Category: Commerce Notes PPT

Different insurance companies in the world are in constant competition with one another. They are always in a lifelong battle to outdo one another. For that purpose, they are coming up with new facilities and offers every time. Such insurance policies are important for several businesses in the world, as they continuously face different issues like losses due to fire or other natural calamities, theft, robbery, etc. Most insurance companies provide insurance in the form of written documents, although there are options for receiving notifications in the form of schemes, premiums, and policies. All these forms of notifications are called insurance correspondence.

What is Insurance? 

Before getting into the different types of insurance correspondence, it is essential to know about insurance. Insurance is considered as a form of protection against any loss or risk. Mostly the financial aspect of the government is considered in insurances. The insurance is a form of risk coverage contract between an insurer and an applicant. The applicant has to pay a premium at a rate determined by him from the different schemes made available to them by the insurer. In return, the insurer pays compensation according to the insurance scheme. Any written information related to the insurance is called the insurance correspondence.

Insurance- The Seven Principles 

There are seven principles related to insurance. They are:

1. Indemnity Principle

According to this principle, the insurance is not related to any profit. The insurer has to pay the entire amount, as mentioned in the insurance plan to the applicant.

2. Faith

Both the insurer and the insured must have complete faith in each other. Both the parties must disclose correct, clear, and complete information as required for the insurance process. 

3. Insurable Interest Principle

The insurance process must have a clear and complete statement with respect to the object being insured.

4. Contribution Principle

This principle says that in the case of any losses, the insured is eligible for claiming compensation equal to the loss amount. 

5. Loss Minimization Principle

The main motto of this principle is that the insured must take all responsibility to prevent the risk from occurring.

6. Subrogation Principle

According to the subrogation principle, once the insured is compensated for the loss, the ownership rights related to the lost property is transferred to the insurer.

7. Causa Proxima Principle

The main theme of this principle is that if there is more than one underlying principle for the loss, then the one most relevant to the case is considered.

Insurance Types

On a broader aspect, insurance is of two types- life insurance and general insurance. The different types of life insurance schemes are as follows.

Money-back Policy

Money-back policies provide financial returns during cases of death or critical illness. Such a policy provides a return after a certain number of years from the start of the policy. This process continues until the end of the policy. It is different from the general insurance policies because the general ones provide financial returns upon completion of the policy.

Term Life

Term Life is the life insurance policy that is provided to the insured upon his or her death during the term of the policy. The financial return in a ‘term life’ insurance policy depends on the premiums paid by the insured during the policy term. Such insurance policies are directed not only towards the financial security of the family but also in securing the child’s future like education, marriage, etc.  

Pension Plan

Pension plans are those insurance policies whose premium is being paid during the working years of an insured, but the financial returns are being provided after his or her retirement. Such a plan was policy to support any individual after retirement. The pension returns are generally enough to support the individual for the rest of life.

Unit-linked Insurance Plan

The unit-linked insurance plan had the provisions for the investor to perform both insurance and investment in an integrated manner. The amount paid as premium by the policyholder is divided into two parts- one part is used to cover the insurance policy while the rest part is being used as investments for debt or equity securities. Such investments made in the equity and debt policies are being made in a similar way to mutual funds.

The Different Types of General Insurance Policies are as Follows.

Health Insurance

The health insurance policies cover any medical assistance required for the treatment of specific diseases. It covers hospital expenses, doctor’s support, medical bills, and any cost incurred during any surgeries. 

Travel Insurance

The travel insurance policies cover flight insurances in the case of an emergency, accidental death, or dismemberment during any travel, loss of luggage, emergency medical evacuation during an unnatural scenario, etc. The insurance money is paid to the nominee in the case of the death of the insured.

Motor Insurance

The motor insurance policy is applicable to cover the cost incurred due to damage to any motor vehicle.

Home Insurance

Home insurance policies provide financial coverages to any damage cost to home property.

Fire Insurance

Fire insurance policies provide financial coverage to any damage caused due to fire.

Insurance Correspondence Types

The following are the types of insurance correspondences.

