F4 Corporate Law Solved

(Pakistan)
PART 2 TUESDAY 7 DECEMBER 2004
QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A SIX questions ONLY to be answered Section B TWO questions ONLY to be answered
Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall
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Paper 2.2(PKN)
Corporate and Business Law
The Association of Chartered Certified Accountants
5 In relation to company law: (a) Describe the role of a company secretary. (5 marks)
(b) Define the term prospectus, state its purpose and briefly state the information it should contain. (5 marks) (10 marks)
6 In relation to company law: (a) Define the term share in the context of the share capital of a company. (b) State what rights are normally attached to ordinary shares. (c) Explain how preference shares differ from ordinary shares. (3 marks) (2 marks) (5 marks) (10 marks)
In relation to company law: (a) State which people are disqualified from becoming an auditor of a company under the Companies Ordinance, 1984. (6 marks)
(b) State what additional requirements are imposed on auditors by the Code of Corporate Governance.
(4 marks) (10 marks)
8 In relation to company law (the Companies Ordinance, 1984): (a) Define a private company and state its characteristics. (b) Discuss the qualifications for the appointment of a person as a director of a company. (4 marks) (6 marks) (10 marks)
11
ABC (Private) Limited is involved in the manufacturing of textile products. In view of the business success in the recent years, the board of directors of the company have made a comprehensive plan to expand the manufacturing facilities, as well as to venture into the business of manufacturing soft drinks under a franchise. In order to raise funds for this purpose, the directors have decided to convert the company into a public company and raise finances through a public offering of its securities. The Chief Executive of the company has asked you for advice.
Required:
(a) Explain what changes are required to be made in the Articles of Association of the company in order to convert it into a public limited company. State the procedure to be followed by the company for amending
its Articles.
(10 marks)
(b) State whether the company would be able to undertake the new business venture of soft drinks manufacturing under its existing Memorandum of Association. Explain the procedure laid down in the Companies Ordinance, 1984 for the amendment of the objects clause. (10 marks) (20 marks)
12
Star Technologies Limited, a listed company having its registered office at 55 the Mall, Lahore, has approached you and informed you that the companys financial year closes on 30 June 2004. It is apprehended that delay may occur in finalizing the annual audited accounts of the company. The companys directors are contemplating the option of holding the due annual general meeting (AGM) on 10 January 2005 in Karachi. For this purpose the directors plan to send the notice of the AGM to all the shareholders 30 days before the proposed date.
Required:
(a) State whether the AGM could be held on 10 January 2005. If not, explain what options the company has in
this regard. (b) State whether the company requires any approval(s) for holding the AGM in Karachi.
(c) State and explain whether there are any additional requirement(s) that the company would need to comply with regard to the notice of the AGM. (5 marks)
(20 marks)
Answers
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(a) Section 2(33) of the Companies Ordinance, 1984 states that a company secretary is an individual appointed to perform secretarial, administrative, or other duties aimed to ensure that the affairs of the company are conducted in accordance with the Ordinance. S.204-A makes it mandatory for listed companies and single member companies to appoint company secretaries. A company secretary acts on behalf of the board of directors. The superior courts have held that a company secretary being an officer of the company has extensive duties, including those of making representations on behalf of the company and entering into contracts which come within the day-to-day running of the companys business.
Generally, a company secretary has duties towards (i) directors; (ii) shareholders; (iii) management and administration; (iv) the company; and (v) law. Duties towards shareholders imply arranging for shareholders meetings; keeping minutes of such meetings; receiving applications for allotment of shares; transferring of shares; and recording dividends paid. Duties towards directors imply arranging board meetings; keeping records and minutes of such meetings and implementing decisions taken in the meetings. If the company is a listed company, the Code of Corporate Governance becomes applicable, which mandates that the company secretary should attend board meetings except those meetings which have on their agenda matters relating to the company secretary; ensure compliance with the law and the memorandum and articles of association.
(b) Prospectus is defined in s.2(1)(29) of the Ordinance as any document described or issued as a prospectus, and includes any notice, circular, advertisement or other communication inviting offers from the public for the subscription of purchase of any shares in a body corporate. Prospectus is a medium through which a company communicates with the public wanting to invest in the company and it is through the prospectus that the company makes certain disclosures to the public for soliciting subscription. In the words of s.2(29) of the Companies Ordinance, 1984, a prospectus is any notice, circular, advertisement or other communication inviting the public to purchase shares or debentures of a body corporate or inviting deposits from the public.
Information which a prospectus should contain is mentioned in s.53 and the Second Schedule to the Companies Ordinance, 1984. This includes information as to the contents of the memorandum and signatories to it; capital structure (number and value of shares); description of business; particulars of directors; chief executive; and company secretary including any restrictions on their appointment; time of opening and closing of subscription list; minimum subscription; amount payable with application; shares issued for consideration other than cash; premium or discount on issue of shares; auditors report; nature and extent of interest of directors or promoters; expert reports and contracts entered into by the company.
(a) The term share is defined under s.2(1)(35) of the Companies Ordinance, 1984 to mean share in the share capital of a company. The authorized share capital of a company is normally divided into shares of a particular denomination. For instance, a company may have an authorized share capital of Rs. 1,000,000 divided into 100,000 shares of Rs. 10 each. A person becomes a shareholder/member of a company by acquiring one share. (b) A share gives certain rights to a shareholder in the company, such as, the right to vote at the meetings of shareholders, the right to a dividend (share in the companys profits) and the right to return of capital in case of winding up of the company. Normally, all these rights are acquired by an ordinary shareholder subject to the Articles of Association of a company that may restrict such rights in accordance with the classes, if any, of the shareholders.
(c) Section 90 of the Companies Ordinance, 1984 allows companies limited by shares to have different kinds of share
capital and different kinds of classes therein as allowed by the companys memorandum and articles of association. Ordinary shares are normally referred to as the equity and connote residual rights viz a viz income and capital of the company after discharge of prior commitments. Ordinary shares carry all the rights enumerated above and do not have a right to a fixed dividend. However, they stand to gain the most in a prosperous company as after payments of fixed dividends to shareholders having preferential rights, the ordinary shareholders enjoy the remainder of the distributable surplus. Also, ordinary shares have voting rights, which, normally, preference shares do not have. Preference shareholders are entitled to preferential payments of a dividend and return of capital in a solvent winding up. They are similar to debentures as they entitle the holder to receive a fixed rate of dividend.
Points of distinction between ordinary and preference shares should be studied in the context of rights of holders of such shares pertaining to: (a) dividend payments; (b) return of capital in case of solvent winding up; and (c) voting rights.
Unlike holders of preference shares, ordinary shareholders do not have a right to a fixed dividend but are entitled to the remainder of a companys distributable surplus after payments to preference shareholders. Usually the voting rights of preference shares are restricted to meetings held to consider variation of their rights. Ordinary shares carry the right to vote in all meetings.
In case of solvent winding up, preference shareholders are to be paid before any payments are made to ordinary shareholders.
Section 254(3) of the Companies Ordinance, 1984 disqualifies the following persons from being appointed as auditor of a company. The disqualified personnel are: A present or past director, officer or employee of the company during the preceding three years; A partner or person in the employment of a director, officer or employee of the company; Spouse of a director of the company;
Person indebted to the company; Persons who either themselves or their spouses or minor children or in case of a firm, all partners of such firm hold any shares in the company (audit client) or any of its associated companies. In case a person holds shares prior to his appointment he shall disclose the fact of his appointment as auditor and thereafter within ninety days of such appointment divest himself of such shares. If after his appointment a person falls in any of the above-mentioned categories, he should be deemed to have vacated his office as auditor from the date he becomes so disqualified. In addition to the above disqualifications the Code of Corporate Governance places the following conditions upon the appointment of auditors by a listed company. Auditors not to hold Shares Listed companies are required to ensure that the firm of external auditors nor any partner in the firm of external auditors and his spouse and minor children during the term of their appointment hold, purchase, sell or take any position in shares of the listed company or any of its associated companies or undertakings. Further, if shares are held by a firm or a partner then such listed company should take measures to ensure that the auditors disclose the interest to the listed company within 14 days of appointment and divest themselves of such interest not later than 90 days thereof. Satisfactory Rating No listed company shall appoint as external auditors a firm of auditors, which has not been given a satisfactory rating under the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan. Prohibition on Appointment No listed company shall appoint as external auditors a firm of auditors which does not comply with the International Federation of Accountants guidelines on Code of Ethics as adopted by the Institute of Chartered Accountants of Pakistan. Auditors not to perform Managerial Functions No listed company shall appoint its auditors to provide services in addition to audit and should ensure that auditors do not perform management functions or make management decisions, which is the domain of the board of directors and management of listed companies.
(a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 as a company which by its articles (i) restricts the right to transfer its shares; (ii) limits its membership to 50; and (iii) prohibits the public from subscribing to the shares or debentures of the company. Restriction on transfer of shares results in the ownership of, and interest in, the company being confined to a close circle of friends or relatives. Such a restriction may exist in the form that directors have the authority to not allow transfer of shares to persons whom they do not approve; shares can only be sold at a certain price or by one member to another. Unlike a public company, a private company cannot have more than 50 members. Also unlike a public company, a private company cannot invite the public to subscribe to its shares or debentures.
(b) Section 175 of the Companies Ordinance, 1984 allows all natural persons to become directors of a company unless they are rendered ineligible under s.187 of the said Ordinance. In addition to these statutory disqualifications, a company may, by providing in its articles of association, impose additional disqualifications for appointment of directors. Disqualifications under s.187 are minority, insanity, insolvency, un-discharged insolvent, and conviction on account of moral turpitude, restriction under the Companies Ordinance, 1984, and non-membership of the company in certain cases.
The condition of minority implies that no person below the age of 18 years can qualify and become a director. Example of offences involving moral turpitude are acts contrary to justice, honesty, principles or good governance. Sub-clause (h) of s.187 is of significance in that it specifies that only members of a company can become its directors, with the exception that persons representing any government, creditors or in permanent employment of the company, are qualified to become directors even if they are not members of the company.
11 (a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 as a company which by its articles (i)
restricts the right to transfer its shares; (ii) limits its membership to fifty; and (iii) prohibits the public from subscribing to the shares or debentures of the company. Section 45(1) of the Companies Ordinance, 1984 (the Ordinance) provides that a private company can convert itself into a public company by altering its articles of association in such a manner that they no longer include the said restrictions/prohibitions. On the date of such alteration, the company would cease to be a private company and is required to file, within a period of fourteen (14) days after such date, with the registrar, either a prospectus or a statement in lieu of a prospectus.
Briefly stated, the procedure for alteration of the articles of association is prescribed by s.28 of the Ordinance. The company may alter or add to its articles by passing a special resolution to this effect. A special resolution is defined in s.2(1)(36) of the Ordinance as a resolution passed by a majority of not less than three-quarters of such members entitled to vote as are present in person, or by proxy at a general meeting of the shareholders of which not less than twenty-one (21) days notice specifying the intention to propose the resolution as a special resolution has been duly given. Upon passing of the special resolution, the alterations to the articles would become effective and shall be as valid as if originally contained in the articles.
(b) Under the existing objects clause of its memorandum of association, the company is authorized to engage in the
manufacturing of textile and related products only. Its undertaking the new business of soft drinks production would be ultra vires its objects, and, hence, illegal.
In order to be able to undertake the manufacturing and sale of soft drinks, the company would be required to first amend the objects clause of its memorandum. The scope and procedure for amending the objects clause is given in s.21 of the Ordinance. The said section provides that a company may effect changes to its objects clause by passing a special resolution and such changes become effective only if confirmed by the Securities and Exchange Commission of Pakistan on a petition by the company under s.21 and registration of such order of confirmation with the concerned registrar of companies within 90 days of the same. The Securities and Exchange Commission of Pakistan, before granting its approval, may require the company to satisfy the demands of its creditors objecting to such alterations to the memorandum. Section 21 of the Ordinance further provides that a company may amend its objects clause to carry on some business, not being a business specified in its memorandum, which may conveniently or advantageously be combined with the business of the company. The superior Courts of Pakistan in the matter of Riaz and Company, PLD 1967 Karachi 695 allowed a company engaged in cotton ginning business to undertake production of vegetable ghee and held that the question whether a company can combine advantageously or efficiently with its existing business the new business is left to the judgment of the directors. The Securities and Exchange Commission of Pakistan should not go behind such a decision of the directors if the same appears to be fair.
12 (a) Star Technologies Limited cannot hold its AGM on the proposed date of 10 January 2005. This is because, under
s.158(1) of the Companies Ordinance, 1984 (the Ordinance), every company is required to hold its AGM within a period of four months following the close of its financial year. In the present instance, the companys financial year ended as on 30 June 2004. The company should hold its AGM at the latest by 31 October 2004. The holding of the proposed AGM on 10 January 2005 would mean that a period of more than six months would have elapsed from the date of closure of the companys financial year, which would be in clear violation of the said s.158. In the given circumstances, the company should take steps to hold the AGM by the end of October 2004 (within a period of four months from the date of the end of its financial year). In case it is not possible, the company may approach the Securities and Exchange Commission of Pakistan for the permission to extend the time for the holding of the AGM. As per the proviso to s.158(1) of the Ordinance, a Commission may for any special reasons extend the time within which a listed company may hold its annual general meeting. For this purpose, the company would be required to file an application before the Commission. It should, however, be noted that the Commission is authorized to extend the time for a maximum period of 60 days only, i.e. until the end of December.
(b) Section 158(2) of the Ordinance requires that in the case of a listed company, an annual general meeting must be held in the town where the registered office of the company is situated. The registered office of Star Technologies Limited is in Lahore. In order for holding the AGM in Karachi, the company would have to seek the approval of the Commission. The proviso to s.158(2) authorizes the Commission to allow upon an application by a listed company, the holding of its AGM at any place other than the registered office. Resultantly, if the company wants to hold the AGM in Karachi (which is not where its registered office is situated), it should seek the approval of the Commission by making an application to this effect. Section 158(3) of the Ordinance provides that notice of an AGM should be sent to the shareholders at least 21 days before the date fixed for the said meeting. The directors plan to send the notice of the proposed AGM to the shareholders of Star Technologies Limited 30 days in advance is in accordance with the law. However, the fact that the company is a listed company requires that in addition to sending notice to the shareholders in the ordinary course, the company should have the notice of the AGM published in at least one issue each of a daily newspaper in English and Urdu language having circulation in the Province in which the stock exchange on which the company is listed is situated.
(c)
(Pakistan)
PART 2 TUESDAY 7 JUNE 2005
Paper 2.2(PKN)
Section A SIX questions ONLY to be attempted 1 In the context of the Constitution of the Islamic Republic of Pakistan, 1973, explain: (a) The concept and position of fundamental rights. (b) The fundamental right of freedom to trade, business or profession. (5 marks) (5 marks) (10 marks)
2 In relation to the law of contract: (a) Distinguish between the terms pledge and hypothecation. (b) Explain the concept of frustration of contract. (6 marks) (4 marks) (10 marks)
3 Describe the different modes by which a partnership firm may be dissolved under the Partnership Act, 1932. (10 marks)
In relation to company law, explain the concept of the lifting of the corporate veil.
(10 marks)
5 In relation to the Companies Ordinance, 1984 define: (a) Associated companies. (b) Companies limited by guarantee. (5 marks) (5 marks) (10 marks)
State the formalities, which need to be complied with under the Companies Ordinance, 1984, for issuing shares at a discount.
(10 marks)
State the procedure prescribed in the Companies Ordinance, 1984 for the removal of a director.
(10 marks)
Section B TWO questions ONLY to be attempted

