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Allama Iqbal Open University, Karachi Region

Assignment # 01,
Course: Mercantile Law (460) Semester: Spring, 2010, Level: B.Com/B.A

Q.1 Comment on the following:

(a) "All contracts are agreements but all agreements are not
contract".

Comments on Statement: A contract is a legally binding

agreement or relationship that exists between two or more parties to do or abstain
from performing certain acts. A contract can also be defined as a legally binding
exchange of promises between two or more parties that the law will enforce. For a
contract to be formed an offer made must backed acceptance of which there must be
consideration. Both parties involved must intend to create legal relation on a lawful
matter which must be entered into freely and should be possible to perform.
An agreement is a form of cross reference between different parties, which may be
written, oral and lies upon the honor of the parties for its fulfillment rather than being
in any way enforceable.

All contracts are agreement because there must be mutual understanding between
two parties for a contract to be formed. All parties should agree and adhere to the
terms and conditions of an offer.

The following cases illustrate ways in which all contracts are agreements;
In the case of invitation to treat, where an invitation to treat is merely an invitation to
make an offer. When a firm's offer is accepted it results into a contract provided other
elements of contracts are accepted.

Considering person A buying a radio on hire purchase from person B who deals with
electronics and its appliances. Both parties must come to an agreement on payment of
monthly installment within specified period of time. Such an agreement result to
specialty contract which a contract under seal.

All contracts are agreement until avoided for example, avoidable contract where
one of the parties can withdraw from it if s/he wishes. This occurs due to minor
agreement and misrepresentation or undue influence. Considering a case where
person A make contract with person B but during the contract period B realizes that
he was engaged to perform an agreement under undue influence.

Definition of contract

According to section 2(h) of the Contract Act: " An agreement enforceable by law is
a contract." A contract therefore, is an agreement the object of which is to create a
legal obligation i.e., a duty enforceable by law.

From the above definition, we find that a contract essentially consists of two
elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.
We shall now examine these elements detail.
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1. Agreement. As per section 2 (e): " Every promise and every set of promises,
forming the consideration for each other, is an agreement." Thus it is clear from this
definition that a 'promise' is an agreement. What is a 'promise'? the answer to this
question is contained in section 2 (b) which defines the term." When the person to
whom the proposal is made signifies his assent thereto the proposal is said to be
accepted. A proposal, when accepted, becomes a promise."

An agreement, therefore, comes into existence only when one party makes a proposal
or offer to the other party and that other party signifies his assent (i.e., gives his
acceptance) thereto. In short, an agreement is the sum total of 'offer' and 'acceptance'.
On analyzing the above definition the following characteristics of an agreement
become evident:

(a) At least two persons. There must be two or more persons to make an agreement
because one person cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject
matter of the agreement in the same sense and at the same time.

2. Legal obligation. As stated above, an agreement to become a contract must give

rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable
of creating a duty enforceable by law. It is not a contract. Thus an agreement is a
wider term than a contract. " All contracts are agreements but all agreements are not
contracts,"

Agreements of moral, religious or social nature e.g., a promise to lunch together at a

friend's house or to take a walk together are not contracts because they are not likely
to create a duty enforceable by law for the simple reason that the parties never
intended that they should be attended by legal consequences

(b) "The law of contract is not the whole law of agreement nor is it the
whole law of obligation".

Comments on Statement: That is true, that an Agreement can be

made without forming a contract. A gift, for example is an agreement to give and to
receive but because there is no consideration (repayment), it is not a contract.
Likewise, contracts are not the only way to create obligations. The obligation of duty
of care for the welfare of others, for instance, resides in Tort law created by common
law or statutory law, or both.

The law is the law of only those agreements which create legal obligation (i.e. an
obligation which is enforceable by law). An obligation is the duty to do or not to do
certain act. In other words the law of contract is concerned with only those
agreements where the parties have the intention to create legal obligations (i.e. the
parties are bound to do or not to do certain act). In business or commercial
agreements, the useful presumption is that the parties intend to create legal obligation.

Q.2 (a) Define the term offer. Discuss briefly the legal rules for a valid offer.

