Company law

1. Corporate personality

Introduction

There are two types of persons that are recognized under law — natural persons and artificial (or fictitious)
persons. A natural person, as per its definition, is any individual who has natural rights and obligations, like a
human. Meanwhile, an artificial or fictitious person can be referred to as an individual who is not natural or
human, like a corporation. However, that does not mean artificial persons do not have rights or obligations,
because they do due to their fictitious personhood that is made by law.

This fictitious or artificial personhood of corporations and other corporate entities originates from the concept
of corporate personality, which we will explore in this article in detail.

What is corporate personality?

In simpler words, corporate personality allows a company to be legally recognized as an artificial or fictitious
person for the enforcement of its rights and obligations. These rights include the right to own properties under
its name along with the right to enter into contracts and agreements as a party. In addition to that, corporate
entities can sue and be sued just like any other person recognised by the law.

This concept was established and coined by the House of Lords in the landmark judgement of Salomon v.
Salomon & Co. Ltd. (1897), in which it was held that a corporation has an identity that is separate and
completely independent from its shareholders and other members working under it. Thus, due to the separate
identities, the shareholders and members of the company cannot be held accountable for the actions taken by
the company in its name. This separate legal identity is known as the corporate personality, which is
responsible for giving a company its artificial personhood.

Thus, to establish or recognise the corporate personality of any corporate entity or organisation, three
conditions need to be fulfilled:

 There should be an organisation or association formed by several individuals with a specific purpose or
goal.
 The said entity should have different organs or departments that can act upon corporate functions, such as
management, sales, human resources, import and export, etc.
 The organisation or association shall have a ‘will’ as per legal fiction.

Once all of these three conditions are met, the corporate entity or organisation can be legally recognised for its
corporate personality and enjoy its advantages. These advantages include the privilege of owning assets and
property during business transactions and conducting financial transactions in the name of the company while
operating independently from the shareholders and its members. However, to represent the collective will, a
common seal is often used by the entities.

As a result of its corporate personality, a company can engage in similar rights and actions as an individual,
which include opening and managing bank accounts, taking debts, lending money, hiring employees, entering
into contracts and agreements, as well as suing and being sued. This is especially beneficial for the shareholders
of the company, who are technically its owners but can also act as creditors, given the occasion.

While some shareholders may own a significant portion of the shares of a company, it would not make them
personally responsible for the company’s actions. This can also be applied vice versa, where the company is not
liable for the shareholder’s actions. This is because the shareholders are not the company’s agents and cannot
be legally bound to the company’s actions or even bind the company through their actions outside of the affairs
of the company.

Features of corporate personality

Artificial personhood- Corporate personality gives a fictitious or artificial personhood to corporate entities. This
enables the corporate entities to have their own presence separate from their agents and conduct day-to-day
business activities such as financial transactions in their own name. It also allows a company to engage in
actions such as opening and managing bank accounts, taking debts, lending money, hiring employees, entering
into contracts and agreements, as well as suing and being sued.

Rights and obligations - Once incorporated, a company gains its separate personality from its members and
shareholders. This corporate personality enables them to have their own rights and obligations since they are
recognised as a legal person in the eyes of the law.

Independent operations - Corporate personality enables a company to operate independently from the
shareholders and its members. This is possible due to a separation between the company and its members by
creating a separate legal identity or personality, which we will cover more in detail later in the article.

Collective will- The will of the natural persons forming the company; that is, its members and shareholders help
create the will of the company. Their collective will is decided by voting in general meetings and whatever
decision is made by the majority, the company would act on it. This decision would then be expressed through
a common seal, which is the physical symbol of such collective will.

Types of corporate personality

Corporation Aggregate

Corporation Aggregate, as the term suggests, is a type of company that is formed by combining several
individuals working under it either as members or as shareholders. In other words, it is a corporate existence
that is made up of various natural persons but still maintains a separate legal identity from its members,
shareholders, and employees. The main feature of this type of corporate personality is the perpetual succession
of the positions of its members and business. That is, even after the retirement or death of any of its members or
shareholders, their titles will merely pass on to the next individual, and the corporation will carry on. This is
how many corporations continued their business ventures for more than a century. The most common type of
corporate aggregate observed would be all the private and public limited companies, along with multinational
corporations.

Corporation sole

Unlike corporation aggregate, corporation sole consists only of a single individual who has the head and
representative in a corporate position. It is more permanent than its counterpart and can also have perpetual
succession for that sole individual. While the concept of corporation sole is a fictitious and artificial one, the
individual heading it is a natural person. The distinction here comes in the form of the position giving the
authority rather than the person. For instance, if the Prime Minister of India declares a public holiday, it would
be the authority of that fictitious position that would give more power to the declaration than the person in that
position.
In India, many official positions can be identified as corporations. This includes the Prime Minister of India,
The Governor of any state, the PostMaster General, the Registrar of Trademark and Patents Registry, etc. Even
positions like Chief Justice of India and Comptroller and Auditor-General of India can be classified under this
type of corporate personality.

Benefits of corporate personality

Independent Identity - As mentioned earlier, corporate personality allows a corporation to have a separate legal
identity from its members and shareholders, giving the corporation its own existence and presence. This
separation helps protect the shareholders from the liabilities of the actions of the company while giving the
company freedom from any arbitrariness that might be committed by its major shareholders or directors.

Limited liability - One of the most popular and sought-after advantages of corporate personality is the limited
liability aspect. In simpler terms, it is the privilege of a member or shareholder of a company where their
liability is limited by how much they invested in the company. None of the shareholders and investors are liable
beyond the amount they have invested in the corporation.

Perpetual Succession -Even if all the members quit, change, retire or even expire, the company would retain its
identity until it has been wound up. The assets, property and any other privileges enjoyed by the company
would continue as long as it shall exist.

Shares and their transferability - Shares of a company, like any other asset, can be treated as movable property
that can be transferred and even inherited. According to Section 44 of the Companies Act, 2013, the nature of
shares, debentures and any other interest that a member may have in the company is a movable property that
can be transferred in the manner as prescribed by the AOA of the company.

Separate assets and property - A corporation can own, use, sell, transfer, lease, etc., their assets and property
just like any other legal person. And since its identity is distinct from its members and shareholders, the chances
of fraudulent transfer or arbitrary actions over such property are reduced. This also means that the property in
the name of the company is owned by the company itself, not by its shareholders as joint owners.

To sue and be sued- Due to corporate personality and the resulting separate legal identity, registered corporate
entities have the capacity to sue and be sued in their own name. And while the company needs to be represented
by a natural person, all the liabilities and rights from a lawsuit shall be of the company itself. This includes any
kind of claim, compensation, or even punishment for criminal offences. A company can even sue for
defamation if its image was hampered by any such false and/or defamatory comment.

Disadvantage

Formalities and complexity - Unlike direct ownership businesses or even partnership firms, corporate entities
with limited liability require more complex procedures. Such formalities often result in unnecessary complexity
along an extended delay in time. If the expenses are to be accounted for as well, for the incorporation of the
company, the notifying of the shareholders and every other administrative and management formalities, then it
can be observed that such actions are quite expensive in comparison to direct ownership businesses.

Not a natural person - While the corporate personality may have given the corporation personhood, such
personhood is artificial or fictitious in nature and cannot have the rights that only a natural person can have, like
citizenship. And while that also can be seen as a benefit for many people, the issue arises when different
countries apply different types of taxes based on such factors. One may argue that the origin place of a
company can be considered its domicile but law does not recognise it as such.
Risk of fraud and evasion of obligations - As observed through many recent events, shell companies have often
been made by individuals to evade tax and other obligations. Such fraudulent activities, while uncovered and
punished justly through the doctrine of lifting the corporate veil, still run rampant. In such cases, corporate
personality acts as a double-edged sword.

Theories of corporate personality

Fiction theory

It was propounded by the famous scholar Savigny and was later supported by various jurists, including
Salmond and Holland. As per this theory, the identity of a corporate entity is based on legal fiction and exists as
nothing but a mere concept that cannot be applied in practicality. In other words, it regards the personality of a
corporation as nothing but a legal fiction made by the law for its convenience. the character of a corporate
entity is completely imaginary, made with the intent to make legal matters easier to navigate through. Since a
company does not have its own body, it acts through its agents and representatives. Thus, a company cannot
have a separate identity from its members, who are the sole reason for its presence in the practical world.

The fiction theory of corporate personality has been criticised the most due to its inability to address the legal
obligations of a corporate entity, which include obligations for civil and criminal offences. The biggest critic of
this theory was Frederick Pollock, who argued that the fiction theory is not recognised by the English common
law. This is so since the first requirement for any entity to be recognised as a legal person under English law is
incorporation. Any entity not incorporated is merely a group of individuals, and they cannot assume rights or
obligations collectively.

Realistic theory

Corporate personality, according to this theory, exists for every association since the identity and presence of an
association or organisation are different from those of its members. While a corporation’s will may be acted
upon by the actions of its agents or representatives, they simply act as a physical medium for the corporation. In
simple words, this theory states that a corporate entity exists as a social body that acts through its human agents
as a medium, which is the physical body. The will of the corporation is manifested through the actions of its
members, agents, employees, etc.

Unlike the fiction theory of corporate personality, this theory argues that the presence of a corporation is based
on its presence in physical reality through its human agents rather than fantasy. However, while the company
may not be a real or natural person, that does not mean it is not a reflection of the will of its agents, who are
natural persons. It is not formed by the law but rather merely recognised by it as a separate identity.

Bracket theory

Out of all the present theories, the Bracket Theory of corporate personality is one of the more popular and
agreeable ones. Also known as the ‘Symbolist Theory’, this theory was propounded by the famous German
scholar, Ihering. The ideology behind this theory is that it is the members who represent the corporation and
draw up the character of the corporation. The law only puts up a ‘bracket’ to form a corporate unit, whose rights
and obligations are mostly delegated from its members and agents. This is done to increase efficiency in the
case of legal applications as well as financial transactions since it is not viable for multiple people to take on
collective obligations.

The major issue with this theory is that it does not define how and when the ‘bracket’ of corporate personality is
removed and added. The concept of lifting the corporate veil for this theory is vague and can result in legal
inconsistency, especially since in the practical world, the identity of a corporate entity is separate from its
members and representatives.

Concession theory

The concession theory of corporate personality was developed by the famous political scholars Dicey, Savigny,
and Salmond since the ideology behind it is derived from the concept of a sovereign state. As per this theory,
the only reason corporate personality exists is because of the legal recognition given by the state. Similar to the
legal theory, it argues that without a legal existence recognised by the state, a corporation cannot exist. It
emphasises the prudence or authority of the state and how much authority they have to recognise a company’s
corporate personality.

The criticism that was faced most by the concession theory was that it puts too much emphasis on the state’s
discretionary power and how only upon its concession can a company exist. It also emphasises that if the state
wishes, it can also take back the recognition given to the company as a legal person. Such absolute
discretionary power can lead to arbitrary actions if left unchecked. This could be especially disastrous in cases
where the corporate entity is made for any political purpose.

Purpose theory

In other words, this theory argues that artificial persons like corporate entities should only be given rights and
obligations when it helps in the protection and better implementation of the rights and obligations of natural
persons working under or with them. It contends that corporate personality is vital to establishing responsibility
for corporate entities in case of any legal breach or consequences of the actions committed in their name.

The only criticism of this theory is that interpreting the company as a legal person based on circumstances can
increase the chance of inconsistency in precedents. It will not only increase the pressure on the judiciary for
such interpretations but also make the process of such legal matters unnecessarily long.

Separate legal entity of company, exception

Introduction —

To understand the principle of Separate Legal Entity of Companies, it is essential first to understand what a
company is. There are multiple definitions of what a company is, Section 2(20) of the Companies Act, 2013
defines “a company incorporated under the Companies Act, 2013 or any other previous company law.” This is
the definition provided in the legislation. Prof. Haney defines “A company is an artificial person created by
law, having a separate legal entity, with a perpetual succession and a common seal.”

So, a company is an artificial person, i.e., it is recognized to be a person as per law and created by law, which
means it can enter into contracts, sue and be sued, and buy and sell property in its name. It has a separate legal
entity, i.e., the members of the company and the company are two distinct persons, and we will see this concept
in detail in the further sections of this article. A company has a perpetual succession meaning that the joining,
leaving, insolvency, or death, of any member, will not affect the company. The common seal explains that since
a company is an artificial person, it cannot hold a pen and sign documents, therefore, it has a common seal that
has the name of the company engraved in it in legible characters and uses it as a stamp for signing any
important document.
Though a company is an artificial person it does not hold citizenship as per the Constitution of India and the
Citizenship Act, 1955 only a natural person can be a citizen. But a company has nationality (eg: Indian
Company, Korean Company), domicile (the place where the company is registered and has a registered office),
and residence (the place where the company operates).

Separate Legal Entity —

Separate legal entity, also known as the corporate personality of a company, is a concept that states that the
company is distinct from its members. A company acts under its own name, its assets are distinct and separate
from those of its members and there is no concept of agency and trustee between the company and the
members.

The company cannot hold the shareholders liable even if any shareholder is holding all of its shares. This
depends on the fact whether the company is a limited company or an unlimited company. If the company is a
limited company then the shareholders can be called for payment during the process of winding up to pay the
amount which is yet to be paid by them (Limited by Shares) or to pay the amount which was guaranteed by the
shareholders as stated in the Memorandum of Association (Limited by Guarantee). In an unlimited company,
the members need to even sell off their personal assets during winding up to settle liabilities, but such
companies rarely exist.

In simple words, a company has a distinct identity that separates it from its members and makes it independent
of its members. The members cannot hold the company liable if the members have any personal debts. The
members do not have any right to claim ownership of the assets of the company and nor can the company claim
any ownership over the personal assets of the members.

The concept of a Separate Legal Entity was strongly established in two cases, Salomon v. Salomon & Co.
Ltd. and Lee v. Lee Air Farming Ltd. In both these cases, the court held that a company is distinct from its
members.

Benefits of corporate personality to be added.

 Lifting the corporate veil
Once a business is incorporated according to the provisions laid out in the Companies Act of 2013, it becomes a
separate legal entity. An incorporated company, unlike a partnership firm, which has no identity of its own, has
a separate legal identity of its own which is independent of its shareholders and its members. This article will
go over what this differentiation means, why this demarcation was brought about and how can the members be
made personally liable for using the company as a vehicle for undesirable purposes.

What is Corporate Veil

A company is composed of its members and is managed by its Board of Directors and its employees. When the
company is incorporated, it is accorded the status of being a separate legal entity which demarcates the status of
the company and the members or shareholders that it is composed of. This concept of differentiation is called a
Corporate Veil which is also referred to as the ‘Veil of Incorporation’.

Meaning of Lifting of Corporate Veil

The advantages of incorporation of a company like perpetual succession, transferable shares, capacity to sue,
flexibility, limited liability and lastly the company being accorded the status of a separate legal entity are by no
means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with them,
the disadvantages are, indeed very few. Yet some of them, which are immensely complicated deserve to be
pointed out. The corporate veil protects the members and the shareholders from the ill-effects of the acts done
in the name of the company. Let’s say a director of a company defaults in the name of the company, the
liability will be incurred by the company and not a member of the company who had defaulted. If the company
incurs any debts or contravenes any laws, the concept of Corporate Veil implies that the members of the
company should not be held liable for these errors.

Basics of Limited Liability

Organizations exist to a limited extent to shield the individual resources of investors or shareholders from
individual obligation for the obligations or activities of a company. Almost opposite to a sole proprietorship in
which the proprietor could be considered in charge of the considerable number of obligations of the
organization, a company customarily constrained the individual risk of the investors. This is why Limited
Liability as a concept is so popular. Puncturing the Veil of Incorporation commonly works best with smaller
privately held companies in which the organization has few investors, restricted resources, and
acknowledgement of the separateness of the partnership from its investors.

Development of the Concept of “Lifting of Corporate Veil”

Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a
partnership firm which has no identity of its own, has a separate legal identity of its own which is independent
of its shareholders and its members. The companies can thus own properties in their names, become signatories
to contracts etc. According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of
incorporation, the subscribers to the memorandum and other persons, who may from time to time be the
members of the company, shall be a body corporate capable of exercising all the functions of an incorporated
company having perpetual succession. Thus the company becomes a body corporate which is capable of
immediately functioning as an incorporated individual.
Solomon v Solomon What the milestone case Solomon v Solomon lays down is that “in inquiries of property
and limitations of acts done and rights procured or liabilities accepted along these lines… the characters of the
common people who are the organization’s employees is to be disregarded”.

Lee v Lee’s Air Farming Ltd In Lee v Lee’s Air Farming Ltd., Lee fused an organization which he was
overseeing executive. In that limit he named himself as a pilot/head of the organization. While on the matter of
the organization he was lost in a flying mishap. His widow asked for remuneration under the Workmen’s
Compensation Act. At times, the court dismisses the status of an organization as a different lawful entity if the
individuals from the organization attempt to exploit this status. The aims of the people behind the cover are
totally uncovered. They are made to obligate for utilizing the organization as a vehicle for unfortunate purposes.

Circumstances under which the Corporate Veil can be Lifted

1. Statutory Provisions
2. Judicial Interpretations

Statutory Provisions

Section 5 of the Companies Act, 2013

This particular section characterizes the distinctive individual engaged in a wrongdoing or a conduct which is
held to be wrong in practice, to be held at risk in regard to offenses as ‘official who is in default’. This section
gives a rundown of officials who will be at risk to discipline or punishment under the articulation ‘official who
is in default’ which includes within itself, an overseeing executive or an entire time chief.

Section 45 of the Companies Act, 2013

Reduction of membership beneath statutory limit: This section lays down that if the individual count from an
organization is found to be under seven on account of a public organization and under two on account of a
private organization (given in Section 12) and the organization keeps on carrying on the business for over half a
year, while the number is so diminished, each individual who knows this reality and is an individual from the
organization is severally at risk for the obligations of the organization contracted during that time.

Section 147 of the Companies Act, 2013

Misdescription of name: Under sub-section (4) of this section, an official of an organization who signs any bill
of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the way that it
should be according to statutory rules, such official can be held liable on the personal level to the holder of the
bill of trade, hundi and so forth except if it is properly paid by the organization. Such case was seen on account
of Hendon v. Adelman.

Section 239 of the Companies Act, 2013

Power of inspector to explore affairs of another company in the same gathering : It gives that in the event that it
is important for the completion of the task of an inspector instructed to research the affairs of the company for
the supposed wrong-doing, or a strategy which is to defraud its individuals, he may examine into the affairs of
another related company in a similar group.

Section 275 of the Companies Act, 2013

Subject to the provision of Section 278, this section provides that no individual can be a director of in excess of
15 companies at any given moment. Section 279 furnishes for a discipline with fine which may reach out to Rs.
50,000 in regard of every one of those companies after the initial twenty.

Section 299 of the Companies Act, 2013

This Section emphasises and offers weightage to the existing proposal of the Company Law Committee: “It is
important to see that the general notice which a director is bound to provide for the company of his interest for
a specific company or firm under the stipulation to sub-section (1) of Section 91 which is ought to be given at a
gathering of the directors or find a way to verify that it is raised and read at the following gathering of the
Board after it is given. The section not only applies to public companies but also applies to private companies.
Inability to consent and act in consonance to the necessities of this Section will cause termination the Director
and will likewise expose him to punishment under sub-section (4).

Section 307 & 308 of the Companies Act, 2013

Section 307 applies to each director and each regarded director. The register of the shareholders should contain
in it, not just the name but also how much shareholding, the description of shareholding and the nature and
extent of the right of the shareholder over the shares or debentures.

Section 542 of the Companies Act, 2013

Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that any business of
the company has been continued with goal to defraud the creditors of the company or some other individual or
for any deceitful reason, the people who were intentionally aware of this and still agreed to the carrying on of
the business, in the way previously mentioned, will be liable on a personal level without incurring the liabilities
of the company, and will be liable in a manner as the court may direct. In Popular Bank Ltd, it was held that
Section 542 seems to leave the Court with attentiveness to make an assertion of risk, in connection to ‘all or any
of the obligations or liabilities of the company’.

Judicial interpretations and pronouncements-

Tata Engineering and Locomotive Co. Ltd. State of Bihar In this case, it was expressed that a company is
likewise not permitted to file a case in the name of fundamental rights by calling itself a collection of
individuals who possess the fundamental rights. When a company is framed, its business is the matter of an
incorporated body therefore shaped and not of the people that it is composed of and the privileges of such body
must be made a decision on that balance and can’t be made a decision on the supposition that they are the rights
owing to the matter of the individual that are a part of the organisation.

Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund Commissioner This is an instance of
‘default in payment of the provident fund of the employee’’- Certain sum was expected and payable to the
provident fund office by the sister concern of the company of the plaintiff, a demand was made by the
defendant from the company of the petitioner on the ground that both the companies had two directors in
common. It was held that the dispute raised by the respondent that the Court should lift the corporate veil and
affix the obligation on the applicant was with no benefits and was unjustifiable. Both the companies were
distinct legal entities under the provisions of the Companies Act and there was no arrangement under the
Provident Fund Act that a risk of one organization can be secured on the other organization even by lifting the
corporate veil, which is why this exercise would have been considered futile.
 Promoters of a company, and legal position
Introduction

Establishing a company is not a one-day task. Before a firm may take its ultimate form, it must complete many
processes. Promoters play an important role right from the start of the process. The process of forming a
corporation is extensive and involves several steps. The ‘promotion’ stage of the formation process is the first
step. An individual or a group of people known as promoters comes up with the concept of starting a business
at this stage. Various processes must be completed to incorporate a firm. The promoters carry out these
functions and establish the firm.

Definition of promoter

The definition of the phrase “promoter” has been defined in Section 2 (69)[1] of Companies Act, 2013. The
term has been used specifically in Sections 35, 39, 40, 300 and 317 of the Act. Section 2 (69) of the Act states
that promoter is a person whose name has been mentioned in the prospectus of the company or is identified in
the annual returns of the company, or any person who has direct or indirect control over the affairs of the
company, whether as a stakeholder or as a director, or on whose direction the Board of Directors act. In simple
words, a promoter is a person who performs the various preliminary steps like making the prospectus of the
company, floating the securities in the market, etc. but if a person is doing this in a professional capacity, he
wouldn’t be considered a promoter. Promoter means a person

1. who has been named as such in a prospectus or is identified by the company in the annual return
referred to in Section 92;
2. who has control over the affairs of the company, directly or indirectly, whether as a shareholder,
director or otherwise;
3. in accordance with whose advice, directions or instructions the Board of directors of the company is
accustomed to act. The proviso excludes persons acting in a professional capacity

Types of promoters

Professional promoter

 Professional promoters are people who are specialists in promoting new business ventures
 Professional promoters initiate all the steps in establishing a new company; they have years of
experience in promoting various businesses, and with that experience, they promote a company
professionally.
 Professional promoters have the promotion of companies as their occupation. Professional promoters are
mostly not directly connected with any specific company because they have an occupation as promoters
for various other companies. They are connected to a specific company only at the time of promotion.

Occasional promoter

 Occasional promoters are not involved in the promotion work of a company on a regular basis, and they
do not have promotion as their occupation.
 Unlike professional promoters, occasional promoters do not promote a series of companies from time to
time; they promote only a limited number of companies that they wish to promote.
 Since occasional promoters have their own occupation or profession apart from promoting a company
and once the promotion work is done they hand over the management of the company to their owners or
shareholders, they move back to their profession.
Financial promoter

 A company needs capital for its existence, and the promoter works in order to bring the company to
existence. The financial promoter helps the company by funding its capital.
 Financial promoters most often collaborate with new entrepreneurs who are willing to invest and
persuade them to invest in new businesses, thus promoting new businesses by acquiring financial aid.
 Financial promoters provide the management and technical expertise needed for a company to come into
existence.

Entrepreneurial promoter

 The role of an entrepreneur is that of an initiator and a promoter. The entrepreneur is also a promoter, as
he does all the initial work just like the promoter, like finding the correct members for the business,
entering into contract in his name for the sake of the company, and bringing the business or the company
into existence.
 Individuals who conceive ideas for business and take all the necessary steps required for the promotion
of the company are called entrepreneurial promoters.
 The best examples of entrepreneurial promoters in India are the Tata, Birla and Reliance groups, where
the founders did all the promotion of the company.

Functions of a promoter

 One of the main functions of a promoter is to comprehend the idea of formation of the company
 The promoter looks into the viability and feasibility of the idea that whether the formation of the
company will be profitable and practicable or not.
 After the idea has been conceived, the promoter collects and organizes the resources available to convert
the idea into a reality.
 The promoter decides the name of the Company and also settles the content regarding the Articles of
Association and the Memorandum of Association of the Company.
 The promoter is the one who decides where the head office of the company will be situated. The
promoter also nominates people or associations for vital posts. For instance, the promoter may appoint
the bankers, auditors and Directors of the company for the first time.
 The promoter also prepares all the other necessary documents which are required to incorporate a
company.
 The promoter must undergo a detailed investigation, and after analyzing all the concepts related to the
idea discovered, the promoter must think about the cost, profitability, production, demand of the product,
supply of such product in the market, etc.
 The promoter has to enter into a preliminary contract with the third parties on behalf of the company to
collect all the resources necessary to form a company. The promoter makes contracts for the purchase of
material, land, and machinery, and he also recruits staff for the initial functioning of the company.
 The promoter decides who can be the signatories to both the MoA and AoA of the company. The
signatories are those who become the directors of the company, and the promoter gets written consent
from such signatories that they will act as the directors.
 The promoter makes all the publicity for the company by way of advertisement and marketing strategies
during the period of promotion of the company

Legal position of a promoter

Promoter is not an agent- The company should be in existence in order to make the promoter an agent of the
company, and since the company is not registered during the promotion of the company, the promoter is not an
agent, and he is not liable for the contracts entered personally by him on behalf of the company. As the contract
is held on behalf of the company, the company has to ratify it; if it does not have the power to ratify and the
promoter still enters into a contract with third parties, then the promoter would be liable. Hence, the promoter
would be individually liable and would not be liable as an agent of the company.

Promoter is not entitled to expenses incurred- The promoter works in his own capacity for the existence of the
company, and he is not entitled to the expenses incurred from the promotion. If the promoter has incurred
expenses during the promotion of the company, the company has to reimburse the promoter for such expenses.
Hence, the promoter is legally not entitled to any expenses incurred on behalf of the company during the
promotion.

Promoter and his remuneration - The company may remunerate the promoter, but it is not mandatory for the
company to remunerate the promoter for the work he has done. The remuneration can be paid by paying the
promoter a lump sum payment or commission for the work done by him during the promotion of the company.
Normally, if the promotion of the company is held by the owners or shareholders of the company, then the
concept of remuneration is immaterial, but in terms of professional promoters, as discussed above, their
remuneration is mandatory. Since the sole occupation of the professional promoters is to promote a company,
they ought to be paid. The professional promoters get remuneration from various companies that they have
promoted.

Allotment of shares or debentures to the promoters- The company may allow and allot shares or debentures to
the promoters, or they can also give the option to purchase their security at a future date. If the shares are
allotted to the promoters, then they become shareholders of the company, thus enjoying ownership of the
company to some extent.

Fiduciary position of the promoter

The fiduciary position of the promoter with regards to a company was first explained in the case of Erlanger v.
New Sombrero Phosphate Co. (1878). Lord Cairns, in this case, stated that the promoters undoubtedly stand in
a fiduciary position. The creation and molding of the company is in their hands. They have the power of
defining when and how, in what shape and under whose supervision the company shall come into existence and
begin to act as a business corporation. Since the concept of promotion of a company gives a very advantageous
position to the promoter in relation to the company proposed, the responsibility of a fiduciary position is fixed
upon the promoter by the courts. The first and foremost duty of a promoter is that if he attains any form of
profit through transactions with the company and obtains money from the shareholders, he must disclose all
facts faithfully relating to such transactions.

Case laws- Probir Kumar Misra v. Ramani Ramaswami (2009) - The question, whether the signatures of the
promoters in the Memorandum and Articles of Association were required in order to make them liable arose.
The Madras High Court held that, before the incorporation of the company, there is no need for the promoter to
be either a signatory of the Memorandum or Articles of Association, or shareholder or the Director of the
Company. The High Court of Madras further stated that the promoters are called “midwives” of the business, as
coined by Henry in the Law of Corporations. It is the promoter who does all the major roles for the purpose of
bringing the corporate person into existence, like proposing the objectives of the company, forming the original
scheme, making arrangements to get the company registered, preparing a prospectus, Memorandum and
Articles of Association, etc., which are crucial for the company to come into existence. Thus, the promoters can
be held liable even though they may not be either signatories to the Memorandum or Articles of Association or
a shareholder or the Director of the company, as they are so connected to the company and its incorporation.
Transfer of shares of company
 Indoor management
Introduction

The ‘Doctrine of Indoor Management’ which is famously known as the ‘Turquand’s Rule’ is an old established
principle which came to be recognized 150 years ago in the context of ‘Doctrine of Constructive Notice’. The
Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. The doctrine of
Constructive Notice seeks to protect the company from the outsider whereas the Doctrine of Indoor
Management seeks to protect the outsider from the company. This doctrine emphasizes on the concept that an
outsider whose actions are in good faith and has entered into a transaction with a company can have a
presumption that there are no irregularities internally and all the procedural requirements have been
complied with by the company.

Origin

The Doctrine of Indoor Management has originated from an English case called Royal British Bank v.
Turquand. Hence, the alternative name to this doctrine is the ‘Turquand Rule’. In this case, the directors of the
company had been authorized by the Articles to borrow on bonds that sum of money as they should from time
to time by passing a special resolution in a General Meeting of the company. A bond under the seal of the
company which was signed by the secretary and the two directors were given to the plaintiff to draw on the
current account without the authority of any resolution. Turquand sought to bind the company’s action on the
basis of such bond. Thus, the main question of law in this matter was whether the company can be held liable
for that bond. The court, in this case, held that the bond was binding on the company as Turquand was entitled
to presume that the resolution of the company has been passed in the general meeting.

The Memorandum and Articles of Associations are Public documents and hence can be inspected by the public.
But whatever is happening internally in the company is not known to the public. An outsider is oblivious to the
internal procedures of the company and hence the outsiders are entitled to presume that all the internal
procedures are catered by the company.

Position under the Indian Companies Act, 1956

The Doctrine of Indoor management can also be traced in the Indian Companies Act, 1956 under Section 290,
which is explained as follows:

Validity of acts of Directors- Acts done by a person as the director shall/can be valid notwithstanding that later
it may be discovered that his appointment was invalid due to any disqualification or defect or was terminated by
any provision of the Act or the Articles. Provided that nothing in the section shall give validity to any of the
acts done by a director after his appointment has been shown to the company to be invalid or terminated.

