Académique Documents
Professionnel Documents
Culture Documents
ICAP
Business Law
Second edition published by
Emile Woolf International
Bracknell Enterprise & Innovation Hub
Ocean House, 12th Floor, The Ring
Bracknell, Berkshire, RG12 1AX United Kingdom
Email: info@ewiglobal.com
www.emilewoolf.com
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, without the prior permission in writing of Emile Woolf
International, or as expressly permitted by law, or under the terms agreed with the
appropriate reprographics rights organisation.
You must not circulate this book in any other binding or cover and you must impose the
same condition on any acquirer.
Notice
Emile Woolf International has made every effort to ensure that at the time of writing the
contents of this study text are accurate, but neither Emile Woolf International nor its directors
or employees shall be under any liability whatsoever for any inaccurate or misleading
information this work could contain.
C
Contents
Page
Syllabus objectives and learning outcomes v
Section A: Mercantile Law
Chapter
1 Introduction to the legal system 1
2 Introduction to the law of contract 25
3 Offer and acceptance 37
4 Capacity of parties 47
5 Consideration 55
6 Free consent 65
7 Legality of object and consideration and agreements opposed
to public policy 85
8 Void agreements 93
9 Contingent contracts 103
10 Quasi contracts 109
11 Performance of a contract 117
12 Discharge of a contract 137
13 Remedies for breach of contract 153
14 Indemnity and guarantee 163
15 Bailment and pledge 181
16 Agency 201
17 Partnership Act 227
18 Negotiable instruments Act 253
Page
Section B: Company Law
Chapter
19 Company 289
20 Incorporation of company 301
21 Share capital types and variation 319
22 Share capital prospectus 329
23 Mortgages and charges 339
24 Meetings 351
25 Management 367
26 Investments and dividends 387
27 Accounts and audit 397
Index 411
S
Syllabus objectives
and learning outcomes
To give students an understanding of the legal system and commercial laws; and build a
knowledge base of corporate laws.
Learning Outcome
Grid Weighting
Introduction to legal system 5-10
Mercantile law
Contract Act 1872 20-30
Partnership Act 1932 10-15
Negotiable Instrument Act 1881 10-15
50
Companies Ordinance 1984 and Securities Act, 2015
Sections 1 to 51 of the Companies Ordinance, 1984 8-15
Sections 67 to 136 of the Companies Ordinance, 1984 and 8-15
Sections 87 to 93 of Securities Act, 2015
Sections 142 to 204A of the Companies Ordinance, 1984 8-15
Sections 208 to 251 of the Companies Ordinance, 1984 8-15
Sections 252 to 257 of the Companies Ordinance, 1984 8-15
Total 50
Syllabus
Contents Level Learning Outcome
Ref
A Introduction to the Legal
System
Sources and process of
legislation
1 Sources of law and an 1 LO1.1.1: Briefly describe sources of
introduction to the law in Pakistan
Constitution of Pakistan LO1.1.2: Describe the basic structure
of the constitution of the Islamic
Republic of Pakistan.
2 Process of legislation and 1 LO1.2.1: Define legislation and
legal system in Pakistan describe its forms
LO1.2.2: Briefly describe the process
of legislation as per the Constitution
LO1.2.3: Identify and briefly explain
the structure of the courts in Pakistan
LO 1.2.4 Explain alternate dispute
resolution (ADR) and its advantages
and disadvantages.
B Mercantile law
a Contract Act 1872
1 Introduction to the Law of 2 LO 2.1.1: Define contract,
Contract agreement and promise
LO 2.1.2: Identify essential elements of
a valid contract
Syllabus
Contents Level Learning Outcome
Ref
LO 2.1.3: Be aware of factors which
might affect the validity of a contract
and their consequences
LO 2.1.4: Identify different types of a
contract.
2 Offer and acceptance 2 LO 2.2.1: Define offer and acceptance
LO 2.2.2: Identify different types of
offers
LO 2.2.3: Explain how offer is different
from invitation of an offer
LO 2.2.4: Identify essential elements of
offer and acceptance
LO 2.2.5: Understand the timing of
revocation and its communication
LO 2.2.6: Identify circumstances when
an offer lapses.
3 Capacity of Parties 2 LO 2.3.1: Identify circumstances when
a person is not competent to contract
LO 2.3.2: Be aware of consequences
or enforceability of contracts with
persons not competent to contract.
4 Consideration 2 LO 2.4.1: Define consideration and
identify essentials of consideration
LO 2.4.2: Understand rules relating to
consideration
LO 2.4.3: Identify agreements which
are valid without consideration.
5 Free consent 2 LO 2.5.1: Define free consent
LO 2.5.2: Know the effect of absence
of free consent
LO 2.5.3: Be aware of factors which
may affect the consent
LO 2.5.4: Identify and understand
coercion, undue influence, fraud,
misrepresentation and mistake.
6 Legality of object and 2 LO 2.6.1: Identify circumstances where
consideration and object or consideration is unlawful
agreements opposed to LO 2.6.2: Identify agreements opposed
public policy to public policy.
7 Void agreement 2 LO 2.7.1: Be aware of circumstances
or conditions when an agreement is
considered as void
LO 2.7.2: Identify different types of
void agreements.
Syllabus
Contents Level Learning Outcome
Ref
8 Contingent contract 2 LO 2.8.1: Define contingent contract
LO 2.8.2: Identify characteristics of
contingent contract
LO 2.8.3: Understand rules regarding
contingent contract
LO 2.8.4: Understand the difference
between contingent contact and
wagering agreement.
9 Quasi contract 2 LO 2.9.1: Know meaning of quasi
contract
LO 2.9.2: Understand and apply rules
regarding quasi contract
LO 2.9.3: Be aware of different kinds
of quasi contract.
10 Performance of a contract 2 LO 2.10.1: Explain performance and
its types i.e. actual and attempted
LO 2.10.2: Understand rules relating to
joint and reciprocal contracts and
appropriation of payment
LO 2.10.3: Identify essentials of a valid
tender
LO 2.10.4: Define tender and explain
its types and effects. Describe the
essentials of a valid tender
LO 2.10.5: Identify factors which may
affect the performance of a contract
LO 2.10.6: Understand and apply rules
relating to joint and reciprocal promises
LO 2.10.7: Understand the meaning of
appropriation of payment and rules
regarding appropriation of payment
LO 2.10.8: Explain the assignment of
contracts.
11 Discharge of a contract 2 LO 2.11.1: Understand the meaning of
discharge of contract
LO 2.11.2: Identify modes of discharge
of a contract: discharge by
performance, by consent, operation of
law, impossibility of performance, lapse
of time and breach (actual and
anticipatory)
LO 2.11.3: Understand rules relating to
discharge of a contract.
Syllabus
Contents Level Learning Outcome
Ref
12 Remedies for breach of 2 LO 2.12.1: Explain the remedy
contract LO 2.12.2: Describe the various
remedies available in case of breach of
a contract
LO 2.12.3: Understand rules relating
to amount of damages
LO 2.12.4: Identify different kinds of
damages
LO 2.12.5: Understand the remoteness
of damages.
13 Indemnity and guarantee 2 LO 2.13.1: Define contract of
indemnity and contract of guarantee.
Differentiate between contract of
guarantee and indemnity
LO 2.13.2: Identify parties in a contract
of indemnity and contract of guarantee
LO 2.13.3: Differentiate between
contract of guarantee and indemnity
LO 2.13.4: Describe the rights of
indemnity holder
LO 2.13.5: Identify the essentials of
the contract of guarantee
LO 2.13.6: Understand the kinds of
guarantees i.e. specific and continuing,
and revocation of continuing guarantee
LO 2.13.7: Describe rights and
responsibilities of surety
LO 2.13.8: Explain how surety is
discharged
LO 2.13.9: Understand rules relating to
indemnity, guarantee and surety.
14 Bailment and pledge 2 LO 2.14.1: Define bailment and identify
the essentials of the contract of
bailment
LO 2.14.2: Explain the types of
bailment
LO 2.14.3: Identify duties and rights of
the bailor and bailee
LO 2.14.4: Explain how contract of
bailment is terminated
LO 2.14.5: Identify rights and duties of
finder of goods
LO 2.14.6: Explain pledge (pawn),
pledgor (pawnor) and pledgee
(pawnee)
Syllabus
Contents Level Learning Outcome
Ref
LO 2.14.7: Explain rights of pledgor
and pledgee
LO 2.14.8: Understand the rules of
pledge by non-owners
LO 2.14.9: Differentiate between
bailment and pledge.
15 Agency 2 LO 2.15.1: Define agency, agent and
principal and explain types of agents
LO 2.15.2: Identify rights and duties of
the agent and principal
LO 2.15.3: Understand rules relating to
agency
LO 2.15.4: Differentiate between sub
agent and co-agent
LO 2.15.5: Explain how an agency can
be created
LO 2.15.6: Understand the
circumstances when an agent is
personally liable
LO 2.15.7: Identify irrevocable agency
LO 2.15.8: Explain how an agency can
be terminated
LO 2.15.9: Understand the meaning of
undisclosed agency, position of agent,
principal and third party.
b Partnership Act 1932
1 Chapter I Preliminary 2 LO3.1.1: Define the terms.
2 Chapter II - The nature of 2 LO3.2.1: Understand and describe the
partnership partnership relationship, its creation
and identify and explain the types of
partnership and the mode of
determining existence of a partnership.
3 Chapter III - Relations of 2 LO3.3.1: Determine and explain the
partners to one another rights and duties of partners of the firm
under various circumstances
LO3.3.2: Explain the provisions of the
law relating to conduct of the business,
property of the firm and personal
profits earned by partners.
4 Chapter IV - Relations of 2 LO3.4.1: Describe the relationship of
partners to third parties partners with third parties
LO3.4.2: Identify and explain the
concepts of implied authority of the
partner in relation to third parties,
partners authority in an emergency,
mode of doing act to bind the firm,
Syllabus
Contents Level Learning Outcome
Ref
effect of admissions by a partner,
effect of notice to acting partner,
liability of a partner for acts of the firm
and liability of the firm for wrongful acts
of a partner or misapplication by
partners, principle of holding out in
given situations
LO3.4.3: Identify and explain the rights
of transferee of a partners interest and
the rights and liabilities of a minor
admitted to the benefits of partnership.
c Negotiable Instruments
Act 1881
1 Definitions and meanings 1 LO4.1.1: Define and explain terms
(Section 1 to 25) LO4.1.2: Explain provisions relating to
types of negotiable instruments and
their maturity.
2 Discharge of liability (Section 2 LO4.2.1: Identify and explain how the
82 to 90) maker of a negotiable instrument is
discharged from his liability under
given scenarios.
3 Provisions relating to 2 LO4.3.1: Describe provisions relating
cheques (Section 122A to to crossing of cheques
131C)
LO4.3.2: Briefly describe and
differentiate between a cheque
crossed generally and a cheque
crossed specially and their payment
modes.
C a Preliminary and
incorporation (Sections 1
to 51)
1 Definitions (Section 2) 1 LO5.1.1: Define the terms which are
relevant to the areas covered in the
syllabus.
2 Meaning of subsidiary and 2 LO5.2.1: Explain subsidiary and
holding company (Section holding company and when a company
3) becomes a subsidiary or holding
company of another company.
LO5.2.2: Apply the concept of
subsidiary in simple scenarios.
3 Powers and functions of the 1 LO5.3.1: Demonstrate familiarity with
Commission (Section 12) the powers and functions of the
Commission.
4 Memorandum of association 2 LO5.4.1: Describe the memorandum
(Section 15 to 25) of association and state its purpose
Syllabus
Contents Level Learning Outcome
Ref
LO5.4.2: List/explain the clauses of
memorandums of association of
various types of companies
LO5.4.3: Describe the purpose and
procedure of alteration to different
clauses of a memorandum of
association.
5 Articles of association 2 LO5.5.1: Define the articles of
(Section 26) association and state its purpose
LO5.5.2: State the information which
should be contained in the articles of
various companies.
6 Registration of 2 LO5.6.1: Describe the procedure of
memorandum and articles of registration of the memorandum and
association (Section 30 to articles of association
36) LO5.6.2: Describe the effects of
registration of the memorandum and
articles of association.
7 Provisions with respect to 2 LO5.7.1: Describe with examples the
names of companies procedure / prohibitions with regard to
(Section 37 to 41) the selection of the name of a
company
LO5.7.2: Identify/explain the actions
and procedures needed to be taken by
company and registrar, if a company is
registered by a prohibited name.
8 Association not for profit 1 LO5.8.1: Comprehend the nature of
(Section 42) association not for profit.
9 Companies limited by 1 LO5.9.1: Understand the provisions
guarantee (Section 43) regarding divisible profit and dividing
the undertaking into shares or interest.
b Allotment of shares,
registration of charge etc.
(Sections 52 to 136 of
Companies Ordinance
1984 and Sections 87 to 93
of Securities Act 2015))
1 Prospectus, allotment, issue 1 LO6.1.1: Define a prospectus and
and transfer of shares and explain its purpose
debentures, deposits, etc.
LO6.1.2: Understand the requirements
relating to a prospectus as laid down in
Section 87(2),(4),(5),(6),(7), 88(1-8),
90, 91, 92 and 93 of the Securities Act
2015
Syllabus
Contents Level Learning Outcome
Ref
LO6.1.3: Describe the matters that are
to be specified in a prospectus as
required under clause 1 to 7 and 17,
18 19, 24, 26 and 27 of Section 1 of
Part I of Second Schedule
LO6.1.4: Describe the reports that are
to be included in a prospectus as
required under Section 2 of Part I of
Second Schedule
LO6.1.5: Understand/explain the
provisions regarding statement and
consent of expert.
2 Share capital and 1 LO6.2.1: Differentiate between shares
debentures (Section 89 to 95 and debentures
and 108 of Companies
LO6.2.2: Describe the classes and
Ordinance 1984)
kinds of shares
LO6.2.3: Describe with simple
example the condition of fully paid
shares
LO6.2.4: State with simple examples
the kinds of alterations that can be
made to the share capital
LO6.2.5: State the rules on prohibition
of purchase of a companys own or its
holding companys shares
LO6.2.6: Understand the meaning of
variation of shareholders rights
LO6.2.7: Demonstrate familiarity with
the procedure for cancellation of
variation of shareholders rights.
3 Registration of mortgages, 1 LO6.3.1: Discuss the meaning of
charges etc. (Section 121, mortgage/charge with simple
129, 132 and 136 of examples, and the duty of company
Companies Ordinance 1984) and the procedure for registration of
charges
LO6.3.2: State the right of an
interested party in respect of a
registration of mortgage/charge
LO6.3.3: State the duty and procedure
of payment or satisfaction of mortgage/
charge
LO6.3.4: Demonstrate familiarity with
the right to inspect the instrument
creating a mortgage/charge
Syllabus
Contents Level Learning Outcome
Ref
LO6.3.5: Discuss the consequences of
registered and unregistered
mortgages/ charges.
c Management and
administration (Sections
142 to 204A of Companies
Ordinance 1984)
1 Registered office, publication 2 LO7.1.1: Discuss with simple
of names etc. (Section 142 examples the provisions with regard to
to 145) having a registered office, publication
of name and publication of paid-up
capital.
2 Commencement of business 1 LO7.2.1: State the conditions to be
by a public company fulfilled before commencement of
(Section 146) business by a company
LO7.2.2: State the applicability and
non-applicability of the conditions on
different kinds of company.
3 Meeting and proceedings 1 LO7.3.1: State the timing, matters and
(Section 157 to 173) reports relating to statutory meetings
LO7.3.2: State the timing, matters and
reports relating to an annual general
meeting using simple examples
LO7.3.3: State who can call an annual
general meeting
LO7.3.4: State the timing, matters and
reports relating to an extraordinary
general meeting
LO7.3.5: State who can call an
extraordinary general meeting
LO7.3.6: State the quorum for a
general meeting
LO7.3.7: State the entitlement of a
member in respect of appointment of
proxy and conditions applicable
thereon
LO7.3.8: Describe the provisions
relating to agenda/ minutes of
meetings.
LO 7.3.9: State the circumstances in
which proceedings of the general
meeting may be declared invalid.
4 Directors (Section 174 to 1 LO 8.4.1: Explain and apply in given
197A) scenarios, the legal provision with
respect to directors:
Syllabus
Contents Level Learning Outcome
Ref
x Eligibility/ineligibility
x Number
x First and subsequent directors
x Term/tenure of office of directors
x Elections
x Removal/vacation of office
x Filling of casual vacancies
x Remuneration
x Powers, duties, rights and liabilities
x Assignment of office and alternate
directors
x Proceedings
LO8.4.2: State the legal provisions
relating to loans to directors.
5 Chief executive (Section 198 1 LO8.5.1: Explain the appointment of
to 204A) first chief executive and subsequent
chief executives using simple
examples
LO8.5.2: State the provisions/
conditions applicable on appointment,
removal, engagement in any business
LO8.5.3: State the provisions relating
to appointment of a secretary.
d Investments, accounts etc.
(Sections 208 to 251 of
Companies Ordinance
1984)
1 Investment in associated 2 LO9.1.1: Describe the conditions
companies and undertakings applicable to a company for making
(Section 208) investment in associated companies
and undertakings.
2 Investment of companies to 1 LO9.2.1: Discuss with simple
be held in its own name examples as to how a company can
(Section 209) hold its investment in names other
than its own name.
3 Disclosure of interest by 1 LO9.3.1: Explain the requirements of
directors (Section 214) disclosure of interest by director in
contract / arrangement entered into by
or on behalf of the company.
4 Interest of other officers etc. 1 LO9.4.1: Explain the requirements of
(Section 215) disclosure of interest by officers in
contract / arrangement entered into by
or on behalf of the company.
Syllabus
Contents Level Learning Outcome
Ref
5 Interested director not to 1 LO9.5.1: Describe the provisions
participate or vote in relating to participation of interested
proceedings of directors director in the proceedings of directors
(Section 216) in contract / arrangement entered into
by or on behalf of the company.
6 Accounts (Section 230, 233, 1 LO9.6.1: Describe the provisions
236, 241 and 242 ) relating to the books of accounts to be
kept by company.
LO9.6.2: Explain the requirements with
respect to the annual accounts and the
balance sheet
LO9.6.3: Describe directors report
LO9.6.4: Describe the authentication
of balance sheet and profit and loss
account
LO9.6.5: Discuss requirements of filing
of balance sheets and profit and loss
accounts with the registrar.
7 Dividend (Section 248 to 1 LO9.7.1: Explain the requirements
251) relating to declaration of dividend and
identify/explain certain restrictions on
declaration of dividend
LO9.7.2: Describe the provisions
applicable to payment of dividend.
e Audit (Sections 252 to 257
of Companies Ordinance
1984)
1 Audit (Section 252 to 257) 2 LO10.1.1: Explain the provisions
applicable to
Appointment, removal and
remuneration of auditors
Qualification and disqualification of
auditors
Powers/ duties of auditors and an
auditors right to access the record
and information
An auditors duty to report and
contents thereof
Signature on an audit report.
CHAPTER
1
Introduction to the legal system
Contents
1 Introduction to the legal system
2 Legislation
3 Structure of courts in Pakistan
4 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Introduction to the legal system
LO 1 On the successful completion of this paper, candidates will be able to
demonstrate a basic knowledge of the legal environment
LO 1.1.1 Briefly describe sources of law in Pakistan
LO 1.1.2 Describe the basic structure of the constitution of the Islamic Republic of
Pakistan
LO 1.2.1 Define legislation and describe its form
LO 1.2.2 Briefly describe the process of legislation as per the Constitution
LO 1.2.3 Identify and briefly explain the structure of the courts in Pakistan
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Definition of Law
Definition of Mercantile Law
Why Chartered Accountants study law
Where to apply law in practical life
Sources of law in Pakistan
Doctrine of Binding Precedent
Criminal law and civil law
The legal system is derived from English common law (Equity) and is based on
the constitution of Pakistan 1973 as well as Islamic law (sharia). Thus we can say
that in Pakistan the main sources of law are following:
1. Legislation
2. Precedent
3. Custom
4. Agreement
Legislation
It is the law created by the Parliament of a country and other bodies to whom it
has delegated authority.
Precedent
Precedent is a judgment or decision of a court which are binding on the
subordinate courts.
Customs
With the passage of time as the society develops this source of law diminished its
tendency as a source of law. In Pakistan, the customary law has been replaced
by the Shariat Law.
Agreement
Parties in their agreement stipulate terms for themselves which constitute law for
the contracting parties.
Types of precedent
Original precedent is one which creates and applies a new rule.
Binding precedent is one which is required to be followed
Persuasive precedent is one which is not required to be followed e.g. a decision
by lower court, decision by courts of other countries.
Declaratory precedent is the application of an already existing rule of law.
Criminal law
Criminal law establishes conduct that the State considers unacceptable, and
which it wishes to prevent. Individuals or organisations that act contrary to the
criminal law are threatened with punishment by the State, in the form of
imprisonment and/or fines.
With criminal law, the State establishes acceptable standards of behaviour, and
represents the interests of society as a whole in doing so.
Legal action may be brought by the State against individuals who are accused of
being in breach of the criminal law. It is the responsibility of the State (and not
private individuals) to bring these legal actions, in criminal trials.
Civil law
The civil law is a branch of the law that primarily deals with disputes between
individuals and organisations (such as companies), and it regulates relationships
between them regarding their rights and obligations. A violation of the civil law is
a tort (a wrongdoing), but is not a crime. The civil law provides for remedies for
civil wrongs (torts), but these do not include imprisonment.
Legal proceedings in the civil law are initiated by an individual or private person
against another. (In contrast, a criminal prosecution is brought to court by the
State.) For example, an individual may bring a civil action against another
person, claiming a wrongdoing by that person and seeking a settlement (for
example, seeking money compensation in the form of damages.)