Offer: Treitel defines an offer as "an expression of willingness to contract on

certain terms, made with the intention that it shall become binding as soon as it is
accepted by the person to whom it is addressed", the "offeree". An offer is a statement
of the terms on which the offeror is willing to be bound.
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The "expression" referred to in the definition may take different forms, such as a
letter, newspaper, fax, email and even conduct, as long as it communicates the basis
on which the offeror is prepared to contract.

Whether two parties have an agreement or a valid offer is an issue which is

determined by the court using the Objective test (Smith v. Hughes). Therefore the
"intention" referred to in the definition is objectively judged by the courts. In the
English case of Smith v. Hughes the court emphasized that the important thing is not a
party's real intentions but how a reasonable person would view the situation. This is
due mainly to common sense as each party would not wish to breach his side of the
contract if it would make him or her culpable to damages, it would especially be
contrary to the principle of certainty and clarity in commercial contract and the topic
of mistake and how it affects the contract. As a minimum requirement the conditions
for an offer should include at least the following 4 conditions: Delivery date, price,
terms of payment that includes the date of payment and detail description of the item
on offer including a fair description of the condition or type of service. Without one
of the minimum requirements of condition an offer of sale is not seen as a legal offer
but rather seen as an advertisement.

Valid Offer: A valid offer is ……..

A valid offer generally has several basic elements

1. There must be genuine intent to contract
2. It must be communicated to the acquirer
3. It must be certain and definitive in its terms and conditions

And, as we said earlier

4. Both parties must be free of duress one from another

 I.e. the contract can be entered into voluntarily

If these conditions are not met

o All or part of the contract may be invalid

(b) Differentiate between void and voidable contracts. Give examples.

Void Contract: A void contract, also known as a void agreement, is not

actually a contract. A void contract cannot be enforced by law. Void contracts are
different from voidable contracts, which are contracts that may be (but not necessarily
will be) nullified.

An agreement to carry out an illegal act is an example of a void contract or void

agreement. For example, a contract between drug dealers and buyers is a void
contract simply because the terms of the contract are illegal. In such a case, neither
party can go to court to enforce the contract. A void contract is void ab initio, i e from
the beginning while a voidable contract can be voidable by one or all of the parties.
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A contract can also be void due to the impossibility of its performance. E g: If a

contract is formed between two parties A & B but during the performance of the
contract the object of the contract becomes impossible to achieve (due to action by
someone or something other than the contracting parties), then the contract cannot be
enforced in the court of law and is thus void. A void contract can be one in which any
of the prerequisites of a valid contract is/are absent for example if there is no
contractual capacity, the contract can be deemed as void. In fact, void means that a
contract does not exist at all. The law can not enforce any legal obligation to either
party especially the disappointed party because they are not entitled to any protective
laws as far as contracts are concerned.

Features of Void agreements:

• An agreement made by incompetent parties (Minor/Lunatic Person) is void.

• Any agreement with a bilateral mistake is void.
• Agreements which have unlawful consideration are void.
• Agreement with an unlawful object is void.
• Agreements made without consideration is void.
• Agreement in restraint of marriage of any major person is void (absolute
restriction).
• Agreement in restraint of trade is void.(reasonable reason)
• Agreement in restraint of legal proceedings is void.
• An agreement the terms of which are uncertain is void.
• An agreement by way of wager (betting/gambling) is void.
• An agreement contingent upon the happening of an impossible event is void.
• Agreement to do impossible acts is void.

Voidable contract
A voidable contract, unlike a void contract, is a valid contract. At most, one party to
the contract is bound. The unbound party may repudiate the contract, at which time
the contract is void.

For example, depending upon jurisdiction, a minor has the right to repudiate certain
contracts. Any contract with a minor is thus a voidable contract. If a minor were to
enter into a contract with an adult, the adult would be bound by the contract, whereas
the minor could choose to avoid performing the contract. Therefore, when entering
into contracts with a minor, people often require the co signature of an adult,
preferably a parent or legal guardian.

Q.3 (a) What is misrepresentation? What are essentials of misrepresentation?

MISREPRESENTATION
Misrepresentation is a contract law concept. It means a false statement of fact made
by one party to another party, which has the effect of inducing that party into the
contract. For example, under certain circumstances, false statements or promises
made by a seller of goods regarding the quality or nature of the product that the seller
has may constitute misrepresentation. A finding of misrepresentation allows for a
remedy of rescission and sometimes damages depending on the type of
misrepresentation.
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The statement made by a party to a contract, that a thing relating to it is in fact in a

particular way, when he knows it is not so.