Exceptions to the Doctrine of Indoor Management

Knowledge of Irregularity

When an outsider who is entering into a transaction with a company has constructive or actual notice of the
irregularity in relation to the internal management of the company, then He/she cannot seek remedy under the
doctrine of Indoor Management. Example of the same is, X and Y are two directors of a company. A transfer of
shares in the company had been approved by both X and Y. X was not validly appointed and Y was
disqualified by reason of being the transferee itself. These material facts were known to the Transferor of the
shares; Hence the transfer of shares was not binding and stood ineffective.
Forgery

It is pertinent to note that the Doctrine of Indoor Management does not apply in cases where an outsider relies
on a document which is forged in the name of the company. A company can never be held liable for the
forgeries committed by its officers.

For example, In the case of Ruben v. Great Fingall Ltd.[5] The Plaintiff was a transferee of the share certificate
issued under the seal of the defendant company. The certificate was issued by the Company’s secretary who has
forged the signature of the two directors of the company and had affixed the seal of the Company. The plaintiff,
in this case, had contended that whether the signature was forged or genuine comes under the purview of the
internal management of the company, therefore the company shall be held liable for the same, But it was held
by the court that the doctrine of Indoor Management has never extended to cover a forgery. Negligence

Acts that are beyond the scope of apparent authority

Acts done by an officer of a company which are beyond the scope of its apparent authority will not make the
company liable for any of the defaults caused by the officer. In such a case, the outsider cannot seek any
remedy under the doctrine of Indoor Management simply because Articles did not delegate the power to the
officer to do such acts. The outsider can only sue the company under the doctrine of Indoor Management if the
officer had the delegated power to act on those grounds.

Representation through Articles

This exception is the most confusing and highly controversial aspect of the Turquand Rule. Articles of
Association generally contain a clause of “power of delegation.” For example, in the case of Lakshmi Ratan
Cotton Mills v. J.K. Jute Mills Co.[9] One B was the Director of the company. The company comprised of
managing agents of which B was also a Director. The Articles of Association authorized the directors to borrow
money and also empowered them to delegate this power to one or more of them. B borrowed a sum of money
from the plaintiff. Further, the Company refused to be bound by the loan on the ground that there was no
resolution passed directing to delegate the power to borrow given to B. Yet it was held in the case that the
company was bound by the loan as the Articles of Association had authorized the director to borrow money and
delegate the power for the same.
 MOA
Introduction

A company is formed when a number of people come together for achieving a specific purpose. This purpose is
usually commercial in nature. Companies are generally formed to earn profit from business activities. To
incorporate a company, an application has to be filed with the Registrar of Companies (ROC). This application
is required to be submitted with a number of documents. One of the fundamental documents that are required to
be submitted with the application for incorporation is the Memorandum of Association.

Definition of Memorandum of Association

An important step in the formation of a company is to prepare a document called the memorandum of
association. Section 2(56) defines it as the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company law or the present Act. It is a document of
great importance in relation to the proposed company. Its importance lies in the fact that it contains the
following fundamental clauses which have often been described as the conditions of the company's
incorporation:

1. Name clause;
2. Registered office clause;
3. Objects clause;
4. Liability clause; and
5. Capital clause.

Content of Memorandum of Association

Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the essential
information that the memorandum should contain.

Name clause- The first clause of the memorandum is required to state the name of the proposed company. A
company, being a legal person, must have a name to establish its identity. "The name of a corporation is the
symbol of its personal existence."Section 4(1)(a) states:

1. If a company is a public company, then the word ‘Limited’ should be there in the name. Example,
“Robotics”, a public company, its registered name will be “Robotics Limited”.
2. If a company is a private company, then ‘Private Limited’ should be there in the name. “Secure”a
private company, its registered name will be “Secure Private Limited”.
3. This condition is not applicable to Section 8 companies.

What are Section 8 companies?

Section 8 Company is named after Section 8 of the Companies Act,2013. It describes companies which are
established to promote commerce, art, sports, education, research, social welfare, religion etc. Section 8
companies are similar to Trust and Societies but they have a better recognition and legal standing than Trust
and Societies.

What kind of names are not allowed?

The name stated in the memorandum shall not be,

 1. Identical to the name of another company;
2. Too nearly resembling the name of an existing company.

Registered Office Clause (Sect.12)

The second clause of the memorandum must specify the State in which the registered office of the company is
to be situated. Within 30 days of incorporation or commencement of business, whichever is earlier, the exact
place where the registered office is to be located must be decided and notice of the location must be given to the
Registrar who has to record the same. All communications to the company must be addressed to its registered
office. The Registered Office of a company determines its nationality and jurisdiction of courts. It is a place of
residence and is used for the purpose of all communications with the company.

Object Clause

The ownership of the corporate capital is vested in the company itself. But in reality that capital has been
contributed by the shareholders and is held by the company as though in trust for them. Such a fund must
obviously be dedicated to some defined objects so that the contributors may know the purposes to which it can
be lawfully applied. The statement of objects, therefore, gives a very important protection to the shareholders
by ensuring that funds raised for one undertaking are not going to be risked in another.

The objects clause, in the second place, affords a certain degree of protection to the creditors also. The creditors
of a company trust the corporation and not the shareholders and they have to seek their repayment only out of
the company's assets. The fact that the corporate capital cannot be spent on any project not directly within the
terms of the company's objects gives the creditors a feeling of security. Public financial institutions providing
loans to companies have to go object-wise because they have their own list of priorities. The objects clause is
their only guidance in this respect.

Thirdly, by confining the corporate activities within a defined field, the statement of objects serves public
interest also. It prevents diversification of a company's activities in directions not closely connected with the
business for which the company may have been initially established.®^ It also prevents concentration of
economic power. Any change of objects would require sanctions, thus giving the sanctioning authority an
opportunity to examine whether the proposed plan of diversification would not be against public interest..

Doctrine of Ultra Vires- If the company operates beyond the scope of the powers stated in the object clause,
then the action of the company will be ultra vires and thus void.

Liability Clause

The Liability Clause provides legal protection to the shareholders by protecting them from being held
personally liable for the loss of the company.

There are two kinds of limited liabilities:

Limited By Shares – Section 2(22) of the Companies Act, 2013 defines a company limited by shares. In a
company limited by shares, the shareholders only have to pay the price of the shares they have subscribed to. If
for some reason they have not paid the full amount for the shares and the company winds up then their liability
will only be limited to the unpaid amount.

Limited By Guarantee – It is defined in Section 2(21) of the Companies Act, 2013.A company limited by
guarantee has members instead of shareholders. These members undertake to contribute to the assets of the
company at the time of winding up. The members give guarantee of a fixed amount that they will be liable
for. Non-profit Organizations and other charities usually have a structure of companies limited by guarantee.

Capital Clause

It states the total amount of share capital in the company and how it is divided into shares. The way the amount
of capital is divided into what kind of shares. The shares can be equity shares or preference shares. Illustration:
The share capital of the company is 80,00,000 rupees, divided into 3000 shares of 4000 rupees each.

Subscription Clause

The Subscription Clause states who are signing the memorandum. Each subscriber must state the number of
shares he is subscribing to. The subscribers have to sign the memorandum in the presence of two witnesses.
Each subscriber must subscribe to at least one share.

Association Clause

In this clause, the subscribers to the memorandum make a declaration that they want to associate themselves to
the company and form an association.

Memorandum of Association for One-Person-Company- A one-person company is called so because it can be

formed by one person. It is a new concept which has been introduced to promote entrepreneurship. All the laws
which are applicable on private companies will be applicable on one-person company.

Section 2(62) of the Companies Act, 2013 defines one-person company. A one-person company is a separate
legal entity from its owner. It is mandatory for the company to be converted into a private limited company in
case its annual turnover crosses the 2 Crore mark.

In case of one-person-company, in addition to all the other clauses, the Memorandum of Association contains a
clause called the Nomination Clause. This clause mentions the name of an individual who will become the
member in case the subscriber dies or becomes incapacitated. The nominee must be an Indian citizen and
resident of India i. e. he must have been living in India for at least 182 days in the preceding year. A minor
cannot be a nominee.

The individual whose name is mentioned should give his consent in written form and it is required to be filed
with the Registrar of Companies at the time of incorporation.

If the nominee wants to withdraw, he shall give it in writing and the owner of the company will have to
nominate a new person within 15 days.

Alteration, Amendment & Change in Memorandum of Association under Companies Act, 2013

The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions, omissions or
substitutions. A company can alter the memorandum only to the extent as permitted by the Act. According to
Section 13, the company can alter the clauses in the memorandum by passing a special resolution. A resolution
is a formal decision taken in a meeting. There are two kinds of resolutions, ordinary and special. A special
resolution is one which requires at least 2/3rd majority to be effective. The alteration to the clauses also require
the approval of the Central Government in writing.

Change of name [S. 13(2-3)].—

A company may change its name by passing a special resolution and with the approval of the Central
Government signified in writing. Any change in the name of company will be subject to the provisions of
Section 4(2) and (3) which have been stated in the requirements of name clause of the memorandum. Approval
of the Central Government is not necessary where the only change in the name is deletion or addition of the
word "Private" consequent upon conversion of the company from one class to another in accordance with the
provisions of the Act. Alteration of name does not affect the rights and obligations of the company. Alteration
becomes effective when it is registered with the Registrar and a new certificate of incorporation with the new
name has been issued. Thereafter the company should use its new name.
Alteration of registered office clause [S. 13(4)].—
Shifting of registered office from one State to another and alteration of objects may affect not only the
company's shareholders, but also its creditors, dealers and employees. That is why the objects can be altered by
a special resolution and the registered office can be removed from one State to another by a special resolution
and sanction of the Central Government. [S. 13(4)] The Central Government has to dispose of the application
within 60 days. Before passing its order it has to satisfy itself that the alteration has the consent of creditors,
debenture-holders and other persons concerned with the company. Alternatively the Central Government has to
be satisfied that sufficient provision has been made by the company for due discharge of all its debts and
obligations or that adequate security has been provided for such discharge. [S. 13(5)] A certified copy of the
order of the Central Government approving the alteration has to be filed with the Registrar of each of the States
within the prescribed time. The Registrar has to register the same. The Registrar of the State to which the
registered office is being shifted has to issue a fresh certificate of incorporation indicating the alteration. [S.
13(7)].
A company can shift its registered office from one place to another within the same city, town or village. But if
it is proposed to carry the registered office from one city to another within the same State, a special resolution
to that effect must be passed. A notice of any such change must be given to the Registrar within 30 days of the
change. If the shifting of the registered office has the effect of taking the office from the jurisdiction of one
Registrar of Companies to that of another within the same State, permission of the Regional Director must be
taken. Application for permission has to be made on a prescribed form. The Regional Directors are required to
confirm the company's application and inform it accordingly within a period of four weeks. After getting the
confirmation of the Regional Director, the company must file a copy of the same with the Registrar of
Companies within two months from the date of confirmation together with a copy of the altered memorandum.
The Registrars are required to register the same and inform companies within one month from the date of filing.
The Registrar's certificate is a conclusive evidence of the fact of alteration and of compliance with
requirements. [S. 12]
Change of objects [S. 13(8)].—
A company which has raised money from the public through prospectus and has not still utilised the whole of
the money is not to change its objects except with the company's special resolution. The second requirement is
that the prescribed details of the resolution have to be published in newspapers (one in English and one in
vernacular language) which is in circulation at the place of the company's registered office. It has also to be
placed on the website of the company, if any. The publication has to indicate justifications for the change. The
dissenting share holders have to be given an opportunity to leave the company, if they so desire. This
opportunity has to be given by the promoters and shareholders who have control over the company in
accordance with the regulations to be specified by SEBI.
The alteration has to be filed with the Registrar. He has to certify the registration within 30 days from the date
of filing of the special resolution under Section 13(6). No alteration is to have effect unless it has been
registered with the Registrar in accordance with the provisions of this section. [S. 13(10)] Any alteration of the
memorandum in the case of a company limited by guarantee and not having a sharing capital, purporting to
give any person a right to participate in the divisible profits of the company otherwise than as a member is to be
void. [S. 13(11)]
 Doctrine of ultra vires
Introduction

Companies have to borrow funds from time to time for various projects in which they are engaged. Borrowing
is an indispensable part of day to day transactions of a company, and no company can be imagined to run
without borrowing from time to time. Balance sheets are released every year by the companies, and you will
hardly find any balance sheet without borrowings in the liabilities clause of it. However, there are certain
restrictions while making such borrowings. If companies go beyond their powers to borrow then such
borrowings may be deemed as ultra-vires.

What is the doctrine of ultra-vires?

Ultra-vires

It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning power or authority.
So we can say that anything which is beyond the authority or power is called ultra-vires. In the context of the
company, we can say that anything which is done by the company or its directors which is beyond their legal
authority or which was outside the scope of the object of the company is ultra-vires.

Doctrine of Ultra-Vires

Memorandum of association is considered to be the constitution of the company. It sets out the internal and
external scope and area of company’s operation along with its objectives, powers, scope. A company is
authorized to do only that much which is within the scope of the powers provided to it by the memorandum. A
company can also do anything which is incidental to the main objects provided by the memorandum. Anything
which is beyond the objects authorized by the memorandum is an ultra-vires act.

Origin of the doctrine

The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage and Iron Co.
Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by the House of Lords. In this case the company and
M/s. Riche entered into a contract where the company agreed to finance construction of a railway line. Later on,
directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company.
Riche filed a suit demanding damages from the company. According to Riche, the words “general contracts” in
the objects clause of the company meant any kind of contract. Thus, according to Riche, the company had all
the powers and authority to enter and perform such kind of contracts. Later, the majority of the shareholders of
the company ratified the contract. However, directors of the company still refused to perform the contract as
according to them the act was ultra-vires and the shareholders of the company cannot ratify any ultra-vires act.

When the matter went to the House of Lords, it was held that the contract was ultra-vires the memorandum of
the company, and, thus, null and void. Term “general contracts” was interpreted in connection with preceding
words mechanical engineers, and it was held that here this term only meant any such contracts as related to
mechanical engineers and not to include every kind of contract. They also stated that even if every shareholder
of the company would have ratified this act, then also it had been null and void as it was ultra-vires the
memorandum of the company. Memorandum of the company cannot be amended retrospectively, and any ultra-
vires act cannot be ratified.

What is the need or purpose of the doctrine of ultra-vires?

The company should devote itself only to the objects set out in the memorandum and to no others. It is the
function of the memorandum "to delimit and identify the objects in such plain and unambiguous manner as that
the reader can identify the field of industry within which the corporate activities are to be confined". And it is
the function of the courts to see that the company does not move in a direction away from that field.

The ownership of the corporate capital is vested in the company itself. But in reality that capital has been
contributed by the shareholders and is held by the company as though in trust for them. Such a fund must
obviously be dedicated to some defined objects so that the contributors may know the purposes to which it can
be lawfully applied. The statement of objects, therefore, gives a very important protection to the shareholders
by ensuring that funds raised for one undertaking are not going to be risked in another.

The objects clause, in the second place, affords a certain degree of protection to the creditors also. The creditors
of a company trust the corporation and not the shareholders and they have to seek their repayment only out of
the company's assets. The fact that the corporate capital cannot be spent on any project not directly within the
terms of the company's objects gives the creditors a feeling of security. Public financial institutions providing
loans to companies have to go object-wise because they have their own list of priorities. The objects clause is
their only guidance in this respect.

Thirdly, by confining the corporate activities within a defined field, the statement of objects serves public
interest also. It prevents diversification of a company's activities in directions not closely connected with the
business for which the company may have been initially established.®^ It also prevents concentration of
economic power. Any change of objects would require sanctions, thus giving the sanctioning authority an
opportunity to examine whether the proposed plan of diversification would not be against public interest.

Consequences of ultra vires transactions

When a company gets involved in an ultra vires transaction the question arises as to what are its effects.

1. Injunction.—In the first place, that members are entitled to hold a registered company to its registered objects
has been recognised long since. Hence whenever an ultra vires act has been or is about to be undertaken, any
member of the company can get an injunction to restrain it from proceeding with it.

2. Personal liability of directors.—It is one of the duties of directors to see that the corporate capital is used only
for the legitimate business of the company. If any part of it has been diverted to purposes foreign to the
company's memorandum, the directors will be personally liable to replace it.'"Thus, for example, the Bombay
High Court in Jehangir R Modi v Shamji Ladha held that a shareholder can maintain an action against the
directors to compel them to restore to the company the funds of the company that have been employed by them
in transactions that they have no authority to enter into, without making the company a party to the suit.

3. Breach of warranty of authority—It is the duty of an agent to act within the scope of his authority. For if he
goes beyond he will be personally liable to the third party for breach of warranty of authority. The directors of a
company are its agents. As such it is their duty to keep within the limits of the company's powers. If they
induce, however innocently, an outsider to contract with the company in a matter in which the company does
not have the power to act, they will be personally liable to him for his loss.

4. Ultra vires acquired property.—a company's money has been spent ultra vires in purchasing some property,
the company's right over that property must be held secure. For,that asset, though wrongly acquired, rep resents
the corporate capital. Thus, for example, the Madras High Court allowed a company to sue on a mortgage to
recover the money lent in spite of the fact that the transaction was beyond the powers of the company.

5. Ultra vires contracts—The objection to an ultra vires contract is, not merely that the corporation ought not to
have made it, but that it could not make it. The question is not as to the legality of the contract: the question is
as to the competency and power of the company to make it. "An ultra vires contract, being void ab initio,cannot
become intra vires by reason of estoppel, lapse of time, ratification, acquiescence or delay. "No performance on
either side can give the unlawful contract any validity or be the foundation of any right of action upon it.

6. Ultra vires torts—The rule of constructive notice of memorandum and articles explains why a company is not
liable for an ultra vires contract, but that does not solve the problem of injustice involved. Moreover, the rule
altogether fails to hold ground when a company is sought to be made liable for a tort committed by a servant of
the company while acting beyond the company's powers. Anyone dealing with a company may, at the pain of
losing the bargain, be required to acquaint himself with the company's memorandum. But that can hardly be
expected of a person who has been the victim of an ultra vires tort. For example, a company is operating
omnibuses—a venture entirely alien to its objects as described in the memorandum. The driver of one such bus
negligently injures the plaintiff who sues the company for the tort.
 Prospectus
Introduction

One of the major reasons why businesses choose the company form of business is because it allows greater
accessibility to funds. A public company that has been incorporated under the Companies Act, 2013 is allowed
to raise investments from the general public through different modes. Since a company raises funds from the
public, it also becomes necessary that such a company be accountable to the public. Accordingly, to secure the
interests of the investors in the company, the Companies Act, 2013 mandates the filing of a prospectus with the
Registrar prior to raising funds. A prospectus is a document issued by a company to invite deposits or
subscriptions from the public by way of issuing securities of the company.

Definition

A public company, but not a private company, is entitled, by issuing a prospectus, to invite applications for its
shares or debentures. "Prospectus" is defined by Section 2(70) in the following words: "'Prospectus' means any
document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32 or
shelf prospectus referred to in Section 31 or anynotice, circular, advertisement or other document inviting offers
from the public for subscription or purchase of any securities of a body corporate. An abridged prospectus
means a memorandum containing such salient features of a prospectus as may be specified by SEBI by making
regulations. [S.2(l)]

Golden Rule by VC Kinderseley

The ‘Golden Rule’ of the prospectus was propounded by Judge VC Kinderseley in the landmark judgement
of The New Brunswick Railway Company v. Muggeridge (1859). In this case, it was held that “Prospectus is
one of the means by which the investor is informed about the soundness of the company’s venture.” The
essence of the rule is that it is mandatory on part of the company to issue a prospectus; it is not only required to
accurately put forth all the relevant facts and information but also ensure that it does not hide any information
which might affect the decision of an investor. The rule is also known as the ‘Golden Legacy’ as has been
described by Judge Pagewood in Henderson v. Lacon (1865).

Essentials for a document to be called as a prospectus

The essential conditions required to be fulfilled for a document to be considered as a prospectus under the
Indian company law are as follows:

1. Invitation to the Public – One of the most important points that one must remember is that a
prospectus is an invitation to offer rather than an offer itself. This means that a company makes an open
declaration to the public at large that some of its securities are available for subscription. A document
shall be deemed to be an invitation to the public only if it is open for any person to subscribe, though
there may be a possibility that ultimately the securities may not be issued to him owing to
oversubscription or any other disqualification.
2. Invitation by the company – The prospectus must be issued by the company itself that wishes to raise
the funds. Even if all the requisite disclosures are made available by the public by some other authority,
that would not satisfy the criteria for making the invitation. However, an entity, on behalf of the
company or on the authorisation of the company, may follow the stipulated process in order to make an
invitation to offer to the public. Hence, an invitation to offer must be made by the company itself or on
behalf of the company by some other authority authorised by the company.
 3. Nature of document and particulars therein – A prospectus shall be in the nature of an invitation to
offer, allowing subscription to the securities of the company. Any document merely disclosing the
details of the securities shall not be considered a prospectus. It must fulfil all the required stipulations
that have been provided under the Companies Act, which have been discussed in the later section of the
article.
4. Information regarding securities of the company – A prospectus is required to contain all the details
regarding the securities. The prospectus must specify the nature of securities, whether equity-based or
debt-based. It must also specify the category as to whether it is an equity or preference share, debenture,
bond, warrant, etc. It must specify the number of securities available for subscription. It must also
provide for other particulars, such as redemption, rate of interest, etc., as may be applicable to the
category of securities.

Types-

The definition of prospectus under Section 2(70) is an inclusive definition. It provides that a prospectus shall
include a Shelf Prospectus (as mentioned under Section 31), a Red Herring Prospectus (as mentioned
under Section 32), or any other document inviting applications for subscription/purchase of securities of the
company. The various categories of prospectus under the Companies Act, 2013 have been discussed hereafter.

Shelf prospectus

Drafting a prospectus is a cumbersome process as it requires a number of disclosures and information to be

passed on to the investor. It may also be possible that a company makes multiple public offers in one financial
year itself. In such a case, it will become nearly impossible for the company to draft an entirely new prospectus
every time. Yet, it is also crucial to note that significant changes may take place in the financial status of the
company. To balance the interests of the company as well as that of investors, the law provides for the concept
of shelf prospectus.

Explanation to Section 31 of the Companies Act, 2013 provides that “the expression “shelf prospectus” means
a prospectus in respect of which the securities or class of securities included therein are issued for subscription
in one or more issues over a certain period without the issue of a further prospectus.” A company issues a shelf
prospectus when it has to offer for subscription by the public, more than one round of issue. Shelf prospectus is
a single prospectus that can hold good for multiple public offers.

Red Herring prospectus

Though most of us imagine big companies when talking about investments and funding, mid-size and small
companies also require investments and they also make public offers. To safeguard their rights and enable them
to have better access to finance, the law provides for red herring prospectus. Explanation to Section 32 of the
Companies Act, 2013 provides the definition of a red herring prospectus as “the expression “red herring
prospectus” means a prospectus which does not include complete particulars of the quantum or price of the
securities included therein.” A red herring prospectus is a prospectus wherein information regarding either the
quantity of securities or the price of securities is not disclosed by the company. Rather, the company only
provides a price band. This enables a company to gauge the worth of its securities and enables them to achieve
the requisite minimum subscription, which may not otherwise be possible had they already supplied the entire
information.
A red herring prospectus is subjected to same regulations as a prospectus. It has to be filed before the Registrar
of Companies at least three days before the issue has to be made public. Further, the company must file the
complete details of the issue with the Registrar and the SEBI after the securities has been duly subscribed to.

Abridged prospectus

Retail investors, having limited access to financial knowledge as well as resources, might not be competent
enough to understand the intricate details mentioned in the prospectus. A solution to this problem is an abridged
prospectus. Section 2(1) of the Companies Act, 2013 defines an abridged prospectus as a memorandum
containing the salient features of an issue. The features to be included in an abridged prospectus are to be
provided by SEBI. Further, Section 33 of the Act mandates for annexing an abridged prospectus along with
form for application of purchase of securities. However, the proviso to sub-section (1) provides that this
requirement may be dispensed with where the form of application was issued for:

 “in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect
to such securities; or
 in relation to securities which were not offered to the public.”

Deemed Prospectus

When a company wishes to issue its securities through an intermediary, the document containing the details of
such securities is considered a deemed prospectus. Section 25(1) of the Companies Act, 2013 governs the
deemed prospectus. The document shall be a deemed prospectus for the company whose securities are being
offered to the public.

Liability for misstatements in a prospectus under Company Law

A prospectus is used by potential investors to gather information about the company. Thus, it is the duty of the
company and its authorised persons to make true and correct statements in the prospectus. Generally, when
false or incorrect information is added to the prospectus, it becomes a misstatement. Even an omission of
important information amounts to a misstatement in a prospectus. Making a false or misleading statement thus
entails certain liabilities. Under the Companies Act, 2013, there are two types of liability for misstatements in
the prospectus.

Civil Liability

Civil liability under the Companies Act, 2013 is provided under Section 35. It provides that where a person has
subscribed to the securities of the company acting on any misstatement included in the prospectus and has
consequently suffered any loss, the company and the persons authorising the issue of such prospectus are liable
for such loss, provided that certain conditions are fulfilled. These conditions include:

1. Subscription to the securities acting upon the misstatement

2. Loss or damages due to such misstatement
3. Knowledge of the Defendant must be proved by the Plaintiff
4. Such misstatement must be material to the facts

If the above conditions are met, the Plaintiff can claim remedies against the company as well as against the
authorised personnel. The remedies include rescission of the contract, damages, and damages for the non-
disclosure of material facts.

Criminal Liability
Apart from the civil liability in case of misstatements, Section 34 of the Act also provides the liability of the
authorised personnel for the misstatements in the prospectus. Criminal liability has been provided under Section
447 of the Act. In case of fraud on the Plaintiff (investor of the company), a criminal suit can be filed against
the following persons:

1. All the directors authorising the issue of the prospectus

2. All the proposed directors of the company
3. Each promoter
4. Any expert involved in the issue

Section 447 of the Act prescribes a minimum imprisonment of six months but not more than ten years, along
with a fine which shall not be less than the amount of damages suffered but not more than three times of such
amount. The proviso to the provision provides that in case the issue involves a public interest, the minimum
term of imprisonment of the aforesaid persons shall be three years.

Important judicial pronouncements

Kiran Mehta v. Universal Luggage Manufacturing Co. Ltd. (1988)

The Plaintiff filed a PIL against a company alleging that the company had issued a prospectus containing false
statements. It was stated that the Plaintiff himself did not have any interest in the matter but filed the case as the
statements were likely to confuse or mislead the general public. The Hon’ble Bombay High Court dismissed the
case stating that a locus standi of the Plaintiff was required to file such a case.

Mohandas Shenoy Adige v. Securities and Exchange Board of India (2021)

The question raised by the complainant was whether the non-compliance with the statements made in the
prospectus amounted to misstatement in the prospectus. The allegations included that the company raised
public funds only to syphon funds to the group of companies. The Securities Appellate Board held that no case
of misstatement was found as the complainant was unable to establish that the funds were actually being
syphoned. In case of no fact-based finding, the non-adherence with the statements in the prospectus cannot be
held to be misstatements. It was further held that “If a statement made in the prospectus is not adhered to by the
Company it does not become a misstatement. At best it can be a case of the Company violating the terms and
conditions of the prospectus”.
 Winding up of a company
A company can cease to exist, but this happens only after it is wound up and dissolved. Winding up is a process
whereby the assets of a company are realised, creditors are paid, and its surplus is distributed among the
members of the company in order to finally dissolve it.

Meaning-

Winding up is the second method of putting an end to the life of a company. In the words of Professor Gower:
"Winding up of a company is the process whereby its life is ended and its property administered for the benefit
of its creditors and members. An administrator, called a liquidator, is appointed and he takes control of the
company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance
with their rights."^ Winding up of a company differs from the insolvency of an individual inasmuch as a
company cannot be made insolvent under the insolvency laws. Moreover, a perfectly solvent company maybe
wound up. The company is not dissolved immediately at the commencement of winding up. Its corporate status
and powers continue. "Winding up precedes dissolution."

Types of winding up [S. 270]

The Act provides only for one kind of winding up:

1. Compulsory winding up under the order of the Tribunal.

2. Voluntary winding up, which itself is of two kinds, namely: (a) Members' voluntary winding up, and (b)
Creditors' voluntary winding up. [These two types of winding up have been abolished.]

Grounds of winding up by Tribunal [S. 271]

A company may be wound up at an order of the Tribunal. This is also called compulsory winding up. The cases
in which a company may be wound up are givenin Section 271.

They are as follows:

Section 271 empowers the Tribunal in its discretion to order the winding up of a company in the following
cases:

(a) If the company has resolved by a special resolution that it be wound up by the Tribunal, (b) If the company
has acted against the interests of sovereignty and integrity of India, the security of the State, friendly relations
with foreign States, public order, decency or morality, (c) If the Tribunal is of opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent or unlawful
purpose or persons concerned in its formation or management of its affairs have been guilty of fraud,
misfeasance or misconduct in those connections and that it is proper that the company be wound up. This clause
can be activated by an application by the Registrar or by any other person authorised by the Central
Government by notification, (d) If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial years, (e) If the Tribunal is of
opinion that it is just and equitable that the company should be wound up.

Voluntary winding up of a company

Corporate Insolvency Resolution Process (CIRP) is a process to resolve the corporate insolvency of a corporate
debtor. It can be initiated by filing an application to the Adjudicating Authority under Chapter II of Part II of
the Code. If this process fails, the company initiates the process of liquidation. The process of voluntary
winding up under IBC may be started by a corporate debtor, financial creditor or operational creditor.

When a company decides to wind up its affairs and proceed further with the required proceedings on its own,
this Act is called the voluntary winding up of a company. Part II of Chapter XX of the Act deals with the
voluntary winding up of the companies.

Circumstances in which a company can be wound up voluntarily

Section 304 provides the circumstances under which a company can be wound up voluntarily:

 Company passes a resolution in a general meeting regarding voluntary winding up due to the expiry of its
duration fixed by its articles or due to the occurrence of any event for which articles provide that the
company should be dissolved;
 Company passes a special resolution regarding voluntary winding up.

However, this Section and the provisions related to the voluntary winding up of a company were omitted in
2016. Now, the Insolvency and Bankruptcy Code, 2016 deals with the voluntary winding up process.

Meeting of creditors

It is necessary to inform the creditors of the company which can be done through the post. A meeting is
conducted where they are notified about the amount of money due to each creditor. The board of directors will
then put forth the statement of affairs and if the majority opines that the company should be wound up
voluntarily, the process is initiated. However, if the majority opt for compulsory winding up of the company or
winding up by a tribunal, application must be sent in this regard to the tribunal within 14 days and inform the
same to the registrar within 10 days. A company liquidator is appointed to carry on the process of voluntary
winding up according to the Insolvency and Bankruptcy Code, 2016 who finally evaluates the assets of the
company and submits the report to the tribunal.