Renewal of Policy

Renewal of policy refers to the continuation of any policy beyond its term, and it might include changes in the existing scheme.

Null and Void 

If the insured fails to pay a few premia, then the policy becomes null and void. The insured will not get the benefits at the time of any mishap.

Reporting Loss

In the case of any losses, a detailed report is required during the insurance application process. It must mention in detail about the loss, reasons behind it, the amount estimated for compensation, etc.

What are the Features of Insurance Correspondence? 

For any insurance correspondence, the application letter must be concise, clear, and mention all the important points. The insured must maintain a polite tone in the letter without using abbreviations or slangs. 

A company is a voluntary group of people who contribute money for a common purpose that may be profit or non-profit in nature. It is a separate legal entity. The money thus contributed, is called the share capital of the company, and the contributors are called the investors or the shareholders. Indian Companies Act, 2013 administers all companies and provides guidelines for them to follow.

Company accounts are a condensed summary of all sorts of financial activities of the company that it has committed in a period of twelve months. Company accounts include all sorts of financial statements ranging from the financial Balance Sheets, the Profit and Loss Statement to the Cash Flow Statement. The contributions done by the actual investors of the company which are always paid in advance are shown as calls in advance. This amount which is received as calls in advance is usually shown as credits in accounts because the amount is received in excess of what the company actually needs.

Calls in Arrears in Balance Sheet 

Calls in the Arrears Account appear in the Notes to Accounts on Share Capital to the Balance Sheet. It is shown as a deduction from the amount of ‘Subscribed but not fully paid-up’ under ‘Subscribed Capital’. The amount is called paid-up capital. Though the interest is chargeable in calls in arrears, according to the provisions of the Articles of the company, the directors of the company do have the right to waive off the interest on calls in arrears.

 

Calls in Advance in Balance Sheet

The meaning of calls in advance is that the excess amount received by the company exceeds what has been called up. They appear separately, in the Balance Sheet as the company’s liability. The company retains such an amount to make the shares fully paid. Once this amount is transferred to the relevant accounts the calls in advance are closed.

It comes under the heading ‘Current Liabilities’ till the calls are made and the amount becomes payable by the shareholder.

 

Calls in Arrears Journal Entry

In case of any default, the amount is called as Calls in arrears and a separate Calls in Arrears Account has to be opened, to make the call in arrears entry. An interest of 5% p.a. is charged on all such calls in arrears until the amount is repaid. And, finally, the total is brought to the balance sheet as a deduction from the Called up Capital.

 

Call in Advance Journal Entry

At times, the company’s shareholder pays a portion or full of the amount due on the shares held in advance. It is an important fact that calls in advance never form a part of the share capital, even though it is being paid by the shareholders. An authorized company can accept calls in advance from its shareholders but the amount of call in advance in the journal entry cannot be credited to the capital amount. Call in advance needs to be credited to the calls in the advance account. 

 

Interest on Calls in Advance

The amount received as calls in advance is written as a liability and the company is liable to pay interest from the date of receipt till the date that the call gets due for payment. A rate of 6% p.a. interest is charged on these calls in advance meaning the articles of the company authorized for the same. This interest has to be paid to the shareholder even when the company does not earn a profit.

As the issue of debentures introduction, it is a debt instrument that organisations issue for investors to raise capital. Therefore, it is mainly an asset class that serves the long-term capital requirements of a company. Besides, it carries an extended period of maturity at a fixed rate of interest payable periodically such as quarterly, semi-annually, or annually. 

For instance, let’s assume that a company ABC issues bonds worth Rs.1,000 in the secondary trading market. Therefore, bondholders have a legal claim to Rs.1,000 worth of ABC’s assets. However, in case of debentures, holders lack the legal ownership of ABC’s assets.

It is primarily due to the fact that debentures are not backed by assets. As a result, creditworthiness coupled with the appropriate market rating generate the confidence of 

investors in this debt instrument. 

What are Debentures? 

Moving on to the definition of debentures, it is a category of corporate debt that is not supported by collateral. As a result, the companies that issue debentures do not have to pledge their assets to fulfil their capital requirements. On top of that, the trust of the issuer is an important element in its financial validity in the market. 