The misrepresentation must be both false and fraudulent, in order to make the party
making it, responsible to the other for damages. It is not every misrepresentation
which will make a party liable; when a mere misstatement of a fact has been
erroneously made, without fraud, in a casual, improvident communication, respecting
a matter which the person to whom the communication was made, and who had an
interest in it, should not have taken upon trust, but is bound to inquire himself, and
had the means of ascertaining the truth, there would be no responsibility and when the
informant was under no legal pledge or obligation as to the precise accuracy and
correctness of his statement, the other party can maintain no action for the
consequences of that statement, upon which it was his indiscretion to place reliance.

Essentials of Misrepresentation: Following are the essentials of

misrepresentation:

The representation should be made innocently and believing it to be true.

The representation must be untrue.
It must be made without any desire to deceive the other party.
The other party must suffer a loss.

(b) What are the rights of the aggrieved party on misrepresentation and
what are the circumstances when the rights are lost?

Rights of the Aggrieved Party on Misrepresentation:

An aggrieved party can be any person whose financial, personal, or property rights or
interests are adversely affected by an act of another or an order, judgment or statute.
An aggrieved party is entitled to challenge the adverse decisions. "Aggrieved party"
defined in Rev. Code Wash. (ARCW) § 4.28.328 means (i) a person against whom
the claimant asserted the cause of action in which the lies pen dens was filed, but does
not include parties fictitiously named in the pleading; or (ii) a person having an
interest or a right to acquire an interest in the real property against which the lies
pendens was filed, provided that the claimant had actual or constructive knowledge of
such interest or right when the lis pendens was filed.

In the bankruptcy context aggrieved parties are defined as “those parties having a
direct and substantial interest in the question being appealed. Bankruptcy's person
aggrieved doctrine restricts standing more than U.S. Const. art. III standing, as it
allows a person to appeal only when they are "directly and adversely affected
pecuniarily by the order." Parties must have a financial stake in the order being
appealed in order to have appellate standing. A financial stake requires a
diminishment of property, increase in burdens, or an impairment of rights.” In re Gulf
States Steel, 285 B.R. 739 (Bankr. N.D. Ala. 2002)

Circumstances when the rights are lost in Misrepresentation:

These are following.

• A false statement of opinion is not a misrepresentation of fact.

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• A false statement by a person as to what he will do in the future is not a

misrepresentation and will not be binding on a person unless the statement is
incorporated into a contract.
• A false statement as to the law is not actionable misrepresentation because everyone
is presumed to know the law. However, the distinction between fact and law is not
simple.
• Generally, silence is not a misrepresentation. The effect of the maxim caveat emptor
is that the other party has no duty to disclose problems voluntarily. Thus if one party
is laboring under a misapprehension there is no duty on the other party to correct it.
• The representor must not misleadingly tell only part of the truth. Thus, a statement
that does not present the whole truth may be regarded as a misrepresentation.
• Where a statement was true when made out but due to a change of circumstances has
become false by the time it is acted upon, there is a duty to disclose the truth.

Q.4 (a) What is agency by Estoppel and agency by Holding out?

Agency by Estoppel: Definition: An agency that is not created as an

actual agency by a principal and an agent but that is imposed by law when a principal
acts in such a way as to lead a third party to reasonably believe that another is the
principal's agent and the third party is injured by relying on and acting in accordance
with that belief.

A principal has a duty to correct a third party's mistaken belief in an agent's authority
to act on the principal's behalf. If the principal could have corrected the
misunderstanding but failed to do so, he or she is estopped from denying the
existence of the agency and is bound by the agent's acts in dealing with the third
party.

Legally binding agency relationship that may arise where, in fact, no formal agency
agreement is in effect. A principal may give an appearance of agency relationship by,
for example, furnishing his or her firm's call cards or other stationery to the agent. In
such cases, the existence of an agency may be presumed, and the principal may be
bound by the acts of the agent performed on the principal's behalf. Also called
presumption of agency.

Agency by Holding out: Some positive conduct of the principal

indicates that a conduct of the principal indicates that a particular person is his agent.

P sends A to buy goods on credit from C. Buys goods on credit for himself & refuses
to pay. C sue P. P cannot plead that A had no authority.