Procedure of voluntary winding up

Further, Section 59 of the Insolvency and Bankruptcy Code, 2016 deals with the voluntary liquidation of
corporate persons. It provides that a corporate person who wants to liquidate itself voluntarily and has not
committed any default may initiate the liquidation proceedings under the Act. However, the proceedings of a
registered corporate person must satisfy the following conditions:

 There must be a declaration from the majority of the directors of the company which must be verified by
an affidavit and must state that:
o A full inquiry into the affairs of the company has been made and an opinion has been formed
that the company has no debt or will be able to pay its debts in full from selling its assets in the
voluntary liquidation.
o The company is not liquidated in order to defraud any person.
 The declaration must be accompanied by the following documents:
o Financial statements and record of the company’s operations for the preceding two years or since
its incorporation.
o Valuation report of the assets of the company which is prepared by a registered valuer.
 A special resolution regarding the voluntary winding up of the company must be passed within four
weeks of declaration or a general resolution must be passed in a general meeting regarding voluntary
 winding up due to the expiry of its duration fixed by its articles or due to occurrence of any event for
which articles provide that the company should be dissolved.

Further, the Section provides that the company must notify the Registrar and Board about the resolution being
passed for the liquidation of the company within seven days from the date such resolution is approved by the
creditors. With the approval of creditors, the liquidation proceedings of the company will be deemed to have
commenced from the date such resolution is passed. When the affairs of a company have wound up completely
and its assets have been liquidated completely, an application will be made by the liquidator to the Adjudicating
Authority for the dissolution of such a company. The Authority will pass an order regarding dissolution of the
company and it will be dissolved accordingly and the copy of said order must be given to the required authority
with which the company is registered within fourteen days.

Winding up of unregistered companies

Part II of Chapter XXI deals with the winding up of unregistered companies. Section 375 of the Act provides
that an unregistered company cannot be wound up voluntarily under the Act. It provides that such a company
will be wound up under the following circumstances:

 The company is dissolved or ceases to carry on the business or is continuing to carry on the business only
for the purpose of winding up.
 The company is not able to pay its debts.
 It is just and equitable in the opinion of the tribunal to wind up the company.

The Section further provides that an unregistered company will include any partnership firm, limited liability
partnership, society or cooperative society, association etc but will not include:

 A railway company incorporated under any Act of Parliament or any other Indian law.
 Any company registered under the Act.
 Any company registered under the previous company law but not a company whose office was in Burma,
Aden, or Pakistan.

According to Section 376, a foreign company incorporated outside India but carrying business in India can be
wound up as an unregistered company if it ceases to carry business in India.

Summary procedure for winding up of a company

Section 361 provides that if a company which is to be wound up has assets of a book value not exceeding one
crore rupees and belongs to prescribed classes of companies, the central government may order for winding up
of such company. After the order is made, the central government will appoint an official liquidator in this
regard. He will further take into his custody all the assets, effects and actionable claims belonging to the
company. He will also submit a report to the central government in this regard and whether any fraud is
committed in the company within thirty days of his appointment.

On receiving the report, the central government can order an investigation into the affairs of the company in
case any fraud has been committed. After taking into consideration the investigation report, the government can
finally order for winding up of the company according to part I of Chapter XX.
 Share and Share capital

Introduction

The Companies Act, 2013 (‘the Act’) details all laws related to companies and their functioning in India,
including shares and share capital. A company is a form of organisation whose capital is contributed largely by
its shareholders, who are the real owners of the company. This capital is the amount that is invested in the
company to carry out the company’s activities. Since a company is an artificial person, all operations of the
company are dependent upon its AOAs and MOAs that are signed with it. It has a corporate legal entity distinct
from its shareholders and members, which means that the liability of the shareholders for the company depends
a lot on shares. All companies limited by shares must have a share capital, and this share capital cannot be
generated by the company on its own and has to be collected by several people. Although the issuance of share
capital is not necessary for a company to be incorporated, it is crucial for running the business based on
capital.

Shares

Shares in a company show the percentage of ownership of a person or member in that company, which is a
single unit that is further divided into several units with their own price. All of these units are of a specific
amount, and when someone purchases these units, they also purchase certain defined units of the share capital
of the company, which makes that person a shareholder in the company. The term share has been defined
under Section 2(84) of the Act, which means a share in the share capital of the company and includes stock. It
signifies the interests of the shareholders in the company, measured for the purposes of liability and dividends.
A share, debenture, or any interest held by a member of a company is deemed movable property and can be
transferred as stipulated in the company’s articles of association.

Share capital in Company Law

Share capital refers to the capital raised by the company by issuing common or preferred stock, as the case may
be. It is not important for a company to have a share capital; the case might be that it is a company limited by
guarantee. The amount contributed by the shareholders is dependent on them, and they can buy shares divided
into equal amounts. Simply put, share capital is the total value of funds raised by a company through the
issuance of shares to its shareholders.

Authorised/registered capital

The Memorandum of Association of a company states the amount and division of share capital in the company.
This amount is called the authorised or nominal capital of the company as per Section 2(8) of the Act.

Issued capital

Section 4(1)(e)(i) of the Act mentions that this share capital is present in the capital clause of the memorandum,
which can be issued depending upon the requirements. The portion of this share capital that is issued to the
public is known as the ‘issued capital,’ which is distributed from time to time through subscriptions.

Subscribed capital

The part of the issued capital that is subscribed by the public is called the ‘subscribed capital’, which, as
per Section 2(86) of the Act, is the part of the share capital that is subscribed by the members for the time
being. The minimum subscription requirement presently is ninety percent of the issued capital, and the
company has flexibility in calling the subscribed capital.
Paid-up capital

The actual amount that the company receives from the subscribed capital is called the ‘paid-up capital’ as
per Section 2(64) of the Act, and the capital that forms the ‘uncalled share capital’ can be set aside as ‘reserve
share capital.’

Called-up capital

The part of the subscribed capital that the company calls up for payment is called the ‘called-up capital’ as
per Section 2(15) of the Act.

Reserve capital

Capital required for meeting share expenses.

Kinds of share capital in Company Law

Section 43 of the Act mentions the two types of share capital that a company can have:

 Equity share capital

1. With voting rights

2. With differential rights as in dividends, voting, or any other in accordance with the rules prescribed.

 Preference share capital ,unless otherwise specified by the company’s Articles of Association (AOA) or
Memorandum of Association (MOA).

Equity shares

Equity share capital means all share capital that is not preference share capital, which represents ownership in a
company. All equity shareholders are eligible to voting rights in the company and are eligible for a share of the
company’s profits, thus bearing a high risk with the possibility of higher returns as well. The dividend that the
shareholders get is not fixed in equity shares, and the company might not give any profits to its equity
shareholders even if it has them. Though, as per Section 43(a) and Section 50(2), all equity shareholders get a
right to vote on every resolution that is passed in the company, and their voting can be determined by the pool
of paid-up capital until otherwise provided by the AOA and MOA.

Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 lays down the conditions for the issuance
of equity shares:

 The AOA of the company is responsible for the issuance of equity shares with differential rights, such as
dividends.
 The shares are issued by the passing of a resolution at a general meeting of the shareholders, where if the
equity shares are listed on a stock exchange, the issuance of shares will be decided upon by the shareholders
through a postal ballot.
 The equity shares that provide differential rights should not exceed more than 26 percent of the total post-
issued paid-up capital shares.
 The company giving out the equity shares must have a consistent track record of distributable profits for at
least three years and should not have defaulted in filing facial statements or returns for those three years and
the three years preceding the year the shares are issued.
 The company should not have defaulted on the payment of its dividends, repayment, or redemption of
preference shares to its shareholders.
 The company should not have defaulted on the payment of dividends, preference shares, and the repayment
of loans taken from a public or private institution or a bank that requires statutory payments.
 The company should not have been penalised by any court or tribunal for at least the last three years under
the Companies Act passed by the Central Government or SEBI that pose sectoral restrictions.

Companies that have their equity shares listed on a stock exchange can have their shares issued by postal ballot
with the shareholders’ approval. Section 102 talks about the statement to be annexed to a general meeting
talking about the issuance of these shares. Though the company cannot cover its existing differential rights for
its shares with voting rights or the other way around.

Preference shares

Preference shares are the shares where the shareholders get preferential rights related to the capital they hold
and a dividend over equity shares. Preference shares are shares with a fixed rate of dividend and preferential
rights over ordinary equity shares. People who buy preferential share capital get priority in dividend
declarations, and at the time of winding up, they are the first ones to receive money. They have the right to vote
only when the matter directly or indirectly affects them. This dividend may be a fixed amount that is payable to
the shareholders to give them preference over the equity shareholders and to give them a higher claim over the
assets of the company without the privilege of voting rights.

Preference shareholders can only vote on resolutions that directly concern them or affect their rights as
preference shareholders or the winding up of the company. If the preference dividend is not paid for two years
or more, the preference shareholders will get the right to vote on every resolution.

In summary, preference share capital with reference to any company limited by shares means that part of the
issued share capital of the company that carries or would carry a preferential right with respect to:

 Payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either
be free of or subject to income-tax; and

 Repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-
up or deemed to have been paid-up, whether or not there is a preferential right to the payment of any
fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Kinds of preference shares

 On the basis of rights to dividends: Cumulative and Non-cumulative preference shares

 On the basis of convertibility: Convertible and Non-Convertible preference shares
 On the basis of maturity period: Redeemable and Irredeemable preference shares
 On the basis of participations in surplus profits: Participating and Non-Participating preference shares

Other types of share capital in Company Law

There are shares which are used to raise the capital of the company. Those shares are:

 Sweat Equity Shares- According to Section 2(88) of the Act, sweat equity shares are issued by a company to
its directors or employees at a discount with some other consideration that does not include cash, like the
know-how for getting rights to intellectual property or some other value additions from them. It is a mode
 of payment of shares to the employees of a company that allows it to retain the employees as well as reward
them for their services by giving them incentives for their contribution to aid the development of the
company.
 Employee Stock Option Scheme- According to Section 2(37) of the Act, an employees stock option is a
scheme or option given to the employees, directors, or officers of a company along with the holding or
subsidiary companies that gives these people a benefit or the right to purchase or subscribe to the shares of
the company at a future date at a predetermined price. SEBI, in its guidelines, clarifies that it is a right and
not an obligation that is granted to all permanent employees of the company. The objective behind the
issuance of this scheme is to provide incentives and reward the employees of the company to make the
company more profitable.
 Bonus Issue- Bonus shares are issued to existing members according to Section 63 of the Act, where the
company can issue paid-up bonus shares to its members.
 Rights Issue- Section 62 of the Act talks about rights issues, which is an easy way of procuring finance for a
company. The previous shareholders of the company have the right to subscribe for the new shares of the
company. There is no prospectus or offer for sale of shares issued in rights issue, and equity shareholders of
the company are given the offer through an application form, which entitles them to take up shares at a price
way below the listed price. Shareholders who do not want to keep their rights to the shares can sell them to
other third parties at a specified price. Shareholders can also renounce their rights to the company and sell
the shares to the public in a manner prescribed by the board of directors.
 Allotment of shares

Concept of allotment of shares

Before diving deep into the topic of allotment of shares it is necessary to understand what allotment really
means. The allotment is the allocation of a portion of shares to an underwriting participant during Initial Public
Offering (IPO). When the shares allotted to the underwriting form, the remaining shares are allotted to other
forms that participate in the same.

The process of appropriation of a certain number of shares and distribution among those who have submitted
the return applications of shares is known as allotment of shares. Companies Act 2013 incorporated therein
forms allotment of shares that are listed on NSE and BSE or any other stock exchanges in India. Other
regulations that are applicable for subsidiaries of listed companies include the provision of SEBI Act,
1992 and Securities Contract Regulation Act, 1956.

Allotment of shares is basically creating and issuing a new number of shares by the company to the new or
existing shareholders. The purpose of allotting new shares is to bring new business partners.

General principles as to allotment of shares

An allotment to be effective has to comply with the requirements of the law of contract relating to the
acceptance of an offer.

 Allotment by proper authority- An allotment should be made by a resolution of the Board of directors. The
Allotment is the primary duty of the directors and this duty cannot be delegated except in accordance with
the provisions of the articles.
 Within reasonable time- allotment should be made within a reasonable period of time otherwise the
application fails. Reasonable time should remain a question of fact in each case. The interval of six months
between application and allotment has been held unreasonable. If the reasonable time expires Section 6 of
the Contract Act applies and the application must be deemed to be revoked.
 Must be communicated- The allotment should be properly communicated to the applicant. Posting of a
properly addressed and stamped letter of allotment is sufficient communication, even though the letter is
lost or held up.
 Absolute and unconditional- Allotment should be absolute and should be according to the terms and
conditions of the application if any.

Nature of shares

According to Section 44 of Companies Act, 2013 the shares of a company are immovable property and
according to the articles of the company, are transferable in the manner specified therein. In the case of
Vishwanath v. East India Distilleries, the nature of share is incorporeal and also has a bundle of rights and
obligations.

How are shares allocated during IPO

Hearing the news of IPO launch by renowned companies, investors usually get excited. IPO, are an important
financial tool to raise funds from the public for some companies which require it. IPOs are raised by companies
when they feel confident about future performance.

From time to time IPOs are announced by companies among the public and investors who are waiting for this
opportunity.
Companies, by issuing public share ownership, raise capital from the public, through IPO. Although there are
various risks associated with announcing an IPO, only when the company feels that it has reached a certain
maturity stage, where it can benefit their targeted public, the company announces IPO.

The number of IPOs defaults on a yearly basis depends entirely upon how the economy is doing. For example,
during the 2008 financial crisis, the market for IPO was completely destroyed.

Though the company announces IPO to the public at large, it doesn’t mean that everyone is qualified to receive
IPOs. It is only on the basis of the share volume of each investor that the company offers an IPO. The securities
and exchange board of India (SEBI) governs the rules of allotment of shares.

Provisions of Companies Act relating to issue and allotment of shares

1. A public company should file a prospectus or declaration in lieu of a prospectus inviting offers from the
public for the purchase of shares.
2. After reading the prospectus, the public applies for the company shares in printed forms. The company can
ask the issue price to be paid in full, together with the application money or to be paid in instalments as
share application money, share first call, second call, etc. The application money must be paid at least five
percent of the nominal value of the share.
3. The Allotment of shares cannot be made unless the minimum amount that is the minimum subscription
stated in the prospectus is subscribed or applied. The minimum subscription should be mentioned in the
prospectus.
4. The share application amount should be deposited in the bank which can be operated by the company only
after the commencement certificate.
5. The company has to return and refund the entire subscription amount instantly if 90% of the issue amount
is not achieved by the company within 60 days. For further delay, which is beyond 78 days, the company
has to pay 6% interest per annum.

After allotment of shares, the company can call for the full amount or installments which are due on shares
from the shareholders according to rules mentioned in the prospectus. Usually, the articles of the company
include provisions regarding calls. If there are no such provisions then the following provisions are applicable:

1. No call should be for more than 25% of the nominal value of each share.
2. The interval between two calls should not be less than a month.
3. At least 14 days should be provided to each member for the call mentioning the amount, date, and place of
payment.
4. Calls should be made on a uniform basis on the entire body of shareholders falling under the same class.

Procedure of allotment of share

The general procedure that is accepted in the law of contract also applies to the allotment of shares. These are:

 The resolution of the board of directors must be done prior to allotment. The directors cannot be delegated
this duty and it becomes very important that a valid resolution is passed by the board for allotment in a valid
meeting. (Portuguese consolidated copper mines 1889)
 According to Section 6 of the Indian contract Act, 1872, it is important that the allotment of shares is done
within a reasonable period of time but this reasonable time varies from case to case. The refusal to accept
the shares by the applicant is the choice of himself if the allotment is made after a very long time to him.
The same thing happened in the case of Ramsgate Victoria Hotel Company v. Montefiore 1866, wherein the
 allotment of the share was made at an interval of six months between application and allotment and it was
held unreasonable.
 Moreover, the allotment must be unconditional and absolute and must be allotted on the same terms upon
which they were agreed upon during the acceptance of the application.
 Acceptance is the key to allotment and without acceptance of valid allotment cannot be made just on an oral
request.

Statutory restrictions on the allotment of shares

Minimum subscription and application money (S-39) – The first essential requirement for a valid allotment is
that of minimum subscription. The amount of minimum subscription has to be declared in the prospectus at the
time when shares are offered to the public. Shares cannot be allotted unless at least so many amounts have been
subscribed and the application money, which must not be less than 5% SEBI may decide the various percentage
of the nominal value of the share, has been received in by cheque or other instruments. It has been established
by various cases that it is a criterion to valid allotment that the entire application money should be paid to and
received by the company by cheque or other instruments. If the shares allotments are made without application
money being paid it is invalid. If the minimum subscription has not been received within thirty days of the
issue of the prospectus, or any such period as specified by SEBI the amount has to be returned within such time
and manner as prescribed. [S-39(4)] Application money can be appropriated towards allotment or it has to be
returned or refunded.

Return of allotment [S.39 (4)] – A return of allotment has to be filed with the registrar in the prescribed manner
whenever a company makes an allotment of shares having a share capital.

Penalty for default [S. 39 (5)] – In case of default, the company and its officer who is in default are liable to a
penalty for each default of Rs 1000 for each day during which the default continues or Rs 1,00,000 whichever
is less.

Shares to be dealt in on stock exchange [S.40] – Every company aiming to offer shares or debentures to the
public by the issue of the prospectus has to make an application before the issue to any one or more of the
accepted stock exchanges for permission for the shares or debentures to be dealt with at the exchange. The need
is not merely to apply but also to obtain permission. In the prospectus, the name or names of the stock
exchanges to which the application is made must be stated.

Cases

Shri Gopal Jalan and company v. Calcutta Stock Exchange Association Limited, in this case, it was held that
appropriation of shares to a particular person by any company is allotment of shares. allotment of shares also
includes acceptance which leads to a contract between the company and the shareholder whereas the
application for shares is an offer.

Khoday distilleries v. CIT. Allotment of shares is a creation and not a transfer of shares.
 Incorporation of company

Introduction

A company comes into existence is generally by a process referred to as incorporation. Once a company has
been legally incorporated, it becomes a distinct entity from those who invest their capital and labour to run the
company. Usually the first step to form a company is the process known as ‘promotion’ where a person
persuades others to contribute capital to a proposed company before it is incorporated . Such a person is called
the promoter of the company. Promoters also can enter into a contract on behalf of a company before or after it
has been granted a certificate of incorporation, and arrange share issues in the name of the company. Section 3
to 22 of the Companies Act, 2013 (herein after called the Act) read with Companies (Incorporation) Rules,
2014 made under Chapter II of the Act (herein after called ‘the Rules’) cover the provisions with regard to
incorporation of companies and matters incidental thereto.

Promoters

Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:-

 Is named as a promoter in the prospectus or in the annual returns of the company.

 Controls the affairs of a company, directly or indirectly.
 Advises, directs, or instructs the Board of Directors.

Hence, we can say that promoters are people who originally come up with the idea of the company, form it and
register it. However, solicitors, accountants, etc. who act in their professional capacity are NOT promoters of
the company.

Formation of a Company

Section 3 of the Companies Act, 2013, details the basic requirements of forming a company as follows:

 Formation of a public company involves 7 or more people who subscribe their names to
the memorandum and register the company for any lawful purpose.
 Similarly, 2 or more people can form a private company.
 One person can form a One-person company.

Registration or Incorporation of a Company

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company. Here is the
procedure:

Filing of company registration papers with the registrar

To incorporate a company, the subscriber has to file the following company registration papers with the
registrar within whose jurisdiction the location of the registered office of the proposed company falls.

1. The Memorandum and Articles of the company. All subscribers have to sign on the memorandum.
2. The person who is engaged in the formation of the company has to give a declaration regarding
compliance of all the requirements and rules of the Act. A person named in the Articles also has to sign
the declaration.
3. Each subscriber to the Memorandum and individuals named as first directors in the Articles should
submit an affidavit with the following details:
 a. Declaration regarding non-conviction of any offence with respect to the formation, promotion, or
management of any company.
b. He has not been found guilty of fraud or any breach of duty to any company in the last five
years.
c. The documents filed with the registrar are complete and true to the best of his knowledge.
4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he needs to provide his full name, residential
address, and nationality along with a proof of identity. If the subscriber is a body corporate, then
prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in the Articles need to provide the details
specified in the point above along with the Director Identification Number.
7. The individuals mentioned as first directors of the company in the Articles must provide particulars of
interests in other firms or bodies corporate along with their consent to act as directors of the company as
per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration papers, he registers all information and
documents and issues a Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a distinct identity for
the company. The allotment of CIN is on and from the company’s incorporation date. The certificate carries
this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

 Furnish incorrect or false information

 Suppress any material information in the documents provided to the Registrar for the incorporation on
purpose

In such cases, the individual is liable for action for fraud under section 447.

The company is already incorporated based on false information

If a company is already incorporated but it is found at a later date that the information or documents submitted
were false or incorrect, then the promoters, first directors, and persons making a declaration is liable for action
for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

If a company is incorporated by furnishing false or incorrect information or representation or suppressing

material facts or information in the documents furnished, the Tribunal can pass the following orders (if an
application is made and the Tribunal is satisfied with it):
  Pass an order to regulate the management of the company. It can include changes in its Memorandum
and Articles if required. This order is either in public interest or in the interest of the company and its
members and creditors.
 Make the liability of its members unlimited
 Order removal of the name of the company from the Registrar of Companies
 Order the company to wind-up
 Pass any other order as it deems fit

Before passing an order, the Tribunal has to give the company a reasonable opportunity to state its case. Also,
the Tribunal should consider the transactions of the company including obligations contracted or payment of
any liability.

Effect of Registration of a Company

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a company:

 From the date of incorporation, the subscribers to the Memorandum and all subsequent members of the
company are a body corporate.
 A registered company can exercise all functions of a company incorporated under the Act. Also, the
company has perpetual succession with power to acquire, hold, and dispose of property of all forms.
Also, it can contract, sue and be sued by the said name.
 Further, the company becomes a legal person separate from the incorporators from the date of
incorporation. Also, a binding contract comes into existence between the company and its members as
mentioned in the Memorandum and Articles of Association. Until the company dissolves or the
Registrar removes it from the register, it has perpetual existence.
Civil, criminal and tortious liability of a company
 Statutory Meeting procedure, voting process

Numerous meetings are convened in a company, which are generally divided into members’ meetings,
directors’ meetings, and other meetings. These meetings are carried on to attain different goals, and each
meeting has its own distinct set of rules and regulations. These rules have to be abided by the company, and
meetings have to be conducted in accordance with such set meetings. These meetings play a major role in the
decision-making process of the company.

Meaning and definition of company meetings

There is no definition of the term “meeting” per se in the Companies Act, 2013; in plain language, a company
can be defined as two or more individuals coming together, gathering, or assembling either by prior notice or
unanimous decision for discussing and carrying out some legitimate activities related to business. A company
meeting can be said to be a concurrence or meeting of a quorum of members to carry out ordinary or special
business and take decisions on important matters of the company.

Important definitions of company meetings

In the case of Sharp v. Dawes (1971), a meeting is defined as “an assembly of people for a lawful purpose” or
“the coming together of at least two persons for any lawful purpose.”

Further, according to P.K. Ghosh, “any gathering, assembly, or coming together of two or more persons for the
transaction of some lawful business of common concern is called meeting.”

Components of a valid company meeting

A company meeting generally consists of the following:

Participants

The first and foremost requirement of a meeting is to have participants. In the case of a private meeting, only
the individuals having the authority to attend the meeting, like the members of the organisation, the committee,
the sub-committee and the people who have received an invitation, can participate. At times, in the event of the
non-availability of such a person, he has the right to send his representative or proxy on their behalf. Whereas,
in the case of public meetings, the general public has the authority to attend them.

Chairman

For a valid company meeting, there has to be a chairman at every meeting who has the authority and duty to
carry on the meeting effectively.

Secretary

The secretary of the organisation, committee, sub-committee etc., is entrusted with several duties right from the
beginning to the very end of the meeting. He plays a crucial role in carrying out such meetings.

Invitees

Apart from those who have the authority to attend the meeting, there are some people who are invited, for
instance, the press reporters.

Material elements
Another major component of the meeting involves material elements. The material elements include:

 The sitting arrangement,

 The materials for writing, etc.

General provisions to know about conducting valid company meetings

Proper authority to convene meetings

In order for a meeting to be regarded as valid, it must be called by a proper authority, like the board of
directors. In a valid board meeting, the decision to convene a general meeting and issue notice in this regard
must be taken by passing a resolution.

Notice

For a meeting to be conducted properly, a proper notice must be issued by the proper authority. It means that
such a notice must be drafted properly according to the provisions laid down under the Companies Act, 2013.
Also, such a notice must be duly served on all the members who are entitled to attend and vote at the meeting.
Moreover, the valid notice of the company must specifically mention the place, the day, the time, and the
statement of the business to be transacted at the meeting.

Quorum

A quorum is defined as the minimum number of members that are required to be present as mentioned under
the provisions of a particular meeting. Any business transaction carried out at a meeting without a quorum shall
be deemed to be invalid. The main object of having a quorum is to avoid taking decisions by a small minority
of members that may not be accepted by the vast majority. Every company meeting has its own number of
quorum, the same has been discussed under separate headings in the upcoming passages.

Agenda

The agenda can be described as the list of businesses to be transacted while conducting any meeting. An agenda
is important for carrying out a business meeting in a systematic manner and in a proper, predetermined order.
An agenda, along with a notice of the meeting, is usually sent to all the members who are entitled to attend a
meeting. The discussion in the meeting has to be conducted in the same manner as stated in the agenda, and
changes can be made in the order only with the proper consent of the members at the meeting.

Minutes

The minutes of the meetings contain a just and accurate summary of the proceedings of the meeting. Minutes of
the meetings have to be prepared and signed within 30 days of the conclusion of the meeting. Further, the
minutes books must be kept at the registered office of the company or any place where the board of directors
has given their approval.

Proxy

The term ‘proxy’ can be used to refer to a person who is chosen by a shareholder of a company to represent him
at a general meeting of the company. Further, it also refers to the process through which such an individual is
named and permitted to attend the meeting.

Resolutions
Business transactions in company meetings are carried out in the form of resolutions. There are two kinds of
resolutions, namely:

1. Ordinary resolution, and

2. Special resolution.

Types of meetings

1. Meeting of shareholders

 General meeting- a) statutory meeting, b) annual general meeting, c) extraordinary general meeting
 Class meeting

2. Directors meeting- a) Board of directors meeting, b) Committee of directors meeting

3. Other meetings- a) Debenture holders meeting, b) Creditors meeting, c) Creditors and contributors meeting

General meeting

The general meeting is subdivided into three categories. Let us have a look at the nitty-gritty of each of them.

Statutory meeting

What is statutory meeting

A statutory meeting is a type of general meeting that must be held by every company limited by shares and
every company limited by guarantee with a share capital within not less than a month and not more than six
months from the date it was incorporated. Private companies are exempt from conducting a statutory meeting.
In this meeting, a report known as the ‘statutory report’ is discussed by the directors of the company.

Which companies do not need to conduct a statutory meeting

The following companies do not have any obligation to conduct a statutory meeting:

1. Private company,
2. Company limited by guarantee having no share capital,
3. Unlimited liability company,
4. A public company that was registered as a private company earlier,
5. A company that has been deemed as a public company under Sec. 43 A.

What is statutory report

The board of directors is obliged to forward a report known as the ‘statutory report’ at least 21 days before the
date of the statutory meeting. A copy of the report has to be forwarded to the registrar for registration. This
report has to be drafted by the board of directors of the company and certified and amended by at least two of
them.

What is the procedure to carry out a statutory meeting

The board of directors has to send a statutory report to every member of the company, as mentioned above. The
members who attend this meeting may carry out discussions on matters relating to the formation of the
company or matters that are incorporated in the statutory report. Below are some of the points one must note:
1. While conducting the statutory meeting, no resolution can be taken.
2. The main motive of conducting such a meeting is to familiarise all the members of the company with
matters relating to the development and origination of the company.
3. The shareholders, perhaps, the members of the company, will receive particulars relating to the following:
4. Shares taken up,
5. Money received,
6. Contracts entered into,
7. Preliminary expenses incurred, etc.
8. The members or shareholders also have the opportunity to carry out a discussion on several business ideas
and ways to prosper the business, along with the future prospects of the company.
9. Moreover, if a decision is not reached at the statutory meeting, an adjournment meeting is called.
10. According to Section 433 of the Companies Act, 1956, if the company errs in submitting the statutory
report or in conducting the statutory meeting within the specified time, it may be subjected to winding up.
11. However, the court, instead of directly winding up the company, has the authority to instruct the company
to submit a statutory report and conduct a statutory meeting, along with levying a fine on the individuals
who erred in conducting the meeting.

The annual general meeting

The annual general meeting is defined under Section 96 of the Companies Act, 2013. As the name suggests, an
annual general meeting is one of the general meetings held once a year. As per Section 96 of the Companies
Act, 2013, all companies have to hold an AGM within the stipulated time. An AGM provides a chance for the
members of the company to review the workings of the company and express their opinions on the management
and workings of the company.

Purpose of conducting an annual general meeting

The main purpose of conducting an AGM is to transact the ordinary business of the company. Ordinary
business includes the following:

1. Consideration of financial statements and reports from the directors and auditors.

2. Making declarations on dividends.

3. Appointing a replacement of director or directors in place of those who have retired.

4. Appointing and setting up the amount of remuneration for the auditors of the company.

5. It also includes annual accounts, crucial reports, and audits.

The three rules of conducting an annual general meeting

1. The meeting must be conducted on an annual basis.

2. A maximum duration of 15 months is permitted between holding two annual general meetings.

3. The meeting must be conducted within six months of preparing the balance sheet.

If any of these rules are not complied with, the same will be said to be an offence under the Companies Act,
2013. It has been discussed in the upcoming passages.

First annual general meeting and relaxations

As per Section 96 of the Companies Act, 2013, a general meeting must be held annually, as the name suggests.
It is mandatory that all companies hold such meetings at regular intervals. When the annual general meeting is
held for the first time after the company’s incorporation, it has to be held within a period of nine months from
the date of the closing of the financial year of the company, and in other cases, within six months from the date
of the closing of the financial year. Further, as per Section 96 of the Companies Act, 2013, a company has no
obligation to hold any general meetings until it holds its first annual general meeting. Such a relaxation is
provided so that the company can set up its final reports for a longer duration. Another provision that is
provided under Section 166(1) is that, with proper authorization from the registrar, the company can postpone
the date of the annual general meeting. The registrar has the authority to postpone the date for a further three
months at the most, however, such a relaxation does not apply in the case of the company’s first annual general
meeting. Further, a company may not hold an annual general meeting in a year provided the registrar has
consented to it, however, the justification for such an extension should be reasonable and genuine.

Gaps between two annual general meetings-

According to Section 96 of the Companies Act, the gap between two annual general meetings must not exceed
fifteen months. Further, Section 210 of the Act states that a company must provide a report on the accounts of
all the profits and losses of the company, and if the company does not have any profits, an income and
expenditure report must be submitted.

Furthermore, the following pointers are crucial to note in cases of gaps between two annual general meetings:

1. When a company presents its report on profits and losses incurred, it has to mention all the profits and
losses endured by the company right from the day of incorporation.
2. The account shall have an update of at least 9 months from the date of the last annual general meeting.
3. A balance sheet along with the account report has to be submitted, as well.

