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Business Law
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C
Business Law
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 303
21 Share capital – types and variation 321
22 Share capital – prospectus 331
23 Mortgages and charges 339
24 Meetings 349
25 Management 363
26 Investments and dividends 385
27 Accounts and audit 397
Index
S
Business Law
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
knowledge of the legal terminology of company law and the basics of company
3
incorporation
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 Act, 2017 and Securities Act, 2015
Sections 1 to 56- of the Companies Act, 2017 8-15
Sections 57 to 112 of the Companies Act, 2017 and Sections 87 8-15
to 93 of Securities Act, 2015
Sections 118 to 196 of the Companies Act, 2017 8-15
Sections 199 to 245 of the Companies Act, 2017 8-15
Sections 246 to 251 of the Companies Act, 2017 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
consideration and where object or consideration is
agreements opposed to unlawful
public policy LO 2.6.2: Identify agreements
opposed 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.
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
Syllabus
Contents Level Learning Outcome
Ref
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)
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.
Syllabus
Contents Level Learning Outcome
Ref
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
partnership the 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,
partner’s 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
Syllabus
Contents Level Learning Outcome
Ref
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 partner’s
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.
Syllabus
Contents Level Learning Outcome
Ref
3 Powers and functions of the 1 LO5.3.1: Demonstrate familiarity with
Commission (Section 7) the powers and functions of the
Commission.
4 Business and objects of a LO5.4.1: Describe the business and
company (section 26) objects of a company
5 Memorandum of association 2 LO5.5.1: Describe the memorandum
(Section 27 to 35, 40, 41) of association and state its purpose
LO5.5.2: List/explain the clauses of
memorandums of association of
various types of companies
LO5.5.3: Describe the purpose and
procedure of alteration to different
clauses of a memorandum of
association
LO5.5.4: Describe the effect of
alteration/noting of alteration of
memorandum of association
6 Registration of memorandum 2 LO5.6.1: Define the articles of
and articles of association association and state its purpose
(Section16-18, 36, 37-39) LO5.6.2: State the information which
should be contained in the articles of
various companies.
LO5.6.3: Describe the procedure for
alteration of articles
LO5.6.4: Describe the procedure of
registration of the memorandum and
articles of association
LO5.6.5: Describe the effects of
registration of the memorandum and
articles of association.
L05.6.6: State the provisions relating
to printing, signing and date of
memorandum and article of
association
7 Provisions with respect to 2 LO5.7.1: Describe with examples the
names of companies/its procedure / prohibitions with regard to
change (Section 10-13) the selection of the name of a
company /change of name
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.
Syllabus
Contents Level Learning Outcome
Ref
8 Association not for profit 1 LO5.8.1: Comprehend the nature of
(Section 42, 43) association not for profit./provisions
relating to licensing/revocation of
licenses granted under section 42
9 Companies limited by 1 LO5.9.1: Understand the provisions
guarantee (Section 45) regarding divisible profit and dividing
the undertaking into shares or
interest.
b Allotment of shares,
registration of charge etc.
(Sections 57 to 112 of
Companies Act 2017 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 (Section 57)
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
LO6.1.5: Understand/explain the
provisions regarding statement and
consent of expert.
2 Share capital and 1 LO6.2.1: Provision relating to nature /
debentures (Section 58 to number of shares and other
62, 85 - 87of Companies securities
Act, 2017) LO6.2.2: Describe the classes and
kinds of shares
LO6.2.3: Describe with simple
example the condition of fully paid
shares
LO6.2.4: State the provision relating
to alteration of share capital / kinds of
alterations that can be made to the
share capital
LO6.2.5: Understand the meaning of
variation of shareholders’ rights
LO6.2.6: Demonstrate familiarity with
the procedure for cancellation of
variation of shareholders’ rights.
Syllabus
Contents Level Learning Outcome
Ref
3 Registration of mortgages, 1 LO6.3.1: Discuss the meaning of
charges etc. (Section 100, mortgage/charge with simple
105, 109, 110 and 112 of examples, and the duty of company
Companies Act, 2017) 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
LO6.3.5: Discuss the consequences
of registered and unregistered
mortgages/ charges.
c Management and
administration (Sections
19 to 25 and 118 to 196 of
Companies Act, 2017)
1 Registered office, publication 2 LO7.1.1: Discuss with simple
of names etc. (Section 21, examples the provisions with regard
22, 24, 25) to 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 19 and 20) business by a company
LO7.2.2: State the applicability and
non-applicability of the conditions on
different kinds of company.
LO7.2.3: State the consequences of
non-compliance of Section 19
3 Meeting and proceedings 1 LO7.3.1: State the timing, matters and
(Section 131 to 152) 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
Syllabus
Contents Level Learning Outcome
Ref
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/ resolution /
minutes of meetings.
LO 7.3.9: State the circumstances in
which proceedings of the general
meeting may be declared invalid.
4 Directors (Section 153 to 1 LO 8.4.1: Explain and apply in given
185) scenarios, the legal provision with
respect to directors’:
Eligibility/ineligibility
Number
First, subsequent and independent
directors
Term/tenure of office of directors
Elections
Removal/vacation of office
Filling of casual vacancies
Remuneration
Powers, duties, rights, liabilities
and limitations
Assignment of office and alternate
directors
Proceedings
Code of Corporate Governance
Passing of resolution
LO8.4.2: State the legal provisions
relating to loans to directors.
5 Chief executive (Section 186 1 LO8.5.1: Explain the appointment of
to 196) first chief executive and subsequent
chief executives using simple
examples
Syllabus
Contents Level Learning Outcome
Ref
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 chairman/ share
registrar/ sole purchase/sales agents/
secretary.
d Investments, accounts etc.
(Sections 199 to 244of
Companies Act, 2017)
1 Investment in associated 2 LO9.1.1: Describe the conditions
companies and undertakings applicable to a company for making
(Section 199) 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 200) 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 205) 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 206) disclosure of interest by officers in
contract / arrangement entered into by
or on behalf of the company.
