"Hire Purchase System": Introduction, Definitions, Characteristics, Advantages, Disadvantages, Differences, Process of Accounting,

Key Points:

1. Introduction of Hire Purchase System.
2. Definitions of Hire Purchase System.
3. Characteristics of Hire Purchase System.
4. Advantages of Hire Purchase System.
   (A) Advantages to Purchaser,
   (B) Advantages to Seller.
5. Disadvantages of Hire Purchase System.
   (A) Disadvantages to Purchaser,
   (B) Disadvantages to Seller.
6. Differences between Hire Purchase and Credit Purchase.
7. Process of Accounting under Hire Purchase System
   (A) In the Books of Hire Purchaser.
   (B) In the books of Hire Vendor.

8. The Accounting Procedure related to “Default and Repossession” of goods sold under Hire Purchase System.

9. Entries are made “In Case of Repairs Borne by Hire Vendor Free of Cost”.

 

Link : https://smckk14.blogspot.com/2022/09/deprecation-methods-6-method-of.html

1. Introduction of Hire Purchase System:

It is a specific system of purchase and sales of goods. Under this system, the purchaser acquires the possession of the goods immediately and agrees to pay the total hire purchase price in instalments, these instalments maybe monthly, quarterly, half yearly or yearly or any other period as mentioned in the agreement. each instalment is treated as a hire charge until the payment of last instalment.

In case the purchaser makes any default in payment of any instalment, the seller has a right to repossess the goods from the purchaser and to forfeit the amount already received treating as hire charge. The Purchaser becomes the owner of the goods only after payment of last instalment.

This system is beneficial to both the parties i.e. purchaser and seller. The purchaser gets the facility of paying the total price of the goods in instalments and seller is able to sell more goods receiving the price in instalments with a security to repossess the goods in case of purchaser makes default in case of payment of any instalment.

2. Definitions of Hire Purchase System:

According to J.R. Batliboi: "Under the hire purchase system goods are delivered to a person (Purchaser) who agrees to pay the owner (Seller) by equal periodical instalments. Each instalment is treated as hire of the goods, and on payment of a certain number in instalments, the goods become property of the hirer".

According to Section 2 (c) of Hire Purchase Act 1972: "Hire Purchase Agreement means an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which (i) Possession of goods is delivered by the owner to a person on a condition that such person pays agreed amount of periodical instalments, and (ii) The property in the goods is to pass to such person on the payment of the last of such instalments and (iii) Such person has a right to terminate the agreement at the time before the property to passes".

3. Characteristics of Hire Purchase System:

(i) Agreement -

Hire Purchase System is an agreement between two parties i.e. between Hire purchaser and Hire vendor /seller.

(ii) Credit Sale -

It is a type of credit sales where full value of goods is not paid immediately but paid in instalments during a particular time interval.

(iii) Instalment -

The full value of the goods is paid in instalments. The amount and period of instalments are determined by agreement.

(iv) Right to use the goods -

On payment of first instalment by the purchaser, goods are transferred by seller to the purchase where purchaser obtains the right to use the goods but ownership of the goods remains with the seller.

(v) Ownership of the goods -

Though right to use the goods vests with the purchaser, ownership of the goods remains with the seller till the last payment of the instalment.

(vi) Duty of Hire Purchaser -

This is the duty of hire purchaser to keep the goods in good condition up to the date of final instalment.

(vii) Duty of Hire Vendor -

This is the duty of hire vendor to make normal repairs free of cost up to the date of final instalment.

(viii) Liability of Guarantor -

If there is any guarantor in hire purchase agreement, in case of non-payment of any instalment, the seller has a right to recover the amount from guarantor.

(ix) Default in Payment by Purchaser -

If the Purchaser commits default in payment of instalments on the due dates, the seller will have the right to repossess the goods and to forfeit the amount paid by purchaser. Such forfeited amount will be treated as hire charge.

4. Advantages of Hire Purchase System:

(A) Advantages to Purchaser:

(i) Availability of costly goods -

In this system price of the goods is paid in number of instalments, it becomes convenient for the purchaser so he can use the costly goods available in the market.

(ii) Facility to return goods -

If utility of the goods reduces, the purchaser has an option to return the goods and get the agreement cancelled.

(iii) Facility of free of cost repairing of goods -

Ownership of goods remains with the seller till the payment of final instalment, so it is the duty of the seller to get the goods repaired free of cost.

(iv) Economical -

In this system, if instalments are not paid properly, goods are returned to the seller. This provision makes the purchaser auctions regarding payment of each instalment so he tries to make more savings for paying the instalments on time.