9 Ghandhara Limited (GL) was incorporated on 1 January 2004, and is currently operating as a profitable company. The directors of GL intend to issue shares at a premium after 1 May 2005 in order to use the proceeds of such issue to pay off the preliminary expenses incurred in setting up the company. In this regard Kamal Brokerage House (KBH) has shown its willingness to procure public subscription for the said shares provided GL agrees to pay a fee equivalent to 5% of the total value of the shares. GL has approached you to seek advice.
Required: Advise GL following: on the (6 marks)
(a) Whether GL can issue shares at a premium after 1 May 2005 and on what conditions?
(b) Whether it is legal for GL to hire the services of KBH for securing public subscription of the shares, and wha is the maximum amount of fee KBH is entitled to receive under law? (6 marks) (c) W hether the proceeds from the issuing of shares at a premium can be utilized for satisfying the preliminary expenses incurred on the setting up of GL? (8 marks)
(20 marks)
10 VEGA Cement Limited (VCL) is a listed company. Jamal and Kamal (J&K), Chartered Accountants, have been its auditors for the past five years. VCL wants to appoint Mr Faisal as its auditor in the next annual general meeting (AGM). Mr Faisal is a dynamic man of impeccable integrity and five months ago resigned from VCL as its internal auditor to
pursue an independent professional practice. Required: Advise VCL following: on the
(a) Whether VCL can remove J&K, Chartered Accountants, from the position of the companys auditors?
(5 marks) (b) Whether Mr Faisal can be appointed as the auditor of VCL? (5 marks)
(c) State the procedure and formalities that VCL should observe for appointing Mr Faisal as its auditor in the next AGM in place of J&K, Chartered Accountants. (10 marks)
(20 marks)
Answers
On incorporation, a company attains a separate legal personality, which is distinct from its members. As a result, the company may own property, sue or be sued in its own name, and is considered a separate legal person from its members, thus insulating the latter from the liability of the former. This legal principle was propounded and elaborated in Salomon v Salomon & Co, (1897) AC 22, wherein it was held that a company is distinct in law from persons who are its members i.e. there exists a curtain, veil, or shield between the company and its members.
English company law has developed largely on the basis of the courts decisions. At times the courts do lift or pierce the corporate veil to fix the responsibility on the persons who are actually responsible for the acts of the company. However, it is to be noted that no fixed rules exist for determining as to when the veil of incorporation may be lifted. The courts in Pakistan have followed the precedents established by the English courts in this regard. In The President v Mr Justice Shaukat Ali, PLD 1971 SC 585, the Supreme Court of Pakistan held that the corporate veil can be lifted where the same is being used merely as a cloak for fraud or improper conduct, or where it can be established that the corporate personality is merely acting as an agent or trustee for someone else, or to determine tax liability or quasi-criminal liability, or whether the corporate body is an enemy concern.
Reiterating the separate legal personality doctrine, the Supreme Court of Pakistan has held in Union Council, Ali Wahan, Sukkur v Associated Cement (Private) Limited, 1993 SCMR 468, that the corporate veil cannot be lifted as a matter of course but rather the same can be done only under justifiable reasons. The court, in Fauji Foundation and another v Shamimur Rehman, PLD 1983 SC 457, held the following circumstances to be justifiable for lifting the corporate veil: (1) the companys membership falls below the prescribed minimum; (2) the company has been used for fraudulent trading; and (3) to counter fraud, oppression or condone some informality in the affairs of the company. In short the corporate veil can be lifted to determine the true relationship of the shareholders with regard to their dealings with the company or to ascertain the true nature of the company itself.
(a) Section 2(1)(2) of the Companies Ordinance, 1984 (the Ordinance) provides that associated companies are companies that are connected to each other in any of the following manners, (i) if a director controls in both companies a minimum of 20% of voting shares. Here if the shares are owned by the director himself, his spouse or minor children, then the director would be said to be exercising control over the other company; or (ii) the two companies are under common management or (iii) if one company is the subsidiary of the other or (iv) one is a modarba managed by another company. The Ordinance aims at regulating the affairs of associated companies in order to prevent dealings between them that cannot be regarded as at arms length.
(b) Companies whose members undertake and guarantee to contribute, to the assets of the company, a certain sum of
money upon its winding up are termed as companies limited by guarantee as per s.2(1)(9) of the Ordinance. The superior courts of Pakistan have observed, in Sindh Industrial Trading Estate Limited v Central Board of Revenue, PLD 1975 Karachi 128, that such kinds of companies, as a common practice, are used as vehicles for non-profit making associations, its members act as guarantors of the companys debts up to guaranteed amounts and the working capital comes from sources such as endowments, grants, fees and subscription. As per s.43 of the Ordinance, every provision in the memorandum or articles of association of a company limited by guarantee (and not having a share capital) or any of its resolutions purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.
After one year of commencement of their businesses, companies are allowed under s.84 of the Companies Ordinance, 1984 (the Ordinance) to issue shares at a discount, provided conditions and the procedures mentioned in the said section are fulfilled. The procedures specified are: (1) Resolution by Directors The board of directors of the company, after discussing the issue of discounting of shares, should pass a resolution to this effect mentioning the discount rate, the discounted price, the reason for discount and possible effects thereof on the company and its existing shareholders. (2) Notice to Members A notice of at least 21 days prior to the date of the general meeting should be issued to the members mentioning the place, day and hour of the general meeting, along with the statement of business to be transacted as per s.160(1)(a) and (b) of the Ordinance and a copy of the proposed resolution. (3) General Meeting A resolution allowing discounting of shares can be passed as an ordinary resolution i.e. by a simple majority of members present and voting at the general meeting. However, the articles of association of the company may require that resolutions for discounting of shares should be passed as special resolutions i.e. by 3/4th majority of the members present and voting at the meeting. (4) Application to Securities and Exchange Commission of Pakistan (SECP) An application is required to be filed with the Securities and Exchange Commission of Pakistan (SECP) for sanctioning the issue of shares at discount. The application should mention the reasons for the discount, rate of discount, discounted price and the effect on the existing shareholders. (5) Issuance of Shares If SECP approves the issue of shares at a discount through an order, the company may issue such shares within 60 days of such order. (6) Future Balance Sheet and Prospectus After compliance with the above formalities, the balance sheets and any prospectus issued by the company in future should contain particulars of the discount allowed on shares.
Section 181 of the Companies Ordinance, 1984 (the Ordinance) prescribes the procedure and the conditions for the removal of a director of a company. It is to be noted that s.181 governs the removal of the first directors, the subsequently elected directors and the directors appointed to fill a vacancy. A director can only be removed from his office by a resolution passed by the shareholders in a general meeting. A resolution seeking removal of a director, who has been elected in accordance with the cumulative voting system under s.178(5) of the Ordinance, is not effective if it is opposed by the minimum number of votes cast for the election of the directors in the immediately preceding election. In the case of the first directors (s.176) and the directors appointed to fill a vacancy (s.180), a resolution seeking their removal does not become effective if the same is opposed by a number of votes calculated by dividing the cumulative votes by the present number of directors for the time being. The figure of cumulative votes is reached as per s.178(5), that is, equals the product of number of voting shares held by person and the number of directors to be elected. The following procedure shall be followed for removal of a director: Notice by the Company In his capacity as director or shareholder of the company, a director is entitled to receive a copy of the notice of the resolution seeking his removal. Serving of the notice should be in line with the principles of natural justice; it should provide the directors with an opportunity to make representation before the directors or members as the case may be. Approval by Directors and General Meeting A resolution seeking removal of a director must firstly be approved by the directors before its presentation before the members in a general meeting, unless the general meeting is requisitioned by the members.
(a) GL can issue shares at a premium after 1 May 2005 provided it fulfills the conditions stipulated in rule (4) of the Companies (Issue of Capital) Rules, 1996, which provide that a company can issue shares to the public at a premium if it has a profitable operation record of at least one year. Since GL would have completed its one year of successful operations, it is eligible for offering shares at a premium. GL must also fulfill the conditions set out in s.83 of the Companies Ordinance, 1984 (the Ordinance) for issuance of shares at a premium. As per the said s.83, where a company issues shares at a premium, a sum equal to the aggregate amount or the value of the premiums on those shares shall be transferred to an account to be called the share premium account. The provisions of the Ordinance relating to reduction of capital of a company shall, except as provided in s.83, apply as if the share premium account were paid-up capital of the company.
(b) GL is authorized as per s.82(1) of the Ordinance to hire the services of a broker, such as KBH, for securing public subscription of its shares subject to the fulfillment of the conditions provided in clauses (a) and (b) of the said section, which stipulate that a company can pay commission to a broker for securing subscription if allowed by the companys articles of association. However, the percentage of such commission should not exceed the sum specified by the Securities and Exchange Commission of Pakistan (SECP). If the articles of association of GL allow it to pay commission to any person who secures subscription for its shares, the management of GL should note that as per s.82(3) of the Ordinance the maximum rate of commission which can be paid to KBH is 1% of the price of the issued shares actually sold through KBH.
(c) GL may utilize the equivalent of the total value of the premium raised from the issuance of shares at a premium for
satisfying the preliminary expenses of the company as allowed by s.83(2) of the Ordinance, which provides, inter alia, that the share premium account may be applied by a company in writing off its expenses. It is, however, to be noted that s.83(1) of the Ordinance mandates that the aggregate value of premium received from the issuance of shares at a premium should be deposited in a share premium account and it is this sum of money in the share premium account which can be utilized for writing-off the preliminary expenses of the company. Resultantly, GL should set up a share premium account and deposit in it the aggregate value of premium received from the issuance of shares at a premium. Further, GL can use this money in the share premium account for satisfying the preliminary expenses of the company.
10 (a) The proviso to s.252 (1) of the Companies Ordinance, 1984 (the Ordinance) provides that an auditor appointed in an
AGM can be removed by a special resolution passed by the members before conclusion of the next general meeting. VCL can remove J&K, Chartered Accountants, before the AGM, provided a special resolution is passed to this effect. For the passing of a special resolution the formalities mentioned in s.2(1)(36) of the Ordinance, that is, a twenty one (21) days advance notice needs to be given for holding the AGM, and at the said meeting the proposed resolution for removal of J&K Chartered Accountants should be passed by a majority of not less than three quarters of members entitled to vote present at the meeting in person or through proxy. In any case, J&K, Chartered Accountants, have already completed their five years as the auditors of VCL, which, being a listed company, is required by the Code of Corporate Governance (incorporated in the Listing Regulations of the Stock Exchanges) to change its auditors every five years. VCL is therefore compelled by law to replace J&K, Chartered Accountants, with another auditor. (b) Mr Faisal cannot be appointed as the auditor of VCL for the reason that he has been an employee of VCL up until five months ago, and as per s.254 (3) (a) of the Ordinance, a person who has been in the employment of the company in the preceding three years cannot be appointed as an auditor of the company, despite his being a qualified chartered accountant (and, therefore, qualifying the requirement of s.254(1)(i), which provides that only a chartered accountant can be appointed as an auditor of a public limited company). (c) For appointing any person as an auditor, VCL should observe the procedure and formalities stipulated in ss.252 and 253 of the Ordinance, which provide as follows: (1) Consent of Auditor As VCL is a public listed company, it can appoint only that person as auditor who meets the qualifications prescribed by s.254 of the Ordinance and who agrees to this appointment. (2) Board of Directors Approval The name of the proposed auditor should be considered by the board of directors of VCL and recommended for appointment in the AGM. (3) Notice
If an auditor, other than the retiring auditor, is going to be appointed in the AGM, a notice mentioning the proposed resolution seeking appointment of an auditor, other than the retiring auditor, is required to be given. Such notice should also mention the name of the proposed auditor and his remuneration and should be given at least fourteen days in advance of the AGM. Copy of the mentioned notice is required to be served on the retiring auditor as well.
(4) Publication of Notice As VCL is a listed company, the notice should also be published in at least one issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the province in which the stock exchange on which the VCL is listed is situated. (5) Representation by Retiring Auditor A retiring auditor who is not recommended for reappointment can make representation against the notice of the resolution proposing appointment of a new auditor and in this case VCL shall be bound to send a copy of the representation to every member to whom notice of the meeting is sent. If such representation of the retiring auditor is received late or because of VCLs default it was not sent to the members, the retiring auditor may require that the same be read out at the AGM. The retiring auditor also has the right to be heard in person. If VCL thinks that J&K Chartered Accountants might abuse this right of representation then VCL can make an application to the registrar and ask that this be waived. (6) Approval by the Members The appointment of the auditors and their remuneration should be considered by the members in the AGM and approved by them. (7) Notification of Removal or Cessation to hold Office by Auditor After approval by the members in the AGM, VCL shall notify the concerned registrar of companies within 14 days from the date of removal of an auditor of this event and to file the consent in writing of the new auditor.
(Pakistan)
Paper 2.2(PKN)
In relation to company law, explain the concept of company as a separate legal personality and briefly discuss the doctrine of limited liability.
(10 marks)
In relation to company law, explain the term 'Memorandum of Association' and describe the standard clauses of such a document. (10 marks)
5 In relation to company law, explain the meaning of the following: (a) Statutory Meeting; (b) Annual General Meeting; and (c) Extraordinary General Meeting. (3 marks) (4 marks) (3 marks) (10 marks)
In relation to company law: (a) Explain the terms: (i) Authorised Share Capital; (2 marks) (2 marks) (2 marks) (4 marks) (10 marks)
(ii) Share; (iii) Debenture. (b) Distinguish between fixed and floating charges.
11 Ameer Sugar Mills Limited (ASML) is a company engaged in the manufacture and sale of sugar and is on the verge of bankruptcy due to the recently imposed government policy of allowing the import of sugar. The other reason for ASMLs position lies in the purchase of machinery at exorbitant costs. One of its directors, Mr Rahim, has approached the concerned Federal Minister for Commerce, who has assured Mr Rahim that he will take up the matter with the Prime Minister provided ASML contributes rupees one million towards the fund of his political party. At the same time, the shareholders of ASML are threatening to take its directors to court because of the purchase of machinery at exorbitant prices. In order to avoid the crisis and to meet its immediate cash needs, ASML has sought a loan worth 50 million rupees from its associated company, Ameer Textile Mills Limited (ATML).
The management of ASML and ATML has approached you for advice on the following issues: (a) Whether ASML is allowed to make political contributions.
(5 marks)
(b) Consider the extent of the directors' liability with regard to purchase of machinery. Please note that the articles of ASML exempt directors from being personally responsible for acts performed on behalf of ASML.
(8 marks)
(c) Can ATML extend a loan to ASML, and, if so, discuss the legal requirements that ATML needs to comply with in this regard. (7 marks)
(20 marks)
Answers
A company incorporated under the Companies Ordinance, 1984 (the Ordinance) exists as an artificial legal person having a personality distinct from its members/shareholders. It continues to enjoy this status unless dissolved in accordance with the provisions of the Ordinance. A companys position as a separate legal person is reinforced by the principles of independent corporate existence and perpetual succession, which set out the following: Independent Corporate Existence This principle was judicially recognised in the famous case Salomon v Salmon and Company Limited, 1897 AC 22 wherein the House of Lords held that a company is a separate and independent personality even if before and after incorporation its business is precisely the same, the same persons are its managers, and the same hands receive profits. Perpetual Succession
This principle holds that companies continue to exist and their life is not affected by the death, lunacy, insolvency or retirement of its members. Members may come and go, but the company continues its operations as long as requirements of law are fulfilled.
Other features that reinforce the companys position as a separate legal person are that the company is capable of having legal rights and obligations like a natural person, for instance, it can acquire and own property, transfer property, enter into contracts and sue and be sued in its own name. Being a legal entity distinct and separate from its members, all assets and liabilities in a business are its own. No member can, either individually or jointly, claim any ownership rights in the assets of the company during its existence or on its winding up. The doctrine of limited liability manifests that the liability of members of a company is either limited to the value of their shares subscribed or to the amount of guarantee given by them. No member can be called upon to pay more than this amount, irrespective of the extent of the companys indebtedness. The personal property of a shareholder cannot be attached for the companys debts unlike the case in a partnership. 4 The memorandum of association is one of the constitutional documents of the company and defines the limitations and powers of the company. It is also referred to as the charter of a company. The memorandum upon registration has the effect of binding the company, its members, their heirs, legal representatives to its provisions and results in the formulation of the subscribers and prospective shareholders into a body corporate (s.32 of the Ordinance). The memorandum of association of a company contains the following clauses: Name clause
The promoters of a company can choose any name for the company provided it is not inappropriate, deceptive, exploits or offends the religious susceptibilities of people or identical or similar to the name of an existing company. Also, a companys name should not suggest patronage or connection with any past or present Pakistani or foreign head of state, foreign government, federal or provincial government or any corporation set up by either of them or international organisation (s.37 of the Ordinance).
In the case of a company limited by shares the word limited or (Private) Limited should appear as the last word of its name and in case of the memorandum of a company limited by guarantee, the words (Guarantee) Limited as the last words of its name (ss.16 and 17 of the Ordinance). Registered office clause The registered office clause mentions the name of the province or address where the registered office of the company will be situated. Full address of the registered office is not required to be mentioned in the memorandum and may be communicated to the registrar within 14 days of incorporation. Objects clause The objects clause defines the main and incidental objects of the company and indicates the extent of the powers and spheres of its activities. Any act done by a company beyond its objects is treated as ultra vires and void. The objects clause must not contain any activity which is illegal or against public policy. Liability clause This clause sets out the liability of the members, that is, in the case of a company limited by shares, the members shall be liable to the extent of amount subscribed by them in respect of shares and no more; and in case of a company limited by guarantee, to the extent of the amount undertaken to be contributed to the assets of the company in the event of its being wound up or within one year afterwards. Capital clause This clause states the amount of share capital with which the company is incorporated and its division into shares of fixed denomination. It mentions the authorised capital of the company, the kind and number of shares in which the authorised capital is divided, denomination and currency of each share and classes into which the authorised capital is divided. Association clause This clause mentions the declaration of compliance, names, addresses, descriptions, occupations of the subscribers and the number of shares each subscriber has taken up and their signatures.
(a) Statutory Meeting Every public company is required to hold once what is also known as its first official general meeting. As per s.157 of the Companies Ordinance, 1984, it is mandatory for every public company limited by shares and every company limited by guarantee and having a share capital to hold a statutory meeting within a period between three and six
months from the date of the commencement of its business. A private company, a company limited by guarantee or an unlimited company is not required to hold a statutory meeting.
The purpose of holding this meeting is to enable the members to know the financial position and prospects of the company, matters relating to company formation, results of the companys appeal for public subscription to its share capital and to get an idea of assets and properties acquired or to be acquired by the company. In other words, the purpose of this meeting is to inform shareholders about the matters relating to incorporation, allotment of shares, details of contracts concluded etc.
(b) Annual General Meeting Section 158 of the Ordinance requires that every company, whether public or private, must hold an annual general meeting (AGM) of its members/shareholders once in every calendar year within four months following the close of its financial year and not more than 15 months after the holding of the preceding annual general meeting. As per s.158 (1), the first AGM shall be held within 18 months from the date of incorporation of the company. An AGM is also referred to as an ordinary general meeting as normally the ordinary business of a company is conducted in an AGM. Ordinary business includes the approval of annual accounts and dividend, the election of directors and appointment of auditors. (c) Extraordinary General Meeting All general meetings of a company, other than the statutory meeting and AGM, are referred to as extraordinary general meetings (EGM). An EGM may be convened by a company at any time as required for conducting any special business, which cannot be postponed until the next AGM. For instance, the alteration of the memorandum and articles of association, reduction and reorganisation of capital, or the issue of debentures. An EGM may be convened by the board of directors either themselves or on requisition by members/shareholders or upon the directions of the Securities and Exchange Commission of Pakistan.
6 (a) (i) Authorised share capital represents the sum mentioned in the memorandum at the time of registration as the capital of the company. It represents the maximum amount of equity which the company is authorised to raise by issuing shares. For instance, a company may have an authorised share capital of one million rupees divided into 100,000 ordinary shares each of a value of rupees 10. A company can issue shares at once or as and when required to the extent of the authorised share capital (one million rupees). (ii) Share capital represents the equity contribution by the shareholders to the common stock of the company and is distinct from loan capital as it is not a debt of the company. Section 90 of the Companies Ordinance, 1984 allows companies limited by shares to have different kinds of share capital and classes therein as provided by its memorandum and articles of association. Share capital once raised cannot be redeemed except through the process of reduction of capital given in the Ordinance.
(iii) Debenture capital represents the money that a company has borrowed on the security of its debentures. A debenture is an acknowledgement of a secured or unsecured debt issued by a company. It is not capital in the sense of a companys share capital or equity and represents a debt due from the company, which might or might not have a charge on its assets. Debenture capital is also known as borrowed capital and debenture holders or lenders are creditors of the company and not its members.
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(c) A fixed charge is created on specific assets of a company which are immovable and of permanent nature and are capable of being definitely ascertained and defined such as land, building, and machinery. Upon creation of a fixed charge, an interest of the creditor is established in the subject assets and although the company retains possession of the assets it cannot deal with or dispose of the same without the consent of the fixed charge holder. A floating charge is created by making the assets or undertaking of the company a security for the payment of debts. The documentation of a floating charge may cover properties which are specified or unspecified. In other words the peculiar feature of this charge is that it is not possible to predicate the exact property on which floating charge operates until the charge crystallises, and until such time the company is free to use the charged assets. The points of distinction between fixed and floating charges are as follows: A fixed charge relates to definite and ascertained property while a floating charge relates to all assets of the company whether present or future. A company cannot deal with assets on which a fixed charge is created so as to affect the rights of persons in whose favour the charge is created. In the case of a floating charge, the company is free to use charged assets until such time that the charge crystallises. A fixed charge is a legal charge whereas a floating charge is equitable. In a fixed charge no one can be allowed to have a preference over the creditors with whom the specific asset has been mortgaged. Whereas a floating charge may be deferred to preferential creditors if the assets available are not sufficient to meet the claims of the creditors in full.
(a) Section 9 read with s.16 of the Partnership Act, 1932 (the Act) stipulates that partners are bound to carry on the business of the firm to the greatest common advantage, should be just and faithful to each other and should share amongst themselves full and true information of all things affecting the partnership, unless otherwise agreed. Further, partners are restricted from making personal profits and from carrying on competing business.
As per s.16(a) of the Act, a partner makes personal profits if he derives any profit for himself from any transaction of the firm or from use of the firm's property, business connection or name. By virtue of this provision, such partners are required to account to the firm for such profits made. This liability is covered in s.9 (partners firstly not to indulge in such transaction) which provides that if a partner makes profit by virtue of his position in the firm, he is liable to account the same to the firm.
With regard to the competitive business partnership, the law ordains that partners owe the obligation of not carrying out business similar or competing with that of the firm either in their own name or in someone else's name and if this obligation is not followed then s.16(b) provides that the partner carrying on such competing business shall be liable to account for and pay to the firm all profits made by him in that business. (b) The Partnership Act, 1932 does not make compulsory the registration of firms. However, the effects of non-registration manifested in s.69 make it essential for partnerships to be registered. Section 69 mentions two effects of nonregistration with respect to partners in an unregistered firm and an unregistered firms rights against third parties. With respect to the effect of non-registration on partners, s.69(1) bars partners in an unregistered firm to sue the firm or any person alleged to be or have been a partner in the firm to enforce a right arising from a contract or conferred by this Act. This restriction covers the present as well as the past partners of a firm. The effect of non-registration of firms against third parties is discussed in s.69(2), which inter alia bars the enforcement of rights in a suit by an unregistered firm against a third party.
The concept of retrenchment as envisaged under the Standing Order 13 of the West Pakistan Industrial and Commercial Employment (Standing Order) Ordinance, 1968 provides that where any workman belonging to a particular category is to be retrenched, the employer shall retrench the workman who is the last person employed in that category. In other words the principle of last come first go is to be applied to a workman of the same category (S.M.Ilyas v Reckitt and Colman Pakistan Limited, 1999 PLC 456).
The word category here means category in an establishment and if the whole business concern consists of one establishment then the same shall be considered as one unit. Where the business concern consists of various establishments, each one will be treated as a separate unit. This categorisation was observed by the courts in the famous case Punjab Road Transport Board v Mohammad Ashfaq, 1984 PLC 200 wherein conductors of Punjab Road Transport Board maintained district-wise seniority and retrenchment was made on this basis. Objection that retrenchment should have been made on the provincial-wise seniority basis was not tenable. Even within the same establishment, workers working in different departments compromised of different categories unless workers were interchangeable and could work in different categories.
Whereas merit of seniority is to be strictly followed, i.e., the most junior workman is to be retrenched first, it is the undeniable right of the management to retain the services of persons who possess special skills (Riaz Ahmed v General Manager, National Gas Fertilizer Factory Multan, 1970 PLC 472).
After retrenchment, according to the Standing Order 14, in case the employer wants to employ persons within a period of one year from the date of such retrenchment, he should give the opportunity of employment first to the retrenched persons belonging to that category in accordance with their respective length of service, i.e., personnel with longer service be given priority. It is to be noted
that such retrenched workers subsequently taken back are entitled to re-employment and not reinstatement. In the case of seasonal factories, the first proviso to the Standing Order 14 sets out that if a workman retrenched in one season reports for duty within ten days of resumption of work in the next season then he should be given preference for employment by the employer.
(a) Section 290(1) of the Companies Ordinance, 1984 (the Ordinance) provides that if any shareholder holding not less than 20% of the issued share capital of a company has complained that the affairs of the company are being conducted in an unlawful or fraudulent manner, or in a manner not provided for in a companys memorandum of association, or in a manner oppressive to shareholders or prejudicial to public interest then such shareholder is entitled to make an application to the court for an order to end matters complained of. In view of the above Mr Bhatti is entitled to file a petition before the court as he holds more (22% of the issued share capital) than the required shareholding.
(b) Section 290 of the Companies Ordinance, 1984 aims to ensure that the affairs of the company are conducted in a
lawful manner and in accordance with the companys memorandum and articles of association Muhammas Fikree v Fikree Development Corporation Limited, 1992 MLD 668, and there is no oppression of shareholders (In re Taj Company Limited, 1994 CLC 2197). In view of s.290, the purchase of land by FPL in Islamabad for development of a housing project can be viewed as a situation where the company is being conducted in a manner not provided for in its memorandum. FPL is a power company and its indulgence in a housing development project may be ultra vires the objects clause of its memorandum of association. It is a settled principle of company law in Pakistan that any act of a company outside the scope of the objects clause of its memorandum is ultra vires and void and cannot be ratified. Hence, the purchase of land for a housing development project may be a suitable ground for moving the court in terms of s.290.
FPLs other act of not responding to Mr Bhattis queries can amount to oppression if it is adopted continuously. It should be noted that the word oppression has not been defined in the Ordinance; rather it has been left to the court to decide on the facts of each case whether there is oppression. Also, the courts have viewed that in a case of oppression it is not essential that the oppressor should be obtaining a pecuniary benefit; oppression exists even if there is a desire to gain control of the company. However, it should be noted that mere loss of confidence between various groups of shareholders does not come under the mischief of s.290 unless it is shown that such lack of confidence has sprung from the desire to oppress the minority in the management of company (Messrs Shaheen Foundation v Messrs Capital F. M. (Pvt.) Limited, 2002 CLD Karachi 188).
(c) In exercise of its authority under s.290, the court has power to pass the following kinds of Orders as envisaged in ss.290, 291 and 292: Interim order The court may on an application by a party to the proceedings, pass an interim order upon such terms and conditions as it considers just and equitable for regulating the companys affairs until a final order is passed (s.292). Other orders The court may, to end matters complained of, pass any order as it thinks fit for regulating the affairs of the company, ordering purchase of any members shares by other members or by the company [s.290(2)]. Further, the court may order alteration in, or addition to, a companys memorandum or articles of association [s.290(3)].
Section 291 allows the court to pass orders providing for (a) the termination, setting aside or modification of any agreement howsoever arrived at between the company and any director, chief executive, managing agent or other officer; (b) setting aside of any transfer, delivery of goods, payment or other transactions and (c) change in the management of the company.
In view of s.290(2), the court has the authority to order the management of FPL to purchase Mr Bhattis shares.
10 (a) The term damages means the money claimed by, or ordered to be paid, to a person as compensation for loss or
injury. The law of contract envisages damages as one of the remedies for breach of a contract. There is no punishment prescribed under the law for a party in breach of a contract. However, if by reason of a wrongful act of one party, the other party suffers any pecuniary loss then the party in breach is required to make good the loss by paying damages to the other party. In other words damages aim to put the injured person in as good a position as he would have been if the promised performance had been rendered. (b) Breach of contract occurs when one party to a contract refuses to perform its obligations arising out of the contract. The remedy in case of breach of a contract is provided in s.73 of the Contract Act, 1872 (the Act), which stipulates that when a contract is breached, the party who suffers due to such breach is entitled to receive, from the party in breach, a compensation for any loss or damage caused in the usual course of things from such breach. Damages are, however, not awarded for any remote and indirect loss or injury sustained due to the breach of the contract. In view of the foregoing, Dr Ammar may bring an action for breach of contract against the English Coaching Centre, which failed to hold the promised number of classes. As per the contract, the classes were to last for four weeks, but the Centre could only arrange half of the scheduled classes for the first three weeks and no class was held in the last week. Dr Ammars claim against the Centre for the breach of contract is fortified by the fact that despite repeated promises the Centre did not appoint a substitute teacher or hold any make up classes. Dr Ammars up-front payment of the entire fees and his complaints support the fact that he had performed his part of the contract, a condition precedent to claim damages (Bashir Hussain Siddiqui v Pan-Islamic Steamship Co Ltd, PLD 1967 Karachi 222).
The Centre is responsible for breach of contract for which the remedy available to Dr Ammar is an action for damages. (c) If Mr Jamal, the teacher, had not missed any classes and after his leaving the Centre had appointed another lecturer in his place then the Centre could not be held liable for breach of contract. A breach of contract occurs when one of the parties to a contract fails to perform its obligations arising out of the contract. Dr Ammar had entered into a contract with the Centre to undertake TOEFL preparatory classes and if the same were held according to the schedule, the Centre could not be said to have breached the contract and, therefore, there could be no claim for damages. Section 73 of the Act provides that a party to a contract is only entitled to damages when a contract has been broken.
11 (a) Section 197(1) of the Companies Ordinance, 1984 specifically prohibits companies from contributing any amount to any
political party, or for any political purpose to any individual or body. If a company contravenes the provisions of the said section, it becomes liable to a fine, which may extend to rupees 10,000 and every director and officer of the company who is knowingly and wilfully in default is punishable with imprisonment for a term which may extend to two years and is also liable to a fine. In view of the above mandatory provision of the Ordinance, ASML should not make any political contribution. (b) The Ordinance authorises the directors to manage the companys business acting honestly and while exercising such degree of skill and diligence as would amount to reasonable care and justifies the directors action of trusting other officials properly empowered to perform duties. In case of any violation of such duties the directors can be held liable to make good to the company the money so misused. Further s.194 of the Companies Ordinance, 1984 stipulates that any provision, whether contained in the articles of a company or in any contract exempting amongst others any director or chief executive of the company from any liability imposed by the law for negligence, default, breach of duty or trust of which he may be guilty in relation to the company, shall be void. If it is proved that the directors of ASML did not act honestly and failed to exercise a reasonable degree of skill and diligence in purchase of the machinery, they would be responsible for making good the loss caused to the company, and in this regard any provision in the articles exempting them from being personally responsible shall be of no avail.
(c) ATML can extend a loan to ASML provided it complies with the formalities set out in s.208 of the Companies Ordinance, 1984 for this purpose. A loan is covered by the definition of investment in terms of s.208, which allows investment in associated companies or associated undertakings under the authority of a special resolution which shall indicate the nature, period and amount of investment and the terms and conditions attached thereto. The shareholders authorisation should be obtained prior to the making of the investment and subsequent ratification of directors action in this respect is not allowed. The proviso to s.208(1) requires that the return in investment in the form of a loan shall not be less than the borrowing cost of the investing company. Hence, ATML should not agree to extend the loan to ASML at a rate of return which is less than its borrowing cost, otherwise it shall be in violation of the provisions of s.208 and would incur serious liabilities thereunder.
Further, it is to be noted that no change is allowed to be made in the nature of an investment or the terms and conditions attached to it except under the authority of a special resolution. ATML should fulfil the following legal requirements under the Ordinance for making an investment in ASML in the shape of a loan: (i) Agreement There should be an agreement between ATML (lending company) and ASML (investee company), which mentions the loan amount, rate of return, maturity period, and assets pledged, if any. Directors Approval The agreement should then be placed before the directors of ATML in their meeting wherein it should be discussed and approved through a resolution in accordance with s.196 of the Ordinance.
(ii)
(iii) Special Resolution Section 208(1) provides that a company shall not extend a loan to its associated companies except under the authority of a special resolution. In this situation all requirements under s.159 of the Ordinance pertaining to calling of the extraordinary general meeting and the passing of the special resolution like 21 days prior written notice to the shareholders, and in case of listed company publishing of notice of a general meeting in at least one issue of a daily newspaper in English and Urdu language having circulation in the province where the stock exchange on which the company listed is situated, should be observed. General Meeting
The extraordinary general meeting should be called and convened in accordance with the provisions of the Ordinance and once the resolution is passed by at least two-thirds majority of the members present, in person or through proxy, and voting, it shall be adopted as a special resolution. The special resolution must mention the nature of investment, the loan amount, rate of return, maturity period, assets pledged, if any, and other terms and conditions.
Filing ATML must file a copy of the special resolution with the Securities and Exchange Commission within 15 days of its passing. Disclosure of Investment ATML and ASML should both disclose the loan in their annual accounts.
12
(a) Section 37 of the Companies Ordinance, 1984 sets out the formalities that all proposed companies have to comply with regarding proposed names. It restricts companies from registering names, which in the opinion of the Securities and Exchange Commission are inappropriate, deceptive, exploit or offend the religious susceptibilities of the people. If a company wants to register with a name which is identical or resembles the name of an already registered company then it can only do so if the existing company is in the course of being dissolved and has given its consent to the satisfaction of the Commission.
In view of the above provision, if there is no existing company with an identical or similar name, the Commission should have no objection to the proposed name Total Protection (Private) Limited as the same is neither inappropriate nor deceptive and does not exploit or offend religious susceptibilities of the people. (b) As per s.9 of the Partnership Act, 1932 partners have the following duties: (i) (ii) To carry out the firms business to the greatest advantage of all partners, To be just and faithful to each other, and
(iii) To render true accounts and share full information about all things affecting the firm.
In the case of companies, directors have a fiduciary relationship with their company which demands that the directors should act in good faith vis--vis the company (Muhammad Baksh & Sons Limited v Azhar Wali Mohammad, 1986 MLD 1870).
Vast powers have been given to the directors in s.196 of the Companies Ordinance, 1984, which states that the business of a company shall be managed by the directors who may for carrying out the same exercise all such powers as are not by the Ordinance or by the articles of association of the company required to be exercised in a general meeting. Duties that directors can perform only after authorisation by means of a resolution passed at their meeting, have been mentioned in subsection
(2) of s.196 and include a call to shareholders to pay any unpaid amount on their shares, issuance of shares or debentures, investment of company funds, giving loans, authorisation to enter into a contract where a director or firm of which he is partner is to sell, purchase or supply goods or services to the company, approve annual or half-yearly accounts or approve bonus to employees. The courts have held that in the performance of their duties the directors must act honestly and exercise reasonable care of the level of an ordinary man. The courts have further held that the level of care does not expect the director to watch inferior officers or verify the calculations of the auditors himself and directors should not put themselves in a position where their duties to the company and their personal interests conflict. Disclosure of a directors interest in any transaction conducted by the company is essential to keep the decision-making process of the company transparent and one which benefits the company. (c) Membership of a private limited company ceases by (i) transfer or (ii) transmission of shares. Sections 76 to 81 set out the procedure for effecting the same. Transfer is a voluntary act, which occurs when under an instrument of transfer duly stamped and executed by the transferor shares are transferred to the transferee. In case of transmission shares are transferred to another person by virtue of operation of law. In other words transmission is an involuntary assignment of shares from the owner to his legal representative upon providing proof of title to the shares and thereafter the legal representative enjoys all the benefits and privileges like the original owner. Transmission takes place when (i) the registered shareholder dies; or (ii) he is adjudicated as insolvent or (iii) when the shareholder is a company and it goes into liquidation.
Part 2 Examination Paper 2.2(PKN) Corporate and Business Law (Pakistan)
December 2005 Marking Scheme
This question is divided into two parts having equal marks and each part shall be marked separately.
(a) 35 Answers explain the process after which all bills become law in the light of Articles 70, 73 and 75 of the Constitution
of Pakistan, 1973 and explain that money bills can only originate in the National Assembly. 02 Poor answers showing little or no knowledge about the process of legislation.
(b) 35 Answers discuss the significance of a federal system of state and the position and importance of Senate as the upper house of the Parliament with emphasis on its role in the election of the President and his removal/impeachment [Articles 41(3) and 47(8)], legislative process (Articles 70, 73 and 75) and representation in cabinet [Article 92(1)].
02
Answers show little understanding of the position and importance of Senate.
This question expects candidates to exhibit knowledge about essential elements of a valid contract and to explain each of them. 710 Answers make reference to s.10 of the Contract Act, 1872 and discuss the same in light of other provisions of the Act regarding a persons competency (s.11), free consent (ss.13 and 14) and lawful considerations and objects (s.23).
36 Answers mention s.10 but do not discuss its contents. 02 Extremely poor answers that show little or no knowledge about the essential elements of a valid contract.
This question expects candidates to display knowledge of a companys position as a separate legal person and of the doctrine of limited liability.
710 Answers exhibit knowledge about the companys position as a separate legal person and discussing the features of independent corporate existence and perpetual succession with special emphasis on the doctrine of limited liability. Reference to and a brief discussion of the landmark case of Salomon v Salomon & Co is to be appreciated.
36 Answers show some understanding of the concept of the company as a separate legal person and doctrine of limited liability. 02 Extremely poor answers that show little or no knowledge about the question.
This question expects candidates to show knowledge about the memorandum of association of a company and its contents.
710 Answers display the knowledge about the nature and status of a memorandum of association as a constituent document of a company. The significance of various clauses of the memorandum are highlighted. Also, discuss briefly the name, registered office, objects, liability, capital and association clauses. 36 Answers display a limited level of knowledge about the memorandum and merely mention that there are generally five clauses in a memorandum without going into details. 02 Extremely poor answers that show little or no knowledge about the question.
This question is divided into three parts and each part shall be marked separately.
(a) 23 Answers mention the time frame within which it is mandatory for certain kinds of company to hold a statutory meeting
(s.157 of the Companies Ordinance, 1984) and the purpose of such a meeting. 01 Answers either mention the time frame within which it is mandatory for certain kinds of company to hold a statutory meeting (s.157) or the purpose of such a meeting. meeting (s.158 of the Companies Ordinance, 1984), the purpose of such a meeting and what kind of business is normally carried out in an annual general meeting. 02 Answers either mention the time frame within which it is mandatory for companies to hold the annual general meeting (s.158) or the purpose of such a meeting. convene them and what kind of matters are discussed in them. 01 Answers show little or no knowledge about any of the above mentioned.
(b) 34 Answers mention the time frame within which it is mandatory for all kinds of companies to hold their annual general
(c) 23 Answers discuss which meetings are called extraordinary general meetings, when can they be convened, who can
This question is divided into two parts (a) and (b) respectively with part (a) being further divided in three parts all having equal marks.
(a) (i) 12 Answers discuss with examples the concept of authorised share capital.
01 Answers exhibit little or no understanding of the concept of authorised share capital and fail to discuss the same with an example.
(ii) 12 Answers discuss with examples the concept of share capital and refer to s.90 of the Companies Ordinance, 1984.
01 Answers exhibit little or no understanding of the concept of share capital or fail to discuss the same with reference to s.90. (iii) 12 Answers discuss the concept of debenture capital, the position of the debenture holders in a company and/or compare the same with share capital. 01 Answers exhibit little or no understanding of the concept of debenture capital and/or fail to discuss the same with reference to an example.
(b) 34 Answers define fixed and floating charges, discuss the salient points of distinction between the two and explain the
position of priority of a fixed charge over a floating charge. 02 Answers define the two kinds of charges, but do not discuss the points of distinction between the two.
This question is divided into two parts and each part shall be marked separately.
(a) 46 Answers discuss with reference to ss.9 and 16 of the Partnership Act, 1932 the general duties that partners owe to
each other with respect to the firms business, particularly not to indulge in making personal profits and carrying on competitive business. 03 Answers do not quote nor discuss general duties that partners owe to each other in the light of ss.9 and 16 and/or show little or no understanding of duties as to personal profits and carrying on competitive business. position and rights of partners in an unregistered firm and an unregistered firms rights vis--vis third parties. 02 Answers show little or no understanding of the effects of non-registration.
8 This question expects candidates to exhibit knowledge about the concept of retrenchment and re-employment as set out in Standing Orders 13 and 14 of the West Pakistan Industrial and Commercial Employment (Standing Order) Ordinance, 1968 respectively.
(b) 34 Answers discuss the effects of non-registration manifested in s.69 of the Partnership Act, 1932 with respect to the
710 Answers explain with reference to case law the concept of retrenchment as set out in Standing Order 13 and reemployment of retrenched workers as per Standing Order 14. 36 Answers refer to Standing Order 13 but are not very clear about the concept of retrenchment particularly in light of judicial interpretation. 02 Extremely poor answers that show little or no knowledge of retrenchment.
This question is divided into three parts and each part shall be marked independently.
(a) 3-4 Answers opine with reference to s.290(1) of the Companies Ordinance, 1984 (Ordinance) as to whether Mr Bhatti
possesses the requisite number of issued share capital of FPL to be entitled to seek remedy before the court. 0-2 Answers do not quote the mentioned legal provision and/or do not opine as to whether Mr Bhatti can seek remedy before the court. (b) 68 Answers in this bandwidth analyse in light of s.290 of the Ordinance as to whether in the given circumstances (business outside the scope of memorandum and non satisfactory response to Mr Bhattis queries) constitute valid grounds to file petition before the court. 35 02 Answers in this marks range quote relevant legal provision and/or comment on the mentioned instances. Extremely poor answers with mere reference to legal provisions.
(c) 68 Answers discuss the courts powers as set out in ss.290, 291 and 292 of the Ordinance and opine in their light as
to whether Mr Bhattis shares can be ordered to be purchased by FPL. 35 02 Answers in this bandwidth mention the courts powers given in the Ordinance and/or opine as to whether Mr Bhattis shares can be ordered by the court to be purchased by FPL. Answers show little knowledge about the topic at hand.
10
This question is divided into three parts and each part has different weighting.
(a) 34 Answers explain the meaning, nature and purpose of damages. 0 2 Answers do not exhibit satisfactory knowledge about damages. (b) 710 Answers quote s.73 of the Contract Act, 1872, discuss breach of contract, analyse whether the English Coaching
Centres actions constitute breach of contract and mention the remedy available to Dr Ammar in this regard.
36 Answers in this marks range are confined to quoting legal provisions and/or show some understanding of the issue especially whether the English Coaching Centre is in breach of contract and the remedies available to Dr Ammar.
02
Extremely poor answers showing a lack of understanding of the issue.