Apart from business organisations, governments also use debentures to fund their infrastructure initiatives. As these organisations do not pledge their assets during debenture issue, traders can earn higher profits from their transactions. Consequently, debentures are traded in the debt market through a network of investment brokers. 

Besides, investors receive debentures in the form of official certification from the issuing organisation. Therefore, these corporations are legally obligated to repay the principal amount invested by an individual after a stipulated period. In addition, the interest that accrues on the principal amount is fixed. Therefore, debentures are an investment avenue that is often referred to as ‘fixed cost bearing capital’. 

For example, suppose an investor Mr. Jones purchases a debenture with a face value of Rs.50,000. The rate of interest applicable is 10% per annum for 5 years. Therefore, Mr. Jones will receive a fixed interest payment of Rs.5,000 every year. 

However, the issue of debentures showcases a wide range of features that separate it from other categories of security. 

Test Your Knowledge 

Consider that the face values of two debentures are Rs.100 each. Debenture A is available at a market price of Rs.85. On the other hand, Debenture B has a market price of Rs.120. Figure out which debenture is discounted and which one is a premium.

What are the Features of Debentures? 

The most prevailing and prominent features of debentures include the following pointers – 

• Redeemable and Irredeemable Debentures – These two types of debentures differ on the degree of time involved in the repayment process. First of all, redeemable debentures make sure that issuing corporations fulfil their repayment obligations to holders. Therefore, the investors are eligible to receive the principal amount combined with the interest portion after a pre-determined period of time. 

On the other hand, the companies that issue irredeemable debentures have no legal obligation to pay the principal amount to holders. However, they must pay the interest on the face value of the debenture as specified intervals. 

• Convertibility of Debentures – A specific section of debentures have the tendency to exhibit convertibility in terms of asset class. Therefore, investors can convert their debentures into equity shares after a tenure. This category of debentures has a conversion ratio which specifies the proportion of shares in exchange of the face value of a bond. For instance, Mr. Jones is eligible to get 10 shares for a debenture with a principal value of Rs.1,000. Therefore, the convertibility ratio is 10:1. 

Contrarily, non-convertible debentures lack the option to be converted into equity shares at any points of time. Non-convertible debentures usually offer a higher rate of interest than ordinary convertible debentures. Moreover, the issue of debenture in this category is exposed to lower market risk and has an increased liquidity. 

• Rank During Liquidation – Debentures and bonds both precede shareholders in terms of receiving debt after a company goes bankrupt. For example, consider that a company ABC faces bankruptcy in the debt market. On liquidation of its assets to repay the creditors, debenture holders are at the beginning of the order. Therefore, companies issue first debentures for creditors who want to recover their sum of investment. 

However, second debentures imply that the holders case receive their repayment after other debts are taken care of.

 

• Market Value of Debentures – Even though debenture issue is at face value, it so happens that the market price often dips or rises. In case the market price is lower than the face value, the debenture is said to be discounted. However, if the market price exceeds the face value, the debenture is a premium issue. 

Therefore, keeping the features in mind will help a student understand the operations of the debt market. However, if you want a detailed insight into the interesting world of issue of debentures, visit the official website of today!

Long Reports and Short Reports: Their name justifies it all. A short report is also called a memorandum. It can be one or two pages long. However, a long report can even be a hundred or five hundred pages long, depending on the topic. While writing both these reports, one needs to follow a formal and structured format. The long reports mainly begin from a table of contents and end with an appendix.

Internal Reports: These kinds of reports stay in the organization itself and are mainly used by the employees, and people who have access to it. Not all are allowed to use their data and content.

External Reports: These reports are also called public reports. External reports serve the purpose of providing information to a mass group. This may also include sending out reports in the newspaper, and a company’s annual report, etc.

Lateral and Vertical Reports: These vary depending on the hierarchy. The reports which move upward and downward in an organization are called vertical reports. They help in managing the tasks across various levels in a company. Whereas, lateral reports are the ones that travel at the same organizational level. It helps in the coordination of a unit. 