Also, after conducting the first annual general meeting, the next AGM must be held within 6 months from the
end of the financial year. If, due to any unforeseeable circumstance, the company fails to hold the meeting, the
tribunal may grant an extension of 3 months.

Quorum

Public company

The quorum in the case of a public company shall consist of the following:

1. 5 if the company has less than 1000 members,

2. 15 if the members are between 1000 and 5000, and
3. 30 if the number of members exceeds 5000.

Private company

In the case of a private company, only two members who are present will constitute the quorum.

Extraordinary general meeting (EGM)

In a company, there are certain matters that are so crucial to be discussed that they need to be addressed
immediately to the members, which is where an extraordinary general meeting comes into play. Such meetings
are discussed under Section 100 of the Companies Act, 2013. An extraordinary general meeting is any general
meeting apart from the statutory meeting, an annual general meeting, or any adjournment meeting. Such a
meeting is held to discuss special business, especially those businesses that do not fall under the ordinary
business that is discussed at annual general meetings. Such meetings are usually called for matters that are
urgent and for those that cannot be discussed at annual general meetings. Extraordinary general meetings are
usually called by the following:

1. The directors or the board of directors of the company,

2. The shareholders of the company who hold 1/10th of the paid-up shares.

Class meeting

Class meetings, as the name suggests, are meetings conducted for shareholders of the company that hold a
particular class of shares. Such a meeting is conducted to pass a resolution that is binding only on members of
the concerned class. Also, only members belonging to that particular class of shares have the right to attend and
vote at the meeting. Usually, the voting rules are applicable to class meetings as they govern voting at general
meetings.

Such class meetings can be conducted whenever there is a need to alter or change the rights or privileges of that
class as stated in the articles of association. In order to execute such changes, it is crucial that these
amendments be approved in a separate meeting of the shareholders and supported by passing a special
resolution. Under Section 48 of the Companies Act, 2013, which talks about variations in shareholders’ rights,
class meetings of the holders of the different classes of shares must be conducted in case there are any
variations. Similarly, under Section 232, which discusses mergers and amalgamations of companies, where a
scheme of arrangement is proposed, there is a requirement that meetings of several classes of shareholders and
creditors be conducted.

Meetings of directors

Board of directors meetings

As per Section 173 of the Companies Act, 2013, a company has to hold the meeting of board of directors in the
following manner:

1. The first board meeting has to be conducted within a span of thirty days from the date of incorporation.
2. In addition to the above meeting, every company has to hold a minimum of four board meetings
annually, and there shall not be a gap of more than one hundred and twenty days between consecutive
two meetings.
3. In matters relating to Section 8 of the Companies Act, with an exemption by MCA dated 5.06.2015, it
was held that the sub clause (1) of Section 173 will be applicable only to the extent that the board of
directors of such companies hold at least one meeting in every six months.

Purpose of holding a board meeting

Board meetings are held for the following purposes:

1. For issuing shares and debentures.

2. For making calls on shares.
3. For forfeiting the shares.
4. For transferring the shares.
5. For fixing the rate of dividend.
6. For taking loans in addition to debentures.
 7. For making an investment in the wealth of the company.
8. For pondering over the difficulties of the company.
9. For making decisions of the policies of the company.

Quorum

As we know, every company needs to have a proper quorum to conduct a valid company meeting. Now, the
quorum for a board meeting under Section 174 of the Act is one third of the total strength or two directors,
whichever is higher. It must be noted that, any director participating through video conferencing or any other
audiovisual means must also be considered to determine the quorum.

Further, if the number of directors is reduced or there is any removal of a director or directors, the directors who
continue may act on behalf of the missing number of directors to fill the missing gap for the quorum or for
summoning a general meeting of the company; however, they shall not act for any other purpose. Moreover, in
cases where the number of directors interested surpasses or is equal to two-thirds of the total strength of the
board of directors, the number of directors who are not interested and are there to attend the meeting, the
number not being below two, shall be the quorum at such times.

Committee of directors

The board of directors has the authority to form committees and delegate powers to such committees; however,
it is crucial that such a committee only consist of directors and no other members. Further, it is mandatory for
such committees to be authorised by the articles of association of the company and be in lieu of the provisions
set out in the Companies Act. The meetings of all these committees are held in the same manner as board
meetings.

In large companies, the following routine matters are looked after by the sub-committees of the board of
directors:

1. Allotment,
2. Transfer,
3. Finance.

Other meetings

Debenture holders meeting

A company is entitled to issue debentures, and to further implement the same, a meeting for debenture holders
can be called. This meeting is between the board of directors and the debenture holders. These meetings are
usually called to discuss the rights and responsibilities of debenture holders. Debenture holder meetings are
generally conducted from time to time to discuss matters where the interest of debenture holders is involved,
like at the time of:

1. Reconstruction,
2. Reorganisation,
3. Amalgamation, or
4. Winding up of the company.

Creditors meeting
Meetings of creditors is a term used to describe a meeting setup by the company to conduct a meeting of the
company’s creditors. Under the Company Act, 2013, companies are not only entrusted with the power to
negotiate with creditors but also set up a procedure to do so. Such meetings are always arranged in matters
where a creditor decides to voluntarily wind up.

Moreover, Section 108 of the Companies Act, 2013, discusses the holding of meetings of creditors. It also
states that meetings be held in accordance with the provisions laid down under the following sections of the
said Act:

1. Section 109 that discusses demand for poll,

2. Section 110 that talks about postal ballot, and
3. Section 111 that has provisions in relation to the circulation of members’ resolutions.

In the creditors meeting, the creditors can decide to either approve, amend, or reject the repayment plan.
Further, the resolution professional must make sure that any sort of changes or modifications suggested by the
creditors of the company are approved by the directors of the company before carrying out that particular
change. Furthermore, the resolution professional also has the authority to adjourn the meeting of the creditors
for a period of not more than seven days at a time.
 Property law
Immovable property

Introduction

A word can be interpreted in as many ways as one might choose. Similarly, the term ‘property’ is said to have a
wide range of connotations. Even the Indian legislature has accorded the term with a multitude of elements. It
has been used in an array of senses. Property constitutes an essential element of the common English
terminology, and its importance in today’s world can’t be ignored. Before diving into the peculiarities of this
term, it is crucial to understand the term in its ordinary sense without any complexities. The most general
classification of the term can be as; Incorporeal’ or ‘Corporeal’, ‘Tangible’ or ‘Intangible’, ‘Personal’ or
‘Private’, and ‘Movable’ or ‘Immovable’ Property.

What is property

The concept of property is dynamic. It has evolved drastically and has been elucidated in diverse manners in the
domain of the legislature, society, and different eras of the time. The term property is transitional, just like the
other inventions and creations of the human mind, and is rich with meanings. The word ‘property’ is derived
from the Latin word ‘proprius’, meaning ‘one’s own’. It is clear from the above discussion that the term
property is not just confined to ownership when looked at from a broader perspective, considering both political
and sociological factors, along with its most acceptable sense. It confers upon an individual a bundle of powers.
Property not just includes the things that are the subject matter of the ownership but also extends to the right of
ownership or dominium or partial ownership, as the case may be. In legal notion, the term property is to include
a bundle of rights and especially in the case of tangible rights, its scope extends to the right to enjoy, retain,
alienate, possess and much more. In light of the Transfer of Property Act, 1882, the property is suggestive and
illustrative of every possible interest a person can possess. In Indian legislatures, the term is mostly used in a
broad sense.

Immovable and movable property as per the Indian property regime

Immovable property

Generally speaking, the word immovable property connotes anything that a person owns which cannot be
moved from one position to another. It can be said that anything which is affixed to land under someone’s
ownership falls under the category of immovable property.

The General Clauses Act, 1897 defines immovable property under Section 3(26), stating that the term shall
include land, things affixed to earth or permanently fastened to anything affixed to earth, and any benefits
arising out of the land. On the other hand, Section 3 of the Transfer of Property Act, 1882, does not provide an
exhaustive definition. It states that immovable property is not to include standing timber, growing crops, or
grass. None of the above definitions is exhaustive. These definitions just denote what is to be included or
excluded from the purview of immovable property.
Section 2(6) of the Registration Act, 1908

Case law- Shanta Bai vs

Movable property

The term movable property in common parlance constitutes any physically mobile property or something that
can be easily moved by any person. Movable property connotes almost everything that is not affixed to land,
irrespective of appearance, shape, size, colour, etc.

The General Clauses Act, 1897, in Section 3(36), defines the term to include property of every description,
except immovable property.

The Registration Act, 1908, in Section 2(l)(9), provides an inclusive definition of movable property. According
to this, it is to include standing timber, growing crops and grass, fruits on the trees, and juice in trees, along
with the property of every description other than immovable property.

The term movable property is also defined under Section 22 of the Indian Penal Code, 1860. It states the term is
to include corporeal property of every description, provided that the same is not affixed to the land. The main
proposition to be understood here is that the property must not be attached to the land. However, the same
immovable property might become movable as soon as severed from the earth.

The Supreme Court of India in the case of State of A.P. v. N.T.P.C. Ltd. (2002), held that electricity falls under
the category of property, and merely because it cannot be felt or touched or moved, it will not cease to come
under this category. Anything that possesses all the attributes of a property can be considered property, be it a
book, a piece of wood, patents, copyrights, etc.

When can property be classified as immovable property

Land

In common parlance, the term ‘land’ constitutes a proportion of the earth which is not covered by water. It can
be connoted as an area of ground with regard to its ownership or use. The term is intended to include all the
things on the surface of the earth, feasibly the column of space above the earth, and the ground below the
surface of the earth. The word is comprehensive enough to engulf even the things below the surface of the
earth, say sub-soil, mines, and minerals. It even covers the objects placed by the human agency on or under the
earth’s surface, provided it shall be done with the intention of permanent annexation. The term also covers the
things which are said to be land covered by water, for instance, well, tubewell, rivers, ponds, lakes, and streams,
which are dug on the earth’s surface. These may be natural or artificial, as the case may be.
Benefits to arise out of the land

The phrase ‘benefits to arise out of land’ is considered under the purview of immovable property since it is an
interest in land. Even the definition provided in Section 2(6) of the Registration Act, 1908 expressly includes
this phrase under the category of immovable property. Some examples of benefits arising out of land include
rent received from the house, revenue from agriculture, rent from shops and jagir, right to catch fish from pond
or river, and right to collect lac from trees. Also, the right to collect dues from the market or fair situated on a
plot of land, interest on the income from immovable property, lease of land, etc. even the right to extract any
minerals, right to conduct an exhibition of a piece of land, right to possession, establish a hoarding or
advertisement of the part of the land, right of the priest to recover dues from the funeral, management of Sarjan
land, interest of the mortgagee in the property that has been mortgaged, etc. are all considered immovable
property.

In the case of Ananda Behera And Another vs The State Of Orissa And Another (1955), the Supreme Court of
India held that a person’s right to enter upon land and to take away fish from a pond is ‘A profits a prendre’,
which is the right to take something from somebody else’s land. Thus it falls under the purview of immovable
property through the category of benefits arising out of the land.

Things attached to the earth

The above-stated expression is separately defined under Section 3 of the Transfer of Property Act, 1882, to
include three categories: things rooted in the earth, things embedded in the earth, and things attached to what is
embedded in the earth.

Things rooted in the earth

By virtue of the definition provided under the General Clauses Act, the things rooted in the earth are considered
immovable property. Thus, trees and shrubs are considered immovable property. Similar is the case with plants
and herbs. However, it is pertinent to mention that this expression does not include standing timber, growing
crops and grass in this category.

Things embedded in the earth

Etymologically, the term ‘embedded’ connotes something that is firmly fixed in a surrounding mass.
Embedding denotes a thing whose foundation is laid underneath the earth’s normal surface and which becomes
a part of the earth. Take, for instance, where stone blocks are placed on one another to frame a wall. Though no
mortar or cement is used, they will be considered immovable property since it has become a part of the land.
However, when the same stone blocks are just stacked on top of each other in a builder’s yard in the form of a
wall, they will be treated as movable property.

There may be instances where the article is firmly fixed in the land; however, if the same has not been done
with the intention of it being a part of the land, then the same will not fall under the purview of immovable
property. For example, an anchor stands firmly fixed to the ground to hold the ship, but the anchor was never
fixed to the ground with the intention of it being a part of the land. Thus, it will not fall under the category of
immovable property. Similarly, a road roller, heavy stone, etc will not be considered immovable property. In
cases where the property is embedded only up to an extent where its weight forces, it shall not fall under the
category of the term embedded.

Attached to what is so embedded

The things falling under this category are the ones through which permanent beneficial enjoyment can be drawn
from the immovable property to which they are attached. A thing will only be said to be attached to the earth
when in some way or the other, its permanent beneficial enjoyment can be done. Doors, windows, shutters, etc
are a few examples that fall under this category. These are said to fall under this because they are attached to
the house. These things have no existence or meaning of their own. What good will a door do if there is no
house? However, it is important to understand that these things must be attached with the intention of
permanent fixation or attachment. However, fans, A.C., window blinds, sashes, etc. will not be considered
immovable property, even though they may be attached to the house. Thus the two most important things that
need to be established while dealing with the fact of whether a thing falls under this category or not are;

 Permanent attachment of the thing must be there; and

 It must be attached in order to experience the beneficial enjoyment of the thing to which it is attached.

Exceptions

As discussed above, trees, shrubs, herbs and plants fall under the purview of immovable property. However, in
cases where such trees, shrubs, and herbs constitute standing timber, crops and grass, they are movable
property.

In the above case the term ‘standing timber’ includes trees whose woods will be used to develop buildings,
houses or any other infrastructure, to make ships, bridges etc. The English Law includes oak, ash or elm trees
under this category. In India, trees like neem, babul, sheesham, teak, or bamboo are considered standing timber.
However, ordinarily, the trees that bear fruit stand on a different footing. These do not fall under the category of
standing timber. For example, mahua, mango, jack fruit, jamun trees, etc. are not considered standing timber.
The reason is they were grown with the intention of using their fruit and not for the intention of cutting them
and using them later on for construction or as wood. If their intention would have been otherwise, it shall then
be considered immovable property. Since standing timber is not an immovable property, a document
concerning it does not require registration.

As stated above, crops also do not fall into the category of immovable property. In this relation the term ‘crop’
means any plant grown for food mainly; it includes all the fruit plants, fruit leaves, barks or roots, etc. It is to be
noted that these crops are movable.

The third exception is grass. It consists of all the short plants having long harrow leaves. These are movable
properties, whether they are cut or not. The main use of grass is for fodder purposes.
 Transfer of benefit for the unborn person

Introduction

Section 5 of the Transfer of Property Act, 1882 defines the phrase “transfer of property”. The section provides
that “transfer of property” means an act by which a living person conveys property, in present or in future, to
one or more other living persons, or to himself and one or more than one living persons; and “to transfer
property” is to perform such act. Further provision to the section mentions that “living person” includes a
company or association or body of individuals, whether incorporated or not, but nothing mentioned here shall
affect any law which is operational in India relating to transfer of property to or by companies, associations or
bodies of individuals.

Thus, bare reading of the above mentioned section helps us understand that the conveyance of the property
must be from one living person to another living person. When it is said that both the individual must be living,
it is implied that transfer by will does not come within the scope of section 5 as such transfers come into effect
only after the death of the person who is executing the will. However an exception to this section is section 13
which facilitates the transfer of immovable property in favour of an unborn person.

The provisions of Transfer of Property Act, 1882 in general do not allow the transfer of property directly to an
unborn person. Before discussing the concept further, let us understand the meaning of unborn person in
reference to this act. A person who does not have any current existence but has a specific reference to one and
who may be born in the future is considered to be an unborn child or person. Even though a child in mother’s
womb is simply not a person in existence, but has been treated as a person under both Hindu Law and English
Law. Therefore, it should be noted that the term ‘unborn’, refers not only to those, who might have been
perceived but not yet born, that is a child in womb, but also includes those who are not even perceived.
Whether they will be born at all or not is all possibility, but a transfer of property is admissible to be effected
for their benefit. After understanding the meaning of the phrase “ unborn person”, now let us examine the
concept enshrined under section 13 of the Transfer of Property Act, 1882.

Provision Under Transfer of Property Act, 1882

Section 13 of the Transfer of Property Act, 1882 provides that when for the transfer of property, an interest
therein is created for the benefit of an unborn person at the date of the transfer, a prior interest is to be created in
respect of the same transfer and the interest created for the benefit of such person shall not take effect, unless it
extends to the whole of the remaining interest of the person transferring the property in the property to be
transferred.

Thus, in order to transfer a property for the benefit of an unborn person on the date of the transfer, it is
imperative that the property must first be transferred by the mechanism of trusts in favour of some person living
other than the inborn person on the date of transfer. In simpler terms, it can be said that the immovable property
must vest in some living person between the date of the transfer and the coming into existence of the unborn
person as the property cannot be transferred directly in favour of an unborn person.

In other words it can be said that the interest of the unborn person must in all cases be preceded by a prior
interest. Moreover,when an interest is created in favour of an unborn person, such interest shall take effect only
if it extends to the whole of the remaining interest of the person transferring the property in the property,
thereby making it impossible to confer an estate for life on an unborn person. The interest in favour of the
unborn person shall constitute all of the entire remaining interest in the estate. The underlying principle in
section 13 is that a person disposing of property to another person shall not cause obstruction in the free
disposition of that property in the hands of more than one generation. Section 13 does not apply restrictions on
the successive interest being created in favour of several persons living at the time of operation of the transfer.
What is provided as a restriction under section 13 of the Transfer of Property Act, 1882, is the grant of interest,
limited by time or otherwise, to an unborn person.

Thus, it can be said that if the persons for whose benefit the transfer is to take effect are living, any number of
successive life interests can be created in their favour. However, an important point to note here is that if the
interest is to be created in favour of persons who have yet not taken birth, then in that case absolute interest
must be granted to such unborn persons.

Essential Elements of Section 13

1. No Direct Transfer

A transfer cannot be directly made to an unborn person. Such a transfer can only be brought into existence by
the mechanism of trusts. It is a cardinal principle of property law that every property will have an owner.
Accordingly, if a transfer of property is made to an unborn person, it will lead to a scenario wherein the
property will remain without an owner from the date of transfer of property till the date the unborn person
comes into existence.

2. Prior Interest

If the circumstances are such that there is no creation of trust, then in that case the estate must in some other
person between the date of transfer and the date when the unborn person comes into existence.In simpler words
we can say that the interest in favour of an unborn person must always be preceded by a prior interest created in
favour of a living person.

3. Absolute Interest

The entire property must be transferred to the unborn person. The transfer to an unborn person must be absolute
and there should be no further transfer from him to any other person.An interest which remains only for the
lifetime cannot be conferred on an unborn person. Under the English law, an unborn person can be conferred an
estate only for his lifetime. This concept of English law, however, is subject to a restriction known as the rule of
double possibilities. This rule was recognised in the case of Whitby Mitchell. The rule states that life interest to
an unborn person should not be transferred as doing so will give rise to existence of two possibilities. The first
possibility will be the birth of the unborn person to whom the life estate was to be transferred and the second
possibility will be the coming into existence of issues of that unborn persons. Thus, the transfer of property to
an unborn person can be permitted only if the absolute interest is transferred and not just the life estate.

Illustration

“A” owns a property. He transfers it to “B” in trust for him and his intended wife successively for their lives.
After the death of the survivor, it is to be transferred to the eldest son of the intended marriage for his life, and
after his death, it is to be transferred to A’s second son. The interest so created for the benefit of the eldest son
does not take effect because it does not extend to the whole of A’s remaining interest in the property.

When an Unborn Person Acquires Vested Interest

The provisions of section 20 of the Transfer of Property Act, 1882 mention the concept that in what
circumstances unborn person acquires vested interest. Unborn person may not be able to enjoy the possession
of property as soon as he is born but he may, however, acquire a vested interest in the property since his birth.
Where, on a transfer of immovable property interest is created for the benefit of an unborn person, he acquires
upon his birth, a vested interest, although he may not be entitled to the enjoyment thereof immediately on his
birth.The mentioned provision however may be waived off if the terms of the agreement mention a contrary
clause.

The section lays down that an interest created for the benefit of an unborn person vests in that unborn person as
soon as he is born. Such interest remains vested interest even though he may not be entitled to the enjoyment
thereof immediately on his birth.

For example, if “A” transfers an estate to trustees for the benefit of A’s unborn son with a direction to
accumulate the income of such estate for a period of ten years from the date of the birth of A’s son and then to
hand over the funds to him. A’s unborn son acquires a vested interest upon his birth, although he is not entitled
to take and enjoy the income of the property for a period of ten years.

Views of the Apex Court in Reference to the Transfer to Unborn Person

The Supreme Court of India in various cases from time to time has interpreted the provisions of the Transfer of
Property Act,1882 in respect of the transfer of property done for the benefit of unborn persons. In the famous
case of Girjesh Dutt vs. Datadin, the Apex Court made important observations. Facts of the case enumerate that
“A” made a gift of her properties to “B”, who was her nephew’s daughter. The gift made by A was made for the
life of B and then to B’s daughter without power of alienation and if there was no heir of B, whether male or
female, then to A’s nephew. B died without having any children. Thus considering the facts of the case, the
court held that the gift in favour of unborn daughters was invalid under Section 13 as the gift was a limited
interest and also subject to the prior interest in favour of B.

Another case related to this concept is of Raja Bajrang Bahadur Singh v. Thakurdin Bhakhtrey Kuer. In the
instant case the Apex Court had observed that no interest can be created in favour of an unborn person but when
the gift is made to a class or series of persons, some of whom are in existence and some are non existent, it does
not fail completely, it is valid with respect to the persons who exist at the time of testator’s death and is invalid
with respect to the rest.
 Doctrine of lis pendes

Introduction

 Lis pendens is a Latin word that means “pending litigation”.

o It is based on a legal maxim “pendente lite nihil innoveture” which means nothing new should
be introduced during pendency of a litigation.
 The doctrine of lis pendens is enshrined under Section 52 of the Transfer of Property Act, 1882
(TOPA), in India.
o This section deals with the effect of transfer of property pending a suit or proceeding.
 It is based on equity and public policy.

What is the Legal Framework of Section 52 of TOPA?

Transfer of property pending suit relating thereto —

During the pendency in any Court having authority within the limits of India or established beyond such limits
by the Central Government, any suit or proceedings which is not collusive and in which any right to
immovable property is directly and specifically in question, the property cannot be transferred or otherwise
dealt with by any party to the suit or proceeding so as to affect the rights of any other party thereto under any
decree or order which may be made therein, except under the authority of the Court and on such terms as it may
impose.

For the purposes of this section, the pendency of a suit or proceeding shall be deemed to commence from
the date of the presentation of the plaint or the institution of the proceeding in a Court of competent
jurisdiction, and to continue until the suit or proceeding has been disposed of by a final decree or order and
complete satisfaction or discharge of such decree or order has been obtained, or has become unobtainable by
reason of the expiration of any period of limitation prescribed for the execution thereof by any law for the
time being in force.

What are the Essentials of Lis Pendens?

 The suit or proceeding must be pending.

 Suit must not be collusive.
 Right related to immovable property must be contended.
 The right to immovable property is directly and specifically in question.

What is the Purpose of Lis Pendens?

 The underlying principle behind the doctrine of lis pendens is to protect the rights of
parties involved in a legal action and prevent parties from transferring the subject matter of a
dispute during the pendency of a suit in a way that might frustrate the final outcome of the litigation.
 The doctrine is based on the idea that a third party acquiring an interest in the property during the
pendency of a suit should be bound by the outcome of that suit.

What is Concept Void Transfer under Lis Pendens?

 When a suit or proceeding is pending in any court and an immovable property is the subject matter of
that suit or proceeding, any transfer of that property by any party to the suit or proceeding
 is void against any person acquiring an interest in the property under the decree or order resulting from
that suit or proceeding.
 The transfer referred to in the section is void as against a subsequent transferee from the date of the
institution of the suit or proceeding.
 This means that if a person transfers an immovable property while a suit is pending, and another person
acquires an interest in the property as a result of the court's decision in that suit, the transfer made during
the pendency of the suit will be considered void.

What are the Exceptions of Lis Pendens?

 The section does not affect the enforcement of a judgment or decree or order in a suit or proceeding
in which such transfer is not contested.
 The doctrine does not apply to suit where property is unidentifiable.
 The doctrine does not apply to collusive suits.

What are the Landmark Cases of Doctrine of Lis Pendens?

 Bellamy v. Sabine (1857):

o This doctrine was originated in this case where Justice Turner observed that “This is a doctrine
common to law and equity courts, which I apprehend, on the grounds that, if alienation pendente
lite was allowed to prevail, it would simply not be possible for any action or suit to be resolved
successfully. In any case, the plaintiff will be responsible for the defendant who alienated the
property before the judgment or the decree and must be obliged, according to the same course of
action, to initiate these proceedings de novo”.
 Rajendra Singh and Ors. v. Santa Singh and Ors (1973):
o The Supreme Court cited that “Lis pendens literally means a pending suit, and the doctrine of
lis pendens has been defined as the jurisdiction, power, or control which a court acquires over
property involved in a suit pending the continuance of the action, and until final judgment
therein”.
 Vinod Seth v. Devinder Bajaj and Ors. (2010):
o The suit property was exempted by SC from application of doctrine of lis pendens on furnishing
security of Rs. 3,00,000.
 Doctrine of Part performance

Introduction

A, a person (promissory) promised B, another person (promisee) to deliver goods to him after payment of Rs.
50,000/- and entered into a contract with him. The payment was duly made, but the promisor failed to deliver
the said goods, as a result of which he was sued by the other person, B. What do you think is the reason for
suing the promisor? Yes, it is the performance of the contract. The promisor failed to perform his duties, as a
result of which he was sued for non-performance of the contract.

This clearly shows that the performance of a contract is one of its essential aspects. Once the parties enter into a
contract, they are bound to perform their respective acts and fulfill their obligations.

Doctrine of part performance

Meaning of the doctrine of part performance

The doctrine of part performance in India is recognized under Section 53A of the Transfer of Property Act,
1882. The doctrine simply means that where two people enter into an agreement and one of the parties acts in
consonance with the agreement, it creates equity, presuming that the other party will also perform its
obligations. So, if the other party later denies or acts fraudulently by refusing to fulfil his duties as mentioned in
the agreement, the doctrine of part performance is applied to safeguard the interest of the party who performed
acts in furtherance of the agreement. Thus, the doctrine is embodied to protect the interests of transferees who
take possession of the property but are not able to obtain the title after paying the consideration in part or whole
and where the transferor later denies such an agreement or sues him for the possession. This doctrine prevents
such instances and provides justice to genuine and innocent transferees.

Illustration: X enters into a contract with Y regarding the transfer of a flat on payment of consideration. The
contract also provided that on partial payment of consideration, Y could take possession, and so he did. Later, X
denies transferring the title to the property, stating that he does not want to sell the flat. The doctrine of part
performance will be applied here to protect the interest of Y, either by asking X to repay the consideration paid
or by performing the contract and transferring the title of the property to Y.

Objective of the doctrine of part performance

Based on the maxim that one who seeks equity must do it, the doctrine has the following objectives:

 It ensures that both parties to a contract, i.e., the transferor and transferee, perform their parts and
fulfill their obligations as mentioned in the contract.
 It preserves and protects the rights of the transferee towards ownership of the property.
 It prevents fraudulent acts by transferors who try to take advantage of innocent transferees.
 By virtue of this doctrine, the transferor or any other person under his name is barred from enforcing
any right on the said property against the transferee except those mentioned in the contract.

Evolution of the doctrine of part performance

The concept of part performance can be said to have originated in English law with the Court of Equity, also
known as the Court of Chancery. The Statute of Frauds, 1677, imposed certain restrictions on contracts and
provided that any contract for the transfer of immovable property must be made in writing. This led to a
situation where a genuine and innocent transferee could not obtain title to the property even after paying the
consideration in part or whole and taking possession as a result of the agreement. Such people faced
disadvantages and were harassed most of the time. The principle of equity was evolved to protect and help such
people. It covered transfers based on oral agreements and where the transferee fulfilled their part.

Another case that led to the development of the doctrine was Maddison v. Alderson (1883), wherein the
plaintiff claimed the property of the defendant on the basis of an oral agreement where the defendant agreed to
transfer his property to her in exchange for the plaintiff’s housekeeping services. The plaintiff, as a result of the
oral agreement, performed her duties honestly. However, the will was alleged to be invalid because it was not
attested. The English Court of Appeal, in this case, explained the significance of the doctrine and held that the
defendant, in this case, is liable for the equities that arose from the acts done in the execution of the contract,
and if such equities are neglected, it would result in injustice.

Position of the doctrine of part performance in India

The application of the doctrine in India can be traced back to the case of Mahomed Musa v. Aghore Kumar
Ganguly (1914), wherein the Privy Council held that the law of India and the Law of England is the same and
follow the same rule and so the Indian Law is not inconsistent with the principles of part performance In this
case, there was a written compromise deed that was not registered and stated that the land was to be divided
among the parties. The deed was, however, challenged because it was not registered. The Privy Council applied
the doctrine of part performance in this case and held that since the deed was made in writing, it is a legal
document.

However, in the case of G.F.C. Ariff v. Rai Jadunath Majumder Bahadur (1931), the Privy Council held the
opposite of what was laid out in the above case. The Council doubted whether the doctrine be applied in cases
that require registration of a document essential for the creation of a title. It was held that the doctrine could not
be applied to the present case because the right of the respondent to sue was barred due to a verbal contract.
This led to a controversy regarding the application of the doctrine in India, as a result of which a Special
Committee was set up in 1927 to decide on the issue, as mentioned in the case of Mahadeo Nathuji Patil v.
Surjabai Khushalchand Lakkad (1993). The Committee observed that the doctrine must be given statutory
recognition, but the law of registration must not be forgotten or evaded. For the application of the doctrine, the
Committee made the following recommendations:

 The agreement must be written.

 The transferee must have taken possession of the property as a result of part performance or an act in
furtherance.
 The transferee who wants to avail himself of the doctrine must be willing to perform his part.
 The rights and liabilities must be enforceable between the parties when the contract has been partly
performed.
 The doctrine must not affect the rights of transferees.

The Committee also suggested that the expiration of the limitation period must not affect the relationship
between the transferor and transferee and that there should be no impact on the protection given by the doctrine.
Based on its recommendations, Section 53A was inserted in the Transfer of Property Act, 1882. This Section
recognises the doctrine of part performance, and in this way, the doctrine was made applicable to Indian
scenarios.

Essential elements of the doctrine of part performance

In order to take benefit of the doctrine mentioned in Section 53A of the Act, the following essential elements
must be fulfilled:
Written contract for the transfer of immovable property- It is necessary that the contract for the transfer of
immovable property be in writing. It is also necessary that the contract fulfill all the requirements of a valid
contract and be signed by the parties. In the case of Smt. Hamida v. Smt. Humer and Ors. (1992), the Allahabad
High Court held that the terms of a contract must not be vague or ambiguous but certain and expressed clearly.
It must also be noted that Section 53A is not applicable to contracts that are void. This means that the contract
must have a lawful purpose, there must be an offer and acceptance of that offer, free consent of the parties,
lawful consideration, and intention to create legal relationships.