(v) Easy Payment -

The price of the goods is to be paid in instalments, payment because becomes very easy and simple and unnecessary burden of making payment in lump sum is avoided.

(B) Advantages to Seller:

(i) Increase in Sale Volume -

Under this system, payment is to be made in easy instalments. So, other person who do not have sufficient money to make purchase in lump sum, also purchase the goods. Ultimately, sale volume increases.

(ii) Regular Income -

Hire purchaser makes the regular payment of instalments under the pressure that the goods might be taken back by seller in case of default in payment of instalments.

(iii) Receiving more amount -

The seller not only receive the cash price of the goods but interest there on also.

(iv) Healthy relationship -

This system increases the healthy relationship between purchaser and seller which may result in increase in sale in future.

5. Disadvantages of Hire Purchase System:

(A) Disadvantages to Purchaser:

(i) Payment of more amount -

The purchaser has to pay cash price plus interest thereon for the goods.

(ii) No right to Sell or Mortgage -

The ownership of the goods remains with the seller till the payment of final instalment. So, the purchaser can neither sell or mortgage the goods till the payment of final instalment.

(iii) Unnecessary Purchases -

The payment under this system is made in easy instalments which induces the consumers to purchase even unnecessary goods.

(B) Disadvantages to Seller:

(i) Difficulty in Recovery of Instalments -

Sometimes, seller of the goods has to face many difficulties to recover the instalments from the purchaser which create dispute between both the parties.

(ii) Difficulty in Repossessing the Goods -

Under the provisions of this system, the seller can repossess the goods sold by him, from the purchaser, if the Purchaser makes default in payment of any instalment but in practice, it is not too easy.

(iii) Loss of Depreciation -

When the goods are to be repossessed from purchaser, the seller has to bear the loss of depreciation on the asset.

(iv) More Capital Required -

In this system, payment of the goods sold is received in instalments, so to maintain stock level, seller requires a large amount of capital which is not possible for every seller.

(v) Burden of Repairs –

The responsibility of making repairs to the asset lies with the seller till the last instalment is received. so, the seller has to bear burden on repairing of the goods sold.

6. Differences between Hire Purchase and Credit Purchase:

S.No.	Hire Purchase	Credit Purchase
1.	Ownership is transferred after payment of final instalment.	Ownership is transferred at the time of purchase.
2.	Burden of repairs lies with the seller.	Burden of repairs lies with the purchaser.
3.	Payment is made in instalments always.	payment is made in lump sum or as agreed upon.
4.	In case of defaults in payment of instalment, seller has no right to repossess the goods.	Seller has no right to repossess the goods. He can claim only for outstanding amount.
5.	Seller is protected under the system.	Purchaser is protected under this system.
6.	The third party cannot get better title on the goods, till last instalment is not paid.	Third party may get better title on this system.

7. Process of Accounting under Hire Purchase System:

There are two methods for making accounting entries of the hire purchase transactions in the books of Hire purchaser -

(A) In the Books of Hire Purchaser:

First method: “Assets Accrual Method”:

This method is used by hire purchaser who considers that he has become owner of that portion of the goods for which payment has been made.

Particular	L.F.	Amt.	Amt.
Asset A/c  Dr.   To Cash /Bank A/c (Being the amount of cash down payment)

 

Particular	L.F.	Amt.	Amt.
Asset A/c  Dr. (Cash price of the asset) Interest A/c  Dr. (Amt. of interest)   To Hire Vendor A/c (Total instalment) (Being the first instalment due)

 

Particular	L.F.	Amt.	Amt.
Hire Vendor A/c  Dr.   To Cash /Bank A/c (Being payment of first instalment)

 

Particular	L.F.	Amt.	Amt.
Depreciation A/c  Dr.   To Asset A/c (Being depreciation charged)

 

Particular	L.F.	Amt.	Amt.
Profit & Loss A/c  Dr.   To Depreciation A/c   To Interest A/c (Being depreciation & interest accounts closed by transferring to Profit & Loss A/c)

Note: 1. Entries (ii) to (v) will be repeated in subsequent years.

2. Asset will be shown in Balance Sheet at purchase price less depreciation.

Second Method: "Credit Purchase Method":

This method is used by the hire purchaser who treats hire purchase as real purchase.