Answers discuss the concept of breach of contract vis--vis the appointment of the new lecturer and opine on the
(c) 46
03
Centres position in this changed scenario in light of s.73 of the Act. Answers produce the legal provision of s.73, but fail in reaching a conclusion as to the Centres liability.
11 This question is divided into three parts and each part carries different marks.
(a) 35 Answers discuss s.197(1) of the Companies Ordinance, 1984 and opine as to whether ASML can make the political
contribution. 02 Weak answers that do not discuss the legal provision and/or do not conclude as to whether ASML can make the contribution or not.
(b) 68 Answers discuss the directors fiduciary duties toward the company, their role, the extent of care that they should
exhibit while performing their duties and opine about the liability of ASMLs directors in view of the provision contained in the articles of association of ASML and s.194 of the Ordinance. 35 02 Answers reflect lack of understanding of the directors role, level of care and/or do not opine about the liability of ASML directors in view of ASML articles and the relevant legal provision. Extremely poor answers that show little understanding of the matter at hand.
(c) 67 Answers produce the requirements of s.208 of the Ordinance and mention the procedure and formalities that ATML
should follow for granting the loan to ASML. 35 Answers mention the procedure and formalities mentioned in s.208. 02 Answers show little understanding of the matter at hand. 12 This question is divided into three parts and each part has different weighting.
(a) 46 Answers discuss and conclude in light of s.37 of the Ordinance as to whether the proposed company can use the
name Total Protection (Private) Limited. 03 Answers quote relevant sections and/or conclude whether proposed name can be used or not.
(b) 710 Answers draw a comparison between partners duties as mentioned in s.9 of the Partnership Act, 1932 and the duties
of the directors as set out in s.196 of the Companies Ordinance, 1984 in light of judicial precedents. 36 Answers discuss the relevant legal provisions but do not elaborate the same. 02 Answers fail to discuss relevant legal provisions and show a lack of understanding of the issue at hand.
(c) 34 Answers in this range discuss the concept of transfer and transmission of shares and mention the relevant legal provisions, ss.76 to 81 of the Ordinance. 02 Extremely poor answers that show a lack of understanding of the concept of transfer and transmission and/or do not mention relevant legal provisions.
(Pakistan)
Paper 2.2(PKN)
Section A SIX questions ONLY to be attempted 1 In relation to the legal system of Pakistan, explain the following as a source of law: (a) Judicial Precedent. (b) Customs. (6 marks) (4 marks) (10 marks)
Explain acceptance in relation to formation of a contract. (10 marks)
3 In the context of the Partnership Act, 1932, define the different types of partnerships recognised by the law. (10 marks)
State the powers and duties of a companys auditors under the Companies Ordinance, 1984. (10 marks)
In relation to company law, outline the formalities for declaring and distributing a dividend. (10 marks)
6 In relation to company law, explain voluntary winding up by: (a) Members. (b) Creditors. (5 marks) (5 marks) (10 marks)
7 Under the Companies Ordinance, 1984 define the terms: (a) Memorandum of Association. (b) Articles of Association. (5 marks) (5 marks) (10 marks)
Discuss the position of workmen under the Industrial Relations Ordinance, 2002. (10 marks)
Section B TWO questions ONLY to be attempted 9 GGL is a public limited company involved in the business of oil and gas exploration. On 10 January 2005, Mr Parvez was appointed by the board of directors of GGL as the companys chief executive officer for a period of two years. On assumption of charge of GGLs affairs, Mr Parvez found out that exploration on five of the companys wells located in the province of Baluchistan had proved successful and pumping for oil on these sites would start very soon. Excited, Mr Parvez mentioned this fact to his wife, Ritu, who without informing Mr Parvez purchased 13% of the companys listed shares and sold the same within a period of five months when their price sky-rocketed because of the eventual oil discovery news in the press media. Concerned by the imminent repercussions of his wifes actions, Mr Parvez has approached you for advice. Required: Advise Mr Parvez on the following: (a) Whether Ritus purchase of GGL shares amounts to insider trading. (8 marks)
(b) W hether he can be removed from the position of chief executive officer of GGL before the expiry of his term because of the transaction. (5 marks) (c) His future course of action and the consequences of failing to act. (7 marks) (20 marks)
10 The board of directors of Good Luck (Private) Limited have decided that the company shall start packaging of food items despite the fact that the memorandum of association of the company states that it shall only engage in the production and sale of soft drinks. Faisal, a shareholder has threatened to initiate winding up proceedings against the company on the grounds that proper books of account are not being maintained and the company is engaging in unauthorised business. The board of directors has approached you for advice. Required:
(a) State whether the board of directors of the company can authorise the company to start the food-packaging
business. (b) Discuss the likely outcome of winding up proceedings.
(10 marks) (10 marks) (20 marks)
[P.T.O.
11 EBL, a commercial bank, advanced to Miss Nadia Rs.500,000 for one year commencing from 10 February 2004 at the rate of 10% per annum for investment in the stock exchange against her jewellery as security. On 10 February 2005, Nadia repaid to EBL the sum of Rs.500,000 only and requested that her jewellery be returned to her. The EBL management has approached you for advice. Required: (a) State whether EBLs relationship with Nadia constitutes pledge or hypothecation. (b) State whether EBL can refuse to return Nadias jewellery. (c) State what rights and remedies does EBL have if Nadia refuses to pay the interest due. (8 marks) (4 marks) (8 marks) (20 marks)
12 In 1987 Waseem, Khalid, Adnan and Asad each contributed 10,000 rupees to start a firm dealing in auto parts. At that time it was agreed that each of them shall be equally entitled to the firms assets and profits. Also that each of them shall be responsible for the firms business. Waseem now plans to retire from the firm and has sought your advice. Required: (a) State whether Waseem requires the permission from other partners to retire. (b) What is the extent of Waseems liability for acts done since 1987 and after retirement. (c) After his retirement, state whether Waseem would be entitled to any profits of the firm. (5 marks) (8 marks) (7 marks) (20 marks)
End of Question Paper
Answers
June 2006 Answers
(a) Before deciding a case judges see if a case involving similar questions of law and fact has been adjudicated upon by a court of higher or equal status. If so, the court deciding the new case shall follow the rule of law established in the earlier case, as a matter of policy not to disturb a settled point of law. The rationale behind this policy is the need to promote certainty, stability and predictability. Keeton in Elementary Principles of Jurisprudence has termed the doctrine of judicial precedents as not a mechanical process but rather as a process of analogy, which permits the judges to continuously adapt the common law to changing social needs.
Precedent as a source of law has been recognised by the Constitution of Pakistan, 1973 in Articles 189 and 201, which stipulate that any decision of the Supreme Court shall, to the extent that it decides a question of law or enunciates a principal of law, shall be binding on all other courts in Pakistan (Article 189); and decisions of a High Court shall, to the extent that it decides a question of law or enunciates a principal of law shall be binding on all courts subordinate to it (Article 201). In other words, the authority of the precedents in Pakistani system of law depends on the status of the court rendering the judgment. The rule is that every court binds the lower courts and that some courts even bind themselves as held by the Supreme Court of Pakistan in Chaudhry Ajaib Hussein v Mst. Zareen Akhtar, 2003 YLR 410 that judgment of Division Bench was binding upon the Single Bench and decision of Full Court was binding upon the Division Bench and Single Bench.
(b)The term customs refers to rules, which through long usage have attained the force of law. The superior courts of Pakistan in
Muhammad Hanif v Abdul Aziz, 1991 MLD 216 have held that customs attain the status of law if they through ancient times have been carried out unaltered, uninterrupted and continuingly and one instance or a few instances would be insufficient to prove a custom. Customs can be basis of judicial decisions if the transaction recognises the custom in question and contains on its records a number of specific instances pertaining to the relevant custom. Further the superior Courts of Pakistan in Nur Mohammad v Mohammad Yar, PLD 1951 Lahore 132 have held that the question as to what the custom was in a particular matter or class of people was a question of public nature and the courts had to make an objective enquiry to ascertain the customer on any particular point as customs may not be necessarily logical.
According to s.2(b) of the Contract Act, 1872 (1872 Act), acceptance is made when the person to whom the proposal/offer is made signifies his assent, and unless an offer is accepted the same would not consummate into a binding and enforceable contract (Rehmat Ali v Fakir Muhammad, 2005 YLR 301). Acceptance may be made by words spoken or written (express) or by conduct (implied), for instance when a person goes to a hotel and eats some food, he impliedly accepts to pay for it. If the person to whom the offer is made remains silent and does nothing to show that he has accepted the offer, no contract is formed (Felthouse v
Bindley, 1862).
Section 7(1) of the 1872 Act mandates that for acceptance to be valid, it must be absolute and unqualified as a qualified and conditional acceptance amounts to a counter offer i.e. rejection of the original offer. In other words consensus ad idem between the parties with regard to all the terms of the contract must be shown as qualified acceptance of a proposal or acceptance of a proposal with a variation is no acceptance (Al Huda Hotels and Tourism Company v Paktel Limited and others, 2002 CLD 218).
Acceptance must be made by the person to whom the proposal is made or by any person authorised by him (Boulton v Jones, 1857). For instance, where offer is made by A to B, the acceptance by C would be inoperative. Further, acceptance must be communicated to the person who made the offer and be made according to the mode prescribed or through the usual or a reasonable mode as acceptance given in any other manner may not be effective. Section 4 of the 1872 Act stipulates that communication of an acceptance is complete as against the proposer when it is put in course of transmission to him, so as to be out of the power of the acceptor and as against the acceptor when it comes to the knowledge of the proposer. Also for acceptance to be valid it must be made within the time allowed by the proposer and if no time is specified, it must be made within a reasonable time.
The concept of a partnership and its various kinds are detailed in the Partnership Act, 1932 (1932 Act). A partnership, unlike a company, is not a separate legal entity and its rights and duties are the rights and duties of partners composing it (Haji Bashir Ahmed v Federal Land Commission, Islamabad, PLD 1985 Karachi 83). Partnership is of three kinds: (1) General Partnership (2) Particular Partnership, and (3) Partnership at Will (1) General Partnership Section 4 of the 1932 Act terms a partnership as a relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The superior courts of Pakistan while interpreting this clause in Ismail Dada Adam Soomar v Shorat Banoo, 1960 PTD 1194 have held that the essentials of a partnership are (i) agreement between two or more persons; (ii) to run a business with the intention of sharing profits and (iii) the business should be run by all or any one of them acting for all. Such kind of partnership is also termed as a general partnership and herein the partners are jointly and severally liable for the debts of the partnership business (National Bank of Pakistan v M.M. Agencies, 1991 CLC 1793). Further, it is different from a particular partnership in which liability of the partners extends only to a particular adventure or undertaking.
(2) Particular Partnership Section 8 of the 1932 Act provides that a Particular Partnership is a partnership organised for a single adventure or undertaking for instance, there may be partnership between an author and a publisher for a particular book. If a partnership has been formed only for running a particular agency, i.e. a single venture then it would continue only as long as such agency lasts and if the partners want to do other business after expiry of agency, they could do so only by a fresh agreement (Seth Hussein Bhai v Muhammad Iqbal, PLD 1976 Quetta 9). (3) Partnership at Will The 1932 Act in s.7 gives us the concept of partnership at will which is a partnership wherein (i) no fixed period has been agreed upon for the duration of the partnership; and (ii) there is no provision for determining the existence of partnership. A partnership at will may be dissolved by any partner by giving notice in writing to this effect. Dissolution takes effect from the date mentioned in the notice and if no date is mentioned then from the date of communication of the notice. Thus, the essence of a partnership at will is that it can be dissolved by the partners at any time.
Auditors are responsible for examining the companys affairs on behalf of the shareholders and are duty bound to honour this position of trust by giving the shareholders a fair and full account of the companys accounts. To enable the auditors to perform their functions and fulfil their duties, s.255 of the Companies Ordinance, 1984 (Ordinance) equip them with certain rights and powers that are discussed below: Rights of Auditors (i) Right of Access Auditors have the right to access at all times the books, papers, accounts and vouchers of the company, whether kept at the companys registered office or elsewhere. (ii) Right to Request
Auditors are entitled to require from the companys directors and officers information necessary for performance of their duties.
Duties of Auditors (i) Auditors Report Auditors shall make a report for the shareholders of the company pertaining to the companys accounts and books of accounts and the same shall state whether all information required had been obtained; proper books of accounts as per law were being kept by the company; balance sheet and profit and loss account or the income and expenditure account was according to law and in agreement with the books of accounts; the accounts gave a true and fair view of the companys state; whether expenditure incurred was for the purpose of the companys business; business conducted, investments made and expenditures incurred were in accordance with the objects of the company; and zakat has been deducted and deposited in the Central Zakat Fund. In case any of the ingredients of the auditors report are missing then the report shall state the reason for this. (ii) Attend the General Meeting Auditor(s) of a company are entitled to attend the general meetings and to receive all notices and communications in this regard.
A dividend is the share in the profits declared by a company for distribution amongst the shareholders (Kantilal Manilal v C.I.T., (1956) 26 Com Cases 357). However, it is to be noted that shareholders cannot compel the company by any process to declare a dividend and the right to obtain a dividend only arises after a company in a general meeting has declared a dividend. Further, a dividend once declared becomes a debt for which the shareholder can sue the company in case of non-payment (Bacha F Guzdar v C.I.T., AIR 1955 SC 74; and In re Severn and Wye & Severn Bridge Ry. Co, (1896) 1 Ch. 559).
For the declaration and distribution of a dividend, the formalities set out in ss.248; 249; 250 and 251 of the Ordinance need to be complied with. Section 249 read with s.248(2) of the Ordinance provides that a dividend can only be paid out of profits of the company. Further that no dividend shall be declared or paid by a company for any financial year when profits were made from the sale or disposal of any immovable property or assets of a capital nature unless the business of the company consists of selling and purchasing any such property or assets. If the above-mentioned requirements are fulfilled, the directors of a company may decide the rate and quantum of dividend and submit the same for the approval by the shareholders in the general meeting. Please note that the shareholders in a general meeting cannot approve a dividend in excess of the amount recommended by the directors (s.248(1) of the Ordinance). Further, s.251 provides that after declaration of a dividend the chief executive of the company shall be responsible for its payment within 45 days of such declaration in the case of a listed company and within 30 days in the case of any other company. Declaration here refers to the date of the general meeting in which the dividend was approved. As per s.250 subsections (1) and (3) a dividend shall be paid by a company to the registered holders of shares, or their bankers, and a dividend warrant shall be sent by registered post unless the shareholder entitled to receive the dividend requires otherwise in writing.
Both (Members and Creditors) instances of voluntary winding up can be initiated by the passing of a special resolution and giving notice by advertisement of the same as per s.361(1) of the Companies Ordinance, 1984. The point of distinction between (Members and Creditors) voluntary winding up is whether a Declaration of Solvency as per s.362 has been made or not. (a) Members Voluntary Winding Up Declaration of Solvency (s.362): Such declaration can be made within five weeks of the passing of the special resolution for winding up by the directors or majority of the directors (in case the company has more than three directors) including the chief executive at a meeting of the board and states that in their opinion the company has no debts, or shall be able to pay all its debts in full within a period of 12 months. Appointment of Liquidator (s.366(1) and (2)): The company shall at a general meeting by special resolution appoint one or more liquidators for winding up the affairs and distributing the assets of the company and shall notify the registrar of the appointment of the liquidator(s) within ten days of the same (s.366(1) and (2)). On appointment of the liquidator, all the powers of the directors, chief executive and other officers cease, except for purposes such as giving notices. Liquidators Report, Final Meeting and Dissolution (s.370): The liquidator shall make a report mentioning how winding up was conducted and the companys property disposed and he shall call, by giving notice according to s.361, a general meeting of the company. At the meeting the liquidator shall present his report and account and within one week of the general meeting, the liquidator shall submit to the registrar a copy of the report and minutes of the meeting. The registrar shall after such scrutiny as he deems fit, register the documents provided and on expiration of three months from such registration, the company shall stand dissolved. (b) Creditors Voluntary Winding Up Creditors Meeting: The company shall call a meeting of the creditors on the day or one day following the date, of the general meeting at which the special resolution for voluntary winding up was proposed. At such meeting the directors and chief executive shall present a full statement of the companys affairs, assets and liabilities, list of creditors and the estimated amount of their claims (s.373(3)). Further, any resolution passed at such meeting shall be sent to the registrar within ten days. Appointment of Liquidator and Committee of Inspection: The creditors and the company at their respective meetings can nominate liquidators for the purpose of winding up the affairs and distributing the assets of the company. In case the creditors and company nominate different persons the nominee of the creditors shall prevail and hold office until conclusion of winding up proceedings. On the appointment of a liquidator, all the powers of the directors, chief executive and other officers of the company come to an end except for limited purposes such as giving notice of resolution of winding up (s.376). The creditors may at a meeting held in pursuance of s.373 or at any subsequent meeting, appoint a Committee of Inspection consisting of not more than five persons to assist in the administration of the company. Liquidators Report, Final Meeting and Dissolution (s.382): This process of winding up should be completed in one year and as soon as the affairs of the company are fully wound up, the liquidator shall make a report and account of winding up and shall call a general meeting of the company and a meeting of the creditors for the purpose of laying before them the said reports. Within one week of the meeting later in time (either of the creditors or of the company) the liquidator shall send to the registrar a copy of his report and account. On receiving the report and account in respect of each meeting the registrar shall after such scrutiny as he may deem fit, register them, and on the expiration of three months from such registration the company shall be deemed to be dissolved.
(a) The memorandum of association of a company is a document, which sets out the constitution of the company and mentions amongst others the objects for attainment of which the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad, 2003 CLD 463). Its purpose is to enable the shareholders, creditors and those who deal with the company to know its permitted range of enterprise. As per ss.16 and 17 of the Companies Ordinance, 1984 the memorandum of a company composes of the following clauses: (i) Name; (ii) Registered Office; (iii) Object; (iv) Liability; (v) Capital (Share or Guarantee) and (vi) Association. The importance of the memorandum can be gauged from the fact that any act of the company in violation of the memorandum is ultra vires and so void that it cannot be ratified.
(b)
The articles of association are rules and regulations framed for the internal management of a company and are subordinate to the memorandum. Articles define powers of directors and set out the terms of contract between them (United Liner
Agencies of Pakistan (Private) Limited v Miss Maheneau Agha, 2003 SCMR 132). In other words, articles define the duties, rights and powers of the governing body, company at large, prescribe the mode by which business of the company is to be carried on, and changes in the internal regulation of the company may be made from time to time. Further, articles cannot enlarge the scope of the companys objects mentioned in the memorandum, however, in case of an ambiguity in the memorandum, the articles can be referred to for the limited purpose of clarifying such ambiguity.
Workman has been defined in s.2(xxx) of the Industrial Relations Ordinance, 2002 (the IRO) as any and all persons who are not employers and have been employed in an establishment or industry for remuneration either directly or through a contractor on express or implied terms. Earlier under the Industrial Relations Ordinance, 1969 there was a monetary aspect to the definition of workmen, i.e. people working in a managerial capacity but drawing less than 800 rupees were also classified as workmen. However the real test of determining whether a person qualifies as workman or not depends on the nature of work to be performed by him (Security Paper Limited v Sindh Labour Appellate Tribunal, PLD 1988 SC 180). Designation or salary of an employee is not the deciding factor in concluding whether a person is a workman or not. It is important to determine whether a person is a workman or not as under the IRO workers have been given certain rights, forums for protection of these rights have also been introduced and it is only workers which can benefit from them. Workers as per s.3(1)(a) of the IRO have the right to form and join Trade Unions (a collective body of workers which strives for their rights). Also for the benefit of workers the IRO in s.23(5) has created the office of Shop Steward who is to act as a link between the workers and the employers for provision of better working conditions. Further, the IRO in s.24 has created the Joint Works Council which along with the management shall strive for providing amongst others safe and healthy conditions; vocational training; and educational facilities for children of workmen. Labour Courts have also been created for resolution of disputes relating to workmen and in proceedings of such courts no court fee has been made payable for filing, exhibiting or recording documents (s.45(4)).
Further to give protection to workmen certain acts such as restriction on workers from joining trade unions or discrimination during employment or dismissal if worker is a member of a trade union by the employers have been termed as unfair labour practices and hence punishable under the IRO (s.63). Further, as per Schedule II of IRO, the employers are bound to protect and safeguard the interest of the workers and to take measures within their resources for the workers socio-economic uplift and welfare.
(a) The purchase and the subsequent sale of 13% shares of GGL by Ritu amounts to insider trading as the shares will be deemed to be in the beneficial ownership of Mr Parvez. The Explanation to s.224(3) of the Companies Ordinance, 1984 provides as follows:
Explanation: (a) For the purposes of this section and s.222, beneficial ownership of securities of any person shall be deemed to include the securities beneficially owned, held or controlled by him or his spouse or by any of his dependent lineal ascendants or descendants not being himself or herself a person who is required to furnish a return under s.222. Sections 222 and 224 of the Ordinance require a beneficial owner of more than 10% listed securities of a company to report and deposit the gain with the company arising from a purchase and sale, or sale and purchase transaction in such securities within a six months period. In the given case, Ritu (and more precisely, Mr Parvez) did not furnish the information to GGL, nor was the registrar or the Securities and Exchange Commission of Pakistan (SECP) informed about this ownership.
Section 224 of the Companies Ordinance, 1984 (Ordinance) states that where amongst others the chief executive of a listed company is the beneficial owner of more than 10% of the companys listed securities and makes any gain by the purchase and sale of any such securities, he should report and tender the amount of such gain to the company and simultaneously send an intimation to the registrar and the SECP.
In view of the above statutory provision, Mr Parvez should have reported and deposited the amount of gain with GGL and notified the registrar and SECP. As Ritus purchase of GGL shares was made when she heard from her husband (GGLs chief executive officer) that work on the companys wells was going to start (companys confidential information) and sold the same when share prices increased due to oil discovery news, her act amounts to insider trading.
(b) Mr Parvez can be removed from the office of chief executive before the expiration of his term (irrespective of any provision to the contrary in the articles of association of GGL or in any agreement between GGL and Mr Parvez) by (i) the directors of GGL; or (ii) passing of a special resolution; as per s.202 of the Ordinance. In case of removal by the directors, a resolution to this effect will have to be passed by at least three quarters of the total number of directors of GGL. Mr Parvez can also be removed at a general meeting provided a resolution to this effect is passed by a majority of not less than three-quarters members of GGL present and entitled to vote in such a meeting (s.202 read with 2(36)). (c) As per s.224(1) of the Ordinance, Mr Parvez being beneficial owner of more than 10% of GGLs listed securities and making a gain by their purchase and subsequent sale, should have made a report and tendered the amount of such gain to GGL. Further, he should have simultaneously sent intimation to this effect to the registrar and the SECP. Mr Parvez shall immediately tender the amount of gain made in the purchase and sale transaction of the shares to GGL. Or else, Mr Parvez would be required to tender the amount to the SECP and would be liable for fine.
Therefore if six months have not elapsed then Mr Parvez should initiate the above mentioned i.e. (i) report and deposit amount of gain with GGL and (ii) notify the registrar and SECP. In case more than six months have elapsed and Mr Parvez has failed or neglected to tender the total amount of the gain from the aforementioned transaction to GGL then as per s.224(2) of the Ordinance, SECP can direct recovery of the gain as an arrear of land revenue. Further, s.224(4) mandates that Mr Parvez could be held liable to a fine, which may extend to 30,000 rupees and in case of a continuing contravention to a further fine of 1,000 rupees (maximum) for every date during which such contravention continues.
10 (a) A company cannot engage in business, which is not fairly incidental or consequential to the business of the company
mentioned in the memorandum of association. As the memorandum of association of a company is a document which amongst others mentions the objects for attainment of which the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad, 2003 CLD 463). Any act of the company in violation of the memorandum is ultra vires and so void that it cannot be ratified. The proper test for determining whether an act is ultra vires or not is to see if the power to do a thing arises from necessary implication from the expressed objects and if it does the act should not be held as ultra vires. As directors are fiduciaries and are bound to exercise their powers in good faith for the benefit of the company and for a proper purpose. Herein the board plans to authorise Good Luck (Private) Limited to initiate the food packaging business despite the fact that the said business is not mentioned in the companys memorandum and neither can it qualify as business, incidental or consequential to the business of Good Luck (Private) Limited. Further, the board does not have power under the Ordinance to allow the company to carry out activities not provided for in its memorandum. (b) Section 305(f)(ii and iv) of the Ordinance provides that a company may be wound up by the court if the company is (ii) carrying on business not authorised by its memorandum and (iv) being run and managed by persons who fail to maintain proper and true accounts or commit fraud, misfeasance or malfeasance in relation to the company.
Please note that the superior courts of Pakistan with regard to winding up have held that a petition for winding up of a company can be made by a shareholder or creditor of the company or by the company itself. Locus standi of a person to file such a petition has to be seen on the date of filing (Mohammad Hussein v Dawood Flour Mills, 2003 CLD 1429). Further that a joint reading of ss.305 and 306 suggests that a company judge has discretion to order or not to order winding up of a company after taking into consideration all the relevant facts. As the object of winding up is to realise the assets of the company and to pay its debts and winding up proceedings should not be initiated to coerce the debtor company into making payment to an unpaid creditor (Platinum Insurance Company Limited v Daewoo Corporation, PLD 1999 SC 1). Further that order for winding up can be sought or made on all or any of the grounds enumerated in s.305 (Habib Bank Limited v Hamza Board Mills, PLD 1996 Lahore 633) provided it is satisfactorily proved and courts should not exercise such discretion on an application which is not bona fide i.e. aims to pressurise the company.
In view of the above, we are of the opinion that winding up proceedings against the company might be successful if Faisal is able to prove the grounds mentioned in s.305(f)(ii and iv) i.e. that Good Luck (Private) Limited are not maintaining proper books of account and are engaging in business not authorised by its memorandum.
11 (a) Sections 148 and 172 of the Contract Act, 1872 (the Act) states that pledge is the delivery of goods by way of security
upon a contract that they shall when the debt is paid or promise performed be returned or otherwise disposed of according to the directions of the pledgor. Therefore, to constitute a valid pledge there must be (i) a contract in relation to an identified chattel which is to be delivered as security and (ii) actual delivery of possession of the identified chattel. Whereas hypothecation is pledging a thing as security for a debt without parting with its possession i.e. possession of the pledged chattel remains with the debtor. Nadias relationship with EBL constitutes a pledge as she delivered the possession of her jewellery to EBL as security against an advance of 500,000 rupees. Further Nadias position is that of the pawner and EBLs as that of pawnee. (b) Section 173 of the Act allows a pawnee to retain possession of the goods pledged not only for payment of the debt but also for interest on the debt. Therefore despite repayment of the amount of 500,000 rupees by Nadia, EBL can retain possession of her jewellery until payment of the interest due on the advanced amount. (c) Section 176 of the Act states that if the pawner makes default in payment of the debt then the pawnee may bring a suit against the pawner for the debt and retain the goods pledged as a collateral security; or he may sell the goods pledged, on giving the pawner reasonable notice of the sale. Further, if the proceeds of such sale are less than the amount due in respect of the debt, the pawner is liable for the balance and if the proceeds of the sale are greater then the pawnee should return the surplus to the pawner.
While interpreting the above mentioned provision the superior courts of Pakistan have held that the three mentioned remedies of (i) right to retain pledged goods, (ii) right to sell same and (iii) right to bring an action for realisation of debt, were not alternative remedies, but concurrent (Central Bank of India v Syed Mohammad Abdul Jalil Shah, 1999 CLC 671). However, before exercising the right to sell the pledged goods, the pawnee is required to give a reasonable notice to pawner of his intention to sell though a second notice at time of actual sale is not required. (A. Habib Ahmed v The Hong Kong Shangai
Banking Corporation, 1987 CLC 1919). If after the sale any part of the debt due remains outstanding then pawnee can recover his debt by personal action against pawner for recovery of balance (National Bank of Pakistan v Bright Leather Works, 1980 CLC 1170).
Therefore, EBL has the right to retain possession of Nadias jewellery until interest due on the amount advanced is paid. At the same time EBL can initiate proceedings for recovery of the said amount and EBL can serve a notice on Nadia stating that her jewellery is liable to be sold by EBL in case she does not pay the amount due to EBL before a certain date. Further if the proceeds of such sale are less than the interest due then EBL can initiate proceedings against Nadia for recovery of the balance and if the proceeds of the sale are greater then EBL should return the surplus to Nadia.
12 (a) The Partnership Act, 1932 (1932 Act) in s.32(1) provides three modes (i) with consent of all other partners; (ii) in
accordance with the express agreement between partners; and (iii) if the partnership is at will then by giving a notice of his intention to retire in writing to all the other partners; by which a partner can retire from a firm. Further, s.7 of the 1932 Act describes that in a partnership-at-will contract there is no provision dealing with the duration of partnership or for the determination of their partnership. In view of the above, we advise that Waseem retire from the firm after obtaining the consent of the other partners. This view is further fortified as the agreement between them (Waseem, Khalid, Adnan and Asad) does not prescribe a mode of retirement and neither is their partnership a partnership-at-will.
(b) Section 32(2) of the 1932 Act states that a retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and that such agreement may be implied by a course of dealing between such third party and the reconstituted firm. It can be implied that third parties had notice if a public notice of retirement is given by the retired partner or by any partner of the reconstituted firm (s.32(4)). Importance of this public notice is provided in s.32(3), which states that notwithstanding the retirement of a partner from a firm, he and the partners shall continue to be liable as partners to third parties for any acts done by any of them before retirement on behalf of the firm until public notice of retirement is given.
In view of the above, we are of the view that Waseem shall continue to be jointly and severally liable for all acts since 1957 until he either (i) reaches an agreement with such third parties and the partners of the reconstituted firm discharging him of any liability or (ii) a public notice of his retirement is given by him or any of the other partners.
(c) At the time of retirement Waseems account i.e. share in the firms capital, assets and profits should be settled vis vis the
other partners (Khalid, Adnan and Asad) and thereafter Waseem shall no longer be entitled to any further share of profits.
However if upon retirement Waseems account is not settled and the remaining partners carry on the business of the firm then Waseem shall be entitled at his option to (i) profits made since his retirement attributable to his share of firm or (ii) to interest at the rate of 6% per annum on the amount of his share in the property of the firm (s.37).
Part 2 Examination Paper 2.2(PKN) Corporate and Business Law (Pakistan) 1 This question is divided into two parts carrying different marks.
June 2006 Marking Scheme
(a) 46 Answers discuss the doctrine of precedents and its position as a source of law as recognised by the Constitution of
Pakistan, 1973. 03 Poor answers depicting little or no knowledge about the doctrine or position of precedents as a source of law.
(b) 34 Answers discuss the nature of customs and refer to factors, which fortify their position as a source of law. 02 Answers show little understanding of the concept of customs. 2 This question expects candidates to define acceptance and discuss conditions, which need to be complied with for a valid acceptance as envisaged in the Contract Act, 1872. 710 Answers define acceptance and discuss in detail the various conditions (ss.2(b), 4, 7(1)) that need to be met for a valid acceptance. 36 Answers define acceptance but reflect incomplete knowledge about the various conditions that need to be met for a valid acceptance. 02 Extremely poor answers that show little or no knowledge about acceptance or conditions for a valid acceptance.
This question expects candidates to demonstrate an understanding about partnership and its kinds as discussed in the Partnership Act, 1932. 710 Answers mention and analyse in detail partnership and its kinds with reference to ss.4, 7 and 8. 36 Answers show some knowledge about partnership and its kinds with little or no reference to Partnership Act, 1932. 02 Extremely poor answers that show little or no knowledge about the concept of partnership and its kinds.
This question expects candidates to refer to s.255 of the Companies Ordinance, 1984 (the Ordinance) for discussion on powers and duties of auditors. 710 Answers mention in detail the rights (of access and request) and duties (compilation of auditors report and attending the annual general meeting) of the auditors. 36 Answers show some knowledge about auditors rights and duties. 02 Extremely poor answers that show little or no knowledge about auditors rights and duties.
This question expects candidates to discuss the formalities set forth by ss.248; 249; 250 and 251 of the Ordinance for declaring and distributing dividends. 710 Answers define a dividend and discuss in detail the formalities set forth by the mentioned provisions for declaring and distributing dividends. 36 Answers exhibit some understanding about the concept of a dividend and/or the mentioned provisions for declaring and distributing dividends. 02 Answers in this bandwidth are extremely poor and show little or no knowledge about a dividend or the process for declaring and distributing the same.
This question is divided into two parts with each having equal marks. Initially the answers refer to ss.361 and 362 of the Ordinance before moving onto the specific provisions dealing with Members and Creditors Voluntary Winding Up respectively.
(a) 35 Answers discuss declaration of solvency (s.362), appointment of liquidator (s.366(1) and (2)), liquidators report,
final meeting and dissolution (s.370) to explain the process of Members Voluntary Winding Up. 02 Answers exhibit little or no knowledge about the process of Members Voluntary Winding Up.
(b) 35 02
Answers discuss creditors meeting (s.373(3)), liquidators report, final meeting and dissolution (s.382) to explain the process of Creditors Voluntary Winding Up. Answers exhibit little or no knowledge about the process of Creditors Voluntary Winding Up.
(a) 35 Answers discuss the nature, purpose and contents of the memorandum of association of a company in light of
leading cases and as per ss.16 and 17 of the Ordinance. 02 Answers fail to exhibit understanding about the concept and importance of the memorandum of association.
(b) 35 Answers discuss the nature, purpose and contents of the articles of association of a company. 02 Answers fail to exhibit little or no knowledge about the question. 8 This question expects candidates to display knowledge about the kinds of employees who are termed as workmen and the protective status enjoyed by them under the Industrial Relations Ordinance, 2002 (the IRO). 710 Answers in this bandwidth discuss the kinds of employees who are considered as workmen (s.2(xxx)); draws comparison with workmen as defined in Industrial Relations Ordinance, 1969 and the forums created for protection of workers like trade union (s.3(1)(a)); shop steward (s.23(5)); joint works council (s.24); and duties enjoined on employers as per schedule II of the IRO. 36 Answers define workers and/or show some understanding about their position under the IRO. 02 Answers show little or no understanding about the position of workmen under IRO. 9 This question expects candidates to demonstrate knowledge about the concept of insider trading and refer to different sections of the Ordinance.
(a) 58 Answers in this marks range discuss the concept of insider trading and Mr Parvezs position as the beneficial owner
of the shares purchased by his wife Ritu keeping in view s.224 of the Ordinance. 04 Answers are restricted to discussion on the concept of insider trading or s.224 of the Ordinance with little or no comment on Mr Parvezs position as the beneficial owner of the shares.
(b)35 Answers in this marks range discuss the two modes mentioned in s.202 of the Ordinance by which Mr Parvez could
be removed from the position of chief executive officer. Reference to s.2(36) special resolution shall be rewarded.
02
Answers show little or no understanding about the modes by which Mr Parvez could be removed from the position of chief executive officer.
(c) 57 Answers give advice to Mr Parvez as to his future course of action in the light of s.224 of the Ordinance.
34 Advice to Mr Parvez does not satisfactorily chalk out his future course of action or does not refer to s.224 of the Ordinance. 02 Answers show little or no knowledge about the matter at hand.
10 This question expects candidates to exhibit knowledge about the role of the memorandum of association of a company
with special emphasis on the object clause vis vis directors powers and to evaluate the likely outcome of winding up proceedings in case the same are violated.
(a) 710 Answers discuss the role of the memorandum of association of a company with special emphasis on the objects
clause, the ultra vires doctrine and opine as to whether the board could authorise Good Luck (Private) Limited to undertake business not mentioned in its memorandum. 36 Answers briefly discuss the role of the memorandum of association of a company in particular the objects clause, the ultra vires doctrine and/or fail to opine as to whether the board could authorise Good Luck (Private) Limited to undertake business not mentioned in its memorandum.
Extremely poor answers failing to exhibit understanding about the role of the memorandum, the ultra vires doctrine and whether the board could authorise Good Luck (Private) Limited to undertake packaging business.
02
(b) 710 Answers discuss undertaking of unauthorised business by Good Luck (Private) Limited and failure to maintain proper
books of account as possible grounds of winding up with reference to s.305(f)(ii and iv) of the Ordinance and opine as to the outcome of the same.
36 02 Answers briefly discuss or opine as the outcome of winding up proceedings on the basis of the mentioned grounds. Answers fail to opine on the outcome of winding up proceedings or show knowledge about the mentioned grounds.
11
This question requires candidates to exhibit understanding of the concepts of pledge and hypothecation and to demonstrate an understanding of rights of parties in such a situation.
(a) 68 Answers discuss the concepts of pledge and hypothecation in light of ss.148 and 172 of the Contract Act, 1872
(Act) and opine as to the nature of relationship that EBL and Nadia are engaged in. 35 02 Answers briefly discuss pledge and hypothecation concepts and/or opine as to the nature of relationship that EBL and Nadia are engaged in with reference to the mentioned provisions. Answers demonstrate little knowledge about the question.
(b) 34 Answers discuss EBLs retention of Nadias jewellery with reference to s.173 of the Act. 02 Answers demonstrate a lack of understanding about the matter at hand. (c) 68 Answers discuss the three concurrent remedies of (i) right to retain pledged goods, (ii) right to sell same and (iii) right to bring an action for realisation of debt as provided in s.176 of the Act and the criteria for availing these remedies. 35 Answers demonstrate little understanding about the remedies available under s.176 of the Act. 02 Answers in this bandwidth show little understanding of the matter.
12 This question requires candidates to enumerate the steps, which need to be taken by a partner to retire from a partnership/firm.
(a) 35 Answers quote s.32(1) of the Partnership Act, 1932 (1932 Act) and opine as to whether Waseem requires the
permission of the other partners to retire from the firm. 02 An incomplete answer showing little understanding of the question.
(b) 68 Answers discuss Waseems liability for acts since 1957 and after retirement with reference to s.32 of the 1932 Act. 35 Answers in this band show a reasonable understanding about Waseems liabilities both before and after retirement. 02 Answers fail to comment properly on Waseems liabilities in both scenarios. (c) 47 Answers quote s.37 of the 1932 Act to discuss Waseems entitlement to firms profits after retirement. 03 Answers fail to exhibit knowledge about Waseems rights to firms profit after retirement.
(Pakistan)
Paper 2.2(PKN)
Section A SIX questions ONLY to be attempted 1 In the context of the Constitution of the Islamic Republic of Pakistan, 1973 explain the position of the Principles of Policy.
(10 marks)
2 Explain the responsibilities of bailor and bailee under the law of contract. (10 marks)
3 In relation to the law of contract, explain the concept of discharge of contract. (10 marks)
4 In relation to partnership law explain: (a) Methods of retirement available to a partner in a firm; and (b) Liabilities of a partner after retirement. (5 marks) (5 marks) (10 marks)
5 In relation to company law define: (a) a public company and state its characteristics. (b) a company limited by shares. (5 marks) (5 marks) (10 marks)
6 In relation to company law, explain the doctrine ofultra vires in the context of the objects of a company. (10 marks)
State the procedure and formalities involved in registering a company under the Companies Ordinance, 1984.
(10 marks)
8 Explain the scope of the following labour statutes: (a) Industrial Relations Ordinance, 2002; and (b) The Industrial & Commercial Employment (Standing Orders) Ordinance, 1968. (5 marks) (5 marks) (10 marks)
Section B TWO questions ONLY to be attempted