Periodic Reports: These reports are prepared based on pre-scheduled dates and sent out accordingly. They usually help in management control. The periodic reports are prepared using computer-generated data. 

Formal and Informal Reports: A formal report is usually made for a bigger group. It has a meticulous structure with proper organization. These reports eliminate any personal data and information, including opinions. They provide deep insight and are written in a specific style. Informal reports are used less in comparison to the formal ones. They are usually short messages with a casual language. Informal reports are mostly used between a team, college peers, etc.

Informational Reports: These reports contain all the data, statistics, analyses, and facts related to a certain topic. They aim at solving actual problems with these reports. 

Proposal Reports: These reports are like a pitch, and are solution-oriented. They aim at problem-solving for a company, helping them deal with the issues better.

Functional Reports: These kinds of reports have a specific function. Almost all reports like the financial report, marketing reports, etc. are included in this type of report. 

Whenever a contract is made, there is a price associated with it. It is the value offered and accepted by people or companies. In simple terms, consideration is something in return. As per section 2(d), the definition of consideration is as follows: 

“When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

In this article, we will simplify the above meaning of consideration in contract law and look at some of the essential elements of consideration.

 

Consideration Meaning in Law

Consideration is the foundation on which any contract is built. The law would enforce only those promises that are made as part of the consideration. A valid Consideration in business law must involve every party, which means that each person involved in the contract must promise to do something and also promise not to do something. Without consideration, a promise does not have any legal obligations.

Consideration is mostly referred to in monetary terms, but it could also mean a particular action or a promise to refrain from a specific action. It is a two-way street where each party must gain something valuable from the other involved parties. 

Let us break down every part of the consideration definition in law:

• Consideration has to move as per the desire of the promisor. 

• Consideration may move from the promise to another person. 

• Consideration might be in the past, present, or future.

• Consideration does not need to be adequate.

• Consideration must be real and not illusory.

• Illegal or immoral acts are not considered.

 

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What are the Requirements of Section 2(d)?

The term consideration is defined in Section 2(d) of the Indian Constitution Act. according to section 2(d), three things are required for consideration to uphold validly, that is, the abstinence or act should be done at the desire of the promisor, the act should be done by the promise or any other person, the act should be either already executed or be in the process of being done or should be executory, that is, it should be promised to be done.

Let us explain the essential elements of consideration in detail.

 

Consideration has to Move as Per the Desire of the Promisor

The performance of the contract has to move as per the promisor and not any third party. The promisor doesn’t need to always benefit from the consideration; it could be meant for a third party also. The significant thing is that there has to be a connection between the promisor’s desire and the action of the promise. Another factor to note here is that what is done as part of the consideration is not voluntarily but at the promisor’s behest. For example, if A’s house is on fire and B rushes to save it at his own will, this is not a consideration. But if A asks B to do it, then it will be deemed as a consideration.

 

Consideration May Move from the Person to Another Person

As per consideration in law, if the promisor has no objection, consideration may move to a third party. For example, A can grant a house on rent to B and direct B to pay it to X. If B refuses to pay it to X, then the case could move to court and force B to pay X as there is enough consideration from A to make the payment to X.

 

Consideration Might be in the Past, Present, or Future

Past Consideration – If the promise or act is performed before the contract was made, it is considered past consideration, and it holds good in Indian law. As an example, A’s bike ran out of petrol on the way and A requests B to fill petrol for which he agrees to pay later. So, the promise of money is made for a past consideration of filling petrol. In English law, any past consideration is no consideration.

Present Consideration – When one of the parties in the contract has performed his part of the promise, which constitutes the consideration to be performed by the other party, it is called present consideration. Let us say A lost his watch and offers to pay Rs 300 to the person who finds it. If B finds the watch and gives it to A, then A is bound to pay Rs 300 to B as part of the present consideration. 

Future Consideration – When a party makes a promise in exchange for the promise from the other party and the performance of the consideration is to be done after making the contract; then it is a future consideration. For example, A promises to sell ten toy cars to B for which B is supposed to pay Rs.1000 at a future date. This is a future consideration.