Particular	L.F.	Amt.	Amt.
Asset A/c  Dr. (Cash price of the asset)   To Hire Vendor A/c (Being asset is purchased on hire purchase system)

 

Particular	L.F.	Amt.	Amt.
Hire Vendor A/c  Dr.   To Bank A/c (Being cash down payment on delivery)

 

Particular	L.F.	Amt.	Amt.
Interest A/c  Dr.   To Hire Vendor A/c (Being interest due at the end of the year)

 

Particular	L.F.	Amt.	Amt.
Hire Vendor A/c  Dr.   To Bank A/c (Being payment of first instalment)

 

Particular	L.F.	Amt.	Amt.
Depreciation A/c  Dr.   To Asset A/c (Being depreciation charged on asset)

 

Particular	L.F.	Amt.	Amt.
Profit & Loss A/c  Dr.   To Depreciation A/c   To Interest A/c (Being depreciation & interest accounts closed by transferring to Profit & Loss A/c)

Note: 1. Entries (iii) to (vi) will be repeated in subsequent years.

2. Asset shown in the Balance Sheet after deducting depreciation and balance due to the vendor from the beginning balance of asset.

(B) In the books of Hire Vendor:

There is only one method of making accounting record in the books of Hire Vendor.

Particular	L.F.	Amt.	Amt.
Hire purchaser’s A/c  Dr.   To Hire Sales A/c (Being goods sold on hire purchase system)

 

Particular	L.F.	Amt.	Amt.
Bank A/c  Dr.   To Hire purchaser’s A/c (Being cash down payment received)

 

Particular	L.F.	Amt.	Amt.
Hire purchaser’s A/c  Dr.   To Interest A/c (Being interest due on instalment at the end of the year)

 

Particular	L.F.	Amt.	Amt.
Bank A/c  Dr.   To Hire purchaser’s A/c (Being amount of first instalment received)

 

Particular	L.F.	Amt.	Amt.
Interest A/c  Dr.   To Profit & Loss A/c (Being interest amount closed by transferring to Profit & Loss A/c)

Note: 1. Entries (iii) to (v) will be repeated in subsequent years.

2. No entry for depreciation is made in the books of Hire Vendor because the asset has been transferred to Hire Purchaser.

8. The Accounting Procedure related to “Default and Repossession” of goods sold under Hire Purchase System:

When the purchaser commits any default in payment of any instalment, the vendor has a right to repossess the goods sold and forfeit the amount which he has already been received from purchaser treating it as hire charge. There may be two conditions in repossession of goods –

(i) When Vendor Repossesses all the Goods Sold:

Under this condition, journal entries regarding interest and depreciation are recorded in the books of hire purchaser and hire vendor excluding the entry for payment up to the date of default.

The hire purchaser closes the account of hire vendor by transferring the balance to asset account by debiting the hire vendor’s account and crediting the asset account.

The hire vendor closes the account of hire purchaser by transferring the balance to goods repossess account. This account is debited with repairing expenses etc. and credited with sale price, if any. The balance shows profit or loss on repossessed goods and is closed by transferring to Profit and Loss account.

(ii) When the hire vendor repossesses apart of goods sold -

Under this condition, journal entry regarding interest and depreciation are recorded in the books of hire purchaser excluding the entry for payment up to the date of default.

The hire purchaser does not close hire vendor’s account and hire vendor does not close hire purchaser’s account in their books but an entry is made with the agreed value of the asset which has been repossessed by the hire vendor. Normally, the hire vendor agrees to repossess apart of asset with enhance rate of depreciation.

The hire purchaser calculates the value of asset remained with him at normal rate of depreciation and keeps this amount as balance carried down in asset account. The balance of asset account shows profit or loss on default and transferred to profit and loss account.

9. Entries are made “In Case of Repairs Borne by Hire Vendor Free of Cost”:

When goods are sold by hire vendor, he assures hire purchaser that repairs will be done by him (hire vendor) free of cost up to a certain period. The anticipated amount of expense is included in purchase price. Hire vendor opens maintenance suspense account in his books.

Following journal entries are made in the books of hire vendor -

Particular	L.F.	Amt.	Amt.
Hire Purchaser A/c  Dr.   To Hire Sales A/c (Being sales made including maintenance charges)

 

Particular	L.F.	Amt.	Amt.
Hire Sales A/c  Dr.   To Maintenance Suspense A/c (Being transfer of maintenance charges to maintenance suspense A/c)

 

Particular	L.F.	Amt.	Amt.
Hire Purchaser A/c  Dr.   To Interest A/c (Being interest due on asset sold)

 

Particular	L.F.	Amt.	Amt.
Bank A/c  Dr.   To Hire Purchaser A/c (Being instalment received)

 

Particular	L.F.	Amt.	Amt.
Maintenance Suspense A/c  Dr.   To Cash A/c (Being actual cost of maintenance paid)

 

Particular	L.F.	Amt.	Amt.
Profit & Loss A/c  Dr.   To Maintenance Suspense A/c (Being excess of actual cost of maintenance transferred to Profit & Loss A/c)

 

Particular	L.F.	Amt.	Amt.
Maintenance Suspense A/c  Dr.   To Profit & Loss A/c (Being excess of maintenance suspense transferred to Profit & Loss A/c)

 

Particular	L.F.	Amt.	Amt.
Interest A/c  Dr.   To Profit & Loss A/c (Being interest transferred to Profit & Loss A/c)

Note: Interest is calculated on cost price including the amount of repairs.  