9 Ali, Arif and Ameer have recently incorporated ABC (Private) Limited (the Company) and have approached KMC Bank (the Bank) for an extension of the existing finance facility availed by the Company. The manager of the Bank has observed that Ali, Arif and Ameer are not the directors of the Company but mere subscribers to its memorandum of association. As per the Banks policy, it extends finance facility to a Company if an employee of the Bank is appointed on the board of directors of the Company and all directors of the Company, except the Banks nominee, have unlimited liability with respect to debts owed to the Bank. The Banks senior management has approached you for advice.
Required: (a) Explain the legal status of Ali, Arif and Ameer according to the Companies Ordinance, 1984. marks) (6 (b) Discuss whether an employee of the Bank can be a director of the Company, and assuming he can, whether a majority of the Companys shareholders can remove him. (8 marks) (c) State whether Ali, Arif and Ameer can have unlimited liability. (6 marks) (20 marks)
10 The ordinary shareholders of JLP Limited, on 8 June 2005, duly passed a special resolution declaring preferential rights enjoyed by preference shareholders void and from then onwards, the ordinary and preference shareholders were to have the same rights and liabilities. Mr Abid, who holds 60% of preference shares, has voted in favour of this special resolution. The remaining 40% of preference shares are held by Mr Bilal (20%) and Mr Jawad (20%), who feel that their economic interests have been compromised and on 20 June 2005 approached you for advice.
Required: (a) Explain whether the special resolution is valid.

(10 marks)
(b) State what remedies are available to Mr Bilal and Mr Jawad under the Companies Ordinance, 1984. (10 marks)
(20 marks)
11 Jamal placed an advertisement in the national newspaper on 1 October 2005 for the sale of his one acre farmhouse in Islamabad. The next day Omer visited the farmhouse, met Jamal, and both Jamal and Omer agreed that if Omer wanted to purchase the farmhouse, he should arrange to pay rupees 5,000,000 to Jamal within three days. On 4 October 2005, Omer posted a letter to Jamal mentioning that he had decided to purchase the farmhouse and that he was in the process of arranging the money. The said letter was received by Jamal on 9 October 2005.
Jamal has approached you and revealed that on 8 October 2005 he had already agreed to sell the farmhouse to Rashid, as he had not heard from Omer within three days of their meeting as agreed. Now both Omer and Rashid are threatening to initiate legal proceedings against Jamal if the farmhouse was not sold to them. Required: (a) Advise Jamal on the merits in Omers claim. (b) Advise Jamal on the merits in Rashids claim. (c) Advise Jamal as to his future course of action. (10 marks) (6 marks) (4 marks) (20 marks)
[P.T.O.
12 Ammar, Bilal and Sohail collectively have formed a firm in which Sohail has the status of junior partner. Sohails status of junior partner, which restricts him from dealing with the firms immovable assets and bank accounts, is not publicly known. In excess of his authority, Sohail has executed in the firms name an agreement to lease out to Qasim a shop in Model Town, Lahore owned by the firm. In another instance Sohail misappropriated a sum of rupees 10,000 paid by Anwar to the firm for supply of timber. Disturbed by such actions of Sohail, Ammar and Bilal have approached you for advice. Required:
(a) State whether the restrictions imposed on Sohail because of his status as a junior partner are valid under the
law of partnership. (b) Discuss the status of the lease agreement executed by Qasim.
(6 marks) (8 marks)
(c) State what is the firms liability in respect of Sohails misappropriation of the amount advanced by Anwar.
Answers
Part 2 Examination Paper 2.2(PKN) Corporate and Business Law (Pakistan) 1
December 2006 Answers
The Principles of Policy contained in chapter 2, Articles 29 to 40 (the Principles) of the Constitution of Pakistan, 1973 (the Constitution) set out the guidelines for the state for future law making and functioning. The guidelines include elements such as, enabling the Muslims of Pakistan to live their lives in accordance with the basic principles of Islam (Articles 31); encouraging local elected government institutions (Article 32); ensuring full participation of women in all spheres of national life (Articles 34); discouraging parochial, racial, tribal, sectarian and provincial prejudices among the citizens (Article 33); and protection of minority rights (Article 36). The position enjoyed by the Principles under the Constitution is reflected in Articles 29 and 30 and is discussed below: The Principles do not constitute rules of law The Supreme Court of Pakistan in Hakam Qureshi v Judges of the High Court, PLD 1976 SC 713 has held that while it is the responsibility of the state, and of each person performing functions on its behalf to act in accordance with the Principles (Articles 29(1)), the Principles themselves are not rules of law, which means that no action shall lie against the state or its any organ on the ground that its actions are not in accordance with the Principles (Articles 30(2)). Observance of the Principles depends on state resources The state and its organs should function in accordance with the Principles keeping in view resources available for the same (Articles 29(2)). The Principles to be used as an aid to interpret other constitutional provisions Duties enjoined on the state under Article 38 of the Constitution regarding the prevention of concentration of wealth in a few hands; providing basic necessities of life to those unable to earn their livelihood on account of infirmity, sickness or unemployment are duties not directly enforceable. Rather such state duties are indirectly enforceable as an aid for interpreting other provisions of the Constitution (Zohra v Government of Sind, PLD 1996 Karachi 1). Annual report The President, in relation to the affairs of the federation, and the Governor of each Province, in relation to the affairs of his Province, is required to prepare and present before the National Assembly or the Provincial Assembly a report on the observance and implementation of the Principles (Article 29(3)).
Section 148 of the Contract Act, 1872 (Act) envisages that bailment is the delivery of goods by one person to another under contract so that they shall be returned or otherwise disposed of according to the directions of the person delivering them upon accomplishment of the purpose of delivery. The person delivering the goods is called the bailor and the person to whom they are delivered is called the bailee. The responsibilities of bailor and bailee as set out in the Act are discussed below: Bailors Responsibilities (1) Disclosure of faults
With regard to this responsibility, a distinction exists between a gratuitous bailor and a bailor for reward. A gratuitous bailor is responsible for damage caused to the bailee from faults of which the bailor was aware and which would materially interfere with the use of goods or expose the bailee to extraordinary risks. In the case of bailor for reward the bailor is responsible for damage whether he was or was not aware of the existence of faults in the goods bailed (s.150).
(2) Repayment by bailor of necessary expenses In the case of gratuitous bailment, a bailor is responsible for repaying to the bailee the necessary expenses incurred by him for the purpose of the bailment (s.158). (3) Unauthorised bailment The bailor is responsible to the bailee for any loss, which the bailee may sustain by reason that the bailor was not entitled to make the bailment or to receive back the goods or to give directions in relation to them (s.158). Bailees Responsibilities (1) Duty of care
The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value (s.151). The initial onus of proof that the bailee had exercised this level of care is on the bailee and if the bailee proves the same then it is up to the bailor to prove negligence (Queensland Insurance Company Limited, Karachi v Trustees of the Port of Karachi, PLD 1976 Karachi 238).
(2) No unauthorised use

If the bailee makes any use of the goods bailed, which is not according to the conditions of bailment, then he shall be responsible for compensating the bailor for any damage arising to the goods from or during such use (s.154). For instance, where Asad gives his motorbike to Jamal for a paint job, Jamal starts using it for his personal use and during this time the motorbike gets stolen then it shall be Jamals responsibility to compensate Asad for the lost motorbike.
(3) No mixing of goods