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 207) in contract / arrangement entered into
by or on behalf of the company.
6 Accounts (Section 220, 223, 1 LO9.6.1: Describe the provisions
226, 227, 232 and 233 ) 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/
duty to prepare directors’ report and
statement of compliance
LO9.6.4: Describe the authentication
of balance sheet and profit and loss
account
Syllabus
Contents Level Learning Outcome
Ref
LO9.6.5: Discuss requirements of
filing of balance sheets and profit and
loss accounts with the registrar.
7 Dividend (Section 240 to 1 LO9.7.1: Explain the requirements
244) 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.
LO9.7.3: Describe the provision
applicable to unclaimed share and
dividend to vest with the Federal
Government
e Audit (Sections 246 to 251
of Companies Act 2017)
1 Audit (Section 246 to 251) 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
auditor’s right to access the record
and information
• An auditor’s duty to report and
contents thereof
• Signature on an audit report.
1
Business Law
CHAPTER
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 Act, 2017 19-27
Securities Act 2015 19-27
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 Pakistan’s 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:
If it is passed by the house in which it is originated then it is
transmitted to the other house and
If the bill is also passed by the other house (without any amendment)
then it is presented to the President for assent.
Scenario 2:
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
if that House passes the Bill with those amendments it shall be
presented to the President for assent.
Scenario 3:
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
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
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:
When the President has returned a Bill to the Parliament it shall be
reconsidered by the Parliament in Joint Sitting and
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.
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
by the National Assembly in case of Money Bill and
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.
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 Act, 2017 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
of its own motion or
on the petition of
- citizen of Pakistan or
- the Federal / Provincial Government
examine and
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:
The reasons for its holding that opinion and
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
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 Act, 2017 19-27
Securities Act 2015 19-27
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 A’s promise to pay Rs. 50,000 is the consideration for B’s promise and B’s
promise to sell the IPAD is the consideration for A’s 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.
Enforceability
Performance
Formation
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
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 Act, 2017 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.
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
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 Act, 2017 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
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 Act, 2017 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 A’s 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
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 Act, 2017 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, B’s 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, B’s daughter, if B refuses to sell his house to him. B
agrees to sell his house. Here, B’s 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, B’s 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 80’s 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
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 Act, 2017 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
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 Act, 2017 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.
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]
Partner’s 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
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
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 Act, 2017 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
10
CHAPTER
Business Law
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 Act, 2017 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
11
CHAPTER
Business Law
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 Act, 2017 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.
Promisor’s 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.
Promisee’s 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
promisee’s 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
12
CHAPTER
Business Law
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 Act, 2017 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
Novation
Rescission
Alteration
Remission
Waiver
Promisee’s 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.
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 person’s 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.
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.
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
13
CHAPTER
Business Law
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 Act, 2017 19-27
Securities Act 2015 19-27
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 B’s promising to marry C (A’s 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
14
CHAPTER
Business Law
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 Act, 2017 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 B’s discounting, at A’s 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 surety’s 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 B’s 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 surety’s liability
Understand the rights of surety
Explain the various ways in which the surety is discharged
15
CHAPTER
Business Law
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 Act, 2017 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
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.
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
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 bailor’s 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
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
16
CHAPTER
Business Law
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 Act, 2017 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 agent’s
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]
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 principal’s
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 principal’s 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.
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 principal’s 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
17
Business Law
CHAPTER
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, partner’s 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 partner’s 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 Act, 2017 19-27
Securities Act 2015 19-27
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 partner’s 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.
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
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 partner’s 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:
the share of the assets of the firm to which the transferring partner is
entitled.
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
18
CHAPTER
Business Law
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 Act, 2017 19-27
Securities Act 2015 19-27
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 one’s 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
A negotiable instrument payable to bearer is negotiable by delivery
(voluntary delivery with the intention of transferring the ownership)
It does not require signature of the transferor i.e. endorsement and
the transferee becomes the holder by mere possession.
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
A negotiable instrument payable to order is negotiable by the holder
by endorsement and delivery.
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 C’s
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 party’s 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
19
Business Law
CHAPTER
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 5.2.1 Explain subsidiary and holding company and when a company becomes a
subsidiary or holding company of another company
LO 5.2.2 Apply the concept of subsidiary in simple scenarios
LO 5.3.1 Demonstrate familiarity with the powers and functions of the Commission
LO 5.8.1 Comprehend the nature of association not for profit
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 Act 2017 19-27
Securities Act 2015 22
which time its ownership has changed many times. The company has continued,
even when its owners have changed. This phenomenon is called ‘perpetual
succession’ or ‘perpetual existence’
2 TYPES OF COMPANIES
Section overview
Generally there would be no difference in the term Company and Body Corporate
or Corporation however Companies Act 2017 defines the body corporate or
corporation separately. We can generally say that the word ‘company’ means a
setup formed and registered under the company law and the body corporate can
be regarded as any company registered under any law..
With a company limited by guarantee, its owners may or may not have
shares. Their share of the ownership of the company is recognised, and
they are ‘members’ of the company. Their liability to the company is limited
to an amount that the member guarantees to contribute in the event that
the company goes into liquidation for a company not having share capital
and for a company having share capital this shall also include the amount
of share capital he subscribed to the company.
It is also possible to register a company as an unlimited company. This has all
the advantages of a normal company except that the liability of its members is
not limited. In practice unlimited companies are fairly rare but are sometimes
used by a ‘partnership style’ business.
Businesses that incorporate as companies are companies limited by shares. The
great advantage of this form of company is that the company is able, if the
shareholders approve, to raise additional capital by issuing new shares.
(Companies limited by guarantee are not able to raise capital in this way. A
company limited by guarantee is a form often used by charities, trade
associations and private members’ sports clubs, where the club is owned by the
members).
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.