(b) What is "lien"? Explain particular lien and general lien of a bail.

Lien: A lien is a legal claim or a "hold" on some type of property, whether

personal or real property, making it collateral against monies or services owed to
another person or entity. A lien usually exists in situations like second mortgages,
loans against a vehicle title, or money loaned against any other substantial item
owned by a borrower. It may keep the borrower from selling the property, or at least
keep him or her from transferring title to the property.
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Any property that carries a lien can be forced into sale by the lender, in order to
collect what is owed, if the loan is in default. If the borrower decides to sell the
property, the lien holder must be paid before the title will be cleared for transfer to the
buyer.

Particular Lien and General Lien of a Bail: This

entitles the lien holder to retain the goods until a debt arising in respect of such goods
is paid. It exists only as a security for the particular debt incurred. While, A Lien that
includes all of the property owned by the debtor, rather than a specific property.

Example: Abel failed to pay 3 months of rent and moved out. Baker, the Landlord
obtained a general lien against Abel by going to secure a Judgment against Abel. If
Abel doesn't pay the back rent, Baker will apply for a specific lien against Abel's
furniture and then have it sold.

Q.5 (a) Explain condition and "warranty" under sale of goods Act?

Condition and "Warranty" under Sale of Goods Act:

These are following and given below:

(1) A stipulation in a contract of sale with reference to goods which are the subject
thereof may be a condition or a warranty.

(2) A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which gives rise to a claim for damages but not to a right to reject the goods
and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in

each case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.

(b) When is breach of condition treated as a breach of warranty?

Breach of Condition Treated: These are as under….

(1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the
buyer may waive the condition or elect to treat the breach of the condition as a breach
of warranty and not as a ground for treating the contract as repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods or
part thereof, 1*** the breach of any condition to be fulfilled by the seller can only be
treated as a breach of warranty and not as a ground for rejecting the goods and
treating the contract as repudiated, unless there is a term of the contract, express or
implied, to that effect.

(3) Nothing in this section shall affect the case of any condition or warranty
fulfillment of which is excused by law by reason of impossibility or otherwise.
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***
Allama Iqbal Open University, Karachi Region.
Assignment # 02,
Course: Mercantile Law (460) Semester: Spring, 2010, Level: B.Com/B.A

Q.1 Discuss the essential characteristics of partnership.

Partnership: A partnership is a type of business entity in which partners

(owners) share with each other the profits or losses of the business. Partnerships are
often favored over corporations for taxation purposes, as the partnership structure
does not generally incur a tax on profits before it is distributed to the partners (i.e.
there is no dividend tax levied). However, depending on the partnership structure and
the jurisdiction in which it operates, owners of a partnership may be exposed to
greater personal liability than they would as shareholders of a corporation.

In civil law systems, a partnership is a nominate contract between individuals who, in

a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining
property, knowledge or activities; and share its profit. Partners may have a
partnership agreement, or declaration of partnership and in some jurisdictions such
agreements may be registered and available for public inspection. In many countries,
a partnership is also considered to be a legal entity, although different legal systems
reach different conclusions on this point.

Essential Characteristics of a Partnership: Following

are the essential characteristics of a partnership firm:

• Two or more persons: Partnership implies business by a group of persons.