If the bailee without the consent of the bailor mixes the bailors goods with his own, then if the goods can be separated, the bailee shall be responsible for bearing such expense of separation (s.156). However, if it is impossible to separate the goods then it shall be the responsibility of the bailee to compensate the bailor for the loss of the goods bailed (s.157).
(4) Return of goods Section 161 mandates that if the bailee retains the goods after the period for which they had been bailed, the bailee shall be responsible to the bailor for any loss, destruction or deterioration of the goods. (5) Account for increase or profit The bailee is responsible for delivering to the bailor any increases or profit which may have accrued from the goods bailed (s.163). (6) Delivery to bailor without title
Section 166 provides that if the bailor has no title to the goods and the bailee in good-faith, delivers them back to, or according to the directions of the bailor, then the bailee shall not be responsible to the owner in respect of such delivery.
A contract is said to be discharged when the parties to it are absolved from the performance of their respective obligations arising from it. The following are the various modes in which a contract may be discharged by: (1) Agreement
The rights and obligations created by an agreement can be discharged without their performance by means of another agreement between the parties which provides for the extinguishment of the earlier rights and obligations. This is called novation and means that there being a contract in existence some new contract is substituted for it, either between the same parties or between different parties; the consideration mutually being the discharge of the old contract (s.62).
(2) Performance
Performance of a contract is a common way of discharge of a contract. The performance of a contract lies in doing or causing to be done what the promisor has promised to do. On the performance of the obligation undertaken by the parties, the contract is automatically discharged. Where a party has done what it undertook to do there is nothing left for it to do. If only one party performs its promise, it alone is discharged and acquires a right of action against the other which is guilty of breach.
(3) Operation of law Discharge by operation of law normally occurs in the instances of insolvency, merger, alteration and death.
Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions transferred to an officer of the court.
Merger is an operation of law, which discharges a right by virtue of its coinciding with another and greater right in the same person. For instance, if Abid holds a certain property under lease but subsequently he buys the same then his rights as a lessee are merged into his right of ownership.
Alteration of a written contract made without the consent of the other party has the effect of discharging the contract provided the alteration is of a material part. An alteration which is not material or authorised will not affect the validity of the contract.
Death of the promisor discharges the contract if performance of a contract is required to be made in person and the personal qualifications of the promisor are the considerations for the contract. (4) Breach of Contract The parties to a contract are expected to perform their respective obligations. If any party fails to perform its obligation, a breach of contract occurs which would result in discharge of the contract. (5) Impossibility of performance Impossibility of performance, results in the discharge of the contract. Impossibility referred to here must be in existence at the time when the contract is made and may or may not be known to both the parties at that time. If, however, the promisor alone knows of the impossibilities then existing, he is bound to compensate the promisee for any loss he may suffer on account of the non-performance of the promise.
(a) When a partner withdraws from a firm and the remaining partners can continue to carry on the business of the firm and the partnership does not stand dissolved, then the withdrawing partner is said to have retired from the firm.
The Partnership Act, 1932 (1932 Act) in s.32 subsection (1) sets out three (3) methods by which a partner may retire:
(i)
Consent of all partners With the express or implied consent of all other partners, a partner may retire at any time from a firm.
(ii)
Express agreement between partners A partner may retire from a firm in accordance with the method prescribed by the articles of partnership whether or not the other partners agree to this at the time of retirement.
(iii) Written Notice In a partnership at will a partner may retire by giving written notice to this effect to all the other partners. A partner may retire from a firm in any of the three methods discussed above and retirement of a partner without his knowledge or consent by other partners is not just and proper (Syed Khurshid Sohail v Aziz Hami, 1988 MLD 381). (b) Section 32, subsections (2) and (3) of the 1932 Act discusses a retiring partners liability.
It stipulates that a retiring partner along with other partners remains liable to third parties for acts done before retirement by any of them on behalf of the firm. Such liability of the retiring partner continues until publication of public notice of retirement.
Also a retiring partner can be absolved of liability towards any third party for acts of the firm done before his retirement by an agreement between the retiring partner, partners of the reconstituted firm and concerned third party. Such agreement can be express or implied i.e. it can be inferred by a course of dealing between third party and the reconstituted firm after the fact of retirement becomes known. Therefore, a retiring partners liability continues until (i) public notice of retirement is published; or (ii) agreement absolving him of liability is reached.
(a) The Companies Ordinance, 1984 (Ordinance) in s.2(30) defines a public company simply as a company, which is not a private company. In other words the characteristics of private companies mentioned in s.2(1)(28) of the Ordinance are not applicable to public companies. Hence, in the case of a public company there is no restriction on: (i) transfer of shares; (ii) maximum number of members; and (iii) offer of shares to the public. (i) Transfer of shares Articles of association of public companies unlike those of private companies do not restrict the transfer of shares of the public between members and the public at large. (ii) Extent of members Public companies are required to have a minimum of three members (s.47) and there is no upper limit to the maximum number of members that a public company may have, unlike a private company where a maximum number of members is fixed at 50 (ss.2(1)(28)(ii) and 47). (iii) Public subscription of shares A public company can offer its shares to the public. Shares of a public company can be publicly subscribed, that is, they can be floated on the stock exchange unlike those of private companies. (b) A company limited by shares is one in which the liability of members is limited to the extent of the value of their respective shares. Generally, if their respective shares are fully paid up then the shareholders are not liable for any more amount and if their shares are not fully paid up then as per s.2(1)(8) of the Ordinance the liability of members is limited to extent of the unpaid amount on their respective shares. Since the Ordinance allows only fully paid-up shares to be issued, and there is no deferred liability of the shareholders on their shares, in Pakistan the liability of the members is limited to the extent of their shareholding.
A company limited by shares can be a private or public company. Further, s.16 states that the memorandum of association of a company limited by shares shall state amongst others (i) the name of the company with the word(s) limited as the last word in the case of a public limited company, and (Private) Limited in the case of private limited company; the amount of share capital with which the company proposes to be registered, the division of the authorised share capital into shares of a fixed denomination and opposite to the name of each shareholder the number of shares taken by him shall be written.
The words ultra and vires mean beyond and powers respectively, and the doctrine of ultra vires encompasses a situation where a company acts beyond its authority.
This doctrine was initiated by the House of Lords in Ashbury Railway Carriage and Iron Company Limited v Riche, (1875) LR 7 HL 653, wherein it was held that contracts executed by the company which were ultra vires its objects were void. Objects for attainment of which the company has been incorporated are contained in the objects clause of the memorandum of association of the company and enable the shareholders, creditors and those who deal with the company to know its permitted range of enterprise. Their importance can be gauged from the fact that any act of the company in violation of the objects is ultra vires and, therefore, void, and cannot be ratified even if all the shareholders agree to it (A. Lakshmanaswami Mudallar v LIC, AIR 1963 SC 1185). Here it should be noted that companies are allowed to do acts, which are necessary or incidental to the attainment of its objects (Attorney General v The Great Eastern Railway Company, (1880) 5 AC 473).
The Superior Courts of Pakistan in Muhammad Yasin Fecto v Muhammad Raza Fecto, 1998 CLC 237 have held that courts generally do not interfere in the working of any company but are permitted to do so if, amongst others, the company indulges in acts ultra vires its objects. In such a situation any member of the company can get an injunction to restrict the company from indulging in such acts (Attorney General v The Great Eastern Railway Company, (1880) 5 AC 473). Also the companys directors incur personal liability if the companys capital is utilised for acts ultra vires its objects (George Newman, Re, [1895] 1 Ch 674) and the company retains its right over any property acquired through ultra vires acts if funds of the company have been utilised.
The procedure and formalities for incorporation of a company as set forth in the Companies Ordinance, 1984 (the Ordinance) are as follows: Section 15 of the Ordinance provides that any three persons may associate to form a public company and any one person may form a private company. For a listed company, the minimum number of members is seven.
As a first step the availability of the proposed name for the company from the registrar should be checked. In selecting the proposed companys name promoters should make sure that the name chosen is not otherwise inappropriate, deceptive or designed to exploit or offend the religious susceptibilities of the people and is not identical or closely similar to the name of an existing company (s.37). If the proposed name is available then the following documents are required to be filed for registration of a company:
(1) The memorandum and articles of the company are finalised in accordance with the Ordinance, and are signed by the subscribers and the first directors, respectively. (2) An application for incorporation of the company, along with the following documents, is moved with the concerned Company Registration Office : (a) Four printed copies of the memorandum and articles of association duly signed by each subscriber. Amongst these copies one copy should be affixed with special adhesive stamps at the rates prescribed under the Stamp Act, 1899. Copies of the national identity cards of each subscriber and witnesses to the memorandum and article of association should be attached. (b) A declaration of compliance on Form-1 of the pre-requisites for formation of the company (s.30). (c) A copy of the original challan evidencing the payment of registering fee in favour of the Securities and Exchange Commission of Pakistan.
(d) The appointment of first directors is required to be notified to the registrar concerned on Form-29 within 14 days from the date of incorporation (s.205). The number and names of first directors can be determined by the majority of subscribers of memorandum in writing and until so determined all the subscribers of the memorandum, who are natural persons, shall be deemed to be directors of the company. (e) The Registered office of the company is required to be notified on Form-21 within 28 days from the date of its incorporation. If the documents are for the incorporation of a single member company then a nomination in the form as set out in FormS1 indicating at least two individuals to act as nominee director and alternate nominee director, of the company in the event of his death should also be filed with the registrar. In addition to the requirements meant for private companies given above public companies are required to file a list of directors and consent of directors and the chief executive within seven days of the incorporation on Forms 27 and 28.
(a) The preamble of Industrial Relations Ordinance, 2002 (IRO) mentions its scope as (i) regulation of formation of trade unions;
(ii) improvement of relations between employers and workmen; and (iii) settlement of disputes. For the achievement of its scope, the IRO contains provisions detailing the process of formation and management of trade unions such as application procedure (ss.4 and 5), qualifications of the office-bearers (s.7) and cancellation of registration of trade union (s.12). For the improvement of relations between employers and workmen, IRO in ss.63 and 64 specifies as unfair labour practice certain forms of conduct on behalf of the employers and workmen. For the settlement of disputes the IRO provides special forums like the Labour Court (s.44); and National Industrial Relations Commission (s.49), who enjoy jurisdiction in the case of labour issues.
(b) The Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 (Standing Orders) regulates the
conditions of employment of workmen in industrial and commercial establishments employing 20 or more workmen. This enactment is a special law which aims to guarantee certain minimum set of terms and conditions of service to workers (Valika Textile Mills Limited v Chairman 1ST Sindh Labour Court, Karachi, PLD 1978 Karachi 952). Standing Orders provide to workmen rights such as annual holidays, festival holidays, casual and sick leave, group incentive scheme, bonus, gratuity, provident fund, compulsory group insurance, working time, late coming and retrenchment.
(a) Section 176(1) of the Companies Ordinance, 1984 (Ordinance) provides that all subscribers to the memorandum of association, who are natural persons, shall be deemed as the first directors of the company until they by majority determine the number and names of the companys first directors. As no directors of the company have been appointed in the articles of association, therefore, in view of the said provision Ali, Arif and Ameer, who are all subscribers to the memorandum, shall be considered as the first directors of the company. Please note that Ali, Arif and Ameer shall continue to enjoy this status until the election of directors in the first annual general meeting of the Company. (b) Section 182 of the Ordinance states that a company may have directors nominated by the company's creditors. If the Bank extends financial facilities to the Company, it shall attain the status of being the Companys creditor and may get the right to nominate a director on the board of directors of the Company. The Bank may nominate one of its employees for this purpose. Therefore, an employee of the Bank can be appointed on the board of the Company. An employee of the Bank present on the Companys board cannot be removed by the majority of the Companys shareholders, as s.181 of the Ordinance only allows a majority of companys shareholders in a general meeting to remove first directors (s.176); elected directors (s.178) and directors appointed to fill a casual vacancy (s.180). (c) Yes, Ali, Arif and Ameer can have unlimited liability as this is allowed by s.111 of the Ordinance. However, for the imposition of unlimited liability on Ali, Arif and Ameer the following conditions set forth by s.111, subsections (1) and (2) should be fulfilled: (1) The fact that Ali, Arif and Ameer shall have unlimited liability is mentioned in the memorandum of the Company. (2) A written notice mentioning that they (Ali, Arif and Ameer) shall have unlimited liability is given to them and the same is accepted by them. The Superior Courts of Pakistan have held that a company is a separate and distinct legal entity from its directors and any liability against the company cannot be transferred to its directors except to the extent of their individual shares in the company unless the director has executed some documents acknowledging the liability of the company upon himself in his personal capacity as a guarantor for the company or his case is covered by s.111 of the Ordinance (Ehtesham Ghazi v Izharuddin and another, 2001 YLR 326).
10 (a) The special resolution passed on 8 June 2005 is invalid. The Ordinance sets out that a special resolution affecting the rights of the shareholders of a particular class shall be effective only if a majority of at least three-quarters (75%) of the shareholders of that particular class vote for it (s.108(1) and proviso to s.(28)). In the instant case the special resolution is invalid as it is supported by only Mr Abid who holds only 60% of preference shares. Thus it falls short of the required minimum majority of three-quarters (75%) of the preference shareholders and hence is invalid. (b) Mr Bilal and Mr Jawad can approach the High Court against the passing of the special resolution.
This remedy is available to them under s.108(2) of the Ordinance, which allows shareholders of a particular class (not less than 10%) aggrieved by variation of their rights to approach the court for an order cancelling the special resolution. As both Mr Bilal and Mr Jawad hold more than the qualifying shares, they may either individually or collectively approach the court.
The said section imposes a 30 days time limit from the date of the passing of the special resolution within which the court could be approached. As the special resolution in question was passed on 8 June 2005, Mr Bilal and Mr Jawad have up until 8 July 2005 to approach the court. Further, the proviso to s.108(2) envisages that the court can only pass an order against the resolution if it is shown that variation has unfairly prejudiced the applicants (Mr Bilal and/or Mr Jawad). Also, the decision of the court on any such application shall be final (s.108(4)).
11 (a) Omers claim is not legally valid. On Omers visit to Jamals farmhouse on 2 October 2005, Jamal had offered to sell to Omer the farm-house provided its price (rupees 5,000,000) was paid within three days, i.e. by 5 October 2005.
Omers letter of 4 October 2005 received on 9 October 2005 would have been binding on Jamal if the payment of rupees 5,000,000 had been made along with it as s.7 (1) of the Contract Act, 1872 (1872 Act) provides that in order to convert an offer into a promise, the acceptance must be absolute and unqualified. Further, the Superior Courts of Pakistan have held that for an offer to become a binding promise (or a contract), there should be an absolute and unqualified acceptance of the offer, and if there is a material variation of the terms of the offer then there is no consensus ad idem or agreement upon which a contract could be founded (Al-Huda Hotels and Tourism Company v Paktel Limited and others, 2002 CLD 218 and
Shalsons Fisheries Limited v Lohmam and Company, PLD 1982 Karachi 76). In other words, if there is no absolute acceptance of a proposal, the parties are still at the stage of negotiation, and no legal obligations arise.
(b) Section 10 of the 1872 Act sets out that all agreements are contracts if they are made by free consent of parties competent to contract, for a lawful consideration, with a lawful object and are not expressly declared to be void. Consent is reached when two persons agree to the same thing in the same sense (s.13) and according to s.14, consent is free when it is not caused by coercion (s.15), undue influence (s.16), fraud (s.17), misrepresentation (s.18) or mistake (ss.20, 21, and 22). All persons are competent to contract if they are of the age of majority, sound mind and have not been disqualified by any law from contracting (s.11). Further, all considerations or objects of an agreement are lawful, unless forbidden by law, or are of such a nature that, if permitted, would defeat the provisions of any law, or are fraudulent, or imply injury to the person or property of another, or the court regards it as immoral, or opposed to public policy (s.23).
As the agreement with Rashid to sell the farmhouse fulfills the criteria mentioned above, Rashid has a valid claim under law.
(c) Jamal should honour his agreement to sell the farmhouse with Rashid to avoid litigation as Rashid has a valid claim under law. Further, to avoid a suit from Omers side, Jamal should inform Omer that he had waited until the agreed date (5 October 2005) for Omer to come up with the agreed sum and it was only after Omers failure that Jamal had agreed to sell the farmhouse to Rashid.
12 (a) According to s.4 of the Partnership Act, 1932 (Act), partnership is a relationship between persons, who have agreed to
share the profits of a business carried on by all or any of them acting for all. In other words it is not necessary that every partner must be actively engaged in the conduct of the business. Partners can by agreement amongst themselves entrust the management of the firm with one or more of the partners. In view of s.4, the restrictions imposed on Sohail are valid. (b) The lease agreement executed by Sohail in the firms name with Qasim despite being beyond Sohails authority is binding on the firm. Section 22 of the Act provides that an instrument executed by a partner is binding on the firm if it is executed in the firms name or expressly or impliedly manifests an intention to bind the firm. Further, the Superior Courts of Pakistan have held that acts done by a partner beyond his authority bind the whole firm if third persons dealing with the firm did not have knowledge that such partner was acting beyond his authority (Suleman Ibrahim Co v Eastern Rice Syndicate and another, PLD 1966 (West Pakistan) Karachi 289. As Sohail has executed the lease agreement in the firms name and his status of junior partner is not publicly known, the firm is bound by the lease agreement. (c) The firm is liable for the advance paid by Anwar to the firm. Section 27 (b) of the Act mandates that when a firm in the course of its business receives money or property from a third party, and the same is misapplied by any of the partners while it is in the custody of the firm, then the firm is liable to make good the loss. Therefore, the firm is liable for the advance given by Anwar.
This question expects the candidates to exhibit knowledge about the status of the Principles of Policy as contained in chapter 2, Articles 29 to 40 (the Principles) of the Constitution of Pakistan, 1973 (Constitution). 710 Answers briefly mention the Principles enlisted in the above Articles of the Constitution and discuss in particular their position under Articles 29 and 30. 36 Answers mention Articles 29 to 40 but fail to exhibit knowledge about Articles 29 and 30. 02 Extremely poor answers that show little or no knowledge about the position of the Principles under the Constitution.
This question expects candidates to briefly refer to the concept of bailment and discuss responsibilities of bailor and bailee under the Contract Act, 1872 (Act). 710 Answers briefly refer to the concept of bailment; discuss bailors responsibilities under ss.150 and 158 and bailees responsibilities under ss.151, 154, 156, 157, 160, 161, 163, 164, and 165. 36 Answers briefly refer to bailors and bailees responsibilities imposed by the above noted sections. 02 Extremely poor answers that show little or no knowledge about the responsibilities of bailor and bailee.
This question expects candidates to discuss the concept of discharge of a contract. 710 Answers firstly define the term discharge of a contract and then discuss the various instances under which a contract stands discharged. 36 Answers briefly comment on some of the instances by which a contract would stand discharged. 02 Extremely poor answers that show little or no knowledge about the concept of discharge of a contract.
This question is divided into two parts having equal marks; each part shall be marked separately.
(a) 35 Answers discuss the three methods by which a partner may retire from a firm in light of s.32 subsection (1) of the
Partnership Act, 1932 (1932 Act). 02 Poor answers depicting little or no knowledge about the methods of retirement prescribed by the 1932 Act.
(b) 35 Answers discuss the liabilities imposed on a retiring partner by s.32 subsections (2) and (3) of the 1932 Act. 02 Answers showing little understanding of the question. 5 This question is divided into two parts having equal marks; each part shall be marked separately.
(a) 35 Answers define and discuss the characteristics of public companies in comparison with private companies and with
reference to s.2(1)(28)(ii), 2(30) and 47 of the Companies Ordinance, 1984 (Ordinance). 02 Answers exhibit little or no knowledge about public companies.
(b) 35 Answers discuss companies limited by shares with reference to ss.2(1)(8) and 16 of the Ordinance. 02 Answers show little or no knowledge about companies limited by shares.
This question expects the candidates to exhibit knowledge of the concept and development of the doctrine of ultra vires. 710 Answers explain the meaning of words ultra vires and discuss the judicial development of the doctrine of ultra vires. 36 Answers discuss briefly the doctrine of ultra vires. 02 Extremely poor answers that show little or no knowledge about the doctrine of ultra vires.
This question expects the candidates to explain the procedure and formalities set forth in the Companies Ordinance, 1984 (ss.15, 30, 37, and 205) for incorporation of a private, public and a single-member company. 710 Answers discuss in detail the procedure and formalities involved in the incorporation of the companies. 36 Answers discuss briefly the procedure and formalities for incorporating a company. 02 Extremely poor answers that show little or no knowledge about the question.
This question is divided into two parts having equal marks; each part shall be marked separately.
(a) 35 Answers discuss the preamble of Industrial Relations Ordinance, 2002 (IRO) and refer to various sections, which
detail the scope of the IRO. 02 Poor answers depicting little or no knowledge about the IRO and its scope.
(b)35 Answers discuss the scope of the Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 and
mention the various rights given to workmen for improvement of their working conditions. 02 Poor answers depicting little or no understanding about the Standing Orders and its scope.
This question is divided into three parts with different marks for each.
(a) 46 Answers discuss the status of Ali, Arif and Ameer with reference to s.176(1) of the Companies Ordinance, 1984
(Ordinance). 03 Answers show little or no understanding about the status of Ali, Arif and Ameer and/or fail to quote the relevant legal provision.
(b)78 Answers firstly quote s.182 of the Ordinance, conclude if a banks employee can be on the board of the company
and then discuss in light of s.181 whether he can be removed by a majority of the companys shareholders. 46 03 Answers refer to s.182 of the Ordinance but do not conclude as to whether the banks employee can be on the board of the company and/or fail to refer to s.81. Answers show little or no knowledge about the matter at hand.
(c) 46 Answers conclude whether Ali, Arif and Ameer can have unlimited liability with regard to s.111 of the Ordinance
and mention the conditions for imposition of the same. 03 Answers opine as to whether Ali, Arif and Ameer can have unlimited liability but fail to discuss the conditions for imposition of the same.
10 This question is divided into two parts and each part has equal marks.
(a) 710 Answers in this range quote s.108(1) and proviso to s.28 of the Ordinance and opine as to the validity of the special
resolution. 36 Answers refer to the relevant sections and/or discuss the validity of the special resolution. 0 3 Incomplete answers showing little or no knowledge about the status of the special resolution.
(b)710 Answers in light of s.108 of the Ordinance discuss the remedy available to Mr Bilal and Mr Jawad; whether such
remedy can be availed individually or collectively; time limit for filing; and matters the court considers before granting relief. 36 02 Answers quote the relevant provision but show little or no knowledge about the remedy available and its concerned matters. Answers do not quote the relevant provision and/or fail to comment on the remedy available.
14
11 This question is divided into three parts and each part shall be marked independently.
(a) 710 Answers discuss the conditions set forth in s.7(1) of the Contract Act, 1872 (1872 Act) upon fulfillment of which
legally binding agreements are concluded and valid claims arise thereto. 36 Answers fail to discuss the weakness of Omers claim and/or refer to the relevant legal provision. 02 Answers show little or no understanding about the position of Omers claim.
(b)46 Answers in this bandwidth discuss the essential conditions of a valid contract as per ss.10, 11, 13, 14, and 23 of
the 1872 Act and conclude as to the strength of Rashids claim. 03 Answers mention the essentials of a valid contract with reference to some of the above noted sections and/or are not clear on the strength of Rashids claim.
(c) 24 Answers advise Jamal as to his future course of action keeping in view the strength of Omer and Rashids claims. 01 Answers fail to clearly advise Jamal as to his future course of action. 12 This question is divided into three parts and each part has different marks. (a) 46 Answers in this range refer to s.4 of the Partnership Act, 1932 (1932 Act) and discuss it with reference to restrictions imposed on Sohail.
03 Answers fail to refer to the mentioned section and/or discuss restrictions imposed on Sohail with reference to it.
(b) 78 Answers opine in the light of s.22 of the 1932 Act as to whether or not the lease agreement is binding on the firm. 46 Answers in this range only quote s.22 and/or fail to opine on the binding nature of the lease agreement. 03 Answers show little or no knowledge about the matter at hand. (c) 46 Answers discuss the issue of the firms liability with reference to s.27(b) of the 1932 Act. 03 Answers do not quote the relevant legal provision and/or do not opine on the firms liability.
(Pakistan)
Paper 2.2(PKN)
Section A SIX questions ONLY to be attempted 1 In the context of the Constitution of Islamic Republic of Pakistan, 1973, discuss the position of the Fundamental Rights of: (a) Freedom of Assembly (Article 16); and (b) Freedom of Speech (Article 19). (5 marks) (5 marks) (10 marks)
2 In the context of the law of contract, discuss the concept of bailment. (10 marks)
In relation to the law of partnership, explain the general rights and duties of partners towards each other. (10 marks)
Discuss the requirements and procedure for alteration of the memorandum of association under the Companies Ordinance, 1984.
(10 marks)
Under the Companies Ordinance 1984, explain how the rights of the shareholders may be varied.
(10 marks)
In relation to the Companies Ordinance, 1984, state the circumstances which render a person ineligible to become a director of a company. (10 marks)
7 Under the Contract Act, 1872: (a) Define agency; (b) Explain an agents role and duties to the principal. (5 marks) (5 marks) (10 marks)
Under the Industrial Relations Ordinance, 2002 and the Industrial & Commercial Employment (Standing Orders) Ordinance, 1968, explain the concept of unfair and wrongful dismissal.
(10 marks)
Section B TWO questions ONLY to be attempted 9 After running at loss for many years, Regal (Private) Limited made a profit in the year 20052006. The directors of the company intend to declare a dividend for the said year. They further intend to declare a dividend for the previous years during which the company was in loss, by selling a part of the land owned by the company. A review of the register of shareholders has revealed that some shareholders have nominated certain financial institutions to receive dividend payments on their behalf. Required: Advise the directors:
(a) The extent of the directors powers in relation to a declaration of a dividend and the procedure for declaring
a dividend.
(10 marks)
(b) Whether the directors can sell the assets of the company to pay a dividend for the years during which the company has been in loss. (5 marks) (c) Whether the company is liable if it makes dividend payments to the financial institutions nominated by the shareholders. (5 marks)
(20 marks)
10 In view of the accumulated losses faced by Jettlers (Private) Limited over several years, its management has decided to reduce its capital to account for the lost capital. This would enable the management to then negotiate the sale of the company to new management. Since the company has outstanding loans from various banks, it is apprehensive that the creditors may object to the reduction of capital. They have approached you for advice.
Required: Advise the management on the following: (a) State which method of reduction of capital could be adopted to reduce the chances of objection by the creditors. (5 marks) (b) Explain the procedure for reduction of capital. (10 marks)
(c) State whether it is mandatory for the company to add the words and reduced to its name, or whether this can be avoided. (5 marks)
(20 marks)
[P.T.O.
11
Mr Kamran owned 60% of the shares of Bits (Private) Limited (BPL), a highly profitable software company. The remaining 40% of the shares were owned by Mr Farooq. Mr Kamran suffered from depression and to deal with it, he joined the spiritual healing centre run by Pappu Pir. During his stay at the centre, upon the request and insistence of Pappu Pir, Mr Kamran agreed to transfer 20% of his shareholding in BPL to Pappu Pir hoping to get an eternal reward in return. When cured and out of the healing centre, Mr Kamran started taking an active part in the management and working of BPL and was informed by Mr Farooq that heavy taxes were expected to be levied by the government on the software industry. Thereafter Mr Kamran sold another 10% of his shares to Mr Farooq at rupees 30 per share.
Soon after Mr Kamran died and his 16 year old son Awais executed an agreement to sell the remaining of his fathers shares in BPL and move to Canada. Mrs Kamran has approached you for advice on the following: Required: Advise Mrs Kamran on the following: (a) State whether the transfer of shares by Mr Kamran to Pappu Pir is valid. (b) State whether the sale of shares by Mr Kamran to Mr Farooq is valid.
(7 marks) (7 marks)
(c) State whether Awais can execute an agreement to sell the remainder of Mr Kamrans shares in BPL. (6 marks) (20 marks)
12 ABC showroom dealing in used cars is run by two partners, Asad and Bilal. Between themselves, the partners have agreed that Bilal would act as a sales person and deal with customers while Asad would look after the office work. When business improved ABC hired Jawed as a sales agent and instructed him not to remove any of the cars from the showroom without the consent of either Asad or Bilal. One day when Asad and Bilal were away, Jawed requested his friend Esa to look after the showroom while he went to collect his daughter from school. Esa took a customer for a test drive and the car got snatched. Angry, Asad and Bilal terminated Jaweds services for disobeying their instructions, forfeited his last months salary and threatened to initiate legal proceedings to recover the cost of the stolen car from Jawed and Esa. Now Bilal has approached you for advice on the following:
Required: (a) State whether Bilal can demand a salary for acting as a sales person for the partnership business. (5 marks) (b) State whether the act of forfeiting Jaweds salary is legal and state the prospects of success of proceedings for recovery of the cars cost from Jawed. (8 marks) (c) Explain Esas position and the remedies that Asad and Bilal have against Esa. (7 marks) (20 marks)
Answers
June 2007 Answers
(a) The fundamental right of Freedom of Assembly is enlisted in Article 16 of the Constitution of Pakistan, 1973 (Constitution). It stipulates that every citizen shall have the right to assemble peacefully and without arms, subject to any reasonable restrictions imposed by law in the interest of public order. Interpreting this fundamental right the superior courts of Pakistan have held that this right, although fundamental, is not in its nature absolute and can be subject to reasonable restrictions imposed in the public interest. For instance, restrictions can be imposed to avert danger to property, human life and disturbance of public tranquility (Shukar Din v Government of West Pakistan, PLD 1965 Lahore 521). It is the courts duty to decide whether the imposed restrictions are reasonable or not and in doing so the court takes into consideration the conditions prevailing at the time, nature, extent and duration of the restrictions and all the surrounding circumstances (Nawabzada Nasrullah Khan v Government of West Pakistan, PLD 1965 Lahore 642).
(b) Article 19 of the Constitution deals with the fundamental right of freedom of speech and sets out that every citizen shall have the right of freedom of speech and expression, the press shall be free subject to any reasonable restrictions imposed by law in the interest of glory of Islam, integrity, security and defence of Pakistan or its any part, friendly relations with foreign states, public order, decency or morality, contempt of court or commission or incitement of an offence.
Freedom of speech and liberty of the press are not absolute and unqualified rights and it does not mean that one can talk or distribute where, when and how one chooses (Nawabzada Nasrullah Khan v Government of West Pakistan, PLD 1965 Lahore 642). Article 19 of the Constitution contemplates circumstances such as glory of Islam, national interest, friendly relations with foreign states, public order, decency/morality, contempt of court and commission/incitement of an offence under which reasonable restrictions can be imposed (Ghulam Sarwar Awan v Government of Sindh, PLD 1988 Karachi 414). Further, that there is no absolute test of the reasonableness of restrictions and it is for the courts to decide whether in the circumstances of the case the restrictions imposed are reasonable or not (Tafazzul Hussein v Government of East Pakistan, PLD 1969 Dacca 589). While interpreting this fundamental right the superior courts of Pakistan have held that the right of freedom of speech includes the right to be silent and to receive information (Mohammad Nawaz Sharif v President of Pakistan, PLD 1993 S.C. 473). 2 Section 148 of the Contract Act, 1872 (the Act) defines the concept of bailment as the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the bailor and the person to whom they are delivered is called the bailee. Bailment refers to the delivery of goods on condition to re-deliver the goods once the purpose of delivery is achieved: for instance giving cloth to the tailor for the purpose of stitching dress. Bailment can be divided into the following of two kinds: (a) voluntary and involuntary; and (b) gratuitous and non-gratuitous. Voluntary bailment is the outcome of an express contract between the parties, whereas involuntary bailment arises by the operation of law; for instance a person receives goods in excess of the quantity ordered. If a bailee keeps the goods for the bailor without reward, it is a gratuitous bailment and if some consideration passes between the parties it is a non-gratuitous bailment or bailment for reward, an example of which is a car let out for hire. Essentials of bailment are: (i) Delivery of Goods The first important feature of bailment is the delivery of goods from one person to another for the purpose of bailment. Delivery here implies change of possession from one person to another and not a change of ownership. (ii) Purpose of Delivery Section 148 of the Act requires that the delivery of goods must be for some specific purpose, for instance delivery of goods by mistake does not constitute bailment. (iii) Return of Goods Bailment is always for some purpose and is subject to the condition that when the purpose is achieved the goods will be returned to the bailor, or disposed of according to his directions. If there is no contract to deliver back or otherwise dispose of the goods, there is no bailment. 3 The law of partnership in Pakistan is embodied in the Partnership Act, 1932 (the Act). Partnership is described as the relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all (s.4). The mutual rights and duties of partners are determined by contract (express or implied) between the partners and are subject to the provisions of the 1932 Act (s.11). Section 9 of the Act provides that partners are bound to carry on the business of the firm to greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.
Other rights and duties that partners have towards each other are as follows: (i) Attend Diligently to his Duties Every partner is bound to attend diligently to his duties in the conduct of the business subject to contract between the partners (s.12-b). (ii) Business Decision-Making Business differences should be decided by a majority of the partners after taking into consideration the opinion of every partner (s.12-c). (iii) Equal Contribution Subject to contract the partners are entitled to share equally in the profits earned and contribute equally to the losses sustained by the firm (s.13-b). (iv) No Secret Profit Subject to the contract between the partners, if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he should account for that profit and pay it to the firm/other partners (s.16-a). (v) No Competing Business If a partner carries on any business competing with that of the firm, he shall be accountable to the firm for all profits made by him in that business (s.16-b).
A memorandum of association is referred to as the constitution of a company. Different clauses of the memorandum set out important information with regard to a company. These include: (i) Name; (ii) Registered Office; (iii) Objects; (iv) Liability; and
(v) Authorised Share Capital.

Alteration of the memorandum is regulated by s.20 of the Companies Ordinance, 1984 (Ordinance) which sets out that a company shall not alter the memorandum except in the cases, mode and to the extent specified in the Ordinance. Further requirements and procedure for the alteration of different clauses of the memorandum are set out in different sections of the Ordinance, for instance s.39 deals with alteration of the name clause and s.92 deals with the alteration to the share capital clause. Section 21 provides for alteration in the registered office of the company and its objects clause. It sets out the conditions under which the objects clause can be altered, such as, to enable the company to (a) carry on its business more economically/efficiently;
(b) attain its main purpose by new/improved means; (c) change the local area of its operations; (d) carry on business not specified in its memorandum; (e) alter objects; (f) sell whole or part of the company and (g) to amalgamate with any other company or body of persons. The memorandum of association can be altered by adopting the following procedure: (i) Directors Meeting and Approval A proposed alteration should be discussed in a meeting of the board of directors and approved by a resolution. (ii) Notice A 21 days notice accompanied with a copy of proposed special resolution and a statement under s.160(1)(b) of the Ordinance setting out material facts should be given to members for convening the general meeting [s.2(1) (36)]. In the case of a listed company, such notice is also required to be published in at least two newspapers, one English and the other in Urdu language having circulation in the area where the stock exchange(s) on which the securities of the company are listed situates. (iii) Special Resolution A proposed resolution should be passed as a special resolution by a majority of three-quarters of the members present and voting at the general meeting. (iv) Filing Section 21(2) mandates that alteration shall not take effect until the same is confirmed by the Securities and Exchange Commission of Pakistan (SECP). For this purpose, a copy of the special resolution on Form 26 should be filed with the SECP within 60 days of the date of passing of the said resolution [Rule (3) of the Companies (General Provisions and Forms) Rules, 1985]. (v) Creditors No Objection Certificates Securities and Exchange Commission of Pakistan is authorised to make an order confirming the alteration either wholly or in part and on such terms and conditions as it thinks fit (s.22). In granting its approval, the Commission considers whether sufficient notice was given to persons whose interests would be affected by the alteration (i.e. debenture holder and creditor) and whether their consent to alteration has been obtained or debt/claim has been discharged or determined and secured to the satisfaction of the SECP [s.21(3)].
(vi) Filing with Registrar

A certified copy of SECPs order confirming the alteration, together with a printed copy of the memorandum as altered, should within 90 days from the date of the order be filed by the company with the concerned Registrar of Companies. This is the conclusive evidence that all the requirements of the Ordinance have been complied with [s.24 (1)].
Variation to the shareholder rights can only be made in the manner set out in s.28 of the Companies Ordinance, 1984 (the Ordinance) as envisaged by s.108 of the Ordinance. The proviso to s.28 requires that where an alteration in the articles of association of a company affects the substantive rights or liabilities of members or of a class of members, it shall be carried out only if a majority of at least three-quarters of the members or of the class of members affected by such alteration, as the case may be, approve such variation. The expression variation includes abrogation, revocation or enhancement [s.108 (6)].
(i)
Directors Meeting The directors consider the proposal for variation of rights of shareholders and pass the resolution in their meeting. The resolution passed should specifically mention the rights to be varied and terms and conditions attached with it.
(ii)
Notice Notice for convening the general meeting along with a statement of material facts under s.160(1)(b) of the Ordinance and a copy of the proposed special resolution for variation of shareholder rights should be sent to the shareholders at least 21 days before the general meeting. In the case of a listed company the notice should be published in at least two newspapers circulating in the province in which stock exchange exists on which company shares are listed.
(iii) Special Resolution The resolution is then discussed by shareholders in a general meeting and passed by three-quarters majority as special resolution. This is in line with s.28 which stipulates that subject to the provisions of the Ordinance and memorandum, a company may by special resolution alter or add to its articles, and variation so made shall be as valid as if originally contained in the articles. (iv) Variation of Rights of a Particular Class In the case where the proposed variation relates to rights of a particular class then notice should be given to shareholders of that particular class and a separate meeting be convened. Thereafter, the said resolution should be passed by a three-quarters majority of that particular class. (v) Filing The special resolution; amended copy of memorandum and articles of association along with the requisite fee are then filed with the Securities and Exchange Commission of Pakistan. (vi) Remedy for Aggrieved Shareholders
Section 108 (2) provides that not less than 10% of the class of shareholders who are aggrieved by the variation of their rights can within 30 days of the date of the resolution apply to the court for an order cancelling the resolution. Further, that the court before passing an order shall satisfy itself whether material facts were withheld from shareholders by the company or not and whether the variation would unfairly prejudice the shareholders of the class represented by the applicant or not.
Section 187 of the Ordinance sets out the circumstances which render a person ineligible to become a director. It states that no person shall be appointed as a director of a company if he: (a) is a minor; (b) is of unsound mind; (c) has applied to be adjudicated as an insolvent and his application is pending; (d) is an undischarged insolvent; (e) is convicted by a court of law for an offence involving moral turpitude; (f) is debarred from holding such office under any provision of this Ordinance; (g) has been declared by court in the last five years to lack fiduciary behaviour; (h) is not a member; and (i) is a defaulter.
(a) Minor A minor is a person who has yet not attained majority i.e. become 18 years old. (b) Unsound Mind A person is of unsound mind if at the time of forming a contract he is not capable of understanding it and forming a rational judgment as to its contents. (c) Insolvent A person becomes ineligible for becoming a director if he has applied to the court for adjudication as an insolvent and his application is pending. (d) Undischarged Insolvent A person becomes ineligible for becoming a director if he is an undischarged insolvent.
(e) Convicted by a Court of Law A person becomes ineligible for becoming a director if he has been convicted for an offence involving moral turpitude. Please note that the term moral turpitude can have a different meaning in a different context i.e. it can mean anything done contrary to justice, honesty, principles, or good morals, an act of baseness or vileness (Durga Singh v State of Punjab, AIR 1957 Punjab 97). (f) Debarred Under the Ordinance A person becomes ineligible if so restricted by any provision of the Ordinance. (g) Lack Fiduciary Behavior
A person becomes ineligible for becoming a director if declared by court in the last five years to lack fiduciary behaviour.
(h) Not a Member

A person becomes ineligible for becoming a director if he is not a shareholder of the company. However being a nonmember is not a disqualification if the person represents the Government or an institution or authority which is a member; is a whole-time director who is an employee of the company; chief executive; or a person representing a creditor.
(i) Defaulter A person becomes ineligible for becoming a director if declared by a court of competent jurisdiction to have defaulted in the repayment of a loan to a financial institution to an extent set by the Securities and Exchange Commission of Pakistan [s.187(i)].
(a) The law of agency is based on the legal principle that what a person does by another, he does by himself. Here the person who acts on behalf of another is called the agent and the person who authorises another to act is called the principal. Further any person of majority age and sound mind can employ an agent (s.183). No consideration is necessary to create an agency (s.185) and the contract of agency can be either (i) express; (ii) implication of law; or (iii) subsequent ratification.
(i)
Express Agreement Here a principal appoints an agent either by words spoken or written to represent and act for him and no particular form or set of words is required for appointing an agent.
(ii)
Implication of Law Here the authority to act as agent can be inferred from the nature of business, the circumstances of the case, the conduct of the principal or the course of dealing between the parties.
(iii) Ratification Ratification is an approval of a previous act. It implies the adoption by the principal of an act done by an agent on his behalf, but without his authority. Section 196 of the Act provides that where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. Upshot the superior courts of Pakistan have held in Pakistan Paper Corporation Limited v National Trading Company Limited, 1983 CLC 1695 that under agency an agent has power on behalf of the principal to deal with third persons so as to bind the principal and is accountable to the principal. (b) An agent is a person employed to do any act for another or represent another in dealing with third persons (s.182 of the Act). It should be noted that any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal (s.184). An agents role may be express (given by words spoken or written) or implied (inferred from the circumstances of the case). An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act (s.188) and in an emergency the agent can do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances (s.189). In an agency relationship an agent has the following duties: (i) Not to Delegate
An agent cannot employ another to perform acts which he has undertaken to perform personally unless by the ordinary custom of trade a sub-agent must be employed (s.189). Further in appointing a sub-agent the agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case (s.195).
(ii)
Agents Duty in Conducting Principals Business An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions, according to custom which prevails in doing business of the same kind. If the agent acts otherwise and any loss occurs then he must make good the same to his principal and if any profit accrues he must account for it (s.211).
(iii) Skills and Diligence Required from Agent An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business (s.212). (iv) Render Accounts An agent is bound to render proper accounts to his principal (s.213) and to pay to his principal all sums received on his account (s.218). (v) Agents Duty to Communicate with Principal It is the duty of an agent to use all reasonable diligence in communicating with his principal and to obtain his instructions (s.214).
Unfair and wrongful dismissal both under Industrial Relations Ordinance, 2002 and Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 (Standing Orders) refers to a situation where a workman has been removed from service without following the procedure set forth in the said statutes. For instance, Standing Order 12 of the Standing Orders requires every appointment or termination to be in writing and communicated to a workman. It reads as follows: The services of a workman shall not be terminated, nor shall a workman be removed, retrenched, discharged or dismissed from service, except by an order in writing which, shall explicitly state the reason for the action taken. In case a workman is aggrieved by the termination of his services or removal, retrenchment, discharge or dismissal, he may take action in accordance with the provisions of s.46 of the Industrial Relations Ordinance, 2002 and thereupon the provisions of the said section shall apply as they apply to the redress of an individual grievance.
Further the superior courts of Pakistan have held that non compliance of such a mandatory provision does not only make the employer liable for punishment but also adverse inference may be drawn against him especially in the case of uneducated workmen (Zaheer Ahmed v Manager Administration Wazir Ali Industries Hyderabad, 1989 PLC 850). Employees unfairly and wrongfully dismissed have the following remedies available to them under the mentioned Ordinances:
(i) Notice to Employer