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 SECP’s 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 7]
Commission has been vested with lot of powers under the Companies Act 2017
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 the Commission is also
empowered by the Securities and Exchange Commission of Pakistan Act, 1997
to exercide many powers and functions in addition to the functions prescribed
under the Companies Act 2017.
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 Act including Commission and Registrar.
20
CHAPTER
Business Law
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO5.4.1: Describe the business and objects of a company
LO5.5.1: Describe the memorandum of association and state its purpose LO5.5.2:
List/explain the clauses of memorandums of association of various types of
companies
LO5.5.3: Describe the purpose and procedure of alteration to different clauses of a
memorandum of association
LO5.5.4: Describe the effect of alteration/noting of alteration of memorandum of
association
LO5.6.1: Define the articles of association and state its purpose
LO5.6.2: State the information which should be contained in the articles of various
companies.
LO5.6.3: Describe the procedure for alteration of articles.
LO5.6.4: Describe the procedure of registration of the memorandum and articles of
association
LO5.6.5: Describe the effects of registration of the memorandum and articles of
association.
L05.6.6: State the provisions relating to printing, signing and date of memorandum and
article of association
LO5.7.1: Describe with examples the procedure / prohibitions with regard to the
selection of the name of a company /change of name
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.
LO5.9.1: Understand the provisions regarding divisible profit and dividing the
undertaking into shares or interest.
LO7.1.1: Discuss with simple examples the provisions with regard to having a
registered office, publication of name and publication of paid-up capital.
LO7.2.1: State the conditions to be fulfilled before commencement of business by a
company
LO7.2.2: State the applicability and non-applicability of the conditions on different kinds
of company.
LO7.2.3: State the consequences of non-compliance of Section 19
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Act 2017 19-27
Securities Act 2015 22
1 INCORPORATION OF COMPANY
Section overview
Process of incorporation
2 NAME OF COMPANY
Section overview
3 MEMORANDUM OF ASSOCIATION
Section overview
the name of the company with the addition of the following words at the end of
the name in case of each of the following companies
Public Company: "Limited"
Private Company: "(Private) Limited"
Single Member Company “(SMC-Private) Limited”
Guarantee Limited Company "(Guarantee) Limited"
Unlimited Company: “Unlimited”
We have already discussed the complexities about the name of the company so
we move forward to the next clause.
Registered office clause
For registered office clause the province or the part of Pakistan not forming part
of a province, as the case may be, in which the registered office of the company
is to be situate.
Liability clause is only altered at the time of conversion of the status of the
company (e.g. from limited to unlimited etc). Subscription clause of the
memorandum of the company cannot be altered in the life time of the company.
Reasons for alteration in principal line of business and registered office clause
As per the Act, a company may alter the provisions of its memorandum so as to:
change the place of its registered office from one Province to another or
from Islamabad Capital Territory to a part of Pakistan not forming part of a
Province and vice versa;
change its principle line of business; or
adopt any business activity or any change therein which is subject to
licence, registration, permission or approval under any law.
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.
Alteration in registered office clause
For alteration in the registered office clause of the company,
Company shall pass a special resolution
Company shall apply to the Commission for obtaining its approval
When the company actually shifts its registered office, it shall inform the
registrar within 15 days of the date of such shifting.
Where alteration involves a transfer of registered office from jurisdiction of
one company registration office to another, physical record of company
shall be transferred to the other registrar (where the registered office has
been shifted)
Alteration in principal line of business clause
For alteration its object clause, company shall pass a special resolution and shall
only file the amended memorandum with registrar within 30 days of the change
Commission’s approval for alteration
For approval of Commission in both of the above cases the company shall file an
application to the Commission on the basis of special resolution as discussed
above. The Commission must be satisfied that:
The circumstances, as discussed above for the alteration of object and
registered office clauses of the memorandum, exist and
Sufficient notice regarding alteration of memorandum has been given by
the company to every creditor and member of the company.
The Commission may make an order confirming the alteration either wholly or in
part, and on such terms and conditions as it thinks fit.
A copy of duly certified order of SECP shall be forwarded to the company and to
the registrar within 7 days from the date of the order.
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 thirty days from
the date of the order for registration. The period of thirty days may be extended
by the Commission
Registrar shall register it and issue a certificate which shall be conclusive
evidence of compliance with the above rules.
Effect of failure to register within given period
Alteration of memorandum is effected upon its registration and it becomes null
and void if not registered within time. Commission may, however, on sufficient
cause shown, extend the time for filing the memorandum for such period as it
thinks proper
Effect of alteration
If the memorandum of association or articles of association are altered and such
alteration requires the members to take more shares in the company than they
already have or to undertake more amount of guarantee than the existing
amount, such alteration shall be applicable to a member only if he gives his
consent to the alteration otherwise this shall not be applicable to the company.
The registration of the company has the following effects as from the date of
incorporation.-
the subscribers to the memorandum, and subsequent members of the
company, are a body corporate by the name stated in the certificate of
incorporation;
it is capable of exercising all the functions of an incorporated company,
having perpetual succession and a common seal;
the status and the registered office of the company are as stated in the
application for registration;
in case of a company having share capital, the subscribers to the
memorandum become holders of the initial shares;
the persons named in the articles of association as proposed directors are
appointed to that office.
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 Act 2017 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.
Articles shall list and enumerate the voting and other rights attached to different
classes of shares and securities issued or to be issued by the company.
Copies of memorandum and articles [Sections 39 and 40]
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.
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.
No money is or may become liable to be repaid to applicants for any shares
which have been offered for public subscription;
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 Act regarding names of companies
The requirements of the Act regarding commencement of business and
registered office of the company.
21
CHAPTER
Business Law
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 6.2.1 Describe the nature of shares and share certificates
LO 6.2.2 Describe the classes and kinds of shares
LO 6.2.3 Describe with simple example the condition of fully paid shares
LO 6.2.4 State the provision relating to alteration of share capital / kinds of alterations
that can be made to the share capital LO 6.2.5 State the rules on
prohibition of purchase of a company’s own or its holding company’s shares
LO 6.2.6 Understand the meaning of variation of shareholders’ right
LO 6.2.7 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 Act 2017 19-27
Securities Act 2015 22
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 company’s ‘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 remaining profit 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.