"Promotion and Incorporation" of Companies

Key Points:

1.Meaning of Promotion.
2. Definition of Promotion.
3. Meaning of Promoter.
4. Definition of Promoter.
5. Who are Promoters?
6. Types of Promoters.
7. Functions or Duties of a Promoter.
8. Rights of Promoters.
9. Liability of Promoters.
10. When the liability of Promoters Commences?
11. Preliminary Contract.
12. Legal Position.
13. Meaning of Incorporation.
14. Process of Incorporation.
15. Certificate of Incorporation.
16. Effects of Incorporation.
17. Commencement of business: section (11).

Link : https://smckk14.blogspot.com/2023/07/prevention-of-oppression-and.html

 

Formation of Companies:

Company is an artificial person created by law. So it cannot be created instantly. It requires various legal formalities which is a long process.

From an idea to estimate a company to commencement of business, there are three steps -

(i) Promotion, (ii) Incorporation and (iii) Commencement.

A private company requires first and second steps only to commence business. While the public company has to follow all three steps to commence of business.

1.Meaning of Promotion:

(Dictionary meaning Film promotion, Job promotion)

Promotion means 'start'. This is the first step towards formation of a company.

Idea - Collection of resources with abilities - Experts etc.

Promotion is process in which the journey of formation of a company starts with an Idea and includes all the formalities /works till the company is formed in real.

2. Definition of Promotion:

According to Professor ES Mead - 'Promotion involves four elements - Discovery, investigation, assembling and financing'.

According to CW Gerstenberg - 'Promotion maybe defined as the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom'.

3. Meaning of Promoter:

Promoter means a person, partner, company or any group of a persons who do the work of promotion. Promoter is a person who generates the idea of formation of a company in his mind and take necessary steps to convert the idea into reality. He investigates about business, forms of a company according to a fixed plan, assembles necessary resources and performs preliminary expenses. He takes the complete risk because if company gets failed, he would have to bear all the losses.

4. Definition of Promoter:

U/s 2 (69): Promoter means a 'person' -

(i). Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section (92). or

(ii) Who has control over the affairs of the company directly or indirectly whether as a shareholder, director or otherwise, or

(iii) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Provided that nothing in the sub clause (c) shall apply to a person who is acting merely in a professional capacity.

According to Francis Palmar - 'Promoter means a person who originates a scheme for the formation of a company, has the memorandum and articles get prepared, get them registered, and appoints the first directors, settles the terms of preliminary contract and prospectus, if any, and make arrangements for an advertising and circulating of the prospectus and placing the capital.

5. Who are Promoters?

A promoter does the work of formation and incorporation of the company and is responsible as a promoter under provisions of Companies Act. It is not mandatory for a promoter that he should take part directly or completely in promotion of company.

Advocates, Chartered Accountant, Legal Experts and Accountants are not promoters because they do not take part in the process.

(i) Promoters Need not be a Person -

Not necessary that a person, or group of persons a firm, incorporation, originations maybe promoters. At present, generally companies perform the work of promoter.

(ii) Need not be a Partner in Proposed Company –

He /they can receive remuneration but in practice generally the promoters participate in the company by accepting the post of managerial post or director.

(iii) Being a Promoter Depend upon Facts –

Any person is a promoter of a company or not, is a matter of fact. In each case, by reviewing the circumstances, it is decided. If a person gets Incorporation of company as a chief person or assists in promotion, he cannot get rid of responsibility that the works had been done by his representatives. This is to be noted that person doing the work of promotion in the capacity of a professional cannot be called promoters. e.g. lawyer, printer and publisher of a prospectus, accountant, chartered accountant, engineers. One who assists in promotion only, can be promoter.

6. Types of Promoters:

(i) Professional Promoters -

They promote (establish) a company and handover to the shareholders. there are many professional Promoter in India to promote a company.

(ii) Occasional Promoters -

Their main profession is not to promote a company but other business. sometimes they promote a company. e.g. Engineer, Architect, Lawyer etc.

(iii) Financial Promoters -

Some financial companies take up the work of promotion depending on situation of the market. They do so to earn financial profits and provide financial assistance too.

(iv) Technical Promoters.

7. Functions or Duties of a Promoter:

(i) Idea in mind.