The worker can bring his grievance to the notice of his employer in writing, either himself or through his Shop Steward or Collective Bargaining Agent, within one month of the day on which cause of such grievance arises. Thereafter the employer is bound to communicate his decision in writing to the worker within 15 days of the grievance being brought to his notice.
(ii) Approach Labour Court If an employer fails to communicate a decision within the period specified or if the worker is dissatisfied with such decision, the worker or Shop Steward may take the matter to his Collective Bargaining Agent or the Labour Court, as the case may be. If the matter is taken to the Labour Court, it shall give a decision within seven days from the date of the matter being brought before it as if such matter were an industrial dispute. (iii) Powers of Labour Court If the Labour Court holds termination of services of a workman wrongful it may award a compensation equivalent to not less than 12 months and not more than 30 months basic pay last drawn and house rent, if admissible, in lieu of reinstatement of the worker in service. Further if the decision is not given effect to or complied with within one month or within the period specified in such order the defaulter shall additionally be punishable with a fine which may extend to 10,000 rupees upon a workers complaint.
(a) The term dividend refers to the portion of company profits which is allocated for distribution to the shareholders of a company. The extent of directors powers and the procedure of a dividend declaration under the Companies Ordinance, 1984 (the Ordinance) is discussed in ss.248, 249, 250 and 251. The same are set out hereunder: (i) Directors Meeting Directors in their meeting shall decide the rate and quantum of dividend. Please note that s.248(1) and 249 of the Ordinance set out that no dividend shall exceed the amount recommended by the directors and a dividend shall only be paid out of profits of the company. (ii) General Meeting
A dividend should be declared in the general meeting. In this respect formalities set out in s.158 of the Ordinance in particular with regard to notice of 21 days (sub-section (3)) should be complied with by the company.
(iii) Payment of Dividend Directors of the company are responsible for making the dividend payments within 45 days of declaration in the case of a listed company and 30 days in the case of any other company [s.251(1)]. Dividend payments shall be made out by registered post to the registered shareholder or any bank or financial institution nominated by the registered shareholder (s.250).
The superior courts have summarised this process as the board of directors recommends and the annual general meeting decides the amount and declares the dividend unless the articles specify otherwise [Kothari Textiles Limited v CWT, (1963) 33 Company Cases 217]. Further a dividend once declared becomes a debt and the shareholder is entitled to sue at law for the recovery of the same after expiry of the prescribed period [In re: Severn and Wye & Severn Bridge Ry Co, (1896) 1 Ch. 559]. (b) No the directors cannot sell assets of the company to pay a dividend for the years the company was running at a loss. This view finds support from s.249, which states that a company is liable to pay dividends only out of its profits and no dividend shall be declared or paid by the company for any financial year out of company profits made from the sale or disposal of any immovable property or assets of the company (s.248). (c) The company shall not be liable in any manner if it makes via registered post dividend payments to financial institutions nominated by the shareholder. As s.250(1) provides that no dividend shall be paid by the company in respect of any share except amongst others to the registered shareholder or to a financial institution nominated by the shareholder. In this respect the financial institution nominated by the shareholder is not required to make a separate application to the company for payment of a dividend [s.250(2)]. Further the company should despatch the dividend warrants by registered post unless otherwise required by the shareholder in writing [s.250(3)]. In addition to this, the company must follow the requirements, if any, in its articles of association in relation to the despatch of dividend warrants.
10 (a) In order to reduce the chances of objection from the creditors, the company should adopt a method of reduction of
capital that does not involve any diminution in the value of the companys assets on which the creditors have charge. In addition to this, the company should finalise a list of creditors whose debt or claim has not been discharged or determined and should either pay to such creditors the full amount of their debt or claim or satisfy the creditors with or without admitting the same. The court may, if it deems fit, dispense with the consent of the objecting creditors. This method is permissible under s.100(i) of the Ordinance, which provides that where a creditor, who is entered on the list of creditors and whose debts or claim has not been discharged or determined, does not consent to the proposed reduction, the court may if it thinks fit dispense with the consent of that creditor on the company securing payment of the full amount of his debt or claim or, though not admitting it, is willing to provide for it. (b) The Ordinance in ss.96 to 107 sets out the conditions and procedure for reduction of share capital by a company limited by shares. Section 96(1) of the Ordinance provides that a company limited by shares if so authorised by its articles can by passing a special resolution reduce its share capital to (i) extinguish or reduce liability on its unpaid shares; (ii) cancel any paid-up share capital which is lost or unrepresented by available assets; and (iii) pay off any paid-up share capital which is in excess of the needs of the company. The procedure for reduction of share capital of a company limited by shares is as follows: (i) Directors Meeting and Approval
Directors consider the proposal for reduction in share capital and pass the resolution at their meeting. The resolution passed should specifically mention the amount of authorised capital, number of shares and face value of each share.
(ii)
Notice At least 21 days notice of the general meeting and a copy of the proposed special resolution for reduction in capital should be sent to the shareholders.
(iii) General Meeting held to pass Special Resolution The resolution is then discussed by the shareholders in a general meeting and passed by a three-quarters majority as a special resolution. Please note that the superior courts of Pakistan have held that reduction of capital is a domestic affair of the company and the decision of majority shareholders is valid if the same does not affect the rights of minority (Bankers Equity Limited v General Public, 1988 MLD 1408). (iv) Petition before High Court
For confirmation of the reduction in share capital a petition is then filed before the High Court (s.97) accompanied by minutes of the general meeting, copies of the special resolution, latest audited annual accounts, consent of creditors, particulars of dissenting shareholders and their point of view. Further the courts, before confirming, take into account whether the formalities for special resolution have been complied with, due notice was given and the same is not likely to adversely affect the interests of the shareholders (In re: Pak Asian Fund Limited, 1999 CLC 1603).
(v)
After Confirmation Formalities The alteration should be noted in all copies of memorandum and articles of association issued thereafter.
(c) Yes it is mandatory for the company to add the words and reduced to its name for a time period fixed by the court. However, the court may under special reasons dispense with this formality. This view finds support from s.98 of the Ordinance which states that when resolution for reducing share capital is passed and confirmed by the court then the company shall unless otherwise directed by the court for any special reasons, add to its name the words and reduced as the last words for a time period so set.
11
(a) In terms of s.16 of the Contract Act, 1872 (the Act), undue influence exists when the relationship subsisting between the parties is such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Further, a person is deemed to be in a position to dominate the will of the another if he holds a real or apparent authority over the other or stands in a fiduciary relation to the other; or makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.
In view of the above the transfer of shares by Mr Kamran to Pappu Pir is not valid as Pappu Pir has exercised undue influence on Mr Kamran. Moreover, if Pappu Pir denies having exercised undue influence over Mr Kamran then the burden of proving that the transfer was not induced by undue influence shall lie upon Pappu Pir [s.16(3)]. (b) The sale of shares to Mr Farooq seems to be the result of fraud played by Mr Farooq on Mr Kamran and, therefore, the same is voidable. The term fraud is defined in s.17(1) of the Act as a suggestion of a fact which is not true by one who does not believe it to be true. When consent is caused by fraud the contract becomes voidable at the option of the party whose consent was so caused. A voidable contract is an agreement which is enforceable by law at the option of one or more of the parties (ss.2(i) and 19). (c) No, Awais cannot execute an agreement to sell the remainder of Mr Kamrans shares in BPL as he is a minor and therefore not competent to execute an agreement. Awais at present is 16 years old i.e. a minor and the Act does not deem minors to be competent parties who can execute agreements enforceable at law. Further competency of parties has been discussed in s.11 of the Act which provides that every person is competent to contract if he is of majority age according to the law to which he is subject, sound mind and is not disqualified from contracting by any law to which he is subject. A person is considered to be of majority age if he is 18 years old or more.
12 (a) No. Bilal cannot demand a salary for acting as a sales person as nothing to this effect had been agreed between the
partners, Bilal and Asad, nor is a partner entitled under the Partnership Act, 1932 (1932 Act) to receive remuneration for taking part in the conduct of the partnership business (s.13(a)). (b) Yes, the act of forfeiting Jaweds salary is legal and the same finds support from s.220 of the Contract Act, 1872 which states that an agent who is guilty of misconduct in the business of the agency is not entitled to receive any remuneration in respect of that part of the business for which he is guilty of misconduct. Further, chances of success of the proceedings for the recovery of the cars cost from Jawed are high as s.193 of the Contract Act, 1872 provides that where an agent without having authority to do so appoints a person to act as a subagent, then the agent stands towards such person in the relationship of a principal and is consequently responsible for his acts both to the principal and to third persons, and the principal is not represented by or responsible for the acts of the person so employed nor is that person responsible to the principal. (c) Esas position is that of a sub-agent, appointed by Jawed (agent) and not by either of the principals (Bilal or Asad), therefore Bilal and Asad do not have any remedy against Esa. This view finds support from the argument that a sub-agent is a person employed by and acting under the control of the original agent (Jawed in this case) in the business of the agency (s.191 of the 1872 Act). Further Jawed was not given authority by either Bilal or Asad, nor under the 1872 Act did he have any authority to appoint a sub-agent as s.190 mandates that an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally and where an agent without having an authority to do so has appointed a person to act as a sub-agent the agent stands towards such person in the relationship of a principal to an agent and is responsible for his acts both to the principal and to third persons and the principal is not represented by or responsible for the acts of the person so employed nor is that person responsible to the principal.
(a) 35 Answers discuss the fundamental right of freedom of assembly enlisted in Article 16 of the Constitution of Pakistan,
1973 (Constitution) in light of leading cases interpreting the same. 02 Poor answers showing little or no knowledge about the fundamental right of freedom of assembly.
(b)35 Answers discuss the fundamental right of freedom of speech as provided in Article 19 of the Constitution in context
of landmark cases. 02 Answers show little understanding of the fundamental right of freedom of speech.
This question expects candidates to exhibit knowledge on the concept of bailment as provided in s.148 of the Contract Act, 1872 (the Act). 710 Answers quote s.148 of the Act, discuss essentials of bailment and its kinds i.e. voluntary and involuntary; and gratuitous and non-gratuitous. 36 Answers mention s.148 with little or no discussion about essentials and kinds of bailment. 02 Poor answers that show little or no knowledge about bailment.
The candidates are expected to display knowledge about the mutual rights and duties of partners set out in the Partnership Act, 1932 (1932 Act). 710 Answers expect candidates to exhibit knowledge about rights and duties of partners inter se as provided in the 1932 Act, particularly in ss.9, 12, 13 and 16 thereof. 36 Answers show some understanding about the rights and duties of partners inter se. 02 Poor answers that show little or no knowledge about the question.
This question expects the candidates to exhibit knowledge about requirements and procedure for alteration of the memorandum of association of a company prescribed by the Companies Ordinance, 1984 (the Ordinance). 710 Answers display knowledge about the procedure of alteration with reference to ss.20, 21, 22 and 39 and discuss the scope of alteration of various clauses of the memorandum of association, including the variation in the share capital clause. 36 Answers display a limited level of knowledge about the scope and procedure of alteration. 02 Poor answers that show little or no knowledge about the question.
This question expects candidates to display knowledge about the procedure for variation of shareholder rights. 710 Answers display knowledge about the procedure of variation of shareholder rights with reference to ss.28 and 108 of the Ordinance. 36 Answers display a limited level of knowledge about the procedure of variation of shareholder rights. 02 Poor answers that show little or no knowledge about the question.
This question expects candidates to display knowledge about the impediments set forth in the Ordinance which render persons ineligible from becoming directors. 710 Answers expect candidates to exhibit knowledge about s.187 of the Ordinance which enlists impediments which render persons ineligible from becoming directors. 36 Answers show some understanding about the impediments. 02 Poor answers that show little or no knowledge about the question.
This question is divided into two parts and each part shall be marked separately. (a) 35 Answers discuss the concept of agency with reference to s.183; and 185 of the Act. 02 Answers show little or no knowledge about the question. (b) 3-5 Answers discuss the concept of agency with reference to ss.182, 184, 185, 188, 189, 195, 211, 212, 213, 214 and 218. 02 Answers show little or no knowledge about the question.
This question expects candidates to display knowledge about labour laws of Pakistan in particular Industrial Relations Ordinance, 2002 (IRO) and Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 (Standing Orders) and remedy available under the mentioned Ordinances. 710 This question expects candidates to display knowledge about the concept of unfair and wrongful dismissal and remedy available under standing order 12 of the Standing Orders and s.46 of the IRO. 36 Answers quote the relevant legal provisions but fail to exhibit much knowledge about remedy available in case of unfair and wrongful dismissal. 02 Answers show little or no knowledge about the matter at hand.
This question is divided into three parts and each part shall be marked independently. (a) 710 Answers lay down the extent of directors powers and procedure of declaring a dividend as laid down in the Companies Ordinance, 1984 (the Ordinance) ss.248, 249, 250 and 251. 36 02 Answers display limited knowledge about directors powers and a dividend declaration procedure. Answers neither quote the mentioned sections nor discuss directors powers with regard to a dividend declaration procedure.
(b) 35 Answers analyse in light of ss.248 and 249 of the Ordinance whether companys assets can be sold to pay a
dividend for the years the company was running at loss. 02 Poor answers with little or no reference to legal provisions.
(d) 35 Answers discuss a companys liability with regard to payments to financial institutions. 02 Answers show little knowledge about the topic at hand. 10 This question is divided into three parts, with parts (a) and (c) having same marks and part (b) different marks.
(a) 35 Answers suggest the method that a company should adopt to reduce the chances of objection from the creditors side
with reference to s.100(i) of the Ordinance. 02 Answers fail to exhibit knowledge about the topic at hand.
(b) 710 Answers quote and discuss with reference to ss.96 to 107 of the Ordinance the conditions and procedure for reduction of capital.
36 Answers in this marks range are confined to quoting legal provision and/or show some understanding of the matter.
02
Answers showing poor understanding on the matter.
(c) 35 Answers opine as to whether the words and reduced can be added to the name of the company in light of s.98 of
the Ordinance. 02 Answers quote the relevant section but fail to conclude whether the words and reduced should be added to the companys name or not.
11 This question is divided into three parts, with parts (a) and (b) having same marks and part (c) different marks.
(a) 57 Answers opine as to the validity of a shares transfer by Mr Kamran to Pappu Pir with regard to s.16 of the Contract
Act, 1872 (the Act). 34 Answers quote s.16 but fail and/or do not clearly opine as to the validity of the shares transfer. 02 Answers that show poor understanding on the issue.
(b)57 Answers quote s.17(1) of the Act and opine as to the validity of sale of shares to Mr Farooq.
34 Answers quote s.17(1) of the Act but fail and/or do not clearly opine as to the validity of the sale of shares. 02 Answers that show poor understanding on the issue.
(c) 46 Answers discuss competency of Awais for executing an agreement to sell with reference to s.11 of the Act.
03 Answers fail to conclude as to whether Awais is competent to contract or not and/or do not quote the relevant section.
12 (a) 35 02
Answers conclude as to whether Bilal being a partner can demand a salary for acting as a sales person under s.13(a) of the Partnership Act, 1932 (1932 Act). Answers quote the relevant provision and/or fail to conclude whether Bilal can draw the salary or not.
(b) 68 Answers opine whether the act of forfeiting Jaweds salary is legal and to the prospect of success of recovery proceedings in light of ss.193 and 220 of the Act. 37 Answers quote the relevant legal provisions but fail to opine on them clearly. 02 Answers display little or no knowledge about the matter at hand.
(c) 57 Answers discuss Esas position and the remedies available to Asad and Bilal in light of ss.190 and 191 of the Act.
34 Answers quote the relevant legal provisions and/or fail to comment on Esas position and the remedies available to Asad and Bilal under them. 02 Answers display little or no knowledge about the subject.
Fundamentals Level Skills Module
Corporate and Business Law (Pakistan)

Tuesday 4 December 2007
Time allowed Reading and planning: 15 minutes Writing: 3 hours ALL TEN questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.
This question paper must not be removed from the examination hall.
Paper F4 (PKN)
ALL TEN questions are compulsory and MUST be attempted 1 In relation to the Pakistan legal system, discuss the concept of fundamental rights as enshrined in the Constitution of Pakistan, 1973.
(10 marks)
2 In relation to the law of contract, discuss the concept of consideration. (10 marks)
3 In relation to the law of torts: (a) discuss the meaning of torts; and (b) state the defences to torts. (5 marks) (5 marks) (10 marks)
4 Under the Companies Ordinance, 1984, explain the role of a: (a) Company secretary. (b) Chief executive officer. (5 marks) (5 marks) (10 marks)
5 In relation to company law, explain the doctrine of lifting of the veil of incorporation. (10 marks)
State:
(a) the different forms of businesses that a company may undertake as a Non-Banking Finance Company; and
(5 marks)
(b) what steps are required for the establishment of a Non-Banking Finance Company.
In relation to employment law, describe the scope of the Workmens Compensation Act, 1923.
(10 marks)
JKB stores (JKB) is a franchisee of Zike International (Zike). Under their franchise agreement, JKB has provided Zike with a bank guarantee of rupees 2,000,000 issued in favour of Zike by Friendly Bank (Bank). Since then the following events have occurred: (a) JKB has defaulted and Zike has requested the Bank for the encashment of the guarantee in its favour. (b) The Bank has refused on the ground that it did not receive any consideration from Zike for providing the guarantee, therefore, Zike should approach JKB. Required:
Analyse the situation from the perspective of contract law and advise Zike as to its future course of action. (10 marks)
Hassan Textile Mills Limited (HTML) is in the process of expansion to finance and has requested a loan facility of rupees 5,000,000 from Barons Bank (Bank). As a security for the requested loan facility, HTML has offered to create an unregistered charge in the Banks favour on the entire stock of cotton bales in HTMLs warehouse. The extension of this loan facility is under consideration by the Banks management. You have been approached by the Banks management for advice. Required: Under the Companies Ordinance, 1984, advise the Bank with regard to the creation of charges over a companys assets.
(10 marks)
10 The board of directors of Sunrise Limited (SL), a public limited company, in their next board meeting plan on authorising: (a) The appointment of TAQ International as its sole distributor for Karachi. Mr Kamal Dawood, who is the managing partner of TAQ International and a director of SL, is the moving spirit behind this. (b) Extension of the repayment time for a loan extended to Mr Kamal Dawood. Required: With reference to company law, explain to the board of directors of SL the procedures for adopting the above plans.
(10 marks)
Answers
Fundamentals Level Skills Module, Paper F4 (PKN) Corporate and Business Law (Pakistan)
1
Fundamental rights are what have traditionally been known as Natural Rights of human beings. These rights as generally understood today date back to the time when the Magna Carta was introduced in 1215 AD through which an absolute monarch was made to acknowledge that the subjects possessed certain rights, which could not be violated by an all powerful sovereign. In Pakistan, the Fundamental Rights are enshrined in Part (II) Chapter (1) of the Constitution of Pakistan, 1973 (the Constitution) and relate to freedom of movement (Article 15); freedom of assembly (Article 16); freedom of association (Article 17); freedom of trade, business and profession (Article 18); free speech (Article 19); religious rights (Article 20); protection of property rights (Article 24); equality of citizens (Article 25); non-discrimination in respect of access to public places (Article 26); and safeguards against discrimination in services (Article 27). The superior Courts of Pakistan in Nawabzada Nasrullah Khan v District Magistrate, PLD 1965 Lahore 642 have held that the concept of fundamental rights as mentioned in the Constitution is not in the form of an absolute proposition, rather such rights are often encumbered by provisos and qualifying conditions. Article (8) of the Constitution provides that any law, custom or usage having the force of law, inconsistent with the fundamental rights shall be void to the extent of such inconsistency and mandates that state shall not make any law, which takes away or abridges such rights. If any law in contravention of fundamental rights is made then the same shall be void to the extent of such contravention. This viewpoint has been reinforced by the Supreme Court of Pakistan in Province of East Pakistan v Mohammad Mehdi Ali Khan, PLD 1959 Supreme Court 378, wherein it has been held that law contravening any of the fundamental rights is void to the extent of such contravention and is not void ab initio i.e. law would exist and would be applicable to matters not covered by fundamental rights. Even in a state of emergency the superior Courts of Pakistan in Rifat Perveen v Bolan Medical College, PLD 1980 Quetta 10 have held that the state cannot make laws in violation of fundamental rights, however, as per Article 233(2) of the Constitution, the right to move Court for enforcement of such rights can be suspended.
According to s.2(d) of the Contract Act, 1872 (Act), when at the desire of the promisor the promisee or any other person who 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 consideration. In other words, consideration means some right, interest, and profit or benefit accruing to one party and some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. The superior Courts of Pakistan in Abdul Aziz v Mazum Ali, (1914) have held that where the promisee has done nothing there is no consideration. Further, anything or any act, can suffice as consideration if the same is not forbidden by law; is not fraudulent; does not involve injury to the person or property of another and the courts do not regard it as immoral or against public policy (s.23 of the Act). Following are the elements of the concept of consideration: At the desire of the Promisor According to s.2(d) of the Act, consideration implies a situation where the desire of one party and the action of the other have a casual connection and consideration ought to be performed only at the desire of the promisor. Consideration given by whom and for whom
Consideration presupposes a situation where the promise needs not necessarily move from the promisee but may move from a third party. It is not necessary that the promisor should derive any direct benefit from the promise; the benefit can go to a third party. However, a stranger to a contract cannot sue under it, nor enforce it, even though the contract had been made for his benefit.
Nature of consideration
Words has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing denote that consideration can be past, present or future. The law treats past consideration on the same footing as present consideration or future consideration. In the case of a promise to do something in future, it should be noted that as long as a future consideration remains executory, it would not be treated as consideration in the eyes of the law unless it involves a legal obligation which the promisor could be compelled to perform. Further, promises to do what a person is required by law to do or acts of natural love and affection or obedience and submission by way of respect, cannot be held to be good consideration or valuable consideration.
Adequacy of consideration What constitutes an adequate consideration is for the parties to decide at the time of making the agreement. Inadequacy of consideration is no ground for refusing the performance of the promise. The only requirement of the Act is that there must be some consideration for the promise and the same can be anything of value in the eyes of the law. However, if any issue arises between the parties regarding the legality of the contract, the courts consider the adequacy of consideration to judge whether the contract has been induced by fraud or other illegal means or not.
(a) The word tort is from the French language and its meaning in English is wrong. The famous jurist Salmond has termed tort as a civil wrong for which the remedy is the common law action for unliquidated damages. Tort occurs as a result of breach of an equitable obligation and not exclusively that of contract or trust. In other words, tort can be termed as a civil wrong independent of contract for which the appropriate remedy is an action for unliquidated damages. The person committing the tort is referred to as the tortfeasor and the act of the tortfeasor is called the tortuous act. Instances of tortuous acts are assault (showing of clenched fists to a passerby), battery (pushing by physical touch) and trespass, which is the entry on someones property without his consent. Further an act would not constitute tort if it would not be complained of by an ordinary person, for instance the act of a motorist throwing water on passers by on a rainy day shall not constitute tort.
Torts have been classified into three categories by the superior Courts of Pakistan in Nasir Ahmed Shaikh v The State Life Insurance Corporation of Pakistan, (1990) MLD 1261 namely: (i) (ii) Tort of Nonfeasance: This relates to the omission of some act which a person by law is bound to do. Tort of Misfeasance: This relates to the improper performance of some lawful act.
(iii) Tort of Malfeasance: This relates to the commission of some act which is in itself unlawful. (b) In certain circumstances, the persons involved cannot be held responsible for the act of committing tort. Such circumstances are generally referred to as the defences to torts and are set out below: (i) (ii) Act of State and Statutory Authority Acts of state done under state policy and/or acts authorised by a statute do not constitute tortuous acts. Judicial Acts Words or actions of judges spoken/done while functioning as a judge cannot constitute tortuous acts even if the judges motive is malicious or improper. This exemption exists to encourage the independence of the judiciary (iii) Quasi Judicial Acts Acts of persons and bodies like universities, colleges and clubs are protected from tortuous liability if done while observing rules of natural justice. (iv) Executive Acts
Acts done by public servants in the performance of their duties, for instances, police officers executing arrest warrants.
(v)
Parental and Quasi Parental Authority Acts of parents and teachers done for the betterment of the child despite involvement of moderate and reasonable punishment on the child are not considered as tort.
(vi) Acts of Necessity Acts done by persons, such as, a captain of a ship in dangerous circumstances to ensure safety of the ship and persons on board. (vii) Works of Necessity and Public Welfare
Acts done for the welfare of the general public, for instance, the pulling down of houses to prevent fire from spreading.
(viii) Volenti Non Fit Injuria When a person understands the risk involved and agrees to accept them, for instance, coal miners agreeing to work in a mine. (ix) Inevitable Accident An accident which could not have been avoided despite the exercise of ordinary care and caution. (x) Private Defence Every person has the right to defend his own person and property from unlawful harm, for instance setting up of a protection barrier to divert flood water which damages neighbours crops.
(a) Section 2(33) of the Companies Ordinance, 1984 (Ordinance) states that a company secretary is an individual appointed to perform secretarial, administrative, or other duties aimed to ensure that the affairs of the company are conducted in accordance with the Ordinance. Appointment of company secretaries is mandatory for listed and single member companies (s.204-A). A company secretary acts on behalf of the board of directors and being an officer of the company has extensive duties, including those of making representations on behalf of the company and, if authorised, entering into contracts which come within the day-to-day running of the companys business. Generally, a company secretary has duties towards (i) directors; (ii) shareholders; (iii) management and administration; (iv) the company; and (v) law. Duties towards shareholders imply arranging for shareholders meetings; keeping minutes of such meetings; receiving applications for allotment of shares; transferring of shares; and recording dividends paid. Duties towards directors imply arranging board meetings; keeping records and minutes of such meetings and implementing decisions taken in the meetings.
In case of a listed company, the Code of Corporate Governance mandates that the company secretary should attend board meetings, except those meetings which have on their agenda matters relating to the company secretary; ensure compliance with the law and the memorandum and articles of association. The Code of Corporate Governance also envisages certain eligibility criteria for the appointment of a company secretary. No person can be appointed as the company secretary of a listed company unless he is: a member of a recognised body of professional accountants; or a member of a recognised body of corporate/chartered secretaries; or a lawyer; or a graduate from a recognised university or equivalent, having at least five years experience of handling corporate affairs of a listed public company or corporation.
(b) According to s.2(1)(6) of the Ordinance a chief executive officer is an individual who is entrusted with the powers of management of the affairs of the company subject to the control and directions of the directors. A chief executive officer is the head of the company and it is mandatory for every company other than a company managed by a managing agent to appoint a chief executive officer (s.198). A chief executive officer, if not already a director of the company, shall be deemed to be its director and entitled to all rights and privileges and liabilities of that office. Further, the directors of the company have the right to fix the terms and conditions of appointment of the chief executive officer if so allowed by the articles, otherwise it shall be fixed in a general meeting (s.200(1) and (2)).
The term of office of the chief executive officer varies in the cases of the first chief executive officer and those appointed later. In the case of the first chief executive officer, appointment should be made on the date of commencement of business or not later than the 15th day after the date of incorporation, whichever is earlier (s.198). The first chief executive officer should hold office until the first annual general meeting or the term fixed by the directors. All subsequently appointed chief executive officers can hold office for a term not extending three years (s.199(1)).
For appointment as chief executive officer, a person must qualify to be appointed as director of the company, for instance, he should not be a minor; should be of sound mind; there should be no insolvency proceedings pending against him; should not have been convicted by a court of law for an offence involving moral turpitude; nor declared by a court to lack fiduciary behaviour (s.187 read with 201). A chief executive officer can be removed from his office by the directors of the company through a resolution passed by not less than three-quarters of the total number of directors for the time being or by a special resolution in the case of removal before the expiration of his term notwithstanding anything contained in the articles of association or in an agreement between the company and the chief executive officer (s.202).
Upon incorporation a company obtains a legal personality separate from its members and as a result a company may own property, sue or be sued in its own name and is considered separate from its members thus protecting the latter from the liability of the former. This legal principle was laid down in Salomon v Salomon, (1897) AC 22 wherein it was held that a company is distinct in law from persons who are its members i.e. there exists a curtain, veil, or shield between the company and its members. When this protection is taken away the corporate veil is said to be lifted. It is to be noted that no fixed rule exists for determining as to when the veil of incorporation should be lifted; rather the Supreme Court of Pakistan in The President v Mr Justice Shaukat Ali, PLD (1971) SC 585 held that the corporate veil can be lifted where the same is being used merely as a cloak for fraud or for improper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someone else, or to determine tax liability or quasi-criminal liability, or whether the corporate body is an enemy concern.
Reiterating the separate legal personality doctrine the Supreme Court of Pakistan in Union Council, Ali Wahan, Sukkur v Associated Cement (Private) Limited, (1993) SCMR 468 held that the corporate veil cannot be lifted as a matter of course but only under justifiable reasons. The said Court in Fauji Foundation and another v Shamimur Rehman, PLD (1983) SC 457 held the following circumstances to be justifiable for lifting the corporate veil: (a) Companys membership falls below the prescribed minimum; (b) Company has been used for fraudulent trading; and (c) To counter fraud, oppression or condone some informality in the affairs of the company. In short, the corporate veil can be lifted to determine the true relationship of shareholders with regard to their dealings with the company or to ascertain the true nature of the company itself.
(a) Non-Banking Finance Companies (NBFC) and the businesses that NBFCs are permitted to engage in are regulated by the Companies Ordinance, 1984 (the Ordinance) and the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (NBFC Rules). NBFCs are characterised as public limited companies incorporated pursuant to the permission from the Securities and Exchange Commission of Pakistan (SECP) and licensed by SECP to carry out any of the businesses mentioned in s.282A. The businesses mentioned in the said section are: (i) Investment Finance Services; (ii) Leasing; (iii) Housing Finance Services;
(iv) (v) (vi) (vii) (viii)
Venture Capital Investment; Discounting Services; Investment Advisory Services; Asset Management Services; and Any other form of business which the federal government may by notification in the official gazette specify from time to time.
(b) Steps set forth in the Ordinance and the NBFC Rules for incorporating NBFCs are as follows: Application to SECP
Section 282C and Rule 4(1) of the NBFC Rules require that persons desirous of forming an NBFC shall submit an application to the SECP as set out in Form-1 for permission to establish a NBFC. Form-1 requires disclosure of information about the proposed management of NBFC such as their names, addresses, educational and professional qualifications, financial standing, evidence of payment of income and wealth tax, names and addresses of business organisations of which these people have been directors, partners or office holders in the last ten years, proposed capital contribution to be made by each, and feasibility report along with payment of nonrefundable processing fee of rupees 100,000 only.
SECPs Approval Section 282C of the Ordinance provides that an NBFC shall not be incorporated without prior approval of the SECP. Before granting its approval, the SECP deliberates whether the requirements of Rule 3 of the Rules have been complied with. Rule 3 requires that an NBFC may be established if each of its sponsors, proposed directors, chief executive and chairman of the board of directors (i) has not been associated with any illegal banking business, deposit taking or financial dealing; (ii) companies in which he is a director or major shareholder have no overdue loans or instalments outstanding towards any NBFC or any banking or non-banking financial institution; (iii) companies in which he is a director or major shareholder have not defaulted in the payment of taxes as on the date of application; (iv) have not been sponsor, director or chief executive of a defaulting cooperative finance society or finance company; (v) has never been convicted of fraud or breach of trust or of an offence involving moral turpitude or removed from service for misconduct; (vi) has neither been adjudged as insolvent nor suspended payment of his debts nor has compounded with his creditors; (vii) his net worth except for the nominee director as per wealth tax statements submitted with the tax authorities is not less than twice the amount to be subscribed by him personally. Only after being satisfied that the formalities of Rule 3 have been complied with, would the SECP through a written order permit establishment of an NBFC. Such permission granted is valid for six months and during this period the promoters of the NBFC should get the NBFC incorporated as a public limited company under the Ordinance (Rule 4 sub-Rules (2) and (3)). Licence After grant of permission by the SECP to form an NBFC and incorporation of the company as a public limited company in accordance with the Rules, the company should apply on Form B to the SECP for grant of a licence to carry on one or more of the businesses mentioned in s.282A along with a non-refundable fee of rupees 100,000 only. The SECP after considering, amongst others, whether the promoters are persons of integrity; means and possess knowledge about matters that the company may have to deal with shall grant the licence (Rule 5(2)). Obtaining a licence from the SECP is imperative as s.282A(2) provides that an NBFC shall not carry on business unless it holds a licence issued by the SECP and licence issued may be subject to conditions as the SECP may deem fit to impose. Commencement of Business An NBFC shall only commence business after obtaining licence from the SECP and meeting the minimum paid up capital requirement prescribed by SECP (s.282(C-4) read with Rule 6(1)).
The Workmens Compensation Act, 1923 (1923 Act) is part of the vast scheme of labour legislation in Pakistan which aims to safeguard the interests of workmen. According to the preamble of the 1923 Act, it aims to regulate the payment of compensation by employers to their workmen in cases of personal injury by accident during their performance of duties. The 1923 Act mandates that compensation for injury related to a workers job is the employers responsibility. To further safeguard the interests of workers, the 1923 Act provides that the quantum of compensation varies with the kinds of injuries, for instance, compensation is different in cases of injury resulting in total disablement and partial disablement. The 1923 Act also links the amount of compensation to workers wages and prescribes the procedure to be followed (medical examination) and duties to be observed by both workers and employers during the same (fixation of expenses of medical examination on employers). In short, this statute aims to fix responsibility of compensation on employers for injuries arising to their employees in the course of their employment. The superior Courts of Pakistan in Kalsoom Akhtar v Abdul Rashid, PLD (1975) Lahore 244, have held that the 1923 Act is not penal in nature but rather sets out the duties and liabilities of citizens in the position of employers towards other citizens who happen to be workmen. Further, the 1923 Act being a quasi penal statute its provisions ought not to receive a strained interpretation in the interest of the beneficiaries thereunder (BombayBurmah Trading Corporation Limited v Ma E. Nan, 1937 Rang 45). The 1923 Act is to be interpreted in a manner so that it advances the purpose of the enactment (Mst Lal Jan v Messers Silver Paper Tube Company, Karachi, PLD 1974 Karachi 140).
This question requires candidates to analyse the concept of a contract of guarantee as envisaged in the Contract Act, 1872 (Act) and advise Zike on a future course of action. Section 126 of the Act describes a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. In the instant case, JKB is the principal debtor, Zike is the creditor, and the Bank is the surety. Refusal by the Bank is not justified as the superior Courts of Pakistan in City Bank v Tariq Mohsin Siddiqi, 1999 PLD 196 have held that a creditor in an action against a guarantor is merely required to show existence of liability of the principal debtor and refusal by the guarantor based on technicalities, laws of procedure or the covenants to which the guarantor is not a party are not valid. Even otherwise, the Banks refusal to encash the guarantee on the pretext that it has not received any consideration is not justified under the law. As s.127 clearly provides that anything done or any promise made for the benefit of the principal debtor is sufficient consideration for the surety to give the guarantee. In other words, consideration need not be for the benefit of the surety, it is sufficient if the benefit goes to the principal debtor. This view is reinforced by the holding of superior Courts of Pakistan in United Bank Limited v Shahyar Textile Mills Limited, (1996) CLC 106 stating that the surety himself need not receive some benefit in return for his guarantee. Refusal on the ground that Zike should approach JKB is not valid as s.128 mandates that the liability of the surety is coextensive with that of the principal debtor unless otherwise provided by contract. This implies that the guarantor (Bank) and principal debtor (JKB) are jointly and severally liable to pay the guarantee amount of rupees 2,000,000 to Zike, and Zike shall be well within its rights to file legal proceedings against the guarantor (the Bank) without joining the principal debtor (JKB) as party to the suit (State Engineering Corporation Limited v National Development Finance Corporation, (2006) SCMR 619 and Hyesons Sugar Mills (Private) Limited v Consolidated Sugar Mills Limited, (2003) CLD 996). In view of the above discussion, Zike has a valid case against the Bank and should initiate legal proceedings against the Bank and JKB for the enforcement of the guarantee.
This question requires candidates to understand as to which charges require registration, what are the advantages of registering a charge and the procedure prescribed in this regard. Section 121(1)(f) of the Companies Ordinance 1984 (Ordinance) provides that a floating charge on the undertaking or property of the company including stock-in-trade shall be void if not registered. Stock-in-trade are assets which would in the ordinary course of business change from time to time.
A registered charge serves as a notice to third parties to the effect that the registered charge would have precedence or priority over charges registered later, which would rank secondary to a prior registered charge (Re: Hamilton Windsor Iron Works, (1879) 12 Ch D 707). Section 121(2) provides that when a charge is registered over certain assets, any person acquiring such assets or any part thereof or any share or interest therein shall be deemed to have notice of the said charge as from the date of registration.
In view of the above legal provisions, the charge to be created in favour of the Bank on the entire stock of cotton bales in the warehouse of HTML should be registered with the concerned Registrar of Companies. This is imperative as judicial precedents suggest that if a charge is not duly registered, the security created becomes void against the creditor (CF. Official Liquidator v Union Bank of India, AIR (1988) NOC 78(KER)).
Further, the Bank should ensure that HTML for creating a charge on its entire stock of cotton bales in favour of the Bank follows the procedure set forth in the Ordinance and the Companies (General Provisions and Forms) Rules, 1985 (1985 Rules). HTML should create a charge on its assets against loans by executing an agreement with the Bank. Before execution of such instrument creating a charge over its assets, HTML should have the approval of its board of directors and HTMLs seal should also be affixed on the agreement. Copies of the charge documents should be made and attested as per requirement of Rule 13 of the 1985 Rules and documents such as Form 10 containing particulars of the charge and the prescribed fee should be paid in the manner set out in the 1985 Rules. The application should be filed with the concerned Registrar of Companies within 21 days of the creation of the charge failing which the company shall have to approach the Securities and Exchange Commission of Pakistan for extension of time. After issuance of the certificate of registration of charge by the registrar, HTML should maintain a register of the charge in accordance with Form 15 prescribed in the 1985 Rules and keep the same at HTMLs registered office.
In conclusion: to legally safeguard the Banks interest the charge to be created on HTMLs stock should be registered.
10
This question requires candidates to understand the limitations imposed on public limited companies regarding execution of contracts with its own members/directors. Section 196(2)(g) of the Companies Ordinance, 1984 (the Ordinance) mentions the procedure that companies, desirous of entering into business dealings with a business organisation of which any of its directors is a stakeholder (member, partner or director), should observe. The said section provides that directors of a company shall by means of a resolution passed at their meeting authorise a director or the firm of which he is a partner or any partner of such firm or a private company of which he is a member or director to enter into any contract with the company for making sale, purchase or supply of goods or rendering services with the company.
Therefore, the board of directors of SL should pass a resolution in their meeting for the implementation of its plan of appointing TAQ International as its sole distributor for Karachi. As regards the directors plan for extending the repayment time for a loan extended to Mr Kamal Dawood, it is noted that SL is a public limited company, therefore, its directors can only authorise this act after obtaining consent in its general meeting. This requirement is set forth in s.196(3)(b) of the Ordinance, which provides that the directors of a public company shall not except with the consent of the general meeting either specifically or by way of an authorisation remit, give any relief or give extension of time for the repayment of any debt outstanding against any person. SL should observe the procedural requirements mentioned in the Ordinance regarding the holding of a general meeting in this respect. For instance, the general meeting should be held in the town in which the registered office of SL is situated. Notice of the general meeting should be sent to the shareholders of SL at least 21 days before the date fixed for the meeting and such notice should in addition to it being despatched in the normal course, be published in at least one issue each of a daily newspaper in English and Urdu languages having circulation in the province in which the stock exchange on which SL shares are listed is situated (s.158 (2) and (3)).
In conclusion: the board of directors of SL can implement its mentioned plans after observing the procedures mentioned above.
Fundamentals Level Skills Module, Paper F4 (PKN) Corporate and Business Law (Pakistan) 1
This question expects candidates to discuss the concept of fundamental rights in light of the Constitution of Pakistan, 1973 and leading judgments. 610 Thorough answers which mention the fundamental rights envisaged in the said Constitution and also explain the nature and limitations of the fundamental rights. 05 Answers discuss the concept of fundamental rights vaguely and mention only few of the fundamental rights enshrined in the Constitution.
This question expects candidates to discuss the concept of consideration as an essential element of a valid contract in light of the Contract Act and leading judgments. 810 Thorough explanation of the concept of consideration mentioned in s.2(d) of the Contract Act, 1872. 57 Sound understanding of the concept of consideration but lacking in detail. 04 Unbalanced answer, lacking in detailed understanding.
This question expects candidates to display their understanding of the concept of tort.
(a) 45 A good explanation of the meaning of tort with examples.