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.
Alteration in capital
Restriction on purchase of own shares by a company
Variation in rights of the shareholders
The company is required to file the resolution and the related documents i-e
altered copy of the memorandum of association with the registrar within fifteen
days of passing the same, failing which the resolution shall not be effective and
shall ultimately lapse.
Further due to the consolidation or subdivision of shares, the rights attaching to
the shares shall not be affected in any way and the new shares issued by the
company shall rank equally with the existing shares of the company.
2.2 Restriction on purchase of own shares by a company [Section 86, 87 & 88]
Restrictions Exceptions
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 restrictions on purchase of own shares by a company
About the variation in rights of the shareholders.
22
CHAPTER
Business Law
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.
LO6.1.1 Define a prospectus and explain its purpose
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
LO6.1.5 Understand/explain the provisions regarding statement and consent of expert.
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Act 2017 19-27
Securities Act 2015 22
1 INTRODUCTION TO PROSPECTUS
Section overview
Basics
Approval of prospectus
Availability of prospectus
Contents of prospectus
Timing of prospectus
Expert to be independent
Expert’s 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.
1.8 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.
1.9 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 concept of experts in context of a prospectus and provisions regarding
their statements
23
CHAPTER
Business Law
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 6.3.1 Discuss the meaning of mortgage/charge with simple examples, and the duty
of company and the procedure for registration of charges
LO 6.3.2 State the right of an interested party in respect of a registration of
mortgage/charge
LO 6.3.3 State the duty and procedure of payment or satisfaction of mortgage/charge
LO 6.3.4 Demonstrate familiarity with the right to inspect the instrument creating a
mortgage/charge
LO 6.3.5 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 Act 2017 19-27
Securities Act 2015 22
It means that the company may name its securities anything they shall effectively
be a debenture if they are debt obtained by 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 creditor’s
respective meetings, if called for any purpose.
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.
Borrowings from credit institutions
Credit institutions include the commercial banks, investment banks, non-banking
finance companies, modarbas and all other business organisations providing
facilities for loan against the interest or sometimes against participation in profits
of the company as per agreed terms.
These loans too, usually are secured against the assets of the company.
Borrowing from other sources
Other sources for obtaining loans may include the sponsors or controlling
shareholders of the company who at times facilitate the company with financial
help whenever it is required. Utilizing this option company at times may stabilize
its financial situation. This type of financing is usually unsecured, however, it may
be secured against the assets of the company.
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
The definition 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 company’s 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.
2.2 Procedure for registration of mortgage or charge [Section 100 & 105]
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 thirty 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.
Upon registration, the registrar shall issue a certificate of registration under his
signatures or authenticated by his official seal in specified manner.
It is usually pre-decided among the parties as to who shall get the mortgage or
charge registered with the registrar.
Whether the charge is registered by company or the interested person, the cost
of registration shall be borne by the company and the interested person
registering the charge shall be entitled for reimbursement of the costs properly
incurred in getting the mortgage or charge registered.
Consequences of non-registration
If the company or interested persons fails or neglects to register the mortgage or
charge as aforesaid, the mortgage or charge would become void and shall not be
accepted as such by the liquidator or any creditor.
However this shall not affect any contract or obligation for repayment of the
money thereby secured.
Registration of mortgage or charge created outside Pakistan on a property situated
outside Pakistan
In such a case where the mortgage or charge has been created outside Pakistan
on any property of the company which is situated outside Pakistan, the rest of the
procedure for registration of the charge is same with the exception that the period
of thirty days shall start from the day when the documents should reach Pakistan
if sent with due care from that other country.
Registration of mortgage or charge created in Pakistan on a property situated
outside Pakistan
In such a case where the mortgage or charge has been created in Pakistan on
any property of the company which is situated outside Pakistan, the rest of the
procedure for registration of the charge is same with the exception that the
registration of charge with the authorities of that other country shall also be
required for completion of registration of mortgage or charge.
Constructive notice regarding existence of mortgage or charge
Every person buying any property of the company shall be deemed to have a
constructive notice of the fact that the asset is subject to mortgage or charge.
This is the reason any person buying any asset from the company needs its
checking with the registrar to confirm whether or not the asset is free from any
mortgage or charge.
If no objection is filed by the lender, the registrar shall register the satisfaction of
the mortgage or charge as requested by company, otherwise he shall
communicate the company regarding objection raised by the lender.
The registrar is entitled, even if no information is received from company, to enter
the satisfaction of mortgage or charge if he is aware that a particular mortgage or
charge has been repaid or the property subject to the charge no longer the
property or part of the undertaking of the company.
2.4 Right to inspect the copies of instruments creating charges [Section 112]
Company is required to keep the copies of the instruments creating charges or
relating to the registration of charges or any rectifications therein at its registered
office.
Further, the company is required to keep at its registered office a register
regarding the mortgages or charges created by it. This register contains fullest
information as to identify the property mortgaged or charged as well as the terms
and conditions and the beneficiary of the charge.
Any creditor or member of the company can inspect the copies of the instruments
so placed and the register of mortgages or charges of the company free of cost
at all reasonable times.
The register of the mortgages or charges as above is also open to inspection of
any person other than members or creditors against payment of fee.
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.
24
CHAPTER
Business Law
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 7.3.1 State the timing, matters and reports relating to statutory meetings
LO 7.3.2 State the timing, matters and reports relating to an annual general meeting
using simple examples
LO 7.3.3 State who can call an annual general meeting
LO 7.3.4 State the timing, matters and reports relating to an extraordinary general
meeting
LO 7.3.5 State who can call an extraordinary general meeting
LO 7.3.6 State the quorum for a general meeting
LO 7.3.7 State the entitlement of a member in respect of appointment of proxy and
conditions applicable thereon
LO 7.3.8 Describe the provisions relating to agenda/ resolution /minutes of meetings
LO 7.3.9: State the circumstances in which proceedings of the general meeting may be
declared invalid
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Act 2017 19-27
Securities Act 2015 22
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.