 

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Consideration Does Not Need to be Adequate

An agreement must be supported by consideration, but the consideration doesn’t need to be equivalent to the promise. The parties are free to determine the appropriate consideration at the time of the bargain. Whether the promise is adequate or not is the lookout of the promisor and not the obligation of law or court to investigate the adequacy of the consideration. For example, if A has a property worth Rs. 50,000, which he agrees to sell to B only for Rs. 5000, then the inadequacy of the transaction does not make the contract void. But if B pleads coercion, fraud, or under influence, then the consideration will be looked into with sufficient evidence.

 

Consideration Must be Real and Not Illusory 

The legal rules of consideration state that consideration has to be certain, definitive, and competent. It cannot be vague, uncertain, or impossible. The transaction is rendered void in such a case. As an example, if A promises to find a treasure by magic if B pays him Rs. 10,000, then this is an illusory consideration and not considered valid.

 

Who is Considered a Stranger to a Contract?

The contract of consideration can only be enforced upon the behest of the parties to the contract and therefore, no third party can enforce the contract upon anyone. The contract arises due to the prevalence of a contractual relationship between the two parties. According to this rule, no third party can enforce any contract, and also the contract cannot levy an obligation on any person other than those who are a part of the contract. Though, in certain cases, strangers either benefit or are involved in the contact other than the two parties. This happened in cases of the marriage settlement, land properties, and acknowledgement to the third party as per the need of the contract.

In the event of a breach of contract, the party at default must pay liquidated damages and penalty to the aggrieved party. Liquidated damages and penalty clauses are not synonymous and there is a difference between the two. These terms are often used interchangeably and sometimes create confusion even in the court of law. Let’s understand in detail the laws that govern them and the differences between the two.

Difference Between Liquidated Damages and Penalty

When two or more parties enter into a contract, the contract may include the amount of compensation to be paid by the defaulting party. In the event of the non-performance of the contract, the enforceability of the compensation and the acceptance of that amount as the damages differ as per the English Law and the Indian Contract Act.

Liquidated damages are implied as a reasonable portrayal of misfortunes in circumstances where genuine damages are hard to find out. As a general rule, liquidated damages are intended to be reasonable, rather than corrective.

Liquidated damages might be alluded to in a particular agreement proviso to cover conditions where a party faces a misfortune from resources that don’t have a direct financial connection. For example, assuming a party in an agreement were to spill production network valuing data that is crucial to a business, this could fall under liquidated damages.

A typical model is a plan stage for another item that might include meeting with outside providers and specialists notwithstanding an organization’s representatives. The hidden plans or plans for an item probably won’t have a set market esteem. This might be valid regardless of whether the ensuing item is vital to the advancement and development of an organization.

These plans might be considered to be proprietary innovations of the business and profoundly delicate. Assuming the plans were uncovered by a displeased representative or provider, it could incredibly hamper the capacity to create income from the arrival of that item. An organization would need to make an assessment ahead of what such misfortunes could cost to remember this for a liquidated damages condition of an agreement.

What are Some Specific Contemplations?

It is conceivable that a liquidated damages proviso probably won’t be authorized by the courts. This can happen on the off chance that the financial measure of liquidated damages referred to in the proviso is remarkably disproportional to the extent of what was impacted by the penetrated contract.

Such limits keep an offended party from endeavoring to guarantee an unconfirmed extreme sum from a respondent. For example, an offended party probably won’t have the option to guarantee liquidated damages that add up to products of its gross income assuming the break just impacted a particular piece of its activities.

The idea of liquidated damages is outlined around remuneration identified with some mischief and injury to the party, rather than a fine forced on the litigant.

The courts commonly necessitate that the gatherings included make the most sensible appraisal feasible for the liquidated damages condition at the time the agreement is agreed upon. This can give a feeling of comprehension and consolation of what is in question assuming that part of the agreement is penetrated. A liquidated damages proviso can likewise give the gatherings included a premise to haggle from for an out-of-court settlement.

English LawUnder the guidelines of the English law, the amount stated in the contract can be treated either as a penalty or liquidated damages.

