Duty to repay the debt or perform the promise.

• Duty to compensate for any expenses incurred by the pawnee.

Pledge by Non-Owners (Section 178 & 179):

In certain cases, non-owners (like mercantile agents or persons with possession under a voidable contract) can make a valid pledge if:

• They act in the ordinary course of business.

• The pawnee acts in good faith and without knowledge of any defect in title.

Examples of Pledge:

• Pledging gold ornaments with a bank for a loan.

• A business pledging goods in a warehouse for working capital financing.

Key differences between Bailment and Pledge:

The term “Dissolution of Partnership“ refers to the change in the relationship among partners due to which one or more partners cease to be partners, while the firm may continue with the remaining partners. It is different from dissolution of a firm, which completely ends the existence of the partnership firm.

Meaning of Dissolution of Partnership:

Dissolution of partnership occurs when there is a reconstitution of the firm without ending its overall business operations. It is a change in the structure of the partnership due to:

• Admission of a new partner

• Retirement or death of an existing partner

• Insolvency of a partner

• Change in profit-sharing ratio

The firm continues to exist, but the partnership agreement among the partners changes.

Legal Definition (Section 4):

According to Section 4 of the Indian Partnership Act, a partnership is “the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.”

When this relationship is altered—without completely closing the business—the partnership is said to be dissolved, though the firm may still exist in a reconstituted form.

Modes of Dissolution of Partnership Firm

A partnership firm can be dissolved either voluntarily or compulsorily, depending on circumstances. The Indian Partnership Act, 1932 provides legal provisions for dissolution. Understanding the modes helps partners terminate their business smoothly, distribute assets fairly, and protect legal rights. The modes can broadly be classified as follows:

1. Dissolution by Agreement

A partnership firm can be dissolved by mutual consent of all partners. If the partnership agreement specifies a method or procedure, it must be followed. Dissolution by agreement is the most common and amicable method, ensuring all partners cooperate in winding up the business. It can occur at any time during the partnership, irrespective of its duration. Partners may agree to dissolve due to business difficulties, personal reasons, or retirement. Legal formalities include notifying creditors, settling liabilities, and distributing remaining assets according to the partnership deed or mutual consent.

2. Dissolution on the Expiration of Term

If the partnership was formed for a fixed term, it automatically dissolves when the term expires, unless partners decide to continue. For instance, a firm formed for five years will dissolve after five years unless renewed. Expiration-based dissolution is natural and does not require a new agreement. Partners must still settle accounts, pay debts, and distribute remaining assets. This mode is simple but requires prior planning. Any delay or negligence in winding up can lead to disputes among partners and with creditors. The legal framework ensures orderly closure.

3. Dissolution on Completion of Objective

Partnership firms formed for a specific purpose or project automatically dissolve after achieving that objective. For example, a firm set up to construct a building will dissolve once the construction is completed. If the objective is partly achieved or impossible, partners may decide whether to continue or dissolve. Completion-of-objective dissolution avoids unnecessary continuation of the partnership. All assets must be liquidated, liabilities cleared, and profits or losses shared according to the deed or agreed ratios. This mode ensures the firm exists only as long as the business purpose remains relevant.

4. Dissolution by Notice of Partnership at Will

A partnership at will is one without a fixed term or objective. Any partner may dissolve such a firm by giving notice to all other partners. The notice serves as an official declaration of intent to dissolve the firm. Partners must then wind up business, pay debts, and distribute assets. This mode allows flexibility but requires reasonable notice to avoid disputes. Partners’ cooperation is essential for smooth liquidation. Legal steps such as informing creditors, settling accounts, and closing contracts must follow the notice.

5. Dissolution by Insolvency of a Partner

If a partner becomes insolvent, the firm may be dissolved either wholly or partially. Insolvency affects the firm’s ability to continue business reliably. Creditors’ claims must be settled using the insolvent partner’s share. If multiple partners exist, the firm may continue unless the partnership deed specifies otherwise. Dissolution due to insolvency ensures that financial liabilities are met and prevents remaining partners from being exposed to undue risk. Legal provisions protect both creditors and remaining partners, facilitating orderly closure of the insolvent partner’s share.

6. Dissolution by Death of a Partner

The death of a partner generally results in the dissolution of the firm, unless the deed provides otherwise. In case of a firm with multiple partners, remaining partners may continue if agreed. The deceased partner’s share in assets, profits, and losses must be settled with heirs or legal representatives. Notification to creditors and proper winding-up procedures are essential. This mode ensures smooth transition or closure, protects heirs’ rights, and maintains compliance with statutory requirements. Legal clarity reduces disputes among surviving partners and successors.