1.3 Statutory meeting [Section 131]
Introduction
In case of a public company, the law requires it to hold a general meeting known
as statutory meeting and deliver a report in such meeting called as a statutory
report. This is actually the beginning phase of the company and the members
usually do not know all other members nor all of them are familiar with
management (directors and chief executive) of the company, so this meeting
provides an opportunity to get to know each other and also the statutory report is
an indicative of financial start-up of the company that can be helpful for
understanding of the members of the company.
Requirement to hold statutory meeting
Every public company having share capital is required to hold statutory meeting
However, a private company is not required to hold a statutory meeting but if
such private company converts itself into a public company within one year of its
incorporation, it shall also be required to hold a statutory meeting.
Timing of statutory meeting
Companies as above are required to hold the statutory meeting within, the earlier
of:
180 days from the date at which the company is entitled to commence
business; or
Nine months from the date of its incorporation
No statutory meeting shall be required if the AGM is held before the due date of
statutory meeting.
The meeting shall consider and approve report called “Statutory Report” which is
sent to each member at least twenty one days before the date of statutory
meeting (along with notice of the statutory meeting).
Matters to be stated in statutory report
The statutory report shall include:
total number of shares allotted by the company. The company shall
distinguish between shares allotted for cash and otherwise than in cash. In
case of shares allotted for a consideration otherwise than in cash, the
consideration shall also be discussed in detail in the statutory report.
total cash received against shares allotted;
summary of receipts and payments prepared to a date not earlier by 15
days of the date of report;
particulars of directors chief executive, secretary, auditor and legal adviser;
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 of
the company in case of a company having share capital and ten percent of all
members in case of other companies 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 90 days of
filing of the same either by the directors or by the requisitionists 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
requisitionists 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 member’s at least twenty
one days before the date of the meeting similarly as of the notice of AGM.
However, in case of unlisted companies, if all the members entitled to attend and
vote at any extraordinary general meeting so agree, a meeting may be held at a
shorter notice. .
Notice of meeting
Quorum of meeting
Voting in meetings
Proxies
Minutes and Resolution
Representation at meetings
The members having not less than ten per cent voting power in the company
may also give notice of a resolution.
Definition: Quorum
Quorum means certain minimum number of members of a company as is fixed as
competent to transact business in a general meeting of members in the absence
of the other members. Any business transacted in a meeting without quorum shall
be void.
Quorum of meeting
The minimum quorum of the meeting has been fixed by the Act, however, the
company may fix a larger number of members as quorum of the meeting by its
articles of association.
The Act 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 or
through video link in the meeting, representing 25% voting powers, either
on their own account or as proxies, in the meeting.
in case of any other company having share capital - two members,
present personally or through video link in the meeting, representing 25 %
of total voting powers, either on their own account or as proxies.
in case of a company not having share capital - as provided in the
articles.
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 either personally or through video link, not being less than two, shall be
a quorum, unless the articles of association provide otherwise.
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.
Note: In case of companies not having share capital members are not entitled to
appoint another person as their proxy.
2.5 Minutes and Resolution [Section 146, 151, 152 and 178]
Minutes of proceedings of general meetings and meeting of directors
Every company is required to maintain records of copies of all resolutions of
members passed otherwise than at general meetings and a fair and accurate
summary of all proceedings of meetings of directors, member or committees of
directors along with names of participants in properly maintained books at it
registered office. A copy of the minutes of meetings of the board of directors shall
be furnished to every director within fourteen days of the date of meeting.
Signatures of the chairman of meeting or of the chairman of next succeeding
meeting shall be sufficient evidence of the proceedings unless contrary is proved.
The books containing the minutes of proceedings of the general meetings shall
be open to inspection by members for at least two hours on each day without
charge during the business hours.
Members of the company can demand a certified copy of the minutes of general
meeting, any time after 7 days from meeting, which the company shall provide to
them within seven working days of receipt of his request.
The records must be kept at the registered office of the company from the date of
the resolution, meeting or decision in physical and electronic form and it shall be
preserved for at least twenty years in physical form and permanently in electronic
form.
Resolution passed at adjourned meeting [Section 146]
Where a resolution is passed at an adjourned meeting it shall be treated as
having been passed on the date on which it was in fact passed. It shall not be
deemed to have been passed on any earlier date.
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.
25
CHAPTER
Business Law
Management
Contents
1 Appointment and election of Directors
2 Powers duties and limitations of directors
3 Other Officers
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 8.4.1 Explain and apply in given scenarios, the legal provision with respect to
directors’:
Eligibility/ineligibility
Number
First, subsequent and independent directors
Term / tenure of office of directorsElections
Removal/vacation of office
Filling of casual vacancies
Remuneration
Powers, duties, rights and limitations
Assignment of office and alternate directors
Proceedings
Code of Corporate Governance
Passing of resolution
LO 8.4.2 State the legal provisions relating to loans to directors
LO 8.5.1 Explain the appointment of first chief executive and subsequent chief
executives using simple examples
LO 8.5.2 State the provisions/conditions applicable on appointment, removal,
engagement in any business
LO 8.5.3 State the provisions relating to appointment of a chairman/ share registrar/
sole purchase/sales agents/ secretary
LO 9.3.1 Explain the requirements of disclosure of interest by director in
contract/arrangement entered into by or on behalf of the company
LO 9.4.1 Explain the requirements of disclosure of interest by officers in
contract/arrangement entered into by or on behalf of the company
LO 9.5.1 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 Act 2017 19-27
Securities Act 2015 22
Directors
Number and appointment of directors
Election of directors
Selection of independent 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 Act
and company’s 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 Act, 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 Act unless, for example, he or she is appointed or elected as
director in accordance with the process provided in the Act.