23 A good understanding of the concept of tort but no examples given. 01 Little or no understanding of the concept of tort.
(b) 45 A good understanding of defences of tort.

23 A good understanding of some of the defences. 01 Little or no understanding of any defence.
(a) 35 02
Answers displaying a fair treatment of the role of company secretary with discussion as to the eligibility under the Code of Corporate Governance in public companies. Little or no knowledge of the area.
(b)35 Answers displaying understanding of the role of chief executive officer, term of his office, appointment and removal
from office. 02 Little or no knowledge of the area.
This question expects candidates to discuss the concept of corporate veil and the circumstances in which the courts may lift the veil. 810 Answers explain the concept of the corporate veil and detail listing of the circumstances under which it can be lifted or pierced with reliance on relevant case law. 57 Answers show some understanding of the concepts of the corporate veil and circumstances under which it can be lifted. 04 Unbalanced answer focusing only on one aspect of the question i.e. the concept of the corporate veil or the circumstances in which it can be lifted.
The question expects the candidates to describe the different kinds of businesses that an NBFC can undertake with a fair idea of the legal requirement of licensing for each kind of business. It is also expected that the candidates are aware of the different steps involved in the incorporation of an NBFC. (a) 45 Answers in this range mention the businesses the NBFC can engage in. 23 Answers show some understanding of the area, but lacking in detail. 01 Little or no knowledge of the area. (b) 45 Answers give good understanding of the steps involved. 23 Little understanding of some steps. 01 No understanding at all.
This question expects candidates to display good understanding of the scope of the Workmens Compensation Act, 1923. 810 A complete answer demonstrating understanding of the scope of the Workmens Compensation Act, 1923, its various provisions and judicial precedents controlling its operation. 57 A sound understanding of the scope of the Act and concerned judicial precedent. 24 An ability to display some knowledge about the question. 01 Very weak answers showing very little or no understanding of the question.
810 A complete answer highlighting and dealing with all the issues presented in the problem scenario while relying on the
relevant statutory provisions and case law. 57 24 01 An accurate recognition of the problems inherent in the question, together with an attempt to apply the appropriate legal rules to the situation. An ability to recognise some, although not all, of the key issues and suggest appropriate legal responses to them. A recognition of the area of law but no attempt to apply that law. Very weak answers showing very little or no understanding of the question.
810 57 04
A good analysis of the scenario with a clear explanation of the law relating to the creation of charges, and detailed reference to the statutory provisions. Some understanding of the situation but perhaps lacking in detail or reference to the statute. Weak answer lacking in knowledge or application, with little or no reference to the statute.
10
810 57 04
A good analysis of the scenario with a clear explanation of the law relating to execution of contracts by public limited companies with its own directors, with detailed reference to the statutory provisions and giving a conclusion. Some understanding of the situation but perhaps lacking in detail or reference to the statute. Weak answer lacking in knowledge or application, with little or no reference to the statute.

Tuesday 3 June 2008
Paper F4 (PKN)
ALL TEN questions are compulsory and MUST be attempted 1 Explain the jurisdiction and powers of the supreme court of Pakistan as envisaged by the Constitution of Pakistan, 1973.
(10 marks)
In relation to law of contract, analyse the meaning of an offer and explain with illustrations what distinguishes it from an invitation to treat. (10 marks)
3 In relation to the law of torts: (a) Define the different kinds of torts; and (b) State the remedies available for torts. (5 marks) (5 marks) (10 marks)
4 Under the Companies Ordinance, 1984, explain: (a) the main characteristics of a private company; (b) a special resolution; and, (c) dividends. (4 marks) (3 marks) (3 marks) (10 marks)
5 Discuss the salient features of the Code of Corporate Governance.
(10 marks)
6 In relation to Companies Ordinance, 1984, describe the following: (a) a statutory meeting; (b) an annual general meeting; and, (c) an extraordinary general meeting. (3 marks) (3 marks) (4 marks) (10 marks)
7 In relation to employment laws, describe the position of a workman. (10 marks)
Before going out of town for one week, Ayaz asked his friend Farhan to look after his designer clothing store during his absence. The next morning Farhan noticed that the store locks had been tampered with, so he had them replaced. In order to boost the sales of Ayazs store, Farhan offered to customers a 20% discount on all items in the store. Upon his return, Ayaz was unhappy with this situation and immediately removed the discount. Disappointed with Farhans handling of the store matters, Ayaz has approached you for advice. Required: Analyse the situation from the perspective of the law of agency and explain what rights and remedies Ayaz has against Farhan.
(10 marks)
Best Foods (Private) Limited (BFL) is a company authorised by the objects clause of its memorandum of association to solely engage in the business of food processing. To enhance the profits of the company, the board of directors of BFL are considering importing energy drinks and distributing and selling them in Pakistan. BFLs shareholders have asked the board of directors to explain whether the company is authorised to undertake the business of importing, distributing and selling energy drinks as proposed. The board of directors have approached you for advice.
Required: In view of the provisions of the Companies Ordinance, 1984, analyse and explain whether BFL can undertake the proposed business.
(10 marks)
10 The chief executive officer (CEO) of Shah Sugar Mills Limited, a public listed company, intends to appoint Mr Yusuf as the companys chief financial officer (CFO). Mr Yusuf holds an MBA degree from the Lahore University of Management Sciences and has been working for the last six years for the corporate department of National Bank. The CEO hopes that with this appointment his workload shall be reduced and thereafter the CFO and the board of directors of Shah Sugar Mills Limited shall approve the financial statements. Before announcing the appointment of Mr Yusuf as the CFO, the CEO has approached you for advice. Required:
Analyse the situation from the perspective of company law and the Code of Corporate Governance and advise the CEO as to whether Mr Yusuf could be appointed as the CFO and what would be his duties in this capacity.
(10 marks)
Answers
June 2008 Answers
Under the Constitution of Pakistan, 1973 (the Constitution), the supreme court enjoys a vast jurisdiction and authority as all subordinate courts in Pakistan are bound by its decisions and all executive and judicial authorities in Pakistan are required to act in aid of the supreme court. The jurisdiction of supreme court is set out in Articles 184, 185 and 186 of the Constitution and can be classified in the following: (a) (b) (c) (d) (e) (f) (g) original jurisdiction appellate jurisdiction advisory jurisdiction transferring cases issuing orders review of its own judgments and making of internal rules. (i) Inter-Government disputes: Article 184 stipulates that the supreme court shall have original jurisdiction to pronounce declaratory judgments in all disputes between any two or more governments (Federal and Provincial). (ii) Enforcement of Fundamental Rights The supreme court is entitled to take cognisance even suo motu of matters involving questions of public importance with reference to the enforcement of fundamental rights. (b) Appellate Jurisdiction The supreme court has the jurisdiction to hear and determine appeals against judgments, decrees, final orders or sentences of a high court in certain matters. For instance, if a high court has reversed an order of acquittal of an accused person and sentenced him to death; in contempt of high court proceedings; and if the high court certifies that the case involves a substantial question of law as to the interpretation of the Constitution. (c) Advisory Jurisdiction The supreme court if requested by the President can give opinion on any question of law of public importance. (d) Transferring Cases The supreme court can in its discretion transfer any case, appeal or other proceedings pending before any high court to any other high court. (e) Issue Orders The supreme court can issue orders for securing the attendance of any person or production of any document. (f) Review The supreme court has power to review its own judgments and orders, which have apparent on the face of the record error of fact or law. (g) Internal Rules The supreme court has authority to make rules regulating its own practice and procedure.
(a) Original Jurisdiction
Section 2(a) of the Contract Act, 1872 (the Act) defines an offer as a proposal by one party to another to do or abstain from doing anything with a view to obtaining assent of the other to such act or abstinence. The superior courts of Pakistan have observed that an agreement starts with an offer and completes on the acceptance of that offer by a promisee. For the formation of a valid contract, an offer made by a proposer must necessarily be accepted by a promisee in unconditional and unqualified terms; any slight variation or departure from the offer would result in its rejection and amount to counterproposal/offer (Shaukat Ali v Secretary Industries and Mineral Development, Government of Punjab Lahore, 1995 MLD 123). In other words, unless an offer is accepted unconditionally, the same would not consummate into a binding and enforceable contract (Rehmat Ali v Fauqir Muhammad, 2005 YLR 301).
When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when accepted becomes a promise (s.2-b). An offer in itself is not a promise, but would become a promise only when it has been accepted. A promise in itself could be equivalent of an agreement, and an agreement enforceable by law is a contract (Habib Bank Limited v Hussein Corporation Limited, 1994 MLD 2276). An offer is an expression of will in definite terms to create legal relations.
An invitation to treat, on the other hand, is information conveying ones readiness to negotiate business with anybody who on such information would make an offer. The typical illustrations of an invitation to treat are goods displayed in a shop with price tags; catalogues containing description of goods; and advertisement for auction. In short, an invitation to treat is an attempt to induce offers and is not an offer in itself.
From the foregoing definitions, it is also clear that an offer and an invitation to treat differ with respect to their fixed terms i.e. in case of offer the other party just has to convey its assent for the offer to become binding as a promise, whereas in the case of invitation to treat there is no intention on the part of person sending out the invitation to obtain the assent of the other person and the same is only to start negotiations (Abdul Razzak v Karachi Development Authority, 1991 CLC 1591).
(a) Tort is a civil wrong independent of contract for which the appropriate remedy is an action for unliquidated damages. The person committing the tort is referred to as the tortfeasor and the act of the tortfeasor is called the tortious act. Torts are of the following four kinds:
(i) Torts actionable per se;

(ii) Torts actionable on proof of damage; (iii) Felonious Torts; and (iv) Foreign Torts.
(i) Torts Actionable Per Se

These torts are actionable without proof of actual damage. The rationale for this is that such kinds of torts are likely to result in harm owing to their mischievous nature, therefore the law prohibits them absolutely and presumes damages, for instance libel, assault, battery, false imprisonment, trespass to land and goods. (ii) Torts actionable on proof of damage For these torts there is no presumption and actual damage must be proved. Actual damage is the gist of the action in the case of such torts i.e. malicious prosecution, seduction, deceit, and negligence. (iii) Felonious Torts These relate to the commission of felonious offences like murderous assault. (iv) Foreign Torts A foreign tort is one which is committed outside the jurisdiction of Pakistani Courts. For action to be maintained in the Pakistani courts in respect of such torts the act complained of should be in violation of the law of the country where it was committed and if the wrong was not actionable in the country of its commission then no action would lie if such wrong is actionable in Pakistan. Further both parties should be resident in Pakistan. (b) Remedies available against torts are the following: (i) Damages; (ii) Injunction; and (iii) Specific Restitution of Property. (i) Damages
Damages are monetary compensation for the loss suffered by a person injured by the tortious act of another. The object of award of damages is to compensate i.e. to put the injured person in the same position as he was before the injury. Further while granting damages the courts are governed by the legal maxim in jure non remote cause and proxima spectator which means that in law the proximate and not the remote cause of any event is regarded and the tortfeasor is not liable for the damages which are too remote but rather is only responsible for the natural or probable loss.
(ii)
Injunctions Injunctions can be granted in respect of torts to prevent the commission of those torts which are threatened or anticipated or to order the doing of an act (mandatory injunction). The grant or refusal of injunction is in the courts discretion and the courts can initially grant a temporary injunction and after hearing the tortfeasor the injunction granted may become permanent.
(iii) Specific Restitution of Property Where damages, if granted, would not be an adequate remedy then the court may grant the specific restitution of property.
(a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 (Ordinance) as a company which by its articles (i) restricts the right to transfer its shares; (ii) limits its membership to 50; and (iii) prohibits the public from subscribing to the shares or debentures of the company. Restriction on the transfer of shares results in the ownership of and interest in the company being confined to a close circle of shareholders. Such restriction may exist in the form that directors have the authority to not allow the transfer of shares to persons whom they do not approve; shares can only be sold at a certain price or by one member to another. Unlike a public company, a private company cannot have more than 50 members and cannot invite the public to subscribe to its shares or debentures.
(b) Section 2(1)(36) of the Ordinance describes a special resolution as a resolution which has been passed by a majority of not less than three-quarters of such members entitled to vote as are present in person or by proxy at a general meeting of which not less than 21 days notice specifying the intention to propose the resolution as a special resolution has been duly given. Provided that if all the members entitled to attend and vote at any such meeting so agree a resolution may be proposed and passed as a special resolution at a meeting of which less than 21 days notice has been given.
A special resolution is generally required to conduct such special business for which a special resolution is required by the Ordinance or the articles of association of a company. A company must file a special resolution with the registrar of companies on Form 26 within 14 days of the passing of such special resolution. (c) The term dividend refers to the profits of the company which is allocated to the holders of shares in the company. Sections 248 to 251 of the Companies Ordinance, 1984 set out the requirements and formalities with respect to dividends. For instance, dividends should only be paid out of the profits of a company (s.249), a company should declare a dividend in a general meeting, no dividend shall exceed the amount recommended by the directors [s.248(1)] and dividend payments should only be made to a registered shareholder or to his order [250(1)].
Corporate Governance is described as a system by which companies are directed and controlled. In Pakistan, the Securities and Exchange Commission of Pakistan (SECP) has issued a Code of Corporate Governance (Code) and has directed all stock exchanges to make the Code a part of their listing regulations. Therefore, at present the Codes application is limited to listed companies only. The Code specifies the distribution of rights and responsibilities among different participants in the company, such as its board of directors, managers, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. The Code aims at professing a transparent management, participation of the minority shareholders in the decision making, appointment of qualified persons as the chief financial officer (CFO) and company secretary. As regards the appointment and duties of the directors, the Code sets out that all listed companies shall encourage effective representation of independent non-executive directors, including those representing minority interests, institutional equity interest on their boards of directors. The Code provides that persons whose names are not borne on the register of national tax payers and/or have been convicted by a court of competent jurisdiction as a defaulter in payment of any loan to any financial institution shall not be elected or nominated as a director of a listed company. Directors of listed companies have been required to exercise their powers and fiduciary duties with a sense of objective judgment and independence in the best interests of the listed company and to prepare a Statement of Ethics and Business Practices to establish a standard of conduct for directors and employees. The Code provides that the appointment, remuneration and terms and conditions of employment of the CFO, the company secretary and the head of internal audit of listed companies shall be determined by the chief executive officer with the approval of the board of directors. The CFO or the company secretary shall not be removed except with the approval of the board of directors. Further the CFO and the company secretary are required to attend meetings of the board of directors.
Another important feature of the Code is the provisions for the external and internal audit of the listed companies. The Code stipulates that no listed company shall appoint as external auditors a firm of auditors which has not been given a satisfactory rating under the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan. Moreover, listed companies have to make a statement of compliance with the Code and the statutory auditors are responsible for reviewing and certifying this statement. On internal audit, the Code requires that there shall be an internal audit function in every listed company. The head of internal audit shall have access to the chair of the Audit Committee, which shall not comprise of less than three members including the chairman. Internal audit reports should be provided for the review of external auditors and any major findings should be reported to the board. Quarterly unaudited financial statements of listed companies shall be published and circulated along with a directors review on the affairs of the listed company for the quarter. Half-yearly financial statements shall be subject to a limited scope review by the statutory auditors in such manner and according to such terms and conditions as may be determined by the Institute of Chartered Accountants of Pakistan and approved by SECP.
The Code reinforces the powers, responsibilities and functions of the board of directors, formalises the corporate decision making process and requires adequate documentation of policies, decisions of directors and audit.
(a) Statutory Meeting Also known as the first official general meeting. As per s.157 of the Companies Ordinance, 1984 it is mandatory for every public company limited by shares and every company limited by guarantee and having a share capital to hold this meeting within a period between three and six months from the date of commencement of business. Private companies, companies limited by guarantee and unlimited companies need not hold a statutory meeting.
The purpose of holding this meeting is to enable the members to know the financial position and prospects of the company, matters relating to company formation, results of companys appeal for public subscription to its share capital and to get an idea of assets and properties acquired or to be acquired by the company. In other words, the purpose of a statutory meeting is to inform shareholders about matters relating to incorporation, allotment of shares, details of contracts concluded, etc.
(b) Annual General Meeting Section 158 mandates that every company whether public or private, must hold an annual general meeting (AGM) of shareholders once in every calendar year within four months following the close of its financial year and not more than 15 months after the holding of the preceding annual general meeting, s.158 (1) and the first AGM shall be held within 18 months from the date of incorporation of the company. AGMs are also referred to as ordinary general meetings as they usually deal with ordinary business, for instance in them the performance of the company for the past year is discussed, annual accounts are adopted, a dividend is declared, directors and auditors are appointed. (c) Extraordinary General Meeting All general meetings of a company, other than the statutory meeting and AGM are referred to as extraordinary general meetings (EGM) (s.159(1)). An EGM may be convened by the company at any time as required for conducting such business that cannot be postponed until the next AGM, for instance, alteration of the memorandum and articles of association; reduction and reorganisation of capital and issue relating to debentures. An EGM may be convened by the board of directors or upon requisition by members or upon directions of the Securities and Exchange Commission of Pakistan. 7 A workman is a person who works for another for hire in a capacity other than managerial or administrative. Under the Industrial Relations Ordinance, 2002 (IRO 2002) any person who did not fall into the definition of the employer and worked in an establishment or industry for hire or reward, either directly or through a contractor, whether his terms of employment were express or implied, is considered a workman. Earlier, the Industrial Relations Ordinance, 1969 imposed an additional qualification on employees to qualify as workmen i.e. they should not be drawing wages exceeding Rs 800 per mensem [s.2(xxviii)]. The supreme court of Pakistan in Muhammad Sadiq v Punjab Labour Court No: 1, Lahore, PLD 1988 SC 633 has held that the real test for determining whether a person falls within the ambit of a workman or not depends on the nature of the duties performed by him. The nature of work performed by an employee is to be considered as the true criteria, and the deciding factor and the designation or salary of an employee would not be the determining factor in deducing whether he is a workman or not. If a workman performs numerous duties, then it is the majority of his duties which are to be considered. If the majority of his duties are of a manual and clerical nature, his designation as building superintendent would not make him an officer (Pakistan Herald Limited, Karachi v Victor Sunny and Another, 1996 PLC 66). It should also be noted that the initial burden of proving whether any person falls into the category of workman is on the workman so claiming, and he could discharge the same by showing the nature of his work. In such an eventuality, the employer could not rebut claims of the employee by producing evidence such as a job description (1997 PLC 239).
The relationship between Ayaz and Farhan amounts to that of an agency. According to s.182 of the Contract Act, 1872 (Act), an agent is simply a person employed to do any act for another or to represent another in dealings with third persons. The request by Ayaz to Farhan to look after Ayazs store in his absence amounts to express authorisation in terms of s.187 of the Act, which states that authority can be vested on the agent expressly by words spoken or written and absence of consideration is no bar to the creation of agency relationship between Ayaz and Farhan as s.185 of the Act provides that presence of consideration is not necessary for creation of an agency. Replacement of tampered locks was a legal act on Farhans part as Ayaz had requested Farhan to take care of the store and if the same had not been replaced there could have been theft. This view finds support from s.222 of the Act which provides that an employer of an agent is bound to indemnify his agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred on the agent. Further, Farhan can recover from Ayaz the expenses incurred in having the tampered store locks replaced as the said action was within Farhans authority. However, Farhans action of offering customers 20% discount on all items in the store was beyond the authority bestowed upon him by Ayaz. Ayaz had simply asked Farhan to look after his store in his absence. This authorisation cannot be extended to allow Farhan to take decisions having a commercial impact on the business. In view of this, the act of putting on special offer all items in the store can by no means be justified as a legal act on Farhans part. This view finds support from s.188 of the Act which stipulates that an agent having authority to carry on a business has an authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business. Section 211 of the Act provides that an agent is bound to conduct the business of his principal according to the directions given by the principal or in the absence of any such directions according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. Where the agent acts otherwise if any loss is sustained he must make it good to his principal and if any profit accrues he must account for it. Resultantly, Ayaz is entitled to recover the loss incurred as a result of this 20% discount on the price that had been fixed by Ayaz.
A company cannot engage in a business, which is not fairly incidental or consequential to the business of the company mentioned in the memorandum of association. The objects clause in the memorandum of association of a company sets out the objects for which the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad, 2003 CLD 463). The superior courts of Pakistan have held that an act of a company in violation of its memorandum is ultra vires and, therefore, void and cannot even be ratified (Munawar Ahmed v Official Liquidator, PLD 1980 Lahore 86). The proper test for determining whether an act is ultra vires or not is to see if the power to do a thing arises from necessary implication from the expressed objects, and, if it does, the act should not be held as ultra vires. The directors are fiduciaries and are bound to exercise their powers in good faith for the benefit of the company and for a proper purpose. Section 305(f)(ii) of the Companies Ordinance, 1984 provides that a company may be wound up by the court if the company is carrying on business not authorised by its memorandum. The superior courts of Pakistan with regard to winding up have held that a petition for winding up of a company can be made by a shareholder or creditor of the company or by the company itself. The locus standi of a person to file such a petition has to be seen on the date of filing (Mohammad Hussein v Dawood Flour Mills, 2003 CLD 1429). A joint reading of ss.305 and 306 of the Ordinance suggests that the court has discretion to order or not to order winding up of a company after taking into consideration all the relevant facts. An order for winding up of a company can be sought or made on all or any of the grounds enumerated in s.305 (Habib Bank Limited v Hamza Board Mills, PLD 1996 Lahore
633) provided that it is satisfactorily proven and courts should not exercise such discretion on an application which is not bona fide, i.e. aiming to pressurise the company into making payment to an unpaid creditor.
In view of the above, BFL is advised to restrain from importing energy drinks and to restrict its business to food processing as allowed by its memorandum. The business of importing and selling energy drinks is not mentioned in BFLs memorandum and neither can it qualify as business, incidental or consequential to its business of food processing. The board of directors of BFL does not have power under the Ordinance to allow the company to carry out activities not provided for in its memorandum. In view of s.305(f)(ii) of the Ordinance, a petition for the winding up of BFL may succeed in case BFL indulges in a business which is not covered by the objects clause of its memorandum.
10
Before announcing the appointment of Mr Yusuf as the chief financial officer (CFO), the chief executive officer (CEO) should obtain the approval of the board of directors in accordance with the requirement of the Code of Corporate Governance (Code) in Rule (xv), which provides that the appointment, remuneration and terms and conditions of employment of the CFO shall be determined by the CEO with the approval of the board of directors. The Code sets forth a set of qualifications for the position of CFO, which should be met by the candidate for the said post. In this particular instance, Mr Yusufs MBA degree and six years work experience with National Bank qualifies him for the job of CFO. Rule (xvi)(b) of the Code provides that no person shall be appointed as the CFO of a listed company unless he is a graduate from a recognised university and has at least five years experience in handling corporate affairs of a bank. Rule (xxiv) of the Code states that no listed company shall circulate its financial statements unless the CEO and the CFO present the financial statements, duly endorsed under their respective signatures, for the consideration and approval of the board of directors, and the board of directors, after consideration and approval, authorise the signing of financial statements for issuance and circulation. Therefore, it would not be possible for just the CFO and the board of directors to approve the financial statements of the company as the said statements have to be firstly endorsed jointly by the CEO and the CFO and then submitted for approval of the board.
The CEO should first submit to the board of directors the candidature of Mr Yusuf for the position of CFO. The CEO should also inform the board of directors that Mr Yusuf qualifies under the Code for appointment as CFO. However, the CEO should remember that the financial statements have to be endorsed both by him and the CFO before they can be approved by the board of directors.
This question expects the candidates to discuss the jurisdiction and powers of the supreme court as set out in Articles 184, 185 and 186 of the Constitution of Pakistan, 1973 (Constitution). 810 Thorough explanation of the jurisdiction and powers of the supreme court. 57 Answers show some knowledge of the jurisdictional powers of the supreme court. 04 Little or no knowledge of the area.
This question expects the candidates to demonstrate their knowledge of the difference between an offer and an invitation to treat in the context of the law of contract. Explanation through illustrations would be appreciated. 810 Thorough explanation of the concept of offer mentioned in s.2(a) of the Contract Act, 1872 (Act) in comparison to invitation to treat along with illustrations. 57 Fair understanding of the concept of offer and invitation to treat but lacking in details and illustrations. 04 An unbalanced answer, lacking in understanding.
The question expects the candidates to demonstrate their understanding of the meaning of tort, kinds of torts and the remedies available. 810 A good explanation of the meaning and kinds of torts and remedies. 57 A fair understanding of the kinds and remedies of torts. 24 Some understanding of the kinds and remedies of torts but lacking in details. 01 Little or no knowledge of the area.
4 (a) 34 02
A good treatment of the characteristics of a private company in reference to s.2(1) (28) of the Companies Ordinance, 1984 (Ordinance). Little or no knowledge of the area.
(b) 23 A good treatment of the concept of a special resolution set out in s.2(1) (36) of the Ordinance. 01 Little or no knowledge of the area. (c) 23 A good treatment of the concept of dividends. 01 Little or no knowledge of the area. 5 This question expects the candidates to show a comprehensive understanding of the Code of Corporate Governance with a grip on the issues addressed by the Code. 810 Thorough explanation of the features (concerning directors, the board of directors role, office of chief financial officer and company secretary, and audit requirements) of the Code.
57 Answers showing some understanding about the features of the Code. 0 4 Answers showing lack of knowledge on the features of the Code.
(a) 23 01
A good treatment of the formalities and need of a statutory meeting in reference to s.157 of the Ordinance. Little or no knowledge of the area.
(b) 23 A good treatment of the formalities and need of an annual general meeting in reference to s.158 of the Ordinance. 01 Little or no knowledge of the area. (c) 34 A good treatment of the formalities and need of an extraordinary general meeting in reference to s.159 of the Ordinance. 02 Little or no knowledge of the area.
13
810 57 24 01
A complete answer demonstrating understanding of the position of a workman under the Industrial Relations Ordinance, 2002 and judicial precedent controlling its operation. A sound understanding of the position of a workman and concerned judicial precedent. An ability to display some knowledge about the question. Very weak answers showing no or very little understanding of the question.
810 57 04
A good analysis of the scenario with a clear explanation of the law relating to agency in particular an agents authority and principals rights. Some understanding of the situation but perhaps lacking in detail or reference to the statute. Weak answer lacking in knowledge or application, with little or no reference to the statute.
810 57 24 01
A complete answer highlighting and dealing with all the issues presented in the problem scenario, it is most likely that statutory provisions and cases will be referred to and they will be credited. An accurate recognition of the problems inherent in the question, together with an attempt to apply the appropriate legal rules to the situation. An ability to recognise either of the key issues and suggest appropriate legal responses to them. A recognition of the area of law but no attempt to apply that law. Weak answers showing no or very little understanding of the question.
10
810 57 04
A good analysis of the scenario with a clear explanation of the law relating to the appointment, qualifications and role of the chief financial officer. Some understanding of the situation but perhaps lacking in detail or reference to the code. Weak answer lacking in knowledge or application, with little or no reference to the code.