A civil case might therefore be identified as: Tanveer v Khatri where a case is
brought to the civil court by Tanveer (the plaintiff) who is making a claim against
Khatri (the claimant).
This means that an individual accused of a crime might be found not guilty in a
criminal court, but the same individual may be sued in a civil court for the same
may be found liable.
2 LEGISLATION
Section overview
President
Prime Minister
Senate
National Assembly
Process of Legislation
Delegated Legislation
Pakistan has a Federal Parliamentary System of government, with the President as the
Head of State and popularly elected Prime Minister as Head of Government. The
Federal Legislature is a bicameral Majlis-e-Shoora (Parliament), composed of the
President, National Assembly (Lower House) and Senate (Upper House).
2.1 President
The President of Pakistan is Pakistans Head of State and is considered a
symbol of unity.
President must be a Muslim.
President is elected for a five year term by Senate, National Assembly and
members of Provincial Assemblies.
President is eligible for re-election, but no individual may hold the office for
more than two consecutive terms.
The majority party in the National Assembly usually nominates and elects a
person as the President.
The President approves the statutes passed by the National Assembly and
thereafter by the Senate.
He guides the Prime Minister in the matters of national importance.
2.3 Senate
The role of the Senate is to promote national cohesion and harmony and to
alleviate fears of the smaller provinces regarding domination by any one
province because of its majority, in the National Assembly.
There are also representatives from the Federally Administered Tribal
Areas and Islamabad Capital Territory.
Members are elected for a period of six years. Half the members retire after
three years and are replaced by the equal number of newly elected
senators.
Senate is a permanent institution. The election of all members is not held at
the same time and so it continues to be present on a permanent basis.
The Chairman of the Senate under the constitution is next in line to act as
President if the office becomes vacant and until such time a new President
can be formally elected.
The members elect from themselves a chairman and a Deputy Chairman.
All statutes passed by the National Assembly are also approved by the
Senate with the exception of money bills.
Composition of Senate
Khyber Federal
Punjab Sindh Baluchistan Fata Total
Pakhtokhwa Capital
General 14 14 14 14 8 2 66
Women 4 4 4 4 1 17
Technocrats 4 4 4 4 1 17
Minority 1 1 1 1 4
104
The seats for the national assembly are determined on the basis of
population of provinces.
The members are elected for a period of five years on the basis of direct
votes by the voters registered.
The members elect from themselves Speaker, Deputy Speaker and Prime
Minister.
The most important function of the National Assembly is law making and
formulation of policies.
Scenario 1:
x If it is passed by the house in which it is originated then it is
transmitted to the other house and
x If the bill is also passed by the other house (without any amendment)
then it is presented to the President for assent.
Scenario 2:
x If the bill is transmitted to a House and is passed with amendments it
shall be sent back to the House in which it originated and
x if that House passes the Bill with those amendments it shall be
presented to the President for assent.
Scenario 3:
x If a bill transmitted to a House is rejected or not passed within ninety
days or a Bill sent to a House with amendments is not passed by that
House with such amendments
x The bill at the request of the house in which it originated shall be
considered in the joint sitting of both the house i.e. National Assembly
and the Senate and
x If it is passed by the votes of the majority of the members present and
voting in the joint sitting it shall be presented to the President for
assent.
Scenario 4:
x When the President has returned a Bill to the Parliament it shall be
reconsidered by the Parliament in Joint Sitting and
x If it is again passed with or without amendment by the Parliament by
the votes of the majority of the members of both Houses present and
voting.
x It shall be presented to the President for assent.
The President shall within ten days assent to the bill or return it to the
Parliament for reconsideration (in case of a bill other than money bill) of any
provision or any amendment therein.
Money bills
A money bill shall originate in the National Assembly and after it has been
passed by the Assembly it shall (without being transmitted to the Senate) be
presented to the President for assent.
Ordinance
The President if deems necessary to take immediate action, he has power
to make an Ordinance when the National Assembly is not in session.
Such Ordinance promulgated thus, shall have the same force and effect as
an Act of the Parliament.
The Ordinance shall stand repealed after one hundred and twenty days if it
is not presented or passed
x by the National Assembly in case of Money Bill and
x by both houses if it is other than Money Bill.
Process of Legislation
President
Money bills All other bills
President
Act / Law
Expert opinion
Much of the content of delegated legislation is technical and is better
worked out in consultation with professional, commercial or industrial
groups outside Parliament.
Flexible
Delegated legislation is more flexible than an Act of Parliament. It is far
simpler to amend a piece of delegated legislation than to amend an Act of
Parliament.
Section overview
Supreme Court
High Courts
Criminal Courts
Civil Courts
Federal Shariat Court
Alternate Dispute Resolution
Supreme court
Federal
High courts Shariat
Court
1. Mandamus
Mandamus requires the court or other body to carry out a public duty.
E.g. a tribunal may be ordered to hear an appeal which it has wrongly
refused to do.
2. Prohibition
It prevents a court or tribunal from exceeding its jurisdiction.
3. Certiorari
Certiorari orders a court or tribunal which has taken action to submit the
record of its proceedings to the High Court for review. It is exercised when
an inferior court has acted illegally, exceeding its jurisdiction or reached its
decision contrary to the principles of natural justice, without giving the
person concerned the right to know of and reply to the case against him.
Sessions Judge
Each province consists of sessions / divisions and every session division shall be
a district or consists of districts. The Provincial Government established a Court
of Session for every sessions / division and appoints a judge of such court called
session judge.
Magistrates courts
Magistrates Courts are the subordinate criminal courts. In addition, they also
exercise certain family law, administrative law and minor civil functions.
District Magistrate
In every district, the Provincial Government appoints a Magistrate of first class,
who is called the District Magistrate.
Subordinate Magistrate
The Provincial Government appoints as many persons as it thinks fit besides the
District Magistrate as Magistrates of the first, second or third class in any district
and defines local areas within which such persons may exercise all or any of the
powers as invested.
Magistrates Courts
High Court
Civil Judge
Civil Judges function under the superintendence and control of District Judge and
all matters of civil nature originate in the courts of Judges. The District Judge
may, however, withdraw any case from any Civil Judge and try it himself.
Appeals against the judgments and decrees passed by the Civil Judges in cases
where the value of the suit does not exceed the specified amount lie to the
District Judge.
District Court
Suit value above
Rs. 200,000
Family Courts
These courts deal with matrimonial cases. Most divorce cases are heard in the
family court, family property cases and proceedings relating to children etc.
Company Courts
The court having jurisdiction under the Companies Ordinance, 1984 is the
High court having jurisdiction in the place at which the registered office of
the company is situated.
The Federal Government may empower any civil court to exercise all or
any of the jurisdictions by this ordinance.
In each High Court one or more benches known as the company bench are
constituted by the chief justice of High Court.
All the matters coming before the court under this Ordinance are disposed
of within ninety days from the date of presentation.
Industrial Tribunal
Industrial Tribunals were established by the Industrial Relation Act, 2008. They
have a wide jurisdiction over most disputes between employee and employer.
Redress of individual grievances
Complaints of unfair dismissal
Pay claims
Questions as to the terms of employment
Appeals against health and safety notices.
Terms to remember
Juveniles: Any offence, other than one punishable with death or transportation for
life, committed by any person under the age of fifteen years. The age is
calculated at the date when he appears or brought before the court, may be tried
by a District Magistrate working under the Reformatory Schools Act, 1897.
Decision reversed: If an appeal court gives its judgment in favour of the party
making the appeal (the appellant) the original decision is said to be reversed.
Court of first instance: It is the court where the case is originally heard in full.
Appellate Court: It is the court to which an appeal is made against the judgment or
the sentence.
The judges hold office for a period of three years. However, the President
may, extend such period.
Process
The Court may either
x of its own motion or
x on the petition of
- citizen of Pakistan or
- the Federal / Provincial Government
x examine and
x decide
the question whether or not any law or provision of the law is repugnant to
the Injunctions of Islam.
If Federal Shariat court decides that a law or the provision of any law is
repugnant to the Injunctions of Islam, it shall set out in its decision:
x The reasons for its holding that opinion and
x The extent to which such law or provision is so repugnant
And specify the day on which decision shall take effect.
Provided that no such decision shall take effect before the expiration of the
period within which an appeal may be preferred to the Supreme Court or
where an appeal has been so preferred, before the disposal of such
appeal.
Negotiation
In negotiation the participation is voluntary and there is no third party who
facilitates the resolution process or imposes a resolution.
Mediation
In mediation there is a third party a mediator is a person who facilitates the
resolution process but does not impose a resolution on the parties.
Arbitration
Arbitration is settlement of a dispute by an independent person usually chosen by
the parties themselves.
Conciliation
It is a process in which conciliator meets with the parties separately to resolve the
grievances.
Advantages of ADR
Speedy
Arbitration is often faster than litigation in court.
Privacy
The public and the press have no right to attend a hearing before an arbitrator.
Appeal
In most legal systems, there are very limited avenues for appeal of an arbitral
award.
Service of an expert
The parties may choose the person who is an expert in the particular commercial
field that they are in to settle their dispute.
Disadvantages of ADR
Appeal
Limited Avenue for appeal means that an erroneous decision cannot be easily
overturned.
Expensive
In countries where the cost of court action is not so high this might be more
expensive to go to arbitration.
Applicability of law
Rules of applicable law are not necessarily binding on the arbitrators, although
they cannot disregard the law.
Delay
When there are multiple arbitrators on the panel, manage their schedules for
hearing dates in long cases can lead to delays.
Qualification to be an arbitrator
Must be a Muslim
Male
Knowledge in Sharia and
Free from any defects that could affect his ability to arbitrate.
4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Briefly describe the sources of law in Pakistan
Understand the civil and criminal law
Explain the purpose and constituents of Parliament
Explain the procedure followed for enactment of any law in Pakistan
Discuss the structure of the courts in Pakistan
CHAPTER
Business Law
2
Introduction to the law of contract
Contents
1 Introduction to the law of contract
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Introduction to the law of contract
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to Contract Act.
LO 2.1.1 Discuss the provisions of Act with respect to validity of a contract.
Demonstrate comprehension in simple scenario based problems.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Definition of a contract
Essentials of a valid contract
Classifications of contract
A contract is an agreement which legally binds the parties. The analysis of the
above definition reveals that a contract has following two elements:
Contract
Agreement Enforceability
Legal
Offer Acceptance
obligation
The analysis of the above definition reveals that an agreement comes into
existence only when one party makes a proposal or offer to the other party and
the other party signifies his acceptance thereto. Thus an agreement can be an
accepted proposal.
The person making the proposal is called the promisor and the person accepting
the proposal is called the promisee.
Enforceability
Every contract is an agreement, but every agreement is not always a contract. An
agreement creating a legal obligation is said to be enforceable by law. The
parties to an agreement must be bound to perform their promises and in case of
default by either of them, must intend to sue. For an agreement to be enforceable
by law there should be legal obligation instead of social, moral or religious
obligation.
Example: Enforceability
A, offers to sell his furniture to B or Rs. 50,000. B accepts this offer. In this
agreement if there is default by either party, an action for breach of contract
can be enforced through a court of law provided all the essential elements of
a valid contract are present in this agreement.
A invites B to dinner. B accepts the invitation but fails to turn up. Here, A
cannot sue B for damages because the parties to this agreement do not
intend to create legal obligations.
Thus, the law of contract covers such agreements where the parties intend to
create legal obligations. In social, domestic, moral and religious obligation the
usual presumption is that the parties do not intend to create legal obligations.
Competency of parties
As per section 11 the parties to an agreement must be competent to contract. In
other words, the person must be of
The age of majority
Person of sound mind and
Not declared as disqualified from contracting by any law to which he is
subject.
Example: Consideration
A offers to buy IPAD from B for Rs. 50,000 to which B responds positively.
Here As promise to pay Rs. 50,000 is the consideration for Bs promise and Bs
promise to sell the IPAD is the consideration for As promise.
Example: Certainty
A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil."
The nature of A's trade affords an indication of the meaning of the words,
and has entered into a contract for the sale of one hundred tons of coconut
oil.
A agrees to sell to B "all the grain in my granary at Peshawar." There is no
uncertainty here to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be fixed by
c." As the price is capable of being made certain, there is no uncertainty here
to make the agreement void.
A agrees to sell to B "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be given.
The agreement is void.
Possibility of performance
As per section 56 the terms of the agreement must be capable of being
performed. An agreement to do an act impossible in itself is void.
Legal formalities
As per section 25 an oral contract is a perfectly valid contract, except in certain
cases where a contract must comply with the necessary formalities as to writing,
registration etc.
Performance
Formation
Enforceability
Express Valid contracts Executed
contracts Void contract
Implied agreement Executory
contracts Void contract contract
Quasi contracts Voidable
contract
Illegal
agreement
Unenforceable
agreement
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Understand the meaning of a contract
Discuss the essentials of a valid contract
Explain the different classifications of contract
CHAPTER
Business Law
3
Offer and acceptance
Contents
1 Offer
2 Acceptance
3 Revocation of offer and acceptance
4 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Offer and acceptance
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to offer and acceptance of a
contract.
LO 2.1.1 Discuss the provisions of Act with respect to offer and acceptance of a
contract. Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 OFFER
Section overview
Thus, an offer is a proposal by one person to another for entering into a legally
binding agreement with him.
2 ACCEPTANCE
Section overview
Meaning of acceptance
Essentials of acceptance
Communication
The acceptance may be complete when it is communicated to the offeror. An
offer can be accepted by words spoken or written or through conduct of the
person. Further, a valid acceptance is communicated either by the offeree
himself or any person authorized by him to communicate to the offeror.
Postal rule
The communication of acceptance by post is complete as against the proposer
when it is put in a course of transmission. In case of acceptance made by post,
the proposer becomes bound as soon as the letter of acceptance is posted even
if such letter is lost or delay.
The communication is complete as against the acceptor when it comes to the
knowledge of the proposer. In case of acceptance by post, the acceptor becomes
bound when the letter of acceptance is actually received, before that acceptor
may revoke his acceptance.
Contracts over telephone / telex / fax
A contract by telephone / telex / fax is treated on the same principle as an oral
agreement made between two parties when they are face to face with each
other. In such cases, the contract will complete only when the acceptance is
received by the proposer and not when it is transmitted by the acceptor.
Reasonable time
A valid acceptance is when it is accepted within the time specified or within a
reasonable time where no time is specified.
Reasonable mode
Acceptance should be made in the manner specified or in a usual manner where
no mode is specified.
If the proposal prescribes a manner in which offer is to be accepted and the
acceptance is not made in that manner. The offeror shall, in this case, when the
acceptance is communicated to him, insist that his proposal shall be accepted in
the prescribed manner and not otherwise. If the offeror fails to insist within a
reasonable time it is deemed that he has accepted the performance.
Awareness of proposal
The acceptor must be aware of the proposal at the time of acceptance of the
proposal.
Before lapse of an offer
The acceptance must be given before the offer lapses or is withdrawn.
Negative confirmation
A proposal is not accepted if the offeree remains silent. In cannot be in the form
of negative confirmation i.e. if it is not accepted within a specific time than it will
be presumed to have been accepted.
Section overview
Timing of revocation
Communication of revocation
Lapse of an offer
4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define the offer and acceptance along with their essentials
Discuss briefly the law relating to the communication of offer, acceptance and
revocation
Discuss the circumstances in which an offer lapses
CHAPTER
Business Law
4
Capacity of parties
Contents
1 Competent to contract
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Capacity of parties
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to competency / capacity of
parties.
LO 2.1.1 Discuss the provisions of Act with respect to competency / capacity of parties.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 COMPETENT TO CONTRACT
Section overview
The below chart shows the persons who are incompetent to contract:
Incompetent to contract
Disqualified by
law
Alien enemies
Minor Unsound mind Foreign sovereigns
and ambassadors
Convicts
Inslovent
Specific persons/idiots
A person who is so mentally deficient by birth as to be incapable of ordinary
reasoning or rational conduct is said to be a specific person.
Lunatic
A person affected by lunacy is said to be 'lunatic'. A person can become lunatic at
any stage of his life.
Position of agreements with a person of unsound mind
The positions of such agreements are given below:
If a lunatic enters into a contract while he is of unsound mind, an
agreement during this period is void.
If a lunatic enters into a contract while he is of sound mind, an agreement
during this period is valid.
An agreement with a specific person is void.
A person delirious from fever or drunken person cannot enter into a
contract while such delirium or drunkenness lasts and he is not able to
understand the terms of the contract or form a rational judgment.
A person of unsound mind can enforce a contract for his benefits
A person who supplied necessaries to a person of unsound mind or his
defendant entitled to be reimbursed from the property of such person of
unsound mind. Such claim is against the property of the person of unsound
mind not against the person personally.
Position of a person who is usually of unsound mind but occasionally of sound mind
A person who is
usually of unsound mind but
occasionally of sound mind
may make a contract when he is of sound mind
If a person is usually of unsound mind then the burden of proof that he was
of sound mind lies on the person who confirms it.
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Explain the capacity to contract and persons who are incompetent to contract
Discuss the position of agreements entered by person incompetent to contract
CHAPTER
Business Law
5
Consideration
Contents
1 Consideration
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Consideration
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to consideration of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to consideration of a contract.
Demonstrate comprehension in simple scenario based problems.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 CONSIDERATION
Section overview
Definition of consideration
Essential elements of consideration
Agreement, the consideration or object of which is partly unlawful
Stranger to contract
Agreements without consideration
Example: Consideration
A promises B to guarantee payment of price of the goods which B sells on
credit to C.
Here selling of goods by B to C on credit is consideration for As promise.
A asks B not to sue C for a year for his debts and promises in case of default
of C, A would be liable.
Here B not filing a suit for a year is abstinence, which is a sufficient
consideration for A.
A promises to deliver iPhone to B and B promises to pay Rs. 85,000 on
delivery.
Here the consideration for A will be Rs. 85,000 on delivery and consideration
for B will be delivery of goods
Example: Lawful
A promises B to pay Rs. 100,000 to beat C. B beats C and claims Rs.
100,000 from B. A refuses to pay. B cannot recover because the agreement
is void on the ground of unlawful consideration.
A promises B to obtain an employment in the public service and B promises
to pay Rs. 100,000 to A. The agreement is void on the ground of unlawful
consideration.
Gifts
The gifts which are accepted by the donee are called completed gifts and are
valid.
Example: Gift
X transferred some property to Y by a duly written and registered deed as a gift.
This is a valid contract even though no consideration given by Y.
Contract of agency
A consideration is not necessary for a contract of agency. [Section 185]
Contract of bailment
A consideration is not necessary for a contract of bailment i.e. gratuitous contract
of bailment.
Charitable subscription
Where the promise on the strength of the promise makes commitments i.e.
changes his position to the detriment.
Contract of guarantee
Consideration received by the principal debtor is sufficient for the surety and it is
not necessary to result in some benefit to the surety himself. [Section 127]
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define consideration and essentials of a valid consideration
Discuss the contracts where there is no consideration
CHAPTER
Business Law
6
Free consent
Contents
1 Consent Consensus-ad-idem
2 Coercion
3 Undue influence
4 Fraud
5 Misrepresentation
6 Mistake
7 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Free consent
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to free consent of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to free consent of a contract.
Demonstrate comprehension in simple scenario based problems
The learning outcome 2.1.1 is covered from chapter 2 to 16.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 CONSENT Consensus-ad-idem
Section overview
Definition of consent
Effect of absence of consent
Definition of free consent
Effect of absence of free consent
Thus, the analysis of the above definition reveals that both the parties must be at
the same frequency of mind at the time of entering into a contract i.e. Consensus
ad ideur.
2 COERCION
Section overview
Definition of coercion
Effects of coercion
The analysis of the above definition reveals that coercion may be compelling a
person to enter into a contract under pressure or a threat.
Example: Coercion
A beats B and compels him to sell his bike for Rs. 20,000. Here, Bs consent
has been obtained by coercion because beating someone is an offence under
the Pakistan Penal Code.
A, on board an English ship causes B to enter into an agreement by an act
amounting to criminal intimidation under the Pakistan Penal Code. A
afterwards sues B for breach of contract at Karachi. A has employed
coercion, although his act is not offence by the law of England and PPC was
not in force at the time when or place where the act was done.
Coercion may be exercised from any person, and may be directed against any
person, even a stranger.
Example: Coercion
A threatens to kill C, Bs daughter, if B refuses to sell his house to him. B
agrees to sell his house. Here, Bs consent has been obtained by coercion
though C is not a party to the contract.
A threatens to kill B if B refuses to sell his house to C. B agrees to sell his
house. Here, Bs consent has been obtained by coercion though A is not a
party to the contract.
3 UNDUE INFLUENCE
Section overview
Thus the analysis of the above definition reveals that an undue influence means
dominating in a relationship the will of the other person to obtain an unfair
advantage. A contract is said to be induced by undue influence:
Where the relations between the parties are such that
one of them in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.
Rebutting presumption
The presumption of undue influence can be rebutted by showing that the:
Dominant party has made a full disclosure of all the facts to the weaker
party before making the contract
Price was adequate
Weaker party was in receipt of competent independence advice before
entering into the contract.
The contract may be set aside either absolutely or if the party who was entitled to
avoid it has received any benefit, upon such terms and conditions as to the Court
may seem just. [Section 19A]
4 FRAUD
Section overview
Definition of fraud
Essentials of fraud
Effects of fraud
Silence as to fraud
By false assertion
A false representation of a fact made
Knowingly or
Without belief in its truth
Fitted act
Any other act fitted to deceive.
Party to a contract
The fraud must be committed by a party to a contract or by anyone with his
connivance or by his agent. Thus, the fraud by a stranger to the contract does not
affect its validity.