(ii) Thinking about initial problems - Place of business, Labour, Raw materials, Power, Market etc.

(iii) Determining deciding Name, Objects and Capital and Place of business.

(iv) Finding the signatories of MOA - Private minimum 2, public 7.

(v) Appointment of first Directors.

(vi) Appointment of Legal advisors, Bankers, Auditors etc.

(vii) Preparing important documents.

(viii) Payment of preliminary expenses.

(ix) Contract with underwriters.

(x) Issue of prospectus - Prepare printing and issuing.

(xi) Obtaining license - If needed.

(xii) Application to Stock Exchange.

(xiii) Obtaining Certificate of Incorporation.

(xiv) Obtaining Certificate of Commencement of Business.

If promotion of a company, is to be performed by purchasing any existing business, then dealing with buyers of Assets and selling of assets with mutual agreement.

8. Rights of Promoters:

(i) Right to Receive Preliminary Expenses -

Expenses incurred in connection with promotion are called preliminary expenses. e.g. - Preparation of MOA and AOA, Advertisement, Fees to Legal advisor, Primary investigation etc. They can get back the amount of preliminary expenses under AOA of company by submitting necessary documents but cannot file suit against the company because (i) There was existence of the company before incorporation, (ii) In case of nonexistence of the company, there cannot be any contract /agreement between company and promoter (s), (iii) If there is no contract, no liability of payment arises.

(ii) Right to Receive Proportionate Amount from Co-Promoters –

If due to any misstatement given in prospectus, anyone of the promoter has to indemnify, he can recover the proportionate amount from co-promoters because promoters have joint and separate liability towards company.

(iii) Rights to Receive Documents -

Promoters are allotted to receive the amount spent by them on incorporation and formation of the company, but in this regard, they cannot file a Suit against the company as long as there is such a contract between them and company after formation of the company. They can receive remuneration, through - (i) Commission on purchase price of business or assets (ii) Profit on assets (iii) Fixed amount (iv) Allotment of shares and debentures.

9. Liability of Promoters:

(i) To Disclose Secret Profits -

Promoters have fiduciary relationship with company. So it is expected not to earn any secret profits. If they have earned, it has to be disclosed and returned to the company with proper detail. If they do not do so and company comes to know, the company can recover the Secret profit from them.

(ii) Liability in Purchase of Property -

If promoters induce the company to purchase any property or purchases property from the money of company, it is necessary for them to disclose important facts to the company. If any property is purchase without disclosing important facts and details and company bears any loss due to it, the promoters will have to reimburse the loss.

(iii) Liability for Default in Prospectus -

If there is only statutory error in prospectus due to carelessness of promoters, the promoters will be liable to shareholders.

(iv) Liability for Misrepresentation or Fraud in Prospectus - To shareholders.

(v) Liability in case of Death - His assets are liable for his work done.

(vi) Liability in case of Insolvency - Amount of liability can be recovered from assets.

(vii) Liability for works done before Incorporation -

Personally liability for preliminary works. if after incorporation, the company approves the works of promoters, they are released from their liability.

(viii) Liability on report of official liquidator -

If at the time of liquidation of company, the official liquidator submits report to the court, the promoters have done fraud in promotion, the court may order for public enquiry. If fraud guilty, they will be liable.

(ix) Liability for Breach of duty - In case of loss, liable

(x) Liability in case of promotion - Liability for all the works.

(xi) Liability for offence -

If they violate the provisions of Companies Act, 2013, they will be liable financially and punishable offence. e.g. misrepresentation or fraud in prospectus, maybe fined or imprisoned or both.

10. When the liability of Promoters Commences?

Liabilities starts as and when the works of promotion gets started. but to be noted that this liability arises only when the company is Incorporated.

11. Preliminary Contract:

These are the contracts which are done by on behalf of company before Incorporation.

12. Legal Position –

Promoters are personally liable for preliminary contract. A promoter is neither an agent nor a Trustee of a company. He acts in a fiduciary position towards the company. He takes steps for the formation of the company and incurs the preliminary expenses for incorporation of company like registration expenses, payment of stamp duty, professional fees etc. The persons with whom the preliminary contract were made cannot file a suit against the company because at the time of making contract, there was no existence of the company. Such contract cannot even be rectified because nobody can rectify that contract. Which were done before coming into existence. If the company after its registration decides to accept the contract made by promoters with vendors, then it will make a fresh contract directly. Thereafter, promoters will be relieved from their liability and company will be liable for that contract. This new contract with company will eliminate the old contract done with promoters.