A valid consideration- The contract for the transfer of immovable property must have a valid consideration.
Consideration is also one of the essentials of a valid contract under Section 10 of the Indian Contract Act, 1872.
This means that the doctrine in India is only applicable to those cases where the immovable property is
transferred for consideration and not as a gift.

Possession of immovable property- The Section clearly provides that the transferee must have taken possession
of the property as a result of part performance of a contract, continue to be in possession, or do an act in
furtherance in order to claim the benefits mentioned therein.

Part performance of the contract- For the application of Section 53A, one of the essential ingredients is that
the contract must be partly performed or that the transferee is willing to perform its part. If the transferee is
already in possession, it must be continued or an act in furtherance of such possession must be done.

Application of the doctrine of part performance

The primary objective of the doctrine contained in Section 53A of the Act is to protect the rights and interests
of transferees. The Section is only applicable where:

 There is a written contract to transfer the immovable property.

 The transferee has-
o taken possession of the property as a result of part performance or,
o Continued to be in possession if he was already in possession,
o Does an act in furtherance of the said contract.
 The transferee wilfully performs his part or is willing to do so.
 The transfer has not been completed by the transferor according to the contract.

Exception to the doctrine of part performance

It is clearly known that Section 53A applies to contracts where the transferee has performed his part of the
contract and taken possession of the property as a consequence of the performance. However, there is an
exception that provides that the doctrine will not be applied to subsequent transferees who have no idea
regarding the contract or its part performance. This means that the provision will not be applicable to bona fide
transferees who, after entering into a contract, are unaware of the terms of the contract and its part performance
by the transferor.

The Supreme Court in the case of Hemraj v. Rustomji (1952) held that the exception to the Section given in the
proviso protects the interests of bona fide transferees who have no knowledge regarding the part performance of
the contract done by the transferor. It is thus necessary that the party who tries to take the defence under Section
53A prove that the subsequent transferee was aware of the part performance of the contract and received a
notice regarding the same.

Consequences of amendment to Section 53A of the Transfer of Property Act, 1882

Before the amendment, the benefits of Section 53A and the doctrine recognition therein could be claimed on the
basis of unregistered documents as well. However, after the enactment of the Registration and Other Related
Laws (Amendment) Act, 2001, the unregistered documents were not accepted to claim the benefits of the
doctrine of part performance contained in the Section. In a case the Delhi High Court, while dealing with the
issue of declaration of title in a suit, held that due to the 2001 amendment, an agreement to sell is not valid and
cannot create any rights until it is registered and stamped at 90% of the value of the deed according to Article
23A of Schedule 1 of the Indian Stamp Act, 1899.
 Election

Introduction

Election simply means to choose. In legal terminology the Doctrine of Election is based upon principle of
equity and is an obligation imposed upon a party by the court to make a choice between two inconsistent rights
and that he should not enjoy both.

Statutory Provision

Essentials of the Doctrine Under Section 35

 The essentials can be enumerated as follows:

o The transferor professes to transfer property which is not his own.
o In the same transaction, benefit is conferred upon the owner of the property.
o The owner must either confirm the transfer or dissent from it.
o In case he dissents, he shall relinquish the benefit so conferred.
 The benefit so relinquished reverts back to the transferor or his representative where:
o The transfer is gratuitous and transferor before election dies, becomes incapable of making a fresh
transfer and
o The transfer is for consideration.

Then, the disappointed transferee has to be made good (compensated) the losses equal to the amount of
property attempted to be transferred. Example: The farmhouse at Udaipur is a property of C. A by gift means
promises to give B 1,00,000. He accepts it although C now wants to retain his farmhouse and A forfeits his gift.
In such a course of action B died, now his representative must pay C 1,00,000.

Who doesn’t have to elect?

The person who indirectly derives benefits from the transactions and not directly according to section 35 does
not need to elect. Example:: A promises to give B 1000 given if his son buys C’s house for 1200, Nowhere n’s
son doesn’t have to elect as it is B who will have to make the decision on what to do.

When does a person elect to dissent?

According to section 35 If the owner decides not to approve the transfer, he will surrender the transferred
service to him and this service will be returned to the transferor or his representative as if he had not been
released. Following could take place:

 The transfer is voluntary and the Transferor had died or had become incapable of doing a fresh transfer.
 In all cases where the transfer must be checked, it is the responsibility of the transferor or his
representative to compensate disappointed buyers. The compensation amount is the amount or value of
the property that will be transferred if the option.

Disappointed Transferee
A transferee who chooses to reject the benefits conferred, dissents from the transaction and can no longer take
the property is a disappointed transferee.
Exceptions to this doctrine as stated by section 35

Section 35 states that if the property owner is transferred by the seller, a particular service is started and that the
service is pressed to apply to that property if the owner claims the property. Which must release the
performance of certain properties. He is not obliged to release the compensation given to him by the same
transaction if you receive such compensation for two years, you must assume that you have chosen the transfer.

Mode Of Election

 Acceptance of the benefits by the person on whom they are conferred constitutes an election if:
o He is aware of his duty to elect.
o He is aware of those circumstances which would influence the judgment of a reasonable man in
making an election, or
 He waives enquiry into the circumstances.
 In the case where the owner, after complying with the above-said provisions has knowingly accepted the
benefits, it signifies he has accepted the transaction. A presumption is drawn towards acceptance where:
o He enjoys the benefit for two years without doing any act to express dissent.
o He does some act by which it is impossible to restore the parties to their original position.

Illustration:

A transfers to B an estate to which C is entitled, and as part of the same transaction gives C a coal-mine. C
takes possession of the mine and exhausts it. He has thereby confirmed the transfer of the estate to B.

Limitation Period

 Where the owner does not within one year after the date of the transfer, signify to the transferor or
his representatives his intention to confirm or to dissent from the transfer, the transferor or his
representative may, upon the expiration of that period, require him to make his election.
o If he does not comply with such requisition within a reasonable time after he has received it, he
shall be deemed to have elected to confirm the transfer.

Effect Of Disability

In case of disability, the election shall be postponed until the disability ceases, or until the election is made by
some competent authority.

Case Laws

Cooper v. Cooper (1873): “... there is an obligation on him who takes a benefit under a will or other
instrument to offer full effect thereto instrument under which he takes a benefit ; and if it’s found that
instrument purports to affect something which it had been beyond the facility of the donor or settlor to
eliminate, but to which effect are often given by the concurrence of him who receives a benefit under an
equivalent instrument, the law will impose on him who takes the benefit the requirement of carrying the
instrument into full and complete force and effect.”

Muhammad Afzal v. Gulam Kasim (1903), it is a landmark case on the topic described below:

 Facts – On death of Nawab of Tank, the Government transferred cash allowance to Nawab's second
son. Nawab, during his lifetime had already transferred villages to his second son for his maintenance.
 Question – Whether both transactions were a part of the same transaction, and can doctrine of election
be applied in this case?
 Verdict – Privy Council in this case held, as the second son acquired grants through two different
sources, they do not form part of same transaction and second son cannot be put to election.
 Sale

Introduction

A sale relates to a transaction between living parties dealing with immoveable property. Section 54
contained in Chapter III of the Transfer of Property Act, 1882 (TPA) deals with the concept of sale.

Definition of Sale

Section 54 defines sale as a transfer of ownership in exchange for a price paid or promised or part-paid and
part-promised. The term “price” is to be interpreted as a price in terms of money and not otherwise. If the
transfer involves any other kind of consideration, it is not a sale. Further, the Section also provides that the price
need not be paid simultaneously with the transfer. The price may either be paid in full or partially, or partly paid
and partly promised. The transfer will be deemed complete in all three cases. Thus, what is relevant is not the
immediate payment but the reference as to when and how the payment is to be made. The subject matter of the
sale under the said Act is immoveable properties. Section 54 includes immoveable properties, both tangible and
intangible. The tangible properties are those that are visible, such as lands, houses, etc.

Parties to sale

In every sale, there are always two parties. The person who transfers the property is known as the “seller,” and
the person who receives such property in exchange for monetary consideration paid by him is known as the
“buyer.” They both must be competent in the eyes of the law to effectuate a valid sale deed.

Registration of Sale

 As per Section 54, such transfer, in the case of tangible immoveable property of the value of one
hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only
by a registered instrument.
 In the case of tangible immoveable property of a value less than one hundred rupees, such transfer
may be made either by a registered instrument or by delivery of the property.
 Delivery of tangible immoveable property takes place when the seller places the buyer, or such
person as he directs, in possession of the property.

Contract For Sale

 A contract for the sale of immoveable property is a contract that the sale of such property shall take
place on terms settled between the parties.
 It does not, of itself, create any interest in or charge on such property.

Distinction Between Sale and Contract for Sale

Sale Contract for Sale

 It is a transfer of ownership.  It is a mere agreement.

 It passes an absolute interest to the purchaser.  It does not create any such interest.

 It creates a right in rem.  It creates a right in personam.

 It must be evidenced by a registered document.  It need not be registered at all.

Essentials of Valid Sale

 Parties to Sale: In a sale, there must be at least two parties. The person who transfers his / her property is
known as the transferor / seller / vendor and the person to whom the property is transferred is known as the
transferee / buyer / vendee.
 Competency: For a valid sale, both the buyer and seller have to be competent on the date of the sale:
o The seller must have ownership of the property which he is going to sell.
o The seller must have legal title to it, only then can he sell the property.
o The seller must not be a minor.
o The seller must not be of an unsound mind.
o The seller must not be statutorily incompetent.
o The buyer must be competent to take the ownership of the property.
o The buyer should not be disqualified from buying the immovable property by any law in force
at the time of the sale.
 Subject Matter of Sale: It specifically deals with the sale of immovable property. Immovable property
can be tangible or intangible.
o Tangible property is one that can be touched, such as a land, a house, a tree, things attached to
earth, etc., while intangible property refers to a property that cannot be touched such as a right
of ferry, a right to mortgage, a right of fishery, etc.
 Price or Consideration: Price is an essential element of the sale. At the time of the contract of a sale, a
price must be ascertained at which the property is going to be transferred.
o The price can be paid at the time of sale or before the sale in advance or after the sale. At the
same time, it can be paid in a lump sum or in part.
 Conveyance: Section 54 provides two modes for transfer of property –
o Delivery of possession
o Registration of sale deed

Rights and liabilities of buyer and seller

Every property transaction create certain rights and liabilities for the contracting parties. In the case of a sale,
the contracting parties, a buyer and a seller, are also vested with some rights and liabilities. Generally, the
parties themselves expressly agree as to which rights and liabilities they will subject themselves to. These are
mostly mentioned in a sale deed. However, the Act does not leave it entirely up to the parties. Section 55 lays
down a detailed description of every right and liability in the absence of a contract to the contrary. For
convenience, the rights and liabilities of the buyer and seller can be categorised into the rights and liabilities
before and after the completion of the sale.

Liabilities and rights of the seller and the buyer before completion of sale

Liabilities of a seller

 Disclosure of material defects (Section 55(1)(a)): A seller is bound to disclose any latent material
defect in the property or his title in his knowledge. A material defect is of such a nature that if it was
 known to the buyer, his intention to enter into a sale might deviate. It is a latent defect because it cannot
be discovered by the buyer even after ordinary care and inquiry.
 Production of title deeds for inspection (Section 55(1)(b)): A seller is bound to produce all the title
documents relating to the property at the request of the buyer for his inspection.
 Answer relevant questions regarding his title or the property (Section 55(1)(c)): The seller must
answer every relevant question put to him by the buyer relating to his title or the property. The answer
must be to the best of his information.
 Execute a proper conveyance of the property (Section 55(1)(d)): Conveyance means an act of
transferring a property. It can be done by signing or affixing a thumb impression on the sale deed by the
seller. A seller is bound to execute a proper conveyance only on the payment of the consideration by the
buyer. This clause imposes reciprocal duties on both the buyer and the seller. The clause also provides
that the execution must be at a proper time and place.
 Take reasonable care of the property and title deed (Section 55(1)(e)): The seller is bound to take
care of the property and title deed in the same manner as an owner of ordinary prudence would do. This
duty is to be exercised till the delivery of the property to the buyer.
 Pay all the charges (Section 55(1)(g)): A seller is bound to pay all the rent and public charges of the
property, with interest if any, due till the completion of the sale except if the buyer purchased the
property with all the encumbrances.

Rights of a seller

Right to take rents and profits (Section 55(4)(a)): A seller is entitled to collect rents and profits from the
property until the ownership is transferred to the buyer.

Liabilities of a buyer

 Disclosure of all the facts known to the buyer that materially increase the value of the
property (Section 55(5)(a)): The buyer is under obligation to confide to the seller any fact to which he has
reason to believe is not known to the seller relating to the increase in the property’s value. If he fails to do
so, it will be considered fraud, and the seller can avoid the sale if it is proven.
 Pay the price in accordance with the contract (Section 55(5)(b)): The buyer must pay the purchase
money at the time of completion of the sale to the seller or any person as directed by the seller. If there are
any encumbrances existing on the property at the time of sale, the buyer is free to deduce such amount
from the consideration he has to pay. It is in correspondence with the duty of the seller to execute a proper
conveyance.

Right of a buyer

Refund of money paid on proper denial to accept delivery (Section 55(6)(b)): The buyer is entitled to
receive the amount of any purchase money with interest properly paid by him to the seller in anticipation of
delivery. The buyer is also entitled to get a refund of any earnest money paid by him or the cost awarded to him
in a suit to compel the specific performance of a contract or to obtain a decree for its rescission.

Liabilities and rights of the seller and the buyer after completion of the sale

Liabilities of a seller

 To give possession (Section 55(1)(f)): The seller is bound to put the buyer or person as directed by the
buyer in possession of the property on being so required. This clause uses the words- “…such possession
of the property as its nature admits.” It refers to the nature of possession. For instance, in the case of
 tangible immoveable property, physical control is to be given over property. In the case of intangible
immoveable property, the possession is symbolic.
 Implied liability (Section 55(2)) – The seller must undertake impliedly that he holds the perfect title to
the property and is transferring the same free from any encumbrance. The rights or interest created by the
sale shall vest with the transferee and may be enforced by every person in whom that right or interest is for
the whole or any part thereof from time to time is vested.
 To deliver title deeds on receipt of price (55(3)): The seller is bound to hand over all the documents
relating to the title of the property to the buyer on payment of the whole of the purchase money. Proviso
(a) to Section 55(3) states that if a seller retains any part of the property comprised in the documents, he is
entitled to keep the documents as well. Proviso (b) also imposes the same duty on the buyer of the greatest
value when the property is sold to different buyers. However, in both cases, such a person must furnish
such documents and their true copies to other buyers at their request. They are also under an obligation to
keep the documents safe unless prevented from doing so by fire or other inevitable accidents.

Right of a seller

Charges upon the property for the unpaid price (55(4)(b)): Where the ownership has been transferred to the
buyer before payment of the whole consideration amount, the seller becomes entitled to a charge upon the
property which is in the hands of the buyer or any transferee without consideration or any transferee with
notice of non-payment. The charge will be for the amount of the purchase money or the part remaining unpaid
or for the interest on such amount or part from the date on which possession has been delivered.

Liabilities of a buyer

 To bear loss to the property (Section 55(5)(c)): After the completion of the sale, the ownership is
completely transferred to the buyer. From that date, if any damage, destruction or decrease in value
occurs in the property, the buyer will be bound to bear such losses.
 To pay the outgoings. (Section 55(5)(d)): The buyer is liable to pay all the public charges or rent
accruing after the completion of the sale or as agreed by the terms settled in the sale deed.

Rights of a buyer

 Benefit of the increment. (Section 55(6)(a)): Any benefit arising from improvement or increase in
value of the property or the rents and profits after completion of the sale shall vest with the buyer.
Mortgage
 Gift

Introduction

Section 122 to Section 129 contained in Chapter VII of Transfer of Property Act, 1882 deals with gifts. A gift
is considered a gratuitous transfer as an existing property is transferred in favour of another person without
consideration. A gift between living persons is intervivos (between the living) gift and it is a transfer of
property within the meaning of Section 5 of this Act. The following gifts do not come within the purview of
this Act: Testamentary gift that is a gift by operation of law, a gift made in apprehension of death.

Section 122 of the Transfer of Property Act, 1882

Gift is the transfer of certain existing moveable or immoveable property made voluntarily and without
consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of
the donee.

Acceptance when to be made – Such acceptance must be made during the lifetime of the donor and while he is
still capable of giving. If the donee dies before acceptance, the gift is void.

Essential Elements of a Valid Gift

1. Transfer of Ownership

 A gift involves transfer of ownership as in this the whole interest of the person in the property is
transferred in favour of another person.
 The person transferring the interest is known as the ‘donor’ and the person to whom the interest is
transferred is known as the ‘donee’.
 The donor must be competent to contract; he must be major as well as of sound mind.
 The donee does not need to be competent to contract; a minor or a person of unsound mind though
disqualified from entering into a contract is capable of receiving the property.

2. Existing Property

 As per Section 124 of this Act, the gifted property must be in existence at the time of making the gift,
although its conveyance may take place either in future or in present.
 Both immovable and movable property may be gifted.
 A gift of a future property is Also, a gift comprising of both the existing and future property is void as to
the future property.
 An actionable claim is an existing property, and it can be gifted.

3. Transfer Without Consideration

 An essential feature of a gift is that it must be gratuitous.

 Ownership must be transferred without any consideration.
 The word ‘consideration’ has been defined in Section 2(d) of the Indian Contract Act, 1872 (ICA) and is
used in the same sense under the Transfer of Property Act, 1882.
 As per Section 2(d) of ICA, when, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called a consideration for the promise.

4. Voluntary Transfer with Free Consent

  The gift must be made by the donor voluntarily, that is with his free will and consent.
 When the consent of the donor is not free that is the consent has been given due to coercion or undue
influence, then the gift will not be a valid gift.
o Section 15 and 16 of the Indian Contract Act, 1872 defines coercion and undue influence
respectively.

5. Acceptance of Gift

 Acceptance of the gift by the donee is necessary and the acceptance may be expressed or implied.
 When the donee is a minor or of unsound mind, then the gift must be accepted on his behalf by a
competent person.

Mode of Transfer

 Section 123 lays down two modes for effecting a gift depending on the nature of property.

Gift to Several Persons of Whom One does not Accept

 Gifts may be made to two or more persons

 For the validity of the gift, it is necessary that it must be accepted by all the donees.
 Section 125 provides that a gift of a thing to two or more donees, of whom one does not accept it, is
void as to the interest which he would have taken had he accepted.

Suspension or Revocation of Gifts

As per Section 126 of this Act, a gift which under an agreement between the parties is revocable wholly or
partially at the mere will of the donor is void wholly or partially as the case may be. It lays down two modes of
revocation of gift which are as follows:

o Revocation by Mutual Agreement:

 If the donor and the donee have agreed that on the happening of a specified event (not
depending upon the will of the donor), the gift should be revoked or suspended.
o Revocation by Recission as in the Case of Contractors:
 A gift will be revoked if it was not made with the free consent of the donor.
 A gift may also be revoked in any of the cases in which if it were a contract, it might be
rescinded. As per Section 19 of Indian Contract Act, 1872, a contract may be rescinded
in case of coercion, undue influence, fraud and misrepresentation.
o Provisions of Section 126 do not apply to an incomplete gift, such a gift can be revoked at any time.

Kinds of Gifts
  Void Gifts
 Onerous Gifts

Void Gift

 Gifts depending on unlawful purposes.

 Gifts made upon a condition, the fulfillment of which is impossible or forbidden by law.
 Gifts by a person incompetent to contract.
 Where the donee of the gift dies before acceptance.
 A gift comprising of both the existing and future property is void as to the future property.

Onerous Gifts

 A gift is said to be onerous when it is accompanied by a burden or obligation.

o This section is based on the maxim ‘qui sentit commodum sentire debetet onus’ which means
that he who receives advantage must also bear the burden.
 Section 127 of this Act deals with the concept of Onerous Gifts. It states that:
o Where a gift is in the form of a single transfer to the same person of several things of which one
is, and the others are not burdened by an obligation, the donee can take nothing by the gift
unless he accepts it fully.
o Where a gift is in the form of two or more separate and independent transfers to the same
person of several things, the donee is at liberty to accept one of them and refuse the others,
although the former may be beneficial and the latter onerous.
 Onerous Gift to Disqualified Person - A donee not competent to contract and accept a property which,
burdened by any obligation, is not bound by his acceptance. But if, after becoming competent to
contract and being aware of the obligation, he retains the property given, he becomes so bound.

Universal Donee

 Section 128 deals with the concept of universal donee. It states that:
 Subject to the provisions of section 127, where a gift consists of the donor's whole property, the donee is
personally liable for all the debts and liabilities of the donor at the time of the gift to the extent of the
property comprised therein.
 Universal Donee is the person who gets the whole property (both movable and immovable) of the donor
under a gift.

Mortis Causa

 Section 129 deals with the Gifts which are made in contemplation of death and known as donatis
mortis causa. Such gifts are exempted from the operation of chapter VII by virtue of Section 129.
 Another exemption is made in favor of gifts which are governed by Muslim personal law.
 Exchange

Introduction

Sections 118 to 121 of the Transfer of Property Act, 1882 (TPA) deals with the concept of Exchange. It is
the same as sale but differs in consideration. Here the consideration is another thing, not money. Exchange is
defined in section 118 of the Transfer of Property Act, 1882. The exchange of property in this act relates to immovable
property** only. The exchange of moveable property is governed by the Sale of Goods Act. The literal meaning of
exchange is giving and taking of something. In the early decades, the concept of exchange was known as barter
system. The people used to exchange their things and commodities with others who are in need of them. And in
return, they used to get something which is useful for themselves.

Exchange

 Section 118 of TPA defines Exchange.

 This Section states that when two persons mutually transfer the ownership of one thing for the ownership
of another neither thing or both things being money only, the transaction is called an exchange.
 A transfer of property in completion of an exchange can be made only in the manner provided for
the transfer of such property by sale.
 The definition does not exclude the payment of money altogether. If one of the two properties which are
to be exchanged exceeds the other in value, the transfer would nonetheless be an exchange, even if some
money is paid by the owner of the property in addition in order to equalize the value of both properties.

Illustrations:

o Exchange of X’s pen for Y’s book.

o A’s house worth Rs. 2000 is to be exchanged for B’s field worth Rs. 1200 and in pursuance of
this bargain, B agrees to pay A Rs. 800 in case. Such a transaction is an exchange.

Essentials of Exchange

 There must be a minimum of two parties and two properties, one of each belonging to each one of
them.
 No other form of consideration should be involved besides the properties.
 There must be a transfer of a thing for another thing and both or either of these things may be movable
or immovable.
 The object of exchange must not be unlawful.

Right of Party Deprived of Thing Received in Exchange

 Section 119 of TPA deals with the right of a party deprived of a thing received in exchange.
 It states that if any party to an exchange or any person claiming through or under such party is by reason
of any defect in the title of the other party deprived of the thing or any part of the thing received by
him in exchange, then, unless a contrary intention appears from the terms of the exchange, such other
party is liable to him or any person claiming through or under him for loss caused thereby, or at
the option of the person so deprived, for the return of the thing transferred, if still in the possession of
such other party or his legal representative or a transferee from him without consideration.

Rights and Liabilities of Parties

Section 120 of TPA deals with the rights and liabilities of parties.
  It states that save as otherwise provided in this Chapter, each party has the rights and is subject to
the liabilities of a seller as to that which he gives, and the rights and is subject to the liabilities of a
buyer as to that which he takes.
 In exchange each party is subject to the rights of the buyer and seller in relation to the property that he
receives and gives respectively.

Both the parties in exchange have equal rights over one another. When the person is transferring the ownership
to the other, he is considered to be at the position of a seller, and he holds all the rights which a seller has while
selling property. The person who receives the property is considered a buyer, and he has all the rights which a
buyer possesses by virtue of being a buyer. The rights are gained after considering the position a person is
holding. If a person is at the receiving side, then he has the rights of a buyer like getting property in a fit
condition and, if not in a fit state, may claim for damages. He has the right to possess all rights over that
property after getting transferred.

Exchange of Money

It is a written rule that money can’t be a thing in exchange. But section 121 of the Transfer of Property Act says
that if money is exchanged between the parties, then the parties must assure the other party regarding the
genuineness of money he has given to the other. The proving of the genuineness of money is essential, if
exchanged. There are many events where money can get exchanged. For example, a person visiting the U.K
requires the currency of that country only. So when he exchanges his money in rupee to get money in pounds, it
is an exchange of money.

Valuation of Things in Exchange

The definition of exchange nowhere provides any provision or statement relating to the valuation of things
transferred in exchange. The parties exchanging things may transfer any value of a thing with the other person.
It is immaterial that both the things do not have equal valuation. So the parties exchanging things must transfer
it voluntarily and mutually.
 Lease

In India, transfer of property is not possible for every individual because of financial issues. The permanent or
absolute transfer is a luxury for some people, but a temporary transfer is something that has given every citizen
the right of enjoying any property. One of the modes of transferring property for a particular period of time is
Lease. Lease is a transfer of an interest in the property for a stipulated period of time without transferring the
ownership of that property. In a lease, right of possession is transferred instead of the right of ownership.
Transferor here is called the lessor and the transferee i.e. the one enjoying the property for a period is called
lessee. Lease is governed by the Transfer of Property Act, 1882 and it is given from Sections 105 to 117.

Definition of Lease

Section 105 states the definition of a lease which states that it is a transfer of immovable property for a
particular time period for a consideration of which the transferee has accepted the terms surrounding the
agreement.

What are the essentials of a lease?

 Parties must be competent: The parties in a lease agreement should be competent to enter into a
contract. Lesser should be entitled to a property and have absolute rights over that property.
 Right of possession: Ownership rights are not transferred in a lease, only the possession of the property
is transferred.
 Rent: Consideration for a lease can be taken in the form of a rent or premium.
 Acceptance: Lessee, who is to get the interest in the property after lease, has to accept the lease
agreement along with the time period and terms & conditions imposed on the transfer.
 Time Period: Lease always takes place for a particular time period which is to be specified in the lease
agreement. It can be relaxed at the option of the lessor.

What happens when the lease agreement does not prescribe the time period of the lease?

Section 106 provides for the duration of the lease in the absence of the lease agreement. It lays down that in
the absence of a contract, lease can be ended by both parties to the lease by issuing a notice to quit. The
prescribed time period always commences from the date of receiving the notice to quit. Following are the
circumstances:

Purpose Term (Deemed) Notice Prescribed End

Agricultural or manufacturing purpose. Year to Year 6 month 1 year

Any other purpose. Month to Month 15 days 1 month

In this table, there is a distinction of two purposes in regard to Section 106 i.e. Agricultural or manufacturing
and other purposes. Hence, two things can be derived from this table:

1. When a lease for Agricultural or manufacturing purpose is deemed to be of year to year, then it will
attract a 6-month notice that the lease will end on the expiry of 1 year from the date of the
commencement of the lease.

2. When a lease for any other purpose is deemed to be of the month to month, then it will attract a 15-day
notice that the lease will end on the expiry of 1 month from the commencement of the lease.
There is proviso to this section which states that the notice to quit in this section should be written and
conveyed to the party who is required to abide by it. If this is not possible then it should be attached to a
conspicuous place in that property.

How is a lease executed?

Section 107 states about lease how made. This section covers three aspects:

1. When there is a lease of Immovable property for a term of 1 year or more – This can only be made by a
registered deed.
2. All other leases of Immovable property – Can be either made by a registered deed or an oral agreement
or settlement along with the transfer of possession of that property.
3. When the lease is of multiple properties that require multiple deeds, it will be made by both the parties
of the lease.

In the case of Punjab National Bank v. Ganga Narain Kapur (1.), Court held that if the lease is done through
an oral agreement, then the provisions of Section 106 will apply.

Rights and liabilities of Lessor and lessee

Rights of the lessor are

1. A lessor has a right to recover the rent from the lease which was mentioned in the lease agreement.
2. Lessor has a right to take back the possession of his property from the lessee if the lessee commits
any breach of condition.
3. Lessor has a right to recover the amount of damages from the lessee if there is any damage done to
the property.
4. Lessor has a right to take back the possession of his property from the lessee on the termination of
the lease term prescribed in the agreement.

Liabilities of the lessor

1. The lessor has to disclose any material defect relating to the property which the lessee does not know
and cannot with ordinary supervision find out.
2. Lessor is bound by the request of the lessee to give him the right of possession over his property.
3. Lessor can enter into a contract with the lessee if he agrees to abide by all terms and conditions
prescribed in the agreement, he can enjoy the property for the rest of the time period without any
interference with an obligation to pay the rent later on.

Rights of the lessee

1. During the period lease is in effect if any alteration is made (alluvion for the time being in force) then
that alteration will come under that same lease.
2. If a significant part of the property that has been leased is destroyed wholly or partly by fire, by flood,
by war, by the violent acts of the mob or by any other means resulting in its inefficiency of being a
benefit for the lessee. If this happens, the lease is voidable at his option.

There is a proviso to this section that states if the damage is done due to any act of the lessee himself, this
remedy will not be available for him.

Liabilities of the lessee

 1. Lessee is under an obligation to disclose all related material facts which are likely to increase the value
of the property for which the lessee has an interest in and the lessor is not aware of.
2. Lessee is under an obligation to pay the rent or premium which is settled upon in the agreement to the
lessor or his agent within the prescribed time.
3. Lessee is under an obligation to maintain the property in the condition that he initially got the property
on commencement of the lease and he has to return it in the same condition.
4. If lessee gets to know about any proceedings relating to the property or any encroachment or any
interference, then lessee is under an obligation to give notice to the lessor.
5. Lessee has a right to use all the assets and goods which are on the property as an owner would use
which is preserving it to the best of its nature. He is although under obligation to prevent any other
person from using that asset or good for any other purpose from what was prescribed in the lease
agreement.
6. The lessee cannot attach any permanent structure without the consent of the lessor except for the
purpose of agriculture.
7. Lessee is under an obligation to give the possession of the property back to the lessor after the expiry of
the prescribed term of the lease.

How does a Lease end?

Determination of lease

Section 111 states about the determination of the lease, which lays down the ways in which lease is terminated:

1. Lapse of time – When the prescribed time of the lease expires, the lease is terminated.
2. Specified event – When there is a condition on time of lease depending upon a happening of an event.
3. Interest – Lessor’s interest to lease the property may cease, hence resulting in the termination of the
lease.
4. Same owner – When the interest of both lessor and lessee are transferred or vested in the same person.
5. Express Surrender – This happens when the lessee ceases to have an interest in the property and
comes into a mutual agreement with the lessor.
6. Implied Surrender – When the lessee enters into a contract with another for the lease of property, this
is an implied surrender of the existing lease.
7. Forfeiture – There are three ways by which a lease can be terminated:
8. When there is a breach of an express condition by the lessee. The lessor may get the possession of the
property back.
9. When lessee renounces his character or gives the title of the property to a third person.
10. When the lessee is termed as insolvent by the banks, and if the conditions provide for it, the lease will
stand terminated.