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.
Directors in fiduciary relationship
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.
Compliance with the Code of Corporate Governance [Section 156]
The Commission may provide for framework to ensure good corporate
governance practices, compliance and matters incidental and axillary for
companies or class of companies in a manner as may be specified.
Natural persons only to be directors [Section 154(2)]
Under the provisions of the Act only natural persons can be directors of the
company. No company can be a director of any other company. Further when
appointed as a director, every director is an equal director and there are no
differences between their authorities, rights and liabilities, so no director can
claim to be a variable representative of the company. It means that no director
can claim relief from his responsibility as a director claiming that he is not
concerned with any particular area of the company’s business. When he is a
director, he is a director in entirety.
Nominee directors [Sections 164 and 165]
In additions to the directors elected and appointed in the general meeting, the
creditors may also nominate directors on the board of the company if they are
empowered to do so by virtue of any agreement in this regard. Remember that
the directors nominated by the creditors are in addition to the minimum number of
directors fixed by the Act.
The Federal Government, Provincial Government and any company, if hold
shares in any other company, can nominate any person to represent them as a
director on the board of directors of the company. Such person shall be
considered to be an elected director termed as ‘deemed to have been elected
director’ and shall be considered for the calculation of minimum number of
directors required for any company.
Assignment of office and alternate directors [Sections 174]
A director of any company shall not assign his office to any other person and any
such appointment shall be void ab-initio.
However the appointment by a director, with the approval of the board, of an
alternate or substitute director to act for him during his absence from Pakistan of
not less than ninety days, shall not be deemed to be an assignment of office.
Such director shall vacate office if and when the director appointing him returns
to Pakistan.
Consent to act as director [Section 167]
No person shall be elected or appointed as a director or a chief executive if such
person has not filed his consent in writing for becoming the director or chief
executive. The company shall file such consent to the registrar within fifteen days
of the date of appointment or election of the director or chief executive as the
case may be.
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.
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.
Fresh election of directors on request of substantial acquirer [Section 162]
As discussed earlier, the directors elected in a general meeting are entitled to
hold the office of the directors for three years. However, there may be a case
when the elections of directors are held on such time before the expiry of the
three years period.
Where a person acquires the requisite shareholding to get him elected as a
director on the board of a company, he may require the company to hold fresh
election of directors in accordance with the procedure laid down in this act.
However the number of directors fixed in the preceding election shall not be
decreased .
The board shall, upon receipt of such requisition, as soon as practicable but not
later than thirty days, proceed to hold fresh election of directors of the company.
A listed company for the purpose of fresh election of directors under this section
shall follow such procedure as may be specified by the Commission
Declaring election of directors invalid [Section 160 and 168]
The court has got the authority to declare the directors’ election invalid on certain
grounds. Members holding at least ten percent of the voting power in the
company may make an appeal in the court to declare the election of all directors
or any one or more of them invalid.
Such appeal may be made within thirty days from the date of election and the
court shall declare the elections invalid if it is satisfied that there has been
material irregularity in the holding of the elections and incidental or relating
matters.
Actions of directors taken within their scope of being a director are considered as
valid whatever invalidity may be subsequently discovered in their election or
appointment or he was disqualified from holding office or he had ceased to hold
such office.
has betrayed lack of fiduciary behavior and a declaration to this effect has
been made by the Court at any time during the preceding five years;
does not hold the national tax number as per the Income Tax Ordinance,
2001
is not a member however this ineligibility shall not apply in the case of
a person representing a member who is not a natural person;
a whole-time director who is an employee of the company;
a chief executive; or
a person representing a creditor or other special interests through
contractual arrangement.
Further for listed companies 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
Illustration: Broker
Broker under Securities Act, 2015 means any person engaged in the business of
effecting transactions in securities for the account of others or self.
Section overview
Powers of directors
Duties of directors
Loans to directors
Quorum and frequency of meeting
Limitations of directors
Disclosure of directors’ interests
when the director has acted as surety of the company and the resolution
under consideration relates to the indemnification or insurance coverage of
the surety director against any loss incurred by the director for becoming
surety of the company.
Provided that the company shall only insure the liability of interested director
where such liability arises out of a transaction validly approved by the board or
the members of the company.
In case of a listed company the interested director shall not be present at the
board meeting in which the matter, in which he has material personal interest, is
being considered.
Interest of other officers, etc. [Section 206]
An officer of a company who is in any way, directly or indirectly, concerned or
interested in any proposed contract or arrangement with the company is required
to:
disclose the nature and extent of his interest in the transaction; and
obtain the prior approval of the directors.
3 OTHER OFFICERS
Section overview
Chief executive
Chairman
Sole purchase, sale or distribution agent
Company secretary
Share registrar
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.
Federal Government shall have the power to nominate and appoint chief
executive of a company where majority of directors are nominated by the Federal
Government,
Subsequent chief executive [Section 187]
First chief executive shall retire on the date of first AGM. Subsequent chief
executive shall be appointed within 14 days of the election of the directors
themselves or office of the chief executive falling vacant as the case may be.
Subsequent chief executive shall be appointed for a maximum period of three
years. However he may be earlier removed from office or he may otherwise
cease to hold office. Retiring chief executive can be re-appointed. the chief
executive appointed against a casual vacancy shall hold office till the directors
elected in the next election appoint a chief executive.
Retiring chief executive shall continue to perform his services until his successor
is appointed but in the following circumstances he shall not so hold the office:
His office was expressly terminated
He is the cause of non-appointment of new chief executive.
Articles of the company state the authority for determination of terms and
conditions of chief executive.
As discussed above, by virtue of his being chief executive, he shall be
considered as a director of the company and shall enjoy and be liable to all the
rights and liabilities attached to the office of the director.