7. Dissolution by Court Order

The court can dissolve a partnership firm under Section 44 of the Indian Partnership Act if certain conditions exist:

• Insanity of a partner

• Permanent incapacity or misconduct

• Breach of agreement

• Continuous disputes affecting business

• Persistent loss or impracticability of business continuation

A partner or creditor can approach the court for dissolution. Court-ordered dissolution ensures fairness and legal protection. The court supervises the settlement of liabilities, distribution of assets, and resolution of disputes, making this mode crucial when voluntary dissolution is not possible.

8. Dissolution on Illegality of Business

A partnership firm carrying on an illegal business is automatically dissolved. If the business violates laws, such as operating without licenses, engaging in prohibited trades, or contravening statutory regulations, the firm cannot continue legally. The assets are liquidated, and liabilities settled as per law. Partners may face legal consequences. This mode ensures adherence to statutory regulations and prevents misuse of partnership structure for illegal purposes. Dissolution protects creditors and the public from illegal activities while maintaining legal integrity.

Causes of Dissolution of Partnership:

• Admission of a New Partner

When a new partner joins the firm, the existing partnership comes to an end, and a new partnership is formed. This is a common cause of dissolution and reconstitution.

• Retirement of a Partner

When a partner retires voluntarily or by agreement, the original partnership dissolves. The remaining partners may continue the firm under a new agreement.

• Death of a Partner

Unless otherwise agreed in the partnership deed, the death of any partner leads to dissolution of the existing partnership. The surviving partners may form a new partnership and carry on the business.

• Insolvency of a Partner

If a partner is declared insolvent by a competent court, the partnership is dissolved unless there is an agreement to the contrary. An insolvent partner cannot continue in a contract-based relationship.

• Expiry of Term or Completion of Project

In a partnership created for a specific duration or particular venture, dissolution takes place automatically at the end of the period or completion of the project. The firm can then be reconstituted if partners agree.

• Change in Profit-Sharing Ratio

A change in the profit-sharing ratio of partners is considered a reconstitution of the partnership, implying dissolution of the old partnership and formation of a new one, unless otherwise agreed.

Effects of Dissolution of Partnership:

• The firm continues to exist unless the firm itself is dissolved.

• The rights and liabilities of the continuing partners are redefined.

• The partnership deed is revised, and a new agreement is formed.

• Capital accounts may need adjustment based on the new structure.

The buyer in a contract of sale has both rights and duties governed by the Sale of Goods Act, 1930. These ensure fairness in commercial transactions and balance responsibilities between buyer and seller.

Rights of the Buyer:

• Right to Delivery of Goods (Section 31)

The buyer has the right to receive delivery of goods as per the terms of the contract. If the seller fails to deliver within the stipulated time or condition, the buyer may refuse delivery, cancel the contract, or claim damages. This ensures protection against non-performance by the seller.

• Right to Reject Goods (Section 37 & 41)

The buyer has the right to reject goods that do not conform to quality, quantity, or description agreed in the contract. This includes rejecting defective, damaged, or excess goods. The right to reject reinforces quality control and encourages compliance by the seller.

• Right to Examine Goods (Section 41)

The buyer is entitled to a reasonable opportunity to inspect and examine the goods upon delivery. This ensures that the goods match the sample, description, or specifications. If not satisfied, the buyer may refuse to accept them. Inspection must be allowed before the buyer is deemed to have accepted the goods.

• Right to Sue for Non-Delivery (Section 57)

If the seller refuses to deliver goods, the buyer can sue for damages caused by non-delivery. The measure of damages is the difference between the contract price and market price on the date of breach. This right compensates the buyer for losses due to breach.

• Right to Sue for Breach of Warranty (Section 59)

When the seller breaches a warranty (minor term), the buyer can claim compensation rather than reject the goods. This is useful in cases where goods are usable but not fully as promised. The buyer keeps the goods but gets monetary relief for the defect.

Duties of the Buyer:

• Duty to Accept and Pay for Goods (Section 31)

The buyer must accept the goods and pay the agreed price as per the contract. Failure to do so gives the seller the right to sue for non-acceptance or non-payment. This duty is central to the sale contract and ensures seller receives fair compensation.