Expiry of Notice to Quit – When the notice to quit by the lessor to the lessee expires, the lease will also expire.

What is notice to quit and what happens after it?

Notice to quit is a formal written statement that is issued to the lessee if the lessor desires to end the lease
agreement, whether on the expiry of the duration as stated under Section 106 or on grounds specified in Section
111. Any lease can be forfeited as mentioned in the sub-clause (g) of Section 111, by acceptance of the notice
to quit. But Section 112, states that if the lessor after initiating the process of termination of the lease on the
grounds of forfeiture accepts any rent from the lessee, it will be understood that the lease will still exist and the
termination and notice to quit has been waived.
Section 113 provides two ways in which the notice can be waived, that is expressly or impliedly.

1. Express Waiver of notice to quit – When a lessor accepts the rent from the lessee after the
notice to quit has been served, this is called express waiver of notice to quit.

2. Implied Waiver of notice to quit – When a lessor issues notice to quit to the lessee, and upon
expiry of that notice, lesser issues another notice to quit to the lessee. The first notice to quit is
impliedly waived.

Effect of Holding over

Section 116 states about the effect of holding overlays down that if there has been a waiver of notice to quit, it
will not be called a new lease instead it will be called as a lease on sufferance or tolerance without objecting
against it. The term ‘Holding over’ stands for retained possession of a property which has been leased. After
this, the lease is renewable as any normal lease and in the way prescribed in Section 106. This section provides
that if the lessor agrees to the holding over of the property by the lessee, it will be renewed. But if the lessor
does not entertain the retained possession by the lessee, he can initiate suit proceedings against him on grounds
of trespass or tenant at sufferance.
 Rent controlling authority and appointment

Introduction

 The Rent Controlling Authority (RCA) in Madhya Pradesh is a statutory body established under the
Madhya Pradesh Accommodation Control Act, 1961.
 The primary function of the RCA is to resolve disputes between landlords and tenants, oversee the
fixation of fair rent, and enforce the provisions of the Act.
 The RCA serves as a judicial body, responsible for maintaining a balance between the rights and
obligations of both landlords and tenants.

What is the Procedure of Appointment of Rent Controlling Authority in Madhya Pradesh?

 Appointment:
1. As per Section 28 of the MP Accommodation Control Act, 1961, the Collector shall, with the
previous approval of the State Government, appoint the RCA.
 Eligibility:
1. He must not be an officer below the rank of Deputy Collector to be the Rent Controlling
Authority for the area within his jurisdiction to which this Act applies.
 Additional RCA:
1. The Collector may, with the previous approval of the State Government, appoint, from amongst
officers, not below the rank of a Deputy Collector, one or more Rent Controlling Authorities, as
he deems fit to assist the Rent Controlling Authority appointed under sub-Section (1) of Section
28.

What are the Powers of Rent Controlling Authority in Madhya Pradesh?

 Civil Court:
o The RCA shall have the same powers as are vested in a Civil Court under the Code of Civil
Procedure, 1908 (CPC).
o It shall be deemed to be a civil Court within the meaning of Section 480 and Section 482 of the
Code of Criminal Procedure, 1898.
o As per Section 35, save as otherwise provided in Section 34, an order made by the RCA, or an
order passed in appeal or in a revision under Chapter III-A shall be executable by the RCA as a
decree of a Civil Court.
 And for this purpose, the Rent Controlling Authority shall have all the powers of a Civil
Court.
 Powers:
o Summoning and enforcing the examining him on oath;
o Requiring the discovery and production of documents;
o Issuing commissions for the examination of witnesses
o Any other matter
 Judicial Proceedings:
o Any proceeding before the RCA shall be deemed to be a judicial proceeding within the meaning
of Section 193 and Section 228 of the Indian Penal Code, 1860 (IPC).
 Holding Any Inquiry or Discharging Any Duty:
o After giving not less than twenty-four hours’ notice in writing, enter and inspect any
accommodation at any time between sunrise and sunset; or
 o By written order, require any person to produce for his inspection, all such accounts, books or
other documents relevant to the inquiry at such time and at such place as may be specified in the
order.
 Power of Magistrate for Recovery of Fine:
o Under Section 34 any fine imposed by the RCA under this Act shall be paid by the person fined,
within such time as may be allowed by the RCA.
o RCA may, for good and sufficient reason, extend the time, and in default of such payment, the
amount shall be recoverable as a fine under the provisions of the Code of Criminal Procedure,
1898 and the RCA shall be deemed to be a Magistrate under the said Code for the purposes of
such recovery.
 Finality of Decision:
o Under Section 36, every order made by the RCA shall, subject to decision in appeal, be final and
shall not be called in question in any original suit, application or execution proceeding.

What is the Procedure Followed by Rent Controlling Authority in Madhya Pradesh?

 According to Section 30 of the MP Accommodation Control Act, 1961, the Rent Controlling Authority
(RCA) cannot make any decision that negatively impacts someone without first giving them
a reasonable opportunity to explain their side.
 The RCA must provide the person with an opportunity to present their objections and any
evidence they have before making a decision.
 During any hearings, the RCA will think about the issue of expenses and decide whether to assign those
costs to a party or not, based on what the Rent Controlling Authority believes is fair.

What are the Functions by Rent Controlling Authority in Madhya Pradesh?

 Fixation of Standard Rent:

o Under Section 10, the RCA shall, on an application made to it in this behalf, either by the
landlord or by the tenant, in the prescribed manner, fix in respect of any accommodation-
 the standard rent in accordance with the provisions of Section 7; or
 the increase, if any, referred to in Section 8.
 Fixation of Interim Rent:
o Under Section 11, if an application for fixing the standard rent or for determining the lawful
increase of such rent is made under Section 10, the RCA shall, pending final decision on the
application, make, as expeditiously as possible, a provisional order specifying the amount of
the interim rent or lawful increase to be paid by the tenant to the landlord and shall appoint the
date from which such interim rent or lawful increase so specified shall be deemed to have effect.
 Dispute of Sub-tenancy:
o Under Section 15 the RCA decides dispute related where the landlord contests that the
accommodation was not lawfully sub-let and an application is made to the RCA in this behalf,
either by the landlord or by the sub-tenant.
 Permission to Construct Additional Structures:
o Under Section 21, the RCA may permit the landlord to make such improvement or construct
such additional structure as required and decided the dispute if the tenant refuses to give
permission to do so.
 Power Regarding Vacant Building Sites:
o Under Section 22, RCA on an application made to it in this behalf by the landlord, is satisfied
that the landlord is ready and willing to commence the work and that the severance of the vacant
 land from the rest of the accommodation will not cause undue hardship to the tenant, the Rent
Controlling Authority may-
 direct such severance;
 place the landlord in possession of the vacant land;
 determine the rent payable by the tenant in respect of the rest of the accommodation; and
 make such other order as it thinks fit in the circumstances of the case.

Conclusion

The RCA under the MP Accommodation Control Act, 1961, maintains a balance between the rights of
landlords and tenants. Through its quasi-judicial functions, the authority ensures the fair and reasonable fixation
of rent, adjudicates disputes, and upholds the principles of natural justice. The specific sections outlined in the
Act empower the RCA to carry out its responsibilities effectively, contributing to a harmonious landlord-tenant
relationship in the state of MP.
 Land Law
Basic features of MPLRC

Introduction

Revenue generated from the taxation of land has been a primary source for India since ancient times. During
the British regime, the cultivable land was taxed as per the zamindari system that incurred a catena of criticism,
for it stratified India into classes namely upper class and lower class. Post-independence, Zamindari Abolition
Act, abolishing the practice of zamindari was passed by different Indian states including Madhya Pradesh,
Vindhya Pradesh and Bhopal. This was followed by the constitution of a Board of Revenue by the State
government via a notification dated 1st November, 1956, wherein the State government delegated the appellate
and existence from the year 1959, empowering the Board to exercise the powers delegated to it.

History of land revenue in India

Land policy in India has been a major topic of government policy discussions since the time prior to
Independence from British rule. The peasants of the country strongly backed the independence movement and
the "Land to the Tiller" policy of the Congress Party because of the prevailing agrarian conditions. The agrarian
structure during British administration emerged with a strong historical background (Baden Powel, 1974; Dutt,
1976; Appu, 1996). The land-revenue system implemented by Todar Mal during Akbar's regime can be traced
as the possible beginning of systematic efforts to manage the land. This method incorporated measurement,
classification and fixation of rent as its main components. Under the various pre- British regimes, land revenues
collected by the state confirmed its right to land produce, and that it was the sole owner of the land. British
rulers took a cue from this system and allowed the existence of noncultivating intermediaries. The existence of
these parasitic intermediaries served as an economic instrument to extract high revenues (Dutt, 1947) as well as
sustaining the political hold on the country. Thus at the time of Independence the agrarian structure was
characterized by parasitic, rent-seeking intermediaries, different land revenue and ownership systems across
regions, small numbers of land holders holding a large share of the land, a high density of tenant cultivators,
many of whom had insecure tenancy, and exploitative production relations. Immediately after Independence a
Committee, under the Chairmanship of the late Shri J. C. Kumarappa (a senior Congress leader), was appointed
to look into the problem of land. The Kumarappa Committee's report recommended comprehensive agrarian
reform measures. India's land policy in the decades immediately following its independence was dominated by
legislative efforts to address the problems identified by the Kumarappa Committee (NCA, 1976; Joshi, 1987).
A substantial volume of legislation was adopted, much of it flawed and little of it seriously implemented.

The Code At A Glance

The Code consolidates laws related to revenue, functions of the Revenue Officers, rights and duties of land
bearers, agricultural tenures and rates. Presently, the Code contains 264 sections and 3 schedules.

Applicability of the Code

Chapter 1 of the Code deals with the extent and applicability of the Act. It is applicable to the whole of the
territory of Madhya Pradesh except for areas which have been recognised as reserved under the Indian Forest
Act, 1927.

The office and scope of Board of revenue and Revenue Officers

The Code provides for the creation of the Board, constituting President along with two or more members
appointed by State government and the office of Revenue Officers wherein office of Commissioner has been
conferred with the highest authority, unless State government comes up with any direction to the contrary. The
members need to be either eligible for the appointment to the post of Judge of the High Court or a Revenue
Officer of a rank of not less than of a Collector, for at least a period of 5 years.

The Code determines the scope of the duties of the Revenue Officers and precludes them from enquiring into
matters outside their jurisdiction. The workmen, on the direction of the Revenue Officers can survey and
demarcate the occupier’s property only if a prior 24 days notification was sent to the occupant. The Board and
the Officers have been conferred with the status of Court and serves as a guardian preventing the abuse of the
Court. The Board and the Commissioner, in order to meet the ends of the justice, holds the authority to transfer
the cases from one Revenue Officer to another of same or a higher rank.

The Revenue Officers, in exercise of their judicial functions, can issue summons to require the presence of
persons necessary for further investigations or enquiry. However, a person living outside the territorial limits of
such a jurisdiction or where there is no railway communication or any other public conveyance near the
residence cannot be called upon. If such a summon is not complied with, the concerned Officer may issue a
bailable warrant of arrest, a fine or may direct the defaulter to present a security for the appearance. The
authority follows the same adjournment procedure as followed by the Courts.

The Concept of Land Revenue

The Code defines every land including standing and flowing waters, mines, quarries and subsoil as the State’s
property. The matters in regard with the dispute with the State are decided by Sub Divisional Officer. If a party
remains aggrieved by the order passed, then a civil suit questioning the validity of the order can be instituted.
The State, being the owner, receives revenue from all the land except for the land exempted by the State
Government by a contract or a special grant. The land with respect to “uneconomic holding” used for the sole
purpose of agriculture is exempted from land revenue.

Assessment of the land

The assessment of revenue is done on the basis of the purpose to which land is put into use. If the purpose of
the land used gets shifted or diverted, then the land will be assessed on the basis of the diverted purpose and in
such a case the Sub Divisional Officer can even impose a premium or diversion. However, no such premium is
imposed when the purpose is diverted to a charitable use.

Revenue Survey and Rent Settlement

The revenue survey operations for non-urban areas are conducted under the control of a Settlement Officer
appointed by the State. The Code defines revenue survey as the process of dividing the land into survey
numbers and grouping them into a village, soil classification, preparation of field maps and preparation of
records of rights. The Settlement Officer is authorised to demarcate these survey numbers and group them. The
Officer may further subdivide these survey numbers into subdivisions or may divide two villages to constitute
one and vice versa.

The revenue survey is followed by the determination of the revenue payable for the land which is termed as
Settlement by the Code. The Settlement Officer is empowered to put forward the rates assessed before the State
for the approval. The State may, however, approve them. The fixation of the rates would be on the principle of
fair assessment.
Post such an assessment the settlement term commences from the beginning of the revenue year. The settlement
term is fixed by the State and cannot be less than thirty years. However, the term can be reduced if the State
government feels fit seeing the general conditions.

Provision of Land Record

The Code provides for the preparation of a field map demarcating the boundaries of survey numbers and the
areas occupied by the private holders in case of a village. The Settlement Officer or the Collector would revise
the maps from time to time. It also necessitates the preparation of the rights of record during a revenue survey
that majorly consist the details of occupants including their names, plot numbers.

The process also requires a preparation of a field book called land records, apart from maps and record of
rights. The book consists of two parts wherein Part 1 deals with rights and encumbrances on the holdings and
Part 2 deals with recovery of revenue in respect of encumbrances on the holdings. The names enrolled in the
record of rights are mandatorily required to maintain a field book.

Collection of Land Revenue

Section 138 of the Code provides with the list of people liable to the payment of the revenue, including a
Bhumiswami or a lessee. In case, a holding is occupied by more than one such occupant, then there will be a
joint and several liabilities on the part of the occupants to make payment. The revenue is payable on the first
day of the revenue year instalments as per the rules devised by the State. A failure to comply with the dates of
payment forms arrear and person responsible is known as defaulter. If such a payment is not made within one
month of the prescribed date then a penalty is imposed upon the defaulter.

The Concept of Government Lessee

The Code defines Government lessee under section 180 of Code as the holding of the State Government’s
property or the person to whom the government has granted the right to occupy. The set of people holding land
as an ordinary tenant, special tenant or as “gair khatedar tenant” as defined in the respective of Madhya Bharat
Land Revenue and Tenancy Act, 2007, Vindhya Pradesh Land Revenue and Tenancy Act or Rajasthan Tenancy
Act are included under the purview of government lessee.

The Code outlines certain right and liabilities of a lessee that majorly includes conforming with the terms and
conditions set by the government. Any contravention by expiration of the period of rent term or using land for
purpose other than it was allotted would amount to the ejection of the lessee from the premises by the Revenue
Officer.

Unoccupied Land

The Code further speaks about land that has remained occupied needs to be recorded in every village and urban
areas. The Collector is authorised to distinguish such lands and use them for public purposes. However, a land
cannot be set aside for public purpose if it is in disharmony with the development plan of the State. The Sub
Divisional Officer is placed in charge of preparing a management scheme called Nistar Patrak, outlining the
management policies of the unoccupied lands in the village.

The Code further provides that all the fruits bearing trees planted by the people on such unoccupied land, before
the commencement of the Code, would continue to benefit or enjoy the entitlement without paying any royalty
to the Government.
 Board of revenue

The Board of Revenue is the higher revenue court to decide all appeals against the decision of the
commissioner. In order to achieve the goal of the Madhya Pradesh Land Revenue Code (MPLRC), the Board of
Revenue has been given various powers.The nature of the Board of Revenue is quasi-judicial. Sections 3 to 10
of the Madhya Pradesh Land Revenue Code, 1959, contain provisions relating to the constitution, powers and
functions of the Board of Revenue.

Constitution of the Board of Revenue

The creation or constitution of the Board of Revenue is provided in section 3 of the Madhya Pradesh Land
Revenue Code, 1959. It states that the Board of Revenue must contain a President and two or more members
appointed by the state government as per his (President’s) choice.

Further, section 3 states that any Board of Revenue established and operating for several areas prior to the
MPLRC’s enactment is presumed to be the Board of Revenue for Madhya Pradesh with effect from the date of
coming into force of the MPLRC.

Furthermore, the eligibility for the members is given under section 5 of the MPLRC. It states that to be a
member of the Board, the person needs to be either eligible for appointment as a High Court Judge or a
Revenue Officer with the rank of not less than Collector for at least five years.

Conditions of Service

The conditions of service of the Board of Revenue have been laid under section 5 of the MPLRC. Section 5
states that if any member of the Board of Revenue is unable to perform the duties of his office due to absence or
otherwise, the state government can appoint any person to fill the vacancy for the time being. And the state
government can do so by issuing a notification.

The section also states that the terms and conditions of service of the Presidents and members of the Board are
those as set forth and prescribed by the state government. And these terms and conditions will be in force until
modified or superseded.

Salaries and Allowances

According to section 6 of the MPLRC, the state government determines the salaries and allowances of the
Board members. And these salaries and allowances of the members of the Board are charged on the
consolidated funds of the state.

The main administrative function of the Board

Supervision, direction and control of the work of Divl. Commissioners, Collectors, S.D.O.s and Tahsildars.
This also includes inspections of the work of Tahsildars, Collectors and Commissioners and submission of
annual remarks to Govt. about the work and conduct of the Commissioner’s Collectors and S.D.O.s

1. Establishment of Tahsildars and Naib Tahsildars

2. Establishment of district and divisional offices.
3. Administration of Government Estates.
4. Survey, settlement and Record operations.
5. Maintenance of Land records.
6. Collection, compilation and publication of statistics relating to land agriculture.
 7. Supervision, direction and implementation of land reforms measures.
8. Work relating to abolition of Zamindari in urban areas of the state.
9. Work relating to payment of compensation.
10. Land Acquisition work including establishment of special Land Acquisition Officers.

Jurisdiction and Powers of the Revenue Board

The Board of Revenue is required to exercise such powers and discharge such functions as have been entrusted
to it under the Madhya Pradesh Land Revenue Code. In addition, the Board must also discharge such functions
as the state government or central government confers on the Board by the notification.

1. Power of Superintendence of Board

The power related to the superintendence of the Board is given under section 8 of the Madhya Pradesh Land
Revenue Code. Accordingly, the Board has superintendence over the authorities regardless of how long such
authorities deal with a particular matter. The Board also has the power to call for returns. However, this power
of the Board is subject to its appellate and revisional jurisdiction.

2. Power to Make Rules

Section 9 of the MPLRC empowers the Board of Revenue to make rules for the exercise of powers and
functions of the Board. This can be done by the benches composed of one or more members. Additionally, it
declares that decisions made by the benches while carrying out such duties are regarded as decisions of the
Board.

3. Power to Transfer Cases

According to section 29 of the MPLRC, the Board has the power to order or direct the transfer of any particular
case from one revenue officer to another revenue officer. However, it is necessary that the revenue officer to
whom the case is being transferred must be of an equal rank to that of the previous revenue officer.

4. Power to Hear Appeals

Section 44 of the Madhya Pradesh Land Revenue Code empowers the Board of Revenue to hear appeals if the
original order is issued by the commissioner. In other words, the Revenue Board has the power to hear appeals
against the order issued by the commissioner.

5. Power of Revision

The Revenue Board has the authority under section 50 of the Madhya Pradesh Land Revenue Code to call for
the record of any case that has been decided or the proceedings in which the order is passed by the
commissioner. The Board of Revenue can do this either suo moto (on his own motion) or on the application
made by the parties.

6. Power to Review Orders

As per section 51 of the Madhya Pradesh Land Revenue Code, the Board of Revenue has been empowered to
review any order passed by him or any of his predecessor-in-office and can further pass any such order in
reference thereto as he may think fit. The Board of Revenue can do this either suo moto or on the application
made by the parties.

7. Conferral of the Status of the Court

The condition where the Board of Revenue has the status of the revenue court is set forth in section 31 of the
MPLRC. According to this section, the Board of Revenue will have the status of a revenue court when using its
authority to investigate or rule on any dispute that arises between the state government and any individual or
between parties to any proceedings under the MPLRC or any other prevailing law.
 Occupancy tenant (Deleted part)

INTRODUCTION

Before Going to the Term Bhumiswami, it’s important for us to understand the term tenant. "Tenant" means a
person holding land from a Bhumiswami as an occupancy tenant under Chapter XlV. The definition of the word
'tenant' in this clause is exhaustive. The first condition for a person to be tenant under this clause is that he
should hold land from Bhoomiswami. Further, it is provided that the person holding land from a Bhoomiswami
, should hold it as an occupancy tenant under Chapter XIV .of this-Code. 2 A tenant is by the definition a person
who holds land as an occupancy tenant from a Bhumiswami; but the status of a Bhumiswami is recognized for
the first time by the Code and an occupancy tenant from a Bhumiswami would mean only a person belonging to
that class who acquires rights of occupancy tenant after the Code comes into force. The position of a tenant
prior to the date on which the Code was brought into force does not appear to have been dealt within this
definition. The definition which is specially devised for the purpose of the Code throws no light on the nature of
the right which invests the holder of land with the status of an occupancy tenant at the commencement of the
Code.

"Tenure-holder" means a person who holds land from the State Government and who is or is deemed to
be Bhumiswami under the provisions of this Code.

The definition of tenure holder under the clause is very simple. A person is called Bhoomiswami' who holds
land from the State Government and is either Bhoomiswami or deemed to be Bhoomiswami under this Code.
For a person who is called 'Bhoomiswami', provisions of Chapter XII should be looked into. Section 157 says
that there will be only one class of tenure holder and the name given to him is Bhoomiswami.

Class of Tenure

“There shall be only one class of tenure holders of lands held from the state to be known as Bhumaswami.” By
enacting Section 157 of the Code, the Legislature has declared that ownership in all lands etc. belong to the
State Government. But it is not necessary that all such lands are held by the State Government. This section for
the first time says that from the State Government, all person holding land as tenure holders shall be called
bhumiswami, meaning thereby ‘owner of the land’. 4 Although absolute ownership does not vest in such
persons, still leaving aside the State Government, such persons are owners against everyone else. They are
neither tenants nor Government lessees who are dealt with separately.

“Every person who at the time of coming into force of this Code, belongs to any of the following classes shall
be called a Bhumiswami and shall have all the rights and be subject to all the liabilities conferred or imposed
upon a Bhumiswami by or under this Code.” 5 For the first time, the M.P Land Revenue Code, 1959, vide
section 157, has called certain classes of persons 'Bhoomiswami' and has declared that such Bhoomiswamis
shall have all the rights and be subject to all the liabilities conferred or imposed upon a Bhoomiswami by or
under this Code. The provisions of the Code do not apply to evacuee property vested in the Central Government
under the Displaced Persons (Compensation and Rehabilitation) Act, 1954. 6

BHUMISWAMI RIGHTS

Claim of acquiring Bhumiswami rights

The plaintiff claimed that he was an occupancy tenant and became Bhumiswami on coming into force of the
M.P.Land Revenue Code, 1959. But he could not establish that he was an occupancy tenant. A person in order
to be an occupancy tenant has to be a sub- tenant of a Khatedar tenant or a grove holder or a sub-tenant or a
tenant of Khatedar. Not only this, it was also found that the land was a 'service' land and it could not be given
on lease for a period exceeding one year. It was held that the plaintiff was not entitled to the benefit of S.158 of
the Code. Bhumiswami rights accrue only in cases of limited category and only on specified grounds. Accrual
of Bhumiswami rights by adverse possession is not contemplated under the Code. A person, who was neither
Muafidar, nor Inamdar nor concessional holder under the Madhya Bharat Act, cannot be mutated as
Bhumiswami under the Code. Status of Pattedar tenant accruing under Rewa Act. Acquisition of Bhoomiswami
rights to such tenant is automatic. It does not depend on mutation entries. 10 Incident of impartibility and special
mode of succession of primogeniture of Jagir lands extinguished. Holders acquired Bhoomiswami rights. Land
situated in a princely State which merged in Vindhya Pradesh region. Gairhaqdar tenant continued in
possession. He became entitled to pattedarl rights under the Vindhya Ptadesh Act of 1953 and ultimately
became Bhoomiswami. The plaintiff's and their predecessor in title were in possession of the land for over 12
years and the defendant State in paragraph 3 of the written statement has clearly admitted that Raghunathsingh
and others who were the predecessor in title of the plaintiffs were Maurusi Kashtkar. After the abolition of
.Jamindari, the plaintiffs became Pacca tenant and under Madhya Pradesh Land Revenue Code they became
Bhumiswami of the said land by virtue of provisions contained in Clause (b) of sub- section (1) of section 158
thereof. 13

Bhoomiswami rights

A Bhumiswami pays land revenue to the Government under section 159. The interest of a Bhumiswami is
heritable and passes on his death by inheritance, survivorship or bequest, as the case may be. This is so
provided in section 164. Subject to certain restrictions contained in section 165 & 168, a Bhumiswami may
transfer any interest in his land. A Bhumiswami can also lease his land but the restriction is that normally he
cannot lease any land for more than one year during any consecutive period of three years. There is no
restriction for grant of leases in respect of certain categories of Bhumiswami, such as widow, unmarried woman
and persons suffering from social, physical or mental disabilities. This is provided in section 168(2). It is
important to notice that there is no provision in the Act for ejectment of a Bhumiswami at the instance of the
Government. These features clearly show, as held by Dube, J. 14 that there is no relationship of landlord and
tenant between the Government and the Bhumiswami. A Bhumiswami is called a tenure holder but he is not a
holder of tenancy rights. The Bhumiswami in these circumstances can well be described as the owner of the
land or more correctly owner of the rights in the land which he holds under the State. 15

Reinstatement of bhumiswami improperly dispossessed

Section 250 of the Revenue Code, which enacts a remedy for reinstatement of a Bhumiswami, improperly
dispossessed, reads thus:--

SEC. 250- Reinstatement of Bhumiswami improperly dispossessed.

1. If a Bhumiswami is dispossessed of the land otherwise than in due course of law or if any person
unauthorisedly continues in possession of any land of the Bhumiswami to the use of which such person
has ceased to be entitled under any provisions of this code, the Bhumiswami or his successor-in-interest
may apply to the Tahsildar for restoration of the possession within two years from the date of
dispossession or from the date on which the possession of such person becomes unauthorised, as the case
may be.
2. The Tahsildar shall, after making an enquiry into the respective claims of the parties, decide the
application and when he orders the restoration of the possession to the Bhumiswami put him in
possession of the land.
3. The Tahsildar may at any stage of the enquiry pass under Sub-section (2) an interim order for handing
over the possession of the land to the applicant, if he finds that he was dispossessed by the opposite party
within six months prior to the submission of the application under this section. In such a case the opposite
party shall, if necessary, be ejected under orders of the Tahsildar.
4. When an interim order has been passed under Sub-section (3) the opposite party may be required by the
Tahsildar to execute a bond for such sum as the Tahsildar may deem fit for abstaining from taking
possession of land until the final order is passed by the Tahsildar.
5. If the person executing a bond is found to have entered on into or taken possession of the land in
contravention of the bond, the Tahsildar may forfeit the bond in whole or in part and may recover such
amount as an arrear of land revenue.
6. If the order passed under Sub-section (2) is in favour of the applicant, the Tahsildar shall also award a
reasonable compensation to be paid to the applicant by the opposite party; Provided that the amount of
compensation shall not exceed ten times the revenue of the land for each year's occupation.
7. The compensation awarded under this section shall be recoverable as an arrear of land revenue.
8. When an order has been passed under Sub-section (2) for the restoration of the possession to the
Bhumiswami the Tahsildar may require the opposite party to execute a bond for such sum as the
Tahsildar may deem fit for abstaining from taking possession of the land in contravention of the order.
9. Where an order has been passed under Sub-section (2) for the restoration of the possession to the
Bhumiswami, the opposite party shall also be liable to a fine which may extend to five thousand rupees;
Provided that it shall not be competent to the Tahsildar to impose a fine of amount exceeding one
thousand five hundred rupees, but if in any case he considers that circumstances of the case warrant
imposition of a higher fine, he may refer the case to the sub-divisional officer who shall after giving the
party concerned an opportunity of being heard, pass such orders in respect of fine as he may deem fit."

Then Section 257 of the same Code provides for exclusive jurisdiction of Revenue authorities as follows:--

"SEC. 257. Except as otherwise provided in this code, or in any other enactment for the time being in force, no
civil Court shall entertain any suit instituted or application made to obtain a decision or order on any matter
which the State Government, the board, or any Revenue officer is, by this code empowered to determine,
decide or dispose of, and in particular and without prejudice to the generality of this provision, no civil court
shall exercise jurisdiction over any of the following matters:--

(10) any decision regarding reinstatement of a Bhumiswami improperly dispossessed under Section 250."

CONCLUSION:

It must be remembered that a Bhumiswami has a title though he is not the "Swami" of the "Bhumi" which he
holds, in the sense of absolute ownership, because as declared in Section 257 of the Revenue Code, ownership
of land vests in the State Government, yet, he is a Bhumiswami. He is not a mere lessee. His rights are higher
and superior. They are akin to those of a proprietor in the sense that they are transferable and heritable, and, he
cannot be deprived of his possession, except by due process of law and under statutory provisions, and his
rights cannot be curtailed except by legislation. since remedy under Section 250 is available to a Bhumiswami,
the applicant has necessarily to prove that he is a Bhumiswami, which means that the Tahsildar can go into the
question of title in order to determine whether the applicant is or is not a Bhumiswami, and on that basis it is
argued that since the Tahsildar is empowered under the Revenue Code, his decision will be within the mischief
of Clause (x) of Section 257, or the general provision contained in the opening part of Section 257.
 Diversion of land

Introduction

The Law in reference to this Article is taken from Madhya Pradesh Land Revenue Code, 1959. The law of Land
Revenue is an exchequer for the holding of State land and the payment for the holding of land to the State
Government. The Land Revenue Code lays down the procedure on how the Land is to be assessed and the
Revenue to be levied on the Holder of the Land. The Land is charged according to its use by the Holder as per
the latest assessment of the land and in case the Holder has to change the Use of the Land or purpose then a
Diversion of land is needed to be done. Generally, the land use is changed from agriculture to non-agriculture
purpose. This Article will discuss how the diversion is done and its procedure before the Revenue Courts and
why it is necessary to be done.

Section 59 – land revenue according to the purpose for which land is used

What is the Object of Diversion?

First we need to understand the object of Land Revenue; it is a comprehensive Code which encompasses all
aspects pertaining to the land. The scheme of the code related to ownership of all lands is vested in the State
and the Government has to power to make rules in pursuant of ownership and ‘land revenue’ which has been
discussed, the whole code in brief here. A Diversion happens when the holder of the land redefines the use of
the land from agriculture to a non-agriculture purpose. Therefore, the law defines two sets of ‘land use’
accordingly Agriculture and Non-Agriculture use of the land.

Conditions for Diversion

For the purpose of Diversion, an assessment for the land is done as per the use of the land, the holder has to
determine the use on the following grounds or purpose:-

 In case the purpose of agriculture,

 A site for dwelling house purposes.
 For an educational purpose.
 For Industrial purpose, including mines.
 For the commercial purpose.
 For the purpose other than those specified from the above points by state govt.