Terms of appointment of chief executive and filling up of casual vacancy
[Section 188]
The terms and conditions of appointment of a chief executive are determined by
the directors or the company in general meeting in accordance with the
provisions in the articles.
The terms and conditions of appointment of a chief executive nominated by the
Federal Government shall be determined by the Federal Government
Removal of chief executive [Section 190]
Chief executive can be removed through any of the following modes at any point
in time regardless of any provisions in the articles of association or in his
appointment to the contrary:
by passing a special resolution in general meeting of the company; or
by passing a resolution in the board of directors supported by at least three-
fourth of the number of directors.
By Government/authority/person nominated authorised by it, where more
than 75% of the voting rights are held by the Government.
Chief executive is required to furnish to the company the detail of every such
business carried on by him and his interest in it forthwith at the time of his
appointment.
3.2 Chairman [Section 192, 193]
Board of a listed company shall within 14 days from date of election of directors,
appoint a chairman from among the non-executive directors. The chairman shall
be responsible for leadership of board and ensure that the board plays an
effective role in fulfilling its responsibilities.
Annual financial statements shall contain a review report by the chairman on the
overall performance of board and effectiveness of role played by board in
achieving the objectives.
Chairman shall hold office for 3 years unless he earlier resigns, becomes
ineligible or disqualified under any provision of this Act or removed by the
directors.
Board shall clearly define the respective roles and responsibilities of chairman
and Chief Executive. The Commission may specify the classes of companies for
which the chairman and chief executive shall not be the same individual.
3.3 Sole purchase, sale or distribution agent
No company (incorporated in Pakistan or outside) which is carrying on business
in Pakistan shall, without the approval of Commission, appoint any sole
purchase, sale or distribution agent:
Exception to this rule
Company incorporated, or person ordinarily residing, outside Pakistan are not
required to obtain the approval of Commission for such appointment. (unless the
major portion of business of such company or person is conducted in Pakistan)
4 CHAPTER REVIEW
Chapter review
26
CHAPTER
Business Law
Contents
1 Investments of company
2 Dividends
3 Payment of dividends
4 Unclaimed shares, modaraba certificates and dividend
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 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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 9.1.1 Describe the conditions applicable to a company for making investment in
associated companies and undertakings
LO 9.2.1 Discuss with simple examples as to how a company can hold its investment in
names other than its own name
LO 9.7.1 Explain the requirement relating to declaration of dividend and identify/explain
certain restrictions on declaration of dividend
LO 9.7.2 Describe the provisions applicable to payment of dividend
LO 9.7.3: Describe the provision applicable to unclaimed share and dividend to vest
with the Federal Government
Act Chapters
Contract Act 1872 3-16
Partnership Act 1932 17
Negotiable Instrument Act 1881 18
Companies Act 2017 19-27
Securities Act 2015 22
1 INVESTMENTS OF COMPANY
Section overview
Definition: Investment
For the purpose of this section, the expression ‘investment’ shall include loans,
advances, equity, guarantees 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, then it should be done
through a written agreement specifying the terms and conditions and the return
on investment in the form of loan shall not be less than the borrowing cost of
investing company or the rate as may be specified by Commission. 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 and the
directors of the investing company shall certify that the investment is made after
due diligence and that the borrower has the ability to repay the loan.
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.
2 DIVIDENDS
Section overview
Dividend meaning
Final and interim dividend and time restriction for its payment
Restriction on declaration of dividend
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.
3 PAYMENT OF DIVIDENDS
Section overview
Payment of Dividend
Consequences of delay in payment
Withholding of Dividends
4.1 Unclaimed shares, modaraba certificates and dividend to vest with the
Federal Government (Sec 244)
This section shall be applicable to following
Shares or modaraba certificates which have been issued, and remain
unpaid for 3 years from the date it is payable; or
Where dividend (or any bonus shares or certificates) has been declared by
a company or Modaraba, and remain unclaimed for 3 years from the date it
is due;
Any other instrument or amount which remain unclaimed or unpaid, having
such nature and for such period as may be specified;
Notice to the shareholder / certificate holder
Any claimant may apply to SECP in such manner with such documents as
may be specified
SECP after necessary verification from company concerned, forward claim
to SBP/NBF for making payment (equivalent to his unclaimed or unpaid
dividend or amount of proceeds)
Payment shall be made within a 30 days from date of verification by the
company.
While making payment, expenses incurred for sale of those shares etc shall
be deducted
If the relevant shares/certificates have not been sold as on date of claim,
the person shall be entitled to receive those shares/modaraba certificates/
other instrument.
Where any dispute regarding those arises or is pending adjudication before
the competent authority or Court, SECP shall process claim in accordance
with the final decision.
No claim shall be entertained after 10 years from the credit of any amount
FG
Every company, within 30 days of close of each financial year, shall submit
to SECP a return of all unclaimed shares certificates, instruments or
dividend in manner specified by SECP.
Contravenes of this section shall attract a penalty of level 3
“Companies Unclaimed Instruments and Dividend and Insurance Benefits
and Investors Education Account” shall be available on direction of Minister
to serve as a collateral in order to facilitate the provision of credit facility to
clearing house to address any systemic risk in the capital market:
This option shall only be exercised where, in opinion of SECP, resources of
clearing house are or likely to be insufficient for timely settlement of trades
executed at the exchanges.
5 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.
Treatement of unclaimed shares, modaraba certificates and dividend
27
CHAPTER
Business Law
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 5.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 9.6.1 Describe the provisions relating to / list the books of accounts to be kept by
the company
LO 9.6.2 Explain the requirements with respect to the annual accounts and the balance
sheet
LO 9.6.3 Describe directors’ report / duty to prepare directors’ report and statement of
compliance
LO 9.6.4 Describe the authentication of balance sheet and profit and loss account
LO 9.6.5 Discuss requirements of filing of balance sheets and profit and loss accounts
with the registrar
LO 10.1.1 Explain the provisions applicable to
Appointment, removal and remuneration of auditors
Qualification and disqualification of auditors
Powers/duties of auditors and an auditor’s right to access the record and
information
An auditor’s duty to report and contents thereof
Signature on an audit report
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 Act 2017 19-27
Securities Act 2015 22
1 BOOKS OF ACCOUNTS
Section overview
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.