• Duty to Apply for Delivery (Section 35)

Unless the contract says otherwise, the buyer must apply for delivery of goods. The seller is not bound to send or deliver the goods unless the buyer initiates the request. This encourages cooperation and clarity in the delivery process.

• Duty to Take Delivery (Section 36)

The buyer must take delivery of goods within a reasonable time. Unreasonable delay can make the buyer liable for loss or additional costs incurred by the seller. This duty ensures prompt clearance of goods and avoids storage or spoilage risks.

• Duty to Pay Damages for Refusal (Section 56)

If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue for damages. The buyer must compensate the seller for any financial loss caused due to breach. This discourages careless cancellations and ensures fairness in business transactions.

• Duty Not to Reject After Acceptance (Section 42)

Once the buyer has accepted the goods, they cannot later reject them unless fraud or breach is discovered. Acceptance may be implied if the buyer uses or resells the goods. This duty prevents unfair reversal of contracts after partial or full performance by the seller.

Sale of Goods Act, 1930 is a key piece of legislation that governs contracts relating to the sale and purchase of goods in India. It defines the rights, duties, remedies, and liabilities of both buyers and sellers, ensuring that transactions involving movable property are carried out fairly and legally.

Historical Background:

Originally, the law relating to the sale of goods was part of the Indian Contract Act, 1872 (Chapter VII). In order to provide clarity and a separate legal framework, it was carved out and enacted as a distinct law on 1st July 1930. The Act is largely based on the English Sale of Goods Act, 1893 and applies to the whole of India.

Scope of the Act:

The Act governs only movable goods, not immovable property or services. It applies to all forms of sale contracts, whether oral or written. It covers:

• Conditions and warranties

• Transfer of property

• Performance of the contract

• Rights of an unpaid seller

• Remedies for breach of contract

Key Definitions under the Act:

1. Goods: Every kind of movable property other than actionable claims and money. Includes stock, shares, crops, etc.

2. Buyer: A person who buys or agrees to buy goods.

3. Seller: A person who sells or agrees to sell goods.

4. Contract of Sale: An agreement where the seller transfers or agrees to transfer the ownership of goods to the buyer for a price.

5. Price: The money consideration for the sale of goods.

Types of Goods:

1. Existing Goods: Owned or possessed by the seller at the time of contract.

2. Future Goods: To be manufactured or acquired by the seller after the contract.

3. Contingent Goods: Depend on the occurrence or non-occurrence of a future event.

Essentials of a Valid Contract of Sale:

• Involves two parties: buyer and seller

• Transfer of ownership (immediate or future)

• Movable goods as subject matter

• Price as monetary consideration

• Voluntary consent and lawful object

Transfer of Ownership:

Ownership of goods passes from seller to buyer when:

• Goods are ascertained

• The contract is unconditional

• Delivery is complete or as agreed

This is crucial because risk follows ownership—once the property is transferred, the buyer bears the risk of loss or damage.

The formation of a contract of sale under the Sale of Goods Act, 1930 follows the general principles of contract law as per the Indian Contract Act, 1872, with specific provisions related to the sale and purchase of goods. It involves an agreement where the seller transfers or agrees to transfer the ownership of goods to the buyer for a price.

✅ Key Elements in the Formation of a Contract of Sale:

1. Offer and Acceptance

A valid contract begins with an offer by the seller to sell goods and the acceptance by the buyer to purchase them. The communication must be clear and mutual.

📝 Example: A shopkeeper offers to sell a fan for ₹2000. The buyer agrees. A contract is formed.

2. Two Parties

There must be at least two separate legal entities — one buyer and one seller. One person cannot be both.

3. Consideration (Price)

The consideration must be money or money’s worth. If goods are exchanged for goods, it’s barter, not a sale.

📝 Example: Selling a book for ₹500 is a valid sale; exchanging two books is not.

4. Subject Matter – Movable Goods

The contract must involve movable goods only. Immovable property (like land) is not governed by this Act.

5. Transfer or Agreement to Transfer Property

There must be an intention to transfer ownership of the goods:

• Sale: Immediate transfer of ownership

• Agreement to Sell: Ownership is transferred later (on future date or condition)

6. Capacity to Contract

Both parties must be competent to contract as per Section 11 of the Indian Contract Act, 1872:

• Must be of sound mind

• Must be above 18 years

• Must not be disqualified by law

7. Free Consent

The contract must be made with free consent, i.e., not caused by coercion, undue influence, fraud, misrepresentation, or mistake.