The Assessing Officer

Sub-Divisional Officer shall be the Assessing Officer who is to be referred for the alteration or assessment to be
carried out. (6) The Bhumiswami shall give a written intimation of such diversion to the Sub- Divisional
Officer alongwith the receipt of the deposit of the amount under subsection (5), and the land shall be deemed to
have been diverted from the date of such intimation .

How Assessment and Premium Is Calculated?

The fixation of the fees and the premium on diversion of land is done as per the rules framed by the
Government as provided under ‘Rules Regarding Alteration of Assessment and Imposition of Premium’, the
notification was last published on 10th July 2014 by Revenue Department of Government of Madhya Pradesh.
The following are the conditions for the assessment and calculation of premium:

1. Alteration of Assessment
  59(2)Even if the term of which the assessment may have been fixed has not expired, assessment will be
done at the rates prescribed for the purpose to which it has been diverted.
 59(3)Where the said land before diversion was free from land revenue or there was no land revenue
charged upon it after diverting it into any one of the above purposes it shall be liable to the payment of
land revenue and assessed in accordance with the purpose to which it has been diverted. The land
revenue shall be charged as the land assessed for the use for any one of the above purpose and to be
diverted into for that purpose.
 When land already diverted to a non-agricultural purpose and re-assessed on that basis is re-diverted to
an agricultural purpose, the assessment as re-fixed shall be equal to the agricultural assessment on the
land as fixed as per the last settlement.
 When land already diverted to a non-agricultural purpose and assessed on that basis is re-diverted to an
agricultural purpose and there is no agricultural assessment to fall back upon, the assessment on re-
diversion shall be fixed at the rate adopted for similar soil in the same village or in a neighbouring
village at the last settlement.
 Where land assessed for use for anyone purpose is diverted to any other purpose, assessment thereon
shall be revised and the land revenue shall be fixed in accordance with rates specified. Provided that
where land is diverted into more than one non-agricultural (mixed use), the assessment thereon shall be
fixed in proportion to the purposes specified.

2. Imposition of Premium

 (4) Where land assessed for use for any one purpose is diverted to any other purpose, and land revenue is
assessed thereon under the provisions of this section, the premium on such diversion shall be payable at
such rates as may be prescribed.
 (5) Whenever land assessed for one purpose is diverted to another purpose, the Bhumiswami shall
compute the premium and reassessed land revenue payable and deposit the amount so computed in the
manner prescribed No premium shall be imposed in case the land assessed and diverted from a non-
agriculture to an agriculture purpose.
 In the event of the land diverted to non-agriculture purposes being re-diverted to agriculture or to any
other purpose, the holder of the land or the successor-in-title will not be entitled to get a refund or set off
of the amount of premium already paid for diversion.

Computation by the Bhumiswami

(7) On the receipt of intimation under sub-section (6), the Sub-Divisional Officer shall, as soon as possible,
make enquiry into the correctness of the computation made by the Bhumiswami and communicate to the
Bhumiswami either confirming the computation made under sub-section (5) or informing him the correct
amount of premium and land revenue payable. In case the amount deposited under sub-section (5) is less than
the amount computed by the Sub- Divisional Officer, the difference shall be paid by the Bhumiswami within
sixty days of receipt of such intimation:

Provided that in case the amount deposited under sub-section (5) is greater than the amount computed by the
Sub-Divisional Officer, the difference shall be refunded to the Bhumiswami within sixty days.

(8) If the Sub-Divisional Officer fails to communicate to the Bhumiswami under sub-section (7) within five
years from the date of intimation received under subsection (6), the arrears of re-assessed land revenue shall not
be payable for a period exceeding five years.

What Happens After Diversion?

1. Land Revenue as per the fair assessment of the demarcated land : The land revenue shall be paid according
to the assessment the land and for the purpose it is used which will be determined by the last Assessment in
that area as notified by the Government, irrespective for the assessment which was fixed has not expired,
otherwise, it will be altered and assessed accordingly to the rules framed by the Government with the
purpose to which it has been diverted.

2. A Separate Survey Number is Demarcated: After diversion of land where the purpose of the land has been
changed from agriculture to a non-agricultural purpose that portion of the land is specially assigned by the
Settlement Officer after assessment into a separate survey number or sub-division of a survey number.

3. Re-Numbering or Sub-dividing Survey Numbers: The Settlement Officer may either renumber or sub-divide
survey numbers into as many sub-divisions as may be required in view of the acquisition of rights in land.

Penalty-

(9) If the Bhumiswami fails to give the intimation of diversion under sub-section (6), the Sub-Divisional
Officer on his own motion or on receiving such information shall compute the premium and re-assess the land
revenue payable on account of such diversion and also impose a penalty equal to fifty per centum of the total
amount payable:

Provided that such re-assessed land revenue shall be payable from the actual date of diversion subject to a
maximum period of five years:

Provided further that no penalty shall be imposed for one year from the date of commencement of the Madhya
Pradesh Land Revenue Code (Amendment) Act, 2018.
 Appeal, review and revision

Sections 44 to 49 of Chapter V of the Madhya Pradesh Land Revenue Code, 1959 provide for the provisions
related to appeal. Section 45 of the MPLRC has been omitted.

Appeal and Appellate Authorities

Section 44 of the MPLRC states the grounds for the appeal and the appellate authorities to whom the appeal
will be directed. It states that the appeal against an original order lies in the following manner:

 If such an order is passed by a revenue officer subordinate to the sub-divisional officer, the appeal lies
to the sub-divisional officer.
 If such an order is passed by a revenue officer subordinate to the deputy survey officer, the appeal lies to
the deputy survey officer.
 If such an order is passed by a sub-divisional officer or any assistant collector, joint collector or deputy
collector, the appeal is made to the collector.
 If such an order is passed by the deputy survey officer, the appeal is made to the district survey officer.
 If such an order is passed by the collector or district survey officer, the appeal is made to the
commissioner.
 If such an order is passed by the commissioner, the appeal is made to the revenue board.

Further, this section states that a second appeal can also be filed against the order passed in the first appeal. And
such appeal lies in the following manner:

 If the order in the first appeal has been passed by the sub-divisional officer, the deputy survey officer,
the collector or the district survey officer, the second appeal must be made to the commissioner.
 If the order in the first appeal has been passed by the commissioner, the second appeal must be made to
the revenue board.

Furthermore, clause (3) of section 44 of MPLRC enumerates (mentions) conditions under which the second
appeal lies. Accordingly, the second appeal against the order passed in the first appeal lies only:

 If the original order in the first appeal has been varied or reversed except in the matter of cost; or
 If the order is contrary to law or usage (any uniform practice or course of conduct on which the parties
rely) having the force of law; or
 If the order has failed to determine some material issue of law, or usage having the force of law; or
 If there has been any substantial error or defect in the procedure as have been specified by this MPLRC,
which may have created an error or defect in the decision of the case upon merits.

Lastly, the appeal against the order of the revision is filed in the same manner as the appeal is made against the
original order.

Exceptions (Orders Against Which Appeal Cannot Be Made)

Section 46 of the Madhya Pradesh Land Revenue Code, 1959 provides for the orders against which no appeal
will lie. Accordingly, an appeal cannot be made against the following orders:

 Allowing or dismissing an application for condonation of delay on the grounds specified in section 5 of the
Limitation Act.
 Rejecting an application for review.
 Allowing or dismissing an application for a stay.
 Order of an interim nature.
 Orders passed under the provisions of sections 29, 30, 104, 106, 114A, 127, 146, 147, 267, 208, 210, 212,
215 of MPLRC.

Further, a second appeal cannot be made against the orders passed in the first appeal under the provisions of
sections 131(1), 134, 173, 234, 239, 240, 241, 242 and 248 of MPLRC.

Limitation Period of Appeals

The limitation period for the appeals is contained under section 47 of the MPLRC. In case of the first appeal,
the application must be made within forty-five days from the date of the original order. And, in case of a second
appeal, it must be filed within forty-five days from the order passed in the first appeal.

In short, the period of limitation for filing an appeal (first appeal or second appeal) is of forty-five days from
the date of the order against which it is to be made.

Powers of an Appellate Authority

The appellate authority has the following powers:

 The appellate authority has the power to either accept or reject the appeal after calling for the record and
giving the appellant an opportunity to be heard.

 If the appeal is admitted, the appellate authority has to fix the date for the hearing and also serve the
notice to the respondent.

 The appellant authority has the power to confirm, reverse or vary the order against which the appeal was
made. However, this can be done after hearing from the parties only.

 The appellant authority, at last, has the power to take or receive such evidence as is necessary for
passing the order.

Provisions Related to Revision

Section 50 of Chapter V of MPLRC contains the provision related to revision. According to section 50, the
revision can be made in the following manner:

 The revenue board has the power to call for record any case which has been decided by the
commissioner. This can be done either on his own motion or the application made by any party to the
case.

 Similarly, the commissioner has the power to call for records of any case which has been decided or any
proceeding in which the order has been passed by the collector or the district survey officer.

 And the collector or the district survey officer can call for records of any case which has been decided
by a revenue officer subordinate to him.

Further, there are certain conditions under which the application for revision is not entertained. These are:

 If the application for the revision is against an appealable order, it will not be entertained.

 If the application for revision is against an order passed in the second appeal, it will not be entertained.
  If the order is passed by the commissioner, the application for revision is not entertained.

 The application for revision is not entertained against the order passed in revision.

Furthermore, prior to making a revision to an order, a notice must be served to both parties. An order cannot be
reversed unless the prior notice has been given to both parties. Also, the parties must be provided with an
opportunity to be heard before reversing the order.

Limitation Period for Revision

The limitation period for revision is also stated under section 50 of the MPLRC. Accordingly, the limitation
period for filing an application for revision is forty-five days from the date of the order against which the
application is to be made.

Provisions Related to Review

Section 51 of the MPLRC provides provisions related to the review of orders. It empowers the revenue board to
review any order passed by him or its predecessor-in-office. This can be done by him either suo moto or on an
application by any interested party. Similarly, the revenue officers can also review any order passed by him or
its predecessor-in-office. The board and revenue officer can further pass any such order with regards to review
as it may think fit.

Further, section 51 states that if the commissioner, collector or district-survey officer wants to review any order
which is not passed by them, they must first obtain the sanction of the board. Likewise, if an officer who is
subordinate to the collector or the district survey officer wants to review any order, they must obtain the
sanction from the collector or district-survey officer to whom they are immediate subordinates.

Exceptions (Orders Against Which No Application for Review Is Made)

Although citizens have the right to file an application for review, there are certain orders against which no
application for review lies. These orders are:

 An order against which an appeal has been brought.

 An order which is the issue of any revision proceedings.

 An order which includes the question of rights between private persons. (However, an application for
review can be made under this condition if the application is made by the party whose rights are being
affected.)

 Any application brought after forty-five days from the order against which it is to be made.
 Assessment of land revenue

Land revenue means all sums and payments in money or in kind received or claimable by, or on behalf of
Government from any person on account of land held by, or vested in, him, and includes any tax, cess, rate or
other impost payable under the provisions of any law for the time being in force.

Land revenue is tax or revenue levied on agricultural production on land. It is either collected as a percentage of
the share of total crop or a monetary value is fixed on the land to be paid by the farmer. It has been the major
source of revenue for empires. The annual or periodical yield of taxes, excise and custom duties and other
sources of income that a nation, state or municipality collects and deposits into treasury for public use.

Revenue a first charge on produce of land.

The land revenue of holding, or of an estate, being a cash commutation of the right of government to a share of
the crops grown upon it, is properly declared to be “ the first charge upon the rents, profits and produce.

Objectives

Main Objective of Land Revenue Administration is;

1. to assess and collect of land revenue, collection of local cess on behalf of local bodies, collection of court
fees, recovery of loans and advances, other dues of various departments, and all other dues recoverable as
arrears of land revenue,

2. to Prepare and maintain "Land Records" related to revenue accounts,

Land Revenue System Under British

British got Diwani rights of Bengal, Bihar, and Orissa in 1765. The major aim of British East India Company
was to increase their land revenue collection. So its policies were aimed at getting maximum income from land
without caring about its consequences on cultivators and peasants.

• They introduced the policy of revenue collection by abandoning the age-old system of revenue administration.
The entire burden of Company s profits, cost of its administration and expenses on wars and conquests were
mainly borne by the peasants.

Who pays the land revenue tax?

• The land revenue tax is also known as land tax or property tax. It is paid by the owner of the property to the
municipal bodies of the states. This tax is one of the major income sources for these bodies. The land revenue
tax collected by the municipal bodies is used in the maintenance and amenities such as water and power supply,
sewage systems, lighting and cleanliness, etc.

• Section 58 - Liability of land to payment of land revenue: All land, is liable to the payment of revenue to the
State Government.

How is it calculated?

The land tax is calculated based on several factors which include size of the property, location of the property,
amenities, etc. the civic bodies of different states use different methods to calculate the taxes, These methods
are:
1. Annual Rental System - Based on the annual rental value of the property, a certain percentage of the earning
is paid as land tax.
2. Unit Area Value System - Based on the carpet area of the property, its usage and location, and expected
returns on the property, tax is calculated.
3. Capital Value Based System - Based on the market value of the property, the civic body revises the taxes
annually.

Recovery of Revenue
There is not single person of the state who is not coming in contact with this department. It is because besides
usual revenue recovery work this department is performing so many other services to the people for example
issue of ration cards, issue of cast certificate and election duties etc. There are thousands of Revenue Officers
working for this department. There top to bottom order is as mentioned below:
– 1. Revenue Minister
– 2. Secretary, Addl. Secretary Asst. Secretary etc.
– 3. Divisional Commissioners
– 4. Collectors
– 5. Sub- Divisional Officers
– 6. Tahasildars/Naib Tahasildars
– 7. Circle Inspectors/Circle Officers
– 8. Talathis/Patwaris
– 9. Kotwals

REVENUE DIVISION

 Each District is divided into Sub divisions for administrative convenience.

 Each Division may consist of 4 to 5 districts.
 These tehsils are further subdivided into revenue circles and circles into revenue sazas.
 Sazas consist of a group of villages.
 Divisional Commissioner is in charge of the "Division".
 District administration is under control of Collector Officer in charge of Sub- Division is called Sub-
Divisional Officer and
 Tahasildar is chief officer on Tehsil level.
 On village level Circle Inspector/Officer is head of revenue circle and saza is under charge of a Patwari.

DIVISION- DISTRICT-SUBDIVISION-TEHSIL-VILLAGE

Section 58A - Certain land to be exempted from payment of land revenue

??????• no land revenue shall be payable in respect of an uneconomic holding used exclusively for the purpose
of agriculture.

• Explanation I.-For the purpose of this section,-2[(a) 'uneconomic holding' shall mean a holding the extent of
which is not more than 5 acres;]

Process of Revenue Survey

Notification of proposed revenue Survey- Formation of survey numbers and villages- Entry of survey numbers
and subdivisions in records- Determination of abadi of village- Grouping of villages

Time of payment of land revenue

The land revenue becomes due on the first day of that year and is to be paid at such times in such instalments to
such persons and at such places as prescribed.

– Arrear of land revenue Any instalment of land revenue that is not paid on the date prescribed for payment
becomes an arrear of land revenue and the person responsible for such payment will become a defaulter.

Assessment of land revenue.

Section 80 - All lands liable to assessment

 The Settlement Officer shall have the power to make fair assessment on all lands what-so-ever to which the
Settlement extends, whether such lands are liable to the payment of land revenue or not
 Assessment is the process of estimating the potential of land for payment of land revenue.
 The term ‘settlement' is applied in Indian revenue affairs to the “Process of assessing the land revenue
demand”.
 The basis of land revenue assessment in some States is net assets of the estate, while in others, it is net
produce or gross produce. Still in another set of States, capital value or rental value determines the basis of
assessment.
 These different bases are essentially the function of certain agricultural and economic factors.

The agricultural factors are quality of soil and level or position of the land, type of crops raised, possibilities of
natural or artificial watering, manuring, and land improvements,

the economic factors are nearness to the village habitation and market, transport and communication facilities,
prices of crops raised, and the economic condition of the tenants.
 Consolidation of holdings

Consolidation of holding is the process of redistribution and allotting continuous plots to Bhumiswami (owner
of the land or owner of the rights in the land) for his convenience of cultivation. To put it simply, consolidation
of land holdings is the process of bringing together various pieces of land and merging them into a single piece
of land. Under the Madhya Pradesh Land Revenue Code (MPLRC), the state government has the authority to
make rules to carry out the provisions of the consolidation of holdings.

Definition of Consolidation of Holdings

Section 205 of the Madhya Pradesh Land Revenue Code defines the consolidation of holdings and
consolidation officers. Accordingly, consolidation of holdings refers to the redistribution of all or part of a
village’s land in order to allot to the Bhumiswami continuous plots of land for convenience of cultivation. The
revenue officer not below the rank of Tahsildars is known as the Consolidation Officer. They are appointed by
the state government.

Process of Consolidation of Holding

Section 206 of the MPLRC deals with the process of consolidation of holding. To begin, any two or more
Bhumiswamis in a village having together more than or equal to the minimum area of land as provided under
section 221 of the Madhya Pradesh Land Revenue Code can apply in writing for consolidation of holding. The
application should be made to the consolidation officers. The district’s Collector can direct, order, or instruct
the consolidation officers to investigate the feasibility or efficiency of consolidating holdings in any village.

Further, if two-thirds of the Bhumiswamis in a village apply for their holdings to be consolidated, the
application is considered to be made on behalf of all the Bhumiswamis in a village. Similarly, if two-thirds of
the Bhumiswamis in the village agree to the consolidation during an investigation, the application is considered
to be made on behalf of all the Bhumiswamis. And, if any scheme of consolidation of holding is confirmed in
such a case, it will be binding on all Bhumiswamis in the village.

Rejection and Admission of Application

The consolidation officer can submit the application to the Collector with a recommendation that it be rejected
or denied in whole or in part or to quash the proceedings. Such an application can be made upon receipt of any
such application or at any point during the proceedings where it appears that there are good and sufficient
reasons for the application to be rejected.

Further, upon receiving the consolidation officer’s recommendation, the Collector may accept it and issue
orders accordingly. The consolidation officer also has the authority to issue an order for further investigation.
According to section 208 of the MPLRC, if the consolidation officer accepts the application, he must follow the
procedure laid down under MPLRC.

Preparation of Scheme for Consolidation of Holding

The provision related to the preparation of a scheme for consolidation of holding is given under section 209 of
the Madhya Pradesh Land Revenue Code. If Bhumiswami submits a scheme of consolidation along with the
application, the consolidation officer reviews it and, if necessary, makes changes. And if no such scheme is
submitted with the application, the consolidation officer will be required to prepare one.

Further, if the consolidation officer believes that redistribution of land following a scheme of consolidation will
result in the allotment of a holding or land of less market or productive value to any Bhumiswami; in this case,
the scheme may provide for compensation to be paid to such Bhumiswami by whoever or whatever the
consolidation officer directs.

Furthermore, when the scheme of consolidation is complete, the consolidation officer has to submit it to the
Collector for approval after considering and removing any objections that may have arisen.

Confirmation of Scheme

According to section 209 of the Madhya Pradesh Land Revenue Code, when the scheme of consolidation is
complete without any objection, the consolidation officer submits it to the Collector. After the submission of
the report to the Collector, the Collector may either:

 Confirm the scheme

 Direct the consolidation officer for the modification
 Refuse the scheme after considering the objections

Procedure After Confirmation of the Scheme

Following ratification of the scheme of the consolidation, the consolidation officer will demarcate the
boundaries of holdings if necessary. He will then announce the final decisions as per the scheme, including a
new field map, record-of-rights, Nistar Patrak, and Wajib-ul-arz.

Power to Make Rules

The state government has the authority to make rules under section 221 of the Madhya Pradesh Land Revenue
Code with regard to the following:

 Specifying the minimum area of land that anyone applying for consolidation of holdings must own.

 Providing for the particulars to be contained in each application for the consolidation of holding.

 Providing procedures that the consolidation officer must follow while dealing with the application.

 Providing for the formation and appointment of any advisory committee or Panchayat to help the
consolidation officer in the examination or preparation of the scheme.

 Determining the amount of compensation to be paid in cases falling under section 209 of the MPLRC.

 Regulating the assessment of costs.

 Determining the market or productive value of the various holdings and lands included in any scheme of
consolidation.
 Revenue officers

Revenue officers are the officers who collect taxes on behalf of the government or another organisation. The
State Government appoints the revenue officers. Section 2(1)(u) of the Madhya Pradesh Land Revenue Code,
1959 states that any officer that is mentioned in section 11 of the MPLRC is a revenue officer. Further, section
11 provides for 19 classes of revenue officers. These are:

 Principal Revenue Commissioner

 Commissioner
 Additional Commissioner
 Commissioner Land Records
 Additional Commissioner Land Records
 Collector
 Additional Collector
 District Survey Officer
 Sub-Divisional Officer
 Deputy Survey Officer
 Assistant Collector
 Joint Collector
 Deputy Collector
 Tahsildar
 Additional Tahsildar
 Assistant Survey Officer
 Superintendent of Land Records
 Nasib Tahsildar
 Assistant Superintendent of Land Records

Powers of Revenue Officers

Revenue officers have several powers under the Madhya Pradesh Land Revenue Code, like:

 Power to enter upon and survey the land.

 Conferral of the status of courts.
 Power to require attendance and to oblige the attendance of witnesses.
 Power to adjourn the hearing.
 Power to award costs.
 Order can be reversed or altered.

1. Power to Enter Upon and Survey the Land

Section 28 of the MPLRC confers the following powers to the revenue officers, their servants and workers
working under his supervision and control:

 To enter upon and survey the land.

 To demarcate or define the boundaries.
 To perform any other activities related to their duties provided under MPLRC or any other enactment.

Further, this section prohibits revenue officers, their servants, and workers from causing more damage than is
necessary for properly performing or discharging their duties. It also restricts them from entering any building
or enclosed garden attached to a dwelling house without the occupier’s consent and without giving the
occupier prior notice of at least twenty-four hours.

2. Conferral of the Status of the Courts

The condition where the revenue officer has the status of the revenue court is set forth in section 31 of the
MPLRC. This section states that while exercising its power to enquire into or decide any question arising for
determination between the state government and any person or between parties to any proceedings under the
MPLRC or any other enactment currently in force, the revenue officer will have the status of a revenue court.

3. Power to Require Attendance and to Oblige Attendance of Witness

According to section 33 of the MPLRC, revenue officers have the following powers:

 To take evidence.
 To summon any person whose attendance he believes is required, either to:
1. Be examined as a party.
2. Give evidence as a witness.
3. Produce any document in support of any enquiry or case.

However, this power of the revenue officer is subject to the provisions of sections 132 and 133 of the Civil
Procedure Code and to rules made under section 258 of the MPLRC.

Further, section 34 of the MPLRC states that if a person summoned to appear as a witness or produce a
document fails to comply with the summon, the officer who issued the summons has the authority to do the
following:

 Issue a bailable warrant of arrest.

 Order him to furnish security for evidence.
 Impose a fine of not more than 1000 rupees.

4. Power to Adjourn the Hearing

As provided under section 36 of the MPLRC, revenue officers have the power to adjourn the hearing of a case
or proceeding before them for the purpose of recording the reasons. It further states that no party must be
granted more than three adjournments during the course of the hearing of the case, and each of such
adjournments should be granted only with costs.

5. Power to Award Costs

The revenue officers have been vested with the power to award costs under section 37 of the MPLRC. The
revenue officers can award such costs incurred in the case or the proceeding as it deems appropriate to them.
However, the fees of legal practitioners are not to be allowed as costs unless such officers believe that it is
required to be recorded by him in writing.

6. Order Can Be Reversed or Altered

The order passed by the revenue officer has the capacity to be reversed or altered in appeal or revision if there
is any error, omission or irregularity in the summons, warrant, notice or order. However, such error, omission
or irregularity must be such that it results in the failure to deliver justice.

Provision Related to Holding Enquiries

Provision related to holding enquiries is provided under section 27 of the Madhya Pradesh Land Revenue Code.
Accordingly, the revenue officers are prohibited from investigating or hearing any case at a place which is
outside the local limits of his jurisdiction or not in his local limits of jurisdiction. However, revenue officers can
record reasons in writing at any location, even if it is outside the local limits of the jurisdiction. The section
further provides a condition that a Sub-Divisional Officer can enquire or hear any case at any place or location
within the district.

Who Can Make Applications to Revenue Officers

According to section 39 of the Madhya Pradesh Land Revenue Code, the appearances and applications can be
made to the revenue officer either by the parties themselves, by their recognised agents or by any legal
practitioners.
 Village officers

As per the rules made under Madhya Pradesh Land Revenue Code (MPLRC), Revenue Officers appoint some
village officers such as Patels and Kotwars. These village officers collect land tax, maintain boundary lines,
keep the village clean, and carry out other duties as assigned by revenue officers. Chapter XVII of MPLRC
contains various provisions related to Village Officers.

Patels Under MPLRC

The Patel is the village officer who collects and pays land revenue in the Gram Kosh. The provisions related to
appointment, remuneration, duties, etc., are given under sections 222 to 229 of the Madhya Pradesh Land
Revenue Code.

Appointment of Patels

The provision related to the appointment of Patel is given under section 222 of the MPLRC. Accordingly, the
Collector appoints one or more Patels for each village or group of villages. The appointment is, however, made
subject to the rules set forth in section 258 of the MPLRC. Further, if two or more Patels are appointed in a
village, the Collector has the authority to allocate the duties of the Patels as he thinks fit.

The qualifications for being eligible for the appointment of Patels are:

The person to be appointed as Patels must not be:

 Less than 21 years of age;

 Recorded as Bhumiswami in the concerned village’s Land Records;
 Undischarged insolvent;
 Unsuitable due to reason of financial position;
 Convicted for any offence;
 Mentally or physically unfit to carry out the duties of the Patel;
 Illiterate or incapable of keeping accurate records;
 Have not paid land revenue or other duties willfully.

Remuneration or Salary of Patels

According to section 223 of the Madhya Pradesh Land Revenue Code, the Collector determines the
remuneration or salary of the Patels. The Collector determines the remuneration in accordance with rules and
regulations established by the state government.

Duties of Patels

Section 224 of MPLRC enumerates the duties of the Patel. Accordingly, these are the duties of the Patels:

 To collect land revenue and any associated taxes and cess payable by him, as well as any other
government dues after deducting collection charges as set by the state government from time to time,
and to deposit them in the government treasury.
 To provide reports to the Collector concerning the condition and situation of his village. Also, the report
is to be provided at such places and times as the Collector may specify.
 To prevent encroachment or intrusion on wasteland, public walkways, and roadways of the villages.
 To preserve any stations and boundary marks displayed in his village by surveyors in the service of the
government and in case of any damage to such marks, report it.
  To maintain the village’s sanitary conditions.
 To prohibit the unauthorized cutting of wood and removal of minerals or any other property that belongs
to the state government.
 To supervise and regulate the Kotwars.

Removal and Punishment of Patels

The provision related to the removal of Patels is given under section 226 of the Madhya Pradesh Land Revenue
Code. Subsequently, Patel can be removed from the office by the Collector.

Further, according to section 227 of the MPLRC, if Patel is found to be neglectful and careless towards
performing his duty, the Tahsildar can impose a fine of up to twenty rupees on him.

Appointment of Substitute Patels

Section 228 of the Madhya Pradesh Land Revenue Code empowers the Sub-Divisional Officer to appoint a
substitute for the Patel if the Patel is temporarily unavailable for the execution of his duties. This can be done
by the Sub-Divisional Officer either on receiving the application made by the Patel or otherwise. The substitute
Patel can be appointed for a period of up to six months. Further, the replacement Patel so appointed is deemed
to be the Patel for the purpose of this Code.

Kotwar Under MPLRC

The Kotwars are the village officers who keep a watch and ward over the houses and properties of the villagers.
They generally assist the government officers visiting the village to discharge their duties. The provisions
related to Kotwars are contained under two sections: section 230 and section 231 of the Madhya Pradesh Land
Revenue Code.

Appointment and Remuneration of Kotwars

Firstly, section 230 of the MPLRC states that every person who holds the status of village watchman in Bhopal
and Sironj regions or is a Chowkidar in the Vindhya Pradesh region at the time the Madhya Pradesh Land
Revenue Code came into force or took effect is considered to be a Kotwar.

Further, section 231 of the MPLRC provides the provision related to the remuneration of Kotwars. According
to this section, the Kotwars are entitled to receive service land or remuneration or both for their services. The
norms for providing service land or remuneration or both are determined by the state government from time to
time by general order.

Conclusion

The Patel is the village officer who collects and pays land revenue in the Gram Kosh, whereas the Kotwars are
the village officers who keep a watch and ward over the houses and properties of the villagers. The appointment
and removal of Patels are made by the Collector. Similarly, the salary of Patels is also determined by the
Collector. And the salary of Kotwars is determined by the state government.
 Nistar patrak

233. Record of unoccupied land- A record of all unoccupied land shall be prepared for every village and
urban area in accordance with rules made in this behalf.]

[233-A. Land to be set apart for public purposes in urban area- The Collector may, in accordance with the
directions issued by the State Government in this behalf, from time to time,-

(a) set apart unoccupied lands in an urban area for public purposes; (b) change the public purpose for which any
such land is set apart; or (c) rescind the action taken under clause (a) in respect of any such land:

Meaning of Nistar Patrak

234. Preparation of Nistar Patrak- The Sub-Divisional Officer shall, in accordance with the provisions of this
Code and the rules made thereunder, prepare a Nistar Patrak for every village embodying a scheme of
management of all unoccupied land in the village and all matters incidental thereto and more particularly
matters specified in section 235.]

Matters to be provided for in Nistar Patrak

The matter which shall be

provided for in the Nistar Patrak shall be as follows, namely: —

(a) terms and conditions on which grazing of cattle in the village will be permitted;
(b) the terms and conditions on which and the extent to which any resident may obtain —
(i) wood, timber, fuel or any of the forest produce;
(ii) mooram, kankar, sand, earth, clay, stones or any of the mine or mineral;
(c) instructions regulating generally the grazing of cattle and the removal of the articles mentioned
in paragraph (b);
(d) any other matter required to be recorded in the Nistar Patrak by or under this Code.