Tuesday 2 December 2008
Paper F4 (PKN)
ALL TEN questions are compulsory and MUST be attempted 1 With reference to Articles 8 and 184 of the Constitution of Pakistan, 1973, discuss the constitutional safeguards available for the protection of the fundamental rights.
(10 marks)
2 In relation to the law of contract, analyse contingent contracts. (10 marks)
3 In relation to the law of partnership, describe the essentials of a partnership. (10 marks)
4 Under the Companies Ordinance, 1984, explain the following: (i) Memorandum of Association; (5 marks) (5 marks) (10 marks)
(ii) Articles of Association.
5 In relation to the Companies Ordinance, 1984, state the powers and duties of the companys auditors. (10 marks)
6 In relation to the law of torts: (a) Define the term tort. (b) Describe the various kinds of tort. (2 marks) (8 marks) (10 marks)
7 In relation to employment laws, discuss the scope of: (i) the Workmens Compensation Act, 1923; (ii) the Industrial Relations Ordinance, 2002. (5 marks) (5 marks) (10 marks)
Junaid paid Rs. 50,000 to Wellness Slimming Centre (Centre) for a six weeks session of aerobics classes. During the first half of the session the aerobics instructor missed half of the scheduled classes and in the second half no classes were held due to non-availability of the instructor. Throughout the session Junaid and others complained to the Centres Manager, who promised to arrange classes to make up for the missed classes. However, this did not happen and the session expired. Thereafter, Junaid served a legal notice on the Centre calling for a refund of the fee deposited along with Rs. 1,000,000 as compensation for the mental anguish and loss of his time; otherwise he would initiate legal proceedings against them for the same. In response, the Centre apologised and offered Junaid the opportunity to join the next six weeks session free of charge.
Required:
Advise Junaid what legal action he can bring against the Centre and what are the chances of its success. (10 marks)
Ali, Asad and Ameer have been carrying out an auto-parts business for the last seven years under a partnership arrangement in which the initial capital was contributed equally by them. They were jointly responsible for the management and all liabilities of the firm were shared equally by them. Now they want to convert their business arrangement from a partnership to a private company limited by shares in which Ali, Asad and Ameer shall hold 50%, 30% and 20% of the shares respectively. Required:
Advise the three partners whether they can convert their partnership arrangement into a private company limited by shares and, what effect will this change in the percentage balance of ownership have on their liabilities.
(10 marks)
10 On 24 February 2006 Mr Hassan was appointed by the board of directors of XXL Ltd (a listed brokerage company) as the companys chief executive for a period of two years. Thereafter, the stock exchange boom occurred and Mrs Hassan also set up a brokerage company. This action on part of Mrs Hassan infuriated the board of directors of XXL Ltd and they passed a resolution by a three-fourths majority removing Mr Hassan from the office of the chief executive. Mr Hassan has threatened to take XXL Ltd to court for removing him from office before the expiration of his two year period. Required: Explain to Mr Hassan whether the boards act of removing him is valid or not.
(10 marks)
Answers
The constitutional safeguards available for the protection of the fundamental rights under the Constitution of Pakistan, 1973 (Constitution) are provided in Articles 8 and 184 of the Constitution. These are explained as under: No Promulgation of Laws that are Violative of the Fundamental Rights Article 8 states that any law, custom or usage having the force of law, insofar as it is inconsistent with the fundamental rights shall to the extent of such inconsistency, be void. Further that the state shall not make any law which takes away or abridges the rights so conferred and any law made in contravention shall to such extent be void. Thus the underlying principle laid down under Article 8 is that no law will be accepted as a good law which is violative of the Fundamental Rights of the citizens of Pakistan. However, if ever such law is made, the Courts are fully competent to declare such law void. Safeguard of Fundamental Right by Supreme Court Article 184 provides for the jurisdiction of the Supreme Court of Pakistan to take cognizance (on petition or even suo moto) of any matter which involves a question of public importance with reference to the enforcement of any of the Fundamental Rights provided under the Constitution. However, this clause provides two preconditions to invoke the jurisdiction of the Supreme Court. The pre-conditions are that the petition must show that the grievance relates to violation of a Fundamental Right; secondly, that the alleged violation is of the nature of public importance. Fundamental Rights remain intact even during Emergency Finally, the constitutional limit on promulgation of laws in contravention of the fundamental rights remains intact even by imposition of emergency under Article 233. As clause (2) of the said Article only provides that during emergency the right to move to any court for the enforcement of any of the fundamental rights, and any proceeding in any court for the enforcement of such rights, shall remains suspended. In conclusion the provisions of Article 8 and 184(3) guarantee the protection of the Fundamental Rights. These provisions not only prohibit the promulgation of any laws in contravention of the Fundamental Rights but also vest a vast jurisdiction in the Supreme Court to strike down such laws as unconstitutional.
Definition: Section 31 of the Contract Act, 1872 (1872 Act) defines a contingent contract as: A contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Explanation Characteristics of a Contingent Contract The above definition provides three essential characteristics of a contingent contract, viz:
(a) Its performance depends upon the uncertainty of happening or non-happening in some future event. (b) Such event must be collateral, i.e. incidental to the contract.
(c) The contingent event should not be mere will of the promisor. Illustration: Ali contracts to pay Asad Rs. 100,000 if Asads house is burnt down. This is a contingent contract. Further, a contract shall ripen into an absolute obligation only on the happening of the event or upon fulfilment of the condition stipulated therein and until then the contract is not enforceable. Rules Regarding the Performance of Contingent Contracts The rules regarding the performance of a contingent contract are contained in ss.32 to 36 of the 1872 Act. (i) The Happening of an Uncertain Future Event According to s.32, a contract dependent on the happening of an uncertain future event can be enforced only when that event has happened. Illustration: A makes a contract with B to buy Bs horse if A survives C. This contract cannot be enforced by law unless and until C dies in As lifetime. (ii) The Non-happening of an Uncertain Future Event According to s.33, a contract dependent on the non-happening of an uncertain future event can be enforced only when the happening of that event becomes impossible and not before. Illustration: A undertook insurance worth Rs. 1,000,000, if a certain ship does not return to the Karachi sea port. That ship is sunk en route to the Karachi sea port. A can claim the insurance amount. (iii) When Event to be Deemed Impossible
According to s.34, if the uncertain event is the future conduct of a third party, such an event shall be considered impossible if that person does any act due to which the contract cannot be enforced in any definite time. For instance, A agrees to pay B a sum of money if B marries C, but C marries D. The marriage of B to C must now be considered impossible.
(iv) The Happening of an Event within a Fixed Time According to s.35, if a promise is to be performed within a specified period of time provided an event happens, he is bound to perform his promise if the event happens within the specified time. If the time so specified elapses and the event does not happen, or the event becomes impossible before the fixed time, the contract becomes void. Illustration: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year and become void if the ship is destroyed within the year. (v) The Non-happening of an Event within a Fixed Time According to the second paragraph of s.35, if a promise is to be performed with a specified period of time provided an event does not happen, such a promise may be enforced if the event does not happen, within the specified period of time or the time expires without the event happening. Illustration: A promised to pay B, a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is destroyed within the year. (vi) Impossible Events According to s.36, a contingent contract to do or not to do anything if an impossible event happens, is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. For instance, A agrees to pay Rs. 10,000 if B will marry As daughter C, whereas C was dead at the time of the agreement. The agreement is therefore void. In conclusion, a contingency is anything that the contract is dependent upon and that could void the contract if the contingency is not met. 3 According to Pollock, partnership is a relationship which subsists between persons who have agreed to share the profits of a business carried on by all or any of them, on behalf of all of them. Essentials of a Partnership According to s.4 of the Partnership Act, 1932 (1932 Act): partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all. By virtue of the above definition the following are the three essential elements to constitute a partnership.
(a) Partnership Agreement: There must be an agreement entered into by all the persons concerned who may be two or more in number. Further, s.5 provides that the relationship of partnership arises from contract and not from status; and
(b) Sharing of Profits: The agreement between them must be to share profits of the agreed business which is often taken as prima facie proof of partnership; whereas, any trade, occupation or profession may qualify as business; and (c) Mutual Agency: The business must be carried on by all or anyone of the partners, acting for all of the partners. All these elements must be present to constitute a valid and lawful partnership. Further, s.6 of the 1932 Act provides a mode of determining partnership as it envisages whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relationship between the parties, as shown by the relevant facts taken together. For instance, Explanation 2 of Section 6 provides that the sharing of profit or of gross return arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
In conclusion if the elements given above are satisfied then the courts will treat such a relationship as a valid and legal partnership.
(a) Memorandum of Association

The memorandum of association of a company is a document which sets out the constitution of the company and mentions among others the objects for attainment of which the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad, 2003 CLD 463). Its purpose is to enable the shareholders, creditors and those who deal with the company to know its permitted range of enterprise. As per ss.16 and 17 of the Companies Ordinance, 1984 the memorandum of a company comprises the following clauses: (i) Name; (ii) Registered Office; (iii) Objects; (iv) Liability; (v) Capital (Share or Guarantee) and (vi) Association. The importance of the memorandum can be gauged from the fact that any act of the company in violation of the memorandum is ultra vires and so void that it cannot be ratified.
(b) Articles of Association

The articles of association are rules and regulations framed for the internal management of a company and are subordinate to the memorandum. Articles define the powers of directors and set out the terms of contract between them (United Liner Agencies of Pakistan (Private) Limited v Miss Maheneau Agha, 2003 SCMR 132). In other words articles define the duties, rights and powers of the governing body, company at large, prescribe the mode by which business of the company is to be carried on, and changes in the internal regulation of the company may be made from time to time. Further, articles cannot enlarge the scope of the companys objects mentioned in the memorandum, however, in case of ambiguity in the memorandum, articles of association can be referred to for the limited purpose of clarifying such ambiguity.
Auditors are responsible for examining the companys affairs on behalf of the shareholders and are duty bound to honour this position of trust by giving the shareholders a fair and full account of the companys accounts and well being. For the discharge of this responsibility s.255 of the Companies Ordinance, 1984 (Ordinance) gives them the powers and duties which are discussed below: Powers of Auditors (a) Power of Access Auditors have the power to access at all times the books, papers, accounts and vouchers of the company, whether kept at the companys registered office or elsewhere. (b) Power to Request Auditors are empowered to require from the companys directors and officers information necessary for performance of their duties. Duties of Auditors (a) Auditors Report Auditors shall make a report for the shareholders of the company pertaining to the companys accounts and books of accounts and the same shall state whether: (i) all information required had been obtained; (ii) proper books of accounts as per law were being kept by the company; (iii) balance-sheet and profit and loss account or the income and expenditure account was according to law and in agreement with the books of accounts; (iv) the accounts gave a true and fair view of companys state; and (v) whether expenditure incurred was for the purpose of the companys business; (vi) Further business conducted, investments made and expenditures incurred were in accordance with the objects of the company; and (vii) zakat has been deducted and deposited in the Central Zakat Fund. In case any of the ingredients of the auditors report are missing then the report shall state the reason for the same. (b) Attend General Meeting
Auditors of a company are entitled to attend general meetings and to receive all notices and communications in this regard.
(a) Definition: Tort is a private (civil) wrong against a person or his property and the basis of tort liability is the breach of legal duty owed to another person resulting in some legal recognisable harm to that person for which the primary remedy is an action for unliquidated damages. The person committing a tort is referred to as the tortfeasor and the act of tortfeasor is called a tortious act. (b) Classification of Torts There are three kinds of torts based on the three theories of liability, viz: (i) Intentional Torts: These are the wrongs in which the persons charged must have acted in such a manner that they either wanted to harm someone or knew that what they did would result in harm. Instances are: assault, battery, defamation, false imprisonment, mental distress, invasion of privacy, trespass, conversion, and fraud. Negligence: Tort of negligence is based on the concept of fault and it exists where four conditions are met: (1) (2) (3) (4) First, the defendant must have owed the plaintiff a duty. Second, the defendant must have breached that duty. Third, breach of that duty must be the actual as well as the legal cause of injury. Fourth, the injury must be one for which money damages may be recovered.
(ii)
(iii) Strict Liability Tort: Strict liability principle finds persons liable even if their conduct was unintentional or non-negligent;
that is, even if it was not their fault, they are liable. Strict liability has its genesis in Ryland v Fletcher, [1868]: that any person who in the course of non-natural use of his land accumulates thereon for his own purpose anything likely to do mischief; if it escapes, the person is answerable for all direct damages thereby caused.
There are four kinds of torts based on the theories of remedy, viz: (i) (ii) Torts actionable Per Se: These are torts which are so mischievous in their nature that they are actionable without proof of actual damages. For instance, assault, battery, false imprisonment, etc. Torts actionable on proof of damages: These are torts where the actual damage is necessary to be proved. For instance, negligence, deceit, malicious prosecution and seduction.
(iii) Felonious Torts: These relate to the commission of felonious offences like murderous assault. (iv) Foreign Torts: It is a tort committed outside the jurisdiction of the Courts of Pakistan. Further, an action against such a tort can only be maintained if both the parties are residents of Pakistan and an act complained of should be in violation of the law of the country where it was committed.
(a) Scope of the Workmens Compensation Act, 1923 Before analysing the scope of the Workmens Compensation Act, 1923 (1923 Act) it should be understood that the superior Courts of Pakistan in PLD 1975 Lahore 244, have held that this statute is not penal in nature but rather sets out the duties and liabilities of citizens in the position of employers towards other citizens who happen to be workmen. It is part of the vast scheme of labour legislation in Pakistan which aims to safeguard the interests of workmen. The 1923 Act in its preamble mentions that it aims to regulate the payment of compensation by employers to their workmen in cases of personal injury by accident. The 1923 Act mandates that compensation for injury related to the workers job is the responsibility of the employer. To further safeguard the interests of workers the 1923 Act provides that the quantum of compensation varies with different kinds of injuries, for instance, compensation is different in cases of injury resulting in total disablement and partial disablement. The Act also links the amount of compensation to workers wages and prescribes the procedure to be followed (medical examination) and duties to be observed by both workers and employees (fixation of expenses of medical examination on employers). In short this statute aims to fix responsibility of compensation on employers for injuries arising out of their employment. (b) Scope of Industrial Relations Ordinance, 2002
The scope of the Industrial Relations Ordinance, 2002 (IRO) is to amend, consolidate and rationalise the law relating to the formation of trade unions, regulation and improvement of relations between employers and workmen and avoidance and settlement of any differences of disputes arising between them. The superior Courts of Pakistan in Ashraf Sugar Mills Limited v Manzoor Ahmed 2006 SCMR 1751 have held that IRO is a beneficial legislation enacted with the object of ameliorating the working conditions of workmen by providing necessary safeguards and therefore it is to be construed liberally.
Further that the IRO was a special law, procedural in nature and was promulgated with the object of controlling the formation of trade unions so as to cultivate better relations/interaction between the employer and employees. Its foremost aim was to speedily settle the dispute between the workers and employer so that industrial peace could flourish [Mazdoor Union Neelam Glass Industries Limited through General Secretary v Neelam Glass Industries Limited, Hassan Abdal 2005 PLC 219].
Section 73 of the Contract Act, 1872 (1872 Act) provides that when a contract has been broken the party who suffers by such a breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract to be likely to result from the breach of it.
It has been held that by granting damages the law aims to put the plaintiff in the same position as far as possible as he would have been had the breach not taken place [State Life Insurance Corporation Pakistan v Bibojee Services Ltd 1999 MLD 2750].
Further, before damages can be granted the superior Courts of Pakistan have held that a party claiming damages due to a breach of contract, must establish the contract, the breach thereof and the extent of damages. Without doing so such a party could not succeed [Ahmad Saeed Khan v MCB Ltd, Islamabad 1993 SCMR 441]. In view of the above mentioned legal provision, it can be submitted that the present matter is one of breach of contract by the Centre as the Centre failed to fulfil its part of the contract i.e. to provide aerobics classes for six weeks and therefore Junaid is competent to sue the Centre and to claim for damages thereof.
Finally, as regards the quantum of damages, s.73 provides that compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach but only for the damages which naturally arose in the usual course of things from such breach, of which the parties knew when they made the contract to be likely result from the breach of it, should be assessed.
In conclusion, in the view of above discussed law, it can be concluded that a claim against the Centre has bright chances of succeeding.
Under the Companies Ordinance, 1984 (Ordinance) an incorporated company has a separate existence and the law recognises it as a legal person separate and distinct from its members. This distinct legal personality emerges from the moment of incorporation. Incorporation gives the company legal personality, separate from its members, with the result that the company may own property, sue and be sued in its own corporate name and does not die when its shareholders die. Further, under the provisions of Ordinance the minimum of two persons are required to get a private limited company incorporated. [s.2(228)]
Whereas under the Partnership Act, 1932 (1932 Act) a partnership is not a legal person or entity distinct and separate from the partners; rather every partner is liable jointly with all the other partners and also severally for all the acts of the firm done while he is a partner (s.25). In other words the distinction between the company and its members should be maintained as an incorporated companys legal entity and its actions, assets, rights and liabilities on one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other, are distinct.
Whereas in a partnership every partner is liable for all acts of the firm done while he is a partner and this liability is joint as well as several. Further, partners are liable to contribute equally to the losses sustained by the firm (s.13-b of the 1932 Act).
In view of the above mentioned legal position, it is to be informed to Ali, Asad and Ameer that they are competent to get a private limited company incorporated. Whereas, under the partnership arrangement they were all liable individually as well as collectively for the partnership debts, but in a private limited company limited by shares the liability of each shareholder (Ali, Asad and Ameer) shall be maximum to the extent of shares held by them.
10
Yes, the boards act of removing Mr Hassan from his post as XXLs chief executive is valid. With respect to the ground of removal, it should be noted that s.203(1) of the Ordinance restricts the chief executive of a public company from directly or indirectly engaging in any business which is of the same nature as and directly competes with the business carried on by the public company. Further it deems business to be carried on by the chief executive, if the same, is carried on by his spouse or any of his minor children. The boards act of removing Mr Hassan occurred when Mrs Hassan set up a brokerage firm i.e. a business same as XXLs. As per s.203(1) this is a valid ground for removing Mr Hassan from the post of XXLs chief executive. As regards the procedure of removal, s.202 of the Ordinance provides that the directors of a company by resolution passed by not less than three-fourths of the total number of directors for the time being or the company by a special resolution may remove a chief executive before the expiration of his term of office; notwithstanding anything contained in the articles or in agreement between the company and such chief executive. In view of the above provision, the board has the authority to remove the chief executive irrespective of any agreement to the contrary between the company and the chief executive provided a resolution to this effect is passed with three-fourths majority. As in the case of Mr Hassan, the said formality of board resolution passed with three-fourths majority has been complied with therefore, the removal process is also valid.
This question expects candidates to discuss the constitutional safeguards available for the protection of fundamental rights as mentioned in Articles 8 and 184 of the Constitution of Pakistan, 1973 (Constitution). 810 Thorough explanation of the constitutional safeguards available for the protection of fundamental rights. 57 Answers show some knowledge of the constitutional safeguards available. 04 Little or no knowledge of the area.
810 Thorough explanation of the concept of contingent contracts as provided in ss.31 and 36 of the Contract Act, 1872. 57 Sound understanding of the concept of contingent contracts but lacking in detail. 04 Very unbalanced answer, lacking in detailed understanding.
810 A good explanation of the essentials to constitute a valid partnership as envisaged under ss.4, 5, and 6 of the 1932 Act. 57 Answers shows some knowledge of the essential elements to constitute a partnership. 04 Little or no knowledge of the area.
4 (a) 35 A good treatment of the concept of memorandum of association in view of ss.(16) and (17) of the Companies Ordinance, 1984 and decisions of the superior Courts. 02 Little or no knowledge of the area. (b) 35 A good treatment of the concept of articles of association. 02 Little or no knowledge of the area. 5 810 A good explanation of the powers and duties of the auditors as mandated by s.255 of the Ordinance. 57 A sound understanding of the powers and duties of the auditors. 24 Displays some understanding of the powers and duties of the auditors but lacks details. 01 Little or no knowledge of the area. 6 (a) 12 A good explanation of the meaning of tort. 0 No knowledge of the area. (b) 68 A sound understanding of kinds of torts. 35 Displays some understanding of kinds of torts but lacks details. 02 Little or no knowledge of the area. 7 (a) 35 A sound understanding of the scope of the Workmens Compensation Act, 1923. 01 Very weak answers showing no or very little understanding of the question.
(b) 35 A sound understanding of the scope of the Industrial Relations Ordinance, 2002. 01 Very weak answers showing no or very little understanding of the question.
810 57 24 01
A complete answer highlighting and dealing with all the issues presented in the problem scenario. It is most likely that statutory provisions and cases will be referred to and they will be credited. An accurate recognition of the problems inherent in the question, together with an attempt to apply the appropriate legal rules to the situation. An ability to recognise either of the key issues and suggest appropriate legal responses to them. A recognition of the area of law but no attempt to apply that law. Very weak answers showing no or very little understanding of the question.
810 A good analysis of the scenario with reference to laws relating to company and partnership in particular liability aspect. 57 Some understanding of the situation but perhaps lacking in detail or reference to the statute. 04 Weak answer lacking in knowledge or application, with little or no reference to the statute.
10
810 A good analysis of the scenario with a clear explanation of the law relating to grounds and procedure of dismissal. 57 Some understanding of the situation but perhaps lacking in detail or reference to the statute. 04 Weak answer lacking in knowledge or application, with little or no reference to the statute.

F4 Corporate Law Solved

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(Pakistan)

PART 2 TUESDAY 7 DECEMBER 2004

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Corporate and Business Law

The Association of Chartered Certified Accountants

(4 marks) (10 marks)

(10 marks) (5 marks)

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Corporate and Business Law

The Association of Chartered Certified Accountants

Section B TWO questions ONLY to be attempted

Required: Advise GL following: on the (6 marks)

pursue an independent professional practice. Required: Advise VCL following: on the

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Corporate and Business Law

The Association of Chartered Certified Accountants

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Part 2 Examination Paper 2.2(PKN) Corporate and Business Law (Pakistan)

December 2005 Marking Scheme

Answers show little understanding of the position and importance of Senate.

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Extremely poor answers showing a lack of understanding of the issue.

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Corporate and Business Law

The Association of Chartered Certified Accountants

Explain acceptance in relation to formation of a contract. (10 marks)

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business. (b) Discuss the likely outcome of winding up proceedings.

(10 marks) (10 marks) (20 marks)

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End of Question Paper

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Part 2 Examination Paper 2.2(PKN) Corporate and Business Law (Pakistan)

June 2006 Answers

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June 2006 Marking Scheme

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Corporate and Business Law

The Association of Chartered Certified Accountants

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Section B TWO questions ONLY to be attempted

Required: (a) Explain whether the special resolution is valid.

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(6 marks) (20 marks)

End of Question Paper

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