There must be atleast two persons to bring partnership into existence. partnership Act
has not prescribed any maximum limit on partners but Companies Act has prescribed
a limit of 10 persons if it is a banking business and 20 persons for other business. If
the number exceeds these limits then the business must be registered as a joint stock
company otherwise it will be illegal.
• contractual Relation: A partnership is a contractual relationship arising out
of an agreement among the partners. A person does not become a partner out of his
status as is the case in joint hindu family. Since a contract is essential, persons
entering in partnership must be competent to enter into a contract. The agreement
among partners may be oral or in writing. A written agreement or deed is preferred
because it helps in resolving some disputes among partners later on.
• Lawful Business: A partnership agreement must be to run a lawful business.
Any understanding to run an unlawful business will be illegal hence no partnership.
• Sharing of profits: An agreement among partners should provide for sharing
of profits and losses. A charitable trust cannot be called partnership because there is
no sharing of profits. Profit sharing is only a prima facia test of partnership but not a
conclusive proof. The employees of a business may also share profits but they are not
the partners.
• No Separate Legal Existence: A partnership firm has no legal entity of its
own. The firm and the partners are one and the same. A firm is only a name to the
collective name of partners. No firm can exist without partners. The rights ad
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liabilities of the partners are the rights and liabilities of the firm. Management of the
firm vests in partners who are its owners also.
• Unlimited Liability: Each and every partner is liable jointly and severally
for the obligations of the partnership firm. If assets of the business are not sufficient
to meet the liabilities of creditors then private property of partners can be used to
meet them. The creditors can claim their dues from anyone or all the partners. If these
liabilities are met by one partner then he is entitled to receive ratable contributions
from other partners.
• Restriction on Transfer of Shares: No partner can transfer his interest in
the firm (except to an existing partner0 to an outsider without the consent of all other
partners. He can do so only with the unanimous consent of all other partners. It is
based on the principle that a partner being an agent of the firm cannot delegate his
authority unilaterally to outsiders.
• Utmost Good Faith: The very basis of partnership business is good faith and
mutual trust. Each and every partner should act honestly and fairly in the conduct of
business. A firm cannot be run if there is suspicion among partners. Partners must
have faith in each other for running the business smoothly.

Q.2 (a) What are the essential parts of a promissory note?

Promissory Note: A promissory note, referred to as a note payable in

accounting, or commonly as just a "note", is a contract where one party (the maker or
issuer) makes an unconditional promise in writing to pay a sum of money to the other
(the payee), either at a fixed or determinable future time or on demand of the payee,
under specific terms. They differ from IOUs in that they contain a specific promise to
pay, rather than simply acknowledging that a debt exists.

A promissory note will identify the parties, the amount of the obligation, some form
of recitation of the consideration for the obligation (that is, what the debtor received
in return for signing the note) and will usually include the terms of repayment, the
interest rate which will apply (if any). It may also include an "acceleration clause"
which will make the entire amount of the note due if a payment is missed.

Be careful when drafting a promissory note to consider state "usury" laws, the laws
defining the maximum interest rate you are allowed to charge. There can be serious
civil, and sometimes criminal, consequences for violating usury laws.

Essential Parts of a Promissory Note:

Promisor - A promisor is the person who makes a promise. In the context of a
promissory note, the promisor is the person who is promising to repay the loan or
obligation secured by the note.

Promisee - A promisee is a person to whom a promise is made. In the context of a

promissory note, the promisee is the person who is entitled to receive payment for the
loan or obligation secured by the note.

(b) Why do we discount a bill with a bank before it matures?

Comments on above statement: A deduction from a specified

sum. Often used in connection with transactions in negotiable commercial paper in
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which the buyer purchases an instrument due at a future date at a price below its face
amount with the intention of ultimately collecting the full value of the instrument.
Sellers offer instruments at a discount because of an immediate need for cash or out
of a fear of never being able to collect on them. "To discount" in finance is to
purchase or pay an amount in cash less a certain percent, as on a promissory note
which is to be collected by discounter or purchaser at maturity. 117 So. 124, 126.

Discount is the difference between the price and the amount of the debt, the evidence
of which is transferred. 14 Ill. App. 566, 570.

Purchasing and discounting of bills of exchange is another short term method of

profitable instrument of banks funds. Bills of exchange can be discounted on rebate
before its due date. The rebate or discount is earning of the bank. The bills of
exchange usually mature within 90 days. In case a bill, say of rupees 2000 due 90
days hence is discounted today at 20 percent per annum, the borrower is paid rupees
1900. the bank however collects the full amount of rupees 2000 of the bill from
drawer on maturity. The drawer or maker of the bill is expected to pay the bill on
maturity.

The bank by discounting the clean or documentary bill advances the amount to the
payee. On maturity of the bill the amount is collected from the drawer. The discount
is the safe earning of the bank because the bill of exchange is a negotiable instrument.
If at any time the bill is dishonoured the payee is responsible to make the full
payment of the bill to the bank. On the maturity of the bill there is certainly of
payment to the bank. It is thus a short term advance with certainly of payment. As the
date of payment to the bank is sure the short term advance is quite liquid.

Q.3 (a) Explain the difference between partnership and co – ownership.