Special provisions for certain matters

Collector shall, as far as possible, make provision for-

 free grazing of the cattle used for agriculture;

 removal free of charge by the residents for their bona fide domestic consumption of- (i) forest
produce; (ii) minor minerals;
 the concessions to be granted to the village craftsmen for the removalof the articles specified in
clause (b) for the purpose of their craft

PROHIBITION OF CUTTING OF CERTAIN TREES

1. No tree shall be cut, felled, girdled or otherwise damaged:-

(a) within 30 metres of the bank of any watercourse' spring or a tank;

(b) within 15 metres of the centre of a road or a cart track and within 6 metres of a footpath;

(c) over an area covered by a grove within a radius of 30 metres of a sacred place;
(d) in the area under plantation of tree species under the Van Mahotsava Programme or under any other similar
scheme;

(e) over an area set apart for an encamping ground, burial or burning ground, gothan, threshing floor, bazar or
abadi; or

(f) on hilly and undulating ground

Cutting of trees only in the circumstances enumerated below: -

 •the trees likely to cause any harm or damage to life and property
 •there is likelihood of pollution of drinking water;
 •the trees are dead or dying;
 •the removal of trees is likely to beautify or increase amenities in a place of public utility.
 •Fruit bearing trees, which have become sterile, dried tree
 •Trees, which are required to be cut for the growth of other plant/tree; and
 •Tree, which are required to be cut in public interest.]
 Wajib-ul-arz

Section 242 - Wajib-ul-arz the Sub-Divisional Officer shall, in the prescribed manner, ascertain and record the
customs in each village in regard to-

a) the right to irrigation or right of way of other easement;

b) the right to fishing ;in any land or water not belonging to or controlled or managed by the State.

Wajib-ul-arz or village administration paper is a record of existing rights not expressly provided for by law and
of customs and usage regarding the rights and liabilities in the estate

Customs to be ascertained and recorded in the Wajib-ul-arz

i.Right to irrigation;
ii.Other water-rights;
iii.Right to fishing;
iv. Rights of way, village roads, paths, drains and the like;
v. Rights of persons of other villages over the lands of the village;
vi. Rights of the villagers over the lands of other villages;
Other easements include
(a) Burial and cremation ground,
(b) Gaothan,
(c) Encamping-ground,
(d) Threshing-floor,
(e) Bazars,
(f) Skinning-grounds,
(g) Rights to graze and take fuel.
(h) Manure and rubbish;
(viii) Other miscellaneous rights

Procedure for ascertaining and recording the customs

(i) The Sub-Divisional Officer shall, examine the Wajib-ul-arz prepared at the last settlement, prepare draft of
Wajib-ul-arz incorporating the existing customs.

(ii) The Sub-Divisional Officer to publish the draft Wajib-ul-arz in the village along with a proclamation ,
calling upon the villagers to submit claims and objections to him by a specified date, which shall not be more
than 15 days after the date of proclamation, stating whether they object to any custom recorded in the draft or
desire any customs to be recorded in it.

(iii) After the expiry of the date fixed for the receipt of claims or objections, the 3[Sub- Divisional Officer] shall
on a date to be announced by beat of drum, make such enquiry in the village as he may deem fit.

(iv) The 3[Sub-Divisional Officer] shall then, make a record of the customs so ascertained and such record
shall be shown as the Wajib-ul-arz of the village.4. After the Wajib-ul-arz is prepared, it shall be read out in the
village or at suitable centres, and a copy thereof shall be posted in the office of the Gram Panchayat or Gram
Sabha or such other suitable place in the village as may be determined by the 3[Sub-Divisional Officer.

Appeal
Any person aggrieved by any entry made in such record may within one year from the date of the publication,
institute a suit in a CIVIL COURT to have such entry cancelled or modified. the decision of the Civil Court in
the suit shall be final and conclusive.

MODIFICATION

Sub-Divisional Officer may, on the application of any person interested therein or on his own motion, modify
an entry or insert any new entry in the Wajib-ul-arz any of the following grounds :-

1. that all persons interested in such entry wish to have it modified; or

2. that by a decree in a civil suit it has been declared to erroneous; or
3. that being founded on a decree or order of a Civil Court or on the order of a Revenue Officer it is not in
accordance with such decree or order; or
4. that being so founded, such decree or order has subsequently been varied on appeal, revision or review; or
5. that the Civil Court has by a decree determined any custom existing in the village.
 Banking law
Definition of bank, kinds and functions

In India, a banking company is responsible for transacting all the business transactions including withdrawal of
cheques, payments, investments, etc. In other words, the bank is involved in the deposit and withdrawal of
money, repayable on demand, savings, and earning a decent amount of profits by lending money. Banks also
help to mobilise the savings of an individual, making funds accessible to businesses and help them to start a
new venture. However, unlike commercial banks, private sector banks are owned, operated, and regulated by
private investors and have the right to operate according to the market forces.

What Is a Bank?

A bank is a lawful organisation that accepts deposits that can be withdrawn on demand. Banks are institutions
that help the public in the management of their finances, public deposit their savings in banks with the
assurance to withdraw money from the deposits whenever required. Banks accept deposits from the general
public and from the business community as well and give two assurances to the depositors –

1. Safety of deposit
2. Withdrawal of deposit, whenever needed

Banks give interest on deposits which adds to the original deposit amount and is a great incentive to the
depositor. This promotes saving habits among the public. Bank also grants loans based on deposits thereby
adding to the economic development of the country and well being of the general public. With this stature, it
becomes important to understand the major functions of a bank.

Types of Banking

Commercial banks: These banks are regulated by Banking Regulation Act, 1949. They accept the public
deposit from the public for lending or investment.

Cooperative banks: Cooperative banks are undertaken by the State Cooperative Societies Act and give cheap
credit to their members. The rural population is dependent on the cooperative banks for its financial backup.

Specialised banks: These banks provide financial help to special industries, foreign trade, etc. Few examples
of specialised banks are foreign exchange banks, export and import banks, development banks, etc.

Central banks: These banks manage, check, and monitor all the activities of the commercial banks of a
country.

Important Functions of Bank

1. Primary functions – being primary are also called banking functions.

2. Secondary Functions

Primary Functions of Bank

1. Accepting of deposits
2. Granting of loans and advances

Accepting of Deposits
A very basic yet important function of all the commercial banks is mobilising public funds, providing safe
custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from the
public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary and wage earners.
The rate of interest is low. There is no restriction on the number and amount of withdrawals. The account
for saving deposits can be opened in a single name or in joint names. The depositors just need to maintain
minimum balance which varies across different banks.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal
money during this period allowed. In case depositors withdraw before maturity, banks levy a penalty for
premature withdrawal. As a lump-sum amount is paid at one time for a specific period, the rate of interest is
high but varies with the period of deposit.
3. Current Deposits: They are opened by businessmen. The account holders get an overdraft facility on this
account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-interest rate
along with the charges for overdraft facility in order to maintain a reserve for unknown demands for the
overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval. Money can be
withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring deposits as
it provides a benefit of compounded rate of interest and enables depositors to collect a big sum of
money. This type of account is operated by salaried persons and petty traders.

Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans to the businesses and
individuals to meet their uncertainties. Bank charges a higher rate of interest on loans and advances than what it
pays on deposits. The difference between the lending interest rate and interest rate for deposits is bank profit.
Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money
anytime more than available in bank balance but up to the provided limit. An overdraft facility is
granted against collateral security. The interest for overdraft is paid only on the borrowed amount for
the period for which the loan is taken.
2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks allow the
customer to take a loan against a mortgage of certain property (tangible assets and / guarantees). Cash
credit is given to any type of account holders and also to those who do not have an account with a bank.
Interest is charged on the amount withdrawn in excess of the limit. Through cash credit, a larger amount
of loan is sanctioned than that of overdraft for a longer period.
3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5 years against
tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the money
either in a lump-sum amount or in the form of instalments spread over a pre-decided time period. Bank
charges interest on the actual amount of loan sanctioned, whether withdrawn or not. The interest rate is
lower than overdrafts and cash credits facilities.
4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller discounts the bill
from the bank for some fees. The bank advances money by discounting or purchasing the bills of
exchange. It pays the bill amount to the drawer(seller) on behalf of the drawee (buyer) by deducting
usual discount charges. On maturity, the bank presents the bill to the drawee or acceptor to collect the
bill amount.
Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:

1. Agency functions
2. Utility Functions

Agency Functions of Bank

Transfer of Funds: Transfering of funds from one branch/place to another.

Periodic Collections: Collecting dividend, salary, pension, and similar periodic collections on the clients’
behalf.

Periodic Payments: Making periodic payments of rents, electricity bills, etc on behalf of the client.

Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the
cheques through the clearing section of its customers.

Portfolio Management: Banks manage the portfolio of their clients. It undertakes the activity to purchase and
sell the shares and debentures of the clients and debits or credits the account.

Other Agency Functions: Under this bank act as a representative of its clients for other institutions. It acts as
an executor, trustee, administrators, advisers, etc. of the client.

Utility Functions of Bank

 Issuing letters of credit, traveller’s cheque, etc.

 Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers.
 Providing customers with facilities of foreign exchange dealings
 Underwriting of shares and debentures
 Dealing in foreign exchanges
 Social Welfare programmes
 Project reports
 Standing guarantee on behalf of its customers, etc.

E-banking and recent trends in E-banking in India

Various banking laws in India

 Customer, and relationship between customer and banker

The words “Banker” and “Bank” are used interchangeably. The Cambridge dictionary says the word ‘Bank’
means “ability to pay” as opposite to the word “bankrupt” which means “inability to pay”. We can arrive at a
common concept of banking. Accordingly a banker is one who a) accepts deposits b) grants loans and
undertakes investments. Before understanding the complete meaning of the word “Banker”, first we have to
understand the meaning of the word “Banking”, also.

Definition of the word “Customer”

a) A customer is one who deals with the bank b) The dealing of the customer must be in the nature of regular
banking business There is no statutory definition of the term ‘Customer’ in India under Banking Regulation
Act, 1949 or and other relevant Act. We have to look to the judicial pronouncement for its definition. For
example, the judgement pronounced in the Great Western Railway Co vs. London and County Banking co
Itd., (1901 A.C414) defines a customer as follows: "A customer is a person who has some sort of account,
either deposit or current account or some similar relations with a bank. From this, it follows that any person
may become a customer by opening a deposit or current account or similar relation with a bank".

Banker-Customer Relationship

The main relationship between bank and a customer is that of debtor -creditor in the case of deposit account and
creditor-debtor in the case of overdraft or loan account. The bank acts trustee in case of valuables entrusted
with the bank branch and as agent or bailee in other kinds of transactions. These kinds of relationships enjoin
different rights and duties on the bank, involving different degrees of care and diligence as below: The
Relationship between banker and customer can be in the form of

1. Debtor - Creditor
2. Trustee - Beneficiary
3. Agent - Principal
4. Bailor - Bailee
5. Assignor - Assignee

Debtor-Creditor A debtor is an entity that owes a debt to another entity. The entity may be an individual, a
firm, a government, a company or other legal person. The counterparty a creditor. When the counterpart of this
debt arrangement is a bank, the debtor is more often referred to as a borrower.

a) Bank as debtor: The principal relationship of bank-customer is that of debtor-creditor in case of deposit
accounts like Savings Bank account, Current account, Fixed Deposit account and Recurring Deposit account.

b) Bank as creditor: The relationship between bank-customer becomes that of creditor-debtor, when customer
has borrowed money from the bank by way of OD(Overdraft), CC(Cash credit), Demand loan, Term loan, Bills
discount or any other kind of loan or advance, either on secured or unsecured basis.

Trustee – Beneficiary Trustee is an individual who is responsible for a property or an organization on behalf of
some other individual or a third party. Trustee is supposed to make profitable decision for the entity under it
authorization. It is a legal relationship between the trustee and the party, where the trustee is totally responsible
for the maintenance, performance, and profitability of the trust under his guidance.

A beneficiary is any person who gains an advantage and/or profits from something.

This relation works out when the,

 Customer deposits money for a specific purpose, the banker is a trustee and the customer beneficiary. As
such, the banker has to employ the funds for a specific purpose for which it is meant.
 Banker becomes a trustee whenever he undertakes to collect cheques on behalf of customers. After
realizing, banker has to credit the proceeds to the account of the customer. When the amount is credited to
the account of the customer, the relationship changes wherein the banker becomes a debtor and the
customer creditor.
 Customer deposits securities and valuables for safe custody with the banker. The banker in such a case is a
trustee and so, whenever the customer demands the securities, the banker has to return them to the customer
who is a beneficiary.

Agent – Principal An agent is a person who acts for or represents another. The principal is the person who
gives authority to another, called an agent, to act on his or her behalf.

Banker acts as an agent of a customer, when

 Purchasing and selling securities on behalf of the customers.

 Collecting dividend warrants and interest warrants
 Paying club subscription, insurance premium, rent and other bills, as per instruction of the customer.

Here again, the relationship cannot be called in the true sense as agent - principal. In the case of a normal agent-
principal relationship, the agent has to render accounts to the principal and should also inform the principal how
the amount given to him by the principal has been spent or invested. In other words, the agent has to render
accounts to the principal while dealing with the funds of the principal.

Bailor – Bailee A bailor is a person who entrusts a piece of his or her property to another person (the bailee). A
bailee does not have ownership of the property. When a customer borrows from a bank against the security
under pledge, the bank is regarded not only a pledgee but also a bailee and so the bank has to take care of the
security until it is returned to the customer. But the goods kept in the safe deposit vault will not come under
bailment. The customer is keeping the goods in the safe deposit vault secretly and hence the banker will not be
a bailee. As a bailee, the goods coming into his custody will be protected and the banker is totally aware of the
nature of the goods. Thus, the banker will act as a bailee only when goods are entrusted to him for a specific
purpose. Any expenses incurred towards maintenance of the security or goods have to be borne by the
customer.

Assignor – Assignee An assignor is a person who transfers property rights or powers to another. An assignee is
a person or entity to which property rights or powers are transferred. An assignee is the one to whom
assignments are made. Whenever a bank gives loan against life insurance policy or book debts or supply bills,
the banker is the assignee and the customer the assignor. Under assignment, the actionable claim of the
customer is transferred to the bank as security for loan. Thus, assignment is done by customers whenever they
take loan against insurance policy or book debts. Even contractors after undertaking public works for the
government, obtain loan from the bank by assigning the supply bills in favour of the bank.

Duties and liabilities of banks and customer

 Dishonour of cheque amounts to offence and remedies

Introduction

The Negotiable Instruments Act of 1881 was enacted to protect the legitimacy of commercial transactions
involving cheques. It also includes precautions to protect drawers of such instruments from potential dishonor.
There have been several significant changes in the way cheques are issued, bounced, and dealt with throughout
the years.

With the fast growth of business and trade, the use of cheques grew as well, as did the number of cheques
bouncing disputes The purpose of Sections 138-142 of the Negotiable Instruments Act of 1881 is to improve
the efficiency of banking operations and maintain the legitimacy of commercial transactions involving cheques.
A person who issues a cheque to satisfy a debt or liability in whole or in part and the cheque is dishonored by
the bank on presentation is guilty of a criminal offence punishable by imprisonment, fine, or both.. Section 138
was established to penalize dishonest check draws who, although claiming to be releasing their responsibility
by issuing a check, have no intention of really doing so.

However, in order to avoid unnecessarily prosecuting an honest cheque drawer and to allow him a chance to
make corrections, the prosecution under Section 138 of the Act has been made subject to specific
circumstances. The proviso to Section 138 specifies these criteria. The conduct of an offence is one thing, but
prosecution is quite another under criminal law. Section 138 of the Act governs the commission of an offence.
Section 142 of the Act governs prosecution.

Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn
by a person on an account maintained by him with a banker for payment of any amount of money to another
person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned
by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient
to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement
made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to
any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or
with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless —

(a) the cheque has been presented to the bank within a period of six months* from the date on which it is drawn
or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of
the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the
receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case
may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice.

Explanation. – For the purposes of this section, “debt or other liability” means a legally enforceable debt or
other liability.

Classification of Offence

The violation under Section 138 is a non-cognizable offence (a case in which a police officer cannot arrest the
accused without an arrest warrant). It is also a bailable offence.
Although it was held in Dashrath Rupsingh Rathod v. State of Maharashtra[vi], that an offence under Section
138 is complete with the dishonor of a cheque, taking cognizance of the same by any court is prohibited so long
as the complainant does not have a cause of action under clause (c) of the proviso read with Section 142.

If cheque is dishonored

When a cheque is returned unpaid, the drawee bank sends a ‘Cheque Return Memo’ to the payee’s banker,
detailing the cause for non-payment. The dishonored cheque and the memo are then given to the payee by the
payee’s banker. If the holder or payee feels the cheque will be honored a second time, he or she can resubmit it
within three months after the date on it. If the cheque issuer fails to make a payment, the payee has the right to
take legal action against the drawer.

Only if the amount indicated in the cheque is for the repayment of a debt or any other duty of the defaulter
owed towards the payee may the payee legally sue the defaulter/drawer for dishonour of cheque. The drawer
cannot be charged if the cheque was given as a gift, used to lend money, or was used for illegal purposes.

Legal action

For instances of cheque dishonour, the Negotiable Instruments Act of 1881 applies. Since 1881, this Act has
been revised several times.

Dishonoring a cheque, according to Section 138 of the Act, is a criminal offence punishable by up to two years
in prison, a monetary penalty, or both.

If the payee chooses to proceed legally, the drawer should be offered the option of promptly returning the
cheque amount. An opportunity like this can only be offered in the form of a written notice.

The payee has 30 days from the date of receiving the “Cheque Return Memo” from the bank to send the notice
to the drawer. The notification should state that the amount of the check must be paid to the payee within 15
days of the drawer receiving the notice. The payee has the right to file a criminal complaint under Section 138
of the Negotiable Instruments Act if the cheque issuer fails to make a new payment within 30 days of receiving
the notification.

However, within a month of the notice period expiring, the complaint must be filed in a magistrate’s court. In
this scenario, it is critical to seek the advice of an attorney who is well-versed and skilled in this field of law to
proceed further in the matter.

Notice under S. 138

The necessary condition of issue of notice in terms of clause (b) of proviso to Section 138 of the Act is met
when the notification is issued by registered mail to the proper addressee of the cheque. It goes without saying
that the complaint must include basic information on the method and manner in which the notice to the cheque
drawer was sent.[vii]

Punishment & Penalty

The court will issue summons and hear the case after receiving the complaint, as well as an affidavit and related
document trail. If proven guilty, the defaulter may be penalised with a monetary penalty of double the amount
of the cheque, or imprisonment for a time of up to two years, or both. For repeated bounced cheque offences,
the bank has the power to suspend the cheque book facility and cancel the account.
If the drawer pays the amount of the check within 15 days after receiving the notice, the drawer is not guilty of
any offence. Otherwise, the payee has one month from the notice’s expiration date to submit a complaint in the
jurisdictional magistrate’s court.

Section 138 provides for a penalty of up to two years in prison, a fine of up to double the amount, or both. It is
important to remember that the power under Section 357(3) CrPC to order the payment of compensation is in
addition to the specified punishment if no fine is imposed. The compensation order can be enforced by a default
sentence under Section 64 IPC and a recovery procedure under Section 431 CrPC.[viii]

Fine points: Conditions for prosecution

There are three separate criteria antecedent that must be met before a check dishonor may be considered an
offence and punished.

(i) The cheque must have been given to the bank within 6 months [3 months][1] after the date on which it was
drawn, or within the validity period, whichever comes first.

(ii) Within 30 days after receiving information from the bank about the return of the cheque as unpaid, the
payee or holder in due course of the cheque, as the case may be, should make a demand for payment of the
specified amount of money by providing a notice in writing to the drawer of the cheque.

(iii) The drawer of such a cheque should have failed to pay the said sum of money to the payee or, as the case
may be, to the holder of the cheque in the proper course of the cheque within 15 days of receiving the said
notice.

The Court in MSR Leathers v. S. Palaniappan[ix] held that an offence under Section 138 may only be
considered to have been committed by the person issuing the cheque if all three requirements stated under the
proviso to Section 138 as clauses (a), (b), and (c) are met.

Dishonour of Cheque issued as a Security can also attract Offences U/Sec 138 NI Act

The Supreme Court recently observed in the judgment of Sripati Singh (D) vs. State of Jharkhand[x] that the
dishonour of a security cheque can also be considered a criminal offence under Section 138 of the Negotiable
Instruments Act.

There can’t be a clear and fast rule that a cheque issued as security can never be given by the cheque’s drawee.
The court went on to say that such a claim would only emerge if the debt had not become collectable and the
security cheque had not matured to be submitted for payment of the obligation if the agreed-upon due date had
not arrived.
Holder
 Various types of negotiable instruments

A negotiable instrument ensures payment of a specified amount to a designated person, either on-demand or at
a set time. It functions like a contract, containing vital details like principal amount and signatures. Unlike non-
negotiable instruments, negotiable instruments can be transferred, granting the new holder full legal rights.

Various types exist, including personal checks, traveler’s checks, promissory notes, money orders, and
certificates of deposit. Each serves unique purposes, from facilitating international transactions to providing
financing alternatives. While technological advancements have altered payment landscapes, negotiable
instruments remain vital due to their security, convenience, and role in financial transactions.

What is a Negotiable Instrument?

A negotiable instrument is a document that guarantees payment of a specific amount of money to a specified
person (the payee). It requires payment either upon demand or at a set time and is structured like a contract. A
negotiable instrument is a document that guarantees the payment of a specific amount of money to a specified
person (the payee) and requires payment either on demand or at a set date. Negotiable instruments are distinct
from non-negotiable instruments in that they can be transferred to different people, and, in that case, the new
holder obtains full legal title to them. Negotiable instruments contain key information such as principal amount,
interest rate, date, and, most importantly, the signature of the payor.

Features of Negotiable Instruments

The term “negotiable” in a negotiable instrument refers to the fact that they are transferable to different parties.
If it is transferred, the new holder obtains the full legal title to it.

Non-negotiable instruments, on the other hand, are set in stone and cannot be altered in any way.

Negotiable instruments enable their holders to either take the funds in cash or transfer to another person. The
exact amount that the payor is promising to pay is indicated on the negotiable instrument and must be paid on
demand or at a specified date. Like contracts, negotiable instruments are signed by the issuer of the document.

Types of Negotiable Instruments

There are many types of negotiable instruments. The most common ones include personal checks, traveler’s
checks, promissory notes, certificates of deposit, and money orders.

1. Personal Checks

Personal checks are signed and authorized by someone who deposited money with the bank and specifies the
amount required to be paid, as well as the name of the bearer of the check (the recipient).

While technology has led to an increase in the popularity of online banking, checks are still used to pay a
variety of bills. However, a limitation of using personal checks is that it is a relatively slow form of payment,
and it takes a long time for checks to be processed compared to other methods.

2. Traveler’s Checks

Traveler’s checks are another type of negotiable instrument intended to be used as a form of payment by people
on vacation in foreign countries as an alternative to foreign currency.
Traveler’s checks are issued by financial institutions with serial numbers and in prepaid fixed amounts. They
operate using a dual signature system, which requires the purchaser of the check to sign once before using the
check and a second time during the transaction. As long as the two signatures match up, the financial institution
issuing the check will guarantee payment to the payee unconditionally.

With traveler’s checks, purchasers do not have to worry about carrying large amounts of foreign currency while
on vacation, and banks provide security for lost or stolen checks.

With technological advancement in the last few decades, the use of traveler’s checks has gone into decline as
more convenient ways of making payments abroad have been introduced. There are also security concerns
associated with traveler’s checks, as signatures can be forged, and the checks themselves can also be
counterfeit.

Today, many retailers and banks do not accept traveler’s checks due to the inconvenience of the transactions
and fees charged by banks to cash them. Instead, traveler’s checks have been mostly replaced with debit and
credit cards as methods of payment.

3. Money Order

Money orders are like checks in that they promise to pay an amount to the holder of the order. Issued by
financial institutions and governments, money orders are widely available but differ from checks in that there is
usually a limit to the amount of the order – typically $1,000.

Entities who need more than $1,000 need to purchase multiple orders. Once the money orders are bought, the
purchaser fills in the details of the recipient and the amount and sends the order to that person.

Money orders contain relatively little personal information compared to checks with just the names and
addresses of the sender and recipients and not any personal account information.

International money orders are also a popular way of sending money abroad nowadays since money orders do
not need to be cashed in the country of issuance. As such, they enable a simple and quick method of
transferring money.

4. Promissory Notes

Promissory notes are documents containing a written promise between parties — one party (the payor) is
promising to pay the other party (the payee) a specified amount of money at a certain date in the future. Like
other negotiable instruments, promissory notes contain all the relevant information for the promise, such as the
specified principal amount, interest rate, term length, date of issuance, and signature of the payor.

The promissory note primarily enables individuals or corporations to obtain financing from a source other than
a bank or financial institution. Those who issue a promissory note become lenders.

While promissory notes are more formal than an IOU, which merely indicates that there is a debt, they are still
less formal and rigid compared to a loan contract, which is more detailed and lists out the consequences if the
note is not paid and other effects.

5. Certificate of Deposit (CD)

A certificate of deposit (CD) is a product offered by financial institutions and banks that allows customers to
deposit and leave untouched a certain amount for a fixed period and, in return, benefit from a higher interest
rate.
Usually, the interest rate increases steadily with the length of the period. The certificate of deposit is expected
to be held until maturity, when the principal, along with the interest, can be withdrawn. As such, fees are often
charged as a penalty for early withdrawal.

Most financial institutions, including banks and credit unions, offer CDs, but the interest rates, term limits, and
penalty fees vary greatly. Interest rates charged on CDs are significantly higher (around three to five times) than
those for savings accounts, so most people shop around for the best rates before committing to a CD.

CDs are attractive to customers not only because of the high interest rate but also for their safe and conservative
nature, as the interest rate is fixed throughout the course of the term.
 Promissory notes

Introduction

A promissory note is a debt instrument that contains a written commitment by one party (the note’s issuer or
maker) to pay another party (the note’s payee) a specific amount of money, either immediately or at a later date.
A promissory note usually includes all the details of the debt, including the principal amount, interest rate,
maturity date, date and location of issuance, and the signature of the issuer. Although they may be issued by
financial institutions, for example, you may be asked to sign a promissory note in order to obtain a small
personal loan. Promissory notes typically allow businesses and people to obtain funding from sources other
than banks. This source could be an individual or a business prepared to carry the note (and supply the funding)
on the agreed-upon terms. Promissory notes, in effect, allow anyone to be a lender.

What is a promissory note

A promissory note is a legal document that outlines the terms of a loan and binds a borrower to repay a quantity
of money to a lender within a certain time frame. Promissory notes are one of the most straightforward ways to
secure funding for your business. Frequently, they are simple documents with a few procedures. If the required
provisions are provided, even a promissory note scribbled on a napkin could also be considered
legitimate. IOU, personal notes, loan agreements, notes payable, promissory note forms, promise to pay,
secured or unsecured notes, demand notes, or commercial papers are some of the other names by means of
which promissory notes can be recognised. As a result, a promissory note must meet all the regular contract
conditions, such as consideration, agreement, and capacity. If the note’s authenticity is challenged, the same
defences, such as fraud or misrepresentation, may apply.

Parties in a promissory note

1. Drawer or Maker: The promisor, also known as the maker or issuer of the promissory note, is the
person who creates or issues the promissory note that specifies the sum to be paid.
2. Drawee or Payee: It is the individual on whose behalf the promissory note is made or issued, also
known as the promisee. Unless the note specifies a different person as the payee, the said individual is
also the payee.

Features of Promissory Note

 Printed/Written Agreement – A promissory should be in writing, and an oral promise to pay money
is not accepted.
 Pay Defined Amount – It is a promise to pay the money on a particular time or when demanded. The
mentioned amount can neither be added or subtracted.
 Signed Documents – The document is duly signed and drawn by the drawer and stamped.
 Unconditional Promise – The promise to pay a certain amount of money must be absolute in all
cases. In such notes, a conditional guarantee is not accepted.
 Legal Composition – All the payment should be made in the nation’s legal currency.
 Detailed Information – The note has all the required information including the name of the drawer
and payee, date of maturity, terms of repayment, issue date, name of the drawee, name, and
signature of the drawer, principal amount, and the rate of interest, etc.

Methods of repayment of a promissory note

A promissory note is repaid in full at the end of the term listed on the note. There are three methods of
repayment that have been provided hereunder:

1. Lump-sum payment: This means that at the end of the period, the full note is paid in one payment.
Only if you are interested.
2. Interest-only: This means that the regular payments are applied only to the interest that has accrued,
not to the principal.
3. Interest and principal repayment: The funds are being applied to both the accrued interest and the
note’s principal amount.

Types of Promissory Notes

Depending upon the kind of promissory loan, notes are of different types. Few are mentioned below.

 Personal Promissory Notes – This is a particular loan taken from family or friends. Though people avoid
legal writings when seeking a loan from close contact, the promissory note shows belief and trust in the
interest of the borrower.
 Commercial – Here, the note is made when dealing with commercial lenders such as banks. Most of the
commercial promissory agreement is similar to personal notes.
 Real Estate – This is similar to commercial notes in terms of nonpayment consequences. If the borrower
becomes a defaulter, then the party has the right to keep the property until the debt is cleared. It is a little
risky as all the essential details become public, which can hinder the borrower’s credit history in the future.
 Investments – The promissory note is occasionally used to raise funds for the business. It is used as a
security purpose and managed by securities laws. It includes terms and conditions related to returns of
investment.

The governing laws

1. Under Section 4 of the Negotiable Instruments Act, 1881, a “promissory note” is a written instrument (not a
banknote or currency note) that contains an unconditional undertaking signed by the maker to pay a
specified quantity of money solely to, or on the order of, a specific person, or to the bearer of the
instrument.
2. The meaning of “promissory note” in Section 2(22) of The Indian Stamp Act, 1899 states that “Promissory
note” means a promissory note as defined by the Negotiable Instruments Act, 1881; it also includes a note
promising the payment of any sum of money out of any particular fund that may or may not be available, or
subject to any condition or contingency that may or may not be performed or occur.
3. This definition of a promissory note suggests that there are various different kinds of promissory notes.
Some promissory notes may be classified as ‘negotiable instruments’ under Section 13 of the Negotiable
Instruments Act, 1881, while others may not, although the character of the document will not change if it is
otherwise a promissory note. To put it another way, if a document is a ‘promissory note’ under Section 4 of
the Act, it will remain a ‘promissory note’ whether or not it falls under the definition of the term ‘negotiable
instrument’ under Section 13 of the Act.
4. As a result, we believe that Section 13 of the Negotiable Instruments Act, 1881 or the definition of the
phrase “negotiable instrument,” is completely immaterial for determining whether a particular document is
a promissory note or not. Similarly, and for similar reasons, referring to the terms of Section 13 of the Act
for determining whether a document is a “bond” or not is completely meaningless. As a result, anything to
the contrary maintained by any of the authorities cited in the orders of reference is invalid.

Is promissory note a compulsorily attestable document

It is necessary to note that a promissory note is not a compulsorily attestable document. To execute a
promissory note, no attestors are usually required.

Liability inter-se

With respect to the nature of their liability, each liable party has a different footing or position.

Liability of acceptor when the endorsement is forged (Section 41)

Even if the bill’s endorsement is faked, an acceptor of a bill of the exchange who has previously endorsed the
bill is still liable. Even if he knew or had reason to suspect the endorsement was forged at the time he accepted
the bill, this is true.

Acceptor’s liability when a bill is drawn in a fictitious name

Any holder will be paid in due course if a bill of exchange acceptor draws a bill in a fake name payable to the
drawer’s order. He or she will not be exempt from obligation due to the use of a false name.

SEBI(byju’s)

Merchant banking

Debt recovery tribunal (Ipleaders)