8. Lawful Object

The objective of the sale must be legal. Contracts for smuggling goods or selling banned items are void.

9. Certainty of Goods and Price

• The goods must be clearly defined or ascertained.

• The price may be fixed, determined in a manner agreed (like market price), or decided by a third party.

10. Modes of Formation (Section 5)

A contract of sale may be:

• Oral or Written

• Implied by Conduct

• Made by Offer and Acceptance
  It may also include conditions or warranties.

An unpaid seller is a seller who has not received the full price of the goods sold or has received a conditional payment (like a cheque or bill of exchange) which has been dishonoured. As per the Sale of Goods Act, 1930 (Section 45), the seller is considered unpaid if the full consideration is not received, regardless of delivery. An unpaid seller enjoys several rights such as lien, stoppage in transit, resale, and suit for price or damages. These rights ensure that the seller is legally protected until payment is completed. The concept protects sellers from buyer default and strengthens trust in commercial transactions.

Rights of Unpaid Seller:

1. Right of Lien (Section 47)

An unpaid seller has the right of lien which allows them to retain possession of the goods until full payment is received. This right applies when the seller is in possession of the goods and the payment is due. It can be exercised even if the seller has a part-delivery. The lien is lost if the goods are delivered to a carrier without reserving rights.

2. Right of Stoppage in Transit (Section 50)

If the goods are in transit and the buyer becomes insolvent, the unpaid seller has the right to stop the goods mid-transit and regain possession. This ensures that goods are not delivered to a buyer who cannot pay. This right ends when the buyer or their agent takes actual delivery, thereby terminating the transit.

3. Right of Resale (Section 54)

The unpaid seller has the right to resell the goods if:

• The goods are perishable,

• There is an express reservation of resale in the contract,

• Or after giving notice to the buyer, the buyer still fails to pay.

If proper notice is given, any loss is borne by the buyer, and any profit belongs to the seller. Without notice, the seller must return any surplus.

🔹 Rights Against the Buyer Personally

4. Right to Sue for Price (Section 55)

If the buyer refuses to pay the agreed price, the unpaid seller can file a suit for price, especially when the ownership of goods has already passed to the buyer. This right allows the seller to claim the contract price regardless of delivery, provided the conditions of the contract have been met.

5. Right to Sue for Damages (Section 56)

When the buyer wrongfully refuses to accept or pay for the goods, the unpaid seller can sue for damages caused by the breach of contract. The amount of damages is usually the difference between the contract price and the market price on the date of breach. This compensates the seller for the financial loss.

6. Right to Sue for Interest (Section 61)

The unpaid seller has the right to claim interest on the amount due from the date of default or from the date agreed upon in the contract. This right exists when the contract or usage of trade allows it. Courts may award interest as part of the compensation for delayed payment.

Remedies of Unpaid Seller:

I. Remedies Against the Goods

1. Right of Lien (Section 47–49)

The seller can retain possession of goods until full payment is made. This lien is available when:

• The goods are sold without credit.

• The credit period has expired.

• The buyer becomes insolvent.

This right is lost if goods are delivered to a carrier without reserving disposal rights.

2. Right of Stoppage in Transit (Section 50–52)

If goods are in transit and the buyer becomes insolvent, the unpaid seller can stop the delivery and regain possession. This remedy protects the seller from delivering goods to a buyer who cannot pay. Transit ends when the buyer or their agent takes delivery.

3. Right of Resale (Section 54)

The unpaid seller may resell the goods:

• Without notice, if goods are perishable.

• With notice, if the buyer defaults despite warning.

If resale is without proper notice, the seller cannot claim loss from the buyer but must give any profit back.

II. Remedies Against the Buyer Personally

4. Suit for Price (Section 55)

The seller can file a suit to recover the contract price if:

• Ownership has passed to the buyer, or

• Price is payable on a fixed date irrespective of delivery.

This remedy gives the seller a direct right to demand payment legally.

5. Suit for Damages for Non-Acceptance (Section 56)

If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue for damages. The amount is calculated based on the loss incurred, usually the difference between contract price and market price on the breach date.

6. Suit for Interest (Section 61)

The seller can claim interest on the unpaid amount from the due date or a date agreed in the contract. This compensates for the delay in payment. The court may decide the interest rate and duration based on fairness.