Partnership: A partnership is a type of business entity in which partners

(owners) share with each other the profits or losses of the business. Partnerships are
often favored over corporations for taxation purposes, as the partnership structure
does not generally incur a tax on profits before it is distributed to the partners (i.e.
there is no dividend tax levied). However, depending on the partnership structure and
the jurisdiction in which it operates, owners of a partnership may be exposed to
greater personal liability than they would as shareholders of a corporation.

In civil law systems, a partnership is a nominate contract between individuals who, in

a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining
property, knowledge or activities; and share its profit. Partners may have a
partnership agreement, or declaration of partnership and in some jurisdictions such
agreements may be registered and available for public inspection. In many countries,
a partnership is also considered to be a legal entity, although different legal systems
reach different conclusions on this point.

Co – Ownership: Co-ownership is a legal concept where two or more

co-owners share the legal ownership of a property.

A generic legal term that refers to various forms of ownership over one asset by more
than one person. In the common law, co-ownership refers to that conglomerate of
property rights in one asset, generally in real property, in which there are more
owners such as tenants in common or joint tenants or statutory co-ownership regimes
such as condominium title or strata title.
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When two or more persons buy a property together, that property will be held in one
of two ways, either as 'joint tenants' or as 'tenants in common'. This article will be
useful reading for anyone considering the purchase of property with anyone else,
whether their wife, brother, grandparent or friend and so on and also those who
already own joint property.

(b) How is a partnership dissolved? Explain its steps.

Dissolution of Partnership: A partnership may be dissolved by

mutual consent, by expiration of predetermined time, by death of one of the partners,
by insanity, by the bankruptcy of either partner, or by the court for any good cause,
such as dishonesty of one partner against the rest, or incapacity caused by habitual
drunkenness or conviction of any crime. A partner may withdraw at any time if no
time for the continuation of the partnership is mentioned in the articles of agreement,
but he must give due notice of his intention to the other partners. If the time for the
continuance of the partnership is mentioned, a partner can nevertheless withdraw at
any time, but he is responsible to the firm for damages caused by the breach of his
promise. If a partner dies the surviving partners alone have the right to settle up the
business. To his heirs and legal representatives they need only to render an account of
the business.

Steps Dissolution of Partnership:

1. Step 1
Analyze why you want to dissolve the partnership. Perhaps you and your business
partner don’t get along or you have different end goals at this point in the business.
Perhaps one of the partners wants to retire and no longer has the energy or desire to
work on the business. You have to look at your assets, customers, inventory, and
anything else that is shared in the business. Sometimes it just doesn’t make sense to
dissolve the business. Be sure you analyze the situation before attempting to dissolve
the business. It is a lengthy and expensive process. Remember: both partners must
agree to dissolve the business.

2. Step 2
Get information on dissolving your business. Go to your state’s government website
and look for information on businesses. They should have a form for dissolving a
business partnership. Print out the form, fill it out, have both partners sign it. A
business can dissolve completely or dissolve and become a corporation or llc.

3. Step 3
Once the business is dissolved, you need to file a statement of dissolution, which lets
third parties know that neither partner has any rights to enter into binding transactions
unless it’s to wrap up the business. It is usually assumed that all third parties know of
the dissolution after ninety days of filing the statement of dissolution.
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4. Step 4
Notify the people you do business with. Be sure to send out a nice letter or card letting people
know about your business dissolution. You can send them to your customers, clients and
suppliers. Usually, the partner who initiated the dissolution is responsible for announcing it. If
you are dissolving the business and starting a new company, be sure to include the
information in the notice, including the new company name and contact information.

5. Step 5
Examine leases, contracts and loan agreements before dissolving the business. You
want to make sure that there will be no legal issues if the business is dissolved. You
don’t want someone filing a lawsuit against you and your partner because you didn’t
follow the agreement. Don’t neglect to learn if the dissolution of the partnership will
affect those agreements.

6. Step 6
Get a business attorney. You may want a business attorney to help you through the
process, especially if your business has grown significantly or if you could be facing
liability issues. A business lawyer will help you through the process.

Q.4 (a) Is it mandatory for all companies to issue and lodge a prospectus with
the Securities and Exchange Commission of Pakistan when issuing
securities?