Second stage

Incorporation of company: under section (7):

13. Meaning of Incorporation:

Registration of a company under section 2 (20), of Companies Act is called Incorporation. Legal existence of a company comes after incorporation. A company is treated as an artificial person only after incorporation and its existence becomes separate from its members.

14. Process of Incorporation:

(1) Preliminary process:

(i) Determining name of company -

First decide then confirm with ROC about availability. For this an application with prescribed fees is send to ROC. If the proposed name is similar to the name (s) of any existing company, ROC rejects. Name should not be objectionable as per Central Government. After scrutiny, ROC send reply within 7 days. After getting approval, company must be incorporated within 6 months. If not done so, that name maybe allotted to other company by ROC.

(ii) Determining place of registered office - Name of state.

(iii) Preparing agreements.

(iv) Preparing MOA and AOA.

(v) Appointment of experts – Advocate, Engineer, Charted Accountant, Agents, Underwriters, Financial Advisor etc.

(2) Submitting the document to the ROC –

An application form should be annexed with following documents –

(i) MOA or Memorandum of Association –

This is the most important document of the company also known as constitution of the company. Every company has to prepare it and has to submit in ROC office. In MOA name of company, place of registered office, main and incidental object, liability of members, capital are mentioned. in case of public company, signature minimum of 7 persons and in case of private company signature of minimum 2 done in MOA. It is printed, divided into paragraphs, serially number and signed by members. Stamp of required value is must. Value of stamp vary from state to states.

(ii) AOA or Article of Association –

In AOA, rules for systematic operations of the business, to obtain the objectives of MOA are mentioned. It is also signed by those persons who have signed in MOA. To be noted that preparation of AOA in all types of the companies and submitting to the ROC is not compulsory. If a company limited by shares does not prepare its AOA then rules of schedule ‘F’ will be applicable on the company. At the time of submitting MOA to ROC, if AOA has not been made, it should be marked with ‘registered without articles’. Making and submission of AOA is compulsory for private company, unlimited company and companies Limited with guarantee.

(iii) Contract Relating to Appointment of Managerial Personnel –

If the company resolves to appoint a person as Managing Director, Whole Time Director or Manager, contract of appointment must be presented before ROC.

(iv) List of Directors –

In this list, names, addresses and other details of those person are to be given who are ready to become a director in the company. This is not compulsory for a private company. In case of public company, there must be particulars of minimum 3 persons.

(v) Written Consent of Directors –

Must for public company but not must for private company.

(vi) Notice of Registered Office –

Along with other documents, information about registered office is also sent. This information maybe send within 30 days of Incorporation.

(vii) Prescribed Fee –

Prescribed amount of registration fees should also be sent. This fees is based on capital of the company. Fees are given in 2013. The fees is deposited into RBI government account. In addition to registration fees, filing fees is also charged.

(3) Verification of Documents –

(a) Issue of receipt of receiving the document and registration fees.

(b) Verification of MOA and AOA –

(i) Name of company is appropriate or not.

(ii) Objectives of MOA should not be illegal and against public policy.

(iii) Signatures on MOA and AOA. In case of company with share capital, each signatory must take at least one share. Signs of signatories must be authenticated by such person who is not member of company.

(c) Verification of a document.

(d) Return of document in case of default.

(4) Issue of Certificate of Incorporation –

When Registrar is satisfied with all the documents submitted for incorporation, he incorporates the company and issues a certificate of incorporation. In this regard, following provisions exist –

(i) Incorporation cannot be denied by ROC after completion of all conditions.

(ii) Writ petition can be filed on refusal by ROC.

(iii) Registration - Issue of Certificate of Incorporation.

15. Certificate of Incorporation:

After registration the ROC issues a certificate under his signature and official seal that the company has been incorporated and (in case of limited liability Company) it is a company with limited liability. This certificate is known as "Certificate of Incorporation".

Following points are given in certificates – (i) Full name of company (ii) Liabilities of members (iii) Date of issue of certificates (iv) Amount of stamp duty (v) Official seal of ROC and (vi) Signature of ROC.

16. Effects of Incorporation:

(i) Company becomes an incorporated organisation.

(ii) Date of company coming into existence is the date of issuance of certificate of Incorporation.

(iii) Contract between company and its members through MOA and AOA.

(iv) Separate legal entity.

(v) Pre Incorporation Contract –

Company is not bound to accept pre incorporation contracts and if they are accepted, there must be fresh /new contract.

(vi) Perpetual Existence –

After Incorporation, the company becomes of permanent existence and it is not affected by death, insanity or insolvency of any member.

(vii) No Dispute in Relation of Existence –

After incorporation, no one can challenge the existence of it in the court.

(viii) Effects on Creditors –

After incorporation, creditor can file suit against company to recover their money.