Liquidated Damages – If the amount fixed and specified in the contract by the parties is a genuine estimate of the losses accruing in case of a future breach of contract, then it is considered liquidated damages. In this case, the parties to the contract unanimously agree that the amount decided is fair compensation for the breach.

Damages – If the amount fixed is irrespective of the actual loss and is specified to deter the other party from committing a breach of the contract, then it is a penalty. In such a case, the amount fixed is not taken into consideration and the aggrieved party cannot claim an amount more than the actual loss suffered.

Indian Law

As per the liquidated damages clause under the Indian Law, there is no apparent distinction between liquidated damages and penalty. In the event of the breach of a contract, the suffering party cannot claim an amount more than the actual loss incurred. According to section 74 of the Indian Contract Act, 1872, if an amount has been specified as compensation in the contract, the court will not allow a compensation more than that amount. However, the compensation awarded can be less than the amount specified in the contract if the actual losses incurred are less than the amount fixed. As per the Contract Act, the party at loss receives a reasonable amount of compensation. In case an amount has not been fixed by the parties, the court takes upon itself to assess the loss and decides a reasonable compensation as per the liquidated damages provision.

Exception: If a party enters into a contract with the central or the state government for the performance of an act in the interest of the general public, then the defaulting party must pay the entire amount mentioned in the contract in case of a breach.

Liquidated Damages and Penalties in Construction Contracts 

This term is commonly applied in construction contracts. If a contractor does not complete the project in time, he is liable to pay the liquidated damages. The employer is not required to prove the loss suffered and liquidated damages become due.Remedies Other Than a Liquidated Damages Clause There are certain other remedies available to the suffering party apart from claiming damages. Rescind a ContractIf one party breaches the contract then the other party can treat the contract as being rescinded. To rescind a contract means to revoke or cancel it. While the other party is discharged from all obligations, he can also claim damages. According to section 75 of the Indian Contract Act, if a party rescinds a contract rightfully, then he can claim compensation for any losses sustained due to the non-performance of the contract.Claim Specific PerformanceIn some contracts, paying damages is not considered adequate compensation. The court can instruct the party committing the breach, to perform the promise as was agreed upon in the contract. This is called a specific performance.InjunctionIf a party enters into a contract to not do something but goes against it and performs that action, then the Court can issue an injunction order to refrain the party from doing what he had promised to not do.

Under the key standard of opportunity of agreement, the gatherings to an agreement have an expansive right to specify in their understanding how much damages recoverable in case of a break, and the courts will for the most part implement such an arrangement, inasmuch as the sum settled upon isn’t, not really set in stone to be an unlawful punishment, and isn’t generally violative of public strategy.

It is by and large concurred that a liquidated damages arrangement doesn’t disregard public approach when, at the time the gatherings go into the agreement containing the provision, the conditions are to such an extent that the real damages liable to move from an ensuing break would be hard for the gatherings to assess or for the nonbreaching party to demonstrate, and the total settled upon is planned simply to repay the nonbreacher for the other party’s inability to perform. 

Then again, a liquidated damages arrangement will be held to abuse public strategy, and subsequently won’t be implemented, when it is expected to rebuff, or rebuffs, a party for penetrating the agreement, or when there is an enormous uniqueness between the sum payable under the arrangement and the genuine damages prone to be brought about by a break, with the goal that it basically looks to force execution of the hidden understanding by punishing non-execution and making a break restrictively and absurdly exorbitant.

In such cases the proviso, rather than setting up damages that rough or are corresponding to the mischief prone to move from a specific break, really comprises a punishment, and, since corrective conditions are by and large unenforceable, arrangements having this impact are pronounced invalid; and this is for the most part obvious even where the arrangement is haggled in with a sense of sincere resolve, at a manageable distance and between gatherings of equivalent bartering power.

Solved Example on Liquidated Damages and PenaltyQues: 

Steve promises to deliver 150 kgs of apples to Martin at 50 rupees per kg in three installments. He delivers the first two installments but fails to deliver the last one. Is Martin obligated to pay him for the first two installments?

Ans: Although Steve has not delivered the last installment of apples, Martin is obliged to pay him for the first two installments of apples according to the principle of Quantum Meruit.