In the case of a company engaged in production, processing, manufacturing or
mining activities, relevant cost accounts shall also be maintained.
Books of accounts for a period of at least ten years must be preserved in good
order under the requirements of the Act. 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.
Once in every calendar year, the directors of the company, other than a single
member company, are required to present the financial statements for the
period, in a general meeting of the company, in the case of first since
incorporation and in any other case since the preceding financial statements
within four months of the close of the financial year of the company. In case of
first financial statements of the company, it shall be presented before the meeting
within sixteen months of date of incorporation of the company.
Such financial statements shall be audited by the auditor of the company and the
auditor’s report shall accompany the financial statements. The reuiqrement of
audit is not applicable to a private company having paid up capital not exceeding
Rupees 1 million or such higher amount as may be notified by the Commission.
The copy of these financial statements along with auditor’s and directors’ report
and in the case of a listed company chairman’s review report shall be sent to
every member of the company at least twenty one days before the date of the
meeting (Usually sent with the notice of the meeting).
Company shall also retain a copy of these documents at its registered office and
every member of the company shall be allowed to inspect such copy.
Further a listed company is required to dispatch at least three copies of these
documents to the Commission, registrar and Stock exchange simultaneously with
the dispatch of the same to the members and the same shall also be uploaded
on the company’s website. A copy of these documents should also be filed
electronically to the Commission.
Upon an application of the company in this behalf, an extension of thirty days
may be granted to a company for presentation of the financial statements as
aforesaid. Such extension in case of the listed company shall be granted by the
Commission and in case of any other company, shall be granted by registrar.
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.
registrar within 30 days of the said annual general meeting in case of listed
companies and fifteen days in the case of other companies.
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.
This filing requirement shall not apply to a private company having paid up capital
not exceeding Rupees 10 million or such higher amount as may be notified by
the Commission
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
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.
Directors’ report shall state the description of principal risks and uncertainties
facing the company and shall contain the comments in respect of adequacy
internal financial controls.
Business review of listed company
The business review of a listed company must at least cover the following:
the main trends and factors likely to affect the future development,
performance and position of the company’s business;
the impact of the company’s business on the environment;
the activities undertaken by the company with regard to corporate social
responsibility during the year;
directors’ responsibility in respect of adequacy of internal financial controls
as may be specified
3 AUDIT
Section overview
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, in this case the
new auditor will be appointed by the board with the approval of the Commission. .
Right of retiring auditor to make representation
If a notice is received from any person appointing any person other than the
existing auditor, then such notice from the member shall be sent to the retiring
auditor forthwith. The retiring auditor has got right to make representation in
writing at least two days before the general meeting. The representation shall be
read out at the meeting before taking up the agenda for appointment of the
auditor it shall be mandatory for the auditor or a person authorized by him in
writing to attend the general meeting in person .
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 within 30 days of such casual
vacancy. 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. In case of appointment the
consent of the concerned auditor is also required along with intimation.
In the case of a company other than those specified above, the auditor must be a
Chartered Accountant or Cost and Management Accountant having valid
certificate of practice from the respective institute or a firm of Chartered
Accountants or Cost and Management Accountants, having such specified
criteria.
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
a person who is indebted to the company other than in the ordinary course
of business of such 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 one million
3.3 Auditor’s right to access the records and information [Section 248]
Auditor’s right to access information
Every auditor of a company has a right to access at all times to the books,
accounts and vouchers of the company, in whatever form they are held,
Auditor’s right to call branch’s information
Auditor has right to access to such copies of, extracts from, the books and
accounts of the branch as have been transmitted to the principal office of the
company;
Auditors’ right to demand information from certain persons
Auditor has the right to require any of the following persons to provide him with
such information or explanations as he thinks necessary for the performance of
his duties as auditor:
any director, officer or employee of the company;
any person holding or accountable for any of the company’s books,
accounts or vouchers;
any subsidiary undertaking of the company;
any officer, employee or auditor of any such subsidiary undertaking of the
company or any person holding or accountable for any books, accounts or
vouchers of any such subsidiary undertaking of the company.
Auditor’s right in respect of general meetings
The auditor is entitled to attend, receive all notices of any general meeting.
The auditor is entitled to be heard at any general meeting which he attends on
any part of the business which concerns him as auditor
The auditors shall state in the auditors’ report that 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 Act
2017.Opinion shall also be expressed as to the conformity of the accounts
with the requirements of the Act and with books of accounts.
Auditors shall also state that whether or not in their opinion the said
financial statements give the information required by this Act in the manner
required by the Act and give a true and fair view:
of the state of the company’s affairs as at the end of its financial year;
of the profit or loss or surplus or deficit, as the case may be, for its
financial year; and
generation and utilisation of the cash and cash equivalents of the
company for its financial year;
Opinion of the auditors shall also be required on expenditure incurred,
investments and guarantee extended by 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)
If auditor's report makes reference to some other report or statement, such report
be annexed to auditor's report and be considered a part of report.
Commission may also direct any company or class of companies that the
auditor’s report shall also include a statement of such additional matters as may
be so specified.
Where any reservation is put in auditor's report, there shall be added the reasons
for it and the true position of Company to the best of auditor's knowledge.
For listed company, auditor or a person authorized by him in writing shall be
present in the general meeting in which financial statements and auditor’s report
are to be considered.
Commission may direct, that the statement of compliance to be attached with
Directors Report, shall be reviewed by the auditor who shall issue a review report
to the members on the format as specified.
Signature of an audit report [Section 251]
The auditor’s report must
state the name of the auditor and the engagement partner
be signed
be dated
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.