(ix) Funds payable by members is considered to be loan of company –

After incorporation, under the provisions of MOA and AOA, any amount payable by members is treated as loan of the company.

(x) Incorporation will not be void due to Irregularity of Pre Incorporation –

If after incorporation, it comes to the knowledge that there were some discrepancies in the process of incorporation, in such a case incorporation would not be void. Certificate of incorporation is a conclusive prove that incorporation is valid.

Once the certificate of incorporation is issued, it cannot be declared invalid. But under provisions of Companies Act, company may get liquidated.

Stage 3

Commencement of business: section (11)

17. Commencement of business: section (11):

(i) Any company with share capital shall not exercise the power of purchase of business or borrowing powers, until –

(a) One director shall file a declaration to ROC that every subscriber of MOA has paid the amount of shares taken by them and in case of public company paid up share capital, is not less than ₹ 5 lakhs and in case of private company is not less than ₹ 1 lakhs.

(b) The proof of registered office has been submitted to ROC.

(ii) If any violation is made in compliance to this section, the company shall be punishable with penalty of up to ₹ 5000 and every officer shall be punished at the rate ₹ 1000 per day, till the default continues.

(iii) If after incorporation within 180 days, the declaration is not filed to registrar and the registrar comes to know that the company is not commencing its business, the registrar may initiate the procedure to eliminate the name of company from the register of company. 

"OFFER" (Proposal): As per Law of Contract (1872):

Key Points:

1. Meaning of OFFER (Proposal)
2. Definition of OFFER (Proposal)
3. Elements of an Offer
4. Types of Offer
5. Lapse & Revocation of an Offer
6. Invitation to offer
7. Important Points to Remember

 

Link : https://smckk14.blogspot.com/2022/05/void-agreements-under-indian-contract.html

1. Meaning of OFFER (Proposal):

The journey of a contract starts from offer.

Offer + Acceptance = Agreement

Agreement + Enforceability by Law = Contract

To form a contract there must be an offer by one person and that offer must be accepted by another person for exchange of goods and/or services.

The person who makes offer is called "Offeror or Promisor". And the person who accepts the offer is called "offeree or Promise or Acceptor".

2. Definition of OFFER (Proposal):

Section 2(a) - "When one person signifies to another person his willingness to do or abstain from doing anything with a view to obtaining the assent of that other person to such an act or abstinence, he is said to make a Proposal".

Section 2(b) - "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a Promise".

Offer is more than a promise because it is made with the understanding that what is being agreed will be legally binding.

Ex. - Sale of goods, Performance of service, Promise not to engage in any activity.

The offeror must express his willingness to do or not to do an act. Only willingness is not sufficient. Offer can be negative or positive and both are valid offers.

3. Elements of an Offer:

(i) There must be Two Parties -

There must be at least two persons, a person to make the offer and the other person to accept the offer. Here, legal persons as well as artificial persons are also included.

(ii) Offer must be Communicated - (Lalman Shukla Vs. Gauri Dutt)-

An offer is valid if it is conveyed to the offeree. Communication must be express or implied.

Section 4 – "Communication of an offer is complete when it comes to the knowledge of the person to whom it is made".

Ex. - Rajesh offers his Activa to Vishal for ₹ 30000/- by writing a letter. Once Vishal receives the letter, the communication is complete.

(iii) Offer must create legal relationship -

Offer must be of such nature that if accepted will become a contract. Social, Domestic, Religious, Personal offers can't be said offers because if such invitation are accepted, they won't create legal relationship.

Ex- Aditya invites his friend Shreyash to dinner and Shreyash accepts the invitation. It is a social invitation and if Aditya fails to provide dinner, he won't be legally liable.

(iv) Offer must be clear and definite -

Terms & conditions of the offer must be certain and clear to create contract because if there is no clarity the Court won't be able to decide what the parties wanted to do.

Ex. - Akash offers Ravi to sell fruits worth ₹ 500/-. This is not a valid offer because what type of fruits or what quantity are not mentioned.

4. Types of Offer:

(i) Express Offer -

An offer made by the words written or spoken is "Express Offer".

Ex. - Ananya says to Alka "Will you purchase my watch for ₹1000/-?”

Ananya writes a letter to Alka "Will you purchase my watch for ₹ 1000/-?”

(ii) Implied Offer -

An offer made by actions, conduct or circumstances is "Implied Offer".

Ex.- Going to Barber's Shop, Going to travel by bus or train etc.

(iii) General Offer -

An offer made to the public is "General Offer". Any person from public can accept the offer and have the right to consideration.

Ex. - Shubham makes an advertisement in the paper that whosoever finds his missing mark sheets will be rewarded with ₹10000.