Comments of above Statement: Companies that fulfill the

basic criteria will be considered for acquisition. Some of the most common
requirements includes, potential acquisition targets must be tax paying registered
corporations, with reputable and easily verifiable track record, production procedures
conducted through digital methods. Some specific and well-defined requirements
about rates, quality of work, turn-around time, and agreements would also have to be
met to qualify as a good buy.

The Securities Market Division of the Securities and Exchange Commission of

Pakistan had initiated a review of the prospectus and supporting documents to
improve the level of quality of disclosure and rationalize the supporting documents
that are submitted to the Commission. After consultation with the stakeholders viz.
issuers of securities, advisers & arrangers, and stock exchanges, the Commission has
made the following guidelines to help the issuers in providing a full, true, and fair
disclosure of all material information to a common investor.

It is hereby stated under clause 18 of the schedule that no certificate has been issued
or agreed to be issued by the Modaraba, otherwise than in cash. As required under
Clauses 26 of the schedule it is clarified that no business has also so far been carried
on by the Modaraba. It is also confirmed that no amount has been paid or benefit
given to the Modaraba Company. The requirements of Clauses 19, 20, 21, 22 and 25
of the Fourth Schedule under reference, have also been suitably dealt with.
 13

(b) Discuss with reasons and indicate the main role of Securities and
Exchange Commission of Pakistan in the issuing of a prospectus.

Role of Securities & Exchange Commission of Pakistan in the

issuing of a prospectus: Eligibility: A Public Limited Company is eligible
to offer TFCs to the general public through issue, publication and circulation of
prospectus under section 57 read with section 120 of the Ordinance. The entity as
well as the instrument should have a minimum credit rating grade of Triple B Minus
(BBB-) assigned by a credit rating agency registered with the Commission under the
Credit Rating Companies Rules, 1995.

Procedure: The issuer will be required to file an application with the Commission
under Section 57 of the Ordinance for approval to issue, circulate and publish
prospectus for offer of TFCs to the general public. Before filing the application the
issuer will be required to fulfill the following requirements: -

i) In case of a new project, Expansion or Balancing, Modernization & Replacement

(BMR), a feasibility study should be conducted and a report should be prepared.
ii) Pre-IPO placement of TFCs should be finalized.
iii) Underwriting arrangements, if any, should be completed.
iv) Credit rating of the entity as well as the instrument from any rating agency should
be carried out.
v) Trustee, Bankers to the Issue, Balloters, Registrar (Transfer Agent) and Legal
Adviser to the Issue should be appointed.
vi) Clearance of the prospectus from the concerned stock exchange(s) should be
obtained.
vii) Auditor’s certificates as required under Section 53 of the Ordinance read with
clause 28(1) of Section 2 of Part-I of the 2nd schedule to the Ordinance should be
obtained.

Contents of the Prospectus: The prospectus should contain all material facts,
information and disclosures as required under Section 53 of the Ordinance, and 2nd
schedule to the Ordinance. However in order to facilitate the issuers the contents of
the Prospectus have been provided for guidance as per Annexure-I, Annexure-II and
Annexure-III for full Prospectus, abridged Prospectus and supplement to the
Prospectus respectively. In addition to these, the Commission may ask for disclosure
of any material information.

Q.5 (a) What are the memorandum and article of association?

Memorandum of Association: The Memorandum of

Association of a company, often simply called the memorandum (and then often
capitalised as an abbreviation for the official name, which is a proper noun and
usually includes other words), is the document that governs the relationship between
the company and the outside. It is one of the documents required to incorporate a
company in the United Kingdom, Ireland and India, and is also used in many of the
common law jurisdictions of the Commonwealth.

While it is still necessary to file a memorandum of association to incorporate a new

company, it no longer forms part of the company’s constitution and it contains
limited information compared to the memorandum that was required prior to 1
October 2009.
 14

It is basically a statement that the subscribers wish to form a company under the 2006
Act, have agreed to become members and, in the case of a company that is to have a
share capital, to take at least one share each. It is no longer required to state the name
of the company, the type of company (such as public limited company or private
company limited by shares), the location of its registered office, the objects of the
company, and its authorised share capital. Companies incorporated prior to 1 October
2009 are not required to amend their memorandum. Those details which are now
required to appear in the Articles, such as the objects clause and details of the share
capital, are deemed to form part of the Articles...

The memorandum no longer restricts what a company is permitted to do. Since 1

October 2009, if a company's constitution contains any restrictions on the objects at
all, those restrictions will form part of the articles of association.

Historically, a company's memorandum of association contained an objects clause,

which limited its capacity to act. When the first limited companies were incorporated,
the objects clause had to be widely drafted so as not to restrict the board of directors
in their day to day trading. In the Companies Act 1989 the term "General Commercial
Company" was introduced which meant that companies could undertake "any lawful
or legal trade or business."

The Companies Act 2006 relaxed the rules even further, removing the need for an
objects clause at all. Companies incorporated on and after 1 October 2009 without an
objects clause are deemed to have unrestricted objects. Existing companies may take
advantage of this change by passing a special resolution to remove their objects
clause. If the company is to be a non-profit making company, the articles will contain
a statement saying that the profits shall not be distributed to the members.

The memorandum of association records the agreement of the first subscribers to

form a company under the 2006 Act, to become members and, in the case of a
company that is to have a share capital, to take at least one share each.

Article of Association: The articles of association of a company, often simply

referred to as the articles (and then often capitalised as an abbreviation for the
official name, which is a proper noun and usually contains the company name), are
the regulations governing the relationships between the shareholders and directors of
the company, and are a requirement for the establishment of a company under the law
of India, the United Kingdom and many other countries. Together with the
memorandum of association, they form the constitution of a company. A similar term,
"articles of agreement", is often used for non-profit organizations.

Articles of association typically cover the issuing of shares (also called stock), the
different voting and dividend rights attached to different classes of share, restrictions
on the transfer of shares, the rules of board meetings and shareholder meetings, and
other similar issues.

In the United Kingdom, model (and default) articles of association known as Table A
have been published since 1865. The articles of association of most companies –
particularly small companies – are Table A, or closely derived from it. However, a
company is free to incorporate under different articles of association, or to amend its
articles of association at any time by a special resolution of its shareholders, provided
that they meet the requirements and restrictions of the Companies Acts. Such
requirements tend to be more onerous for public companies than for private ones.
 15

The Companies Act 2006, which received Royal Assent on 8 November 2006 and
was fully implemented on 1 October 2009, provides for a new form of model articles
of association for companies incorporated in the United Kingdom. Under the new
legislation, the articles of association will become the single constitutional document
for a UK company, and will subsume the role currently filled by the separate
memorandum of association.

(b) Who can be the director of a company?

Eligibility for a Director Ship: Anyone who is involved in the

management of a company may be regarded as a director, even if that person has not
formally been appointed as such [Corporations Act 2001 s.9 — definition of
"director")]. If the directors of a company are accustomed to act in accordance with
the instructions or wishes of a particular person, that person is also a director.
However, a person does not become a director simply because the directors act on her
or his professional advice.

A director automatically ceases to be a director if the person becomes disqualified

from managing corporation under Part 2D.6 Corporations Act 2001 unless ASIC or
the Court allows them to manage [s203B]. S206B Corporations Act 2001 sets out the
circumstances in which a person becomes automatically disqualified which includes
being convicted of certain types of offence involving fraud or the management of a
company or contraventions of the Corporations Act 2001 (and its predecessors). A
person who is bankrupt or subject to an arrangement under Part X of the Bankruptcy
Act 1966 may also be disqualified from managing a corporation [s206B(3),
s206B(4)]. In addition ASIC or the Court can make an order disqualifying a person
from being a director [Corporations Act 2001 s206C — s206F].

The rules governing who can be a company director are contained within the
Companies Act 2006, Part 10, Chapter 1.

The requirements state that appointees must be over the age if 15, that is a person of
16 may become a company director. The 2006 Act later lays out provisions whereby
a person under this age may be appointed in special circumstances. These provisions
for a person under the age of 16 to act as a company director only extend to
England and Wales. There is no such provision for Scottish Companies.

Disqualified and Undischarged Bankrupts

Persons who are currently disqualified from being a company officer or those who are
undischarged bankrupts are also prohibited from being company directors. Apart
from the disqualification and bankruptcy provisions, in reality, Companies House will
accept nominations for any persons the shareholders of a given company deem fit to
act in that capacity.

The Companies Act 2006 requires a person or other entity seeking appointment as a
director to be a natural person. This requirement means that an individual person
must be appointed for a single director company.

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