False representation
It means that a false representation is made with the knowledge of its falsehood.
It will equal to fraud if a true representation is made but becomes untrue at the
time of formation of contract the fact is known to the party who made the
representation.
Representation as to fact
A mere opinion does not amount to fraud. A representation must relate to a fact
than it amount to fraud.
Actually deceived
A deceit, which does not deceive is not fraud. The fraud must have actually
deceived the other party who has acted on the basis of such representation.
Suffered loss
Loss has been suffered by the party who acted on the representation.
Note
In the early 80s the Federal Shariat Court decided that provision regarding position of
silence in Contract Act is not in conformity with the teachings of Islam.
5 MISREPRESENTATION
Section overview
Definition of misrepresentation
Essentials of misrepresentation
Effects of misrepresentation
Unwarranted statement
When a person makes a positive statement that a fact is true when his information
does not warrant it to be so, though he believes it to be true this amounts to
misrepresentation.
Breach of duty
Any breach of duty which
without an intent to deceive,
gains an advantage to the person committing it, or
anyone claiming under him,
by misleading another
to his prejudice or
to the prejudice of anyone claiming under him.
Inducing mistake about subject matter (Innocent misrepresentation)
A party to an agreement induces (however innocently) the other party to make a
mistake as to the nature or quality of the subject of the agreement.
Party to a contract
The representation must be made by a party to a contract or by anyone with his
connivance or by his agent. Thus, the representation by a stranger to the contract
does not affect the validity of the contract.
False representation
There must be a false representation and it must be made without the knowledge
of its falsehood i.e. the person making it must honestly believe it to be true.
Representation as to fact
A mere opinion does not amount to misrepresentation. A representation must
relate to a fact if it amounts to misrepresentation.
Object
The objective is to induce the other party to enter into contract without the
intention of deceiving the other party.
Actually acted
The other party must have acted on the faith of the representation.
6 MISTAKE
Section overview
Mistake
Types of mistakes
6.1 Mistake
Where both the parties to an agreement are under a mistake as to matters of
facts essential to the agreement, the agreement is void [Section 20].
Types of mistakes
Mistake of
Mistake of fact
law
Pakistan Foreign
Bilateral Unilateral
law law
Bilateral mistake
Where both the parties to an agreement are under a mistake as to a matter of
facts essential to the agreement, the agreement is void.
An erroneous opinion as to the value of the thing which forms the subject matter
of the agreement is not to be deemed a mistake as to a matter of facts. [Section
20]
Unilateral mistake
A contract is not voidable merely because it was caused by one of the parties to
it being under a mistake as to matter of facts. [Section 22]
7 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Discuss the meaning of consent
Explain when a consent is said to be free
Understand the effects and meaning of coercion, undue influence, fraud and
misrepresentation
Discuss the laws relating to the effect of mistake on contracts
CHAPTER
Business Law
7
Legality of object and consideration
and agreements opposed
to public policy
Contents
1 Legality of object, consideration and agreements
opposed to public policy
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Legality of object, consideration and agreements opposed to public policy
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to legality of object and
agreements opposed to public policy.
LO 2.1.1 Discuss the provisions of Act with respect to legality of object and agreements
opposed to public policy. Demonstrate comprehension in simple scenario
based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Example: Fraudulent
A, B and C enter into an agreement of the division among them of gains
acquired, or be acquired, by them by fraud. The agreement is void, as its
object is unlawful.
A, being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his
principal. The agreement between A and B is void, as it implies a fraud by
concealment by A, on his principal.
some part of which is legal and other part(s) illegal, the legal position is as follows
[Section 24]:
If the illegal part cannot be separated than the whole agreement is illegal.
If the illegal part can be separated than court will enforce the legal part and
will reject illegal party.
Promise to do legal and illegal things
Where persons reciprocally promise, firstly, to do certain things which are legal,
and secondly, under specified circumstances, to do certain other things which
are illegal, the first set of promises is a contract, but the second is a void
agreement. [Section 57]
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Explain the cases where the object or consideration of an agreement are said to
be unlawful
Name various types of agreements which are considered to be opposed to public
policy
CHAPTER
Business Law
8
Void agreements
Contents
1 Void agreements
2 Agreements in restraint of trade
3 Wagering agreements
4 Other void agreements
5 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Void agreements
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to void agreements.
LO 2.1.1 Discuss the provisions of Act with respect to void agreements. Demonstrate
comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 VOID AGREEMENTS
Section overview
Note
Agreements from 1 to 6 have been discussed in earlier chapters.
From 5 to 11 are those agreements which are specifically or expressly declared
as void under the Contract Act.
Section overview
Sale of goodwill
One who sells the goodwill of a business may agree with the buyer to refrain from
carrying on a similar business within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business
therein, provided that such limits are reasonable. [Section 27]
Partners agreements
The Partnership Act allows following agreements as an exception to the
agreement in restraint of trade:
Existing partner
Subject to contract between partners, a partner may not carry on any
business competing with that of the firm while he is a partner. [Section 1]
Outgoing partner
An outgoing partner may agree with his partners that he will not carry on
any business similar to that of the firm for a specified period and for
specified local limits. [Section 36]
Dissolution of the firm
Partners may, upon or in anticipation of the dissolution of the firm, make an
agreement that some or all of them will not carry on a business similar to
that of the firm for a specified period and for specified local limits. [Section
54]
Sale of goodwill
Partner(s) may upon the sale of the goodwill of a firm, make an agreement
that partner(s) will not carry on any business similar to that of the firm for a
specified period and for specified local limits. [Section 55]
Trade combinations
An agreement between different firms in the nature of a trade combination in
order to maintain a price level and avoid under selling is not void.
Service Agreements
During the employment, agreement of services often contains a clause by which
an employee is prohibited from working anywhere else. Such a clause in service
agreement by which an employer restricts the employee not to compete with the
employer or accepting any other employment is not restraint of trade. Further,
where legitimate interest or goodwill or trade secret of employer is involved an
employer may restrict his employee even after the end of employment but such
restriction should be just and reasonable.
3 WAGERING AGREEMENTS
Section overview
Section overview
Exceptions
An agreement between two or more persons who agree that any dispute
which may arise between them shall be referred to arbitration, is valid.
An agreement whereby parties agree not to file an appeal in upper court lf
law, is valid.
Parties making extract to select one court of law between two courts
equally competent.
Exception
An agreement restraining the marriage/to hear case, is valid of a minor is valid.
5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Discuss briefly expressly declared void agreements
Discuss the exceptions to such void agreements
Explain wagering agreement
CHAPTER
Business Law
9
Contingent contracts
Contents
1 Contingent contracts
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Contingent contracts
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to contingent contracts.
LO 2.1.1 Discuss the provisions of Act with respect to contingent contracts.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 CONTINGENT CONTRACT
Section overview
Insurance contracts and contracts of indemnity and guarantee provide the best
example of contingent contracts.
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define the term contingent contracts
Discuss the rules relating to the performance of contingent contracts
Explain the extent of impossibility of the contingency affects the performance of
the contract
Differentiate between contingent contract and wagering agreement
CHAPTER
Business Law
10
Quasi contracts
Contents
1 Quasi contracts
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Quasi contracts
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to Quasi contracts.
LO 2.1.1 Discuss the provisions of Act with respect to Quasi contracts. Demonstrate
comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 QUASI CONTRACTS
Section overview
The payment must be such as the other party was bound by law to pay
Finder of goods
A person who finds goods belonging to another, and takes them into his custody,
is subject to the same responsibility as a bailee. He is bound to take as much
care of the goods as a man of ordinary prudence would, under similar
circumstances, take of his own goods. He must also take reasonable steps to
trace its owner - if he does not, he will be guilty of wrongful conversion of the
property. [Section 71]
This has been discussed in detail in chapter 15.
Quantum meruit
The term Quantum Meruit means as much as earned or deserved. In case of
breach of contract the application or non-application of the term quantum meruit
varies depending upon the terms of the contract. Further, the divisibility or
indivisibility of performance of the contract may also be taken into account.
The aim of such an award is based on an implied agreement to pay for what has
been done. Quantum Meruit is likely to be sought where one party has already
performed part of his obligations and the other party then repudiates the contract.
Provided the injured elects to treat the contract as terminated, he may claim a
reasonable amount for the work done.
Divisible contract
The party at default may sue on a quantum meruit if the contract is divisible and
the party not at default has enjoyed benefits of the part performance.
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Explain Quasi contracts
Discuss the kinds of Quasi contracts
CHAPTER
Business Law
11
Performance of a contract
Contents
1 Performance of a contract
2 Reciprocal promises
3 Appropriation of payment
4 Assignment of contracts
5 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Performance of a contract
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to performance of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to performance of a contract.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 PERFORMANCE OF A CONTRACT
Section overview
Meaning of performance
Types of performance
Types of tender
Essentials of a valid tender
Effect of refusal to perform
Persons who can perform and demand performance
Rules regarding the performance of joint promise
Time and place of performance
Time as essence of contract
Actual performance
When the promisor has made the performance in accordance with the terms of
the contract and is accepted by the promisee it is called an actual performance.
[Section 37]
Attempted performance
Although, the promisor has made an offer of performance but the offer of
performance of promisor is not accepted by the promisee it is called an
attempted performance. Attempted performance is also known as tender.
[Section 38]
Effects
Goods or services need not be offered again.
Promisor may sue the promisee for non-performance and claim damages.
Promisor is discharged from his liability i.e. he is not liable for non-
performance.
Tender of money
Where the promisor offers to pay the amount but the promisee refuses to accept
the same.
Effects
Promisor is not discharged from his liability to pay the amount
Promisor will not be liable for interest from the date of a valid tender
Unconditional
Tender is said to be unconditional when it is made in accordance with the
terms of the contract.
Proper Time
Tender must be made at the stipulated time or during business hours.
Tender of goods or money before the due date is also not a valid tender.
Proper Place
Tender must be made at the stipulated place or at business place.
Proper Person
It must be made to the promisee or his duly authorized agent. In case of
several joint promisees, a tender made to one of them has the same legal
consequences as tender to all of them.
Reasonable Opportunity
Promisee must have reasonable opportunity for examining that the goods
offered are the same as per the terms of the contract.
Whole Obligation
A valid tender is for the whole obligation. However, a minor deviation from
the terms of the contract may not render the tender invalid.
Fixed amount and legal tender
In case of tender of money the amount must be fixed and in legal tender.
Promisor
Promisor's agent
Persons who Legal representative
can perform Third party
Joint promisor
Promisee
Persons who Promisee's agent
can demand Legal representative
performance Third party
Joint promisees
Promisor
If a contract is of personal nature or it was agreed that promise will be
performed by the promisor himself than such promise must be performed
by the promisor.
Example: Promisor
A promises to marry B, A must perform this promise personally.
A promises to paint a picture for B, A must perform the promise
personally.
Promisors agent
If the intention of parties is that the promise can either be performed by the
promisor himself or any person employed by him than such contracts can
be performed by the promisor himself or an agent employed by him.
Example: Promisee
A promises B to pay Rs.10,000 to C. It is only B who can demand performance and
not C.
Promisees agent:
If the intention of parties is that performance can be demanded from any
person authorised by the promisee then performance can be demanded by
promisees agent.
Legal representative
Unless a contrary intention appears from the contract or the contract is of a
personal nature on death of the promisee, his legal representative can
demand performance.
2 RECIPROCAL PROMISES
Section overview
Order of performance
Where the order in which reciprocal promises are to be performed is
expressly fixed by the contract, they must be performed in that order, and
where the order is not expressly fixed by the contract, they must be
performed in the order which the nature of the transaction requires. [Section
52]
3 APPROPRIATION OF PAYMENT
Section overview
4 ASSIGNMENT OF CONTRACTS
Section overview
Example: Assignment
A promises to marry B. Here, neither A can assign their obligation nor B can
assign their right because the contract is of personal nature.
A owes B Rs.100,000 and C owes A Rs.100,000. Here A cannot compel B to
recover the amount from C. However, he can transfer his liability to C with the
consent of B and C. B can also transfer his right to a third party to recover the
amount from A.
5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Understand the meaning of performance of a contract
Explain the term tender and effect of refusal to accept a tender
State who can perform and demand performance
State briefly provisions of act relating to the time and place of performance
Explain reciprocal promises and rules regarding their performance
Summarize the rules laid down in the act as to the appropriation of payments
Understand the meaning and modes of assignment of contract
CHAPTER
Business Law
12
Discharge of a contract
Contents
1 Discharge of a contract
2 Discharge by performance
3 Discharge by agreement or by consent
4 Discharge by operation of law
5 Discharge by impossibility of performance
6 Discharge by lapse of time
7 Discharge by breach
8 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Discharge of a contract
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to discharge of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to discharge of a contract.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 DISCHARGE OF A CONTRACT
Section overview
Meaning of discharge
Modes of discharge of a contract
2 DISCHARGE BY PERFORMANCE
Section overview
Actual performance
Attempted performance
Section overview
Novation
Rescission
Alteration
Remission
Waiver
Promisees refusal / neglect
The rights and obligations created by an agreement can be discharged without being
performed through formation of another agreement between the parties due to which
the rights and obligations in the original agreement comes to an end. A contract can be
discharged by mutual agreement in any of the following ways:
3.1 Novation
Novation means the substitution of a new contract for an old one. The new
agreement extinguishes the rights and obligations that were in effect under the
old agreement.
A novation ordinarily arises when a new individual assumes an obligation to pay
that was incurred by the original party to the contract. In the case of a novation,
the original debtor is totally released from the obligation, which is transferred to
someone else. The nature of the transaction is dependent upon the agreement
between the parties. A novation also takes place when the original parties
continue their obligation to one another, but a new agreement is substituted for
the old one. [Section 62]
Example: Novation
A owes money to B under a contract. It is agreed between A, B and C that B
shall now accept C as his debtor; instead of A. The old debt of A to B no
longer exists and a new debt from C to B has been contracted.
A owes B Rs.10,000. A enters into an agreement with B, and gives B a
mortgage of his (A's) estate for Rs.5,000 in place of the debt of Rs.10,000.
This is a new contract and extinguishes the old.
3.2 Rescission
Rescission is the cancellation of a contract by mutual agreement of parties.
[Section 62]
Example: Rescission
A promises B to sell and deliver 500 Bales of cotton on 1st November at his
godown and B promises to pay for goods on 1st December. A does not supply the
goods. B may rescind the contract.
3.3 Alteration
Alteration means a variation made in the language or terms of a contract with
mutual agreement. When this occurs the original contract is discharged and a
new contract is created. The parties in alteration remain same. [Section 62]
Example: Alteration
X promise to sell and deliver 500 bales of cotton, on 1st November and Y promises
to pay for goods on 1st December. Afterwards, X and Y mutually decide that the
goods shall be delivered in five equal instalments at Z's godown. Here, original
contract has been discharged and a new contract has come into effect.
3.4 Remission
Remission means accepting a less amount than the initial amount agreed.
[Section 63]
Example: Remission
A promises to paint a picture for B. B afterwards requested A not to do so. A,
if agreed is no longer bound to perform the promise.
A owes B Rs.5,000. C pays to B Rs.1,000, and B accepts them in satisfaction
of his claim on A. This payment is a discharge of the whole claim.
3.5 Waiver
Waiver is a unilateral act of one person that results in the surrender of a legal
right. Thus, it amounts to releasing a person of certain legal obligation under a
contract.
Section overview
Death
Insolvency
Material alteration
Same identity
4.1 Death
On the death of the promisor a contract involving the personal skill or ability is
discharged. In other contracts, the rights and liabilities of the deceased person
pass on to his legal representatives.
Example: Death
A (an artist) promises to paint a picture for B by June 22, 2013 for Rs. 100,000. A
dies before completing the picture. Here it is a contract involving personal skill and
on death of A the contract will be discharged.
4.2 Insolvency
When a persons debts exceeds his assets, he is adjudged insolvent and his
property stands vested in the Official Receiver or Official Assignee appointed by
the court. Such person cannot:
Enter into contracts relating to his property
Sue
Sued
Therefore, on declaration of a person as an insolvent person is discharged from
his liabilities incurred prior to his adjudication.
Example: Insolvency
A took a loan from B amounting to Rs. 1 million payable in June 2013. On March
2013 A was declared as insolvent by relevant court. After the order adjudication he
is discharged from his liabilities as the amount will be paid by the Official Assignee
/ Official Receiver.
An alteration which is not material or which is made after getting prior consent
does not affect the validity of the contract.
Here, change of date is a material alteration and has discharged A from the
instrument because it was made without his consent.
Section overview
Supervening impossibility
Grounds of supervening impossibility
Not an excuse of supervening impossibility
Supervening illegality
Declaration of war
At the time of declaration of war the contracts with alien enemies are either
suspended or declared as void.
Difficulty of performance
If the performance of a contract becomes difficult, more costly or less beneficial
then that agreed at the time of its formation, a contract will not be discharged.
Section overview
Limitation period
7 DISCHARGE BY BREACH
Section overview
If a party refuses or fails to perform his part of the contract then the contract is said to
be discharged due to breach. A breach of contract may occur in the following two ways:
beyond the stipulated time is accepted, unless the promisee gives notice to
the promisor of his intention to claim damages.
Time is not essence
In case of actual breach where time is not essence the breach will have the
following consequences: [Section 55]
Not Voidable at the option of promisee
Promisee is not entitled to claim compensation for any loss arising to him
due to non-performance of the promise at agreed time where performance
beyond the stipulated time is accepted, unless the promisee gives notice to
the promisor of his intention to claim damages.
8 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Explain the various modes in which a contract may be discharged
Discuss the doctrine of supervening impossibility
Explain types of breach and their consequences
CHAPTER
Business Law
13
Remedies for breach of contract
Contents
1 Remedies for breach of contract
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Remedies for breach of contract
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to remedies for breach of a
contract.
LO 2.1.1 Discuss the provisions of Act with respect to remedies of a contract.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Meaning of remedy
Remedies for breach
Kinds of damages
Rules regarding amount of damages
Remoteness of damages
Rescission of contract
Rescission is the putting an end to a contract. Rescission means a right not to
perform your obligation. In case of breach of a contract, the promisee may put an
end to the contract. In such a case, the aggrieved party is discharged from all the
obligations under the contract and is entitled to claim compensation for the
damage which he has sustained because of the non-performance of the contract.
[Section 39 and 75]
Restitution
It means return of the benefit received by one party to the contract from the other
under a void contract. When a contract becomes void it needs not to be
performed by either party.
Example: Restitution
A pays B Rs. 1,000 in consideration of Bs promising to marry C (As daughter). C is
dead at the time of promise. The agreement is void but B must repay A Rs.1,000.
Damages
Damages are monetary compensation allowed for loss suffered by the aggrieved
party due to breach of a contract. The object of awarding damages is not to
punish the party at fault but to compensate the aggrieved party (pecuniary loss)
as far as money can do so. [Section 73]
Specific performance
Suit for specific performance is an equitable doctrine that compels a party to
execute the agreement according to its terms where monetary damages would
be inadequate compensation for the breach of an agreement.
Specific performance is a discretionary remedy, which is allowed only in a limited
number of cases some of them are listed below:
Monetary compensation is not adequate
Actual damage cannot be ascertain due to non-performance
It is probable that compensation in money on non-performance cannot be
obtained
There is a contract for the sale of rare commodities
There is a contract for the sale of land / building / apartment / houses
Following are the cases where suit for specific performance is not maintainable
where:
Monetary compensation are considered as an adequate remedy
Contract is of personal nature, e.g. contract of services
Court cannot supervise the performance of the contract e.g. construction of
building
One of the parties is a minor
Contract is inequitable to either party
Injunction
Suit for injunction is also an equitable remedy demanding courts stay order.
Injunction means an order of the court which abstains from wrong doing. Where a
party to a contract does something which he promised not to do, the court may
issue an order prohibiting him from doing so.
Example: Injunction
A agreed to play cricket for Apple Cricket Club during the contract period of 3
years. During the contract period, A made a contract with Orange Cricket
Club and refused to play cricket for Apple Cricket Club. Here, A could be
restrained by injunction from doing so.
X, a film actress, agreed to act exclusively for Y for a year and for no one
else. During the year she contracted to act for Z. Here, she could be
restrained by injunction from doing so.
Quantum meruit
The term Quantum Meruit means as much as earned or deserved. In case of
breach of contract the application or non-application of the term quantum meruit
varies depending upon the terms of the contract. Further, the divisibility or
indivisibility of performance of the contract may also be taken into account.
The aim of such an award is based on an implied agreement to pay for what has
been done. Quantum Meruit is likely to be sought where one party has already
performed part of his obligations and the other party then repudiates the contract.
Provided the injured elects to treat the contract as terminated, he may claim a
reasonable amount for the work done.
This has been discussed in detail in Chapter 10.
Ordinary Damages
Ordinary damages are those which arise naturally in the usual course of things
from the breach itself. These damages can be recovered if the following two
conditions are fulfilled: [Section 73]
The aggrieved party must suffer by breach of contract, and
The damage must be a direct consequence of the breach of contract
Special damages
Special damages can be recovered for the loss which the parties [Section 73]
Knew about
At the time they made the contract
As likely to result from such breach of contract
Special damages are due to special losses which are in the reasonable
contemplation of the parties at the time of formation of contract.
Nominal damages
Nominal damages are awarded where the injured party has sustained damage of
a short but not of a substantial nature to be reckoned.
Where the breach is technical and injured party has no intention of
performing his part of the contract
Where the injured party has not suffered any actual damage or fails to
prove that he has
Where damage is due to the fault of the injured party
Penalty
If a contract states that a particular sum is to be paid on breach of the contract
and [Section 74]
that sum is not the genuine pre-estimate of the loss that would be suffered
in the event of breach or
that the sum is disproportionate to the actual loss likely to result due to
breach this is penalty clause.
the court can decrease but not increase the penalty stipulation.
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Discuss the various remedies available to a party in case of breach of a contract
Explain the circumstances when rescission is granted by court
Explain the circumstances when specific performance is granted by court
Understand the different kinds of damages
CHAPTER
Business Law
14
Indemnity and guarantee
Contents
1 Contract of indemnity
2 Contract of guarantee
3 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Indemnity and guarantee
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to indemnity and guarantee.
LO 2.1.1 Discuss the provisions of Act with respect to indemnity and guarantee.
Demonstrate comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 CONTRACT OF INDEMNITY
Section overview
Indemnifier (Promisor)
The indemnifier (or promisor) is the person who promises to make good the loss.
2 CONTRACT OF GUARANTEE
Section overview
Principal debtor
The person in respect of whose default the guarantee is given. [Section 126]
Creditor
The person to whom guarantee is given. [Section 126]
Surety
The person who gives guarantee. [Section 126]
Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor,
creditor and surety. There are three contracts in contract of guarantee:
Contract between creditor and the principal debtor
Contract between surety and the principal debtor
Contract between surety and creditor
Consent of parties
Consent is an essential for all the contracts similarly all three must have
consented in a contract of guarantee.
Existence of a debt
A contract of guarantee requires an existing debt or a promise whose
performance is guaranteed which is enforceable at law. If no such liability exists
then there cannot be a contract of guarantee. The principal debtor can be a
minor; in this case surety will be liable personally.
Essentials of a contract
All the essentials required in a contract must exist in a contract of guarantee.
Misrepresentation
According to Section 142 of Contract Act, a guarantee must not be obtained by
misrepresentation.
Fraud
According to Section 143 of Contract Act, a guarantee must not be obtained by
fraud.
Specific guarantee
When a guarantee extends to a single transaction or debt, it is called a specific or
simple guarantee. The liability of the surety comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.
Notice
A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor. [Section 130]
Examples: Notice
A, in consideration of Bs discounting, at As request, bills of exchange for C,
guarantees to B, for 12 months, the due payment of all such bills to the
extent of Rs. 5,000. B discounts bills for C to the extent of Rs. 2,000.
Afterwards at the end of three months. A revokes the guarantee. This
revocation discharges A from all the liability to B for any subsequent
discount. But A is liable to B for Rs. 2,000 on default of C.
A guarantees to B to the extent of Rs. 10,000, that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice
of revocation, C dishonours the bill at maturity. A is liable upon his guarantee.
Death of surety
The death of the surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee regarding future transactions. [Section
131]
Rights of surety
Against /
Against / towards Against / towards
towards
principal debtor creditor
co-sureties
Rigth to
Right to Right to Right to Right to
claim
subrogation indemnity securities claim set off
contribution
Right to subrogation
After making a payment and discharging the liability of the principal debtor, the
surety is clothed with all the rights of the creditor, which he can himself exercise
against the principal debtor. [Section 140]
Right to indemnity
In every contract of guarantee there is an implied promise by the principal debtor
to indemnify the surety; and the surety is entitled to recover from the principal
debtor all payments properly made under the guarantee. After the surety makes
payment, he is entitled to recover from the principal debtor whatever amount he
has paid rightfully including the amount of interest. [Section 145]
Rights to securities
A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship is entered into,
whether the surety knows of the existence of such security or not and if the
creditor loses or without the consent of the surety parts with such security, the
surety is discharged to the extent of the value of the security. [Section 141]
Where there are co-sureties, a release by the creditor of one of them does
not discharge the others, neither does it free the surety so released from
his responsibility to the other sureties. [Section 138]
Notice
A surety can be discharged by giving notice to the creditor in case of continuing
guarantee, as to future transactions, by notice to the creditor. [Section 130]
Death of surety
The deceased suretys estate will not be liable for any transactions entered into
between the creditor and the principal debtor after the death of the surety, even if
the creditor has no notice of the death. [Section 131]
Novation
Novation means the substitution of a new contract of guarantee for an old one.
The new contract extinguishes the rights and obligations that were in effect under
the old contract. [Section 62]
Alteration
If an alteration is made without the consent of the surety then the surety is
discharged as to the transactions, subsequent to the alteration. [Section 133]
Examples: Alteration
A becomes surety to C for B's conduct as a manager in C's bank.
Afterwards, B and C contract, without A's consent, that B's salary shall
be raised, and that he shall become liable for one-fourth of the losses
on overdrafts. B allows a customer to overdraw, and the bank loses a
sum of money. A is discharged from his surety ship by the variance
made without his consent, and is not liable to make good this loss.
C agrees to appoint B as his clerk to sell goods at a yearly salary, upon
A's becoming surety to C for B's duly accounting for money received by
him as such clerk. Afterwards, without A's knowledge or consent, C
and B agree that B should be paid by a commission on the goods sold
by him and not by a fixed salary. A is not liable for subsequent
misconduct of B.
C contracts to lend B Rs. 5,000 on the first March. A guarantees
repayment. C pays Rs. 5,000 to B on the first January. A is discharged
from his liability as the contract has been varied in as much as C might
sue B for the money before the first of March.
Arrangement
A contract between the creditor and the principal debtor, by which the creditor
makes a competition with, or promises to give time to, or not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract.
[Section 135]
Misrepresentation/ Fraud
Any guarantee which has been obtained by means of misrepresentation made by
the creditor or keeping silence as to material circumstances, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
[Section 142 & 143]
Examples: Fraud
A engages B as a clerk to collect money for him. B fails to account for some
of his receipts and A, in consequence calls upon C to furnish security for his
duly accounting. C gives guarantee for B's duly account. A does not inform C
about Bs previous conduct. B, afterwards, makes default. C is not liable
because the guarantee was obtained by concealment of facts.
Act or omission
If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is impaired, the
surety is discharged. [Section 139]
3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define a contract of indemnity
Discuss the rights of indemnity holder
Define contract of guarantee and its types
Discuss the nature and extent of suretys liability
Understand the rights of surety
Explain the various ways in which the surety is discharged
CHAPTER
Business Law
15
Bailment and pledge
Contents
1 Nature of bailment
2 Duties and rights of bailor and bailee
3 Termination
4 Finder of goods
5 Pledge
6 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 NATURE OF BAILMENT
Section overview
Meaning of bailment
Essential elements of bailment
Types of bailment
Example: bailment
X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. There is a
contract of bailment between X and Y.
A lends a laptop to B to be returned after the examination. There is a contract
of bailment between A and B.
An insurance company places a damaged insured car of X in possession of Y,
a repairer. X is the bailor, the insurance company is the bailee, and Y is the
sub-bailee.
Agreement
A bailment is usually created by agreement between the bailor and the bailee. It
may be gratuitous i.e. without consideration or non-gratuitous i.e. with
consideration. The agreement may be express or implied. In case of finder of
goods the bailment is implied by law.
Delivery of goods
A bailment involves delivery of goods by bailor to bailee. In this connection, the
following points may be noted:
The delivery must be voluntary e.g. the delivery of jewellery by its owner to
a thief who shows a revolver does not create a bailment because the
delivery is not voluntary.
Delivery may be actual or constructive
x Actual delivery is when goods are physically transferred by one
person to another e.g. delivery of a car to mechanic for the purpose of
repair.
x Constructive or symbolic delivery may be made by doing something
which has the effect of putting the goods in the possession of the
intended bailee or any person authorized to hold them on his behalf.
This means possession is transferred to the bailee without actually
handing over the goods physically e.g. the delivery of a railway
receipt amounts to delivery of the goods.
Purpose
The delivery of goods from bailor to bailee must be for some purpose such as
personal service, safe custody, some work to be done upon or transportation.
Return of specific goods
In contract of bailment the goods are either returned or disposed of as per the
instructions of bailor after the purpose is achieved.
Types of bailment
Type Meaning
Gratuitous It is a contract of bailment where no consideration passes
bailment between the bailor and the bailee.
Non-gratuitous It is a contract of bailment where some consideration
bailment passes between the bailor and the bailee.
Type Meaning
Bailment for the A contract of bailment which is executed only for the
exclusive benefit of benefit of the bailor.
bailor
Bailment for the A contract of bailment which is executed only for the
exclusive benefit of benefit of the bailee.
bailee
Bailment for the A contract of bailment which is executed for the
mutual benefit of mutual benefit of the bailor and the bailee.
bailor & bailee
Example: Sub-Bailment
An insurance company places a damaged insured car of A in possession of R, a
repairer. A is the bailor, the insurance company is the bailee, and R is the sub-
bailee.
Pledge/Pawn
Term Meaning
Pledge The bailment of goods as security for payment of a debt or
performance of a promise is called pledge or pawn
Pawnor The bailor in this case is called the pawnor / pedgor
Pawnee The bailee in this case is called the pawnee / pledgee
Section overview
Duties of bailor
Duties of bailee
Rights of bailor
Rights of bailee
The table below shows the duties and rights of bailor and bailee:
Duty to indemnify bailee for loss in case of early termination of gratuitous bailment
In case of gratuitous bailment the bailor can terminate bailment even if it is made
for a fixed time or purpose. In such case bailor is liable to compensate bailee for
any loss in excess of benefit due to early termination. [Section 159]
Duty not to mix the goods bailed with his own goods
A bailee is bound to keep the goods bailed separately. He must take prior
consent from bailor to mix with his own goods. [Section 155 to 157]
Mixture without bailors consent
If the goods of the bailor get mixed up with the like goods of the bailee, by
inadvertence of the bailee or accident or by the act of an unauthorized third party,
the mixture belongs to the bailor and the bailee in proportion to their shares.
Duty not to set up an adverse title
The bailee is not the legal owner of the goods bailed but holds the goods on
behalf of the bailor. He cannot deny the right of the bailor to bail the goods and
receive them back. He may however refuse to deliver goods back to the bailor if
there is an effective pressure such as a court order, not to return goods to the
bailor.
3 TERMINATION
Section overview
4 FINDER OF GOODS
Section overview
Finder of goods is the person who finds some goods which do not belong to him. If he
takes them into his custody, he becomes a bailee.
5 PLEDGE
Section overview
Definition
Rights of pawnee
Rights of pawnor
Pledge by non-owners
Difference between pledge and bailment
5.1 Definition
The person who delivers the goods as security for payment of a debt or
performance of a promise is called pawnor or pledgor.
The person to whom the goods are delivered as security for payment of a debt or
performance of a promise is called pawnee or pledgee.
Any kind of movable property, i.e., goods, documents, or valuables may be
pledged. But delivery is necessary to complete a pledge. The delivery may be
actual or constructive.
Example: Pledge
If A borrows Rs. 200,000 from B and keeps his Rolex watch as security for
payment of the debt, the bailment of watch is a pledge.
ABC Bank has a right to keep laptop of A in its custody until the loan amount i.e.
Rs. 100,000 and mark up i.e. Rs. 1,000 is paid in full.
Right to sell
The pawnee may sell the goods pledged after giving pawnor a reasonable
notice of the sale. He can recover from the pawnor any deficiency arising
on the sale of the goods by him. However, he shall have to hand over the
surplus to the pawnor, if any, realized on the sale of the goods
Purpose
Bailment is for safe custody,
The purpose of pledge is security for
transportation etc.
the performance of a specific promise,
i.e. the payment of a debt or
performance of a promise
Right to use
Pawnee has no right to use the goods Bailee can use if terms of bailment so
pledged. provide.
Right to sell
Pawnee can sell the goods pledged Bailee can either retain the goods or
after giving notice to the pawnor in sue the bailor for his dues.
case of default by the pawnor.
6 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define bailment and its characteristics
State the rights and duties of bailor and bailee
Describe briefly the various ways by which an bailment may be terminated
Explain the rights and obligations of a finder of goods
Define pledge and discuss the circumstances where pledge can be made by non-
owners
Differentiate between pledge and bailment
CHAPTER
Business Law
16
Agency
Contents
1 Role of an agent
2 Rights and duties of the agent and principal
3 Irrevocable agency
4 Termination of agency
5 Undisclosed agency
6 Personal liability of an agent
7 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Contract of Agency
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to contract of agency.
LO 2.1.1 Discuss the provisions of Act with respect to contract of agency. Demonstrate
comprehension in simple scenario based problems
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 ROLE OF AN AGENT
Section overview
An agent may act for a principal in arranging just one transaction. However, it is
common in business for an agent to act regularly on behalf of a principal,
arranging large numbers of different business transactions and contracts.
Agency by ratification
An agency relationship may be created retrospectively, by ratification. This may
happen when a person who does not actually have actual authority as an agent
negotiates with a third party, claiming to be an agent of a named principal. The
agent may negotiate a transaction between the third party and the so-called
principal.
At this stage, there is no agency relationship. However, the person who has been
named as principal might then choose to accept the contract with the third party.
This gives validity in retrospect to the actions of the person claiming to act as
Effect of ratification
Ratification is established from the time of formation of contract between
the ratifier of the act and the person who did of the act.
A contractual relationship is established between the ratifier and the third
party.
Agency by estoppel
Estoppel is a word used in law to mean stop or prevent.
An agency relationship may be created when someone has led others to believe
that a person has the authority to act on his behalf. An express agency
agreement does not in fact exist, but it may seem to other people that it does. If a
third party then agrees a transaction with the person who appears to be an agent,
the principal can be prevented (estopped) from denying that an agency
agreement does not exists. In other words, the principal cannot reject the
agreement by saying that the person who was apparently acting as an agent was
not in fact an agent.
In this situation, the agent has ostensible authority or apparent authority,
even though he does not have actual authority to act as an agent. [Section 237]
For a third party to rely on the existence of an agency by estoppel, the following
conditions must apply.
A person (the principal) must give a clear representation to others that
someone has the authority to act as his agent. The representation must be
made by the principal. If a person claims to be an agent but the principal
has given no representation to others that this person is an agent, an
agency by estoppel cannot exist.
This representation must have been made to the third party who then relies
on the existence of the agency relationship.
The third party who then negotiates the transaction with the agent must
have relied on the existence of the agency relationship in reaching a
decision about the transaction.
If these circumstances apply, a third party who suffers losses resulting from the
situation can hold the principal as liable, and take legal action against the
principal.
In a simple situation, suppose that a father regularly pays the debts of his
daughter to a particular shop. He may be denied (estopped) from denying that
she acts as his agent, so that if he decides that he will not pay a particular bill to
the shop for his daughter, he may nevertheless be legally obliged to do so.
Agency by necessity
Agency by necessity occurs in circumstances where there is no agreement
between the parties, but an emergency requires that one party (the agent) has to
take action to protect the interests of the other party (the principal).
A typical situation that might create agency by necessity happens when one
person (the agent) is in possession of property belonging to another person (the
principal), and as a result of an unexpected emergency, the agent takes action to
protect or safeguard the property of the principal. Unless the agent takes action,
the principal will lose the property, or the property will suffer significant damage.
For agency by necessity to exist, the following conditions must apply.
There must be a real emergency.
It must be impossible for the person acting as the agent to contact the
owner of the property and obtain instructions.
The person acting as agent by necessity must act as far as possible, in the
best interests of the principal.
In most cases involving agency by necessity, the person acting as agent by
necessity is in charge of goods or other assets owned by the principal, and
there is an emergency in relation to those assets or goods.
Express authority
An agreement is express if both parties by words spoken or written agree to
create an agency relationship. A written agency agreement may give the agent
express authority. [Section 186]
Express authority is not unlimited power to do anything on behalf of the principal.
The principal should specify what task or tasks the agent is required to perform,
and what power and authority the agent can exercise.
If the agent subsequently acts outside the limits of his express authority, this will
affect the contractual relationship between the principal and the third party. In
such a situation, express authority does not exist, but there may be implied
authority or ostensible authority. The legal consequences will depend on
whether the third party knew that the agent was acting outside the limit of his
authority.
Implied authority
Implied authority is authority of an agent in excess of his express authority i.e.
which is inferred from the circumstances of the case. The scope of an agents
authority may be increased by implied authority.
Unless the third party has knowledge to the contrary, he is entitled to assume
that an agent holding a particular position has all the powers that are normally
given to a person in such a position. [Section 187]
Section overview
Duties of agent
Rights of agent
Duties of principal
Rights of principal
In a normal agency agreement, the principal appoints an agent to perform a task (or
several tasks, or a particular function) on his behalf, and the agent agrees to carry out
the task or the function.
The agreement between the principal and agent is a contractual agreement that should
give both parties certain rights and duties. (The duties of an agent are rights of the
principal, and rights of the agent are duties of the principal.)
An agency relationship also gives the agent certain authority and powers.
Duty to communicate
An agent should communicate to the principal in cases requiring principals
instructions / directions. [Section 214]
Right of lien
Subject to contract to contract an agent has a lien on goods, papers and other
properties of the principal received by him, until the amount due to himself for
commission, disbursements and services in respect of the same has been paid
or accounted for, to him. [Section 221]
Right of retainer
An agent has a right to retain his principals money in his hands for all money due
to himself in respect of:
Remuneration as may be payable to him for acting as agent
Advances made or
Expenses properly incurred
by him in conducting the business of agency. [Section 217]
Duty to compensate
The principal has a duty to compensate the agent for injuries sustained by him by
neglect or want of skill on the part of the principal. [Section 225]
Duty to pay
It is the duty of the principal to pay to agent the agreed remuneration or if there is
no agreement to a reasonable remuneration, unless he agrees to act without it.
[Section 219 & 220]
Right to revoke
The principal can revoke the authority given to his agent except in case of
irrevocable agency or where authority has been exercised. [Section 203]
Right to accounts
It is the right of the principal that proper accounts are provided to him by the
agent when he demands. [Section 213]
Right to repudiate
If an agent deals on his own account in the business of agency without first
getting prior consent of his principal, it is the right of the principal to repudiate the
transaction. [Section 215]
3 IRREVOCABLE AGENCY
Section overview
4 TERMINATION OF AGENCY
Section overview
Mutual agreement
A contract of agency can be terminated at any time by mutual agreement of
principal and agent.
Completion of business
An agency is automatically terminated when its business is completed. [Section
201]
Expiry of time
When the agent is appointed for a fixed period of time the agency comes to an
end after the expiry of that time.
On winding up of company
An agency is automatically terminated when the principal or agent is a company
and the company is wound up.
5 UNDISCLOSED AGENCY
Section overview
if he can show that he would not have entered into the contract if he had
known
who was the principal in the contract or
that the agent was not principal.
Terms unchanged
The terms of the contract between the agent and the other contracting party will
remain unchanged if the principal is allowed to intervene in the contract.
Section overview
Foreign principal
When an agent contracts for a principal resident abroad he is presumed to be
personally liable. [Section 230]
Unnamed principal
If an agent declines to disclose the identity of his principal then he is personally
liable to the third party.
Undisclosed Principal
Where an agent acts for an undisclosed principal and contracts in his own name
then he is personally liable to the third parties. [Section 231]
Custom
An agent is personally liable on a contract if there is any usage or custom of a
market or trade to that effect. e.g. stock brokerage business.
Criminal act
Where an agent has been employed to do a criminal act, the agent is not entitled
to indemnify himself against the consequences of that act and is personally liable
for it.
Special contract
If an agent, while acting in the course of business of agency enters into a special
contract with the third party that he will be personally liable on the contract then
the agent is personally liable.
7 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define the terms agent and principal
Discuss the general rules of agency
Explain the various modes by which an agency may be created
Define the different types of authorities and explain the extent
Discuss the extent of principals liability and cases where agent is personally liable
Briefly explain the rights and duties of agent and principal
Describe briefly the various modes by which an agency may be terminated
CHAPTER
17
Partnership Act
Contents
1 The nature of partnership
2 Relations of partners to one another
3 Relations of partners to third parties
4 Chapter Review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Partnership Act 1932
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to partnership
LO 2.3.1 Understand and describe the partnership relationship, its creation and identify
and explain the types of partnership and the mode of determining existence of
a partnership.
LO 2.4.1 Determine and explain the rights and duties of partners of the firm under
various circumstances.
LO 2.4.2 Explain the provisions of the law relating to conduct of the business, property
of the firm and personal profits earned by partners.
LO 2.5.1 Describe the relationship of partners with third parties.
LO 2.5.2 Identify and explain the concepts of implied authority of the partner in relation
to third parties, partners authority in an emergency, mode of doing act to bind
the firm, effect of admissions by a partner, effect of notice to acting partner,
liability of a partner for acts of the firm and liability of the firm for wrongful acts
of a partner or misapplication by partners, principle of holding out in given
situations.
LO 2.5.3 Identify and explain the rights of transferee of a partners interest and the
rights and liabilities of a minor admitted to the benefits of partnership.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Definitions
Essential elements of a partnership
Test of partnership
Types of partnership
Types of partners
Difference between a partnership firm and a joint stock company
Difference between a partnership firm and co-ownership
1.1 Definitions
Association
of two or
more
persons
Mutual
Agreement
agency
Essential
elements of
partnership
Sharing of
Business
profit
Agreement
A partnership is a contractual agreement between the partners. This agreement
may be express (whether written or oral) or implied. The written agreement is
known as partnership deed. In Pakistan partnership arises from contract and not
from status such as, (Joint Family Business) operation of law inheritance, or
succession.
A partnership deed usually sets out the following:
Firm name
Place or principal place of business of the firm
Names of any other places where the firm carries on business
The date when each partner joined the firm
Number of partners
Names in full and permanent addresses of partners
Duration of partnership (if any)
Purpose of the partnership
Rights and duties of the partners.
Amount of capital that each partner should put into the business, and keep
in the business until the partner retires or the partnership is dissolved
In Pakistan, if the partnership agreement does not specify what the rights or
duties of the partners should be in particular circumstances, the rules set out in
the Partnership Act 1932 are assumed to apply. These are the default rules in
the absence of anything else.
This means that if a partnership exists but does not have a written agreement, it
will be assumed (unless there is evidence to suggest otherwise) that the rules of
the partnership agreement are those contained in the Partnership Act.
Carrying on business
To constitute a partnership, the parties must have agreed to carry on a business.
Where there is no business to be done, there can be no question of partnership.
Business here includes any lawful trade, occupation and profession. An
agreement to carry on business at a future time does not result in partnership
unless that time arrives and the business is commenced. If the purpose is to
carry on some charitable work it will not be a partnership.
Sharing of profits
The next essential element of partnership is that there must be an objective to
make profit. The partners may agree to share profits in any manner they like. The
sharing of profits is a prima facie evidence and not a conclusive evidence of
partnership. Partners may share it equally or in any other proportion. Further, it is
not necessary that the partners should agree to share losses. It must be noted
that even though a partner may not share in the losses of the business, yet his
liability towards outsiders shall be unlimited.
A person receiving profits is not necessarily a partner, such as:
Lender of money to persons engaged or about to engage in any business
Servant or agent as remuneration
Widow or child of a deceased partner as annuity
A transferee of a partners interest
A minor who is admitted to the benefits of an existing partnership
Previous owner or part owner as consideration for the sale of goodwill or
share of it.
Mutual agency
There must exist a mutual agency relationship among partners. Mutual Agency
relationship means that each partner is both an agent and a principal. Each
partner is an agent in the sense that he has the capacity to bind other partners by
his acts done. Each partner is principal in the sense that he is bound by the acts
of other partners.
Note
Following two important features of the partnership need to be understood.
A partnership does not have a legal personality. Unlike a company, it is not
a legal person. A third party entering into business transaction with a
partnership does not have a contractual agreement with the partnership;
the contractual agreement is between the third party and all the partners as
individuals.
Partners in a partnership do not have limited liability, and are personally
liable for any liabilities of the partnership business that the partnership
cannot pay.
Partnership-at-will
Where no provision is made between the partners for the duration of their
partnership, or for the determination of their partnership, the partnership is called
partnership at will. In such partnership there is no provision as to when the
partnership will come to an end. Any partner is free to dissolve the partnership by
giving a notice in writing to all other partners of his intention to dissolve the firm.
The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or if no date is mentioned as from the date of the communication of
the notice. [Section 7 and 43]
If freedom to dissolve the firm at will is curtailed by agreement, like if the
agreement provides that the partnership can be dissolved by mutual consent of
all the partners, only then will it not constitute a partnership at will.
Particular partnership
Where a partnership is created for any particular adventure or undertaking or for
a specific time period it is called a particular partnership. Such partnership comes
to an end on the completion of venture or on the expiry of the period.
If the partners decide to continue such a partnership even after the expiry of the
specific period or completion of specific venture then it becomes partnership at
will. [Section 8]
Note
A sleeping partner is not required to give public notice of his retirement and he is
not liable for any act done by the firm after his retirement.
Nominal partner
A partner who does not contribute any capital or share in profits, but lends his
name to the firm is called a nominal partner. He along with other partners is liable
to the outsiders for all the debts of the firm.
Sub-partner
When a partner agrees to share his profits derived from the firm with a stranger,
that stranger is known as a sub-partner. A sub-partner is in no way connected
with the firm and cannot represent himself as a partner of the firm. He has no
rights against the firm nor is he liable for the acts of the firm.
Silent partner
Those who by agreement with other partners have no voice in the management
of the partnership business. They share profit and losses, are fully liable for the
debts of the firm and may take active part in the conduct of the business.
Section overview
The duties, rights and liabilities of the partners are shown below:
Right to be consulted
Every partner has the right to be consulted before any matter is decided. Any
difference arising as to ordinary matters connected with the business may be
decided by a majority of the partners in good faith but no change may be made in
the nature of the business without the consent of all the partners. [Section 12]
Right to indemnity
Every partner has a right to claim indemnity from the firm in respect of payments
made or liabilities incurred by him:
In the ordinary and proper conduct of the business and
In doing such act, in an emergency, for the purpose of protecting the firm
from loss, as would be done by a person of ordinary prudence, in his own
case, under similar circumstances. [Section 13]
Right to retire
A partner has a right to retire.
With the consent of all the partners or
In accordance with an express agreement between the parties or
Where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire. [Section 32]
Note
Unless, any contrary intention appears any property purchased with
partnership money without other partners consent will be deemed to be
partnership property.
Goodwill
Goodwill is an accounting concept meaning the value of an intangible asset
which has a quantifiable value in a business. An example would be the reputation
the firm enjoys with its customers. This reputation enables the firm to earn more
than the normal profits earned by the business as a whole.
Goodwill can be thought of as the value of the business as a whole (i.e. what
Section overview
Actual authority
The authority of each partner to take decisions for the business, and enter into
transactions with other parties, may be specified in the partnership agreement.
Since the partnership agreement is a contract, its terms are the terms of a
contractual agreement between the partners.
Implied authority
The act of a partner done by him: [Section 19]
as an agent of the firm
in the course of business of the firm
in the name of the firm, or in any other manner expressing an intention to
bind the firm.
An authority to bind the firm is known as implied authority of a partner.
In a trading partnership, all the partners have the implied authority to borrow
money on the credit of the partnership, and a lender is under no particular
obligation to investigate the purpose of the loan. This means that unless a lender
has knowledge that a partner does not have the actual authority to borrow on
behalf of the partnership, he can rely on the partners implied authority.
Every partner within the scope of his implied authority may bind the firm by the
following acts:
Buying and selling good, on behalf of the firm and giving valid receipts for
them
Receiving payments of the debts due to the firm and giving valid receipts or
discharge for them
Contracting debts and paying debts on behalf of the firm
Statutory restrictions
The restrictions imposed by law are statutory restrictions and is applicable
against the whole world whether a particular person dealing with the firm has
knowledge of it or not e.g. about the name of the firm, etc.
In case of fraud, although the firm is liable to the third party for loss caused to the
third party by fraud committed by a partner but as between partners same must
be borne by the partner committing the fraud and cannot be shared among all the
partners. [Section 26]
Requirement
In order to render a person liable as a partner on the ground of estoppel or
holding out:
Direct Representation
He must have by words spoken or written or by his conduct represented himself
to be a partner
Indirect Representation
He must have knowingly permitted himself to be represented as a partner to the
other person.
Rights of Transferee
He is entitled to receive the share of the profits of the transferring partner.
On the dissolution of the firm or on retirement of the transferring partner he
is entitled to receive:
x the share of the assets of the firm to which the transferring partner is
entitled.
x an account from the date of the dissolution for the purpose of
ascertaining the share.
Disabilities of Transferee
No status of a partner.
Disability to interfere in the conduct of the business during the continuance
of the firm
Disability to require accounts.
Disability to inspect the books of the firm.
Disability to challenge the accounts of profits agreed to by the partners.
Disability to sue for dissolution of the firm.
Rights
Right to share property and profits of the firm as agreed by the partners
Right to have access to accounts of the firm ONLY and not to the secret
books
Right not to be adjudged insolvent
Liabilities:
Personally not liable i.e. limited liability.
His share is liable for the acts of the firm.
Disabilities:
No status of a partner.
No suit against partners for profit and property except after disconnecting
his relation with the firm.
Not entitled to have access to books other than accounts.
4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Understand the concept of partnership and determine whether a group of persons
has constituted a partnership
Explain the different types of partnerships and partners
Explain role and relationship of partner among themselves and with outsiders
Summarise the authority of the partner
Describe the liabilities for acts of the firm
Understand the status of a minor in a partnership and rules governing his rights
and liabilities
CHAPTER
Business Law
18
Negotiable Instruments Act
Contents
1 Meaning and characteristics of negotiable instruments
2 Promissory Note
3 Bill of Exchange
4 Cheque
5 Discharge of liability
6 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Negotiable instruments Act
LO 2 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of laws relating to Negotiable Instruments.
LO 2.6.1 Define and explain terms under Negotiable Instruments Act, 1881.
LO 2.6.2 Explain provisions relating to types of negotiable instruments and its maturity.
LO 2.7.1 Identify and explain how the maker of a negotiable instrument is discharged
from his liability under given scenarios.
LO 2.8.1 Describe provisions relating to crossing of cheques.
LO 2.8.2 Briefly describe and differentiate between a cheque crossed generally and a
cheque crossed specially and their payment modes.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Payable to order
A promissory note, bill of exchange or cheque is payable to order which is
expressed to be so payable or which is expressed to be payable to a particular
person, and does not contain words prohibiting transfer or indicating an intention
that it shall not be transferable is called payable to order. e.g. Pay A, Pay A or
order and Pay A or B.
However, there is an exception in favour of cheque. A crossed cheque "Account
Payee only" can still be negotiated further.
Payable to bearer
A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an
endorsement in blank. If an instrument is payable to any person whosoever bears
it than it is called payable to bearer. Thus a note, bill or cheque in the form Pay
to A or bearer or pay bearer is payable to bearer.
Easy transferability
They are transferable from one person to another by mere delivery if payable to
bearer and by endorsement and delivery if payable to order.
Holder
A person is called holder of a negotiable instrument if he satisfies the following
two conditions:
He must be entitled to the possession of the instrument in his own name
and
He must be entitled to receive / recover the amount due on the instrument
from the parties liable under the instrument
Thus a holder means the bearer of the bearer instrument and the endorsee or
payee of the order instrument.
When the note, bill or cheque is lost and not found or is destroyed, the person in
possession of it or the bearer at the time of loss or destruction shall deemed to
continue to be its holder. [Section 8]
Order instrument
A promissory note, bill of exchange or cheque is payable to order if either of the
following two conditions is fulfilled:
Which is expressed to be so payable or
Which is expressed to be payable to a particular person
and does not contain words:
which prohibit transfer or
indicate an intention that it shall not be transferable. [Section 13]
Note:
An order instrument can be transferred by an endorsement on it and then
its delivery.
Bearer instrument
A promissory note of bill of exchange or cheque is payable to bearer if either of
the following two conditions if fulfilled:
expressed to be so payable, or
last endorsement must be an endorsement in blank. [Section 13]
Note:
A promissory note cannot be made payable to the bearer.
A bill of exchange cannot be made payable to bearer on demand.
Demand instrument
Instruments payable on demand means the instrument in which no time for
payment is mentioned. A cheque is always payable on demand. A promissory
note or bill of exchange is payable on demand where:
It is expressed to be so or
It is expressed to be payable at sight or presentment; or on demand
No time for payment is specified; or
The bill or note accepted or endorsed after it is overdue, as regards to
person accepting or indorsing it. [Section 19 & 21]
Notes
'At sight' and presentment means on demand.
An instrument on demand is payable immediately.
Time instrument
An instrument payable after a fixed time or on a specified date is called Time
Instrument. A promissory note or bill of exchange is a time instrument when it is
expressed to be payable.
After a specified period
On a specific day
Certain date after sight
On the happening of event which is certain to happen e.g. death.
Note
There can be a time bill, time note but not a time cheque because the
cheque cannot be expressed to be payable otherwise than on demand.
Example:
A bill of exchange is payable on 1St January, will have maturity on 4th January.
Inland instrument
A promissory note, bill of exchange or cheque which is:
Made or drawn in Pakistan and also made payable in Pakistan, or
Made or drawn in Pakistan upon any person resident in Pakistan, although
it may be payable in a foreign country.
is called an inland instrument. [Section 11]
Note:
An inland instrument remains inland even if it has been endorsed in a
foreign country.
Foreign instrument
An instrument, which is not an inland instrument, is deemed to be a foreign
instrument. [Section 12]
Inchoate instrument
An incomplete or blank negotiable instrument is one which is
properly stamped and
signed
but where the name or amount is missing. [Section 20]
The following points should be noted in connection with inchoate instrument.
The liability of a person who signs and delivers an inchoate instrument
arises only when the blanks are filled in and the instrument is completed.
To make the signer liable on an inchoate instrument, it is necessary that the
instrument should be delivered to the transferee.
The instrument must be stamped and the stamp affixed must be sufficient
to cover the amount filled in the instrument.
If an inchoate instrument is completed and negotiated to a holder in due
course, he can claim payment of full amount covered by the stamp.
Note
The provisions in this section cannot be applied to a cheque which is not required
to be stamped.
Ambiguous instrument
An instrument which may be interpreted as either promissory note or bill of
exchange is called an ambiguous instrument. Its holder must elect once for all
whether he wants to treat it as a promissory note or bill of exchange. [Section 17]
1.6 Endorsement
The term endorsement may be defined as signing ones name on the negotiable
instrument for the purpose of transferring it to another person.
Kinds of endorsements
Blank or general endorsement
If the endorser signs his name only and does not specify the name of the
endorsee, the endorsement is said to be blank. The effect of a blank
endorsement is to convert the order instrument into bearer instrument which may
be transferred by delivery. [Section 16 & 54]
1.7 Negotiation
The analysis of the definition reveals that negotiation takes place when the
negotiable instrument is transferred from one person to another and the transfer
is made in such a manner so as to make the transferee the holder of the
negotiable instrument and it must be transferred free from defects.
Modes of negotiation
Negotiation by mere delivery
x A negotiable instrument payable to bearer is negotiable by delivery
(voluntary delivery with the intention of transferring the ownership)
x It does not require signature of the transferor i.e. endorsement and
the transferee becomes the holder by mere possession.
x The transferor of a bearer instrument is not liable on its dishonour
because by not signing as endorser he has not added his credit to the
instrument. [Section 47]
Negotiation by endorsement and delivery
x A negotiable instrument payable to order is negotiable by the holder
by endorsement and delivery.
x The negotiation of an order instrument requires two formalities
The holder should endorse it and
Then deliver to his endorsee (voluntary delivery with the
intention of transferring the ownership) [Section 48]
2 PROMISSORY NOTE
Section overview
The analysis of the definition shows that, a promissory note is a written and
signed promise to pay a certain sum of money to a specified person or his order.
Maker
It is a person who makes the promissory note and promises to pay the money
stated in it.
Payee
It is a person to whom the amount of promissory note is payable i.e. to whom the
promise to pay is made.
Three months after date I promise to pay ABC or to his order the sum of
Rupees Ten Thousand, for value received
To Sign: __________
ABC XYZ
Jail Road Saddar
Karachi Karachi
In writing
A promissory note has to be in writing. An oral promise to pay does not become a
promissory note. The writing may be on any paper, on any book. The words used
must impart a clear undertaking to pay, but it is not necessary that the word
promise should be used.
Promise to pay
There must be a promise or a clear undertaking to pay. A mere
acknowledgement of indebtedness is not a promissory note, although it is valid
as an agreement and may be sued upon as such.
Exception
But a promise to pay is not conditional if the amount is made payable
at a particular place or
after a specified time or
on the happening of an event which must happen, although the time of its
happening may be uncertain.
Example: Exception
If A signs an instrument stating I promise to Pay B Rs.500 seven days after Cs
death, the promissory note is valid because it is not considered to be conditional,
for it is certain that C will die one day.
Signed by maker
It is imperative that the promissory note should be duly authenticated by the
signature of the maker. If the maker is illiterate he may place his thumb mark.
Certain parties
The instrument point out with certainty as to who is the maker and who is the
payee. Where the maker and the payee cannot be identified with certainty, the
instrument even if it contains an unconditional promise to pay is not a promissory
note.
A promissory note cannot be made payable to the maker himself. But if it is
endorsed by the maker to some other person or endorse in blank it will become
valid.
The above instruments are invalid as promissory notes because the exact
amount is not certain.
3 BILL OF EXCHANGE
Section overview
The analysis of the definition shows that, a bill of exchange is a written and
signed order directing a person to pay a certain sum of money to the bear or of
the instrument or to a specified person or his order. Generally, a bill of exchange
is drawn by a creditor, who directs his debtor to pay the money to the person
specified in the instrument.
Drawer
It is a person who draws a bill of exchange.
Drawee
It is a person who is ordered to pay the amount of the bill of exchange (on whom
the bill is drawn). When drawee accepts the bill of exchange (when he gives
consent to make the payment) he is called the acceptor.
Payee
It is a person to whom the amount of bill of exchange is payable.
Three months after date pay to XYZ or to his order the sum of Rupees Ten
Thousand, for value received.
Accepted
ABC
To Sign: __________
ABC MNO
Jail Road Saddar
Karachi Karachi
In the specimen MNO is the drawer, ABC is the drawee and XYZ is the payee.
In writing
A bill of exchange is required to be in writing. Like promissory note, a bill of
exchange also cannot be oral.
Order to pay
A bill of exchange contains an order to pay instead of a promise to pay like in
promissory note. This feature distinguishes it from promissory note. Further, a
request to pay money is not considered to be a bill of exchange.
Certain parties
All the parties must be certain i.e. indicated in a bill of exchange with reasonable
certainty.
4 CHEQUE
Section overview
Definition of cheque
Parties to a cheque
Specimen of a cheque
Essential elements of a cheque
Method of crossing
Types of crossing
Crossing of a cheque after issue
Protection to the collecting banker
Rights of holder against the banker
Circumstances in which a banker must refuse to honour a cheque
Circumstances in which a banker may refuse to honour a cheque
The analysis of the above definition reveals that a cheque is a bill of exchange
but is different in following two characteristics:
Drawee will always be a banker
Always payable on demand
Drawer
It is a person who draws a cheque.
Drawee
It is a banker who is ordered to pay the amount of the cheque.
Payee
It is a person to whom the amount of cheque is payable.
Rupees _______________________________________
Rs.
Account no: _____________
Title of account
Signature
Do not write below this line
Purpose of crossing
The purpose of crossing is to direct the drawee (banker) to pay the amount of the
cheque only to a banker so that the party who receives the payment can easily
be traced.
General crossing
A cheque is said to be crossed generally where it bears across its face an
addition of:
The words and company or any abbreviation of it between two parallel
transverse lines. [Section 123 ]
Special crossing
A cheque is said to be crossed especially where it bears across its face an
addition of:
Name of the banker
Parallel lines are not necessary. [Section 124]
Restrictive crossing
Restrictive crossing may be added with general crossing by adding the words
A/c Payee or A/c Payee only. [Section 123A]
When the customer has given a notice to the banker for the assignment of
the credit balance of his account.
When the banker has reason to believe the holder title is defective.
When the banker receives a notice of loss of cheque from his customer.
When there has been material alteration in the cheque and such alteration
has not been authenticated by his customer by putting his signature.
When the signature of the drawer does not tally with the specimen
signature kept by the bank.
When the banker receives notice in respect of closure of account.
5 DISCHARGE OF LIABILITY
Section overview
Discharge of liability means that the partys liability, on instrument comes to an end.
The term discharge in relation to negotiable instrument has the following two
meanings:
Discharge of the negotiable instrument
Discharge of one or more parties from their liability
The chart below shows the various ways in which an instrument and party may get
discharged.
Negotiation back
If the party primarily liable on the instrument becomes the holder at or after its
maturity in his own right, the instrument is discharged. [Section 90]
Release
When the holder of a negotiable instrument at or after its maturity absolutely and
unconditionally renounces in writing and gives up his rights against all the parties
to the instrument, the instrument is discharged. [Section 82]
Cancellation
Where an instrument is intentionally cancelled by the holder or its agent the
instrument is discharged and ceases to be negotiable. Cancelation may take
place by;
crossing out signatures on the instrument, or
by physical destruction of the instrument
with the intention of putting an end to the liability of the parties to the instrument.
[Section 82]
Discharge as a simple contract
A negotiable instrument may be discharged in the same way as any other
contract for the payment of money. This includes, for example, discharge of an
instrument by novation or rescission or by expiry of limit of limitation.
Payment
The party is discharge by payment made in due course by the party who is
secondary liable to pay. [Section 82]
Cancellation
When the holder of a negotiable instrument or his agent cancels the name of a
party on the instrument with the intent to discharge him, such party and all
subsequent parties who have a right of action against the party whose name is
so cancelled are discharged from liability. [Section 82]
Release
Where the holder of a negotiable instrument releases any party to the instrument
by any method other than cancellation, the party so released is discharged from
the liability. [Section 82]
Non-presentment of cheque
Where a cheque is not presented by the holder for payment within a reasonable
time of its issue and the drawer suffers damage through the delay because of the
failure of the bank, he is discharge from the liability to the extent of such damage.
[Section 84]
Qualified acceptance
If the holder of a bill agrees to a qualified acceptance all prior parties whose
consent is not obtained to such an acceptance are discharged from liability.
[Section 86]
The qualified acceptance can be in any of the following ways:
Conditional: the payment is dependent on the happening of an event.
Part payment: Where he undertakes the payment of part only of the sum
ordered to be paid.
Place of payment: No place of payment is specified in the order, it undertakes
the payment at a specified place and not anywhere else or where place of
payment is specified in the order it undertakes payment at some other place and
not anywhere else.
Time of payment: Payment at a time other than it is legally due.
Operation of law
This includes discharge;
By an order of insolvency court, discharging the insolvent.
By merger. When a judgement is obtained against the acceptor, maker or
endorser, the debt under the bill is merged into the judgement debt.
By lapse of time i.e. when the remedy becomes time barred.
Material alteration
A material alteration of a negotiable instrument renders the same void as against
anyone who is a party to it at the time of alteration and does not consent to it,
unless it was made in order to carry out the common intention of the original
parties. [Section 87]
Persons who become parties to the instrument after the alteration are liable
under the instrument as altered.
Negotiation back
When a bill of exchange comes back to the drawer or endorser by process of
negotiation and he becomes its holder then all the parties in between are
discharged from the instrument unless the person to whom the instrument is re-
endorsed did sans recourse endorsement. [Section 90]
6 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
Define the term negotiable Instrument and different types of negotiable Instrument
Discuss the essential characteristics of Negotiable Instrument
Understand the effect of crossing a cheque and various types of crossing
Indicate the cases in which banker must and may refuse to honour a cheque
Discuss the protection granted to the collecting banker and rights of holder
against the banker
Explain the terms Holder, Holder in due course, Acceptor for Honour, Payer for
Honour, Material alteration, Negotiation and Endorsement
Explain the various ways in which negotiable instrument or party in a negotiable
instrument is discharged
Define maturity and state the rules determining the maturity of negotiable
instrument
CHAPTER
Business Law
19
Company
Contents
1 The features of a company
2 Types of companies
3 Association not for profit
4 Securities and Exchange Commission of Pakistan
5 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 3 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the legal terminology of company law and the
basics of company incorporation.
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 3.2.1 Explain subsidiary and holding company and when a company becomes a
subsidiary or holding company of another company
LO 3.2.2 Apply the concept of subsidiary in simple scenarios
LO 3.3.1 Demonstrate familiarity with the powers and functions of the Commission
LO 3.8.1 Comprehend the nature of association not for profit
LO 3.9.1 Understand the provisions regarding divisible profit and dividing the
undertaking into shares or interest
References to Legal Acts
Section number references embedded in the learning materials refer to the following legal
acts unless otherwise stated:
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
the law, would be two separate persons - both would have separate legal
existence.
A company is an artificial person, whereas individual people are natural
persons. Essentially, however, the law treats persons in the same way, whether
they are artificial or natural.
Because it is a person, a company can enter into contractual agreements
with other persons individuals or companies.
If a company incurs a debt, the company itself is liable and its owners (the
shareholders) are not.
A company owns its own assets. Although the members (ordinary
shareholders) own the company, they do not own the assets of the
company. The shareholders are simply owners of the shares in the
company. The company itself is the legal owner of its assets.
The debtor of the company owes the money to the company, and not to its
owners.
A company is personally liable to pay tax on its income (profits).
If a company breaks the law, it is usually the company itself that is liable,
although there are circumstances in which its owners or its officers (mainly
directors) may be personally liable.
The effects of separate legal personality
The separate legal personality of companies has several consequences:
limited liability of the owners of business
separation of ownership from control i-e members and directors
transfer of ownership and perpetual succession/perpetual existence.
The word limited in the name of the company draws the fact of limited liability to
the attention of anyone dealing with it.
2 TYPES OF COMPANIES
Section overview
Generally there would be no difference in the term Company and Body Corporate
or Corporation however Companies Ordinance 1984 defines the body corporate
or corporation separately.
Now if Stone Limited is a holding company of Stylish Stones Limited then being the
holding company of Stone Limited the Hill Limited shall also be considered as
holding company of Stylish Stones Limited.
Section overview
A license under this section may be revoked at any time by the Commission but
Commission shall provide an opportunity of being heard to the association before
such revocation.
Upon its revocation the registrar shall enter the word or words "Limited",
"(Private) Limited" or "(Guarantee) Limited", as the case may be, at the end of the
name of the association upon the register, and the association shall cease to
enjoy the exemptions and privileges granted by that license.
Section overview
The Commission
Registrar
Organization
Securities and Exchange Commission of Pakistan (SECP) established under the
Securities and Exchange Commission of Pakistan Act 1997 was operationalized
on 1st January 1999. SECP replaced Corporate Law Authority, the former
corporate regulatory body. It has been vested with adequate operational,
administrative and financial autonomy.
The SECPs head office is at the Federal Capital, Islamabad and it has eight
regional offices (Company Registration Offices), one at Federal Capital, four at
provincial capitals and three in other major cities i.e. Multan, Faisalabad and
Sukkur.
Functions [Section 12]
Commission has been vested with lot of powers under the Companies Ordinance
1984 and other relevant laws. Commission has got powers to regulate the affairs
of all the companies and Insurance Companies, Banking Companies, Modarbas
and Non-Banking Finance Companies etc.
Law has vested various powers to Commission and also Federal Government is
empowered to vest its powers to the Commission to the extent it thinks fit.
4.2 Registrar
5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
What is a company and what are the distinctive features of a company from
other forms of business.
The various types of companies including associations not for profit and how
they differ from each other.
The various authorities under the Ordinance including Commission, Registrar
and Court.
CHAPTER
Business Law
20
Incorporation of Company
Contents
1 Incorporation of company
2 Name of company
3 Memorandum of association
4 Articles of association
5 Commencement of business and registered office
6 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 3 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the legal terminology of company law and the
basics of company incorporation.
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 3.4.1 Describe the memorandum of association and state its purpose
LO 3.4.2 List/explain the clauses of memorandums of association of various types of
companies
LO 3.4.3 Describe the purpose and procedure of alteration to different clauses of a
memorandum of association
LO 3.5.1 Define the articles of association and state its purpose
LO 3.5.2 State the information which should be contained in the articles of various
companies
LO 3.6.1 Describe the procedure of registration of the memorandum and articles of
association
LO 3.6.2 Describe the effects of registration of the memorandum and articles of
association
LO 3.7.1 Describe with examples the procedure/prohibitions with regard to the selection
of the name of a company
LO 3.7.2 Identify/explain the actions and procedures needed to be taken by company
and registrar, if a company is registered by a prohibited name
LO 5.1.1 Discuss with simple examples the provisions with regard to having a
registered office, publication of name and publication of paid-up capital
LO 5.2.1 State the conditions to be fulfilled before commencement of business by a
company
LO 5.2.2 State the applicability and non-applicability of the conditions on different kinds
of company
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 INCORPORATION OF COMPANY
Section overview
Process of incorporation
2 NAME OF COMPANY
Section overview
Prohibited names
After striking the idea of formation of a company the first thing to do is to choose
a suitable name of the company but only choosing such a name is not sufficient
and the persons desirous of forming a company (named as promoters here-in-
after) should get the approval of the name from registrar. In case the approval is
not so obtained or the approval is not granted by the registrar, the company
cannot be established.
While selecting the name it should be considered that the name:
is not inappropriate or deceptive;
is not designed to exploit or offend the religious sentiments of the people;
is not a name identical with the name of the company already registered
and does not closely resemble with the name of the company already
registered, except where the company in existence is in the course of being
dissolved and signifies its consent in granting its name to the new company
in such manner as the registrar requires.
Whatever name is proposed, the final authority to decide whether or not a name
is in line with the provisions of the Ordinance lies with the Commission.
The registrar may also direct the company to change its name within thirty (30)
days of the receipt of such directions. The registrar cannot issue any direction in
this regard after the expiration of three years from the date of registration of the
name of the company.
The registrar shall give to the company an opportunity of being heard before
issuing such direction.
3 MEMORANDUM OF ASSOCIATION
Section overview
Clauses of memorandum
Memorandum of association consists of various clauses which contain variety of
information and it may vary from company to company on the basis of the type of
the company or the business of the company. Following clauses usually exist in
the memorandum of association of the company.
Name clause
Registered office clause
Objects clause
Liability clause
Authorised capital clause
Subscription clause
We discuss each of these clauses at length hereunder.
Name clause
As we discussed the company has got the availability of name certificate from the
registrar till the date of preparation of memorandum of association hence the first
clause of the memorandum is the name clause of the company which contains
the name of the company with the addition of the word (Private) Limited in case
of a private limited company, Limited in case of a public limited company and
(Guarantee) Limited in case of a company limited by guarantee. In case of an
unlimited company, the word company is added to the name of the company.
We have already discussed the complexities about the name of the company so
we move forward to the next clause.
Object clause
This clause of the memorandum clause contains the objects of the company and,
except in the case of a trading corporation the territories to which they extend.
Company cannot do anything as a business which is not written in its object
clause of the memorandum hence it must be very carefully worded, the
registration of the memorandum is also dependent upon lawfulness,
appropriateness and clarity of the objects mentioned in the memorandum of
association.
Illustration: Objects
A company is required to state in its object clause the territories to which
its objects extend except in case of a trading company. A Limited stated in its
object clause of the Memorandum of Association that its manufacturing units will
be located in the province of Sindh. In this case the company cannot start its
manufacturing in the province of Punjab as the company cannot go beyond the
defined areas in its object clause.
The company is now planning to start its manufacturing operations in other areas
as well and in this case the object clause of its Memorandum would need to be
altered subject to the procedures and conditions specified in the law.
Liability clause
In case of a company limited by shares and limited by guarantee, the liability
clause states that the liability of the members is limited. In case of an unlimited
company, the liability clause does not form part of the memorandum of
association.
Alterations
Alteration in the memorandum of association can only be made if it is authorised
by the Ordinance
Ordinance allows the alterations of various clauses of the memorandum of
association of the company however there is difference as to the procedure or
requirements of law in altering various clauses of the memorandum.
We have already seen the procedure of alteration in the name clause of the
company and the procedure for change in the authorised capital clause shall be
discussed in more detail in next chapter of this study text.
Liability clause is only altered at the time of conversion of company from limited
to unlimited or vice versa. Subscription clause of the memorandum of the
company cannot be altered in the life time of the company.
The alteration shall not take effect until and except in so far as it is confirmed by
the Commission on petition of the company filed for this purpose.
As we already know that the company is required to write only the province or
part of Pakistan not forming part of a province in its memorandum of association.
Therefore, the company is not required to alter its memorandum of association if
it intends to shift its registered office within a province from one place to another.
The Commission may make an order confirming the alteration either wholly or in
part, and on such terms and conditions as it thinks fit.
The Commission may also order to purchase the shares from dissenting
shareholders by some controlling shareholders.
A certified copy of the order confirming the alteration and a printed copy of the
altered memorandum are required to be filed with registrar within ninety days
from the date of the order for registration. The period of ninety days may be
extended by the Commission
Registration
For registration of a memorandum of association, it shall be filed with the registrar
of companies. A declaration of compliance with requirements of the Ordinance in
getting the company registered shall be provided to the registrar along with the
memorandum.
Registrar shall register the memorandum of association only if it satisfied that
the company is being formed for lawful purposes,
none of its objects stated in the memorandum is inappropriate or deceptive
or insufficiently expressive and
all the requirements of this Ordinance and the rules made thereunder have
been complied with in respect of registration.
If the registrar of companies for any reason refuses the registration of the
memorandum, the company may file an appeal before a registrar higher in rank
4 ARTICLES OF ASSOCIATION
Section overview
It is the option for the company limited by shares to get the articles registered or
adopt Table A of the first schedule to the Companies Ordinance 1984 as its
articles.
However the registration of the articles of association is compulsory requirements
for a company limited by guarantee and an unlimited company.
The articles of an unlimited company or a company limited by guarantee (if both
have a share capital) shall state the amount of share capital with which the
company proposes to be registered.
The articles of an unlimited company or a company limited by guarantee (if both
have no share capital) shall state the number of members with which the
company proposes to be registered.
Copies of memorandum and articles [Sections 35 and 36]
Every company, upon the request and payment of a prescribed amount by its
member, shall supply within a period of fourteen days a copy of the
memorandum and articles of the company.
Every copy issued after the date of the alteration in the memorandum or articles
of a company shall contain such alteration and the officers of the company liable
to contravention shall be liable to a fine.
Section overview
Commencement of business
Registered office
Further the directors of the company should have paid to the company full
amount on each of the shares taken or contracted to be taken by them and for
which they are liable to pay in cash.
If the company had issued a prospectus and could not get its shares listed on the
exchange, the company shall not be given a certificate of commencement of
business until the date all money repayable on such a prospectus is not paid by
the company and statement in lieu of prospectus is not filed by the company
Registered office
Registered office is a place which is the address of the company for receiving all
of its communications. It does not necessarily require being the head office of the
company. There may be more than one office for business of the company but
registered office shall be single.
A company shall as from the day on which it begins to carry on business, or as
from the twenty-eighth day after the date of its incorporation, whichever is the
earlier, have a registered office to which all communications and notices may be
addressed.
Notice of the situation of the registered office and of any change therein shall be
given within twenty-eight days after the date of the incorporation of the company
or of the change, as the case may be, to the registrar who shall record the same.
The inclusion in the annual return or any other document of a company of the
statement as to the address of its registered office shall not be enough
compliance and company shall have to files the change of the registered office
appropriately on prescribed form.
6 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
How to register a company.
The various clauses of memorandum and articles of association.
Procedure for alteration in memorandum and articles of association.
The requirements of Ordinance regarding names of companies
The requirements of the Ordinance regarding commencement of business and
registered office of the company.
CHAPTER
Business Law
21
Share Capital
Types and Variations
Contents
1 Shares in companies
2 Variation in share capital
3 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 4 On the successful completion of this paper, candidates will be able to
demonstrate familiarity with the provisions governing the issuance of
shares.
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 4.2.1 Describe the nature of shares and share certificates
LO 4.2.2 Describe the classes and kinds of shares
LO 4.2.3 Describe with simple example the condition of fully paid shares
LO 4.2.4 State with simple examples the kinds of alterations can be made to the share
capital
LO 4.2.5 State the rules on prohibition of purchase of a companys own or its holding
companys shares
LO 4.2.6 Understand the meaning of variation of shareholders right
LO 4.2.7 Demonstrate familiarity with the procedure for cancellation of variation of
shareholders right
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 SHARES IN COMPANIES
Section overview
Share capital
In a company limited by shares, the share capital represents capital introduced
into the company by the companys shareholders, the members.
The share capital of a company may be divided into several different classes, or
there may be just one class of shares. Within each class of shares, all the shares
must be of the same fixed amount. This is the nominal value of the shares.
Issuance of shares is the first step of offering shares by the company, then
people or promoters pay for the shares, this is termed as subscription of shares
and finally shares are allotted to respective names of applicants this is paying up
of the capital.
A company limited by shares may have different kinds of share capital and
various classes under each kind. Common examples of kinds of shares are:
Ordinary shares
Preference shares
Company can have more than one kind of share capital only if it has got
authorized capital for all kinds of share capital.
Ordinary shares
The ordinary shareholders are the owners of their company. Ordinary shares are
often called equity shares.
The ordinary shareholders own the distributable profits of their company, after
preference dividends have been paid, but are only entitled to a dividend:
if the directors propose a dividend and
(in the case of a final dividend) the shareholders vote for the payment of a
dividend.
There is no limit to the amount of dividends that a company can pay to its
ordinary shareholders out of its distributable profits.
Ordinary dividends cannot be paid until all unpaid cumulative preference
dividends payable have been paid to the preference shareholders, and until all
preference dividends for the current year have been paid to all classes of
preference shareholders. In a way they are entitled to residual profit after
payment of preference shareholders. In return to this risk (if there is no residual
profit) that they accept the reward they get when the company makes large
profits, the preferred shareholders are paid the fixed amounts to which they are
entitled, while the ordinary shareholders divide the large profits among
themselves
In a winding up of the company, the ordinary shareholders are not entitled to
receive payment of any capital from the liquidation of its assets until all creditors
have been paid and the nominal share capital of all preference shareholders has
been repaid.
The ordinary shareholders are entitled to vote at general meetings of the
company. Normally, all ordinary shareholders have one vote per share.
(However, this general rule does not apply all the time in the rare cases where a
company has more than one class of ordinary shares class A and class B
ordinary shares will usually have different voting rights.
Company may make various classes of shares by writing in the articles of
association. Different classes may enjoy different voting rights, voting rights
disproportionate to the paid up value of the shares of the company or no voting
rights at all, or otherwise different classes may be made on the basis of different
entitlements to dividends or right or bonus shares etc.
Preference shares
A preference share normally carries a prior right (ahead of ordinary shares) to:
receive a dividend: the dividend payable on preference shares is normally a
fixed amount each year
receive a repayment of capital in the event that the company is wound up.
Holders of preference shares therefore receive preferential treatment, ahead of
the ordinary shareholders.
Section overview
Alteration in capital
Restriction on purchase of own shares by a company
Variation in rights of the shareholders
3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
About shares and share certificates
About kinds and classes of shares
About authorised and paid up capital
About the variation of authorised capital
About the variation in rights of the shareholders.
CHAPTER
Business Law
22
Share Capital-Prospectus
Contents
1 Introduction to prospectus
2 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
LO4.1.1 Define a prospectus and explain its purpose
LO4.1.2 Understand the requirements relating to a prospectus as laid down in Section
87(2),(4),(5),(6),(7), 88(1-8), 90, 91, 92 and 93 of the Securities Act 2015
LO4.1.3 Describe the matters that are to be specified in a prospectus as required
under clause 1 to 7 and 17, 18 19, 24, 26 and 27 of Section 1 of Part I of
Second Schedule
LO4.1.4 Describe the reports that are to be included in a prospectus as required under
Section 2 of Part I of Second Schedule
LO4.1.5 Understand/explain the provisions regarding statement and consent of expert.
1 INTRODUCTION TO PROSPECTUS
Section overview
Basics
Approval of prospectus
Availability of prospectus
Contents of prospectus
Reports to be set out in the prospectus
Timing of prospectus
Expert to be independent
Experts consent to issue of prospectus containing statement made by him
Criminal liability for defective prospectus
Compensation for false or misleading prospectus
1.1 Basics
Definition
Shelf-Prospectus
A shelf-prospectus is a single offering document allowing companies to make
multiple offerings as disclosed in the offering document within a prescribed time
and subject to prescribed conditions.
Supplement to Prospectus
A supplement to the prospectus invites the general public for subscription of the
security(ies) earlier offered to the public through shelf-prospectus. The
supplement to the prospectus for each offering contains updated disclosures. It
also provides such information as prescribed by the Commission.
The prospectus along with subscription form shall be uploaded on the website of
the issuer and shall remain there from the date of its publication in the
newspapers till the closing of the subscription.
losses of that business or company and assets and liabilities of that business or
company at a date not earlier than 120 days of the prospectus.
Further If the proceeds of the issue shall be used for the acquisition of any
business or any interest therein, which shall make the other company as
subsidiary of the company, then the auditors (of that company whose shares or
interest is proposed to be purchased) shall report separately on last five years
profits and losses of that business or company and assets and liabilities of that
business.
The report shall also explain that what difference would it have been on the profit
and loss of the company (issuing a prospectus) had the company always held
those shares in that company which are proposed to be purchased now.
Further if that other business or company has subsidiaries, the report shall
include the performance and assets and liabilities of that business as well.
In case of (a) the Securities Act, 2015 does not allow a company to circulate
the prospectus unless the Commission approves the prospectus.
In case of (b) a prospectus approved by the Commission is valid for sixty days
from the date of approval or such longer period as approved by the
Commission. ABC limited shall have to apply for grant of extension for the
validity of the prospectus beyond sixty days if the Commission has not
approved it for a longer period.
1.9 Criminal liability for defective prospectus (Section 92, Securities Act, 2015)
A person commits an offence, who:
i. Makes a misleading, incorrect, untrue or deceptive statement in a
prospectus; or
ii. Omits information or a statement from a prospectus that Securities Act,
2015 or any rule or regulation made under Securities Act, 2015, requires
to be included in the prospectus.
1.10 Compensation for false or misleading prospectus (Section 93, Securities Act,
2015)
Every offeror, issuer, director of an offeror or issuer or any person who has
signed the prospectus shall be liable to pay compensation to any person who
acquires any of the securities, in reliance upon the prospectus, to which the
prospectus relates and suffers loss in respect of them as a result of any incorrect,
untrue or misleading statement in the prospectus or the omission from it of any
matter required to be included under Securities Act, 2015.
2 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
The concept, need and contents of a prospectus
The reports to be set out in a prospectus
The concept of experts in context of a prospectus and provisions regarding
their statements
CHAPTER
Business Law
23
Mortgages and Charges
Contents
1 Borrowing powers of a company
2 Registration of mortgages and charges
3 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 4 On the successful completion of this paper, candidates will be able to
demonstrate familiarity with the provisions governing the issuance of
shares
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 4.3.1 Discuss the meaning of mortgage/charge with simple examples, and the duty
of company and the procedure for registration of charges
LO 4.3.2 State the right of an interested party in respect of a registration of
mortgage/charge
LO 4.3.3 State the duty and procedure of payment or satisfaction of mortgage/charge
LO 4.3.4 Demonstrate familiarity with the right to inspect the instrument creating a
mortgage/charge
LO 4.3.5 Discuss the consequences of registered and unregistered mortgages/charges
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Restriction on borrowing
As studied in earlier chapters, few companies are required to obtain a certificate
of commencement of business before commencing their business, such
companies cannot exercise any borrowing powers until the date they obtain a
certificate of commencement of business.
Ultra-Vires borrowings
The power to borrow money rests with the directors of the company and they are
allowed to borrow money once they have passed a resolution in their meeting in
this behalf. Company may restrict their powers to borrow by its articles of
association, by mentioning, as such, that the borrowings exceeding a certain
amount may be made only with the prior approval of members in a general
meeting. Hence if the directors exceed their authority in such a case and borrow
in excess of the limit, the borrowing so made shall be considered as ultra-vires
borrowings.
Debentures
The securities issued to borrow money are named as debentures.
It means that the company may name its securities anything they shall effectively
be a debenture if they are not the share of the company.
A public company may issue debentures to public or otherwise issue debentures
to any persons privately. The debentures often carry certain fixed interest
however the companies are also allowed to issue debentures which do not carry
interest rather such debentures are allowed to participate in the profits of the
company. Holders of debentures are not allowed to cast votes in the general
meetings of the company. They have the right to vote in their own or creditors
respective meetings, if called for any purpose. At times, however, the holder of
debentures convertible to ordinary shares may also be allowed to cast votes in
the general meetings of the company.
Debentures may be secured or unsecured. The secured debentures are the ones
against which company has provided any collateral as a security. It may be any
property of the company or any other asset of the company having value
equivalent or in excess of the amount borrowed against debentures. Normally
such agreements do not require the physical transfer of the asset at the time of
making a borrowing agreement. This takes place at some future date if the
company does not honour its obligations to pay interest or principal at relevant
time.
Pledge
Definition: Pledge
Contract Act defines pledge as a bailment of goods as security for the repayment
of a debt or performance of a promise.
As the definition implies, the goods or valuables of the company are physically
given in possession of the lender till the debt or obligation is satisfied by the
company. Although, the contracts for pledge are in writing and signed by both the
parties but this contract is not required to be registered with registrar of
companies as both lender and borrower are secured by the valuables of each
other, the lender holds the right to the goods and the borrower uses the money
instead.
Example: Pledge
Company ABC textiles Limited needs funds for procurement of raw material which
shall be used by the company over next six months. The company is not financially
capable of purchasing the inventory for next six months but they cannot delay the
procurement because the raw material shall not be available in next few months.
The company may make an arrangement with a financial institution to borrow
money for the procurement of inventory and against such borrowing provide the
same inventory as a security and ask the financial institution to take the
possession of the inventory. The company shall get the inventory for usage as and
when required when it pays the liability of the financial institution.
The above arrangement is an example of pledge contract in which physical
possession of the asset was handed to the lender and released once his
outstanding balance was cleared.
Mortgage
Definition: Mortgage
A mortgage is the transfer of an interest in specific immovable property for the
purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt or the performance of an engagement which may
give rise to a financial liability.
The definition clearly implies that the term mortgage shall be used when the
company agrees to transfer the title in any of its immoveable property to any
person against the loan or any other debt provided by that person.
The company does not transfer the physical possession of the asset to the lender
in case of a mortgage and continues enjoying benefits of the asset unless and
until it fails in complying with the terms of the loan contract giving rise to physical
transfer of the property to the lender.
Example: Mortgage
If the company ABC Textiles Limited as in previous example required the loan for
construction of a new factory, it would have an option to get the long term loan on
the basis of the mortgage of the same property on which they shall construct the
factory.
Title of the property and factory will be in the name of the financial institution
however the company will continue to use its asset and pay the amount of the
financial institution as agreed between them.
This set up is a mortgage contract.
Charge
Definition: Charge
A charge is security for the payment of a debt or other obligation that does not pass
title of the property or any right to its possession to the person to whom the
charge is given.
Evident from its definition the term charge shall be used when there is mere
contract of transferring the title and physical possession of the asset in the event
of companys failure to abide by the terms of the loan contract.
Example:Charge
Suppose the company ABC textiles Limited requires funds off and on because
sometimes their receivables take longer than usual time to pay. The management
of the company feels that they can manage their short term needs of funds if they
get a facility of overdrawing from their bank as and when required up to an amount
of Rupees 500 Million. Now it is not the case that they will be using entire amount
of Rupees 500 million all the times however they will use any funds they need to
the tune of this amount.
Bank shall surely ask for some security against such loan. Company can make an
arrangement of creating a charge on the current assets of the company, say on
receivables. The broader terms of the contract shall state that company shall
continue its business in its ordinary course and overdraw from bank as and when
they require. If the company fails to do so, bank shall be entitled to receive the
money from receivables of the company.
Section overview
Duty of registration
Whenever the company enters into any of the mortgages and charges (which
required to be registered) it is the duty of the company to get the particulars of
charge registered with the registrar within twenty one days of the creation of the
same. The particulars required to be produced to the registrar include the
agreements for loan or debt and other information prescribed.
Briefly, the following documents are required to be filed for registration of a
mortgage or charge:
Particulars of mortgage/charges etc.
Copy of instruments (contract documents) creating the mortgage or charge.
An affidavit to the effect that the copies of the instruments are the true
copies.
Bank challan evidencing the payment of fee for registration.
3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
What are the inherent borrowing powers of a company,
What are different modes of borrowings by the companies
What are different types of mortgages and charges and what is the procedure
of their registration and satisfaction.
CHAPTER
Business Law
24
Meetings
Contents
1 Company meetings
2 General provisions as to company meetings
3 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 5 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the management of companies
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 5.3.1 State the timing, matters and reports relating to statutory meetings
LO 5.3.2 State the timing, matters and reports relating to an annual general meeting
using simple examples
LO 5.3.3 State who can call an annual general meeting
LO 5.3.4 State the timing, matters and reports relating to an extraordinary general
meeting
LO 5.3.5 State who can call an extraordinary general meeting
LO 5.3.6 State the quorum for a general meeting
LO 5.3.7 State the entitlement of a member in respect of appointment of proxy and
conditions applicable thereon
LO 5.3.8 Describe the provisions relating to agenda/minutes of meetings
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 COMPANY MEETINGS
Section overview
General meetings are chaired by the chairman of the board of directors, and
other directors also attend. However, the directors do not have a right to vote at a
general meeting unless they are also a member of the company. They can then
vote at the meeting as a member.
A general meeting may be:
a statutory meeting,
an annual general meeting, or
an extraordinary general meeting.
Note: In case where a private company converts itself into a public company, the
three to six months period for holding of statutory meeting shall be determined
from the date of confirmation of conversion by the registrar of companies
from the directors would be deprived of the opportunity to hear the directors give
an account of themselves and the companys achievements.
Besides consideration and adoption of audited financial statements, auditors and
directors report, an AGM is also used to obtain shareholder approval for certain
matters such as:
the election or re-election of directors, if due on the date of AGM
the approval of a final dividend, if declared by the directors
the appointment or re-appointment of the auditors.
The AGM is therefore normally used to consider routine business. Most of the
resolutions at an AGM are (ordinary) resolutions, but there may also be some
special resolutions (defined in earlier chapters).
Timing, place and notice period
The first annual general meeting of a company shall be held within 18
months from the date of its incorporation and thereafter at least once in a
calendar year.
Subsequent annual general meeting shall be held within four months from
closure of its financial year and 15 months from the last meeting, whichever
is earlier.
The SECP, in the case of a listed company and the Registrar, in the cases
of other companies may extend the time for holding of such meetings.
No extension of time can be granted to any company for the first annual
general meeting after incorporation. For subsequent AGM; the period of
extension cannot exceed 30 days.
At least 21 days notice shall be given to members for holding of a meeting,
Further, in the case of listed companies such notice shall also be published
in an Urdu and an English daily newspapers having circulation in the
province in which the stock exchange, on which the company is listed, is
situated.
AGM of a listed company is held in the town in which the registered office is
situated. However, SECP may allow to hold any particular AGM elsewhere
other than the town of registered office.
AGM is called on the order of directors and not of the members
We assume that the company opted to hold the annual general meeting on 31st
August 2011. From this date onward company will be required to hold the annual
general meeting within four months of the close of financial year at least once in a
calendar year and not later than 15 months from previous AGM. Keeping all the
above in view, what shall be the latest time on which company can hold its AGM in
2012?
The next financial year will close on 30th June 2012, so when would the company
be required to hold its AGM, on 31st October 2012 (within four months of close of
financial year) or on 30th November 2012 (within 15 months of previous AGM)? It
should be 30th October 2012 because it cannot wait for 15 months from previous
AGM.
XYZ limited, another company registered on 1st September 2010, Its financial year
closes in 30th September each year. It held its first annual general meeting on 1st
November 2011 which was well within 18 months from the date of its
incorporation.
What is the latest date by which company can hold its second AGM? Come on, its
within 4 months of close of financial year and within 15 months of the previous
meeting whichever is earlier. I am sure you are not missing the point of holding at
least one AGM a year, so latest date should be 31st December 2012.
Purpose
As seen in last chapters, Ordinance requires various matters of the company to
be approved by its members by a resolution, for example alteration in articles or
memorandum of association of the company. For this purpose it is not always
possible to defer the approval of such matters till annual general meeting hence
the directors need to call a general meeting for obtaining approvals of members,
such meeting is known as extraordinary general meeting (EGM).
Calling of EGM
Directors of the company are entitled to call and hold an EGM on their own
motion whenever they feel the need for it to get some approvals from
shareholders. Members holding more than ten per cent of total voting power in
the company may also require the holding of such a meeting. They shall file a
proper written requisition for this purpose which shall include the objects of the
meeting and shall be signed by the rquisitionist in this behalf.
Directors should call the meeting on such valid requisition as discussed above,
however, if they do not proceed to call a meeting within twenty one days of filing
of the requisition, the rquisitionist themselves should call a meeting. The meeting
so called by the rquisitionist should be called as nearly possible in such a way as
the meetings called by the directors are held. After filing a requisition for the
holding of an EGM, the meeting should be held and conducted within three
months of filing of the same either by the directors or by the requisiteness
otherwise the requisition shall be expired.
Any reasonable expenses incurred by the rquisitionist due to failure of the
directors to convene a meeting shall be repaid by the company to the rquisitionist
and company shall deduct this money from the remuneration payable to the
directors in default.
The notice of the meeting is required to be sent to the members at least twenty
one days before the date of the meeting similarly as of the notice of AGM.
However, the registrar may authorise holding of a meeting at a shorter notice (for
less than twenty one days notice). The registrar shall so authorize in an
emergency situations only on application by directors.
Section overview
Notice of meeting
Quorum of meeting
Voting in meetings
Proxies
Minutes and Resolution
Representation at meetings
General provisions
Notice of meeting is a formal document sent to each member at his registered
address or such address which he has supplied to the company for
communication purpose in case where he has no registered address in Pakistan.
Further the notice of a general meeting shall also be sent to the auditors of the
company.
This notice shall state place, day and time of the meeting and in case any
resolution is to be passed in the meeting which is other than the ordinary
business, the draft of that resolution shall also be contained in the notice. The
notice may be served to members by hand or by post and its service is deemed
to be complete if the company properly prepays and addresses the envelope
containing the notice and sends it to the member.
If the meeting is required to discuss and transact any special business, there
shall be annexed to the notice of the meeting all material facts concerning such
business. This statement is commonly known as statement of material facts.
Theoretically, this statement must be so comprehensive and self-explanatory that
every member of the company can reach a decision on the proposed resolutions
after studying this statement.
The members having not less than ten per cent voting power in the company
may also give notice of a resolution.
Definition: Quorum
Quorum of meeting
The minimum quorum of the meeting has been fixed by the Ordinance, however,
the company may fix a larger number of members as quorum of the meeting by
its articles of association.
The Ordinance provides that unless a larger number is fixed by the articles, the
minimum quorum shall be:
in case of a public listed company - Ten members, present personally in
the meeting, representing 25% voting powers, either on their own account
or as proxies, in the meeting.
in case of any other company - two members, present personally in the
meeting, representing 25 % of total voting powers, either on their own
account or as proxies.
in case of single member company - The single member present in
person or proxy.
Presence/Absence of quorum
If the required quorum is not present at the meeting within half an hour from the
time appointed for the meeting, it shall be:
dissolved, if called upon the requisition of members; and
adjourned to the same day in the next week at the same time and place if
called by the directors on their own.
If a quorum is not present at an adjourned meeting, as above, within half an hour
from the time appointed for the adjourned meeting, the members present in the
meetings, not being less than two, shall be a quorum, however the articles of
association may provide otherwise.
competent to demand the poll. On show of hands every member shall exercise
one vote however on a poll votes may be casted personally or through proxy.
The chairman of the meeting shall declare the results of the show of hands i.e.
whether a resolution has been carried or not, unanimously or by a particular
majority. An entry in the minute books of the company shall be the evidence of
such result unless contrary is proved.
Note: please note carefully that we have used the word proportionate to the paid
up value of shares rather than equal to the paid up value of shares. This is
because of the various classes of share capital in the company. If the company has
more than one class of shares then voting rights of one class may differ from other
but whatever the difference may be the voting rights shall have regard to the paid
up value of shares.
Explanation From above it is evident that the right to demand for a poll is either on
the basis of votes of members or on the basis of number of members. Suppose Mr
A has got 12% shares out of total voting power of the company and on the basis of
these shares he has got same percentage of voting power, he is allowed to
demand for a poll, Now although if he had not got 12% voting because of any class
difference of shares, but his paid up shares are more than 10% of the total paid up
capital of the company hence he can still demand for a poll.
The demand for poll may be withdrawn at any time by the person or persons who
made the demand.
The instrument for appointment of proxy has been provided in table A of the first
schedule to the companies Ordinance 1984. If the instrument is valid as per that
table A, company shall not reject or question its validity for non-compliance of
any additional terms or conditions attached to such instruments by the company
itself and shall accept the instrument as proper.
In order to be effective, proxies shall be lodged with the company at least 48
hours before the meeting.
Note: In case of companies not having share capital members are not entitled to
appoint another person as their proxy.
3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
Different types of meetings of the company
Rights and duties regarding calling and holding of meetings
Various provisions regarding notices, quorum and minutes of the meetings.
CHAPTER
Business Law
25
Management
Contents
1 Appointment and election of Directors
2 Powers duties and liabilities of directors
3 Chief executive and company secretary
4 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 5 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the management of companies
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 5.4.1 Explain and apply in given scenarios, the legal provision with respect to
directors:
x Eligibility/ineligibility
x Number
x Elections
x Removal/vacation of office
x Remuneration
x Powers, duties, rights and liabilities
x Assignment of office
x Proceedings
LO 5.4.2 State the legal provisions relating to loans to directors
LO 5.5.1 Explain the appointment of first chief executive and subsequent chief
executives using simple examples
LO 5.5.2 State the provisions/conditions applicable on appointment, removal,
engagement in any business
LO 5.5.3 State the provisions relating to appointment of a secretary
LO 6.3.1 Explain the requirements of disclosure of interest by director in
contract/arrangement entered into by or on behalf of the company
LO 6.4.1 Explain the requirements of disclosure of interest by officers in
contract/arrangement entered into by or on behalf of the company
LO 6.5.1 Describe the provisions relating to participation of interested director in the
proceedings of directors in contract / arrangement entered into by or on behalf
of the company
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
Section overview
Directors
Number and appointment of directors
Election of directors
Eligibility to act as director
Vacation of office by directors
1.1 Directors
Introduction
A company is an artificial person, and cannot manage itself. Companies therefore
have individuals to give it leadership and direction. This is provided by the board
of directors. Most of the powers of a company are given to its directors by the
Ordinance and companys articles of association. Directors are collectively
named as board or board of directors (we may use abbreviations as BOD for
board of directors)
For the purpose of Ordinance, a person is a director if he or she occupies the
position of a director by whatever name.
The word director in a job title does not mean that a person is legally a director:
for example, a human resources director or an IT director is not a director for
the purpose of the ordinance unless, for example, he or she is appointed or
elected as director in accordance with the process provided in the Ordinance.
Directors must be member of the company except where law specifically allows
the non-members as directors. Sometimes in small companies the directors are
the only members of the company or in other words all the members of the
company are directors. In such cases the directors have a dual role, as a
member and as a director. Being director, in the board of directors meeting every
director shall have one vote but the same persons while sitting in a general
meeting as members may have different voting rights based on the number of
shares they hold.
Directors act collectively or by majority, every decision to be taken by the
directors is taken in a board meeting of the directors in which every director has
got one vote.
Definition: Fiduciary
Fiduciary is defined as ethical or legal relationship of trust between two or more
parties. Typically, a fiduciary (being a person or entity) prudently takes care of
money for another person.
A fiduciary relationship is generally established only when the confidence given by
one person is actually accepted by the other person. Directors and companies
therefore establish a fiduciary relationship.
Directors of the company may well be said as agents of the company whom
members have given the right to make financial decisions on their behalf. They
are supposed to make decisions in the best interest of the company and its
stakeholders. They must be vigilant and should not be negligent in performance
of their duties.
The director is said to be lacking a fiduciary behaviour if he deliberately keeps the
company and members at a disadvantage. No director can hold office of a
director if he is declared as lacking fiduciary behaviour by the court.
Illustration: directors
The company can be a subscriber of memorandum to any other company however
any company cannot be a director of any other company.
The first directors shall retire at the date of first annual general meeting and in
such a meeting an election of directors shall be conducted to elect and appoint
subsequent directors. [Section 177]
During a poll for election of directors every member is entitled to cast the number
of votes equal to the product of number of shares held and the number of
directors to be elected, a member can give all his votes to any one contestants or
he may distribute it to more than one contestant as he deems appropriate.
The person getting the highest number of votes shall be considered as a director
then the second and then third until the number of directors fixed for election is
reached.
In case of a company not having share capital, the procedure for election of
directors shall be mentioned in its articles of association.
After election as a director, every director shall have equal authority and they
shall not be superior or inferior on the basis of number of votes they got in
election or on any other grounds.
is not a member however this ineligibility shall not apply in the case of
x a person representing the Government or an institution or authority
which is a member;
x a whole-time director who is an employee of the company;
x a chief executive; or
x a person representing a creditor
Further for listed companies only a person shall not be appointed as a director if
he:
has been declared by a Court as defaulter in repayment of loan to a
financial institution,
is engaged in the business of brokerage, or is a spouse of such person or
is a sponsor, director or officer of a corporate brokerage house
The prohibition contained above shall not apply where the company is a stock
exchange.
As above, a person who is a bankrupt shall not act as a director of the company
and if such person acts as such he shall be liable to imprisonment for a term
which may extend to two years or with a fine which may extend to ten thousand
rupees or with both.
Illustration: Broker
Broker under Securities and Exchange Ordinance, 1969 means any person
engaged in the business of effecting transactions in securities for the account of
others.
and number of directors for the term. The director shall not be considered to have
been removed if the number of votes casted against the resolution equals or
exceeds the least number of votes which were enough to qualify a person as a
director in the last election of directors.
Similarly removal of a director appointed as first director and under the casual
vacancy shall not be removed from the office if number of votes cast against the
resolution equals or exceeds the number of votes calculated as per following
formula:
Number of director for the term multiplied by the number of shares divided by
number of directors for the time being
Further a director shall be treated to have vacated the office of director if he, his
partnership firm in which he is a partner or any private company in which he is a
director,
accepts any loan or guarantee in contravention of the provisions of this
Ordinance; or
Section overview
Powers of directors
Loans to directors
Quorum and frequency of meeting
Disclosure of directors interests
Restriction on assignment of office by directors
Prohibition regarding making of political contributions and distribution of gifts
Exceptions
The restrictions to not to grant loan or extend any other financial facilities as
above shall not apply to:
a private company which is not a subsidiary of a public company
a banking company
any loan, guarantee or security provided by the holding company for/to its
subsidiary company.
Timing of disclosure
The director should give the notice of his interest in any transaction or
arrangement of the company in which he is directly or indirectly interested and
such notice shall be given
if the transaction or arrangement requires the directors' approval before
start-up of the contract or transaction as the case may be then in the first
meeting of directors in which discussion is started regarding the transaction
or arrangement and in case the directors was not interested at the time of
first discussion regarding the matter, such disclosure shall be given at the
first meeting after he becomes so interested.
in case where the transaction or arrangement does not require directors'
approval before its start up or commencement then the director concerned
shall give the notice of his interest in first meeting held after the transaction
or arrangement is entered into.
Section overview
Definition
First chief executive can be appointed for a period of maximum up to the first
AGM. He may earlier resign or be removed from his office. We shall discuss the
procedure for removal in forthcoming paragraphs.
Chief executive is required to furnish to the company the detail of every such
business carried on by him forthwith at the time of his appointment.
Company Secretary
The Ordinance requires the appointment of a whole time qualified company
secretary for listed companies. He shall be an employee of the company and his
responsibilities include making sure that company complies with all relevant
corporate requirements.
Further the appointment of a company secretary is also compulsory for single
member companies.
Share registrar
Listed companies are further required to appoint independent share registrar to
handle the transfer of shares and all other obligations of the company as an
issuer towards shareholder. In case of listed companies all applications for
transfer of shares are directed to the share registrar instead of company. The
name of share registrar of the company is mentioned in the notice of general
meetings as well.
Commission provides licenses to persons for working as share registrar and the
pre-requisites have been established by the Commission to grant a license for
providing share registrar services.
4 CHAPTER REVIEW
Chapter review
CHAPTER
Business Law
26
Investments and dividends
Contents
1 Investments of company
2 Dividends
3 Payment of dividends
4 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 6 On the successful completion of this paper, candidates will be able to
demonstrate familiarity with investment by companies, financial
accounts and distribution of profit
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 6.1.1 Describe the conditions applicable to a company for making investment in
associated companies and undertakings
LO 6.2.1 Discuss with simple examples as to how a company can hold its investment in
names other than its own name
LO 6.7.1 Explain the requirement relating to declaration of dividend and identify/explain
certain restrictions on declaration of dividend
LO 6.7.2 Describe the provisions applicable to payment of dividend
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 INVESTMENTS OF COMPANY
Section overview
Associated company/undertaking
Definition: Investment
For the purpose of this section, the expression investment shall include loans,
advances, equity, by whatever name called, or any amount, which is not in the
nature of normal trade credit.
If the investment has been made in the form of a loan, the return on investment in
the form of loan shall not be less than the borrowing cost of investing company. If
the investing company itself can borrow at an interest rate of 10% per annum, it
shall not grant loan at lower than this rate to any of its associated companies.
The Commission has specified certain classes of companies including private
companies on which requirements of passing a special resolution etc. are not
applicable. It further has made regulations for imposing conditions on making
investments by companies in associated companies.
Exceptions
Following are exception to this general rule of keeping the investments of
company in its own name:
If a company has made equity investments in any other company. Due to
this investment, it enjoys the right to nominate any person as director of the
investee company. The investor company is allowed to hold such number
of shares in the name of that nominee who shall be appointed as a
directors of investee company and would require certain qualification
shares of investee company.
A holding company may hold any shares in its subsidiary company in the
name of its nominees if the number of members of the subsidiary company
has reduced below required minimum number of members required for that
company.
An investment company having its principal business as making
investments can make and keep its investments in the name of any other
person.
Company may deposit or transfer in the name of a financial institution its shares
or debentures if it is a condition for the company to register the transfer of shares
or debentures.
However if the transfer does not take place within six months of the date of
deposit of securities in the name of financial institution then company must get
the securities back in its own name.
Company may also place its investment in securities in the name of central
depository company if it so desires and the securities are allowed to be kept in
central depository system.
Although the companies are required to keep the investments in their own
custody and in their own name. However, the investments being the assets of the
company can be pledged with any financial institution for obtaining loans and this
transaction will not make the company non-compliant of the provisions of this
section.
Inspection of register
This register is open to inspection of the members and creditors of the company
including holder of debenture of the company free of cost for at least two hours
daily. The company may impose certain restrictions on the inspection by its
articles or by resolution of a general meeting.
2 DIVIDENDS
Section overview
Dividend meaning
Final and interim dividend and time restriction for its payment
Restriction on declaration of dividend
Concept
Dividends are payments made to shareholders by a company, out of its
distributable profits. Unless there are specific restrictions in the companys
memorandum and articles, every company has an implied power to use its profits
to pay dividends to its shareholders. [Section 249]
The power to declare a dividend should be specified in the companys articles of
association. The articles should provide for the company to declare a dividend in
a general meeting, by means of an ordinary resolution of the shareholders
(requiring a majority vote), and should specify the procedures for agreeing to a
dividend payment.
Companies make one dividend payments each year, but sometimes more than
one. For example, a listed company might pay an interim dividend in the middle
of its financial year, and then a final dividend after the end of the financial year.
2.2 Final & Interim Dividend & time restriction for its payment
Final dividend
The amount of final dividend is proposed by directors and approved by members
in annual general meeting of the company. The directors propose this amount
along with the approval of annual financial statements. The members may
reduce, accept or reject the dividend as proposed by the director. However, they
cannot resolve to increase the amount as proposed by directors.
Final dividend is paid within thirty days of the date of annual general meeting for
all companies
Interim dividend
The directors of the company may propose and pay interim dividend before end
of the year. This dividend is usually announced with interim results (quarterly or
half yearly accounts) of the company in addition to the final dividend.
The interim dividend must be paid within 30 days of commencement of book
closure for this purpose or if share transfer books were not closed for this
purpose such dividend shall be paid within 30 days of date of directors meeting.
Gain arising out of sale of immoveable properties and items of capital nature
For any financial year, dividend is not declared out of the profits from sale of
immovable property or item of capital nature except after such profits are
adjusted against losses on sale of immovable properties or assets of capital
nature sold by the company. A company which is in the business of buying and
selling items of capital nature can pay dividend out of such profit.
3 PAYMENT OF DIVIDENDS
Section overview
Dividend Warrants
Consequences of delay in payment
Withholding of Dividends
Dividend warrants
Dividend is paid in form of dividend warrants which are a type of a crossed
cheque and can be credited into the bank account of member of the company.
Dividend warrants are sent to the shareholders at their registered addresses
through registered post unless the recipient of dividend desires otherwise in
writing. It may be credited/paid to bank, financial institution or to some other
person on order of the shareholder.
4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
Associated companies and undertakings,
Procedure for and restrictions on investment in associated companies and
undertakings,
Provisions about investment of companies to be held in its own name and
exceptions thereof,
Types of dividends and restrictions on declaration of dividends,
Time limitation for payment of dividends and consequences in case of default.
CHAPTER
Business Law
27
Accounts and audit
Contents
1 Books of accounts
2 Directors report
3 Audit
4 Chapter review
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Sources and process of legislation
LO 7 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of the appointment of auditors and their
responsibilities and duties
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 6.6.1 Describe the provisions relating to / list the books of accounts to be kept by
the company
LO 6.6.2 Explain the requirements with respect to the annual accounts and the balance
sheet
LO 6.6.3 Describe directors report
LO 6.6.4 Describe the authentication of balance sheet and profit and loss account
LO 6.6.5 Discuss requirements of filing of balance sheets and profit and loss accounts
with the registrar
LO 7.1.1 Explain the provisions applicable to
x Appointment, removal and remuneration of auditors
x Qualification and disqualification of auditors
x Powers/duties of auditors and an auditors right to access the record and
information
x An auditors duty to report and contents thereof
x Signature on an audit report
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Ordinance 1984 19-27
Securities Act 2015 19-27
1 BOOKS OF ACCOUNTS
Section overview
Books of accounts
The company being a business concern should always keep a full record of its
financial and operational activities so that all the stakeholders of the company are
provided with appropriate and adequate information as and when required by
them. Every stakeholder needs to rely on the records of the company, the
government for revenue collection, the members for ascertaining profit and loss
and all other stakeholders for their own justified reasons.
The Ordinance requires that a company must maintain proper books of accounts
and by elaborating the term proper it means such set of books of accounts,
which fairly present the state of the affairs of the company and a fair record of all
its transactions.
In order to achieve the above stated objective the books and records that are
required to be kept by the company may take the form of hardcopy books or any
other accounting system which is capable of achieving the above referred
objective.
On the basis of these books of accounts, the company draws its financial
statements which indicate its profits or losses, its assets and liabilities and
ownerships. These books must provide for all this information fairly and correctly.
Whether it is a computerized or manual system of bookkeeping, we shall use the
words books of accounts in rest of the chapter.
Broadly, the following books of accounts should be kept by a company namely
books with respect to:
all sums of money received and expended by the company and the matters
in respect of which the receipt and expenditure takes place;
all sales and purchases of goods by the company;
all assets of the company;
all liabilities of the company; and
such special books and records as required by Commission from certain
types of companies in manufacturing or mining activities etc.
Books of accounts for a period of at least ten years must be preserved in good
order under the requirements of the Ordinance. The liquidator of the company
appointed for winding up of the company is also required to maintain the above
stated books of accounts for the company during its winding up.
Company should not prepare the above accounts for a period more than twelve
months however on application of the company the registrar may extend this
period on specific request of the company.
Power to approve
Authentication means the process of approval of accounts for the purpose of
issuance of the same to the members of the company.
As from the above it is evident that the members are only asked to review the
accounts and ask any question if they so require, it is actually the directors of the
company who are empowered as well as responsible for approval and issue of
accounts of the company.
Directors authenticate the accounts of the company in their meeting by passing a
resolution. The members only receive the accounts and can ask any questions
arising out of these accounts and finally adopt in annual general meeting.
As a token of approval of accounts, the chief executive and at least one director
of the company put their signatures on the accounts. If the chief executive is out
of Pakistan at the time of signing the accounts then at least two directors shall
sign the accounts and add a statement to the accounts that the requirements of
the authentication could not be specifically complied with because of the absence
of chief executive from Pakistan.
Filing of accounts
As discussed earlier, a listed company is required to send five copies of its
accounts along with directors and auditors report thereon to Commission and
stock exchange, in addition to that all the companies are required by law to send
copies of its accounts as well as auditors and directors report to the registrar
within 30 days of the date of annual general meeting in which these accounts
were approved.
The listed company shall send three copies of the above said accounts and
reports and other companies are required to send two copies to the registrar.
These copies must be signed as required by their individual provisions such that
the accounts to be filed shall be authenticated by the director and a chief
executive.
If the general meeting to which such accounts and reports are presented does
not adopt these accounts and reports, the fact shall be mentioned to the registrar
along with the copies of documents to be filed as above.
Further the auditors report shall be signed by the auditors of the company.
The accounts shall be signed by the chief executive and one director. If the chief
executive is out of Pakistan then the account will be signed by at least two
directors. In this situation, a statement signed by such directors explaining the
reasons for non-compliance with the requirements of signature will be attached
with the accounts.
A private company shall file the accounts and auditors and directors report with
registrar only if it has a paid up capital of seven and a half million Rupees or
more. All the other private companies need not to file their accounts and reports.
2 DIRECTORS REPORT
Section overview
Directors report
The directors report of a public company shall address all the material changes
occurred during the financial year which affect:
the business of the company
its holding company
any of its subsidiaries
any other company where it has made investments
However, the company may apply to the registrar and get permission for non-
disclosure of such information if the disclosure of such information shall harm the
business interest of the company.
Also the directors report shall discuss the reservations, observations,
qualification etc. or any adverse remarks pointed out by the auditors.
Directors report shall state the earnings per shares and the reasons for incurring
loss and also contain the reasonable indication of future profit, if any.
Pattern of shareholding shall be circulated along with the directors report and the
report shall state the name and place of incorporation of its holding company if
such holding company is incorporated outside Pakistan.
Directors report shall contain the information regarding default in repayments of
loans or interests on loans, if any.
3 AUDIT
Section overview
Introduction of auditor
The annual financial statements of the company should be audited by an auditor
before they are sent to the members or filed to Commission or registrar and also
they shall be accompanied by the auditors report. Company should always have
an auditor appointed under the Companies Ordinance 1984. Audit is not only a
yearend task rather office of the auditor should not be vacant and any vacancies
should be filled in within given timeframes.
The auditors duty is to express an opinion on the truthfulness/fairness or
otherwise of the accounts.
Auditor may be appointed in his individual capacity or in the capacity of a firm. In
Pakistan, auditors are not allowed to work in form of a limited liability company.
Auditors must be eligible to work as auditors under the relevant provisions of the
Companies Ordinance 1984 as well as the other applicable laws.
Usually companies appoint only one auditor however for large companies two or
more joint auditors may be appointed but the expression used in the Ordinance is
a plural as the auditors even for a single auditor.
Most of the companies are required to appoint the practicing chartered
accountants as their auditors and the exception is only for the private companies
with a paid up capital of less than Rupees three millions.
Appointment and removal of first auditors and their remuneration [Section 253]
After the incorporation of the company, first auditors of the company shall be
appointed by the directors of the company within sixty days after the date of
incorporation of the company, the directors are also entitled to fix the
remuneration of the auditors so appointed by them.
If the first auditors are not appointed by the directors within the period of sixty
days from the date of incorporation, then the members should appoint first
auditors of the company within one hundred and twenty days of the date of
incorporation of the company. While appointing auditors as such the members
may fix their remuneration, as well.
If the auditors are not appointed as such by the directors or the members,
Commission may appoint the auditors and fix their remuneration. The company
shall be required to give a notice to the auditors regarding its powers becoming
exercisable.
If the first auditors are appointed by the directors, they may be removed from
office by the members by passing a resolution in the general meeting of the
company. In place of removed auditor, any person may be appointed, who have
been nominated for appointment by any member of the company and of whose
nomination notice has been given to the members of the company not less than
fourteen days before the date of the meeting.
Appointment of subsequent auditor
First auditors shall retire on the date of first annual general meeting and in their
place the new auditors shall be appointed. New auditor shall be appointed by
members by passing a resolution in the general meeting.
Notice for appointment of the auditor shall be sent by any member of the
company at least fourteen days before the date of meeting and the company
shall circulate this notice to all the members at least seven days before the date
of annual general meeting.
If more than one persons are proposed as auditor of the company by its
members, then resolution of the members in the general meeting shall decide as
to who shall be appointed in the office of the auditor of the company.
The auditor so appointed shall hold the office of the auditor till conclusion of next
annual general meeting. The members may remove him from office before the
expiration of the term of the office by passing a special resolution. As discussed
earlier, in such a situation the new auditor cannot be appointed by the members
and such appointment and fixation of remuneration of the auditors shall be made
by the Commission.
Whenever the powers of Commission become exercisable, the company shall
give it a notice within one week of the powers becoming so exercisable.
Casual vacancy
Casual vacancy in the office of the auditor arising due to the resignation or death
etc. of the auditor shall be filled by the directors. Until such vacancy is so filled,
the surviving auditor if any may continue to act as auditor.
If auditors are not appointed in case of casual vacancy by the directors of the
company within thirty days of the occurrence of vacancy then Commission shall
appoint auditor to fill in the casual vacancy. Commission shall also be
empowered to appoint auditors and fix their remuneration when the auditors
appointed by the company are unwilling to act as auditors.
An auditor appointed to fill the casual vacancy shall hold the office of the auditor
till the conclusion of next annual general meeting.
Notice to registrar
Company is required to inform the registrar within fourteen days of every
appointment, removal or retirement of the auditor.
Qualification of auditors
For a public company and its subsidiaries and a private company having paid up
capital of more than or equal to Rupees 3 million, the qualification of auditors is a
chartered accountant within the meanings of chartered accountants Ordinance
1961. Further a firm of which all the partners practicing in Pakistan are Chartered
Accountants may be appointed by its firm name as auditors of a company and
may act in its firm name.
As per relevant provisions of the Chartered Accountants Ordinance 1961, only
those persons can act as auditors who have obtained a valid certificate of
practice from the Institute of Chartered Accountants of Pakistan. Furthermore, a
body corporate cannot be appointed as auditor of any company the auditor has
to be a natural person or the firm of natural persons who have obtained a valid
certificate of practice from the Institute of Chartered Accountants of Pakistan.
Disqualification of auditors
The following named persons cannot act as auditors of the company.
a person who is a director, other officer or employee of the company or
held such a position at any time during the preceding three years;
a person who is a partner of a director, officer or employee of the company
or is in the employment of any of these persons;
the spouse of a director of the company and a person who is indebted to
the company. A person is not considered as indebted:
if the company is a utility provider and the unpaid bills are not for more
than ninety days
if the company is a credit card issuer and outstanding credit card
amount is not more than Rupees five hundred thousand
Q: Before the annual general meeting of ABC Bank Limited, a banking company
issuing credit cards as well, a notice has been received from a member of the
company for appointment of Mr Zaid ACA as auditor of the company. During the
meeting the company secretary of ABC Bank Limited identified that Mr Zaid is a
credit card holder of the company and owes Rupees four hundred thousand
against the credit card utilisation. Is Mr Zaid disqualified to become auditor of
ABC Bank Limited?
A: No, because he owes less than Rupees five hundred thousands, which is the
threshold beyond that a debtor of the Bank will be considered disqualified.
3.3 Auditors right to access the records and information [Section 255]
The auditors shall state in the auditors report that t they have obtained all
the information and explanations which in their knowledge and belief were
necessary for the purposes of the audit; however if any information or
explanation is not provided by the company or any of its officer, the auditors
shall report that they were not provided with all the required information and
explanations.
The auditor shall further express a opinion about the books of accounts as
to the adequateness of them as per the requirements of the Companies
Ordinance 1984.Opinion shall also be expressed as to the conformity of the
accounts with the requirements of the Ordinance and with books of
accounts.
Auditors shall also state that whether or not in their opinion the said
accounts give the information required by this Ordinance in the manner
required by the Ordinance and give a true and fair view:
x of the state of the companys affairs as at the end of its financial year;
x of the profit or loss or surplus or deficit, as the case may be, for its
financial year; and
x of the changes in the financial position (statement of changes in
equity) or the sources and application of funds (statement of cash
flows) for its financial year;
Opinion of the auditors shall also be required on expenditure of the
company and investments of the company during the year were for the
business of the company and were in line with the objects of the company.
Auditor shall also report as to the responsibility of the company regarding
deduction and payment of Zakat under relevant law has been discharged.
The auditor shall state the reasons and factual position known to him if any of his
above stated opinions is negative or is qualified (positive opinion but with
exceptions)
4 CHAPTER REVIEW
Chapter review
Before concluding your studies of this chapter check that you now know:
What books of account are required to be maintained by the company
What are the requirements for presentation of accounts by the company
What are the contents of a directors report
How auditors are appointed, what power and obligations do they have and
what do they report.
I
Index
j Mandamus
Marriage brokerage agreement
16
90
Material alteration 143, 266
Joint and several liability of joint Maturity of Negotiable instrument 261
promisors 125 Meaning of
Joint promisor 125 acceptance 42
Judiciary makes the law (The) 6 appropriation of payment 132
Jurisdiction of Supreme Court 15 Crossing 279
Juveniles 20 reciprocal promises 129
undisclosed agency 221
Mediation 22
k Memorandum of association
Mercantile agent
307
198
Minimum
Kinds of number of directors 370
damages 158 subscription 315
endorsements 264 Minor 49
guarantee 169 Minors admission to the benefits of
Knowledge of the third party 248 partnership 250
Minutes 363
Misrepresentation 77, 169
l Fraud
Mistake
176
80
of foreign law 80
Lapse of an offer 43 of Pakistan law 80
Large number of precedents 6 Modarba 389
Legality of Modes of discharge of a contract 139
object and consideration 87 Modes of negotiation 265
object, consideration and Money bills 12
agreements opposed to public
Mortgage 343
policy 87
Mutual agency 232
Legislation 4, 9
Mutual Rights and Liabilities 242
Liabilities of partner and firm 246
Liability clause 308
Limitation
of suretys liability 170 n
period 148
Limited liability 292 Name clause 308
Liquidated damages 160 Name of a company 310
Loans to directors 378 National Assembly 10
Lunatic 51 Natural love and affection 61
Nature of
bailment
partnership (The)
183
229
p
relationship 70
suretys liability - it is co- Participatory redeemable capital 345
extensive 170 Particular
suretys liability 170 partnership 233
Negotiable Instrument 255 state of things ceases to exist or
Negotiation 22, 265 occur 146
Negotiation by Parties in a
endorsement and delivery 265 contract of guarantee 167
mere delivery 265 contract of indemnity 165
Nominal Parties to
Damages 160 a Bill of Exchange 272
partner 234 a Cheque 277
value of shares 327 a Promissory Note 268
Non-gratuitous act / goods 112 Negotiable Instruments 258
Not an excuse of supervening Partner
impossibility 146 by estoppel or holding out 234
Not Negotiable Crossing 280 in profits only 234
Notice 170, 175 Partnership 245, 291
of meeting 359 property 242
Novation 141, 175 Partnership-at-will 233
Past consideration 59
Pawn 186
o Payable to
bearer 256
order 256
Object clause 308 Payment by
Obligations of parties to contracts 119 interested person 111
Offer 39 mistake or under coercion 112
On due date of performance 149 Payment for Honour 259
Operation of law 133, 285 Payment in due course 266
Options to the aggrieved party 151 Penalty 160
Order instrument 260 Performance 119
Ordinance 12 of a contract 119
Ordinary Perpetual existence 293
business 359 Person enjoying benefit of non-
damages 158 gratuitous act / goods 112, 114
shares 323 Personal liability of an agent 223
Ostensible authority 208 Persons who can
Other modes of revocation of demand performance 124
continuing guarantee 170 perform and demand
Other VOID agreements 99 performance 122
Overruling a precedent 5 Persons who can perform 123
Persuasive authority 4
Pledge 186, 196, 342
Pledged by non-owners 198
principal 212
Reciprocal promises 129 Right of
Rectification of names 304 acceptor for honour 258
Redeemable Capital 345 bailee 192
Refusal to perform 122 bailor 191
promise 150 finder of goods 195
payer for honour 259
Right to Share
claim contribution 125, 173 capital 321
certificate 321
claim set off 172 registrar 384
demand return of goods 192 Shares in companies 321
indemnity 171, 241 Sharing of
share the profits 241 loss in contribution 125
subrogation 171 profits 231
Rights against Signature of an audit report 408
co-sureties 173 Silence as to fraud 75
creditor 172 Silent partner 234
principal debtor 171 Single Member Company 295
Rights and liabilities of acceptor for Sleeping or dormant partner 234
honour 258 Sole trader 291
Rights of Sound mind 50
agent 213 Sources of law in Pakistan 3
Holder against Banker 281 Special
indemnity holder 165 business 359
partner 241 contract 224
Pawnee 196 crossing 279
Pawnor 198 damages 159
Rights of resolution 305
Principal 215 Specific
surety 171 guarantee 169
transferee of a partners interest 249 offer 41
securities 172 performance 157
Role of an agent 203 persons 50
Rules for calculating maturity 261 Specimen of a
Rules regarding Bill of Exchange 273
appropriation of payment 132 Cheque 277
contingent contracts 105 Promissory Note 268
performance of reciprocal Standing / Open / Continuing offer /
promises 129 Tender 41
the performance of joint promise 124 Statutory
meeting 354
report 354
s restrictions
Steps of registration
245
303
Stifling prosecution 89
Sale of public offices 90 Stipulation for Interest 160
Same identity 144 Stranger to contract 60
Satisfaction of mortgage or charge 347 Structure of courts in Pakistan 15
Save time and expense 5 Sub-Bailment 186
Securities and exchange commission Subordinate Magistrate 18
of pakistan 299
Sub-partner 234
Senate 9
Subscription lists 333
Separate legal personality 291
Subsequent chief executive 383
Sessions Judge 18
Subsidiary Company 296
Supervening Types of
illegality 147 performance 119
impossibility 145 precedent 5
Supply of necessaries 111 Quasi Contracts 111
Supreme Court 15 reciprocal promises 129
Surety 167 tender 120
t u
Tender of goods or services 120 Ultra-Vires Borrowings 341
Tender 119 Uncertain agreements 99
of money 120 Underwriting 333
Termination by Undisclosed agency 221
act of parties 219 Undue influence 70
operation of law 220 Unilateral mistake 82
Termination of Unjust precedents 6
agency 219 Unlimited company 295
all contract of bailment 194 Unsound mind 50
gratuitous bailment 194
Test of partnership 233
Third party
Time
229 v
and place of performance 126
as essence of contract 127 Vacation of office 374
instrument 261 Variation in rights 327
is essence 149 Variation in share capital 325
is not essence 150 Vindictive damages 159
of commencement of the Void agreements 95
indemnifiers liability 166 Voting in meetings 360
Timing of revocation 44
Trading with enemy 89
Tripartite agreement
Types of
168 w
agent 204
bailment 185 Wagering agreement 98
companies 294 Waiver 142
crossing 279 Where to apply law in practical life 3
instrument 260 Who are competent to contract? 49
mistakes 80 Why Chartered Accountants study
offer 41 law 3
partners 233 Withholding of dividends 395
partnership 233