(iv) Specific Offer -

An offer made for acceptance of any specific person or group of persons to whom it is made and not by anyone else, is specific offer.

Ex. - Ashok offers to sell his house for ₹10 Lakhs to Bala.

A clothe stores offers to give 20% discount on school uniform to the students of Sunshine Public School.

(v) Cross Offer - 

When the persons make the same offer at same time to each other, is called "Cross Offer". In this case, Cross Offer will not amount to accepting the offer.

Ex. - Rakesh sends letter to sell his car to Ramesh for ₹ 2 Lakhs on 10th Sep.2020 and Ramesh sends letter to Rakesh to buy his car for ₹ 2 Lakhs on 10th Sep. 2020. This is Cross Offer.

(vi) Counter Offer - 

A Counter Offer is an answer given to the original offer. It means that the original offer has been refused and replaced by another offer.

Ex. - Anil offers to sell his shop to Mukesh for ₹ 20 Lakhs. Instead of accepting, Mukesh gives offer to Anil to purchase his shop for ₹18 Lakhs.

5. Lapse & Revocation of an Offer:

(i) An offer lapses after a specified or reasonable time

(ii) An offer lapses by not being accepted in specified mode.

(iii) An offer lapses by rejection.

(iv) An offer lapses by the offeror’s or offeree's death or insanity until acceptance.

(v) An offer lapses by the revocation before acceptance.

(vi) An offer lapses by subsequent illegality or destruction of subject matter.

6. Invitation to offer:

An invitation to offer is an indication of willingness to deal or trade and statements that purely provide information without intending to make an offer, are not offers.

"Offer" is defined in Section 2(a) but "Invitation to offer" is not defined in Indian Contract Act.

(i) Shop Displays, Catalogues & Advertisement -

These are invitation to offer. The offer is made when the customer takes the item to the counter and acceptance is the shopkeeper selling the item to the customer.

An advertisement, catalogue & shop display are treated as invitation to a customer to make an offer and not as an offer. The Courts say that a business might not have sufficient stock to fulfill the demand and that it would not be reasonable for a customer to expect for sale.

In addition Courts have held that an advertisement is an offer for a unilateral contract that can be revoked at the desire of the offeror before its performance.

(ii) Auction Sale –

In auction sale, the auctioneer's call for bids is an invitation to offer. Where a bid is made, it is an offer from the bidder to the buyer at the price offered. The auctioneer may then either accept or reject the offer on behalf of the Principal.

(iii) Online Auction - 

Online auctions like e-bay create binding contracts because the online sites create a framework for the auction in which the buyer and the seller were willing participants.

(iv) Tenders - 

Tenders are usually regarded as an invitation to the offer. A person submitting tender makes the offer and there is no contract until the person who called for tender accepts the tender.

7. Important Points to Remember:

(i) An offer made can be revoked at any time before the communication of its acceptance is complete but not afterwards.

(ii) The offeror can withdraw his offer before it is accepted.

Ex. - X offers to sell his house to Y for ₹ 20 Lakhs through a letter sent by post. X may revoke his offer at any time before or at the moment when Y posts his letter of acceptance but not afterwards. Y may revoke his acceptance at any time before or at the moment when Y posts his letter of acceptance but not afterwards.

(iii) Communication of the offer is not valid and not completed until it is consented by the other person and accepted by him.

(iv) Communication must be done in some usual and reasonable manner.

(v) When one person says that he desires to do something, this doesn’t mean that he will do something. So, it will not be an offer.

(vi) The major difference between OFFER and INVITATION TO OFFER is that the purpose of the OFFER is to create a contract while purpose of INVITATION TO OFFER is to receive an offer to create a contract.

Ex. - Piyush in a shop sees a packet of chocolate with price tag of ₹ 100 in the shop of Manish. Piyush tells Manish that he wants to buy that chocolate and offers him ₹ 100. Manish says that he doesn’t want to sell that chocolate. In this case there is no contract at all and the price tag is not an offer but an invitation to offer. It is on the desire/ discretion of the shopkeeper whether he wants to sell or not.

CASE LAW- HARVEY Vs. FACEY (1893)

(vii) Advertisements are generally Invitation to Offer. (CASE LAW- Partridge Vs. Crittenden-1968)

(viii) However in some cases an advertisement can amount to an offer. (CASE LAW- Carlill Vs. Carbolic Smoke Ball Co. -1892)

(ix) The Cash Depositing Machine represents the offer and inserting the Cash into the Machine is acceptance. (CASE LAW- Thornton Vs. Shoe Lane Parking-1971)

OFFER & ACCEPTANCE: