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Corporate andBusiness Law(Pakistan)

PART 2

TUESDAY 7 DECEMBER 2004

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A SIX questions ONLY to be answered

Section B TWO questions ONLY to be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

r 2.2

(PK

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Section A – SIX questions ONLY to be attempted

1 Explain the constitution of the Supreme Court of Pakistan and discuss its jurisdiction under the Constitution ofthe Islamic Republic of Pakistan, 1973.

(10 marks)

2 In the context of labour legislation explain:

(a) The classification of ‘workmen’ under the West Pakistan Industrial and Commercial Employment (StandingOrders) Ordinance, 1968. (5 marks)

(b) The scope of the Workmen’s Compensation Act, 1923. (5 marks)

(10 marks)

3 In relation to the law of contract:

(a) Distinguish between an ‘offer’ and ‘invitation to treat’. (5 marks)

(b) Distinguish between ‘void’ and ‘voidable’ contracts. (5 marks)

(10 marks)

4 In relation to partnerships explain:

(a) The advantages of a company as a business form over a partnership. (6 marks)

(b) The position of ‘minors as partners’ under the Partnership Act, 1932. (4 marks)

(10 marks)

5 In relation to company law:

(a) Describe the role of a company secretary. (5 marks)

(b) Define the term ‘prospectus’, state its purpose and briefly state the information it should contain.(5 marks)

(10 marks)


(a) Define the term ‘share’ in the context of the share capital of a company. (3 marks)

(b) State what rights are normally attached to ordinary shares. (2 marks)

(c) Explain how preference shares differ from ordinary shares. (5 marks)

(10 marks)

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(a) State which people are disqualified from becoming an auditor of a company under the Companies Ordinance,1984. (6 marks)

(b) State what additional requirements are imposed on auditors by the Code of Corporate Governance.(4 marks)

(10 marks)

8 In relation to company law (the Companies Ordinance, 1984):

(a) Define a ‘private company’ and state its characteristics. (4 marks)

(b) Discuss the qualifications for the appointment of a person as a director of a company. (6 marks)

(10 marks)

3 [P.T.O.



Section B – TWO questions ONLY to be attempted

9 Mrs Pasha had bought a precious stone from South Africa during her recent visit. The stone was a wedding gift forMrs Pasha’s daughter. Mrs Pasha handed over the stone to Mr Goldsmith, a master in the art of cutting and polishingprecious stones, to cut and polish the stone for her. It was agreed that Mr Goldsmith would do the job within twomonths time and have it ready for Mrs Pasha before her daughter’s wedding. Mr Goldsmith did an excellent job andhad the stone ready in time. However, before he could deliver it to Mrs Pasha, the stone was stolen from a wellprotected safe in the basement of Mr Goldsmith’s workshop. Consequently, Mrs Pasha could not give the stone to herdaughter at her wedding. The thief was caught red-handed two days after the wedding while selling the stone to astone trader. Mrs Pasha demanded the stone back from Mr Goldsmith and refused to pay for the services rendered byhim with respect to the cutting and polishing the stone as penalty/damages for Mr Goldsmith’s failure to return thestone in time which caused embarrassment for Mrs Pasha since she could not give it to her daughter as planned. Mr Goldsmith has approached you to seek advice.

Required:

You should advise on the following issues:

(a) Does a valid contract of bailment exist between Mrs Pasha and Mr Goldsmith under the given circumstances?(4 marks)

(b) Explain the general responsibilities of a bailee, and discuss whether Mr Goldsmith could be held responsiblefor the delay in the delivery of the stone to Mrs Pasha. (10 marks)

(c) State whether Mr Goldsmith is required to return the stone to Mrs Pasha without receiving the remunerationfor his work. (6 marks)

(20 marks)

10 Ameer allowed his cousin Sana to use the garage of his house to open up a café, which soon became a success.Sana and Ameer fell in love and decided to marry. After their marriage, the couple went to a beach resort in Thailandfor a holiday. While shopping one day, Ameer promised to buy Sana a gold bracelet the next day. However, due to thesudden death of Sana’s father, both of them had to fly back to Pakistan on that very evening. Unfortunately, one monthafter their return the marriage came to an end and Ameer asked Sana to close the café and give him a 50% share inthe profits to date as the café was run in a partnership. Sana, in turn, informed Ameer that she would close the cafélocated in Ameer’s garage only if he would fulfil his promise made during the marriage. Sana has decided to open upa similar café in a commercial area and has approached your law firm for advice.

Required:

(a) State whether Ameer’s promise to buy Sana the bracelet constitutes a contract. (8 marks)

(b) State whether the use of Ameer’s garage for the café by Sana created a ‘partnership’ between Sana andAmeer. (8 marks)

(c) State whether Sana can open up the new café. (4 marks)

(20 marks)

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11 ABC (Private) Limited is involved in the manufacturing of textile products. In view of the business success in the recentyears, the board of directors of the company have made a comprehensive plan to expand the manufacturing facilities,as well as to venture into the business of manufacturing soft drinks under a franchise. In order to raise funds for thispurpose, the directors have decided to convert the company into a public company and raise finances through a publicoffering of its securities. The Chief Executive of the company has asked you for advice.

Required:

(a) Explain what changes are required to be made in the Articles of Association of the company in order toconvert it into a public limited company. State the procedure to be followed by the company for amendingits Articles. (10 marks)

(b) State whether the company would be able to undertake the new business venture of soft drinksmanufacturing under its existing Memorandum of Association. Explain the procedure laid down in theCompanies Ordinance, 1984 for the amendment of the objects clause. (10 marks)

(20 marks)

12 Star Technologies Limited, a listed company having its registered office at 55 the Mall, Lahore, has approached youand informed you that the company’s financial year closes on 30 June 2004. It is apprehended that delay may occurin finalizing the annual audited accounts of the company. The company’s directors are contemplating the option ofholding the due annual general meeting (‘AGM’) on 10 January 2005 in Karachi. For this purpose the directors planto send the notice of the AGM to all the shareholders 30 days before the proposed date.

Required:

(a) State whether the AGM could be held on 10 January 2005. If not, explain what options the company has inthis regard. (10 marks)

(b) State whether the company requires any approval(s) for holding the AGM in Karachi. (5 marks)

(c) State and explain whether there are any additional requirement(s) that the company would need to complywith regard to the ‘notice’ of the AGM. (5 marks)

(20 marks)

End of Question Paper

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Answers



Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) December 2004 Answers

1 The Supreme Court of Pakistan is the apex court of the country established under Article 175 of the Constitution of the IslamicRepublic of Pakistan, 1973 (the ‘Constitution’). As per Articles 176, 177 and 183 of the Constitution, the Supreme Court consistsof a Chief Justice (who is known as the Chief Justice of Pakistan) and such number of other judges as may be determined by theParliament. The Chief Justice of Pakistan is appointed by the President of Pakistan, who also makes appointment of each of theother judges of the Supreme Court, in consultation with the Chief Justice of Pakistan. Such consultation, as laid down in the Al-Jehad Trust v Federation of Pakistan, PLD 1996 SC 324 case, should be ‘meaningful’ and any appointment made withoutmeaningful consultation would be ultra vires the Constitution and, hence, be invalid. Qualifications for appointment of a person asa judge of the Supreme Court have been prescribed in Article 177(2) of the Constitution. It provides that for appointment as ajudge of the Supreme Court, a person should be a citizen of Pakistan and should either have been a judge of a High Court for aperiod of not less than five years or an advocate of a High Court for an aggregated period of not less than 15 years. As per Article179 of the Constitution, a judge of the Supreme Court should hold office until he attains the age of 65 years, unless he resignsearlier or is removed from his office in accordance with the Constitution. The permanent seat of the Supreme Court is at Islamabad.

The Supreme Court enjoys the supreme authoritative status in the judicial hierarchy of the courts in the country. All subordinatecourts in Pakistan are bound by the decisions of the Supreme Court (Article 189), and all executive and judicial authoritiesthroughout Pakistan are required to act in its aid (Article 190). The jurisdictional powers of the Supreme Court are discussed inArticles 184, 185 and 186 of the Constitution, and the same can be classified into: (i) original jurisdiction; (ii) enforcement offundamental rights; (iii) appeals against judgments and orders of the High Courts; (iv) opinion rendering; (v) transferring cases;(vi) issuing orders; (vii) review of its own judgments; and (viii) making of internal rules.

Original Jurisdiction

Article 184 stipulates that the Supreme Court shall have original jurisdiction to pronounce declaratory judgments in all disputesbetween any two or more governments (Federal as well as Provincial).

Enforcement of Fundamental Rights

The Supreme Court may take suo moto cognizance of matters involving questions of public importance with reference to theenforcement of fundamental rights.

Appeals against judgments and orders of the High Courts

The Supreme Court has jurisdiction to hear and determine appeals against judgments, decrees, final orders or sentences of a HighCourt enumerated in Article 185(2) and in all other cases only subject to grant of leave to appeal. For instance, where a High Courthas reversed an order of acquittal of an accused person and sentenced him to death; in contempt of High Court proceedings; andwhere a High Court certifies that the case involves a substantial question of law requiring interpretation of the Constitution.

Opinion Rendering

The Supreme Court, if requested by the President, can give an opinion on any question of law of public importance (Article 186).

Transferring Cases

The Supreme Court can in its discretion transfer any case, appeal or other proceedings pending before any High Court to any otherHigh Court (Article 186A).

Issue Orders

The Supreme Court can issue orders for securing the attendance of any person or production of any document (Article 187).

Review

The Supreme Court has power to review its own judgments and orders, which have apparent on the face of the record an error offact or law (Article 188).

Internal Rules

The Supreme Court has authority to make rules regulating its own practice and procedure (Article 191).

2 (a) The West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance 1968, aims to provide amenities andbenefits to workers during the course of their employment, and it is for determination of these benefits that the Standing Order(1) divides workmen into the following five categories:

(i) permanent(ii) probationers(iii) badlis(iv) temporary and(v) apprentices.

Workers are divided into these classifications depending on their nature of work and duration of employment. A ‘permanentworkman’, for example, is a workman who has satisfactorily completed a probationary period of ‘three months’ and is engagedin work of a permanent nature. The Supreme Court of Pakistan in Pakistan International Airlines v Sindh Labour Appellate

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Court, PLD 1980 SC 323 has defined ‘permanent work’ as a work which is likely to last more than nine months. Workspreading over a period of greater than nine months due to reasons such as negligence cannot be considered in this category.‘Probationer’ is a workman provisionally employed to fill a permanent vacancy and has not completed three months of service.‘Badli’ is a temporary substitute for a permanent workman or probationer, who is temporarily absent. ‘Temporary workman’is a workman engaged in work essentially of a temporary nature and such work as compared to permanent work is likely tobe completed within a period of nine months. The term ‘Apprentice’ here is used for a workman undergoing training.

(b) Before analysing the scope of the Workmen’s Compensation Act, 1923 (‘Act’) it should be understood that the superior courtsof Pakistan in the case cited as Kalsoom Akhtar v Abdul Rashid, PLD 1975 Lahore 244, have held that this statute is not‘penal’ in nature, but rather sets out the duties and liabilities of citizens in position of employees towards other citizens, whohappen to be workmen. It is a part of the larger scheme of the labour legislation in Pakistan, which aims at safeguarding theinterests of workmen. The Act in its preamble mentions that its objective is to regulate the payment of compensation by theemployers to the workmen in cases of personal injury incurred by the workmen by accident during the performance of theirduties. The Act mandates that the employer is responsible to pay compensation for injury sustained by a workman during theperformance of his job. To further safeguard the interests of workers, the Act provides that the quantum of compensationvaries with different kinds of injuries, for instance compensation is different for cases of injury resulting in total disablementand partial disablement. The Act also links the amount of compensation to workers’ wages and prescribes the procedure tobe followed in this regard (such as medical examination) and duties of both the workers as well as the employers. In shortthis statute aims at fixing the responsibility of compensation on the employers for injuries occurring to the workmen inconnection with their employment.

3 (a) Section 2(a) of the Contract Act, 1872 terms an ‘offer’ as a proposal by one party to another to do or abstain from doinganything with a view to obtaining assent of the other to such act or abstinence. In other words, an offer is an expression ofwill in definite terms to create legal relations. ‘Invitation to treat’, on the other hand, is circulation of information conveyingone’s readiness to negotiate business with anybody, who on such information would make an offer.

From the above definitions, it can be concluded that ‘offer’ and ‘invitation to treat’ differ with respect to their fixed terms, i.e.,in the case of offer the other party just has to convey its assent for the offer to become binding as a promise, whereas in thecase of ‘invitation to treat’ there is no intention on the part of the person sending out the invitation to obtain the assent of theother person, and the same is only to initiate negotiations. The typical illustrations of an invitation to treat are goods displayedin a shop with price tags and catalogues containing a description of goods. In short ‘invitation to treat’ is an attempt to induceoffers, and is not an offer in itself.

(b) A void contract in terms of s.2(g) of the Contract Act, 1872 (the ‘Act’) is without any legal effect and is a nullity as it is notenforceable under law nor can the parties render it valid. A voidable contract, according to s.2(i) of the Act, is enforceable bylaw at the option of one or more of the parties thereto but not at the option of others. In other words, a voidable contract isgood until it is avoided on grounds such as fraud, undue influence or misrepresentation. However, if the affected partychooses to affirm it, the contract continues to be valid. A commonplace instance of a void transaction in the sense of absolutenullity is an agreement by a person under a legal disability, e.g., a minor or a person of unsound mind. Such agreement isvoid ab initio and is incapable of ratification or confirmation. On the other hand, a commonplace instance of a voidabletransaction is that which is brought about by undue influence or fraud, which remains of full effect unless avoided byappropriate proceedings (see, The Chairman District Screening Committee Lahore v Sharif Ahmed Hashmi, PLD 1976 SC 258).

The points of distinction between void and voidable agreements are:

Legal EffectsA void agreement from the very beginning has no legal effect and is unenforceable at law. On the other hand a voidablecontract is valid and enforceable till it is repudiated or rescinded.

Position of Third Parties In case of a void agreement a third party cannot acquire any right from persons claiming under such agreement. In a voidablecontract a third party can acquire a valid title from a person claiming under such a contract.

EnforceabilityAs a void agreement is unenforceable at law, there does not arise any question of compensation on account of its non-performance. However, in the case of a voidable contract a person is entitled to compensation for loss or damagessuffered by him on account of non-performance of the contract.

4 (a) The corporate jurisprudence considers a ‘company’ to be a distinct legal entity from its members, capable of having separaterights and duties and having perpetual succession. ‘Partnership’, on the other hand, arises from a contract between personswho have agreed to share the profits of a business carried on by all or any of them acting for all (s.4 of the Partnership Act,1932). The advantages of carrying on business in form of a company as compared to a partnership are limited liability;perpetual succession; separate property; and transparency.

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Limited liability implies that members/shareholders being distinct from the company cannot be held liable for the company’sliabilities beyond the payment due on their shares or the guarantee given by them. The liability of members/shareholders is,therefore, limited to a certain extent. In a partnership, partners are jointly and severally liable for the debts of the partnershipbusiness.

A company is capable of holding property i.e. owning, enjoying and disposing of property in its own name.

Perpetual succession implies that a company’s membership may keep on changing without affecting the company’scontinuity. A change of partners may result in termination of a partnership relationship.

(b) Section 30(1) of the Partnership Act, 1932 restricts minors from becoming partners in a firm since partnership arises froma legally binding contract between partners, and minors do not have the capacity to enter into a legally binding contract (s.11of the Contract Act, 1872).

Irrespective of the above, minors can be admitted to the ‘benefits of partnership’ with the consent of all the partners. A minoradmitted to a partnership occupies a favoured position until he reaches the age of majority, for instance he continues to enjoyrights similar to those of partners, such as, right to inspect and copy accounts; share in the property and profits of the firmand at the same time due to his favoured status he is not held personally liable for the debts and acts of the partnership.

However, on attaining the age of majority the position changes and a minor has the option of either becoming a partner or ofsevering his connections with the partnership. In case he elects to become a partner, he shall be personally liable to the thirdparties for all debts and acts of the partnership from the date of his becoming a partner. In case he decides not to become apartner, his rights and liabilities will continue up to the date of severance and then onwards he shall not be liable for any actsof the partnership.

5 (a) Section 2(33) of the Companies Ordinance, 1984 states that a company secretary is an individual appointed to performsecretarial, administrative, or other duties aimed to ensure that the affairs of the company are conducted in accordance withthe Ordinance. S.204-A makes it mandatory for listed companies and single member companies to appoint companysecretaries.

A company secretary acts on behalf of the board of directors. The superior courts have held that a company secretary beingan officer of the company has extensive duties, including those of making representations on behalf of the company andentering into contracts which come within the day-to-day running of the company’s business.

Generally, a company secretary has duties towards (i) directors; (ii) shareholders; (iii) management and administration; (iv) the company; and (v) law. Duties towards shareholders imply arranging for shareholders meetings; keeping minutes ofsuch meetings; receiving applications for allotment of shares; transferring of shares; and recording dividends paid. Dutiestowards directors imply arranging board meetings; keeping records and minutes of such meetings and implementing decisionstaken in the meetings. If the company is a listed company, the Code of Corporate Governance becomes applicable, whichmandates that the company secretary should attend board meetings except those meetings which have on their agendamatters relating to the company secretary; ensure compliance with the law and the memorandum and articles of association.

(b) ‘Prospectus’ is defined in s.2(1)(29) of the Ordinance as any document described or issued as a prospectus, and includesany notice, circular, advertisement or other communication inviting offers from the public for the subscription of purchase ofany shares in a body corporate. Prospectus is a medium through which a company communicates with the public wantingto invest in the company and it is through the prospectus that the company makes certain disclosures to the public forsoliciting subscription. In the words of s.2(29) of the Companies Ordinance, 1984, a prospectus is any notice, circular,advertisement or other communication inviting the public to purchase shares or debentures of a body corporate or invitingdeposits from the public.

Information which a prospectus should contain is mentioned in s.53 and the Second Schedule to the Companies Ordinance,1984. This includes information as to the contents of the memorandum and signatories to it; capital structure (number andvalue of shares); description of business; particulars of directors; chief executive; and company secretary including anyrestrictions on their appointment; time of opening and closing of subscription list; minimum subscription; amount payablewith application; shares issued for consideration other than cash; premium or discount on issue of shares; auditor’s report;nature and extent of interest of directors or promoters; expert reports and contracts entered into by the company.

6 (a) The term ‘share’ is defined under s.2(1)(35) of the Companies Ordinance, 1984 to mean ‘share in the share capital of acompany’. The authorized share capital of a company is normally divided into shares of a particular denomination. Forinstance, a company may have an authorized share capital of Rs. 1,000,000 divided into 100,000 shares of Rs. 10 each.A person becomes a shareholder/member of a company by acquiring one share.

(b) A share gives certain rights to a shareholder in the company, such as, the right to vote at the meetings of shareholders, theright to a dividend (share in the company’s profits) and the right to return of capital in case of winding up of the company.Normally, all these rights are acquired by an ordinary shareholder subject to the Articles of Association of a company that mayrestrict such rights in accordance with the classes, if any, of the shareholders.

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(c) Section 90 of the Companies Ordinance, 1984 allows companies limited by shares to have different kinds of share capitaland different kinds of classes therein as allowed by the company’s memorandum and articles of association. Ordinary sharesare normally referred to as the ‘equity’ and connote residual rights viz a viz income and capital of the company after dischargeof prior commitments. Ordinary shares carry all the rights enumerated above and do not have a right to a fixed dividend.However, they stand to gain the most in a prosperous company as after payments of fixed dividends to shareholders havingpreferential rights, the ordinary shareholders enjoy the remainder of the distributable surplus. Also, ordinary shares havevoting rights, which, normally, preference shares do not have. Preference shareholders are entitled to preferential paymentsof a dividend and return of capital in a solvent winding up. They are similar to debentures as they entitle the holder to receivea fixed rate of dividend.

Points of distinction between ordinary and preference shares should be studied in the context of rights of holders of suchshares pertaining to: (a) dividend payments; (b) return of capital in case of solvent winding up; and (c) voting rights.

Unlike holders of preference shares, ordinary shareholders do not have a right to a fixed dividend but are entitled to theremainder of a company’s distributable surplus after payments to preference shareholders.

Usually the voting rights of preference shares are restricted to meetings held to consider variation of their rights. Ordinaryshares carry the right to vote in all meetings.

In case of solvent winding up, preference shareholders are to be paid before any payments are made to ordinary shareholders.

7 Section 254(3) of the Companies Ordinance, 1984 disqualifies the following persons from being appointed as auditor of acompany. The disqualified personnel are:

– A present or past director, officer or employee of the company during the preceding three years;– A partner or person in the employment of a director, officer or employee of the company;– Spouse of a director of the company;– Person indebted to the company;– Persons who either themselves or their spouses or minor children or in case of a firm, all partners of such firm hold any shares

in the company (audit client) or any of its associated companies. In case a person holds shares prior to his appointment heshall disclose the fact of his appointment as auditor and thereafter within ninety days of such appointment divest himself ofsuch shares.

If after his appointment a person falls in any of the above-mentioned categories, he should be deemed to have vacated his officeas auditor from the date he becomes so disqualified.

In addition to the above disqualifications the Code of Corporate Governance places the following conditions upon the appointmentof auditors by a listed company.

Auditors not to hold Shares Listed companies are required to ensure that the firm of external auditors nor any partner in the firm of external auditors and hisspouse and minor children during the term of their appointment hold, purchase, sell or take any position in shares of the listedcompany or any of its associated companies or undertakings. Further, if shares are held by a firm or a partner then such listedcompany should take measures to ensure that the auditors disclose the interest to the listed company within 14 days ofappointment and divest themselves of such interest not later than 90 days thereof.

Satisfactory RatingNo listed company shall appoint as external auditors a firm of auditors, which has not been given a satisfactory rating under theQuality Control Review programme of the Institute of Chartered Accountants of Pakistan.

Prohibition on AppointmentNo listed company shall appoint as external auditors a firm of auditors which does not comply with the International Federation ofAccountant’s guidelines on Code of Ethics as adopted by the Institute of Chartered Accountants of Pakistan.

Auditors not to perform Managerial FunctionsNo listed company shall appoint its auditors to provide services in addition to audit and should ensure that auditors do not performmanagement functions or make management decisions, which is the domain of the board of directors and management of listedcompanies.

8 (a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 as a company which by its articles (i) restrictsthe right to transfer its shares; (ii) limits its membership to 50; and (iii) prohibits the public from subscribing to the shares ordebentures of the company.

Restriction on transfer of shares results in the ownership of, and interest in, the company being confined to a close circle offriends or relatives. Such a restriction may exist in the form that directors have the authority to not allow transfer of shares topersons whom they do not approve; shares can only be sold at a certain price or by one member to another. Unlike a publiccompany, a private company cannot have more than 50 members. Also unlike a public company, a private company cannotinvite the public to subscribe to its shares or debentures.

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(b) Section 175 of the Companies Ordinance, 1984 allows all natural persons to become directors of a company unless they arerendered ineligible under s.187 of the said Ordinance. In addition to these statutory disqualifications, a company may, byproviding in its articles of association, impose additional disqualifications for appointment of directors.

Disqualifications under s.187 are minority, insanity, insolvency, un-discharged insolvent, and conviction on account of moralturpitude, restriction under the Companies Ordinance, 1984, and non-membership of the company in certain cases.

The condition of minority implies that no person below the age of 18 years can qualify and become a director. Example ofoffences involving moral turpitude are acts contrary to justice, honesty, principles or good governance.

Sub-clause (h) of s.187 is of significance in that it specifies that only members of a company can become its directors, withthe exception that persons representing any government, creditors or in permanent employment of the company, are qualifiedto become directors even if they are not members of the company.

9 (a) As per s.148 of the Contract Act, 1872 (the ‘Act’), a ‘bailment’ is the delivery of goods by one person to another for somepurpose, upon a contract that they shall, when the purpose is accomplished, be returned, or otherwise disposed of, accordingto the directions of the person delivering them. Mrs Pasha delivered the stone to Mr Goldsmith under an agreement that Mr Goldsmith would cut and polish the stone, and return the same to Mrs Pasha before her daughter’s wedding. Hence allthe essential characteristics of a contract of bailment, namely, delivery of goods, purpose of delivery under a contract and thecondition that the goods would be returned when the purpose is accomplished, exist in the present case. Hence, a validcontract of bailment exists between the parties. Mrs Pasha enjoys the position of ‘bailor’ and Mr Goldsmith that of ‘bailee’.

(b) Sections 151, 152 and 160 of the Act mention the general responsibilities of a bailee. This can be divided into two categories(i) during the period goods are in possession of the bailee and (ii) bailees responsibility for the return of goods.

Responsibility during the period goods are in possession of the Bailee

In a contract of bailment, once the actual physical possession of the bailed goods is handed over to the bailee, he becomesbound under s.151 of the Act to take as much care of the bailed goods as a man of ordinary prudence would under similarcircumstances take of his own goods of the same bulk, quality and value. Further, if the bailee has taken reasonable care ofthe goods delivered to him, then in terms of s.152 of the Act he cannot be held responsible for any loss, destruction ordeterioration to the goods bailed unless there is a special contract to this effect. It is to be noted that the bailee is required todisplay ‘level of care’ as that of a man of ‘ordinary prudence would under similar circumstances’.

Responsibility for the return of Goods

Upon completion of the period or purpose of bailment, the bailee is bound under s.160 of the Act to return the goods bailed,and in case of any failure on his part, the bailee is to be responsible, under s.161 of the Act, to the bailor for any loss,destruction or deterioration of the goods bailed.

In the present circumstances, Mr Goldsmith had kept the stone in a well protected safe in the basement of his workshop. Hehas displayed the level of care expected of a man of ordinary prudence as required by s.151. Resultantly, as per s.152 of theAct, Mr Goldsmith cannot be held responsible for any delay caused due to theft. However, Mr Goldsmith may have to accountfor reasons behind keeping the stone in his workshop after completion of the cutting and polishing job, as s.160 requires thebailee to deliver back ‘even without demand’ the goods bailed upon completion of the purpose of bailment.

(c) No, Mr Goldsmith is entitled to retain the possession of the stone until he receives remuneration for the cutting and polishingjob performed by him on the stone. This view finds support from s.170 of the Act, which provides that if the bailee has inaccordance with the purpose of bailment rendered services involving labour or skill in respect of goods bailed then he isentitled to retain possession of such goods until he receives remuneration for his services. However, Mr Goldsmith cannot sellthe stone in order to recover his remuneration.

10 (a) Ameer’s promise to buy Sana the bracelet does not constitute a contract. Section 2(h) of the Contract Act, 1872 (the ‘Act’)provides that only an agreement enforceable by law is a contract. An agreement is reached if there is an unconditional offer,acceptance of the same without any variation whatsoever and consideration. The term ‘consideration’ as used in the said Actdoes not only imply anything of value but includes a set of reciprocal promises to do or abstain from doing something asallowed by s.2(d) of the Act.

Ameer’s promise to buy Sana the bracelet may have covered the stages of offer and acceptance but as it is without anyconsideration it does not give rise to a contract. The argument that consideration need not only be in money and the love thatAmeer held for his wife Sana is sufficient consideration is also not sound as s.25(1) of the Act specifically provides thatagreements made without consideration are void unless expressed in written form and registered. The facts provided showthat Ameer’s promise may have been made on account of love for Sana, but since it was never documented and registered,therefore, it could be concluded that a contract does not exist between Ameer and Sana.

(b) The mere use of Ameer’s garage by Sana does not create a ‘partnership’ between them as there was no agreement with regardto the management of the café and sharing of profits. An agreement covering these essentials is necessary to constitute apartnership. A partnership according to s.4 of the Partnership Act, 1932 (‘1932 Act’) constitutes a relationship betweenpersons who have agreed to share profits of a business carried on by all, or any of them acting for all.

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In other words, a partnership would exist if there is a business; an agreement to share profits of that business; and thebusiness is to be carried on by all, or any of the partners acting for all. It is to be noted that business should be in actualexistence on the date of the partnership agreement and an agreement to carry on business from a future date will not resultin a partnership until that date arrives. Such an agreement does not necessarily have to be in written form; it may very wellbe an oral agreement. In the agreement the partners can agree to share profits in any way they like. For instance it may beagreed that one partner shall receive a fixed annual or monthly sum. Agreement as to sharing of losses is not necessary andit may very well be that a partner may just share profits and not the losses. Lastly, to constitute a partnership, there must bemutual agency between the partners i.e. persons should not be just receiving a share of profits in the business, they shouldrather be involved in carrying out the partnership business on behalf of other partners.

(c) Yes, Sana can open up the new café since s.27 of the Act provides that an agreement restraining any one from exercising alawful profession, trade or business is void.

The exceptions to this rule are given in exception (1) to s.27 of the Act, which provides that if the goodwill of any businessis sold then the seller can be restricted from carrying a similar business within reasonable local limits, and in s.11(2) of the1932 Act, which provides that during a partnership, a partner can be restricted from carrying on business except that of thepartnership.

11 (a) A ‘private company’ is defined in s.2(1)(28) of the Companies Ordinance, 1984 as a company which by its articles (i) restrictsthe right to transfer its shares; (ii) limits its membership to fifty; and (iii) prohibits the public from subscribing to the sharesor debentures of the company. Section 45(1) of the Companies Ordinance, 1984 (the ‘Ordinance’) provides that a privatecompany can convert itself into a public company by altering its articles of association in such a manner that they no longerinclude the said restrictions/prohibitions. On the date of such alteration, the company would cease to be a private companyand is required to file, within a period of fourteen (14) days after such date, with the registrar, either a prospectus or astatement in lieu of a prospectus.

Briefly stated, the procedure for alteration of the articles of association is prescribed by s.28 of the Ordinance. The companymay alter or add to its articles by passing a special resolution to this effect. A special resolution is defined in s.2(1)(36) ofthe Ordinance as a resolution passed by a majority of not less than three-quarters of such members entitled to vote as arepresent in person, or by proxy at a general meeting of the shareholders of which not less than twenty-one (21) days noticespecifying the intention to propose the resolution as a special resolution has been duly given. Upon passing of the specialresolution, the alterations to the articles would become effective and shall be as valid as if originally contained in the articles.

(b) Under the existing objects clause of its memorandum of association, the company is authorized to engage in themanufacturing of textile and related products only. Its undertaking the new business of soft drinks production would be ultravires its objects, and, hence, illegal.

In order to be able to undertake the manufacturing and sale of soft drinks, the company would be required to first amend theobjects clause of its memorandum. The scope and procedure for amending the objects clause is given in s.21 of theOrdinance. The said section provides that a company may effect changes to its objects clause by passing a special resolutionand such changes become effective only if confirmed by the Securities and Exchange Commission of Pakistan on a petitionby the company under s.21 and registration of such order of confirmation with the concerned registrar of companies within90 days of the same. The Securities and Exchange Commission of Pakistan, before granting its approval, may require thecompany to satisfy the demands of its creditors objecting to such alterations to the memorandum. Section 21 of the Ordinancefurther provides that a company may amend its objects clause to carry on some business, not being a business specified inits memorandum, which may conveniently or advantageously be combined with the business of the company. The superiorCourts of Pakistan in the matter of Riaz and Company, PLD 1967 Karachi 695 allowed a company engaged in cotton ginningbusiness to undertake production of vegetable ghee and held that the question whether a company can combineadvantageously or efficiently with its existing business the new business is left to the judgment of the directors. The Securitiesand Exchange Commission of Pakistan should not go behind such a decision of the directors if the same appears to be fair.

12 (a) Star Technologies Limited cannot hold its AGM on the proposed date of 10 January 2005. This is because, under s.158(1)of the Companies Ordinance, 1984 (the ‘Ordinance’), every company is required to hold its AGM within a period of four months following the close of its financial year. In the present instance, the company’s financial year ended as on 30 June 2004. The company should hold its AGM at the latest by 31 October 2004. The holding of the proposed AGM on10 January 2005 would mean that a period of more than six months would have elapsed from the date of closure of thecompany’s financial year, which would be in clear violation of the said s.158.

In the given circumstances, the company should take steps to hold the AGM by the end of October 2004 (within a period offour months from the date of the end of its financial year). In case it is not possible, the company may approach the Securitiesand Exchange Commission of Pakistan for the permission to extend the time for the holding of the AGM. As per the provisoto s.158(1) of the Ordinance, a Commission may for any special reasons extend the time within which a listed company mayhold its annual general meeting. For this purpose, the company would be required to file an application before theCommission. It should, however, be noted that the Commission is authorized to extend the time for a maximum period of 60 days only, i.e. until the end of December.

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(b) Section 158(2) of the Ordinance requires that in the case of a listed company, an annual general meeting must be held inthe town where the registered office of the company is situated. The registered office of Star Technologies Limited is in Lahore.In order for holding the AGM in Karachi, the company would have to seek the approval of the Commission. The proviso tos.158(2) authorizes the Commission to allow upon an application by a listed company, the holding of its AGM at any placeother than the registered office. Resultantly, if the company wants to hold the AGM in Karachi (which is not where itsregistered office is situated), it should seek the approval of the Commission by making an application to this effect.

(c) Section 158(3) of the Ordinance provides that notice of an AGM should be sent to the shareholders at least 21 days beforethe date fixed for the said meeting. The directors’ plan to send the notice of the proposed AGM to the shareholders of StarTechnologies Limited 30 days in advance is in accordance with the law. However, the fact that the company is a listedcompany requires that in addition to sending notice to the shareholders in the ordinary course, the company should have thenotice of the AGM published in at least one issue each of a daily newspaper in English and Urdu language having circulationin the Province in which the stock exchange on which the company is listed is situated.

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Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) December 2004 Marking Scheme

1 This question expects candidates to exhibit understanding about the constitutional structure and jurisdictional powers of theSupreme Court of Pakistan provided in Articles 176, 177, 183, 184, 185 and 186 of the Constitution of Pakistan, 1973.

7–10 Answers discuss in detail the constitutional structure and jurisdictional powers of the Supreme Court of Pakistan. Analysethe jurisdictional powers of the Supreme Court with regard to disputes between different governments, proceedings beforethe High Courts, enforcement of fundamental rights, review and internal rule making. Further discussion on the precedentsto be followed for appointment of judges of this apex court and the qualifications of such personnel shall be appreciated.

3–6 Answers reflect some understanding of the constitutional structure and jurisdictional powers of the Supreme Court ofPakistan. Touch upon the minimum qualifications mandated by the constitution for appointment of the judges of theSupreme Court.

0–2 Extremely poor answers that show little or no knowledge about the constitutional structure and jurisdictional powers of theSupreme Court of Pakistan.

2 This question is divided into two parts having equal marks and each part shall be marked separately.

(a) 3–5 Answers discuss the division of workmen into five categories for the purposes of the West Pakistan Industrial andCommercial Employment (Standing Orders) Ordinance, 1968 for determination of the benefits to be provided todifferent classes of workmen during the course of their employment and upon termination of employment.

0–2 Poor answers depicting little or no knowledge about the different classes of workmen under the West PakistanIndustrial and Commercial Employment (Standing Orders) Ordinance 1968.

(b) 3–5 Answers mention that the Workmen’s Compensation Act, 1923 is not a penal statute and discuss the duties andliabilities of employers and workmen in cases involving injuries to workmen in the course of their employment.

0–2 Answers show little understanding of the scope of the Workmen’s Compensation Act, 1923.


(a) 3–5 Answers first define and then draw a distinction between the natures of ‘offer’ and ‘invitation to treat’ in the contextof the Contract Act, 1872. Examples clarifying the same shall be appreciated.

0–2 Answers exhibit little or no knowledge about the distinguishing features of ‘offer’ and ‘invitation to treat’.

(b) 3–5 Answers first define and then draw distinction between ‘void’ and ‘voidable’ contracts as discussed in the ContractAct, 1872.

0–2 Answers show little understanding of the two concepts and/or fail to discuss their points of distinction.

4 This question is divided into two parts having different marks and each part shall be marked separately.

(a) 3–6 Answers in this band define the two types of business forms (company and partnership) and then make acomparative analysis of features which make a company as a business form advantageous over a partnership.

0–2 Answers fail to discuss or show little understanding of the advantages that corporate form has over partnership.

(b) 3–4 Answers discuss the favourable position enjoyed by minors in a partnership relationship under the Partnership Act,1932. Discussion on minors’ position in a partnership on attaining majority shall be appreciated.

0–2 Answers show little understanding about the favourable status enjoyed by the minors under the Partnership Act,1932.

5 This question is divided into two parts having equal marks, and each part shall be marked separately.

(a) 3–5 Answers display candidates’ knowledge about the role of the company secretary as envisaged in the CompaniesOrdinance, 1984 and the various duties of this office.

0–2 A weak answer showing little or no understanding about the role of a company secretary.

(b) 3–5 Answers define and discuss the nature of a prospectus and mention the different types of information that should beprovided in it.

0–2 Answers fail to make clear the meaning and nature of a prospectus.

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6 This question expects candidates to exhibit knowledge about the concept of shares in the context of corporate jurisprudence.

(a) 2–3 Answers define ‘share’, quote the relevant provision of the Companies Ordinance, 1984 and explain, by illustration,the division of authorized share capital in shares.

0–1 Answers fail to define the term ‘share’.

(b) 1–2 Answers set out all the three kinds of the rights attached to ordinary shares, namely, the right to vote at theshareholders’ meetings, the right to share in the dividend and the right to return of capital in the case of a company’swinding-up.

0 Answers fail to state all the three rights.

(c) 4–5 Answers quote s.90 of the Companies Ordinance, 1984, which allows a company to have different kinds of sharecapital, discuss the concept of ordinary and preference shares and set out the points of distinction between them.

2–3 Answers reflect some understanding about ordinary and preference shares but are not clear as to their differingfeatures.

0–1 Extremely poor answers that show little or no knowledge about the distinguishing features of ordinary and preferenceshares.

7 This question requires candidates to set out the disqualifications laid down in the Companies Ordinance, 1984 with regard to theappointment of an auditor for a company. Additional requirements for listed companies as set out in the Code of CorporateGovernance should also be referred to.

7–10 Answers mention the disqualifications which make appointment of an auditor illegal both before and after assumption ofthe said office. Particular reference is made to additional requirements for listed companies.

3–6 Answers in this band mention some disqualifications set out in the Companies Ordinance, 1984 but do not refer to therequirements of the Code of Corporate Governance for listed companies.

0–2 An incomplete answer showing little knowledge of the disqualifications.

8 This question is divided into two parts, and each part shall be marked independently.

(a) 3–4 Answers give the definition and characteristics of a private company as set out in s.2(1)(28) of the CompaniesOrdinance, 1984.

0–2 Answers show little or no understanding of the concept of a private company.

(b) 3–6 Answers discuss the scope of s.187 of the Companies Ordinance, 1984 with regard to appointment of naturalpersons as directors in juxtaposition to the disqualifications set out in s.175.

0–2 Answers do not quote the relevant broad qualifying legal provision and/or do not discuss the same in the context ofdisqualifications.

9 This question is divided into three parts with different marks for each.

(a) 3–4 Answers define contract of bailment, setting out the salient features of such a contract in the context of s.148 of theContract Act, 1872 and examine the existence of the contract of bailment in the given circumstances. Answersmentioning the respective positions held by Mr Goldsmith and Mrs Pasha in the said contract shall be appreciated.

0–2 Answers do not quote the relevant legal provision and/or do not discuss whether a contract of bailment exists.

(b) This part of the question requires candidates to display knowledge about the general responsibilities of the bailee provided inss.151, 152 and 160 of the Act and to explain whether Mr Goldsmith is responsible for the delayed delivery.

7–10 Answers discuss general responsibilities of the bailee and conclude, with reasons, as to whether Mr Goldsmith isresponsible or not.

3–6 Answers in this band outline the general responsibilities of a bailee but do not discuss whether Mr Goldsmith isresponsible or not.

0–2 Incomplete answers showing little understanding of the question.

(c) 3–6 Answers quote s.170 of the Act and discuss the right of Mr Goldsmith to retain the stone until he is paid remunerationfor the services rendered by him.

0–2 Answers do not quote the relevant section and/or do not discuss it.

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10 This question is divided into three parts and each part has a different weighting.

(a) 6–8 Answers analyse and discuss the status of Ameer’s promise in the context of s.2(d) and (h) and s.25(1) of thePartnership Act, 1932 and conclude whether a contract exists or not.

3–5 Answers mention the relevant legal provisions but fail to conclude whether a contract exists or not.

0–2 Answers do not refer to the relevant provisions and fail to discuss the issue involved.

(b) 6–8 Answers discuss s.4 of the Partnership Act, 1932, its ingredients and conclude as to whether a partnership exists ornot.

3–5 Answers mention the relevant legal provisions but fail to conclude whether an partnership exists or not.

0–2 Answers do not refer to the relevant provisions and fail to reach a conclusion.

(c) 3–4 Answers discuss s.27 of the Act with its exceptions i.e. given in exception (1) to s.27 and s.11(2) of the PartnershipAct, 1932.

0–2 Answers do not refer to the relevant provision and/or do not discuss its exceptions.

11 This question is divided into two parts, each carrying equal marks.

(a) 7–10 Answers in this band define a private company, point out the changes which need to be made to the articles in lightof s.45(1) of the Companies Ordinance, 1984 (the ‘Ordinance’). Giving a brief account of the procedure for amendingthe articles and describing a special resolution in accordance with s.2(1)(36)of the Ordinance along with the effectsof such changes shall be appreciated.

4–6 Answers quote the relevant legal provisions but do not discuss any formalities which need to be complied with foraffecting such changes.

0–3 Answers display little understating of the relevant legal provisions.

(b) 7–10 Answers in this band point out the particular clause of the memorandum which needs to be changed for undertakingnew business; discuss the formalities and the scope mentioned in s.21 of the Ordinance on the basis of which sucha change can be made.

4–6 Answers quote the relevant legal provision but do not discuss the formalities and the basis on which such changecan be effected.

0–3 Answers display little understating of relevant legal provisions and issues at hand.

12 This question is divided into three parts with different marks for each and aims to test the application of candidates’ knowledge ofs.158 of the Companies Ordinance, 1984.

(a) 7–10 Answers briefly discuss s.158 of the Ordinance and discuss the options which the company has with regard toextension in time for holding the AGM in view of the expected delays. Further, answers advise the company as to theprocedure to be followed for seeking extension of a statutory deadline for holding the AGM.

4–6 Answers quote the relevant legal provision but do not discuss the company’s options as to the date of the AGM andprocedure for getting an extension.

0–3 Answers display little understating of the relevant legal provision and/or issue.

(b) 3–5 Answers discuss the requirements of the Ordinance as to the venue of the AGM in light of s.158(2) and as to howthe same can be changed.

0–2 Answers merely quote the relevant section but do not opine as to whether the venue of AGM can be changed or not.

(c) 3–5 Answers mention the requirements of notice imposed by s.158(3) with particular reference to additional requirementsin case of listed companies.

0–2 Answers fail to mention the additional requirements that listed companies have to comply with in giving notice of itsAGM.

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PART 2

TUESDAY 7 JUNE 2005

QUESTION PAPER








Pape

r 2.2

(PK

N)




1 In the context of the Constitution of the Islamic Republic of Pakistan, 1973, explain:

(a) The concept and position of fundamental rights. (5 marks)

(b) The fundamental right of ‘freedom to trade, business or profession’. (5 marks)

(10 marks)

2 In relation to the law of contract:

(a) Distinguish between the terms ‘pledge’ and ‘hypothecation’. (6 marks)

(b) Explain the concept of ‘frustration of contract’. (4 marks)

(10 marks)

3 Describe the different modes by which a partnership firm may be dissolved under the Partnership Act, 1932.

(10 marks)

4 In relation to company law, explain the concept of the ‘lifting of the corporate veil’.

(10 marks)

5 In relation to the Companies Ordinance, 1984 define:

(a) Associated companies. (5 marks)

(b) Companies limited by guarantee. (5 marks)

(10 marks)

6 State the formalities, which need to be complied with under the Companies Ordinance, 1984, for issuing sharesat a discount.

(10 marks)

7 State the procedure prescribed in the Companies Ordinance, 1984 for the removal of a director.

(10 marks)

8 In relation to the employment laws, discuss the following:

(a) ‘Provident fund’ and ‘gratuity’ under the West Pakistan Industrial and Commercial Employment (StandingOrder) Ordinance, 1968. (5 marks)

(b) ‘Trade union’, under the Industrial Relations Ordinance, 2002. (5 marks)

(10 marks)

2




9 Ghandhara Limited (GL) was incorporated on 1 January 2004, and is currently operating as a profitable company.The directors of GL intend to issue shares at a premium after 1 May 2005 in order to use the proceeds of such issueto pay off the preliminary expenses incurred in setting up the company. In this regard Kamal Brokerage House (KBH)has shown its willingness to procure public subscription for the said shares provided GL agrees to pay a fee equivalentto 5% of the total value of the shares. GL has approached you to seek advice.

Required:

Advise GL on the following:

(a) Whether GL can issue shares at a premium after 1 May 2005 and on what conditions? (6 marks)

(b) Whether it is legal for GL to hire the services of KBH for securing public subscription of the shares, and whatis the maximum amount of fee KBH is entitled to receive under law? (6 marks)

(c) Whether the proceeds from the issuing of shares at a premium can be utilized for satisfying the preliminaryexpenses incurred on the setting up of GL? (8 marks)

(20 marks)

10 VEGA Cement Limited (VCL) is a listed company. Jamal and Kamal (J&K), Chartered Accountants, have been itsauditors for the past five years. VCL wants to appoint Mr Faisal as its auditor in the next annual general meeting(AGM). Mr Faisal is a dynamic man of impeccable integrity and five months ago resigned from VCL as its internalauditor to pursue an independent professional practice.

Required:

Advise VCL on the following:

(a) Whether VCL can remove J&K, Chartered Accountants, from the position of the company’s auditors? (5 marks)

(b) Whether Mr Faisal can be appointed as the auditor of VCL? (5 marks)

(c) State the procedure and formalities that VCL should observe for appointing Mr Faisal as its auditor in thenext AGM in place of J&K, Chartered Accountants. (10 marks)

(20 marks)

3 [P.T.O.



11 Bilal entered into an agreement to sell his house to Jaffer, who sought one week’s time for making the full payment.Since Bilal had to leave for Singapore on urgent business, before leaving he introduced his neighbour, Qasim, to Jafferand handed over the keys of the house to Qasim in front of Jaffer. Bilal requested Qasim to look after his house in hisabsence and to hand over the keys to Jaffer on Bilal’s instructions in this respect. Two days after Bilal’s departure,there was a severe hail storm one night, and the next morning when Qasim went to check Bilal’s house, he foundthat a big glass window of a room on the front had shattered. Qasim immediately arranged to have installed a newglass through a carpenter. The cost of the glass pane and its installation came to Rupees fifteen thousand (Rs. 15,000), which Qasim paid out of his own pocket. Also, during Bilal’s absence Qasim rented out for one weekone bedroom of Bilal’s house at the daily rate of Rupees eight hundred only (Rs. 800). Bilal’s deal with Jaffer couldnot materialize since the latter had failed to arrange the payment in time. Upon his return, Bilal was disappointed tofind out about Qasim’s handling of his house.

Required:

Advise Qasim on the following:

(a) What kind of contractual relationship does Bilal’s request to Qasim create between the two? (4 marks)

(b) Whether Qasim is legally justified in hiring the services of the carpenter for fixing the glass window andwhether Qasim can recover the cost from Bilal? (8 marks)

(c) Discuss the legality of Qasim’s renting out one of the rooms and state whether Bilal can claim from Qasimfor this. (8 marks)

(20 marks)

12 Irfan tailors shirts. He agreed to supply 60 shirts to Ali at the price of Rupees one thousand (Rs.1,000) per shirt overa period of one month in six equal consignments provided Umer undertakes to pay Irfan any amount owed by Ali incase of Ali’s default. Umer being a close friend of Ali agrees to this, and Irfan supplies Ali with two consignments inthe first ten days at the agreed price. Subsequently, Irfan and Ali agreed that the remaining four consignments shallbe supplied at the price of Rupees twelve hundred (Rs. 1,200) per shirt. Umer had no knowledge of this arrangement.Irfan supplied the remaining four consignments and requested Ali for the payments due. Ali refused to pay on pretextthat he had not been able to sell the shirts.

Required:

(a) Explain the nature of contractual relationship between Irfan, Ali and Umer. (5 marks)

(b) State whether the fact that Umer has not received any consideration for the undertaking affects Irfan’s rightsagainst Umer. (5 marks)

(c) State the extent of Umer’s liability. (10 marks)

(20 marks)


4



Answers



Part 2 Examination – Paper 2.2 (PKN)Corporate and Business Law (Pakistan) June 2005 Answers

1 (a) ‘Fundamental rights’ is the modern name given to what have traditionally been known as ‘Natural Rights’. Such rights dateback to the time when the Magna Carta (1214) was introduced and through it an absolute monarch was made toacknowledge that the subjects possessed certain rights, which could not be violated by an all powerful sovereign. In fact,even prior to that, the Holy Quran enshrines the natural rights of human beings. In Pakistan, the Fundamental Rights areprotected in Part II, Chapter (1) of the Constitution of the Islamic Republic of Pakistan, 1973 (the ‘Constitution’). TheFundamental Rights guaranteed by the Constitution include the right to life and liberty, protection against slavery, forcedlabour and retrospective and double punishment, right to dignity of man and privacy of home, freedom of movement,assembly, association, speech, trade, business and profession, freedom to profess religion and to manage religiousinstitutions, right to acquire property and protection of property rights and safeguards against discrimination on the basis ofrace, religion, caste and sex.

The position of the Fundamental Rights is protected in Article 8 of the Constitution, which provides that any law, custom orusage having the force of law, if inconsistent with the Fundamental Rights shall be void to the extent of such inconsistency.The said Article mandates that the state shall not make any law which takes away or abridges such rights, and if any law incontravention of Fundamental Rights is made then the same shall be void to the extent of such contravention. This view pointhas been reinforced by the Supreme Court of Pakistan in Province of East Pakistan v Mohammad Mehdi Ali Khan, PLD 1959S.C. (Pak) 378, wherein it was held that a law contravening any of the Fundamental Rights is void to the extent of suchcontravention and is not void ab initio i.e. the law exists and is totally applicable to matters not covered by FundamentalRights. It has been further held in Rifat Perveen v Bolan Medical College, PLD 1980 Quetta 10, that even in a state ofemergency, the state cannot make laws in violation of Fundamental Rights. However, as per Article 233(2), the right to moveCourt for enforcement of such rights can be suspended.

(b) The fundamental right to freely trade or practice a business or profession is guaranteed by Article 18 of the Constitution, whichstipulates that every citizen shall have the right to enter upon any lawful profession or conduct any lawful trade or businesssubject to any qualifications prescribed by law.

The use of the word ‘lawful’ in Article 18 allows the legislature to either totally or partially prohibit trade, business, orprofessions, which are against the public interest, such as, prostitution, as viewed by the superior Courts of Pakistan inMehtab Jan v Rawalpindi Muncipal Committee, PLD 1958 Lahore 929.

Article 18 allows (i) regulation of any trade or profession by a licensing system, (ii) regulation of trade commerce or industryin the interest of free competition and (iii) the carrying on, by the government (federal or provincial) or by a corporationcontrolled by the government, of any trade, business, industry or service, to the complete or partial exclusion of other persons.

2 (a) Section 172 of the Contract Act, 1872 (the ‘Act’) defines the term ‘pledge’ as a delivery of goods as security under a contractand such goods are to be returned or otherwise disposed of when the debt or promise made under such contract is performedor paid. Use of the term ‘goods’ means that pledge could be created in respect of movable property. Immovable propertycannot be a subject matter of pledge. To constitute a valid pledge there must be (i) a contract under which goods are to bedelivered as security and (ii) delivery of possession of the goods mentioned in the contract. A person who pledges his goodsas security for a debt is called a pledgor and the person to whom the goods are pledged is called a pledgee.

‘Hypothecation’, on the other hand, is also a kind of pledge and covers a situation where the possession of the goods pledgedremains with the debtor, and the creditor merely acquires the right to sell them to recover his claims out of the proceeds. Asa consequence, despite the fact that property is in possession of the debtor, it cannot be transferred to a third party withoutthe express permission of the creditor. Hypothecation can be with respect to existing goods and goods that might be acquiredsubsequently.

From the above discussion, it can be noted that pledge and hypothecation differ on the point of delivery of possession i.e.under pledge the creditor gets possession of the goods pledged whereas under hypothecation the possession remains withthe debtor.

(b) The doctrine of frustration of contract is anticipated by s.56 of the Act. It provides that (i) agreements to do impossible actsare void and (ii) executed contracts may be discharged by reason of supervening impossibility or illegality of the act agreedto be done.

The doctrine of frustration of contract applies if the following conditions exist: (i) the act or promise must have becomeimpossible to perform, (ii) the impossibility should be the result of some event which the promisor could not prevent and (iii)such impossibility should not be self-induced or due to negligence of the promisor.

The word ‘impossible’ should be construed to embrace within its purview acts that become impractical or extremely hazardousand cannot be said to refer to situations where a party has refused to perform its part of the contract. Also, there is nofrustration if performance of the contract remains physically and legally possible though commercially unprofitable. Lastly,before claiming frustration, it should be shown that an event under which a contract is deemed to be frustrated should besuch an event which the parties to the contract did not foresee and could not with reasonable diligence have foreseen.

7



3 Dissolution of a partnership means breaking-up or extinction of a relationship of partnership between all the partners of a firm interms of s.39 of the Partnership Act, 1932 (the ‘Act’). Under the Act, dissolution of a firm may occur in the following instances:

(1) Compulsory DissolutionA firm stands compulsorily dissolved if any of the events mentioned in s.41 of the Act has occurred, that is, (i) all partnersor all partners except one is adjudicated as insolvent; or (ii) if any event happens which makes unlawful the business of thefirm or makes illegal the carrying on of the said business under a partnership.

(2) Dissolution on the happening of certain ContingenciesSection 42 of the Act allows partners to agree that their partnership shall stand dissolved if, amongst others, any of thefollowing events would occur: (i) the time period for which the firm was constituted expires; and/or (ii) the project for whichthe partnership was constituted stands accomplished.

(3) Notice of dissolution of partnership at willSection 43 of the Act allows partnerships-at-will to be dissolved by any partner by giving a written notice to this effect to otherpartners as a result whereof the firm shall stand dissolved from the date of communication of the notice.

(4) Dissolution by CourtAny partner may file a suit before a competent court praying dissolution of the partnership if any of the following events haveoccurred: (i) a partner has become of unsound mind or is incapable of performing his duties as a partner; and (ii) a partneris guilty of conduct which is likely to affect prejudicially the carrying on of the business.

4 On incorporation, a company attains a separate legal personality, which is distinct from its members. As a result, the company mayown property, sue or be sued in its own name, and is considered a separate legal person from its members, thus insulating thelatter from the liability of the former. This legal principle was propounded and elaborated in Salomon v Salomon & Co, (1897) AC 22, wherein it was held that a company is distinct in law from persons who are its members i.e. there exists a curtain, veil, orshield between the company and its members.

English company law has developed largely on the basis of the court’s decisions. At times the courts do lift or pierce the corporateveil to fix the responsibility on the persons who are actually responsible for the acts of the company. However, it is to be noted thatno fixed rules exist for determining as to when the veil of incorporation may be lifted. The courts in Pakistan have followed theprecedents established by the English courts in this regard. In The President v Mr Justice Shaukat Ali, PLD 1971 SC 585, theSupreme Court of Pakistan held that the corporate veil can be lifted where the same is being used merely as a cloak for fraud orimproper conduct, or where it can be established that the corporate personality is merely acting as an agent or trustee for someoneelse, or to determine tax liability or quasi-criminal liability, or whether the corporate body is an enemy concern.

Reiterating the separate legal personality doctrine, the Supreme Court of Pakistan has held in Union Council, Ali Wahan, Sukkurv Associated Cement (Private) Limited, 1993 SCMR 468, that the corporate veil cannot be lifted as a matter of course but ratherthe same can be done only under justifiable reasons. The court, in Fauji Foundation and another v Shamimur Rehman, PLD 1983SC 457, held the following circumstances to be justifiable for lifting the corporate veil:

(1) the company’s membership falls below the prescribed minimum;

(2) the company has been used for fraudulent trading; and

(3) to counter fraud, oppression or condone some informality in the affairs of the company.

In short the corporate veil can be lifted to determine the true relationship of the shareholders with regard to their dealings with thecompany or to ascertain the true nature of the company itself.

5 (a) Section 2(1)(2) of the Companies Ordinance, 1984 (the ‘Ordinance’) provides that associated companies are companies thatare connected to each other in any of the following manners, (i) if a director controls in both companies a minimum of 20%of voting shares. Here if the shares are owned by the director himself, his spouse or minor children, then the director wouldbe said to be exercising control over the other company; or (ii) the two companies are under common management or (iii) ifone company is the subsidiary of the other or (iv) one is a modarba managed by another company. The Ordinance aims atregulating the affairs of associated companies in order to prevent dealings between them that cannot be regarded as at armslength.

(b) Companies whose members undertake and guarantee to contribute, to the assets of the company, a certain sum of moneyupon its winding up are termed as companies limited by guarantee as per s.2(1)(9) of the Ordinance. The superior courts ofPakistan have observed, in Sindh Industrial Trading Estate Limited v Central Board of Revenue, PLD 1975 Karachi 128, thatsuch kinds of companies, as a common practice, are used as vehicles for non-profit making associations, its members act asguarantors of the company’s debts up to guaranteed amounts and the working capital comes from sources such asendowments, grants, fees and subscription.

As per s.43 of the Ordinance, every provision in the memorandum or articles of association of a company limited by guarantee(and not having a share capital) or any of its resolutions purporting to give any person a right to participate in the divisibleprofits of the company otherwise than as a member shall be void.

8



6 After one year of commencement of their businesses, companies are allowed under s.84 of the Companies Ordinance, 1984 (the‘Ordinance’) to issue shares at a discount, provided conditions and the procedures mentioned in the said section are fulfilled. Theprocedures specified are:

(1) Resolution by DirectorsThe board of directors of the company, after discussing the issue of discounting of shares, should pass a resolution to thiseffect mentioning the discount rate, the discounted price, the reason for discount and possible effects thereof on the companyand its existing shareholders.

(2) Notice to MembersA notice of at least 21 days prior to the date of the general meeting should be issued to the members mentioning the place,day and hour of the general meeting, along with the statement of business to be transacted as per s.160(1)(a) and (b) of theOrdinance and a copy of the proposed resolution.

(3) General MeetingA resolution allowing discounting of shares can be passed as an ordinary resolution i.e. by a simple majority of memberspresent and voting at the general meeting. However, the articles of association of the company may require that resolutionsfor discounting of shares should be passed as special resolutions i.e. by 3/4th majority of the members present and voting atthe meeting.

(4) Application to Securities and Exchange Commission of Pakistan (‘SECP’)An application is required to be filed with the Securities and Exchange Commission of Pakistan (SECP) for sanctioning theissue of shares at discount. The application should mention the reasons for the discount, rate of discount, discounted priceand the effect on the existing shareholders.

(5) Issuance of SharesIf SECP approves the issue of shares at a discount through an order, the company may issue such shares within 60 days ofsuch order.

(6) Future Balance Sheet and ProspectusAfter compliance with the above formalities, the balance sheets and any prospectus issued by the company in future shouldcontain particulars of the discount allowed on shares.

7 Section 181 of the Companies Ordinance, 1984 (the ‘Ordinance’) prescribes the procedure and the conditions for the removal ofa director of a company. It is to be noted that s.181 governs the removal of the first directors, the subsequently elected directorsand the directors appointed to fill a vacancy.

A director can only be removed from his office by a resolution passed by the shareholders in a general meeting.

A resolution seeking removal of a director, who has been elected in accordance with the cumulative voting system under s.178(5)of the Ordinance, is not effective if it is opposed by the minimum number of votes cast for the election of the directors in theimmediately preceding election.

In the case of the first directors (s.176) and the directors appointed to fill a vacancy (s.180), a resolution seeking their removaldoes not become effective if the same is opposed by a number of votes calculated by dividing the cumulative votes by the presentnumber of directors for the time being. The figure of cumulative votes is reached as per s.178(5), that is, equals the product ofnumber of voting shares held by person and the number of directors to be elected.

The following procedure shall be followed for removal of a director:

Notice by the CompanyIn his capacity as director or shareholder of the company, a director is entitled to receive a copy of the notice of the resolutionseeking his removal. Serving of the notice should be in line with the principles of natural justice; it should provide the directorswith an opportunity to make representation before the directors or members as the case may be.

Approval by Directors and General MeetingA resolution seeking removal of a director must firstly be approved by the directors before its presentation before the members ina general meeting, unless the general meeting is requisitioned by the members.

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8 (a) The proviso to the Standing Order 12(6) of the West Pakistan Industrial and Commercial Employment (Standing Orders)Ordinance, 1968 (the ‘Standing Orders’) defines the term ‘provident fund’ as a fund to which a workman is a contributor andthe contribution of the employer to such fund is not less than that of the workman.

‘Gratuity’ becomes due on resignation, retirement, death or termination, for any reason other than misconduct of the servicesof a workman and is calculated on the basis of the number of years completed in service (period in excess of six months istaken as a full year and period less than six months is ignored) multiplied by 30 days’ wages of an employee, drawn in thelast month of his service. In light of the Supreme Court’s decision in the case titled: Zain Packaging Industries Limited v AbdulRashid and 2 others, 1994 SCMR 2222, wages of an employee would include the basic salary plus all allowances, whichare paid to the employee regularly on a permanent basis and which are not dependent on any contingency or condition. Therelevant provision of law in respect of gratuity is also contained in the Standing Order 12(6) of the Standing Orders.

Gratuity is not payable by the employer during the period when a provident fund scheme is in existence. However, if there isany agreement, custom, usage, settlement or an award in this regard, the employer can provide both, gratuity as well asprovident fund. Further the term ‘workman’ as used here refers to a person employed in any industrial or commercialestablishment to do any skilled or unskilled, manual or clerical work for hire or reward.

(b) Under s.2(xxix) of the Industrial Relations Ordinance, 2002 (‘IRO’), a ‘trade union’ is defined as any combination of workersformed primarily for the purpose of defending and furthering the interests and rights of workers in any industry orestablishment. Since the IRO aims, inter alia, at regulating the formation of trade unions and to improve relations betweenthe employers and the workmen, its Chapter II deals with all aspects of a trade union, including the workers’ right to form atrade union or to join existing trade unions, formalities required to be complied with for making applications for registrationof a trade union, the circumstances under which such an application for registration of a trade union could be refused, thecircumstances under which the registration of a trade union could be cancelled and curbing of the administrative discretion.

As per s.14 of the IRO, every registered trade union is considered to be a body corporate by the name under which it isregistered having perpetual succession and a common seal and the power to contract and to acquire, hold and dispose ofproperty, both movable and immovable and may sue or be sued by that name. Section 16 of the IRO provides immunity toregistered trade unions from legal proceedings in respect of any action done in contemplation or furtherance of an industrialdispute to which the trade union is a part on the ground only that such act induces some other person to break a contract ofemployment or that it is an interference with the trade, business or employment of some other person. A trade union has alsobeen given immunity from any liability in any action for tortuous remedy against an act done in contemplation or furtheranceof an industrial dispute by an agent of the trade union if it is proved that such person acted without the knowledge of orcontrary to express instructions given by the executive of the trade union.

9 (a) GL can issue shares at a premium after 1 May 2005 provided it fulfills the conditions stipulated in rule (4) of the Companies(Issue of Capital) Rules, 1996, which provide that a company can issue shares to the public at a premium if it has a profitableoperation record of at least one year. Since GL would have completed its one year of successful operations, it is eligible foroffering shares at a premium. GL must also fulfill the conditions set out in s.83 of the Companies Ordinance, 1984 (the‘Ordinance’) for issuance of shares at a premium. As per the said s.83, where a company issues shares at a premium, a sumequal to the aggregate amount or the value of the premiums on those shares shall be transferred to an account to be called‘the share premium account’. The provisions of the Ordinance relating to reduction of capital of a company shall, except asprovided in s.83, apply as if the share premium account were paid-up capital of the company.

(b) GL is authorized as per s.82(1) of the Ordinance to hire the services of a broker, such as KBH, for securing public subscriptionof its shares subject to the fulfillment of the conditions provided in clauses (a) and (b) of the said section, which stipulate thata company can pay commission to a broker for securing subscription if allowed by the company’s articles of association.However, the percentage of such commission should not exceed the sum specified by the Securities and ExchangeCommission of Pakistan (SECP).

If the articles of association of GL allow it to pay commission to any person who secures subscription for its shares, themanagement of GL should note that as per s.82(3) of the Ordinance the maximum rate of commission which can be paid toKBH is 1% of the price of the issued shares actually sold through KBH.

(c) GL may utilize the equivalent of the total value of the premium raised from the issuance of shares at a premium for satisfyingthe preliminary expenses of the company as allowed by s.83(2) of the Ordinance, which provides, inter alia, that the sharepremium account may be applied by a company in writing off its expenses.

It is, however, to be noted that s.83(1) of the Ordinance mandates that the aggregate value of premium received from theissuance of shares at a premium should be deposited in a ‘share premium account’ and it is this sum of money in the sharepremium account which can be utilized for writing-off the preliminary expenses of the company.

Resultantly, GL should set up a ‘share premium account’ and deposit in it the aggregate value of premium received from theissuance of shares at a premium. Further, GL can use this money in the ‘share premium account’ for satisfying the preliminaryexpenses of the company.

10



10 (a) The proviso to s.252 (1) of the Companies Ordinance, 1984 (the ‘Ordinance’) provides that an auditor appointed in an AGMcan be removed by a special resolution passed by the members before conclusion of the next general meeting.

VCL can remove J&K, Chartered Accountants, before the AGM, provided a special resolution is passed to this effect. For thepassing of a special resolution the formalities mentioned in s.2(1)(36) of the Ordinance, that is, a twenty one (21) days’advance notice needs to be given for holding the AGM, and at the said meeting the proposed resolution for removal of J&KChartered Accountants should be passed by a majority of not less than three quarters of members entitled to vote present atthe meeting in person or through proxy.

In any case, J&K, Chartered Accountants, have already completed their five years as the auditors of VCL, which, being a listedcompany, is required by the Code of Corporate Governance (incorporated in the Listing Regulations of the Stock Exchanges)to change its auditors every five years. VCL is therefore compelled by law to replace J&K, Chartered Accountants, with anotherauditor.

(b) Mr Faisal cannot be appointed as the auditor of VCL for the reason that he has been an employee of VCL up until five monthsago, and as per s.254 (3) (a) of the Ordinance, a person who has been in the employment of the company in the precedingthree years cannot be appointed as an auditor of the company, despite his being a qualified chartered accountant (and,therefore, qualifying the requirement of s.254(1)(i), which provides that only a chartered accountant can be appointed as anauditor of a public limited company).

(c) For appointing any person as an auditor, VCL should observe the procedure and formalities stipulated in ss.252 and 253 ofthe Ordinance, which provide as follows:

(1) Consent of AuditorAs VCL is a public listed company, it can appoint only that person as auditor who meets the qualifications prescribedby s.254 of the Ordinance and who agrees to this appointment.

(2) Board of Directors ApprovalThe name of the proposed auditor should be considered by the board of directors of VCL and recommended forappointment in the AGM.

(3) NoticeIf an auditor, other than the retiring auditor, is going to be appointed in the AGM, a notice mentioning the proposedresolution seeking appointment of an auditor, other than the retiring auditor, is required to be given. Such notice shouldalso mention the name of the proposed auditor and his remuneration and should be given at least fourteen days inadvance of the AGM. Copy of the mentioned notice is required to be served on the retiring auditor as well.

(4) Publication of NoticeAs VCL is a listed company, the notice should also be published in at least one issue each of a daily newspaper in Englishlanguage and a daily newspaper in Urdu language having circulation in the province in which the stock exchange onwhich the VCL is listed is situated.

(5) Representation by Retiring AuditorA retiring auditor who is not recommended for reappointment can make representation against the notice of theresolution proposing appointment of a new auditor and in this case VCL shall be bound to send a copy of therepresentation to every member to whom notice of the meeting is sent. If such representation of the retiring auditor isreceived late or because of VCL’s default it was not sent to the members, the retiring auditor may require that the samebe read out at the AGM. The retiring auditor also has the right to be heard in person.

If VCL thinks that J&K Chartered Accountants might abuse this right of representation then VCL can make an applicationto the registrar and ask that this be waived.

(6) Approval by the MembersThe appointment of the auditors and their remuneration should be considered by the members in the AGM and approvedby them.

(7) Notification of Removal or Cessation to hold Office by AuditorAfter approval by the members in the AGM, VCL shall notify the concerned registrar of companies within 14 days fromthe date of removal of an auditor of this event and to file the consent in writing of the new auditor.

11



11 (a) According to s.182 of the Contract Act, 1872 (the ‘Act’), the relationship between Bilal and Qasim amounts to a principal-agent relationship. An agent is a person employed to do any act for another or to represent another in dealings with thirdpersons. A joint reading of ss.186 and 187 of the Act suggests that such authority can also be vested impliedly, that is, theauthority can be inferred from the circumstances of a case.

Bilal’s action of handing over of the keys of his house to Qasim with the instructions to look it after and deliver the keys toJaffer on further instructions amounts to creation of an agency relationship between the two.

(b) Section 188 of the Act stipulates that an agent having authority to do an act shall have authority to do every lawful thingwhich is necessary in order to do such act. Where an agent acts within the limits of his authority, his act would be as effectiveas that of the principal himself. The extent of an agent’s authority in cases of emergency is discussed in s.189, which providesthat an agent has authority in an emergency to do all such acts for the purpose of protecting his principal from loss as wouldbe done by a person of ordinary prudence in his own case in similar circumstances as held in Worldwide Trading Co Ltd vElectric Trading Co Ltd, PLD 1986 Karachi 234.

If the glass window had not been immediately replaced, there was a possibility of theft or the house could have been damagedby further storm. Also, it was important to restore the house in the condition as Bilal had left it so that it could be handedover to Jaffer in good condition in case of further instruction by Bilal. As Bilal had requested Qasim to take care of the house,from the circumstances it can be concluded that the hiring of the carpenter was an act within Qasim’s lawful authority in hiscapacity as an agent.

Qasim is entitled to recover the expenses incurred in hiring the carpenter and installation of the glass window as the saidaction was within Qasim’s authority. Section 222 of the Act provides that a principal is bound to indemnify his agent againstthe consequences of all lawful acts done by such an agent in exercise of the authority conferred on the agent. The fact thatno consideration has passed to Qasim under the agency arrangement would not precluded Qasim from suing Bilal for theamount due towards the agency.

(c) Qasim had acted beyond his mandate by renting out one bedroom in Bilal’s house. This was not within Qasim’s authority tolook after Bilal’s house in his absence and to pass on the keys to Jaffer if instructed to do so by Bilal. In view of this, the actof renting out the room in Bilal’s house can by no means be justified as an act within Qasim’s authority.

Resultantly, Bilal is entitled to recover the amount of Rs. 5,600 (the product of daily rent and the number of days for whichone room in Bilal’s house was rented out) from Qasim. Section 216 of the Act provides that if an agent, without the knowledgeof his principal, deals with the business of the agency on his own account instead of the account of the principal then theprincipal is entitled to claim from the agent the benefit which may have resulted to him from the transaction.

12



12 (a) By agreeing to pay to Irfan any amount owed by Ali, Umer has entered into a contract of guarantee with Irfan in terms ofs.126 of the Contract Act, 1872 (the ‘Act’), which provides that a guarantee may be either oral or written and is a contractto perform the promise or discharge the liability of a third person in case of his default.

According to the said section, since Umer has given the guarantee, he is the ‘surety’. Ali, being the person in respect of whosedefault the guarantee is given, is the ‘principal debtor’, and Irfan, being the person to whom the guarantee is given, is the‘creditor’.

(b) Section 127 of the Act provides that anything done or any promise made for the benefit of the principal debtor is sufficientconsideration for a surety’s act of giving a guarantee. This is a settled principle of law relating to guarantees as held inShipyard K. Damen International v Karachi Shipyard and Engineering Works Limited, PLD 2003 Supreme Court 191; andImtiaz Ahmed v Platimum Commercial Bank Limited, 2004 CLD 481 Lahore. Resultantly, Irfan’s rights as the creditor againstUmer (the surety) are not affected by the fact that Umer has not received any consideration for his agreeing to act as surety.

(c) To understand the extent of Umer’s liability the concepts of a surety’s co-extensive liability, continuing guarantee and effectsof variance in terms of contract of guarantee as provided in ss.128, 129 and 133 of the Act respectively must be examined.

A surety’s co-extensive liability in terms of s.128 of the Act implies that the surety shall be liable along with the principaldebtor unless there is a contract to the contrary. This means that a surety cannot avoid his responsibility by arguing that thecreditor should first proceed against the principal debtor, and only in case of inability of the principal debtor the creditor shallbe entitled to recover the amount guaranteed by the surety (see, Messrs Huffaz Seamlen Pipe Industries Ltd v Messrs Securityleasing Corporation Ltd, 2002 SCMR 1419 and Khawaja Muhammad Daud Sulaimans v Election Tribunal, PLD 2003Lahore 106).

Continuing guarantee under s.129 of the Act extends to a series of transactions. In this case Umer has guaranteed to Irfanthe payments due from Ali viz a viz Irfan’s supplying sixty (60) shirts at the rate of Rs. 1,000 per shirt within one month.Therefore, Umer’s guarantee is in the nature of a continuing guarantee.

Section 133 of the Act provides that any variance made without the surety’s consent in the terms of the contract between theprincipal debtor and the creditor would discharge the surety of his liability on account of transactions subsequent to suchvariance (see, National Bank of Pakistan Ltd v Shoaib Corporation Ltd, 2004 CLD 631).

In the case at hand, after the completion of the supply of the first two consignments (20 shirts at the rate of Rs. 1,000 each)Ali and Irfan agreed, without Umer’s consent, to enhance the price of the shirts from Rs. 1,000 to Rs. 1,200 for each shirt.This action on part of Ali and Irfan amounts to variance of the terms of their contract. Umer, therefore, stands dischargedfrom his liability to pay to Irfan the additional value of four consignments (40 shirts at the rate of Rs. 1,200 per shirt).However, Umer continues to be liable to Irfan for the value of the initial two consignments (20 shirts at the rate of Rs. 1,000each). Similarly, Irfan’s claim for the outstanding amount stands against Ali.

13



15

Part 2 Examination – Paper 2.2 (PKN)Corporate and Business Law (Pakistan) June 2005 Marking Scheme


(a) 3–5 Answers discuss the historical concept of fundamental rights and position held by them viz a viz Article 8 and/or Article233(2) of the Constitution of Pakistan, 1973.

0–2 Poor answers depicting little or no knowledge about the historical concept of fundamental rights and/or position held bythem viz a viz Article 8 of the Constitution of Pakistan, 1973.

(b) 3–5 Answers discuss the right to freely trade or practice a business or profession as envisaged in Article 18 of the Constitutionof Pakistan, 1973 and refer to instances in which the same can be regulated.

0–2 Answers showing little understanding of the fundamental rights to freely trade or practice a business or profession.


(a) 4–6 Answers quote s.172 of the Contract Act, 1872 for defining and distinguishing between the nature of possession forpledge and hypothecation.

0–3 Answers exhibit little or no knowledge about the concepts of pledge and hypothecations and/or their points of distinction.

(b) 3–4 Answers mention and analyze the factors which result in frustration of contract as provided in s.56 of the Contract Act,1872 with particular reference to the word ‘impossible’ as used therein.

0–2 Answers show little or no knowledge about the doctrine of frustration of contract.

3 This question expects candidates to exhibit knowledge about various modes of dissolving a firm as provided in ss.40, 41, 42, 43and 44 of Partnership Act, 1932.

7–10 Answers discuss the modes of dissolution as provided in the above noted sections and refer to examples under whichthe same may occur.

3–6 Answers mention without examples the different modes of dissolution.

0–2 Extremely poor answers that show little or no knowledge about the different modes of dissolution of a partnership.

4 This question expects candidates to discuss the concept of the lifting of the veil of incorporation in light of the judgments of superiorcourts.

7–10 Answers firstly define and discuss the various instances under which the corporate veil can be lifted.

3–6 Answers discuss incompletely the nature of circumstances under which the corporate veil can be lifted.

0–2 Answers merely define the concept of lifting of the corporate veil and do not quote instances under which the sameoccurs.


(a) 3–5 Answers explain the circumstances in light of s.2(1)(2) of the Companies Ordinance, 1984 under which companies aretermed as associated.

0–2 Answers exhibit little or no understanding of the circumstances giving rise to an associate relationship betweencompanies.

(b) 3–5 Answers explain the nature of a company limited by guarantee as provided under s.2(1)(9) of the Companies Ordinance,1984 and make reference to the special provision under s.43 of the said Ordinance.

0–2 Answers do not quote the relevant legal provision and/or do not discuss it.



6 This question requires candidates to state the steps and formalities mentioned in s.84 of the Companies Ordinance, 1984 thatneed to be fulfilled for issuing shares at a discount.

7–10 Answers discuss in detail the steps and formalities provided in the mentioned provision of law.

3–6 Answers in this band show good treatment of some steps but incomplete discussion of the others.

0–2 An incomplete answer showing little understanding of the question.

7 This question requires candidates to discuss the procedure and conditions for removing a director of the company as provided ins.181 of the Companies Ordinance, 1984.

7–10 Answers discuss in detail the procedure and conditions provided in the mentioned provision of law for removing firstdirectors, subsequently elected directors as well as directors appointed to fill a vacancy.

3–6 Answers in this band discuss to an extent some steps and formalities.



(a) 3–5 Answers discuss both provident fund and gratuity as mentioned in the Standing Order 12(6) of the West PakistanIndustrial and Commercial Employment (Standing Orders) Ordinance, 1968.

0–2 Poor answers depicting little or no knowledge about the said two benefits available to the workmen.

(b) 3–5 Answers discuss the right to form a trade union, its registration under the law and the role of a trade union and theimmunities enjoyed by it under the Industrial Relations Ordinance, 2002.

0–2 Answers show little understanding of the nature of organization and its role or immunities.

9 This question is divided into three parts and each part has different weighting.

(a) 4–6 Answers discuss with reference to s.83 of the Companies Ordinance, 1984 and rule (4) of the Companies (Issue ofCapital) Rules, 1996 whether shares can be issued at a premium by GL.

0–3 Answers do not quote the mentioned legal provision and/or do not opine as to whether shares can be issued at apremium.

(b) 5–6 Answers in this band discuss s.82(1) of the Companies Ordinance, 1984 including clauses (a) and (b) and concludeas to whether a company can pay commission to a person who secures public subscription for its shares and the extentof such commission.

3–4 Answers in this range are confined to quoting relevant legal provisions and/or estimating the extent of commission thatcan be paid by the company.

0–2 Extremely poor answers with just reference to legal provisions.

(c) 6–8 Answers discuss with reference to ss.83(1) and 83(2) of the Ordinance the purpose for which the funds generatedthrough sale of shares at premium could be utilized and formalities that need compliance in this regard.

3–5 Answers in this band point out the purpose for which the funds generated could be utilized and/or mention theformalities.

0–2 Answers show little knowledge about the relevant legal provisions.

16



10 This question requires the candidates to exhibit understanding of the requirements of the law and the Code of CorporateGovernance insofar as the removal of auditors of a listed company is concerned. The candidates would analyse the facts and applylaw to come to the conclusions. It is divided into three parts with different marks for each part.

(a) 3–5 Answers mention the mechanism that needs to be adopted for removing an auditor in light of ss.2(1)(36) and 252(1)of the Ordinance. The answer also mentions the requirement of the Code of Corporate Governance for change of auditorsevery five years.

0–2 Answers do not discuss in detail the mechanism for removing an auditor and/or do not mention the requirement of theCode.

(b) 3–5 Answers discuss the qualifications and disqualifications in terms of ss.254 (1)(i) and (3)(a) of the Ordinance for theappointment of Mr Faisal as the auditor of VCL and reach a conclusion with respect to the same.

0–2 Answers quote the mentioned legal provisions but fail to reach a conclusion as to whether Mr Faisal can be appointedas the auditor of VCL or not.

(c) 7–10 Answers discuss the procedure for the appointment of an auditor as provided by ss.252 and 253 of the Ordinance.

3–6 Answers in this range are confined to quoting legal provisions and/or show some understanding of the procedure that needs to be adhered to for appointment of an auditor.

0–2 Extremely poor answers that show little understanding of the procedure and formalities that need to be observed.

11 This question examines the candidates’ analytical skills to understand the facts and come to a conclusion whether an agency existsbetween Bilal and Qasim. The candidates’ opinion is also required on whether Qasim was legally justified in his position to incurthe expense on having the window fixed and can he recover the amount spent out of his own pocket. It further demands analysison the legality of Qasim’s act of letting the room and the consequences thereof.

(a) 3–4 Answers opine as to whether an agency relationship exists between Bilal and Qasim according to ss.182, 186 and 187of the Contract Act, 1872 (Act).

0–2 Weak answers that do not fully discuss and/or conclude as to whether agency relationship exists between Bilal andQasim.

(b) 6–8 Answers discuss the extent of an agent’s authority both under ordinary circumstances (s.188 of the Act) and in thecases of emergency (s.189 of the Act) and opine as to whether Qasim acted lawfully in hiring the services of thecarpenter. Further, the answers conclude with reference to s.222 of the Act as to whether Qasim can recover theexpenses so incurred from Bilal. Answers discussing the aspect that lack of consideration would not preclude Qasim’sright to sue Bilal for recovery of the amount spent in respect of the agency shall be given special consideration.

3–5 Answers only discuss with reference to concerned legal provisions one part of the question i.e. as to whether Qasimacted lawfully in hiring the carpenter and/or whether Qasim can recover the expenses of the carpenter from Bilal.

0–2 Extremely poor answers that show little understanding of the matter at hand.

(c) 6–8 Answers discuss in detail Qasim’s action of renting out one room in Bilal’s house, and Bilal’s right to recover the profitmade by his agent as per s.216 of the Act.

3–5 Answers show some understanding of the issue at hand but fail to mention Bilal’s rights with respect to secret profit.

0–2 Answers discuss relevant provisions but do not comment on Bilal’s rights.

17



12 This question is divided into three parts. The candidates are expected to display their comprehension of the question and theirapplication of knowledge to the given facts to reach a conclusion as to whether a contract of guarantee exists and what is theconsideration for the contract of guarantee in this case. The candidates are expected to analyse and come to a conclusion as towhether the variation in the terms of the contract between Irfan and Ali would discharge Umer of his liability as a surety, and towhat extent.

(a) 3–5 Answers discuss the relationship of Ali, Irfan and Umer in the light of s.126 of the Act and the positions held by eachparty.

0–2 Answers describe the relationship of the mentioned parties and/or the position held by each party.

(b) 3–5 Answers in this band discuss the nature of consideration that is sufficient for the purposes of a contract of guarantee asper s.127 of the Act.

0–2 Extremely poor answers showing little understanding of the concept of consideration in contracts of guarantee.

(c) 7–10 Answers discuss in detail the concepts of a surety’s co-extensive liability, continuing guarantee and effects of variancein the terms of contract and its effect on guarantee as provided in ss.128, 129 and 133 of the Act respectively andconclude as to the extent of surety liability for the consignments.

3–6 Answers discuss the concepts of a surety’s co-extensive liability, continuing guarantee and effects of variance in termsof contract of guarantee under the above-mentioned sections but fail to conclude as to the extent of a surety’s liability

for the consignments.

0–2 Answers fail to discuss all the three relevant legal provisions and/or to reach an opinion as to the extent of the surety’sliability.

18




PART 2


QUESTION PAPER








Pape

r 2.2

(PK

N)




1 In relation to the Constitution of Pakistan, explain:

(a) The process by which legislation is made. (5 marks)

(b) The position of the 'Senate' as the upper house of the Parliament. (5 marks)

(10 marks)

2 Explain the essential elements of a valid contract. (10 marks)

3 In relation to company law, explain the concept of company as a ‘separate legal personality’ and briefly discussthe doctrine of ‘limited liability’.

(10 marks)

4 In relation to company law, explain the term 'Memorandum of Association' and describe the standard clauses ofsuch a document.

(10 marks)

5 In relation to company law, explain the meaning of the following:

(a) Statutory Meeting; (3 marks)

(b) Annual General Meeting; and (4 marks)

(c) Extraordinary General Meeting. (3 marks)

(10 marks)


(a) Explain the terms:

(i) Authorised Share Capital; (2 marks)

(ii) Share; (2 marks)

(iii) Debenture. (2 marks)

(b) Distinguish between ‘fixed’ and ‘floating’ charges. (4 marks)

(10 marks)

7 In relation to the law of partnership:

(a) State the liability of partners in the case of personal profits earned. (6 marks)

(b) State the effect of non-registration of a partnership firm. (4 marks)

(10 marks)

8 Explain the concept of ‘retrenchment’ as provided in the West Pakistan Industrial and Commercial Employment(Standing Order) Ordinance, 1968.

(10 marks)

2




9 Friendly Power (Private) Limited (‘FPL’) intends to execute contracts worth millions of rupees with certain suppliers ofcoal and for purchase of land in Islamabad for development of a housing scheme. Mr Bhatti, who holds 22% of theissued share capital of FPL feels that execution of contracts with coal suppliers and purchase of land in Islamabadwould prejudice his interests and has been vigorously trying to dissuade the management of FPL from going aheadwith their plans. Mr Bhatti has gone to the extent of requesting FPL management to buy his shareholding in case itgoes ahead with its plans. Mr Bhatti has approached you for advice.

Required:

(a) Advise Mr Bhatti as to whether he is entitled to any remedy before the court. (4 marks)

(b) Discuss whether the above-mentioned instances constitute valid grounds to seek remedy before the court. (8 marks)

(c) Discuss the extent of the court's powers and analyse whether the court can order the purchase of Mr Bhatti’sshares. (8 marks)

(20 marks)

10 Dr Ammar entered into a contract with the English Coaching Centre (the ‘Centre’) to undertake preparatory classes forthe Test of English as a Foreign Language (‘TOEFL’). The classes were to last for four weeks and the total fee for thesaid classes was rupees 20,000, all of which was to be paid in advance. During the first three weeks the teacher MrJamal missed half of the scheduled classes and in the fourth week he missed all the remaining classes. During thesefour weeks many students including Dr Ammar complained to the administrator of the Centre, who repeatedlypromised that a substitute teacher would be appointed and make up classes would be scheduled. However, none ofthis happened and subsequently Dr Ammar could not secure the required score in TOEFL and as a result was unableto take up a job offer worth rupees 25,000 per month with Agha Khan Hospital, Karachi. Dr Ammar intends to suethe English Coaching Centre and has approached you for advice on the following matters.

Required:

(a) Explain the meaning of the term ‘damages’ to Dr Ammar. (4 marks)

(b) Advise Dr Ammar as to whether the Centre is in breach of the contract and what remedies are available tohim in this regard. (10 marks)

(c) State whether the Centre would be in breach of the contract if the teacher, Mr Jamal, had not missed anyclasses, but at the end of the second week he had left the Centre and another lecturer was appointed in hisplace. (6 marks)

(20 marks)

3 [P.T.O.



11 Ameer Sugar Mills Limited (‘ASML’) is a company engaged in the manufacture and sale of sugar and is on the vergeof bankruptcy due to the recently imposed government policy of allowing the import of sugar. The other reason forASML’s position lies in the purchase of machinery at exorbitant costs. One of its directors, Mr Rahim, has approachedthe concerned Federal Minister for Commerce, who has assured Mr Rahim that he will take up the matter with thePrime Minister provided ASML contributes rupees one million towards the fund of his political party. At the same time,the shareholders of ASML are threatening to take its directors to court because of the purchase of machinery atexorbitant prices. In order to avoid the crisis and to meet its immediate cash needs, ASML has sought a loan worth50 million rupees from its ‘associated company’, Ameer Textile Mills Limited (‘ATML’).

The management of ASML and ATML has approached you for advice on the following issues:

(a) Whether ASML is allowed to make political contributions. (5 marks)

(b) Consider the extent of the directors' liability with regard to purchase of machinery. Please note that thearticles of ASML exempt directors from being personally responsible for acts performed on behalf of ASML.

(8 marks)

(c) Can ATML extend a loan to ASML, and, if so, discuss the legal requirements that ATML needs to comply within this regard. (7 marks)

(20 marks)

12 Bilal and Jawad have been running in partnership the business of installing tracking systems in cars for the last threemonths under the name of ‘Total Protection’. Their business has grown considerably and enjoys a good reputation inLahore. Both are now considering forming a private limited company and have approached you for advice on thefollowing specific questions:

(a) Whether the proposed private limited company can have the name ‘Total Protection (Private) Limited’. (6 marks)

(b) Explain to Bilal and Jawad the duties of partners as compared to the fiduciary duties of directors. (10 marks)

(c) State how Bilal or Jawad could cease to be members of the private limited company. (4 marks)

(20 marks)


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Answers



Part 2 Examination – Paper 2.2(PKN) December 2005 AnswersCorporate and Business Law (Pakistan)

1 (a) All laws originate in either house of the Parliament (the Senate and the National Assembly) in the form of a bill and the processfor them to become law is laid down in Articles 70, 73 and 75 of the Constitution of Pakistan, 1973 (the ‘Constitution’). Thesaid Articles provide that all bills, except money bills, dealing with any matter in the federal legislative list or concurrentlegislative list of the Fourth Schedule of the Constitution can originate in either the Senate or the National Assembly. After abill is passed by the house in which it originated, it is transmitted to the other house, where if the bill is passed withoutamendment, it is presented to the President for assent.

In case the bill transmitted is rejected or is not passed within 90 days of its receipt or is passed with an amendment, it isconsidered in a joint sitting of both the houses at the request of the house of its origin. In the joint sitting, if the bill is passedwith or without an amendment by the votes of the majority of the total membership of the two houses, it is presented to thePresident for assent.

Money bills, on the other hand, can only originate in the National Assembly and once passed, they are presented to thePresident for assent without being transmitted to the Senate. A bill is termed as a money bill if it contains provisions dealingwith taxation, borrowing of money, or giving of any guarantee by the federal government or any financial obligations of thefederal government, federal consolidated fund, public account of the federation or the audit of the accounts of federalgovernment or a provincial government. In case of a dispute regarding the nature of a bill, the decision of the Speaker of theNational Assembly as to whether it is a money bill or not is final.

When a bill is presented to the President for his assent, he shall, within thirty (30) days, either give his assent to the bill or,in case of a bill other than a money bill, return the bill to the Parliament with a message requesting that the bill, or anyspecified provision thereof, be reconsidered. The returned bill shall be reconsidered by the Parliament in a joint sitting and, ifit is again passed, with or without amendment by the majority votes of the members of both the houses present and voting,it shall be again presented to the President, who shall then not withhold his assent. Upon the President's assent, a billbecomes law and is called an Act of Parliament.

(b) The Islamic Republic of Pakistan is a federation. The Constitution provides for a parliamentary form of government with abicameral legislature, comprising of the National Assembly and the Senate (Article 50). The Senate's composition gives equalrepresentation to all the federating units so as to dispel doubts and apprehensions regarding deprivation and exploitationamongst smaller provinces having less representation in the National Assembly. The Senate comprises of an equal numberof members elected from all the Provincial Assemblies, members elected from the Federally Administered Tribal Areas, theFederal Capital of Islamabad, and includes ulema, technocrats and other professionals. The Constitution guarantees safeguardby providing that the Senate cannot be dissolved like the National Assembly and is a continuous body undergoing changewith retirement of its members upon the terms set forth in Article 59.

The Senate’s position as the upper house of the Parliament can be understood from the following discussion:

President's Election and RemovalThe President is elected by the members of the Parliament and the Provincial Assemblies in accordance with Article 41(3) ofthe Constitution. Further, as per Article 47(8), the President may be removed from his office or impeached through aresolution passed by not less than two-thirds of the total membership of the Parliament in a joint sitting of the NationalAssembly and the Senate convened for this purpose.

Role in the Legislative ProcessAs per Articles 70, 73 and 75 of the Constitution, for a bill, except a money bill, to become law, assent of the Senate, theNational Assembly and the President is required.

Representation in Cabinet Article 92(1) of the Constitution provides that there shall be a cabinet headed by the Prime Minister which is collectivelyresponsible to the National Assembly.

The Federal Ministers and Ministers of State are appointed from amongst the members of the Parliament. However, thenumber of Federal Ministers as well as Ministers of State, who are members of the Senate, should not at any time exceedone-fourth of the total number of Federal Ministers.

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2 In terms of s.10 of the Contract Act 1872 (the ‘Act’), for agreements to be valid contracts they should be made by free consent ofparties competent to contract, for a lawful consideration and with a lawful object. Hence, the essentials of a valid contract are: (i) competent parties, (ii) free consent, (iii) lawful consideration and subject matter and (iv) mutuality of agreement.

To create a valid contract, there must be an agreement between two or more parties. An agreement involves a valid offer by oneparty and a valid acceptance of the same by the other party.

Persons are considered competent to contract if they fulfil the criteria set by s.11 of the Act, namely, they are of majority age, soundmind and have not been disqualified from contracting by any law to which they are subject. Soundness of mind means that at thetime of making a contract the concerned parties are capable of forming a rational judgment as to its effect upon their interests.

Consent means that parties entering into the contract agree upon the same thing in the same sense (s.13). Consent is said to befree when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake (s.14). Consent can be given eitherexpressly or impliedly.

All considerations and objects are lawful unless forbidden by law, or are of such a nature that if permitted would defeat provisionsof any law, or are fraudulent, or involve injury to person or property of another, or are immoral, or opposed to public policy (s.23).

The doctrine of mutuality envisages that as long as the parties to the transaction could back out of it if they desire there can be noconcluded or binding contract between the parties, although material terms may have been agreed to.

3 A company incorporated under the Companies Ordinance, 1984 (the ‘Ordinance’) exists as an artificial legal person having apersonality distinct from its members/shareholders. It continues to enjoy this status unless dissolved in accordance with theprovisions of the Ordinance.

A company’s position as a separate legal person is reinforced by the principles of independent corporate existence and perpetualsuccession, which set out the following:

Independent Corporate ExistenceThis principle was judicially recognised in the famous case Salomon v Salmon and Company Limited, 1897 AC 22 wherein theHouse of Lords held that a company is a separate and independent personality even if before and after incorporation its businessis precisely the same, the same persons are its managers, and the same hands receive profits.

Perpetual SuccessionThis principle holds that companies continue to exist and their life is not affected by the death, lunacy, insolvency or retirement ofits members. Members may come and go, but the company continues its operations as long as requirements of law are fulfilled.

Other features that reinforce the company’s position as a separate legal person are that the company is capable of having legalrights and obligations like a natural person, for instance, it can acquire and own property, transfer property, enter into contractsand sue and be sued in its own name. Being a legal entity distinct and separate from its members, all assets and liabilities in abusiness are its own. No member can, either individually or jointly, claim any ownership rights in the assets of the company duringits existence or on its winding up.

The doctrine of limited liability manifests that the liability of members of a company is either limited to the value of their sharessubscribed or to the amount of guarantee given by them. No member can be called upon to pay more than this amount, irrespectiveof the extent of the company’s indebtedness. The personal property of a shareholder cannot be attached for the company’s debtsunlike the case in a partnership.

4 The memorandum of association is one of the constitutional documents of the company and defines the limitations and powers ofthe company. It is also referred to as the charter of a company. The memorandum upon registration has the effect of binding thecompany, its members, their heirs, legal representatives to its provisions and results in the formulation of the subscribers andprospective shareholders into a body corporate (s.32 of the Ordinance).

The memorandum of association of a company contains the following clauses:

Name clauseThe promoters of a company can choose any name for the company provided it is not inappropriate, deceptive, exploits or offendsthe religious susceptibilities of people or identical or similar to the name of an existing company. Also, a company’s name shouldnot suggest patronage or connection with any past or present Pakistani or foreign head of state, foreign government, federal orprovincial government or any corporation set up by either of them or international organisation (s.37 of the Ordinance).

In the case of a company limited by shares the word ‘limited’ or ‘(Private) Limited’ should appear as the last word of its name andin case of the memorandum of a company limited by guarantee, the words ‘(Guarantee) Limited’ as the last words of its name(ss.16 and 17 of the Ordinance).

Registered office clauseThe registered office clause mentions the name of the province or address where the registered office of the company will besituated. Full address of the registered office is not required to be mentioned in the memorandum and may be communicated tothe registrar within 14 days of incorporation.

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Objects clauseThe objects clause defines the main and incidental objects of the company and indicates the extent of the powers and spheres ofits activities. Any act done by a company beyond its objects is treated as ultra vires and void. The objects clause must not containany activity which is illegal or against public policy.

Liability clauseThis clause sets out the liability of the members, that is, in the case of a company limited by shares, the members shall be liableto the extent of amount subscribed by them in respect of shares and no more; and in case of a company limited by guarantee, tothe extent of the amount undertaken to be contributed to the assets of the company in the event of its being wound up or withinone year afterwards.

Capital clauseThis clause states the amount of share capital with which the company is incorporated and its division into shares of fixeddenomination. It mentions the authorised capital of the company, the kind and number of shares in which the authorised capitalis divided, denomination and currency of each share and classes into which the authorised capital is divided.

Association clause This clause mentions the declaration of compliance, names, addresses, descriptions, occupations of the subscribers and thenumber of shares each subscriber has taken up and their signatures.

5 (a) Statutory MeetingEvery public company is required to hold once what is also known as its first official general meeting. As per s.157 of theCompanies Ordinance, 1984, it is mandatory for every public company limited by shares and every company limited byguarantee and having a share capital to hold a statutory meeting within a period between three and six months from the dateof the commencement of its business. A private company, a company limited by guarantee or an unlimited company is notrequired to hold a statutory meeting.

The purpose of holding this meeting is to enable the members to know the financial position and prospects of the company,matters relating to company formation, results of the company’s appeal for public subscription to its share capital and to getan idea of assets and properties acquired or to be acquired by the company. In other words, the purpose of this meeting isto inform shareholders about the matters relating to incorporation, allotment of shares, details of contracts concluded etc.

(b) Annual General MeetingSection 158 of the Ordinance requires that every company, whether public or private, must hold an annual general meeting(‘AGM’) of its members/shareholders once in every calendar year within four months following the close of its financial yearand not more than 15 months after the holding of the preceding annual general meeting. As per s.158 (1), the first AGMshall be held within 18 months from the date of incorporation of the company.

An AGM is also referred to as an ‘ordinary general meeting’ as normally the ordinary business of a company is conducted inan AGM. Ordinary business includes the approval of annual accounts and dividend, the election of directors and appointmentof auditors.

(c) Extraordinary General MeetingAll general meetings of a company, other than the statutory meeting and AGM, are referred to as extraordinary generalmeetings (‘EGM’). An EGM may be convened by a company at any time as required for conducting any special business,which cannot be postponed until the next AGM. For instance, the alteration of the memorandum and articles of association,reduction and reorganisation of capital, or the issue of debentures.

An EGM may be convened by the board of directors either themselves or on requisition by members/shareholders or upon thedirections of the Securities and Exchange Commission of Pakistan.

6 (a) (i) ‘Authorised share capital’ represents the sum mentioned in the memorandum at the time of registration as the capital ofthe company. It represents the maximum amount of equity which the company is authorised to raise by issuing shares.For instance, a company may have an authorised share capital of one million rupees divided into 100,000 ordinaryshares each of a value of rupees 10. A company can issue shares at once or as and when required to the extent of theauthorised share capital (one million rupees).

(ii) ‘Share capital’ represents the equity contribution by the shareholders to the common stock of the company and is distinctfrom loan capital as it is not a debt of the company. Section 90 of the Companies Ordinance, 1984 allows companieslimited by shares to have different kinds of share capital and classes therein as provided by its memorandum and articlesof association. Share capital once raised cannot be redeemed except through the process of reduction of capital givenin the Ordinance.

(iii) ‘Debenture capital’ represents the money that a company has borrowed on the security of its debentures. A debentureis an acknowledgement of a secured or unsecured debt issued by a company. It is not capital in the sense of a company’sshare capital or equity and represents a debt due from the company, which might or might not have a charge on itsassets. Debenture capital is also known as borrowed capital and debenture holders or lenders are creditors of thecompany and not its members.

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(b) A ‘fixed charge’ is created on specific assets of a company which are immovable and of permanent nature and are capableof being definitely ascertained and defined such as land, building, and machinery. Upon creation of a fixed charge, an interestof the creditor is established in the subject assets and although the company retains possession of the assets it cannot dealwith or dispose of the same without the consent of the fixed charge holder.

A ‘floating charge’ is created by making the assets or undertaking of the company a security for the payment of debts. Thedocumentation of a floating charge may cover properties which are specified or unspecified. In other words the peculiarfeature of this charge is that it is not possible to predicate the exact property on which floating charge operates until the chargecrystallises, and until such time the company is free to use the charged assets.

The points of distinction between fixed and floating charges are as follows:

A fixed charge relates to definite and ascertained property while a floating charge relates to all assets of the company whetherpresent or future.

A company cannot deal with assets on which a fixed charge is created so as to affect the rights of persons in whose favourthe charge is created. In the case of a floating charge, the company is free to use charged assets until such time that thecharge crystallises.

A fixed charge is a legal charge whereas a floating charge is equitable.

In a fixed charge no one can be allowed to have a preference over the creditors with whom the specific asset has beenmortgaged. Whereas a floating charge may be deferred to preferential creditors if the assets available are not sufficient to meetthe claims of the creditors in full.

7 (a) Section 9 read with s.16 of the Partnership Act, 1932 (the ‘Act’) stipulates that partners are bound to carry on the businessof the firm to the greatest common advantage, should be just and faithful to each other and should share amongst themselvesfull and true information of all things affecting the partnership, unless otherwise agreed. Further, partners are restricted frommaking personal profits and from carrying on competing business.

As per s.16(a) of the Act, a partner makes personal profits if he derives any profit for himself from any transaction of the firmor from use of the firm's property, business connection or name. By virtue of this provision, such partners are required toaccount to the firm for such profits made. This liability is covered in s.9 (partners firstly not to indulge in such transaction)which provides that if a partner makes profit by virtue of his position in the firm, he is liable to account the same to the firm.

With regard to the competitive business partnership, the law ordains that partners owe the obligation of not carrying outbusiness similar or competing with that of the firm either in their own name or in someone else's name and if this obligationis not followed then s.16(b) provides that the partner carrying on such competing business shall be liable to account for andpay to the firm all profits made by him in that business.

(b) The Partnership Act, 1932 does not make compulsory the registration of firms. However, the effects of non-registrationmanifested in s.69 make it essential for partnerships to be registered. Section 69 mentions two effects of non-registration withrespect to partners in an unregistered firm and an unregistered firm’s rights against third parties.

With respect to the effect of non-registration on partners, s.69(1) bars partners in an unregistered firm to sue the firm or anyperson alleged to be or have been a partner in the firm to enforce a right arising from a contract or conferred by this Act. Thisrestriction covers the present as well as the past partners of a firm.

The effect of non-registration of firms against third parties is discussed in s.69(2), which inter alia bars the enforcement ofrights in a suit by an unregistered firm against a third party.

8 The concept of ‘retrenchment’ as envisaged under the Standing Order 13 of the West Pakistan Industrial and CommercialEmployment (Standing Order) Ordinance, 1968 provides that where any workman belonging to a particular category is to beretrenched, the employer shall retrench the workman who is the last person employed in that category. In other words the principleof ‘last come first go’ is to be applied to a workman of the same category (S.M.Ilyas v Reckitt and Colman Pakistan Limited, 1999PLC 456).

The word ‘category’ here means category in an establishment and if the whole business concern consists of one establishmentthen the same shall be considered as one unit. Where the business concern consists of various establishments, each one will betreated as a separate unit. This categorisation was observed by the courts in the famous case Punjab Road Transport Board vMohammad Ashfaq, 1984 PLC 200 wherein conductors of Punjab Road Transport Board maintained district-wise seniority andretrenchment was made on this basis. Objection that retrenchment should have been made on the provincial-wise seniority basiswas not tenable. Even within the same establishment, workers working in different departments compromised of differentcategories unless workers were interchangeable and could work in different categories.

Whereas merit of seniority is to be strictly followed, i.e., the most junior workman is to be retrenched first, it is the undeniable rightof the management to retain the services of persons who possess special skills (Riaz Ahmed v General Manager, National GasFertilizer Factory Multan, 1970 PLC 472).

After retrenchment, according to the Standing Order 14, in case the employer wants to employ persons within a period of one yearfrom the date of such retrenchment, he should give the opportunity of employment first to the retrenched persons belonging to thatcategory in accordance with their respective length of service, i.e., personnel with longer service be given priority. It is to be noted

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that such retrenched workers subsequently taken back are entitled to re-employment and not reinstatement. In the case of seasonalfactories, the first proviso to the Standing Order 14 sets out that if a workman retrenched in one season reports for duty within tendays of resumption of work in the next season then he should be given preference for employment by the employer.

9 (a) Section 290(1) of the Companies Ordinance, 1984 (the ‘Ordinance’) provides that if any shareholder holding not less than20% of the issued share capital of a company has complained that the affairs of the company are being conducted in anunlawful or fraudulent manner, or in a manner not provided for in a company’s memorandum of association, or in a manneroppressive to shareholders or prejudicial to public interest then such shareholder is entitled to make an application to thecourt for an order to end matters complained of.

In view of the above Mr Bhatti is entitled to file a petition before the court as he holds more (22% of the issued share capital)than the required shareholding.

(b) Section 290 of the Companies Ordinance, 1984 aims to ensure that the affairs of the company are conducted in a lawfulmanner and in accordance with the company’s memorandum and articles of association Muhammas Fikree v FikreeDevelopment Corporation Limited, 1992 MLD 668, and there is no oppression of shareholders (In re Taj Company Limited,1994 CLC 2197).

In view of s.290, the purchase of land by FPL in Islamabad for development of a housing project can be viewed as a situationwhere the company is being conducted in a manner not provided for in its memorandum. FPL is a power company and itsindulgence in a housing development project may be ultra vires the objects clause of its memorandum of association. It is asettled principle of company law in Pakistan that any act of a company outside the scope of the objects clause of itsmemorandum is ultra vires and void and cannot be ratified. Hence, the purchase of land for a housing development projectmay be a suitable ground for moving the court in terms of s.290.

FPL’s other act of not responding to Mr Bhatti’s queries can amount to oppression if it is adopted continuously. It should benoted that the word oppression has not been defined in the Ordinance; rather it has been left to the court to decide on thefacts of each case whether there is oppression. Also, the courts have viewed that in a case of oppression it is not essentialthat the oppressor should be obtaining a pecuniary benefit; oppression exists even if there is a desire to gain control of thecompany. However, it should be noted that mere loss of confidence between various groups of shareholders does not comeunder the mischief of s.290 unless it is shown that such lack of confidence has sprung from the desire to oppress the minorityin the management of company (Messrs Shaheen Foundation v Messrs Capital F. M. (Pvt.) Limited, 2002 CLD Karachi 188).

(c) In exercise of its authority under s.290, the court has power to pass the following kinds of Orders as envisaged in ss.290,291 and 292:

Interim orderThe court may on an application by a party to the proceedings, pass an interim order upon such terms and conditions as itconsiders just and equitable for regulating the company’s affairs until a final order is passed (s.292).

Other ordersThe court may, to end matters complained of, pass any order as it thinks fit for regulating the affairs of the company, orderingpurchase of any member’s shares by other members or by the company [s.290(2)]. Further, the court may order alterationin, or addition to, a company’s memorandum or articles of association [s.290(3)].

Section 291 allows the court to pass orders providing for (a) the termination, setting aside or modification of any agreementhowsoever arrived at between the company and any director, chief executive, managing agent or other officer; (b) setting asideof any transfer, delivery of goods, payment or other transactions and (c) change in the management of the company.

In view of s.290(2), the court has the authority to order the management of FPL to purchase Mr Bhatti’s shares.

10 (a) The term ‘damages’ means the money claimed by, or ordered to be paid, to a person as compensation for loss or injury. Thelaw of contract envisages damages as one of the remedies for breach of a contract. There is no punishment prescribed underthe law for a party in breach of a contract. However, if by reason of a wrongful act of one party, the other party suffers anypecuniary loss then the party in breach is required to make good the loss by paying damages to the other party. In otherwords damages aim to put the injured person in as good a position as he would have been if the promised performance hadbeen rendered.

(b) Breach of contract occurs when one party to a contract refuses to perform its obligations arising out of the contract. Theremedy in case of breach of a contract is provided in s.73 of the Contract Act, 1872 (the ‘Act’), which stipulates that whena contract is breached, the party who suffers due to such breach is entitled to receive, from the party in breach, acompensation for any loss or damage caused in the usual course of things from such breach. Damages are, however, notawarded for any remote and indirect loss or injury sustained due to the breach of the contract.

In view of the foregoing, Dr Ammar may bring an action for breach of contract against the English Coaching Centre, whichfailed to hold the promised number of classes. As per the contract, the classes were to last for four weeks, but the Centrecould only arrange half of the scheduled classes for the first three weeks and no class was held in the last week. Dr Ammar’sclaim against the Centre for the breach of contract is fortified by the fact that despite repeated promises the Centre did notappoint a substitute teacher or hold any make up classes. Dr Ammar’s up-front payment of the entire fees and his complaintssupport the fact that he had performed his part of the contract, a condition precedent to claim damages (Bashir HussainSiddiqui v Pan-Islamic Steamship Co Ltd, PLD 1967 Karachi 222).

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The Centre is responsible for breach of contract for which the remedy available to Dr Ammar is an action for damages.

(c) If Mr Jamal, the teacher, had not missed any classes and after his leaving the Centre had appointed another lecturer in hisplace then the Centre could not be held liable for breach of contract. A breach of contract occurs when one of the parties toa contract fails to perform its obligations arising out of the contract. Dr Ammar had entered into a contract with the Centre toundertake TOEFL preparatory classes and if the same were held according to the schedule, the Centre could not be said tohave breached the contract and, therefore, there could be no claim for damages. Section 73 of the Act provides that a partyto a contract is only entitled to damages when a contract has been broken.

11 (a) Section 197(1) of the Companies Ordinance, 1984 specifically prohibits companies from contributing any amount to anypolitical party, or for any political purpose to any individual or body. If a company contravenes the provisions of the saidsection, it becomes liable to a fine, which may extend to rupees 10,000 and every director and officer of the company whois knowingly and wilfully in default is punishable with imprisonment for a term which may extend to two years and is alsoliable to a fine.

In view of the above mandatory provision of the Ordinance, ASML should not make any political contribution.

(b) The Ordinance authorises the directors to manage the company’s business acting honestly and while exercising such degreeof skill and diligence as would amount to reasonable care and justifies the director’s action of trusting other officials properlyempowered to perform duties. In case of any violation of such duties the directors can be held liable to make good to thecompany the money so misused. Further s.194 of the Companies Ordinance, 1984 stipulates that any provision, whethercontained in the articles of a company or in any contract exempting amongst others any director or chief executive of thecompany from any liability imposed by the law for negligence, default, breach of duty or trust of which he may be guilty inrelation to the company, shall be void.

If it is proved that the directors of ASML did not act honestly and failed to exercise a reasonable degree of skill and diligencein purchase of the machinery, they would be responsible for making good the loss caused to the company, and in this regardany provision in the articles exempting them from being personally responsible shall be of no avail.

(c) ATML can extend a loan to ASML provided it complies with the formalities set out in s.208 of the Companies Ordinance,1984 for this purpose. A loan is covered by the definition of ‘investment’ in terms of s.208, which allows investment inassociated companies or associated undertakings under the authority of a special resolution which shall indicate the nature,period and amount of investment and the terms and conditions attached thereto. The shareholders’ authorisation should beobtained prior to the making of the investment and subsequent ratification of directors’ action in this respect is not allowed.

The proviso to s.208(1) requires that the return in investment in the form of a loan shall not be less than the borrowing costof the investing company. Hence, ATML should not agree to extend the loan to ASML at a rate of return which is less thanits borrowing cost, otherwise it shall be in violation of the provisions of s.208 and would incur serious liabilities thereunder.

Further, it is to be noted that no change is allowed to be made in the nature of an investment or the terms and conditionsattached to it except under the authority of a special resolution.

ATML should fulfil the following legal requirements under the Ordinance for making an investment in ASML in the shape ofa loan:

(i) AgreementThere should be an agreement between ATML (lending company) and ASML (investee company), which mentions theloan amount, rate of return, maturity period, and assets pledged, if any.

(ii) Directors’ ApprovalThe agreement should then be placed before the directors of ATML in their meeting wherein it should be discussed andapproved through a resolution in accordance with s.196 of the Ordinance.

(iii) Special ResolutionSection 208(1) provides that a company shall not extend a loan to its associated companies except under the authorityof a special resolution. In this situation all requirements under s.159 of the Ordinance pertaining to calling of theextraordinary general meeting and the passing of the special resolution like 21 days prior written notice to theshareholders, and in case of listed company publishing of notice of a general meeting in at least one issue of a dailynewspaper in English and Urdu language having circulation in the province where the stock exchange on which thecompany listed is situated, should be observed.

General MeetingThe extraordinary general meeting should be called and convened in accordance with the provisions of the Ordinanceand once the resolution is passed by at least two-thirds majority of the members present, in person or through proxy,and voting, it shall be adopted as a special resolution. The special resolution must mention the nature of investment,the loan amount, rate of return, maturity period, assets pledged, if any, and other terms and conditions.

Filing ATML must file a copy of the special resolution with the Securities and Exchange Commission within 15 days of itspassing.

Disclosure of InvestmentATML and ASML should both disclose the loan in their annual accounts.

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12 (a) Section 37 of the Companies Ordinance, 1984 sets out the formalities that all proposed companies have to comply withregarding proposed names. It restricts companies from registering names, which in the opinion of the Securities and ExchangeCommission are inappropriate, deceptive, exploit or offend the religious susceptibilities of the people. If a company wants toregister with a name which is identical or resembles the name of an already registered company then it can only do so if theexisting company is in the course of being dissolved and has given its consent to the satisfaction of the Commission.

In view of the above provision, if there is no existing company with an identical or similar name, the Commission should haveno objection to the proposed name ‘Total Protection (Private) Limited’ as the same is neither inappropriate nor deceptive anddoes not exploit or offend religious susceptibilities of the people.

(b) As per s.9 of the Partnership Act, 1932 partners have the following duties:

(i) To carry out the firm’s business to the greatest advantage of all partners,

(ii) To be just and faithful to each other, and

(iii) To render true accounts and share full information about all things affecting the firm.

In the case of companies, directors have a fiduciary relationship with their company which demands that the directors shouldact in good faith vis-à-vis the company (Muhammad Baksh & Sons Limited v Azhar Wali Mohammad, 1986 MLD 1870).

Vast powers have been given to the directors in s.196 of the Companies Ordinance, 1984, which states that the business ofa company shall be managed by the directors who may for carrying out the same exercise all such powers as are not by theOrdinance or by the articles of association of the company required to be exercised in a general meeting. Duties that directorscan perform only after authorisation by means of a resolution passed at their meeting, have been mentioned in subsection(2) of s.196 and include a call to shareholders to pay any unpaid amount on their shares, issuance of shares or debentures,investment of company funds, giving loans, authorisation to enter into a contract where a director or firm of which he ispartner is to sell, purchase or supply goods or services to the company, approve annual or half-yearly accounts or approvebonus to employees.

The courts have held that in the performance of their duties the directors must act honestly and exercise reasonable care ofthe level of an ordinary man. The courts have further held that the level of care does not expect the director to watch inferiorofficers or verify the calculations of the auditors himself and directors should not put themselves in a position where theirduties to the company and their personal interests conflict. Disclosure of a directors’ interest in any transaction conducted bythe company is essential to keep the decision-making process of the company transparent and one which benefits thecompany.

(c) Membership of a private limited company ceases by (i) transfer or (ii) transmission of shares. Sections 76 to 81 set out theprocedure for effecting the same.

Transfer is a voluntary act, which occurs when under an instrument of transfer duly stamped and executed by the transferorshares are transferred to the transferee. In case of transmission shares are transferred to another person by virtue of operationof law. In other words transmission is an involuntary assignment of shares from the owner to his legal representative uponproviding proof of title to the shares and thereafter the legal representative enjoys all the benefits and privileges like the originalowner. Transmission takes place when (i) the registered shareholder dies; or (ii) he is adjudicated as insolvent or (iii) whenthe shareholder is a company and it goes into liquidation.

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15

Part 2 Examination – Paper 2.2(PKN) December 2005 Marking SchemeCorporate and Business Law (Pakistan)


(a) 3–5 Answers explain the process after which all bills become law in the light of Articles 70, 73 and 75 of the Constitutionof Pakistan, 1973 and explain that money bills can only originate in the National Assembly.

0–2 Poor answers showing little or no knowledge about the process of legislation.

(b) 3–5 Answers discuss the significance of a federal system of state and the position and importance of Senate as the upperhouse of the Parliament with emphasis on its role in the election of the President and his removal/impeachment[Articles 41(3) and 47(8)], legislative process (Articles 70, 73 and 75) and representation in cabinet [Article 92(1)].

0–2 Answers show little understanding of the position and importance of Senate.

2 This question expects candidates to exhibit knowledge about essential elements of a valid contract and to explain each of them.

7–10 Answers make reference to s.10 of the Contract Act, 1872 and discuss the same in light of other provisions of the Actregarding a person’s competency (s.11), free consent (ss.13 and 14) and lawful considerations and objects (s.23).

3–6 Answers mention s.10 but do not discuss its contents.

0–2 Extremely poor answers that show little or no knowledge about the essential elements of a valid contract.

3 This question expects candidates to display knowledge of a company’s position as a separate legal person and of the doctrine oflimited liability.

7–10 Answers exhibit knowledge about the company’s position as a separate legal person and discussing the features ofindependent corporate existence and perpetual succession with special emphasis on the doctrine of limited liability.Reference to and a brief discussion of the landmark case of Salomon v Salomon & Co is to be appreciated.

3–6 Answers show some understanding of the concept of the company as a separate legal person and doctrine of limitedliability.

0–2 Extremely poor answers that show little or no knowledge about the question.

4 This question expects candidates to show knowledge about the memorandum of association of a company and its contents.

7–10 Answers display the knowledge about the nature and status of a memorandum of association as a constituent documentof a company. The significance of various clauses of the memorandum are highlighted. Also, discuss briefly the name,registered office, objects, liability, capital and association clauses.

3–6 Answers display a limited level of knowledge about the memorandum and merely mention that there are generally fiveclauses in a memorandum without going into details.


5 This question is divided into three parts and each part shall be marked separately.

(a) 2–3 Answers mention the time frame within which it is mandatory for certain kinds of company to hold a statutory meeting(s.157 of the Companies Ordinance, 1984) and the purpose of such a meeting.

0–1 Answers either mention the time frame within which it is mandatory for certain kinds of company to hold a statutorymeeting (s.157) or the purpose of such a meeting.

(b) 3–4 Answers mention the time frame within which it is mandatory for all kinds of companies to hold their annual generalmeeting (s.158 of the Companies Ordinance, 1984), the purpose of such a meeting and what kind of business isnormally carried out in an annual general meeting.

0–2 Answers either mention the time frame within which it is mandatory for companies to hold the annual general meeting(s.158) or the purpose of such a meeting.

(c) 2–3 Answers discuss which meetings are called extraordinary general meetings, when can they be convened, who canconvene them and what kind of matters are discussed in them.

0–1 Answers show little or no knowledge about any of the above mentioned.



6 This question is divided into two parts (a) and (b) respectively with part (a) being further divided in three parts all having equalmarks.

(a) (i) 1–2 Answers discuss with examples the concept of authorised share capital.

0–1 Answers exhibit little or no understanding of the concept of authorised share capital and fail to discuss the samewith an example.

(ii) 1–2 Answers discuss with examples the concept of share capital and refer to s.90 of the Companies Ordinance, 1984.

0–1 Answers exhibit little or no understanding of the concept of share capital or fail to discuss the same with referenceto s.90.

(iii) 1–2 Answers discuss the concept of debenture capital, the position of the debenture holders in a company and/orcompare the same with share capital.

0–1 Answers exhibit little or no understanding of the concept of debenture capital and/or fail to discuss the same withreference to an example.

(b) 3–4 Answers define fixed and floating charges, discuss the salient points of distinction between the two and explain theposition of priority of a fixed charge over a floating charge.

0–2 Answers define the two kinds of charges, but do not discuss the points of distinction between the two.

7 This question is divided into two parts and each part shall be marked separately.

(a) 4–6 Answers discuss with reference to ss.9 and 16 of the Partnership Act, 1932 the general duties that partners owe toeach other with respect to the firm’s business, particularly not to indulge in making personal profits and carrying oncompetitive business.

0–3 Answers do not quote nor discuss general duties that partners owe to each other in the light of ss.9 and 16 and/orshow little or no understanding of duties as to personal profits and carrying on competitive business.

(b) 3–4 Answers discuss the effects of non-registration manifested in s.69 of the Partnership Act, 1932 with respect to theposition and rights of partners in an unregistered firm and an unregistered firm’s rights vis-à-vis third parties.

0–2 Answers show little or no understanding of the effects of non-registration.

8 This question expects candidates to exhibit knowledge about the concept of retrenchment and re-employment as set out in StandingOrders 13 and 14 of the West Pakistan Industrial and Commercial Employment (Standing Order) Ordinance, 1968 respectively.

7–10 Answers explain with reference to case law the concept of retrenchment as set out in Standing Order 13 and re-employment of retrenched workers as per Standing Order 14.

3–6 Answers refer to Standing Order 13 but are not very clear about the concept of retrenchment particularly in light of judicialinterpretation.

0–2 Extremely poor answers that show little or no knowledge of retrenchment.

9 This question is divided into three parts and each part shall be marked independently.

(a) 3-4 Answers opine with reference to s.290(1) of the Companies Ordinance, 1984 (‘Ordinance’) as to whether Mr Bhattipossesses the requisite number of issued share capital of FPL to be entitled to seek remedy before the court.

0-2 Answers do not quote the mentioned legal provision and/or do not opine as to whether Mr Bhatti can seek remedybefore the court.

(b) 6–8 Answers in this bandwidth analyse in light of s.290 of the Ordinance as to whether in the given circumstances(business outside the scope of memorandum and non satisfactory response to Mr Bhatti’s queries) constitute validgrounds to file petition before the court.

3–5 Answers in this marks range quote relevant legal provision and/or comment on the mentioned instances.

0–2 Extremely poor answers with mere reference to legal provisions.

(c) 6–8 Answers discuss the court’s powers as set out in ss.290, 291 and 292 of the Ordinance and opine in their light asto whether Mr Bhatti’s shares can be ordered to be purchased by FPL.

3–5 Answers in this bandwidth mention the court’s powers given in the Ordinance and/or opine as to whether Mr Bhatti’sshares can be ordered by the court to be purchased by FPL.

0–2 Answers show little knowledge about the topic at hand.

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(a) 3–4 Answers explain the meaning, nature and purpose of damages.

0–2 Answers do not exhibit satisfactory knowledge about damages.

(b) 7–10 Answers quote s.73 of the Contract Act, 1872, discuss breach of contract, analyse whether the English CoachingCentre’s actions constitute breach of contract and mention the remedy available to Dr Ammar in this regard.

3–6 Answers in this marks range are confined to quoting legal provisions and/or show some understanding of the issueespecially whether the English Coaching Centre is in breach of contract and the remedies available to Dr Ammar.

0–2 Extremely poor answers showing a lack of understanding of the issue.

(c) 4–6 Answers discuss the concept of breach of contract vis-à-vis the appointment of the new lecturer and opine on theCentre’s position in this changed scenario in light of s.73 of the Act.

0–3 Answers produce the legal provision of s.73, but fail in reaching a conclusion as to the Centre’s liability.

11 This question is divided into three parts and each part carries different marks.

(a) 3–5 Answers discuss s.197(1) of the Companies Ordinance, 1984 and opine as to whether ASML can make the politicalcontribution.

0–2 Weak answers that do not discuss the legal provision and/or do not conclude as to whether ASML can make thecontribution or not.

(b) 6–8 Answers discuss the directors’ fiduciary duties toward the company, their role, the extent of care that they shouldexhibit while performing their duties and opine about the liability of ASML’s directors in view of the provision containedin the articles of association of ASML and s.194 of the Ordinance.

3–5 Answers reflect lack of understanding of the directors’ role, level of care and/or do not opine about the liability of ASMLdirectors in view of ASML articles and the relevant legal provision.

0–2 Extremely poor answers that show little understanding of the matter at hand.

(c) 6–7 Answers produce the requirements of s.208 of the Ordinance and mention the procedure and formalities that ATMLshould follow for granting the loan to ASML.

3–5 Answers mention the procedure and formalities mentioned in s.208.

0–2 Answers show little understanding of the matter at hand.


(a) 4–6 Answers discuss and conclude in light of s.37 of the Ordinance as to whether the proposed company can use thename ‘Total Protection (Private) Limited’.

0–3 Answers quote relevant sections and/or conclude whether proposed name can be used or not.

(b) 7–10 Answers draw a comparison between partners’ duties as mentioned in s.9 of the Partnership Act, 1932 and the dutiesof the directors as set out in s.196 of the Companies Ordinance, 1984 in light of judicial precedents.

3–6 Answers discuss the relevant legal provisions but do not elaborate the same.

0–2 Answers fail to discuss relevant legal provisions and show a lack of understanding of the issue at hand.

(c) 3–4 Answers in this range discuss the concept of transfer and transmission of shares and mention the relevant legalprovisions, ss.76 to 81 of the Ordinance.

0–2 Extremely poor answers that show a lack of understanding of the concept of transfer and transmission and/or do notmention relevant legal provisions.

17




PART 2

TUESDAY 6 JUNE 2006

QUESTION PAPER








Pape

r 2.2

(PK

N)




1 In relation to the legal system of Pakistan, explain the following as a source of law:

(a) Judicial Precedent. (6 marks)

(b) Customs. (4 marks)

(10 marks)

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

3 In the context of the Partnership Act, 1932, define the different types of partnerships recognised by the law.

(10 marks)

4 State the powers and duties of a company’s auditors under the Companies Ordinance, 1984.(10 marks)

5 In relation to company law, outline the formalities for declaring and distributing a dividend.(10 marks)

6 In relation to company law, explain voluntary winding up by:

(a) Members. (5 marks)

(b) Creditors. (5 marks)

(10 marks)

7 Under the Companies Ordinance, 1984 define the terms:

(a) Memorandum of Association. (5 marks)

(b) Articles of Association. (5 marks)

(10 marks)

8 Discuss the position of ‘workmen’ under the Industrial Relations Ordinance, 2002.(10 marks)

2




9 GGL is a public limited company involved in the business of oil and gas exploration. On 10 January 2005, Mr Parvezwas appointed by the board of directors of GGL as the company’s chief executive officer for a period of two years. Onassumption of charge of GGL’s affairs, Mr Parvez found out that exploration on five of the company’s wells located inthe province of Baluchistan had proved successful and pumping for oil on these sites would start very soon. Excited,Mr Parvez mentioned this fact to his wife, Ritu, who without informing Mr Parvez purchased 13% of the company’slisted shares and sold the same within a period of five months when their price sky-rocketed because of the eventualoil discovery news in the press media. Concerned by the imminent repercussions of his wife’s actions, Mr Parvez hasapproached you for advice.

Required:

Advise Mr Parvez on the following:

(a) Whether Ritu’s purchase of GGL shares amounts to insider trading. (8 marks)

(b) Whether he can be removed from the position of chief executive officer of GGL before the expiry of his termbecause of the transaction. (5 marks)

(c) His future course of action and the consequences of failing to act. (7 marks)

(20 marks)

10 The board of directors of Good Luck (Private) Limited have decided that the company shall start packaging of fooditems despite the fact that the memorandum of association of the company states that it shall only engage in theproduction and sale of soft drinks. Faisal, a shareholder has threatened to initiate winding up proceedings against thecompany on the grounds that proper books of account are not being maintained and the company is engaging inunauthorised business. The board of directors has approached you for advice.

Required:

(a) State whether the board of directors of the company can authorise the company to start the food-packagingbusiness. (10 marks)

(b) Discuss the likely outcome of winding up proceedings. (10 marks)

(20 marks)

3 [P.T.O.



11 EBL, a commercial bank, advanced to Miss Nadia Rs.500,000 for one year commencing from 10 February 2004 atthe rate of 10% per annum for investment in the stock exchange against her jewellery as security. On 10 February2005, Nadia repaid to EBL the sum of Rs.500,000 only and requested that her jewellery be returned to her. The EBLmanagement has approached you for advice.

Required:

(a) State whether EBL’s relationship with Nadia constitutes pledge or hypothecation. (8 marks)

(b) State whether EBL can refuse to return Nadia’s jewellery. (4 marks)

(c) State what rights and remedies does EBL have if Nadia refuses to pay the interest due. (8 marks)

(20 marks)

12 In 1987 Waseem, Khalid, Adnan and Asad each contributed 10,000 rupees to start a firm dealing in auto parts. Atthat time it was agreed that each of them shall be equally entitled to the firm’s assets and profits. Also that each ofthem shall be responsible for the firm’s business. Waseem now plans to retire from the firm and has sought youradvice.

Required:

(a) State whether Waseem requires the permission from other partners to retire. (5 marks)

(b) What is the extent of Waseem’s liability for acts done since 1987 and after retirement. (8 marks)

(c) After his retirement, state whether Waseem would be entitled to any profits of the firm. (7 marks)

(20 marks)


4



Answers



Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) June 2006 Answers

1 (a) Before deciding a case judges see if a case involving similar questions of law and fact has been adjudicated upon by a courtof higher or equal status. If so, the court deciding the new case shall follow the rule of law established in the earlier case, asa matter of policy not to disturb a settled point of law. The rationale behind this policy is the need to promote certainty, stabilityand predictability. Keeton in Elementary Principles of Jurisprudence has termed the doctrine of judicial precedents as not amechanical process but rather as a process of analogy, which permits the judges to continuously adapt the common law tochanging social needs.

Precedent as a source of law has been recognised by the Constitution of Pakistan, 1973 in Articles 189 and 201, whichstipulate that any decision of the Supreme Court shall, to the extent that it decides a question of law or enunciates a principalof law, shall be binding on all other courts in Pakistan (Article 189); and decisions of a High Court shall, to the extent that itdecides a question of law or enunciates a principal of law shall be binding on all courts subordinate to it (Article 201). Inother words, the authority of the precedents in Pakistani system of law depends on the status of the court rendering thejudgment. The rule is that every court binds the lower courts and that some courts even bind themselves as held by theSupreme Court of Pakistan in Chaudhry Ajaib Hussein v Mst. Zareen Akhtar, 2003 YLR 410 that judgment of Division Benchwas binding upon the Single Bench and decision of Full Court was binding upon the Division Bench and Single Bench.

(b) The term ‘customs’ refers to rules, which through long usage have attained the force of law. The superior courts of Pakistanin Muhammad Hanif v Abdul Aziz, 1991 MLD 216 have held that customs attain the status of law if they through ancienttimes have been carried out unaltered, uninterrupted and continuingly and one instance or a few instances would beinsufficient to prove a custom. Customs can be basis of judicial decisions if the transaction recognises the custom in questionand contains on its records a number of specific instances pertaining to the relevant custom. Further the superior Courts ofPakistan in Nur Mohammad v Mohammad Yar, PLD 1951 Lahore 132 have held that the question as to what the customwas in a particular matter or class of people was a question of public nature and the courts had to make an objective enquiryto ascertain the customer on any particular point as customs may not be necessarily logical.

2 According to s.2(b) of the Contract Act, 1872 (‘1872 Act’), ‘acceptance’ is made when the person to whom the proposal/offer ismade signifies his assent, and unless an offer is accepted the same would not consummate into a binding and enforceable contract(Rehmat Ali v Fakir Muhammad, 2005 YLR 301). Acceptance may be made by words spoken or written (express) or by conduct(implied), for instance when a person goes to a hotel and eats some food, he impliedly accepts to pay for it. If the person to whomthe offer is made remains silent and does nothing to show that he has accepted the offer, no contract is formed (Felthouse vBindley, 1862).

Section 7(1) of the 1872 Act mandates that for acceptance to be valid, it must be absolute and unqualified as a qualified andconditional acceptance amounts to a counter offer i.e. rejection of the original offer. In other words consensus ad idem betweenthe parties with regard to all the terms of the contract must be shown as qualified acceptance of a proposal or acceptance of aproposal with a variation is no acceptance (Al Huda Hotels and Tourism Company v Paktel Limited and others, 2002 CLD 218).

Acceptance must be made by the person to whom the proposal is made or by any person authorised by him (Boulton v Jones,1857). For instance, where offer is made by A to B, the acceptance by C would be inoperative. Further, acceptance must becommunicated to the person who made the offer and be made according to the mode prescribed or through the usual or areasonable mode as acceptance given in any other manner may not be effective. Section 4 of the 1872 Act stipulates thatcommunication of an acceptance is complete as against the proposer when it is put in course of transmission to him, so as to beout of the power of the acceptor and as against the acceptor when it comes to the knowledge of the proposer. Also for acceptanceto be valid it must be made within the time allowed by the proposer and if no time is specified, it must be made within a reasonabletime.

3 The concept of a partnership and its various kinds are detailed in the Partnership Act, 1932 (‘1932 Act’). A partnership, unlike acompany, is not a separate legal entity and its rights and duties are the rights and duties of partners composing it (Haji BashirAhmed v Federal Land Commission, Islamabad, PLD 1985 Karachi 83).

Partnership is of three kinds:

(1) General Partnership(2) Particular Partnership, and(3) Partnership at Will

(1) General Partnership

Section 4 of the 1932 Act terms a partnership as a relationship between persons who have agreed to share the profits of abusiness carried on by all or any one of them acting for all. The superior courts of Pakistan while interpreting this clause inIsmail Dada Adam Soomar v Shorat Banoo, 1960 PTD 1194 have held that the essentials of a partnership are (i) agreementbetween two or more persons; (ii) to run a business with the intention of sharing profits and (iii) the business should be runby all or any one of them acting for all. Such kind of partnership is also termed as a ‘general partnership’ and herein thepartners are jointly and severally liable for the debts of the partnership business (National Bank of Pakistan v M.M. Agencies,1991 CLC 1793). Further, it is different from a particular partnership in which liability of the partners extends only to aparticular adventure or undertaking.

7



(2) Particular Partnership

Section 8 of the 1932 Act provides that a ‘Particular Partnership’ is a partnership organised for a single adventure orundertaking for instance, there may be partnership between an author and a publisher for a particular book. If a partnershiphas been formed only for running a particular agency, i.e. a single venture then it would continue only as long as such agencylasts and if the partners want to do other business after expiry of agency, they could do so only by a fresh agreement (SethHussein Bhai v Muhammad Iqbal, PLD 1976 Quetta 9).

(3) Partnership at Will

The 1932 Act in s.7 gives us the concept of ‘partnership at will’ which is a partnership wherein (i) no fixed period has beenagreed upon for the duration of the partnership; and (ii) there is no provision for determining the existence of partnership. Apartnership at will may be dissolved by any partner by giving notice in writing to this effect. Dissolution takes effect from thedate mentioned in the notice and if no date is mentioned then from the date of communication of the notice. Thus, theessence of a partnership at will is that it can be dissolved by the partners at any time.

4 Auditors are responsible for examining the company’s affairs on behalf of the shareholders and are duty bound to honour thisposition of trust by giving the shareholders a fair and full account of the company’s accounts. To enable the auditors to performtheir functions and fulfil their duties, s.255 of the Companies Ordinance, 1984 (‘Ordinance’) equip them with certain rights andpowers that are discussed below:

Rights of Auditors

(i) Right of Access

Auditors have the right to access at all times the books, papers, accounts and vouchers of the company, whether kept at thecompany’s registered office or elsewhere.

(ii) Right to Request

Auditors are entitled to require from the company’s directors and officers information necessary for performance of their duties.

Duties of Auditors

(i) Auditor’s Report

Auditors shall make a report for the shareholders of the company pertaining to the company’s accounts and books of accountsand the same shall state whether all information required had been obtained; proper books of accounts as per law were beingkept by the company; balance sheet and profit and loss account or the income and expenditure account was according tolaw and in agreement with the books of accounts; the accounts gave a true and fair view of the company’s state; whetherexpenditure incurred was for the purpose of the company’s business; business conducted, investments made andexpenditures incurred were in accordance with the objects of the company; and zakat has been deducted and deposited inthe Central Zakat Fund. In case any of the ingredients of the auditor’s report are missing then the report shall state the reasonfor this.

(ii) Attend the General Meeting

Auditor(s) of a company are entitled to attend the general meetings and to receive all notices and communications in thisregard.

5 A dividend is the share in the profits declared by a company for distribution amongst the shareholders (Kantilal Manilal v C.I.T.,(1956) 26 Com Cases 357). However, it is to be noted that shareholders cannot compel the company by any process to declarea dividend and the right to obtain a dividend only arises after a company in a general meeting has declared a dividend. Further, adividend once declared becomes a debt for which the shareholder can sue the company in case of non-payment (Bacha F Guzdarv C.I.T., AIR 1955 SC 74; and In re Severn and Wye & Severn Bridge Ry. Co, (1896) 1 Ch. 559).

For the declaration and distribution of a dividend, the formalities set out in ss.248; 249; 250 and 251 of the Ordinance need tobe complied with.

Section 249 read with s.248(2) of the Ordinance provides that a dividend can only be paid out of profits of the company. Furtherthat no dividend shall be declared or paid by a company for any financial year when profits were made from the sale or disposalof any immovable property or assets of a capital nature unless the business of the company consists of selling and purchasing anysuch property or assets.

If the above-mentioned requirements are fulfilled, the directors of a company may decide the rate and quantum of dividend andsubmit the same for the approval by the shareholders in the general meeting. Please note that the shareholders in a general meetingcannot approve a dividend in excess of the amount recommended by the directors (s.248(1) of the Ordinance). Further, s.251provides that after declaration of a dividend the chief executive of the company shall be responsible for its payment within 45 daysof such declaration in the case of a listed company and within 30 days in the case of any other company. Declaration here refersto the date of the general meeting in which the dividend was approved.

As per s.250 subsections (1) and (3) a dividend shall be paid by a company to the registered holders of shares, or their bankers,and a dividend warrant shall be sent by registered post unless the shareholder entitled to receive the dividend requires otherwisein writing.

8



6 Both (Members and Creditors) instances of voluntary winding up can be initiated by the passing of a special resolution and givingnotice by advertisement of the same as per s.361(1) of the Companies Ordinance, 1984.

The point of distinction between (Members and Creditors) voluntary winding up is whether a ‘Declaration of Solvency’ as per s.362has been made or not.

(a) Members’ Voluntary Winding Up

Declaration of Solvency (s.362):

Such declaration can be made within five weeks of the passing of the special resolution for winding up by the directors ormajority of the directors (in case the company has more than three directors) including the chief executive at a meeting of theboard and states that in their opinion the company has no debts, or shall be able to pay all its debts in full within a periodof 12 months.

Appointment of Liquidator (s.366(1) and (2)):

The company shall at a general meeting by special resolution appoint one or more liquidators for winding up the affairs anddistributing the assets of the company and shall notify the registrar of the appointment of the liquidator(s) within ten days ofthe same (s.366(1) and (2)). On appointment of the liquidator, all the powers of the directors, chief executive and otherofficers cease, except for purposes such as giving notices.

Liquidators Report, Final Meeting and Dissolution (s.370):

The liquidator shall make a report mentioning how winding up was conducted and the company’s property disposed and heshall call, by giving notice according to s.361, a general meeting of the company.

At the meeting the liquidator shall present his report and account and within one week of the general meeting, the liquidatorshall submit to the registrar a copy of the report and minutes of the meeting.

The registrar shall after such scrutiny as he deems fit, register the documents provided and on expiration of three monthsfrom such registration, the company shall stand dissolved.

(b) Creditors’ Voluntary Winding Up

Creditors Meeting:

The company shall call a meeting of the creditors on the day or one day following the date, of the general meeting at whichthe special resolution for voluntary winding up was proposed. At such meeting the directors and chief executive shall presenta full statement of the company’s affairs, assets and liabilities, list of creditors and the estimated amount of their claims(s.373(3)). Further, any resolution passed at such meeting shall be sent to the registrar within ten days.

Appointment of Liquidator and Committee of Inspection:

The creditors and the company at their respective meetings can nominate liquidators for the purpose of winding up the affairsand distributing the assets of the company. In case the creditors and company nominate different persons the nominee of thecreditors shall prevail and hold office until conclusion of winding up proceedings. On the appointment of a liquidator, all thepowers of the directors, chief executive and other officers of the company come to an end except for limited purposes suchas giving notice of resolution of winding up (s.376).

The creditors may at a meeting held in pursuance of s.373 or at any subsequent meeting, appoint a Committee of Inspectionconsisting of not more than five persons to assist in the administration of the company.

Liquidators Report, Final Meeting and Dissolution (s.382):

This process of winding up should be completed in one year and as soon as the affairs of the company are fully wound up,the liquidator shall make a report and account of winding up and shall call a general meeting of the company and a meetingof the creditors for the purpose of laying before them the said reports.

Within one week of the meeting later in time (either of the creditors or of the company) the liquidator shall send to the registrara copy of his report and account. On receiving the report and account in respect of each meeting the registrar shall after suchscrutiny as he may deem fit, register them, and on the expiration of three months from such registration the company shallbe deemed to be dissolved.

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

(b) The articles of association are rules and regulations framed for the internal management of a company and are subordinateto the memorandum. Articles define powers of directors and set out the terms of contract between them (United Liner

9



Agencies of Pakistan (Private) Limited v Miss Maheneau Agha, 2003 SCMR 132). In other words, articles define the duties,rights and powers of the governing body, company at large, prescribe the mode by which business of the company is to becarried on, and changes in the internal regulation of the company may be made from time to time. Further, articles cannotenlarge the scope of the company’s objects mentioned in the memorandum, however, in case of an ambiguity in thememorandum, the articles can be referred to for the limited purpose of clarifying such ambiguity.

8 ‘Workman’ has been defined in s.2(xxx) of the Industrial Relations Ordinance, 2002 (the ‘IRO’) as any and all persons who are notemployers and have been employed in an establishment or industry for remuneration either directly or through a contractor onexpress or implied terms. Earlier under the Industrial Relations Ordinance, 1969 there was a monetary aspect to the definition ofworkmen, i.e. people working in a managerial capacity but drawing less than 800 rupees were also classified as workmen.However the real test of determining whether a person qualifies as workman or not depends on the nature of work to be performedby him (Security Paper Limited v Sindh Labour Appellate Tribunal, PLD 1988 SC 180). Designation or salary of an employee isnot the deciding factor in concluding whether a person is a workman or not.

It is important to determine whether a person is a workman or not as under the IRO workers have been given certain rights, forumsfor protection of these rights have also been introduced and it is only ‘workers’ which can benefit from them.

Workers as per s.3(1)(a) of the IRO have the right to form and join ‘Trade Unions’ (a collective body of workers which strives fortheir rights). Also for the benefit of workers the IRO in s.23(5) has created the office of ‘Shop Steward’ who is to act as a linkbetween the workers and the employers for provision of better working conditions. Further, the IRO in s.24 has created the ‘JointWorks Council’ which along with the management shall strive for providing amongst others safe and healthy conditions; vocationaltraining; and educational facilities for children of workmen. Labour Courts have also been created for resolution of disputes relatingto workmen and in proceedings of such courts no court fee has been made payable for filing, exhibiting or recording documents(s.45(4)).

Further to give protection to workmen certain acts such as restriction on workers from joining trade unions or discrimination duringemployment or dismissal if worker is a member of a trade union by the employers have been termed as unfair labour practicesand hence punishable under the IRO (s.63). Further, as per Schedule II of IRO, the employers are bound to protect and safeguardthe interest of the workers and to take measures within their resources for the workers’ socio-economic uplift and welfare.

9 (a) The purchase and the subsequent sale of 13% shares of GGL by Ritu amounts to insider trading as the shares will be deemedto be in the beneficial ownership of Mr Parvez. The ‘Explanation’ to s.224(3) of the Companies Ordinance, 1984 provides asfollows:

Explanation: (a) For the purposes of this section and s.222, beneficial ownership of securities of any person shall bedeemed to include the securities beneficially owned, held or controlled by him or his spouse or by any of his dependentlineal ascendants or descendants not being himself or herself a person who is required to furnish a return under s.222.

Sections 222 and 224 of the Ordinance require a beneficial owner of more than 10% listed securities of a company to reportand deposit the gain with the company arising from a purchase and sale, or sale and purchase transaction in such securitieswithin a six months period. In the given case, Ritu (and more precisely, Mr Parvez) did not furnish the information to GGL,nor was the registrar or the Securities and Exchange Commission of Pakistan (‘SECP’) informed about this ownership.

Section 224 of the Companies Ordinance, 1984 (‘Ordinance’) states that where amongst others the chief executive of a listedcompany is the beneficial owner of more than 10% of the company’s listed securities and makes any gain by the purchaseand sale of any such securities, he should report and tender the amount of such gain to the company and simultaneouslysend an intimation to the registrar and the SECP.

In view of the above statutory provision, Mr Parvez should have reported and deposited the amount of gain with GGL andnotified the registrar and SECP. As Ritu’s purchase of GGL shares was made when she heard from her husband (GGL’s chiefexecutive officer) that work on the company’s wells was going to start (company’s confidential information) and sold the samewhen share prices increased due to oil discovery news, her act amounts to insider trading.

(b) Mr Parvez can be removed from the office of chief executive before the expiration of his term (irrespective of any provision tothe contrary in the articles of association of GGL or in any agreement between GGL and Mr Parvez) by (i) the directors ofGGL; or (ii) passing of a special resolution; as per s.202 of the Ordinance.

In case of removal by the directors, a resolution to this effect will have to be passed by at least three quarters of the totalnumber of directors of GGL.

Mr Parvez can also be removed at a general meeting provided a resolution to this effect is passed by a majority of not lessthan three-quarters members of GGL present and entitled to vote in such a meeting (s.202 read with 2(36)).

(c) As per s.224(1) of the Ordinance, Mr Parvez being beneficial owner of more than 10% of GGL’s listed securities and makinga gain by their purchase and subsequent sale, should have made a report and tendered the amount of such gain to GGL.Further, he should have simultaneously sent intimation to this effect to the registrar and the SECP.

Mr Parvez shall immediately tender the amount of gain made in the purchase and sale transaction of the shares to GGL. Orelse, Mr Parvez would be required to tender the amount to the SECP and would be liable for fine.

10



Therefore if six months have not elapsed then Mr Parvez should initiate the above mentioned i.e. (i) report and deposit amountof gain with GGL and (ii) notify the registrar and SECP.

In case more than six months have elapsed and Mr Parvez has failed or neglected to tender the total amount of the gain fromthe aforementioned transaction to GGL then as per s.224(2) of the Ordinance, SECP can direct recovery of the gain as anarrear of land revenue. Further, s.224(4) mandates that Mr Parvez could be held liable to a fine, which may extend to 30,000rupees and in case of a continuing contravention to a further fine of 1,000 rupees (maximum) for every date during whichsuch contravention continues.

10 (a) A company cannot engage in business, which is not fairly incidental or consequential to the business of the companymentioned in the memorandum of association. As the memorandum of association of a company is a document whichamongst others mentions the objects for attainment of which the company has been incorporated (Adamjee InsuranceCompany Limited v Muslim Commercial Bank Limited, Islamabad, 2003 CLD 463). Any act of the company in violation ofthe memorandum is ultra vires and so void that it cannot be ratified. The proper test for determining whether an act is ultravires or not is to see if the power to do a thing arises from necessary implication from the expressed objects and if it does theact should not be held as ultra vires. As directors are fiduciaries and are bound to exercise their powers in good faith for thebenefit of the company and for a proper purpose.

Herein the board plans to authorise Good Luck (Private) Limited to initiate the food packaging business despite the fact thatthe said business is not mentioned in the company’s memorandum and neither can it qualify as business, incidental orconsequential to the business of Good Luck (Private) Limited. Further, the board does not have power under the Ordinanceto allow the company to carry out activities not provided for in its memorandum.

(b) Section 305(f)(ii and iv) of the Ordinance provides that a company may be wound up by the court if the company is (ii)carrying on business not authorised by its memorandum and (iv) being run and managed by persons who fail to maintainproper and true accounts or commit fraud, misfeasance or malfeasance in relation to the company.

Please note that the superior courts of Pakistan with regard to winding up have held that a petition for winding up of acompany can be made by a shareholder or creditor of the company or by the company itself. Locus standi of a person to filesuch a petition has to be seen on the date of filing (Mohammad Hussein v Dawood Flour Mills, 2003 CLD 1429). Furtherthat a joint reading of ss.305 and 306 suggests that a company judge has discretion to order or not to order winding up ofa company after taking into consideration all the relevant facts. As the object of winding up is to realise the assets of thecompany and to pay its debts and winding up proceedings should not be initiated to coerce the debtor company into makingpayment to an unpaid creditor (Platinum Insurance Company Limited v Daewoo Corporation, PLD 1999 SC 1). Further thatorder for winding up can be sought or made on all or any of the grounds enumerated in s.305 (Habib Bank Limited v HamzaBoard Mills, PLD 1996 Lahore 633) provided it is satisfactorily proved and courts should not exercise such discretion on anapplication which is not bona fide i.e. aims to pressurise the company.

In view of the above, we are of the opinion that winding up proceedings against the company might be successful if Faisalis able to prove the grounds mentioned in s.305(f)(ii and iv) i.e. that Good Luck (Private) Limited are not maintaining properbooks of account and are engaging in business not authorised by its memorandum.

11 (a) Sections 148 and 172 of the Contract Act, 1872 (the ‘Act’) states that pledge is the delivery of goods by way of security upona contract that they shall when the debt is paid or promise performed be returned or otherwise disposed of according to thedirections of the pledgor. Therefore, to constitute a valid pledge there must be (i) a contract in relation to an identified chattelwhich is to be delivered as security and (ii) actual delivery of possession of the identified chattel. Whereas hypothecation ispledging a thing as security for a debt without parting with its possession i.e. possession of the pledged chattel remains withthe debtor.

Nadia’s relationship with EBL constitutes a pledge as she delivered the possession of her jewellery to EBL as security againstan advance of 500,000 rupees. Further Nadia’s position is that of the ‘pawner’ and EBL’s as that of ‘pawnee’.

(b) Section 173 of the Act allows a pawnee to retain possession of the goods pledged not only for payment of the debt but alsofor interest on the debt.

Therefore despite repayment of the amount of 500,000 rupees by Nadia, EBL can retain possession of her jewellery untilpayment of the interest due on the advanced amount.

(c) Section 176 of the Act states that if the pawner makes default in payment of the debt then the pawnee may bring a suitagainst the pawner for the debt and retain the goods pledged as a collateral security; or he may sell the goods pledged, ongiving the pawner reasonable notice of the sale. Further, if the proceeds of such sale are less than the amount due in respectof the debt, the pawner is liable for the balance and if the proceeds of the sale are greater then the pawnee should return thesurplus to the pawner.

While interpreting the above mentioned provision the superior courts of Pakistan have held that the three mentioned remediesof (i) right to retain pledged goods, (ii) right to sell same and (iii) right to bring an action for realisation of debt, were notalternative remedies, but concurrent (Central Bank of India v Syed Mohammad Abdul Jalil Shah, 1999 CLC 671). However,before exercising the right to sell the pledged goods, the pawnee is required to give a reasonable notice to pawner of hisintention to sell though a second notice at time of actual sale is not required. (A. Habib Ahmed v The Hong Kong Shangai

11



Banking Corporation, 1987 CLC 1919). If after the sale any part of the debt due remains outstanding then pawnee canrecover his debt by personal action against pawner for recovery of balance (National Bank of Pakistan v Bright Leather Works,1980 CLC 1170).

Therefore, EBL has the right to retain possession of Nadia’s jewellery until interest due on the amount advanced is paid. Atthe same time EBL can initiate proceedings for recovery of the said amount and EBL can serve a notice on Nadia stating thather jewellery is liable to be sold by EBL in case she does not pay the amount due to EBL before a certain date. Further if theproceeds of such sale are less than the interest due then EBL can initiate proceedings against Nadia for recovery of thebalance and if the proceeds of the sale are greater then EBL should return the surplus to Nadia.

12 (a) The Partnership Act, 1932 (‘1932 Act’) in s.32(1) provides three modes (i) with consent of all other partners; (ii) inaccordance with the express agreement between partners; and (iii) if the partnership is at will then by giving a notice of hisintention to retire in writing to all the other partners; by which a partner can retire from a firm. Further, s.7 of the 1932 Actdescribes that in a ‘partnership-at-will’ contract there is no provision dealing with the duration of partnership or for thedetermination of their partnership.

In view of the above, we advise that Waseem retire from the firm after obtaining the consent of the other partners. This viewis further fortified as the agreement between them (Waseem, Khalid, Adnan and Asad) does not prescribe a mode ofretirement and neither is their partnership a ‘partnership-at-will’.

(b) Section 32(2) of the 1932 Act states that a retiring partner may be discharged from any liability to any third party for acts ofthe firm done before his retirement by an agreement made by him with such third party and the partners of the reconstitutedfirm, and that such agreement may be implied by a course of dealing between such third party and the reconstituted firm. Itcan be implied that third parties had notice if a public notice of retirement is given by the retired partner or by any partner ofthe reconstituted firm (s.32(4)). Importance of this public notice is provided in s.32(3), which states that notwithstandingthe retirement of a partner from a firm, he and the partners shall continue to be liable as partners to third parties for any actsdone by any of them before retirement on behalf of the firm until public notice of retirement is given.

In view of the above, we are of the view that Waseem shall continue to be jointly and severally liable for all acts since 1957until he either (i) reaches an agreement with such third parties and the partners of the reconstituted firm discharging him ofany liability or (ii) a public notice of his retirement is given by him or any of the other partners.

(c) At the time of retirement Waseem’s account i.e. share in the firm’s capital, assets and profits should be settled vis à vis theother partners (Khalid, Adnan and Asad) and thereafter Waseem shall no longer be entitled to any further share of profits.

However if upon retirement Waseem’s account is not settled and the remaining partners carry on the business of the firmthen Waseem shall be entitled at his option to (i) profits made since his retirement attributable to his share of firm or (ii) tointerest at the rate of 6% per annum on the amount of his share in the property of the firm (s.37).

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Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) June 2006 Marking Scheme

1 This question is divided into two parts carrying different marks.

(a) 4–6 Answers discuss the doctrine of precedents and its position as a source of law as recognised by the Constitution ofPakistan, 1973.

0–3 Poor answers depicting little or no knowledge about the doctrine or position of precedents as a source of law.

(b) 3–4 Answers discuss the nature of customs and refer to factors, which fortify their position as a source of law.

0–2 Answers show little understanding of the concept of customs.

2 This question expects candidates to define ‘acceptance’ and discuss conditions, which need to be complied with for a validacceptance as envisaged in the Contract Act, 1872.

7–10 Answers define acceptance and discuss in detail the various conditions (ss.2(b), 4, 7(1)) that need to be met for a validacceptance.

3–6 Answers define acceptance but reflect incomplete knowledge about the various conditions that need to be met for a validacceptance.

0–2 Extremely poor answers that show little or no knowledge about acceptance or conditions for a valid acceptance.

3 This question expects candidates to demonstrate an understanding about ‘partnership and its kinds’ as discussed in the PartnershipAct, 1932.

7–10 Answers mention and analyse in detail ‘partnership and its kinds’ with reference to ss.4, 7 and 8.

3–6 Answers show some knowledge about partnership and its kinds with little or no reference to Partnership Act, 1932.

0–2 Extremely poor answers that show little or no knowledge about the concept of partnership and its kinds.

4 This question expects candidates to refer to s.255 of the Companies Ordinance, 1984 (the ‘Ordinance’) for discussion on powersand duties of auditors.

7–10 Answers mention in detail the rights (of access and request) and duties (compilation of auditor’s report and attending theannual general meeting) of the auditors.

3–6 Answers show some knowledge about auditor’s rights and duties.

0–2 Extremely poor answers that show little or no knowledge about auditor’s rights and duties.

5 This question expects candidates to discuss the formalities set forth by ss.248; 249; 250 and 251 of the Ordinance for declaringand distributing dividends.

7–10 Answers define a dividend and discuss in detail the formalities set forth by the mentioned provisions for declaring anddistributing dividends.

3–6 Answers exhibit some understanding about the concept of a dividend and/or the mentioned provisions for declaring anddistributing dividends.

0–2 Answers in this bandwidth are extremely poor and show little or no knowledge about a dividend or the process fordeclaring and distributing the same.

6 This question is divided into two parts with each having equal marks. Initially the answers refer to ss.361 and 362 of theOrdinance before moving onto the specific provisions dealing with Members’ and Creditors’ Voluntary Winding Up respectively.

(a) 3–5 Answers discuss declaration of solvency (s.362), appointment of liquidator (s.366(1) and (2)), liquidator’s report,final meeting and dissolution (s.370) to explain the process of Members’ Voluntary Winding Up.

0–2 Answers exhibit little or no knowledge about the process of Members’ Voluntary Winding Up.

(b) 3–5 Answers discuss creditors’ meeting (s.373(3)), liquidator’s report, final meeting and dissolution (s.382) to explainthe process of Creditors’ Voluntary Winding Up.

0–2 Answers exhibit little or no knowledge about the process of Creditors’ Voluntary Winding Up.

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(a) 3–5 Answers discuss the nature, purpose and contents of the memorandum of association of a company in light ofleading cases and as per ss.16 and 17 of the Ordinance.

0–2 Answers fail to exhibit understanding about the concept and importance of the memorandum of association.

(b) 3–5 Answers discuss the nature, purpose and contents of the articles of association of a company.

0–2 Answers fail to exhibit little or no knowledge about the question.

8 This question expects candidates to display knowledge about the kinds of employees who are termed as ‘workmen’ and theprotective status enjoyed by them under the Industrial Relations Ordinance, 2002 (the ‘IRO’).

7–10 Answers in this bandwidth discuss the kinds of employees who are considered as workmen (s.2(xxx)); draws comparisonwith workmen as defined in Industrial Relations Ordinance, 1969 and the forums created for protection of workers liketrade union (s.3(1)(a)); shop steward (s.23(5)); joint works council (s.24); and duties enjoined on employers as perschedule II of the IRO.

3–6 Answers define workers and/or show some understanding about their position under the IRO.

0–2 Answers show little or no understanding about the position of workmen under IRO.

9 This question expects candidates to demonstrate knowledge about the concept of ‘insider trading’ and refer to different sections ofthe Ordinance.

(a) 5–8 Answers in this marks range discuss the concept of insider trading and Mr Parvez’s position as the beneficial ownerof the shares purchased by his wife Ritu keeping in view s.224 of the Ordinance.

0–4 Answers are restricted to discussion on the concept of insider trading or s.224 of the Ordinance with little or nocomment on Mr Parvez’s position as the beneficial owner of the shares.

(b) 3–5 Answers in this marks range discuss the two modes mentioned in s.202 of the Ordinance by which Mr Parvez couldbe removed from the position of chief executive officer. Reference to s.2(36) ‘special resolution’ shall be rewarded.

0–2 Answers show little or no understanding about the modes by which Mr Parvez could be removed from the positionof chief executive officer.

(c) 5–7 Answers give advice to Mr Parvez as to his future course of action in the light of s.224 of the Ordinance.

3–4 Advice to Mr Parvez does not satisfactorily chalk out his future course of action or does not refer to s.224 of theOrdinance.

0–2 Answers show little or no knowledge about the matter at hand.

10 This question expects candidates to exhibit knowledge about the role of the memorandum of association of a company with specialemphasis on the ‘object clause’ vis à vis directors’ powers and to evaluate the likely outcome of winding up proceedings in casethe same are violated.

(a) 7–10 Answers discuss the role of the memorandum of association of a company with special emphasis on the ‘objectsclause’, the ultra vires doctrine and opine as to whether the board could authorise Good Luck (Private) Limited toundertake business not mentioned in its memorandum.

3–6 Answers briefly discuss the role of the memorandum of association of a company in particular the ‘objects clause’,the ultra vires doctrine and/or fail to opine as to whether the board could authorise Good Luck (Private) Limited toundertake business not mentioned in its memorandum.

0–2 Extremely poor answers failing to exhibit understanding about the role of the memorandum, the ultra vires doctrineand whether the board could authorise Good Luck (Private) Limited to undertake packaging business.

(b) 7–10 Answers discuss undertaking of unauthorised business by Good Luck (Private) Limited and failure to maintain properbooks of account as possible grounds of winding up with reference to s.305(f)(ii and iv) of the Ordinance and opineas to the outcome of the same.

3–6 Answers briefly discuss or opine as the outcome of winding up proceedings on the basis of the mentioned grounds.

0–2 Answers fail to opine on the outcome of winding up proceedings or show knowledge about the mentioned grounds.

14



11 This question requires candidates to exhibit understanding of the concepts of ‘pledge and hypothecation’ and to demonstrate anunderstanding of rights of parties in such a situation.

(a) 6–8 Answers discuss the concepts of pledge and hypothecation in light of ss.148 and 172 of the Contract Act, 1872(‘Act’) and opine as to the nature of relationship that EBL and Nadia are engaged in.

3–5 Answers briefly discuss pledge and hypothecation concepts and/or opine as to the nature of relationship that EBLand Nadia are engaged in with reference to the mentioned provisions.

0–2 Answers demonstrate little knowledge about the question.

(b) 3–4 Answers discuss EBL’s retention of Nadia’s jewellery with reference to s.173 of the Act.

0–2 Answers demonstrate a lack of understanding about the matter at hand.

(c) 6–8 Answers discuss the three concurrent remedies of (i) right to retain pledged goods, (ii) right to sell same and (iii) right to bring an action for realisation of debt as provided in s.176 of the Act and the criteria for availing theseremedies.

3–5 Answers demonstrate little understanding about the remedies available under s.176 of the Act.

0–2 Answers in this bandwidth show little understanding of the matter.

12 This question requires candidates to enumerate the steps, which need to be taken by a partner to retire from a partnership/firm.

(a) 3–5 Answers quote s.32(1) of the Partnership Act, 1932 (‘1932 Act’) and opine as to whether Waseem requires thepermission of the other partners to retire from the firm.


(b) 6–8 Answers discuss Waseem’s liability for acts since 1957 and after retirement with reference to s.32 of the 1932 Act.

3–5 Answers in this band show a reasonable understanding about Waseem’s liabilities both before and after retirement.

0–2 Answers fail to comment properly on Waseem’s liabilities in both scenarios.

(c) 4–7 Answers quote s.37 of the 1932 Act to discuss Waseem’s entitlement to firm’s profits after retirement.

0–3 Answers fail to exhibit knowledge about Waseem’s rights to firm’s profit after retirement.

15




PART 2


QUESTION PAPER








Pape

r 2.2

(PK

N)




1 In the context of the Constitution of the Islamic Republic of Pakistan, 1973 explain the position of the Principlesof Policy.

(10 marks)

2 Explain the responsibilities of bailor and bailee under the law of contract.

(10 marks)

3 In relation to the law of contract, explain the concept of ‘discharge of contract’.

(10 marks)

4 In relation to partnership law explain:

(a) Methods of retirement available to a partner in a firm; and (5 marks)

(b) Liabilities of a partner after retirement. (5 marks)

(10 marks)

5 In relation to company law define:

(a) a ‘public company’ and state its characteristics. (5 marks)

(b) a company limited by shares. (5 marks)

(10 marks)

6 In relation to company law, explain the doctrine of ultra vires in the context of the objects of a company.

(10 marks)

7 State the procedure and formalities involved in registering a company under the Companies Ordinance, 1984.

(10 marks)

8 Explain the scope of the following labour statutes:

(a) Industrial Relations Ordinance, 2002; and (5 marks)

(b) The Industrial & Commercial Employment (Standing Orders) Ordinance, 1968. (5 marks)

(10 marks)

2




9 Ali, Arif and Ameer have recently incorporated ABC (Private) Limited (the ‘Company’) and have approached KMC Bank(the ‘Bank’) for an extension of the existing finance facility availed by the Company. The manager of the Bank hasobserved that Ali, Arif and Ameer are not the directors of the Company but mere subscribers to its memorandum ofassociation. As per the Bank’s policy, it extends finance facility to a Company if an employee of the Bank is appointedon the board of directors of the Company and all directors of the Company, except the Bank’s nominee, have unlimitedliability with respect to debts owed to the Bank. The Bank’s senior management has approached you for advice.

Required:

(a) Explain the legal status of Ali, Arif and Ameer according to the Companies Ordinance, 1984. (6 marks)

(b) Discuss whether an employee of the Bank can be a director of the Company, and assuming he can, whethera majority of the Company’s shareholders can remove him. (8 marks)

(c) State whether Ali, Arif and Ameer can have unlimited liability. (6 marks)

(20 marks)

10 The ordinary shareholders of JLP Limited, on 8 June 2005, duly passed a special resolution declaring preferentialrights enjoyed by preference shareholders void and from then onwards, the ordinary and preference shareholders wereto have the same rights and liabilities. Mr Abid, who holds 60% of preference shares, has voted in favour of thisspecial resolution. The remaining 40% of preference shares are held by Mr Bilal (20%) and Mr Jawad (20%), whofeel that their economic interests have been compromised and on 20 June 2005 approached you for advice.

Required:

(a) Explain whether the special resolution is valid. (10 marks)

(b) State what remedies are available to Mr Bilal and Mr Jawad under the Companies Ordinance, 1984.(10 marks)

(20 marks)

11 Jamal placed an advertisement in the national newspaper on 1 October 2005 for the sale of his one acre farmhousein Islamabad. The next day Omer visited the farmhouse, met Jamal, and both Jamal and Omer agreed that if Omerwanted to purchase the farmhouse, he should arrange to pay rupees 5,000,000 to Jamal within three days. On 4 October 2005, Omer posted a letter to Jamal mentioning that he had decided to purchase the farmhouse and thathe was in the process of arranging the money. The said letter was received by Jamal on 9 October 2005.

Jamal has approached you and revealed that on 8 October 2005 he had already agreed to sell the farmhouse toRashid, as he had not heard from Omer within three days of their meeting as agreed. Now both Omer and Rashid arethreatening to initiate legal proceedings against Jamal if the farmhouse was not sold to them.

Required:

(a) Advise Jamal on the merits in Omer’s claim. (10 marks)

(b) Advise Jamal on the merits in Rashid’s claim. (6 marks)

(c) Advise Jamal as to his future course of action. (4 marks)

(20 marks)

3 [P.T.O.



12 Ammar, Bilal and Sohail collectively have formed a firm in which Sohail has the status of junior partner. Sohail’s statusof junior partner, which restricts him from dealing with the firm’s immovable assets and bank accounts, is not publiclyknown. In excess of his authority, Sohail has executed in the firm’s name an agreement to lease out to Qasim a shopin Model Town, Lahore owned by the firm. In another instance Sohail misappropriated a sum of rupees 10,000 paidby Anwar to the firm for supply of timber. Disturbed by such actions of Sohail, Ammar and Bilal have approached youfor advice.

Required:

(a) State whether the restrictions imposed on Sohail because of his status as a junior partner are valid under thelaw of partnership. (6 marks)

(b) Discuss the status of the lease agreement executed by Qasim. (8 marks)

(c) State what is the firm’s liability in respect of Sohail’s misappropriation of the amount advanced by Anwar.(6 marks)

(20 marks)


4



Answers



Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) December 2006 Answers

1 The Principles of Policy contained in chapter 2, Articles 29 to 40 (the ‘Principles’) of the Constitution of Pakistan, 1973 (the‘Constitution’) set out the guidelines for the state for future law making and functioning. The guidelines include elements such as,enabling the Muslims of Pakistan to live their lives in accordance with the basic principles of Islam (Articles 31); encouraging localelected government institutions (Article 32); ensuring full participation of women in all spheres of national life (Articles 34);discouraging parochial, racial, tribal, sectarian and provincial prejudices among the citizens (Article 33); and protection of minorityrights (Article 36).

The position enjoyed by the Principles under the Constitution is reflected in Articles 29 and 30 and is discussed below:

The Principles do not constitute rules of law

The Supreme Court of Pakistan in Hakam Qureshi v Judges of the High Court, PLD 1976 SC 713 has held that while it is theresponsibility of the state, and of each person performing functions on its behalf to act in accordance with the Principles (Articles29(1)), the Principles themselves are not rules of law, which means that no action shall lie against the state or its any organ onthe ground that its actions are not in accordance with the Principles (Articles 30(2)).

Observance of the Principles depends on state resources

The state and its organs should function in accordance with the Principles keeping in view resources available for the same (Articles29(2)).

The Principles to be used as an aid to interpret other constitutional provisions

Duties enjoined on the state under Article 38 of the Constitution regarding the prevention of concentration of wealth in a few hands;providing basic necessities of life to those unable to earn their livelihood on account of infirmity, sickness or unemployment areduties not directly enforceable. Rather such state duties are indirectly enforceable as an aid for interpreting other provisions of theConstitution (Zohra v Government of Sind, PLD 1996 Karachi 1).

Annual report

The President, in relation to the affairs of the federation, and the Governor of each Province, in relation to the affairs of his Province,is required to prepare and present before the National Assembly or the Provincial Assembly a report on the observance andimplementation of the Principles (Article 29(3)).

2 Section 148 of the Contract Act, 1872 (‘Act’) envisages that ‘bailment’ is the delivery of goods by one person to another undercontract so that they shall be returned or otherwise disposed of according to the directions of the person delivering them uponaccomplishment of the purpose of delivery. The person delivering the goods is called the ‘bailor’ and the person to whom they aredelivered is called the ‘bailee’.

The responsibilities of bailor and bailee as set out in the Act are discussed below:

Bailor’s Responsibilities

(1) Disclosure of faults

With regard to this responsibility, a distinction exists between a gratuitous bailor and a bailor for reward. A gratuitous bailoris responsible for damage caused to the bailee from faults of which the bailor was aware and which would materially interferewith the use of goods or expose the bailee to extraordinary risks. In the case of bailor for reward the bailor is responsible fordamage whether he was or was not aware of the existence of faults in the goods bailed (s.150).

(2) Repayment by bailor of necessary expenses

In the case of gratuitous bailment, a bailor is responsible for repaying to the bailee the necessary expenses incurred by himfor the purpose of the bailment (s.158).

(3) Unauthorised bailment

The bailor is responsible to the bailee for any loss, which the bailee may sustain by reason that the bailor was not entitled tomake the bailment or to receive back the goods or to give directions in relation to them (s.158).

Bailee’s Responsibilities

(1) Duty of care

The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similarcircumstances, take of his own goods of the same bulk, quality and value (s.151). The initial onus of proof that the baileehad exercised this level of care is on the bailee and if the bailee proves the same then it is up to the bailor to prove negligence(Queensland Insurance Company Limited, Karachi v Trustees of the Port of Karachi, PLD 1976 Karachi 238).

(2) No unauthorised use

If the bailee makes any use of the goods bailed, which is not according to the conditions of bailment, then he shall beresponsible for compensating the bailor for any damage arising to the goods from or during such use (s.154). For instance,where Asad gives his motorbike to Jamal for a paint job, Jamal starts using it for his personal use and during this time themotorbike gets stolen then it shall be Jamal’s responsibility to compensate Asad for the lost motorbike.

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(3) No mixing of goods

If the bailee without the consent of the bailor mixes the bailor’s goods with his own, then if the goods can be separated, thebailee shall be responsible for bearing such expense of separation (s.156). However, if it is impossible to separate the goodsthen it shall be the responsibility of the bailee to compensate the bailor for the loss of the goods bailed (s.157).

(4) Return of goods

Section 161 mandates that if the bailee retains the goods after the period for which they had been bailed, the bailee shall beresponsible to the bailor for any loss, destruction or deterioration of the goods.

(5) Account for increase or profit

The bailee is responsible for delivering to the bailor any increases or profit which may have accrued from the goods bailed(s.163).

(6) Delivery to bailor without title

Section 166 provides that if the bailor has no title to the goods and the bailee in good-faith, delivers them back to, or accordingto the directions of the bailor, then the bailee shall not be responsible to the owner in respect of such delivery.

3 A contract is said to be discharged when the parties to it are absolved from the performance of their respective obligations arisingfrom it.

The following are the various modes in which a contract may be discharged by:

(1) Agreement

The rights and obligations created by an agreement can be discharged without their performance by means of anotheragreement between the parties which provides for the extinguishment of the earlier rights and obligations. This is called‘novation’ and means that there being a contract in existence some new contract is substituted for it, either between the sameparties or between different parties; the consideration mutually being the discharge of the old contract (s.62).

(2) Performance

Performance of a contract is a common way of discharge of a contract. The performance of a contract lies in doing or causingto be done what the promisor has promised to do. On the performance of the obligation undertaken by the parties, thecontract is automatically discharged. Where a party has done what it undertook to do there is nothing left for it to do. If onlyone party performs its promise, it alone is discharged and acquires a right of action against the other which is guilty of breach.

(3) Operation of law

Discharge by operation of law normally occurs in the instances of insolvency, merger, alteration and death.

Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions transferred to an officer of the court.

Merger is an operation of law, which discharges a right by virtue of its coinciding with another and greater right in the sameperson. For instance, if Abid holds a certain property under lease but subsequently he buys the same then his rights as alessee are merged into his right of ownership.

Alteration of a written contract made without the consent of the other party has the effect of discharging the contract providedthe alteration is of a material part. An alteration which is not material or authorised will not affect the validity of the contract.

Death of the promisor discharges the contract if performance of a contract is required to be made in person and the personalqualifications of the promisor are the considerations for the contract.

(4) Breach of Contract

The parties to a contract are expected to perform their respective obligations. If any party fails to perform its obligation, abreach of contract occurs which would result in discharge of the contract.

(5) Impossibility of performance

Impossibility of performance, results in the discharge of the contract. Impossibility referred to here must be in existence at thetime when the contract is made and may or may not be known to both the parties at that time. If, however, the promisoralone knows of the impossibilities then existing, he is bound to compensate the promisee for any loss he may suffer onaccount of the non-performance of the promise.

4 (a) When a partner withdraws from a firm and the remaining partners can continue to carry on the business of the firm and thepartnership does not stand dissolved, then the withdrawing partner is said to have retired from the firm.

The Partnership Act, 1932 (‘1932 Act’) in s.32 subsection (1) sets out three (3) methods by which a partner may retire:

(i) Consent of all partners

With the express or implied consent of all other partners, a partner may retire at any time from a firm.

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(ii) Express agreement between partners

A partner may retire from a firm in accordance with the method prescribed by the articles of partnership whether or notthe other partners agree to this at the time of retirement.

(iii) Written Notice

In a partnership at will a partner may retire by giving written notice to this effect to all the other partners.

A partner may retire from a firm in any of the three methods discussed above and retirement of a partner without hisknowledge or consent by other partners is not just and proper (Syed Khurshid Sohail v Aziz Hami, 1988 MLD 381).

(b) Section 32, subsections (2) and (3) of the 1932 Act discusses a retiring partner’s liability.

It stipulates that a retiring partner along with other partners remains liable to third parties for acts done before retirement byany of them on behalf of the firm. Such liability of the retiring partner continues until publication of public notice of retirement.

Also a retiring partner can be absolved of liability towards any third party for acts of the firm done before his retirement by anagreement between the retiring partner, partners of the reconstituted firm and concerned third party. Such agreement can beexpress or implied i.e. it can be inferred by a course of dealing between third party and the reconstituted firm after the factof retirement becomes known.

Therefore, a retiring partner’s liability continues until (i) public notice of retirement is published; or (ii) agreement absolvinghim of liability is reached.

5 (a) The Companies Ordinance, 1984 (‘Ordinance’) in s.2(30) defines a public company simply as ‘a company, which is not aprivate company’. In other words the characteristics of private companies mentioned in s.2(1)(28) of the Ordinance are notapplicable to public companies. Hence, in the case of a public company there is no restriction on: (i) transfer of shares; (ii) maximum number of members; and (iii) offer of shares to the public.

(i) Transfer of shares

Articles of association of public companies unlike those of private companies do not restrict the transfer of shares of thepublic between members and the public at large.

(ii) Extent of members

Public companies are required to have a minimum of three members (s.47) and there is no upper limit to the maximumnumber of members that a public company may have, unlike a private company where a maximum number of membersis fixed at 50 (ss.2(1)(28)(ii) and 47).

(iii) Public subscription of shares

A public company can offer its shares to the public. Shares of a public company can be publicly subscribed, that is,they can be floated on the stock exchange unlike those of private companies.

(b) A company limited by shares is one in which the liability of members is limited to the extent of the value of their respectiveshares. Generally, if their respective shares are fully paid up then the shareholders are not liable for any more amount and iftheir shares are not fully paid up then as per s.2(1)(8) of the Ordinance the liability of members is limited to extent of theunpaid amount on their respective shares. Since the Ordinance allows only fully paid-up shares to be issued, and there is nodeferred liability of the shareholders on their shares, in Pakistan the liability of the members is limited to the extent of theirshareholding.

A company limited by shares can be a private or public company. Further, s.16 states that the memorandum of associationof a company limited by shares shall state amongst others (i) the name of the company with the word(s) ‘limited’ as the lastword in the case of a public limited company, and ‘(Private) Limited’ in the case of private limited company; the amount ofshare capital with which the company proposes to be registered, the division of the authorised share capital into shares of afixed denomination and opposite to the name of each shareholder the number of shares taken by him shall be written.

6 The words ‘ultra’ and ‘vires’ mean ‘beyond’ and ‘powers’ respectively, and the doctrine of ultra vires encompasses a situation wherea company acts beyond its authority.

This doctrine was initiated by the House of Lords in Ashbury Railway Carriage and Iron Company Limited v Riche, (1875) LR 7HL 653, wherein it was held that contracts executed by the company which were ultra vires its objects were void. Objects forattainment of which the company has been incorporated are contained in the objects clause of the memorandum of association ofthe company and enable the shareholders, creditors and those who deal with the company to know its permitted range ofenterprise. Their importance can be gauged from the fact that any act of the company in violation of the objects is ultra vires and,therefore, void, and cannot be ratified even if all the shareholders agree to it (A. Lakshmanaswami Mudallar v LIC, AIR 1963 SC1185). Here it should be noted that companies are allowed to do acts, which are necessary or incidental to the attainment of itsobjects (Attorney General v The Great Eastern Railway Company, (1880) 5 AC 473).

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The Superior Courts of Pakistan in Muhammad Yasin Fecto v Muhammad Raza Fecto, 1998 CLC 237 have held that courtsgenerally do not interfere in the working of any company but are permitted to do so if, amongst others, the company indulges inacts ultra vires its objects. In such a situation any member of the company can get an injunction to restrict the company fromindulging in such acts (Attorney General v The Great Eastern Railway Company, (1880) 5 AC 473). Also the company’s directorsincur personal liability if the company’s capital is utilised for acts ultra vires its objects (George Newman, Re, [1895] 1 Ch 674)and the company retains its right over any property acquired through ultra vires acts if funds of the company have been utilised.

7 The procedure and formalities for incorporation of a company as set forth in the Companies Ordinance, 1984 (the ‘Ordinance’) areas follows:

Section 15 of the Ordinance provides that any three persons may associate to form a public company and any one person mayform a private company. For a listed company, the minimum number of members is seven.

As a first step the availability of the proposed name for the company from the registrar should be checked. In selecting the proposedcompany‘s name promoters should make sure that the name chosen is not otherwise inappropriate, deceptive or designed to exploitor offend the religious susceptibilities of the people and is not identical or closely similar to the name of an existing company (s.37).

If the proposed name is available then the following documents are required to be filed for registration of a company:

(1) The memorandum and articles of the company are finalised in accordance with the Ordinance, and are signed by thesubscribers and the first directors, respectively.

(2) An application for incorporation of the company, along with the following documents, is moved with the concerned CompanyRegistration Office :

(a) Four printed copies of the memorandum and articles of association duly signed by each subscriber. Amongst thesecopies one copy should be affixed with special adhesive stamps at the rates prescribed under the Stamp Act, 1899.Copies of the national identity cards of each subscriber and witnesses to the memorandum and article of associationshould be attached.

(b) A declaration of compliance on Form-1 of the pre-requisites for formation of the company (s.30).

(c) A copy of the original challan evidencing the payment of registering fee in favour of the Securities and ExchangeCommission of Pakistan.

(d) The appointment of first directors is required to be notified to the registrar concerned on Form-29 within 14 days fromthe date of incorporation (s.205). The number and names of first directors can be determined by the majority ofsubscribers of memorandum in writing and until so determined all the subscribers of the memorandum, who are naturalpersons, shall be deemed to be directors of the company.

(e) The Registered office of the company is required to be notified on Form-21 within 28 days from the date of itsincorporation.

If the documents are for the incorporation of a single member company then a nomination in the form as set out in Form-S1indicating at least two individuals to act as nominee director and alternate nominee director, of the company in the event of hisdeath should also be filed with the registrar.

In addition to the requirements meant for private companies given above public companies are required to file a list of directorsand consent of directors and the chief executive within seven days of the incorporation on Forms 27 and 28.

8 (a) The preamble of Industrial Relations Ordinance, 2002 (‘IRO’) mentions its scope as (i) regulation of formation of trade unions;(ii) improvement of relations between employers and workmen; and (iii) settlement of disputes.

For the achievement of its scope, the IRO contains provisions detailing the process of formation and management of tradeunions such as application procedure (ss.4 and 5), qualifications of the office-bearers (s.7) and cancellation of registration oftrade union (s.12). For the improvement of relations between employers and workmen, IRO in ss.63 and 64 specifies asunfair labour practice certain forms of conduct on behalf of the employers and workmen. For the settlement of disputes theIRO provides special forums like the Labour Court (s.44); and National Industrial Relations Commission (s.49), who enjoyjurisdiction in the case of labour issues.

(b) The Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 (‘Standing Orders’) regulates the conditions ofemployment of workmen in industrial and commercial establishments employing 20 or more workmen. This enactment is aspecial law which aims to guarantee certain minimum set of terms and conditions of service to workers (Valika Textile MillsLimited v Chairman 1ST Sindh Labour Court, Karachi, PLD 1978 Karachi 952). Standing Orders provide to workmen rightssuch as annual holidays, festival holidays, casual and sick leave, group incentive scheme, bonus, gratuity, provident fund,compulsory group insurance, working time, late coming and retrenchment.

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9 (a) Section 176(1) of the Companies Ordinance, 1984 (‘Ordinance’) provides that all subscribers to the memorandum ofassociation, who are natural persons, shall be deemed as the first directors of the company until they by majority determinethe number and names of the company’s first directors.

As no directors of the company have been appointed in the articles of association, therefore, in view of the said provision Ali,Arif and Ameer, who are all subscribers to the memorandum, shall be considered as the first directors of the company. Pleasenote that Ali, Arif and Ameer shall continue to enjoy this status until the election of directors in the first annual general meetingof the Company.

(b) Section 182 of the Ordinance states that ‘a company may have directors nominated by the company's creditors’. If the Bankextends financial facilities to the Company, it shall attain the status of being the Company’s creditor and may get the right tonominate a director on the board of directors of the Company. The Bank may nominate one of its employees for this purpose.Therefore, an employee of the Bank can be appointed on the board of the Company.

An employee of the Bank present on the Company’s board cannot be removed by the majority of the Company’s shareholders,as s.181 of the Ordinance only allows a majority of company’s shareholders in a general meeting to remove first directors(s.176); elected directors (s.178) and directors appointed to fill a casual vacancy (s.180).

(c) Yes, Ali, Arif and Ameer can have unlimited liability as this is allowed by s.111 of the Ordinance.

However, for the imposition of unlimited liability on Ali, Arif and Ameer the following conditions set forth by s.111,subsections (1) and (2) should be fulfilled:

(1) The fact that Ali, Arif and Ameer shall have unlimited liability is mentioned in the memorandum of the Company.

(2) A written notice mentioning that they (Ali, Arif and Ameer) shall have unlimited liability is given to them and the sameis accepted by them.

The Superior Courts of Pakistan have held that a company is a separate and distinct legal entity from its directors and anyliability against the company cannot be transferred to its directors except to the extent of their individual shares in the companyunless the director has executed some documents acknowledging the liability of the company upon himself in his personalcapacity as a guarantor for the company or his case is covered by s.111 of the Ordinance (Ehtesham Ghazi v Izharuddin andanother, 2001 YLR 326).

10 (a) The special resolution passed on 8 June 2005 is invalid.

The Ordinance sets out that a special resolution affecting the rights of the shareholders of a particular class shall be effectiveonly if a majority of at least three-quarters (75%) of the shareholders of that particular class vote for it (s.108(1) and provisoto s.(28)).

In the instant case the special resolution is invalid as it is supported by only Mr Abid who holds only 60% of preferenceshares. Thus it falls short of the required minimum majority of three-quarters (75%) of the preference shareholders and henceis invalid.

(b) Mr Bilal and Mr Jawad can approach the High Court against the passing of the special resolution.

This remedy is available to them under s.108(2) of the Ordinance, which allows shareholders of a particular class (not lessthan 10%) aggrieved by variation of their rights to approach the court for an order cancelling the special resolution. As bothMr Bilal and Mr Jawad hold more than the qualifying shares, they may either individually or collectively approach the court.

The said section imposes a 30 days time limit from the date of the passing of the special resolution within which the courtcould be approached. As the special resolution in question was passed on 8 June 2005, Mr Bilal and Mr Jawad have upuntil 8 July 2005 to approach the court.

Further, the proviso to s.108(2) envisages that the court can only pass an order against the resolution if it is shown thatvariation has unfairly prejudiced the applicants (Mr Bilal and/or Mr Jawad). Also, the decision of the court on any suchapplication shall be final (s.108(4)).

11 (a) Omer’s claim is not legally valid.

On Omer’s visit to Jamal’s farmhouse on 2 October 2005, Jamal had offered to sell to Omer the farm-house provided its price(rupees 5,000,000) was paid within three days, i.e. by 5 October 2005.

Omer’s letter of 4 October 2005 received on 9 October 2005 would have been binding on Jamal if the payment of rupees5,000,000 had been made along with it as s.7 (1) of the Contract Act, 1872 (‘1872 Act’) provides that in order to convertan offer into a promise, the acceptance must be absolute and unqualified. Further, the Superior Courts of Pakistan have heldthat for an offer to become a binding promise (or a contract), there should be an absolute and unqualified acceptance of theoffer, and if there is a material variation of the terms of the offer then there is no consensus ad idem or agreement upon whicha contract could be founded (Al-Huda Hotels and Tourism Company v Paktel Limited and others, 2002 CLD 218 andShalsons Fisheries Limited v Lohmam and Company, PLD 1982 Karachi 76). In other words, if there is no absoluteacceptance of a proposal, the parties are still at the stage of negotiation, and no legal obligations arise.

11



(b) Section 10 of the 1872 Act sets out that all agreements are contracts if they are made by free consent of parties competentto contract, for a lawful consideration, with a lawful object and are not expressly declared to be void.

Consent is reached when two persons agree to the same thing in the same sense (s.13) and according to s.14, consent isfree when it is not caused by coercion (s.15), undue influence (s.16), fraud (s.17), misrepresentation (s.18) or mistake(ss.20, 21, and 22).

All persons are competent to contract if they are of the age of majority, sound mind and have not been disqualified by anylaw from contracting (s.11).

Further, all considerations or objects of an agreement are lawful, unless forbidden by law, or are of such a nature that, ifpermitted, would defeat the provisions of any law, or are fraudulent, or imply injury to the person or property of another, orthe court regards it as immoral, or opposed to public policy (s.23).

As the agreement with Rashid to sell the farmhouse fulfills the criteria mentioned above, Rashid has a valid claim under law.

(c) Jamal should honour his agreement to sell the farmhouse with Rashid to avoid litigation as Rashid has a valid claim underlaw.

Further, to avoid a suit from Omer’s side, Jamal should inform Omer that he had waited until the agreed date (5 October2005) for Omer to come up with the agreed sum and it was only after Omer’s failure that Jamal had agreed to sell thefarmhouse to Rashid.

12 (a) According to s.4 of the Partnership Act, 1932 (‘Act’), partnership is a relationship between persons, who have agreed to sharethe profits of a business carried on by all or any of them acting for all.

In other words it is not necessary that every partner must be actively engaged in the conduct of the business. Partners canby agreement amongst themselves entrust the management of the firm with one or more of the partners.

In view of s.4, the restrictions imposed on Sohail are valid.

(b) The lease agreement executed by Sohail in the firm’s name with Qasim despite being beyond Sohail’s authority is binding onthe firm.

Section 22 of the Act provides that an instrument executed by a partner is binding on the firm if it is executed in the firm’sname or expressly or impliedly manifests an intention to bind the firm. Further, the Superior Courts of Pakistan have held thatacts done by a partner beyond his authority bind the whole firm if third persons dealing with the firm did not have knowledgethat such partner was acting beyond his authority (Suleman Ibrahim Co v Eastern Rice Syndicate and another, PLD 1966(West Pakistan) Karachi 289.

As Sohail has executed the lease agreement in the firm’s name and his status of ‘junior partner’ is not publicly known, thefirm is bound by the lease agreement.

(c) The firm is liable for the advance paid by Anwar to the firm. Section 27 (b) of the Act mandates that when a firm in the courseof its business receives money or property from a third party, and the same is misapplied by any of the partners while it is inthe custody of the firm, then the firm is liable to make good the loss.

Therefore, the firm is liable for the advance given by Anwar.

12



Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) December 2006 Marking Scheme

1 This question expects the candidates to exhibit knowledge about the status of the Principles of Policy as contained in chapter 2,Articles 29 to 40 (the ‘Principles’) of the Constitution of Pakistan, 1973 (‘Constitution’).

7–10 Answers briefly mention the Principles enlisted in the above Articles of the Constitution and discuss in particular theirposition under Articles 29 and 30.

3–6 Answers mention Articles 29 to 40 but fail to exhibit knowledge about Articles 29 and 30.

0–2 Extremely poor answers that show little or no knowledge about the position of the Principles under the Constitution.

2 This question expects candidates to briefly refer to the concept of bailment and discuss responsibilities of bailor and bailee underthe Contract Act, 1872 (‘Act’).

7–10 Answers briefly refer to the concept of bailment; discuss bailors responsibilities under ss.150 and 158 and bailee’sresponsibilities under ss.151, 154, 156, 157, 160, 161, 163, 164, and 165.

3–6 Answers briefly refer to bailors and bailees responsibilities imposed by the above noted sections.

0–2 Extremely poor answers that show little or no knowledge about the responsibilities of bailor and bailee.

3 This question expects candidates to discuss the concept of discharge of a contract.

7–10 Answers firstly define the term discharge of a contract and then discuss the various instances under which a contractstands discharged.

3–6 Answers briefly comment on some of the instances by which a contract would stand discharged.

0–2 Extremely poor answers that show little or no knowledge about the concept of discharge of a contract.

4 This question is divided into two parts having equal marks; each part shall be marked separately.

(a) 3–5 Answers discuss the three methods by which a partner may retire from a firm in light of s.32 subsection (1) of thePartnership Act, 1932 (‘1932 Act’).

0–2 Poor answers depicting little or no knowledge about the methods of retirement prescribed by the 1932 Act.

(b) 3–5 Answers discuss the liabilities imposed on a retiring partner by s.32 subsections (2) and (3) of the 1932 Act.

0–2 Answers showing little understanding of the question.


(a) 3–5 Answers define and discuss the characteristics of public companies in comparison with private companies and withreference to s.2(1)(28)(ii), 2(30) and 47 of the Companies Ordinance, 1984 (‘Ordinance’).

0–2 Answers exhibit little or no knowledge about public companies.

(b) 3–5 Answers discuss companies limited by shares with reference to ss.2(1)(8) and 16 of the Ordinance.

0–2 Answers show little or no knowledge about companies limited by shares.

6 This question expects the candidates to exhibit knowledge of the concept and development of the doctrine of ultra vires.

7–10 Answers explain the meaning of words ‘ultra vires’ and discuss the judicial development of the doctrine of ultra vires.

3–6 Answers discuss briefly the doctrine of ultra vires.

0–2 Extremely poor answers that show little or no knowledge about the doctrine of ultra vires.

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7 This question expects the candidates to explain the procedure and formalities set forth in the Companies Ordinance, 1984 (ss.15,30, 37, and 205) for incorporation of a private, public and a single-member company.

7–10 Answers discuss in detail the procedure and formalities involved in the incorporation of the companies.

3–6 Answers discuss briefly the procedure and formalities for incorporating a company.



(a) 3–5 Answers discuss the preamble of Industrial Relations Ordinance, 2002 (‘IRO’) and refer to various sections, whichdetail the scope of the IRO.

0–2 Poor answers depicting little or no knowledge about the IRO and its scope.

(b) 3–5 Answers discuss the scope of the Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 andmention the various rights given to workmen for improvement of their working conditions.

0–2 Poor answers depicting little or no understanding about the Standing Orders and its scope.

9 This question is divided into three parts with different marks for each.

(a) 4–6 Answers discuss the status of Ali, Arif and Ameer with reference to s.176(1) of the Companies Ordinance, 1984(‘Ordinance’).

0–3 Answers show little or no understanding about the status of Ali, Arif and Ameer and/or fail to quote the relevant legalprovision.

(b) 7–8 Answers firstly quote s.182 of the Ordinance, conclude if a bank’s employee can be on the board of the companyand then discuss in light of s.181 whether he can be removed by a majority of the company’s shareholders.

4–6 Answers refer to s.182 of the Ordinance but do not conclude as to whether the bank’s employee can be on theboard of the company and/or fail to refer to s.81.


(c) 4–6 Answers conclude whether Ali, Arif and Ameer can have unlimited liability with regard to s.111 of the Ordinanceand mention the conditions for imposition of the same.

0–3 Answers opine as to whether Ali, Arif and Ameer can have unlimited liability but fail to discuss the conditions forimposition of the same.

10 This question is divided into two parts and each part has equal marks.

(a) 7–10 Answers in this range quote s.108(1) and proviso to s.28 of the Ordinance and opine as to the validity of the specialresolution.

3–6 Answers refer to the relevant sections and/or discuss the validity of the special resolution.

0–3 Incomplete answers showing little or no knowledge about the status of the special resolution.

(b) 7–10 Answers in light of s.108 of the Ordinance discuss the remedy available to Mr Bilal and Mr Jawad; whether suchremedy can be availed individually or collectively; time limit for filing; and matters the court considers beforegranting relief.

3–6 Answers quote the relevant provision but show little or no knowledge about the remedy available and its concernedmatters.

0–2 Answers do not quote the relevant provision and/or fail to comment on the remedy available.

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(a) 7–10 Answers discuss the conditions set forth in s.7(1) of the Contract Act, 1872 (‘1872 Act’) upon fulfillment of whichlegally binding agreements are concluded and valid claims arise thereto.

3–6 Answers fail to discuss the weakness of Omer’s claim and/or refer to the relevant legal provision.

0–2 Answers show little or no understanding about the position of Omer’s claim.

(b) 4–6 Answers in this bandwidth discuss the essential conditions of a valid contract as per ss.10, 11, 13, 14, and 23 ofthe 1872 Act and conclude as to the strength of Rashid’s claim.

0–3 Answers mention the essentials of a valid contract with reference to some of the above noted sections and/or arenot clear on the strength of Rashid’s claim.

(c) 2–4 Answers advise Jamal as to his future course of action keeping in view the strength of Omer and Rashid’s claims.

0–1 Answers fail to clearly advise Jamal as to his future course of action.

12 This question is divided into three parts and each part has different marks.

(a) 4–6 Answers in this range refer to s.4 of the Partnership Act, 1932 (‘1932 Act’) and discuss it with reference torestrictions imposed on Sohail.

0–3 Answers fail to refer to the mentioned section and/or discuss restrictions imposed on Sohail with reference to it.

(b) 7–8 Answers opine in the light of s.22 of the 1932 Act as to whether or not the lease agreement is binding on the firm.

4–6 Answers in this range only quote s.22 and/or fail to opine on the binding nature of the lease agreement.


(c) 4–6 Answers discuss the issue of the firm’s liability with reference to s.27(b) of the 1932 Act.

0–3 Answers do not quote the relevant legal provision and/or do not opine on the firm’s liability.

15




PART 2

TUESDAY 5 JUNE 2007

QUESTION PAPER








Pape

r 2.2

(PK

N)




1 In the context of the Constitution of Islamic Republic of Pakistan, 1973, discuss the position of the FundamentalRights of:

(a) Freedom of Assembly (Article 16); and (5 marks)

(b) Freedom of Speech (Article 19). (5 marks)

(10 marks)

2 In the context of the law of contract, discuss the concept of ‘bailment’.

(10 marks)

3 In relation to the law of partnership, explain the general rights and duties of partners towards each other.

(10 marks)

4 Discuss the requirements and procedure for alteration of the memorandum of association under the CompaniesOrdinance, 1984.

(10 marks)

5 Under the Companies Ordinance 1984, explain how the rights of the shareholders may be varied.

(10 marks)

6 In relation to the Companies Ordinance, 1984, state the circumstances which render a person ineligible tobecome a director of a company.

(10 marks)

7 Under the Contract Act, 1872:

(a) Define agency; (5 marks)

(b) Explain an agent’s role and duties to the principal. (5 marks)

(10 marks)

8 Under the Industrial Relations Ordinance, 2002 and the Industrial & Commercial Employment (Standing Orders)Ordinance, 1968, explain the concept of ‘unfair and wrongful dismissal’.

(10 marks)

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9 After running at loss for many years, Regal (Private) Limited made a profit in the year 2005–2006. The directors ofthe company intend to declare a dividend for the said year. They further intend to declare a dividend for the previousyears during which the company was in loss, by selling a part of the land owned by the company. A review of theregister of shareholders has revealed that some shareholders have nominated certain financial institutions to receivedividend payments on their behalf.

Required:

Advise the directors:

(a) The extent of the directors’ powers in relation to a declaration of a dividend and the procedure for declaringa dividend. (10 marks)

(b) Whether the directors can sell the assets of the company to pay a dividend for the years during which thecompany has been in loss. (5 marks)

(c) Whether the company is liable if it makes dividend payments to the financial institutions nominated by theshareholders. (5 marks)

(20 marks)

10 In view of the accumulated losses faced by Jettlers (Private) Limited over several years, its management has decidedto reduce its capital to account for the lost capital. This would enable the management to then negotiate the sale ofthe company to new management. Since the company has outstanding loans from various banks, it is apprehensivethat the creditors may object to the reduction of capital. They have approached you for advice.

Required:

Advise the management on the following:

(a) State which method of reduction of capital could be adopted to reduce the chances of objection by thecreditors. (5 marks)

(b) Explain the procedure for reduction of capital. (10 marks)

(c) State whether it is mandatory for the company to add the words ‘and reduced’ to its name, or whether thiscan be avoided. (5 marks)

(20 marks)

3 [P.T.O.



11 Mr Kamran owned 60% of the shares of Bits (Private) Limited (‘BPL’), a highly profitable software company. Theremaining 40% of the shares were owned by Mr Farooq. Mr Kamran suffered from depression and to deal with it, hejoined the spiritual healing centre run by Pappu Pir. During his stay at the centre, upon the request and insistence ofPappu Pir, Mr Kamran agreed to transfer 20% of his shareholding in BPL to Pappu Pir hoping to get an eternal rewardin return. When cured and out of the healing centre, Mr Kamran started taking an active part in the management andworking of BPL and was informed by Mr Farooq that heavy taxes were expected to be levied by the government onthe software industry. Thereafter Mr Kamran sold another 10% of his shares to Mr Farooq at rupees 30 per share.

Soon after Mr Kamran died and his 16 year old son Awais executed an agreement to sell the remaining of his father’sshares in BPL and move to Canada. Mrs Kamran has approached you for advice on the following:

Required:

Advise Mrs Kamran on the following:

(a) State whether the transfer of shares by Mr Kamran to Pappu Pir is valid. (7 marks)

(b) State whether the sale of shares by Mr Kamran to Mr Farooq is valid. (7 marks)

(c) State whether Awais can execute an agreement to sell the remainder of Mr Kamran’s shares in BPL.(6 marks)

(20 marks)

12 ABC showroom dealing in used cars is run by two partners, Asad and Bilal. Between themselves, the partners haveagreed that Bilal would act as a sales person and deal with customers while Asad would look after the office work.When business improved ABC hired Jawed as a sales agent and instructed him not to remove any of the cars fromthe showroom without the consent of either Asad or Bilal. One day when Asad and Bilal were away, Jawed requestedhis friend Esa to look after the showroom while he went to collect his daughter from school. Esa took a customer fora test drive and the car got snatched. Angry, Asad and Bilal terminated Jawed’s services for disobeying theirinstructions, forfeited his last month’s salary and threatened to initiate legal proceedings to recover the cost of thestolen car from Jawed and Esa. Now Bilal has approached you for advice on the following:

Required:

(a) State whether Bilal can demand a salary for acting as a sales person for the partnership business.(5 marks)

(b) State whether the act of forfeiting Jawed’s salary is legal and state the prospects of success of proceedingsfor recovery of the car’s cost from Jawed. (8 marks)

(c) Explain Esa’s position and the remedies that Asad and Bilal have against Esa. (7 marks)

(20 marks)


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Answers



Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) June 2007 Answers

1 (a) The fundamental right of ‘Freedom of Assembly’ is enlisted in Article 16 of the Constitution of Pakistan, 1973 (’Constitution’).It stipulates that every citizen shall have the right to assemble peacefully and without arms, subject to any reasonablerestrictions imposed by law in the interest of public order.

Interpreting this fundamental right the superior courts of Pakistan have held that this right, although fundamental, is not inits nature absolute and can be subject to reasonable restrictions imposed in the public interest. For instance, restrictions canbe imposed to avert danger to property, human life and disturbance of public tranquility (Shukar Din v Government of WestPakistan, PLD 1965 Lahore 521). It is the courts’ duty to decide whether the imposed restrictions are reasonable or not andin doing so the court takes into consideration the conditions prevailing at the time, nature, extent and duration of therestrictions and all the surrounding circumstances (Nawabzada Nasrullah Khan v Government of West Pakistan, PLD 1965Lahore 642).

(b) Article 19 of the Constitution deals with the fundamental right of ‘freedom of speech’ and sets out that every citizen shall havethe right of freedom of speech and expression, the press shall be free subject to any reasonable restrictions imposed by lawin the interest of glory of Islam, integrity, security and defence of Pakistan or its any part, friendly relations with foreign states,public order, decency or morality, contempt of court or commission or incitement of an offence.

Freedom of speech and liberty of the press are not absolute and unqualified rights and it does not mean that one can talk ordistribute where, when and how one chooses (Nawabzada Nasrullah Khan v Government of West Pakistan, PLD 1965Lahore 642). Article 19 of the Constitution contemplates circumstances such as glory of Islam, national interest, friendlyrelations with foreign states, public order, decency/morality, contempt of court and commission/incitement of an offence underwhich reasonable restrictions can be imposed (Ghulam Sarwar Awan v Government of Sindh, PLD 1988 Karachi 414).Further, that there is no absolute test of the reasonableness of restrictions and it is for the courts to decide whether in thecircumstances of the case the restrictions imposed are reasonable or not (Tafazzul Hussein v Government of East Pakistan,PLD 1969 Dacca 589). While interpreting this fundamental right the superior courts of Pakistan have held that the right offreedom of speech includes the right to be silent and to receive information (Mohammad Nawaz Sharif v President ofPakistan, PLD 1993 S.C. 473).

2 Section 148 of the Contract Act, 1872 (the ‘Act’) defines the concept of bailment as the delivery of goods by one person toanother for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposedof according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and the personto whom they are delivered is called the ‘bailee’.

Bailment refers to the delivery of goods on condition to re-deliver the goods once the purpose of delivery is achieved: for instancegiving cloth to the tailor for the purpose of stitching dress. Bailment can be divided into the following of two kinds: (a) voluntaryand involuntary; and (b) gratuitous and non-gratuitous.

Voluntary bailment is the outcome of an express contract between the parties, whereas involuntary bailment arises by theoperation of law; for instance a person receives goods in excess of the quantity ordered. If a bailee keeps the goods for the bailorwithout reward, it is a gratuitous bailment and if some consideration passes between the parties it is a non-gratuitous bailmentor bailment for reward, an example of which is a car let out for hire.

Essentials of bailment are:

(i) Delivery of Goods

The first important feature of bailment is the delivery of goods from one person to another for the purpose of bailment. Deliveryhere implies change of possession from one person to another and not a change of ownership.

(ii) Purpose of Delivery

Section 148 of the Act requires that the delivery of goods must be for some specific purpose, for instance delivery of goodsby mistake does not constitute bailment.

(iii) Return of Goods

Bailment is always for some purpose and is subject to the condition that when the purpose is achieved the goods will bereturned to the bailor, or disposed of according to his directions. If there is no contract to deliver back or otherwise disposeof the goods, there is no bailment.

3 The law of partnership in Pakistan is embodied in the Partnership Act, 1932 (the ‘Act’). Partnership is described as the relationshipbetween persons who have agreed to share the profits of a business carried on by all or any one of them acting for all (s.4). Themutual rights and duties of partners are determined by contract (express or implied) between the partners and are subject to theprovisions of the 1932 Act (s.11).

Section 9 of the Act provides that partners are bound to carry on the business of the firm to greatest common advantage, to bejust and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, hisheir or legal representative.

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Other rights and duties that partners have towards each other are as follows:

(i) Attend Diligently to his DutiesEvery partner is bound to attend diligently to his duties in the conduct of the business subject to contract between the partners(s.12-b).

(ii) Business Decision-Making

Business differences should be decided by a majority of the partners after taking into consideration the opinion of everypartner (s.12-c).

(iii) Equal Contribution

Subject to contract the partners are entitled to share equally in the profits earned and contribute equally to the losses sustainedby the firm (s.13-b).

(iv) No Secret Profit Subject to the contract between the partners, if a partner derives any profits for himself from any transaction of the firm, orfrom the use of the property or business connection of the firm or the firm-name, he should account for that profit and payit to the firm/other partners (s.16-a).

(v) No Competing Business

If a partner carries on any business competing with that of the firm, he shall be accountable to the firm for all profits madeby him in that business (s.16-b).

4 A memorandum of association is referred to as the constitution of a company. Different clauses of the memorandum set outimportant information with regard to a company. These include: (i) Name; (ii) Registered Office; (iii) Objects; (iv) Liability; and (v) Authorised Share Capital.

Alteration of the memorandum is regulated by s.20 of the Companies Ordinance, 1984 (‘Ordinance’) which sets out that acompany shall not alter the memorandum except in the cases, mode and to the extent specified in the Ordinance. Furtherrequirements and procedure for the alteration of different clauses of the memorandum are set out in different sections of theOrdinance, for instance s.39 deals with alteration of the name clause and s.92 deals with the alteration to the share capital clause.

Section 21 provides for alteration in the registered office of the company and its objects clause. It sets out the ‘conditions’ underwhich the objects clause can be altered, such as, to enable the company to (a) carry on its business more economically/efficiently;(b) attain its main purpose by new/improved means; (c) change the local area of its operations; (d) carry on business not specifiedin its memorandum; (e) alter objects; (f) sell whole or part of the company and (g) to amalgamate with any other company or bodyof persons.

The memorandum of association can be altered by adopting the following procedure:

(i) Directors’ Meeting and Approval

A proposed alteration should be discussed in a meeting of the board of directors and approved by a resolution.

(ii) Notice

A 21 days notice accompanied with a copy of proposed special resolution and a statement under s.160(1)(b) of theOrdinance setting out material facts should be given to members for convening the general meeting [s.2(1) (36)]. In the caseof a listed company, such notice is also required to be published in at least two newspapers, one English and the other inUrdu language having circulation in the area where the stock exchange(s) on which the securities of the company are listedsituates.

(iii) Special Resolution

A proposed resolution should be passed as a special resolution by a majority of three-quarters of the members present andvoting at the general meeting.

(iv) Filing

Section 21(2) mandates that alteration shall not take effect until the same is confirmed by the Securities and ExchangeCommission of Pakistan (‘SECP’). For this purpose, a copy of the special resolution on Form 26 should be filed with the SECPwithin 60 days of the date of passing of the said resolution [Rule (3) of the Companies (General Provisions and Forms) Rules,1985].

(v) Creditors No Objection Certificates

Securities and Exchange Commission of Pakistan is authorised to make an order confirming the alteration either wholly or inpart and on such terms and conditions as it thinks fit (s.22). In granting its approval, the Commission considers whethersufficient notice was given to persons whose interests would be affected by the alteration (i.e. debenture holder and creditor)and whether their consent to alteration has been obtained or debt/claim has been discharged or determined and secured tothe satisfaction of the SECP [s.21(3)].

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(vi) Filing with Registrar

A certified copy of SECP’s order confirming the alteration, together with a printed copy of the memorandum as altered, shouldwithin 90 days from the date of the order be filed by the company with the concerned Registrar of Companies. This is theconclusive evidence that all the requirements of the Ordinance have been complied with [s.24 (1)].

5 Variation to the shareholder rights can only be made in the manner set out in s.28 of the Companies Ordinance, 1984 (the‘Ordinance’) as envisaged by s.108 of the Ordinance. The proviso to s.28 requires that where an alteration in the articles ofassociation of a company affects the substantive rights or liabilities of members or of a class of members, it shall be carried outonly if a majority of at least three-quarters of the members or of the class of members affected by such alteration, as the case maybe, approve such variation. The expression ‘variation’ includes abrogation, revocation or enhancement [s.108 (6)].

(i) Directors’ Meeting

The directors consider the proposal for variation of rights of shareholders and pass the resolution in their meeting. Theresolution passed should specifically mention the rights to be varied and terms and conditions attached with it.

(ii) Notice

Notice for convening the general meeting along with a statement of material facts under s.160(1)(b) of the Ordinance and acopy of the proposed special resolution for variation of shareholder rights should be sent to the shareholders at least 21 daysbefore the general meeting. In the case of a listed company the notice should be published in at least two newspaperscirculating in the province in which stock exchange exists on which company shares are listed.

(iii) Special Resolution

The resolution is then discussed by shareholders in a general meeting and passed by three-quarters majority as specialresolution. This is in line with s.28 which stipulates that subject to the provisions of the Ordinance and memorandum, acompany may by special resolution alter or add to its articles, and variation so made shall be as valid as if originally containedin the articles.

(iv) Variation of Rights of a Particular Class

In the case where the proposed variation relates to rights of a particular class then notice should be given to shareholders ofthat particular class and a separate meeting be convened. Thereafter, the said resolution should be passed by a three-quartersmajority of that particular class.

(v) Filing

The special resolution; amended copy of memorandum and articles of association along with the requisite fee are then filedwith the Securities and Exchange Commission of Pakistan.

(vi) Remedy for Aggrieved Shareholders

Section 108 (2) provides that not less than 10% of the class of shareholders who are aggrieved by the variation of their rightscan within 30 days of the date of the resolution apply to the court for an order cancelling the resolution. Further, that thecourt before passing an order shall satisfy itself whether material facts were withheld from shareholders by the company ornot and whether the variation would unfairly prejudice the shareholders of the class represented by the applicant or not.

6 Section 187 of the Ordinance sets out the circumstances which render a person ineligible to become a director. It states that noperson shall be appointed as a director of a company if he: (a) is a minor; (b) is of unsound mind; (c) has applied to be adjudicatedas an insolvent and his application is pending; (d) is an undischarged insolvent; (e) is convicted by a court of law for an offenceinvolving moral turpitude; (f) is debarred from holding such office under any provision of this Ordinance; (g) has been declared bycourt in the last five years to lack fiduciary behaviour; (h) is not a member; and (i) is a defaulter.

(a) Minor

A minor is a person who has yet not attained majority i.e. become 18 years old.

(b) Unsound Mind

A person is of unsound mind if at the time of forming a contract he is not capable of understanding it and forming a rationaljudgment as to its contents.

(c) Insolvent

A person becomes ineligible for becoming a director if he has applied to the court for adjudication as an insolvent and hisapplication is pending.

(d) Undischarged Insolvent

A person becomes ineligible for becoming a director if he is an undischarged insolvent.

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(e) Convicted by a Court of Law

A person becomes ineligible for becoming a director if he has been convicted for an offence involving moral turpitude. Pleasenote that the term ‘moral turpitude’ can have a different meaning in a different context i.e. it can mean anything done contraryto justice, honesty, principles, or good morals, an act of baseness or vileness (Durga Singh v State of Punjab, AIR 1957Punjab 97).

(f) Debarred Under the Ordinance

A person becomes ineligible if so restricted by any provision of the Ordinance.

(g) Lack Fiduciary Behavior

A person becomes ineligible for becoming a director if declared by court in the last five years to lack fiduciary behaviour.

(h) Not a Member

A person becomes ineligible for becoming a director if he is not a shareholder of the company. However being a non-memberis not a disqualification if the person represents the Government or an institution or authority which is a member; is a whole-time director who is an employee of the company; chief executive; or a person representing a creditor.

(i) Defaulter

A person becomes ineligible for becoming a director if declared by a court of competent jurisdiction to have defaulted in therepayment of a loan to a financial institution to an extent set by the Securities and Exchange Commission of Pakistan[s.187(i)].

7 (a) The law of agency is based on the legal principle that ‘what a person does by another, he does by himself’. Here the personwho acts on behalf of another is called the ‘agent’ and the person who authorises another to act is called the ‘principal’.Further any person of majority age and sound mind can employ an agent (s.183). No consideration is necessary to createan agency (s.185) and the contract of agency can be either (i) express; (ii) implication of law; or (iii) subsequent ratification.

(i) Express Agreement

Here a principal appoints an agent either by words spoken or written to represent and act for him and no particular formor set of words is required for appointing an agent.

(ii) Implication of Law

Here the authority to act as agent can be inferred from the nature of business, the circumstances of the case, the conductof the principal or the course of dealing between the parties.

(iii) Ratification

Ratification is an approval of a previous act. It implies the adoption by the principal of an act done by an agent on hisbehalf, but without his authority. Section 196 of the Act provides that where acts are done by one person on behalf ofanother, but without his knowledge or authority, he may elect to ratify or disown such acts. If he ratifies them, the sameeffects will follow as if they had been performed by his authority.

Upshot the superior courts of Pakistan have held in Pakistan Paper Corporation Limited v National Trading CompanyLimited, 1983 CLC 1695 that under agency an agent has power on behalf of the principal to deal with third personsso as to bind the principal and is accountable to the principal.

(b) An agent is a person employed to do any act for another or represent another in dealing with third persons (s.182 of the Act).It should be noted that any person may become an agent, but no person who is not of the age of majority and of sound mindcan become an agent, so as to be responsible to his principal (s.184).

An agent’s role may be express (given by words spoken or written) or implied (inferred from the circumstances of the case).An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act(s.188) and in an emergency the agent can do all such acts for the purpose of protecting his principal from loss as would bedone by a person of ordinary prudence, in his own case, under similar circumstances (s.189).

In an agency relationship an agent has the following duties:

(i) Not to Delegate

An agent cannot employ another to perform acts which he has undertaken to perform personally unless by the ordinarycustom of trade a sub-agent must be employed (s.189). Further in appointing a sub-agent the agent is bound to exercisethe same amount of discretion as a man of ordinary prudence would exercise in his own case (s.195).

(ii) Agent’s Duty in Conducting Principal’s Business

An agent is bound to conduct the business of his principal according to the directions given by the principal, or in theabsence of any such directions, according to custom which prevails in doing business of the same kind. If the agentacts otherwise and any loss occurs then he must make good the same to his principal and if any profit accrues he mustaccount for it (s.211).

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(iii) Skills and Diligence Required from Agent

An agent is bound to conduct the business of the agency with as much skill as is generally possessed by personsengaged in similar business (s.212).

(iv) Render Accounts

An agent is bound to render proper accounts to his principal (s.213) and to pay to his principal all sums received onhis account (s.218).

(v) Agent’s Duty to Communicate with Principal

It is the duty of an agent to use all reasonable diligence in communicating with his principal and to obtain hisinstructions (s.214).

8 Unfair and wrongful dismissal both under Industrial Relations Ordinance, 2002 and Industrial & Commercial Employment(Standing Orders) Ordinance, 1968 (‘Standing Orders’) refers to a situation where a workman has been removed from servicewithout following the procedure set forth in the said statutes. For instance, Standing Order 12 of the Standing Orders requires everyappointment or termination to be in writing and communicated to a workman. It reads as follows:

The services of a workman shall not be terminated, nor shall a workman be removed, retrenched, discharged or dismissedfrom service, except by an order in writing which, shall explicitly state the reason for the action taken. In case a workman isaggrieved by the termination of his services or removal, retrenchment, discharge or dismissal, he may take action inaccordance with the provisions of s.46 of the Industrial Relations Ordinance, 2002 and thereupon the provisions of the saidsection shall apply as they apply to the redress of an individual grievance.

Further the superior courts of Pakistan have held that non compliance of such a mandatory provision does not only make theemployer liable for punishment but also adverse inference may be drawn against him especially in the case of uneducatedworkmen (Zaheer Ahmed v Manager Administration Wazir Ali Industries Hyderabad, 1989 PLC 850). Employees unfairly andwrongfully dismissed have the following remedies available to them under the mentioned Ordinances:

(i) Notice to Employer

The worker can bring his grievance to the notice of his employer in writing, either himself or through his Shop Steward orCollective Bargaining Agent, within one month of the day on which cause of such grievance arises. Thereafter the employeris bound to communicate his decision in writing to the worker within 15 days of the grievance being brought to his notice.

(ii) Approach Labour Court

If an employer fails to communicate a decision within the period specified or if the worker is dissatisfied with such decision,the worker or Shop Steward may take the matter to his Collective Bargaining Agent or the Labour Court, as the case may be.If the matter is taken to the Labour Court, it shall give a decision within seven days from the date of the matter being broughtbefore it as if such matter were an industrial dispute.

(iii) Powers of Labour Court

If the Labour Court holds termination of services of a workman wrongful it may award a compensation equivalent to not lessthan 12 months and not more than 30 months basic pay last drawn and house rent, if admissible, in lieu of reinstatementof the worker in service. Further if the decision is not given effect to or complied with within one month or within the periodspecified in such order the defaulter shall additionally be punishable with a fine which may extend to 10,000 rupees upona worker’s complaint.

9 (a) The term ‘dividend’ refers to the portion of company profits which is allocated for distribution to the shareholders of acompany.

The extent of directors’ powers and the procedure of a dividend declaration under the Companies Ordinance, 1984 (the‘Ordinance’) is discussed in ss.248, 249, 250 and 251. The same are set out hereunder:

(i) Directors’ Meeting

Directors in their meeting shall decide the rate and quantum of dividend. Please note that s.248(1) and 249 of theOrdinance set out that no dividend shall exceed the amount recommended by the directors and a dividend shall only bepaid out of profits of the company.

(ii) General Meeting

A dividend should be declared in the general meeting. In this respect formalities set out in s.158 of the Ordinance inparticular with regard to notice of 21 days (sub-section (3)) should be complied with by the company.

(iii) Payment of Dividend

Directors of the company are responsible for making the dividend payments within 45 days of declaration in the caseof a listed company and 30 days in the case of any other company [s.251(1)]. Dividend payments shall be made outby registered post to the registered shareholder or any bank or financial institution nominated by the registeredshareholder (s.250).

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The superior courts have summarised this process as the board of directors recommends and the annual general meetingdecides the amount and declares the dividend unless the articles specify otherwise [Kothari Textiles Limited v CWT, (1963)33 Company Cases 217]. Further a dividend once declared becomes a debt and the shareholder is entitled to sue at law forthe recovery of the same after expiry of the prescribed period [In re: Severn and Wye & Severn Bridge Ry Co, (1896) 1 Ch.559].

(b) No the directors cannot sell assets of the company to pay a dividend for the years the company was running at a loss.

This view finds support from s.249, which states that a company is liable to pay dividends only out of its profits and nodividend shall be declared or paid by the company for any financial year out of company profits made from the sale or disposalof any immovable property or assets of the company (s.248).

(c) The company shall not be liable in any manner if it makes via registered post dividend payments to financial institutionsnominated by the shareholder.

As s.250(1) provides that no dividend shall be paid by the company in respect of any share except amongst others to theregistered shareholder or to a financial institution nominated by the shareholder. In this respect the financial institutionnominated by the shareholder is not required to make a separate application to the company for payment of a dividend [s.250(2)]. Further the company should despatch the dividend warrants by registered post unless otherwise required by theshareholder in writing [s.250(3)]. In addition to this, the company must follow the requirements, if any, in its articles ofassociation in relation to the despatch of dividend warrants.

10 (a) In order to reduce the chances of objection from the creditors, the company should adopt a method of reduction of capitalthat does not involve any diminution in the value of the company’s assets on which the creditors have charge. In addition tothis, the company should finalise a list of creditors whose debt or claim has not been discharged or determined and shouldeither pay to such creditors the full amount of their debt or claim or satisfy the creditors with or without admitting the same.The court may, if it deems fit, dispense with the consent of the objecting creditors.

This method is permissible under s.100(i) of the Ordinance, which provides that where a creditor, who is entered on the listof creditors and whose debts or claim has not been discharged or determined, does not consent to the proposed reduction,the court may if it thinks fit dispense with the consent of that creditor on the company securing payment of the full amountof his debt or claim or, though not admitting it, is willing to provide for it.

(b) The Ordinance in ss.96 to 107 sets out the conditions and procedure for reduction of share capital by a company limited byshares. Section 96(1) of the Ordinance provides that a company limited by shares if so authorised by its articles can bypassing a special resolution reduce its share capital to (i) extinguish or reduce liability on its unpaid shares; (ii) cancel anypaid-up share capital which is lost or unrepresented by available assets; and (iii) pay off any paid-up share capital which isin excess of the needs of the company.

The procedure for reduction of share capital of a company limited by shares is as follows:

(i) Directors’ Meeting and Approval

Directors consider the proposal for reduction in share capital and pass the resolution at their meeting. The resolutionpassed should specifically mention the amount of authorised capital, number of shares and face value of each share.

(ii) Notice

At least 21 days notice of the general meeting and a copy of the proposed special resolution for reduction in capitalshould be sent to the shareholders.

(iii) General Meeting held to pass Special Resolution

The resolution is then discussed by the shareholders in a general meeting and passed by a three-quarters majority as aspecial resolution. Please note that the superior courts of Pakistan have held that reduction of capital is a domestic affairof the company and the decision of majority shareholders is valid if the same does not affect the rights of minority(Bankers Equity Limited v General Public, 1988 MLD 1408).

(iv) Petition before High Court

For confirmation of the reduction in share capital a petition is then filed before the High Court (s.97) accompanied byminutes of the general meeting, copies of the special resolution, latest audited annual accounts, consent of creditors,particulars of dissenting shareholders and their point of view. Further the courts, before confirming, take into accountwhether the formalities for special resolution have been complied with, due notice was given and the same is not likelyto adversely affect the interests of the shareholders (In re: Pak Asian Fund Limited, 1999 CLC 1603).

(v) After Confirmation Formalities

The alteration should be noted in all copies of memorandum and articles of association issued thereafter.

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(c) Yes it is mandatory for the company to add the words ‘and reduced’ to its name for a time period fixed by the court. However,the court may under special reasons dispense with this formality.

This view finds support from s.98 of the Ordinance which states that when resolution for reducing share capital is passedand confirmed by the court then the company shall unless otherwise directed by the court for any special reasons, add to itsname the words ‘and reduced’ as the last words for a time period so set.

11 (a) In terms of s.16 of the Contract Act, 1872 (the ‘Act’), ‘undue influence’ exists when the relationship subsisting between theparties is such that one of the parties is in a position to dominate the will of the other and uses that position to obtain anunfair advantage over the other. Further, a person is deemed to be in a position to dominate the will of the another if he holdsa real or apparent authority over the other or stands in a fiduciary relation to the other; or makes a contract with a personwhose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.

In view of the above the transfer of shares by Mr Kamran to Pappu Pir is not valid as Pappu Pir has exercised undue influenceon Mr Kamran. Moreover, if Pappu Pir denies having exercised undue influence over Mr Kamran then the burden of provingthat the transfer was not induced by undue influence shall lie upon Pappu Pir [s.16(3)].

(b) The sale of shares to Mr Farooq seems to be the result of fraud played by Mr Farooq on Mr Kamran and, therefore, the sameis voidable.

The term ‘fraud’ is defined in s.17(1) of the Act as a suggestion of a fact which is not true by one who does not believe it tobe true. When consent is caused by fraud the contract becomes voidable at the option of the party whose consent was socaused. A voidable contract is an agreement which is enforceable by law at the option of one or more of the parties (ss.2(i) and 19).

(c) No, Awais cannot execute an agreement to sell the remainder of Mr Kamran’s shares in BPL as he is a minor and thereforenot competent to execute an agreement.

Awais at present is 16 years old i.e. a minor and the Act does not deem minors to be ‘competent parties’ who can executeagreements enforceable at law. Further competency of parties has been discussed in s.11 of the Act which provides that everyperson is competent to contract if he is of majority age according to the law to which he is subject, sound mind and is notdisqualified from contracting by any law to which he is subject. A person is considered to be of majority age if he is 18 yearsold or more.

12 (a) No. Bilal cannot demand a salary for acting as a sales person as nothing to this effect had been agreed between the partners,Bilal and Asad, nor is a partner entitled under the Partnership Act, 1932 (’1932 Act’) to receive remuneration for taking partin the conduct of the partnership business (s.13(a)).

(b) Yes, the act of forfeiting Jawed’s salary is legal and the same finds support from s.220 of the Contract Act, 1872 which statesthat an agent who is guilty of misconduct in the business of the agency is not entitled to receive any remuneration in respectof that part of the business for which he is guilty of misconduct.

Further, chances of success of the proceedings for the recovery of the car’s cost from Jawed are high as s.193 of the ContractAct, 1872 provides that where an agent without having authority to do so appoints a person to act as a sub-agent, then theagent stands towards such person in the relationship of a principal and is consequently responsible for his acts both to theprincipal and to third persons, and the principal is not represented by or responsible for the acts of the person so employednor is that person responsible to the principal.

(c) Esa’s position is that of a sub-agent, appointed by Jawed (agent) and not by either of the principals (Bilal or Asad), thereforeBilal and Asad do not have any remedy against Esa.

This view finds support from the argument that a sub-agent is a person employed by and acting under the control of theoriginal agent (Jawed in this case) in the business of the agency (s.191 of the 1872 Act). Further Jawed was not givenauthority by either Bilal or Asad, nor under the 1872 Act did he have any authority to appoint a sub-agent as s.190 mandatesthat an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to performpersonally and where an agent without having an authority to do so has appointed a person to act as a sub-agent the agentstands towards such person in the relationship of a principal to an agent and is responsible for his acts both to the principaland to third persons and the principal is not represented by or responsible for the acts of the person so employed nor is thatperson responsible to the principal.

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15

Part 2 Examination – Paper 2.2(PKN)Corporate and Business Law (Pakistan) June 2007 Marking Scheme


(a) 3–5 Answers discuss the fundamental right of ‘freedom of assembly’ enlisted in Article 16 of the Constitution of Pakistan,1973 (‘Constitution’) in light of leading cases interpreting the same.

0–2 Poor answers showing little or no knowledge about the fundamental right of freedom of assembly.

(b) 3–5 Answers discuss the fundamental right of ‘freedom of speech’ as provided in Article 19 of the Constitution in contextof landmark cases.

0–2 Answers show little understanding of the fundamental right of ‘freedom of speech’.

2 This question expects candidates to exhibit knowledge on the concept of bailment as provided in s.148 of the Contract Act, 1872(the ‘Act’).

7–10 Answers quote s.148 of the Act, discuss essentials of bailment and its kinds i.e. voluntary and involuntary; and gratuitousand non-gratuitous.

3–6 Answers mention s.148 with little or no discussion about essentials and kinds of bailment.

0–2 Poor answers that show little or no knowledge about bailment.

3 The candidates are expected to display knowledge about the mutual rights and duties of partners set out in the Partnership Act,1932 (‘1932 Act’).

7–10 Answers expect candidates to exhibit knowledge about rights and duties of partners inter se as provided in the 1932 Act,particularly in ss.9, 12, 13 and 16 thereof.

3–6 Answers show some understanding about the rights and duties of partners inter se.

0–2 Poor answers that show little or no knowledge about the question.

4 This question expects the candidates to exhibit knowledge about requirements and procedure for alteration of the memorandum ofassociation of a company prescribed by the Companies Ordinance, 1984 (the ‘Ordinance’).

7–10 Answers display knowledge about the procedure of alteration with reference to ss.20, 21, 22 and 39 and discuss thescope of alteration of various clauses of the memorandum of association, including the variation in the share capitalclause.

3–6 Answers display a limited level of knowledge about the scope and procedure of alteration.


5 This question expects candidates to display knowledge about the procedure for variation of shareholder rights.

7–10 Answers display knowledge about the procedure of variation of shareholder rights with reference to ss.28 and 108 of theOrdinance.

3–6 Answers display a limited level of knowledge about the procedure of variation of shareholder rights.


6 This question expects candidates to display knowledge about the impediments set forth in the Ordinance which render personsineligible from becoming directors.

7–10 Answers expect candidates to exhibit knowledge about s.187 of the Ordinance which enlists impediments which renderpersons ineligible from becoming directors.

3–6 Answers show some understanding about the impediments.




7 This question is divided into two parts and each part shall be marked separately.

(a) 3–5 Answers discuss the concept of agency with reference to s.183; and 185 of the Act.

0–2 Answers show little or no knowledge about the question.

(b) 3-5 Answers discuss the concept of agency with reference to ss.182, 184, 185, 188, 189, 195, 211, 212, 213, 214and 218.

0–2 Answers show little or no knowledge about the question.

8 This question expects candidates to display knowledge about labour laws of Pakistan in particular Industrial Relations Ordinance,2002 (‘IRO’) and Industrial & Commercial Employment (Standing Orders) Ordinance, 1968 (‘Standing Orders’) and remedyavailable under the mentioned Ordinances.

7–10 This question expects candidates to display knowledge about the concept of unfair and wrongful dismissal and remedyavailable under standing order 12 of the Standing Orders and s.46 of the IRO.

3–6 Answers quote the relevant legal provisions but fail to exhibit much knowledge about remedy available in case of unfairand wrongful dismissal.



(a) 7–10 Answers lay down the extent of directors’ powers and procedure of declaring a dividend as laid down in theCompanies Ordinance, 1984 (the ‘Ordinance’) ss.248, 249, 250 and 251.

3–6 Answers display limited knowledge about directors’ powers and a dividend declaration procedure.

0–2 Answers neither quote the mentioned sections nor discuss directors’ powers with regard to a dividend declarationprocedure.

(b) 3–5 Answers analyse in light of ss.248 and 249 of the Ordinance whether company’s assets can be sold to pay adividend for the years the company was running at loss.

0–2 Poor answers with little or no reference to legal provisions.

(c) 3–5 Answers discuss a company’s liability with regard to payments to financial institutions.

0–2 Answers show little knowledge about the topic at hand.

10 This question is divided into three parts, with parts (a) and (c) having same marks and part (b) different marks.

(a) 3–5 Answers suggest the method that a company should adopt to reduce the chances of objection from the creditors sidewith reference to s.100(i) of the Ordinance.

0–2 Answers fail to exhibit knowledge about the topic at hand.

(b) 7–10 Answers quote and discuss with reference to ss.96 to 107 of the Ordinance the conditions and procedure forreduction of capital.

3–6 Answers in this marks range are confined to quoting legal provision and/or show some understanding of the matter.

0–2 Answers showing poor understanding on the matter.

(c) 3–5 Answers opine as to whether the words ‘and reduced’ can be added to the name of the company in light of s.98 ofthe Ordinance.

0–2 Answers quote the relevant section but fail to conclude whether the words ‘and reduced’ should be added to thecompany’s name or not.

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11 This question is divided into three parts, with parts (a) and (b) having same marks and part (c) different marks.

(a) 5–7 Answers opine as to the validity of a shares transfer by Mr Kamran to Pappu Pir with regard to s.16 of the ContractAct, 1872 (the ‘Act‘).

3–4 Answers quote s.16 but fail and/or do not clearly opine as to the validity of the shares transfer.

0–2 Answers that show poor understanding on the issue.

(b) 5–7 Answers quote s.17(1) of the Act and opine as to the validity of sale of shares to Mr Farooq.

3–4 Answers quote s.17(1) of the Act but fail and/or do not clearly opine as to the validity of the sale of shares.

0–2 Answers that show poor understanding on the issue.

(c) 4–6 Answers discuss competency of Awais for executing an agreement to sell with reference to s.11 of the Act.

0–3 Answers fail to conclude as to whether Awais is competent to contract or not and/or do not quote the relevant section.

12 (a) 3–5 Answers conclude as to whether Bilal being a partner can demand a salary for acting as a sales person under s.13(a)of the Partnership Act, 1932 (‘1932 Act‘).

0–2 Answers quote the relevant provision and/or fail to conclude whether Bilal can draw the salary or not.

(b) 6–8 Answers opine whether the act of forfeiting Jawed’s salary is legal and to the prospect of success of recoveryproceedings in light of ss.193 and 220 of the Act.

3–7 Answers quote the relevant legal provisions but fail to opine on them clearly.

0–2 Answers display little or no knowledge about the matter at hand.

(c) 5–7 Answers discuss Esa’s position and the remedies available to Asad and Bilal in light of ss.190 and 191 of the Act.

3–4 Answers quote the relevant legal provisions and/or fail to comment on Esa’s position and the remedies available toAsad and Bilal under them.

0–2 Answers display little or no knowledge about the subject.

17



Fundamentals Level – Skills Module

Time allowedReading and planning: 15 minutesWriting: 3 hours

ALL TEN questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.

This question paper must not be removed from the examination hall.

Pape

r F4

(PK

N)

Corporate and Business Law(Pakistan)

Tuesday 4 December 2007




ALL TEN questions are compulsory and MUST be attempted

1 In relation to the Pakistan legal system, discuss the concept of ‘fundamental rights’ as enshrined in theConstitution of Pakistan, 1973.

(10 marks)

2 In relation to the law of contract, discuss the concept of ‘consideration’.

(10 marks)

3 In relation to the law of torts:

(a) discuss the meaning of ‘torts’; and (5 marks)

(b) state the defences to torts. (5 marks)

(10 marks)

4 Under the Companies Ordinance, 1984, explain the role of a:

(a) Company secretary. (5 marks)

(b) Chief executive officer. (5 marks)

(10 marks)

5 In relation to company law, explain the doctrine of ‘lifting of the veil of incorporation’.

(10 marks)

6 State:

(a) the different forms of businesses that a company may undertake as a Non-Banking Finance Company; and(5 marks)

(b) what steps are required for the establishment of a Non-Banking Finance Company. (5 marks)

(10 marks)

7 In relation to employment law, describe the scope of the Workmen’s Compensation Act, 1923.

(10 marks)

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8 JKB stores (‘JKB’) is a franchisee of Zike International (‘Zike’). Under their franchise agreement, JKB has providedZike with a bank guarantee of rupees 2,000,000 issued in favour of Zike by Friendly Bank (‘Bank’). Since then thefollowing events have occurred:

(a) JKB has defaulted and Zike has requested the Bank for the encashment of the guarantee in its favour.

(b) The Bank has refused on the ground that it did not receive any consideration from Zike for providing theguarantee, therefore, Zike should approach JKB.

Required:

Analyse the situation from the perspective of contract law and advise Zike as to its future course of action.

(10 marks)

9 Hassan Textile Mills Limited (‘HTML) is in the process of expansion to finance and has requested a loan facility ofrupees 5,000,000 from Barons Bank (‘Bank’). As a security for the requested loan facility, HTML has offered to createan unregistered charge in the Bank’s favour on the entire stock of cotton bales in HTML’s warehouse. The extensionof this loan facility is under consideration by the Bank’s management. You have been approached by the Bank’smanagement for advice.

Required:

Under the Companies Ordinance, 1984, advise the Bank with regard to the creation of charges over a company’sassets.

(10 marks)

10 The board of directors of Sunrise Limited (‘SL’), a public limited company, in their next board meeting plan onauthorising:

(a) The appointment of TAQ International as its sole distributor for Karachi. Mr Kamal Dawood, who is the managingpartner of TAQ International and a director of SL, is the moving spirit behind this.

(b) Extension of the repayment time for a loan extended to Mr Kamal Dawood.

Required:

With reference to company law, explain to the board of directors of SL the procedures for adopting the aboveplans.

(10 marks)


3



Answers



Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) December 2007 Answers

1 Fundamental rights are what have traditionally been known as ‘Natural Rights’ of human beings. These rights as generallyunderstood today date back to the time when the Magna Carta was introduced in 1215 AD through which an absolute monarchwas made to acknowledge that the subjects possessed certain rights, which could not be violated by an all powerful sovereign.

In Pakistan, the Fundamental Rights are enshrined in Part (II) Chapter (1) of the Constitution of Pakistan, 1973 (the ‘Constitution’)and relate to freedom of movement (Article 15); freedom of assembly (Article 16); freedom of association (Article 17); freedom oftrade, business and profession (Article 18); free speech (Article 19); religious rights (Article 20); protection of property rights(Article 24); equality of citizens (Article 25); non-discrimination in respect of access to public places (Article 26); and safeguardsagainst discrimination in services (Article 27). The superior Courts of Pakistan in Nawabzada Nasrullah Khan v District Magistrate,PLD 1965 Lahore 642 have held that the concept of fundamental rights as mentioned in the Constitution is not in the form of anabsolute proposition, rather such rights are often encumbered by provisos and qualifying conditions.

Article (8) of the Constitution provides that any law, custom or usage having the force of law, inconsistent with the fundamentalrights shall be void to the extent of such inconsistency and mandates that state shall not make any law, which takes away orabridges such rights. If any law in contravention of fundamental rights is made then the same shall be void to the extent of suchcontravention. This viewpoint has been reinforced by the Supreme Court of Pakistan in Province of East Pakistan v MohammadMehdi Ali Khan, PLD 1959 Supreme Court 378, wherein it has been held that law contravening any of the fundamental rights isvoid to the extent of such contravention and is not void ab initio i.e. law would exist and would be applicable to matters not coveredby fundamental rights. Even in a ‘state of emergency’ the superior Courts of Pakistan in Rifat Perveen v Bolan Medical College,PLD 1980 Quetta 10 have held that the state cannot make laws in violation of fundamental rights, however, as per Article 233(2)of the Constitution, the right to move Court for enforcement of such rights can be suspended.

2 According to s.2(d) of the Contract Act, 1872 (‘Act’), when at the desire of the promisor the promisee or any other person who hasdone or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing something; such act orabstinence or promise is called consideration. In other words, consideration means some right, interest, and profit or benefitaccruing to one party and some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Thesuperior Courts of Pakistan in Abdul Aziz v Mazum Ali, (1914) have held that where the promisee has done nothing there is noconsideration.

Further, anything or any act, can suffice as consideration if the same is not forbidden by law; is not fraudulent; does not involveinjury to the person or property of another and the courts do not regard it as immoral or against public policy (s.23 of the Act).

Following are the elements of the concept of consideration:

At the desire of the Promisor

According to s.2(d) of the Act, consideration implies a situation where the desire of one party and the action of the other have acasual connection and consideration ought to be performed only at the desire of the promisor.

Consideration given by whom and for whom

Consideration presupposes a situation where the promise needs not necessarily move from the promisee but may move from athird party. It is not necessary that the promisor should derive any direct benefit from the promise; the benefit can go to a thirdparty. However, a stranger to a contract cannot sue under it, nor enforce it, even though the contract had been made for his benefit.

Nature of consideration

Words ‘has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing’ denote thatconsideration can be past, present or future. The law treats past consideration on the same footing as present consideration orfuture consideration. In the case of a promise to do something in future, it should be noted that as long as a future considerationremains executory, it would not be treated as consideration in the eyes of the law unless it involves a legal obligation which thepromisor could be compelled to perform. Further, promises to do what a person is required by law to do or acts of natural love andaffection or obedience and submission by way of respect, cannot be held to be good consideration or valuable consideration.

Adequacy of consideration

What constitutes an adequate consideration is for the parties to decide at the time of making the agreement. Inadequacy ofconsideration is no ground for refusing the performance of the promise. The only requirement of the Act is that there must be someconsideration for the promise and the same can be anything of value in the eyes of the law. However, if any issue arises betweenthe parties regarding the legality of the contract, the courts consider the adequacy of consideration to judge whether the contracthas been induced by fraud or other illegal means or not.

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3 (a) The word ‘tort’ is from the French language and its meaning in English is ‘wrong’. The famous jurist Salmond has termed‘tort’ as a civil wrong for which the remedy is the common law action for unliquidated damages. Tort occurs as a result ofbreach of an equitable obligation and not exclusively that of contract or trust. In other words, tort can be termed as a civilwrong independent of contract for which the appropriate remedy is an action for unliquidated damages. The personcommitting the tort is referred to as the ‘tortfeasor’ and the act of the tortfeasor is called the ‘tortuous act’. Instances of tortuousacts are assault (showing of clenched fists to a passerby), battery (pushing by physical touch) and trespass, which is the entryon someone’s property without his consent. Further an act would not constitute tort if it would not be complained of by anordinary person, for instance the act of a motorist throwing water on passers by on a rainy day shall not constitute tort.

Torts have been classified into three categories by the superior Courts of Pakistan in Nasir Ahmed Shaikh v The State LifeInsurance Corporation of Pakistan, (1990) MLD 1261 namely:

(i) Tort of Nonfeasance: This relates to the omission of some act which a person by law is bound to do.

(ii) Tort of Misfeasance: This relates to the improper performance of some lawful act.

(iii) Tort of Malfeasance: This relates to the commission of some act which is in itself unlawful.

(b) In certain circumstances, the persons involved cannot be held responsible for the act of committing tort. Such circumstancesare generally referred to as the defences to torts and are set out below:

(i) Act of State and Statutory Authority

Acts of state done under state policy and/or acts authorised by a statute do not constitute tortuous acts.

(ii) Judicial Acts

Words or actions of judges spoken/done while functioning as a judge cannot constitute tortuous acts even if the judge’smotive is malicious or improper. This exemption exists to encourage the independence of the judiciary

(iii) Quasi Judicial Acts

Acts of persons and bodies like universities, colleges and clubs are protected from tortuous liability if done whileobserving rules of natural justice.

(iv) Executive Acts

Acts done by public servants in the performance of their duties, for instances, police officers executing arrest warrants.

(v) Parental and Quasi Parental Authority

Acts of parents and teachers done for the betterment of the child despite involvement of moderate and reasonablepunishment on the child are not considered as tort.

(vi) Acts of Necessity

Acts done by persons, such as, a captain of a ship in dangerous circumstances to ensure safety of the ship and personson board.

(vii) Works of Necessity and Public Welfare

Acts done for the welfare of the general public, for instance, the pulling down of houses to prevent fire from spreading.

(viii) Volenti Non Fit Injuria

When a person understands the risk involved and agrees to accept them, for instance, coal miners agreeing to work ina mine.

(ix) Inevitable Accident

An accident which could not have been avoided despite the exercise of ordinary care and caution.

(x) Private Defence

Every person has the right to defend his own person and property from unlawful harm, for instance setting up of aprotection barrier to divert flood water which damages neighbour’s crops.

4 (a) Section 2(33) of the Companies Ordinance, 1984 (‘Ordinance’) states that a company secretary is an individual appointedto perform secretarial, administrative, or other duties aimed to ensure that the affairs of the company are conducted inaccordance with the Ordinance. Appointment of company secretaries is mandatory for listed and single member companies(s.204-A).

A company secretary acts on behalf of the board of directors and being an officer of the company has extensive duties,including those of making representations on behalf of the company and, if authorised, entering into contracts which comewithin the day-to-day running of the company’s business.

Generally, a company secretary has duties towards (i) directors; (ii) shareholders; (iii) management and administration; (iv) the company; and (v) law. Duties towards shareholders imply arranging for shareholders’ meetings; keeping minutes ofsuch meetings; receiving applications for allotment of shares; transferring of shares; and recording dividends paid. Dutiestowards directors imply arranging board meetings; keeping records and minutes of such meetings and implementing decisionstaken in the meetings.

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In case of a listed company, the Code of Corporate Governance mandates that the company secretary should attend boardmeetings, except those meetings which have on their agenda matters relating to the company secretary; ensure compliancewith the law and the memorandum and articles of association. The Code of Corporate Governance also envisages certaineligibility criteria for the appointment of a company secretary. No person can be appointed as the company secretary of alisted company unless he is: a member of a recognised body of professional accountants; or a member of a recognised bodyof corporate/chartered secretaries; or a lawyer; or a graduate from a recognised university or equivalent, having at least fiveyears experience of handling corporate affairs of a listed public company or corporation.

(b) According to s.2(1)(6) of the Ordinance a chief executive officer is an individual who is entrusted with the powers ofmanagement of the affairs of the company subject to the control and directions of the directors. A chief executive officer isthe head of the company and it is mandatory for every company other than a company managed by a managing agent toappoint a chief executive officer (s.198).

A chief executive officer, if not already a director of the company, shall be deemed to be its director and entitled to all rightsand privileges and liabilities of that office. Further, the directors of the company have the right to fix the terms and conditionsof appointment of the chief executive officer if so allowed by the articles, otherwise it shall be fixed in a general meeting(s.200(1) and (2)).

The term of office of the chief executive officer varies in the cases of the first chief executive officer and those appointed later.In the case of the first chief executive officer, appointment should be made on the date of commencement of business or notlater than the 15th day after the date of incorporation, whichever is earlier (s.198). The first chief executive officer shouldhold office until the first annual general meeting or the term fixed by the directors. All subsequently appointed chief executiveofficers can hold office for a term not extending three years (s.199(1)).

For appointment as chief executive officer, a person must qualify to be appointed as director of the company, for instance, heshould not be a minor; should be of sound mind; there should be no insolvency proceedings pending against him; shouldnot have been convicted by a court of law for an offence involving moral turpitude; nor declared by a court to lack fiduciarybehaviour (s.187 read with 201).

A chief executive officer can be removed from his office by the directors of the company through a resolution passed by notless than three-quarters of the total number of directors for the time being or by a special resolution in the case of removalbefore the expiration of his term notwithstanding anything contained in the articles of association or in an agreement betweenthe company and the chief executive officer (s.202).

5 Upon incorporation a company obtains a legal personality separate from its members and as a result a company may own property,sue or be sued in its own name and is considered separate from its members thus protecting the latter from the liability of theformer. This legal principle was laid down in Salomon v Salomon, (1897) AC 22 wherein it was held that a company is distinctin law from persons who are its members i.e. there exists a curtain, veil, or shield between the company and its members.

When this protection is taken away the corporate veil is said to be lifted. It is to be noted that no fixed rule exists for determiningas to when the veil of incorporation should be lifted; rather the Supreme Court of Pakistan in The President v Mr Justice ShaukatAli, PLD (1971) SC 585 held that the corporate veil can be lifted where the same is being used merely as a cloak for fraud or forimproper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someoneelse, or to determine tax liability or quasi-criminal liability, or whether the corporate body is an enemy concern.

Reiterating the separate legal personality doctrine the Supreme Court of Pakistan in Union Council, Ali Wahan, Sukkur v AssociatedCement (Private) Limited, (1993) SCMR 468 held that the corporate veil cannot be lifted as a matter of course but only underjustifiable reasons. The said Court in Fauji Foundation and another v Shamimur Rehman, PLD (1983) SC 457 held the followingcircumstances to be justifiable for lifting the corporate veil:

(a) Company’s membership falls below the prescribed minimum;

(b) Company has been used for fraudulent trading; and

(c) To counter fraud, oppression or condone some informality in the affairs of the company.

In short, the corporate veil can be lifted to determine the true relationship of shareholders with regard to their dealings with thecompany or to ascertain the true nature of the company itself.

6 (a) Non-Banking Finance Companies (‘NBFC’) and the businesses that NBFCs are permitted to engage in are regulated by theCompanies Ordinance, 1984 (the ‘Ordinance’) and the Non-Banking Finance Companies (Establishment and Regulation)Rules, 2003 (‘NBFC Rules’).

NBFCs are characterised as public limited companies incorporated pursuant to the permission from the Securities andExchange Commission of Pakistan (‘SECP’) and licensed by SECP to carry out any of the businesses mentioned in s.282A.The businesses mentioned in the said section are:

(i) Investment Finance Services;(ii) Leasing;(iii) Housing Finance Services;

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(iv) Venture Capital Investment;(v) Discounting Services;(vi) Investment Advisory Services;(vii) Asset Management Services; and(viii) Any other form of business which the federal government may by notification in the official gazette specify from time to

time.

(b) Steps set forth in the Ordinance and the NBFC Rules for incorporating NBFCs are as follows:

Application to SECP

Section 282C and Rule 4(1) of the NBFC Rules require that persons desirous of forming an NBFC shall submit an applicationto the SECP as set out in Form-1 for permission to establish a NBFC. Form-1 requires disclosure of information about theproposed management of NBFC such as their names, addresses, educational and professional qualifications, financialstanding, evidence of payment of income and wealth tax, names and addresses of business organisations of which thesepeople have been directors, partners or office holders in the last ten years, proposed capital contribution to be made by each,and feasibility report along with payment of nonrefundable processing fee of rupees 100,000 only.

SECP’s Approval

Section 282C of the Ordinance provides that an NBFC shall not be incorporated without prior approval of the SECP. Beforegranting its approval, the SECP deliberates whether the requirements of Rule 3 of the Rules have been complied with. Rule3 requires that an NBFC may be established if each of its sponsors, proposed directors, chief executive and chairman of theboard of directors (i) has not been associated with any illegal banking business, deposit taking or financial dealing; (ii)companies in which he is a director or major shareholder have no overdue loans or instalments outstanding towards anyNBFC or any banking or non-banking financial institution; (iii) companies in which he is a director or major shareholder havenot defaulted in the payment of taxes as on the date of application; (iv) have not been sponsor, director or chief executive ofa defaulting cooperative finance society or finance company; (v) has never been convicted of fraud or breach of trust or of anoffence involving moral turpitude or removed from service for misconduct; (vi) has neither been adjudged as insolvent norsuspended payment of his debts nor has compounded with his creditors; (vii) his net worth except for the nominee directoras per wealth tax statements submitted with the tax authorities is not less than twice the amount to be subscribed by himpersonally.

Only after being satisfied that the formalities of Rule 3 have been complied with, would the SECP through a written orderpermit establishment of an NBFC. Such permission granted is valid for six months and during this period the promoters ofthe NBFC should get the NBFC incorporated as a public limited company under the Ordinance (Rule 4 sub-Rules (2) and(3)).

Licence

After grant of permission by the SECP to form an NBFC and incorporation of the company as a public limited company inaccordance with the Rules, the company should apply on Form B to the SECP for grant of a licence to carry on one or moreof the businesses mentioned in s.282A along with a non-refundable fee of rupees 100,000 only. The SECP after considering,amongst others, whether the promoters are persons of integrity; means and possess knowledge about matters that thecompany may have to deal with shall grant the licence (Rule 5(2)). Obtaining a licence from the SECP is imperative ass.282A(2) provides that an NBFC shall not carry on business unless it holds a licence issued by the SECP and licence issuedmay be subject to conditions as the SECP may deem fit to impose.

Commencement of Business

An NBFC shall only commence business after obtaining licence from the SECP and meeting the minimum paid up capitalrequirement prescribed by SECP (s.282(C-4) read with Rule 6(1)).

7 The Workmen’s Compensation Act, 1923 (‘1923 Act’) is part of the vast scheme of labour legislation in Pakistan which aims tosafeguard the interests of workmen. According to the preamble of the 1923 Act, it aims to regulate the payment of compensationby employers to their workmen in cases of personal injury by accident during their performance of duties. The 1923 Act mandatesthat compensation for injury related to a worker’s job is the employer’s responsibility.

To further safeguard the interests of workers, the 1923 Act provides that the quantum of compensation varies with the kinds ofinjuries, for instance, compensation is different in cases of injury resulting in total disablement and partial disablement. The 1923Act also links the amount of compensation to workers’ wages and prescribes the procedure to be followed (medical examination)and duties to be observed by both workers and employers during the same (fixation of expenses of medical examination onemployers). In short, this statute aims to fix responsibility of compensation on employers for injuries arising to their employees inthe course of their employment.

The superior Courts of Pakistan in Kalsoom Akhtar v Abdul Rashid, PLD (1975) Lahore 244, have held that the 1923 Act is not‘penal’ in nature but rather sets out the duties and liabilities of citizens in the position of employers towards other citizens whohappen to be workmen. Further, the 1923 Act being a quasi penal statute its provisions ought not to receive a strainedinterpretation in the interest of the beneficiaries thereunder (BombayBurmah Trading Corporation Limited v Ma E. Nan, 1937 Rang45). The 1923 Act is to be interpreted in a manner so that it advances the purpose of the enactment (Mst Lal Jan v Messers SilverPaper Tube Company, Karachi, PLD 1974 Karachi 140).

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8 This question requires candidates to analyse the concept of a contract of guarantee as envisaged in the Contract Act, 1872 (‘Act’)and advise Zike on a future course of action.

Section 126 of the Act describes a contract of guarantee as a contract to perform the promise, or discharge the liability, of a thirdperson in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default theguarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. In the instantcase, JKB is the principal debtor, Zike is the creditor, and the Bank is the surety.

Refusal by the Bank is not justified as the superior Courts of Pakistan in City Bank v Tariq Mohsin Siddiqi, 1999 PLD 196 haveheld that a creditor in an action against a guarantor is merely required to show existence of liability of the principal debtor andrefusal by the guarantor based on technicalities, laws of procedure or the covenants to which the guarantor is not a party are notvalid.

Even otherwise, the Bank’s refusal to encash the guarantee on the pretext that it has not received any consideration is not justifiedunder the law. As s.127 clearly provides that anything done or any promise made for the benefit of the principal debtor is sufficientconsideration for the surety to give the guarantee. In other words, consideration need not be for the benefit of the surety, it issufficient if the benefit goes to the principal debtor. This view is reinforced by the holding of superior Courts of Pakistan in UnitedBank Limited v Shahyar Textile Mills Limited, (1996) CLC 106 stating that the surety himself need not receive some benefit inreturn for his guarantee.

Refusal on the ground that Zike should approach JKB is not valid as s.128 mandates that the liability of the surety is co-extensivewith that of the principal debtor unless otherwise provided by contract. This implies that the guarantor (Bank) and principal debtor(JKB) are jointly and severally liable to pay the guarantee amount of rupees 2,000,000 to Zike, and Zike shall be well within itsrights to file legal proceedings against the guarantor (the Bank) without joining the principal debtor (JKB) as party to the suit (StateEngineering Corporation Limited v National Development Finance Corporation, (2006) SCMR 619 and Hyesons Sugar Mills(Private) Limited v Consolidated Sugar Mills Limited, (2003) CLD 996).

In view of the above discussion, Zike has a valid case against the Bank and should initiate legal proceedings against the Bank andJKB for the enforcement of the guarantee.

9 This question requires candidates to understand as to which charges require registration, what are the advantages of registering acharge and the procedure prescribed in this regard.

Section 121(1)(f) of the Companies Ordinance 1984 (‘Ordinance’) provides that a floating charge on the undertaking or propertyof the company including stock-in-trade shall be void if not registered. Stock-in-trade are assets which would in the ordinary courseof business change from time to time.

A registered charge serves as a notice to third parties to the effect that the registered charge would have precedence or priority overcharges registered later, which would rank secondary to a prior registered charge (Re: Hamilton Windsor Iron Works, (1879) 12 Ch D 707). Section 121(2) provides that when a charge is registered over certain assets, any person acquiring such assets orany part thereof or any share or interest therein shall be deemed to have notice of the said charge as from the date of registration.

In view of the above legal provisions, the charge to be created in favour of the Bank on the entire stock of cotton bales in thewarehouse of HTML should be registered with the concerned Registrar of Companies. This is imperative as judicial precedentssuggest that if a charge is not duly registered, the security created becomes void against the creditor (CF. Official Liquidator v UnionBank of India, AIR (1988) NOC 78(KER)).

Further, the Bank should ensure that HTML for creating a charge on its entire stock of cotton bales in favour of the Bank followsthe procedure set forth in the Ordinance and the Companies (General Provisions and Forms) Rules, 1985 (‘1985 Rules’). HTMLshould create a charge on its assets against loans by executing an agreement with the Bank. Before execution of such instrumentcreating a charge over its assets, HTML should have the approval of its board of directors and HTML’s seal should also be affixedon the agreement. Copies of the charge documents should be made and attested as per requirement of Rule 13 of the 1985 Rulesand documents such as Form 10 containing particulars of the charge and the prescribed fee should be paid in the manner set outin the 1985 Rules. The application should be filed with the concerned Registrar of Companies within 21 days of the creation ofthe charge failing which the company shall have to approach the Securities and Exchange Commission of Pakistan for extensionof time. After issuance of the certificate of registration of charge by the registrar, HTML should maintain a register of the charge inaccordance with Form 15 prescribed in the 1985 Rules and keep the same at HTML’s registered office.

In conclusion: to legally safeguard the Bank’s interest the charge to be created on HTML’s stock should be registered.

10 This question requires candidates to understand the limitations imposed on public limited companies regarding execution ofcontracts with its own members/directors.

Section 196(2)(g) of the Companies Ordinance, 1984 (the ‘Ordinance’) mentions the procedure that companies, desirous ofentering into business dealings with a business organisation of which any of its directors is a stakeholder (member, partner ordirector), should observe. The said section provides that directors of a company shall by means of a resolution passed at theirmeeting authorise a director or the firm of which he is a partner or any partner of such firm or a private company of which he isa member or director to enter into any contract with the company for making sale, purchase or supply of goods or rendering serviceswith the company.

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Therefore, the board of directors of SL should pass a resolution in their meeting for the implementation of its plan of appointingTAQ International as its sole distributor for Karachi.

As regards the directors’ plan for extending the repayment time for a loan extended to Mr Kamal Dawood, it is noted that SL is apublic limited company, therefore, its directors can only authorise this act after obtaining consent in its general meeting. Thisrequirement is set forth in s.196(3)(b) of the Ordinance, which provides that the directors of a public company shall not exceptwith the consent of the general meeting either specifically or by way of an authorisation remit, give any relief or give extension oftime for the repayment of any debt outstanding against any person.

SL should observe the procedural requirements mentioned in the Ordinance regarding the holding of a general meeting in thisrespect. For instance, the general meeting should be held in the town in which the registered office of SL is situated. Notice of thegeneral meeting should be sent to the shareholders of SL at least 21 days before the date fixed for the meeting and such noticeshould in addition to it being despatched in the normal course, be published in at least one issue each of a daily newspaper inEnglish and Urdu languages having circulation in the province in which the stock exchange on which SL shares are listed issituated (s.158 (2) and (3)).

In conclusion: the board of directors of SL can implement its mentioned plans after observing the procedures mentioned above.

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Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) December 2007 Marking Scheme

1 This question expects candidates to discuss the concept of fundamental rights in light of the Constitution of Pakistan, 1973 andleading judgments.

6–10 Thorough answers which mention the fundamental rights envisaged in the said Constitution and also explain the natureand limitations of the fundamental rights.

0–5 Answers discuss the concept of fundamental rights vaguely and mention only few of the fundamental rights enshrined inthe Constitution.

2 This question expects candidates to discuss the concept of consideration as an essential element of a valid contract in light of theContract Act and leading judgments.

8–10 Thorough explanation of the concept of consideration mentioned in s.2(d) of the Contract Act, 1872.

5–7 Sound understanding of the concept of consideration but lacking in detail.

0–4 Unbalanced answer, lacking in detailed understanding.

3 This question expects candidates to display their understanding of the concept of tort.

(a) 4–5 A good explanation of the meaning of tort with examples.

2–3 A good understanding of the concept of tort but no examples given.

0–1 Little or no understanding of the concept of tort.

(b) 4–5 A good understanding of defences of tort.

2–3 A good understanding of some of the defences.

0–1 Little or no understanding of any defence.

4 (a) 3–5 Answers displaying a fair treatment of the role of company secretary with discussion as to the eligibility under theCode of Corporate Governance in public companies.

0–2 Little or no knowledge of the area.

(b) 3–5 Answers displaying understanding of the role of chief executive officer, term of his office, appointment and removalfrom office.


5 This question expects candidates to discuss the concept of corporate veil and the circumstances in which the courts may lift theveil.

8–10 Answers explain the concept of the corporate veil and detail listing of the circumstances under which it can be lifted orpierced with reliance on relevant case law.

5–7 Answers show some understanding of the concepts of the corporate veil and circumstances under which it can be lifted.

0–4 Unbalanced answer focusing only on one aspect of the question i.e. the concept of the corporate veil or the circumstancesin which it can be lifted.

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6 The question expects the candidates to describe the different kinds of businesses that an NBFC can undertake with a fair idea ofthe legal requirement of licensing for each kind of business. It is also expected that the candidates are aware of the different stepsinvolved in the incorporation of an NBFC.

(a) 4–5 Answers in this range mention the businesses the NBFC can engage in.

2–3 Answers show some understanding of the area, but lacking in detail.


(b) 4–5 Answers give good understanding of the steps involved.

2–3 Little understanding of some steps.

0–1 No understanding at all.

7 This question expects candidates to display good understanding of the scope of the Workmen’s Compensation Act, 1923.

8–10 A complete answer demonstrating understanding of the scope of the Workmen’s Compensation Act, 1923, its variousprovisions and judicial precedents controlling its operation.

5–7 A sound understanding of the scope of the Act and concerned judicial precedent.

2–4 An ability to display some knowledge about the question.

0–1 Very weak answers showing very little or no understanding of the question.

8 8–10 A complete answer highlighting and dealing with all the issues presented in the problem scenario while relying on therelevant statutory provisions and case law.

5–7 An accurate recognition of the problems inherent in the question, together with an attempt to apply the appropriate legalrules to the situation.

2–4 An ability to recognise some, although not all, of the key issues and suggest appropriate legal responses to them. Arecognition of the area of law but no attempt to apply that law.

0–1 Very weak answers showing very little or no understanding of the question.

9 8–10 A good analysis of the scenario with a clear explanation of the law relating to the creation of charges, and detailed referenceto the statutory provisions.

5–7 Some understanding of the situation but perhaps lacking in detail or reference to the statute.

0–4 Weak answer lacking in knowledge or application, with little or no reference to the statute.

10 8–10 A good analysis of the scenario with a clear explanation of the law relating to execution of contracts by public limitedcompanies with its own directors, with detailed reference to the statutory provisions and giving a conclusion.



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Pape

r F4

(PK

N)


Tuesday 3 June 2008





1 Explain the jurisdiction and powers of the supreme court of Pakistan as envisaged by the Constitution of Pakistan,1973.

(10 marks)

2 In relation to law of contract, analyse the meaning of an ‘offer’ and explain with illustrations what distinguishesit from an ‘invitation to treat’.

(10 marks)


(a) Define the different kinds of ‘torts’; and (5 marks)

(b) State the remedies available for torts. (5 marks)

(10 marks)

4 Under the Companies Ordinance, 1984, explain:

(a) the main characteristics of a private company; (4 marks)

(b) a special resolution; and, (3 marks)

(c) dividends. (3 marks)

(10 marks)

5 Discuss the salient features of the Code of Corporate Governance. (10 marks)

6 In relation to Companies Ordinance, 1984, describe the following:

(a) a statutory meeting; (3 marks)

(b) an annual general meeting; and, (3 marks)

(c) an extraordinary general meeting. (4 marks)

(10 marks)

7 In relation to employment laws, describe the position of a workman.

(10 marks)

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8 Before going out of town for one week, Ayaz asked his friend Farhan to look after his designer clothing store duringhis absence. The next morning Farhan noticed that the store locks had been tampered with, so he had them replaced.In order to boost the sales of Ayaz’s store, Farhan offered to customers a 20% discount on all items in the store. Uponhis return, Ayaz was unhappy with this situation and immediately removed the discount. Disappointed with Farhan’shandling of the store matters, Ayaz has approached you for advice.

Required:

Analyse the situation from the perspective of the law of agency and explain what rights and remedies Ayaz hasagainst Farhan.

(10 marks)

9 Best Foods (Private) Limited (‘BFL’) is a company authorised by the objects clause of its memorandum of associationto solely engage in the business of food processing. To enhance the profits of the company, the board of directors ofBFL are considering importing energy drinks and distributing and selling them in Pakistan. BFL’s shareholders haveasked the board of directors to explain whether the company is authorised to undertake the business of importing,distributing and selling energy drinks as proposed. The board of directors have approached you for advice.

Required:

In view of the provisions of the Companies Ordinance, 1984, analyse and explain whether BFL can undertakethe proposed business.

(10 marks)

10 The chief executive officer (‘CEO’) of Shah Sugar Mills Limited, a public listed company, intends to appoint Mr Yusufas the company’s chief financial officer (‘CFO’). Mr Yusuf holds an MBA degree from the Lahore University ofManagement Sciences and has been working for the last six years for the corporate department of National Bank. TheCEO hopes that with this appointment his workload shall be reduced and thereafter the CFO and the board of directorsof Shah Sugar Mills Limited shall approve the financial statements. Before announcing the appointment of Mr Yusufas the CFO, the CEO has approached you for advice.

Required:

Analyse the situation from the perspective of company law and the Code of Corporate Governance and advise theCEO as to whether Mr Yusuf could be appointed as the CFO and what would be his duties in this capacity.

(10 marks)


3



Answers



Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) June 2008 Answers

1 Under the Constitution of Pakistan, 1973 (the ‘Constitution’), the supreme court enjoys a vast jurisdiction and authority as allsubordinate courts in Pakistan are bound by its decisions and all executive and judicial authorities in Pakistan are required to actin aid of the supreme court. The jurisdiction of supreme court is set out in Articles 184, 185 and 186 of the Constitution and canbe classified in the following:

(a) original jurisdiction(b) appellate jurisdiction(c) advisory jurisdiction(d) transferring cases(e) issuing orders(f) review of its own judgments and (g) making of internal rules.

(a) Original Jurisdiction

(i) Inter-Government disputes:

Article 184 stipulates that the supreme court shall have original jurisdiction to pronounce declaratory judgments in alldisputes between any two or more governments (Federal and Provincial).

(ii) Enforcement of Fundamental Rights

The supreme court is entitled to take cognisance even suo motu of matters involving questions of public importance withreference to the enforcement of fundamental rights.

(b) Appellate Jurisdiction

The supreme court has the jurisdiction to hear and determine appeals against judgments, decrees, final orders or sentencesof a high court in certain matters. For instance, if a high court has reversed an order of acquittal of an accused person andsentenced him to death; in contempt of high court proceedings; and if the high court certifies that the case involves asubstantial question of law as to the interpretation of the Constitution.

(c) Advisory Jurisdiction

The supreme court if requested by the President can give opinion on any question of law of public importance.

(d) Transferring Cases

The supreme court can in its discretion transfer any case, appeal or other proceedings pending before any high court to anyother high court.

(e) Issue Orders

The supreme court can issue orders for securing the attendance of any person or production of any document.

(f) Review

The supreme court has power to review its own judgments and orders, which have apparent on the face of the record errorof fact or law.

(g) Internal Rules

The supreme court has authority to make rules regulating its own practice and procedure.

2 Section 2(a) of the Contract Act, 1872 (the ‘Act’) defines an ‘offer’ as a proposal by one party to another to do or abstain fromdoing anything with a view to obtaining assent of the other to such act or abstinence. The superior courts of Pakistan have observedthat an agreement starts with an offer and completes on the acceptance of that offer by a promisee. For the formation of a validcontract, an offer made by a proposer must necessarily be accepted by a promisee in unconditional and unqualified terms; anyslight variation or departure from the offer would result in its rejection and amount to counter-proposal/offer (Shaukat Ali v SecretaryIndustries and Mineral Development, Government of Punjab Lahore, 1995 MLD 123). In other words, unless an offer is acceptedunconditionally, the same would not consummate into a binding and enforceable contract (Rehmat Ali v Fauqir Muhammad, 2005YLR 301).

When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal whenaccepted becomes a promise (s.2-b). An offer in itself is not a ‘promise’, but would become a ‘promise’ only when it has beenaccepted. A promise in itself could be equivalent of an agreement, and an agreement enforceable by law is a contract (Habib BankLimited v Hussein Corporation Limited, 1994 MLD 2276). An offer is an expression of will in definite terms to create legal relations.

An ‘invitation to treat’, on the other hand, is information conveying one’s readiness to negotiate business with anybody who onsuch information would make an offer. The typical illustrations of an invitation to treat are goods displayed in a shop with pricetags; catalogues containing description of goods; and advertisement for auction. In short, an ‘invitation to treat’ is an attempt toinduce offers and is not an offer in itself.

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From the foregoing definitions, it is also clear that an ‘offer’ and an ‘invitation to treat’ differ with respect to their fixed terms i.e. incase of offer the other party just has to convey its assent for the offer to become binding as a promise, whereas in the case of‘invitation to treat’ there is no intention on the part of person sending out the invitation to obtain the assent of the other person andthe same is only to start negotiations (Abdul Razzak v Karachi Development Authority, 1991 CLC 1591).

3 (a) Tort is a civil wrong independent of contract for which the appropriate remedy is an action for unliquidated damages. Theperson committing the tort is referred to as the ‘tortfeasor’ and the act of the tortfeasor is called the ‘tortious act’.

Torts are of the following four kinds:

(i) Torts actionable per se;(ii) Torts actionable on proof of damage;(iii) Felonious Torts; and (iv) Foreign Torts.

(i) Torts Actionable Per Se

These torts are actionable without proof of actual damage. The rationale for this is that such kinds of torts are likely toresult in harm owing to their mischievous nature, therefore the law prohibits them absolutely and presumes damages,for instance libel, assault, battery, false imprisonment, trespass to land and goods.

(ii) Torts actionable on proof of damage

For these torts there is no presumption and actual damage must be proved. Actual damage is the gist of the action inthe case of such torts i.e. malicious prosecution, seduction, deceit, and negligence.

(iii) Felonious Torts

These relate to the commission of felonious offences like murderous assault.

(iv) Foreign Torts

A foreign tort is one which is committed outside the jurisdiction of Pakistani Courts. For action to be maintained in thePakistani courts in respect of such torts the act complained of should be in violation of the law of the country where itwas committed and if the wrong was not actionable in the country of its commission then no action would lie if suchwrong is actionable in Pakistan. Further both parties should be resident in Pakistan.

(b) Remedies available against torts are the following:

(i) Damages;(ii) Injunction; and (iii) Specific Restitution of Property.

(i) Damages

Damages are monetary compensation for the loss suffered by a person injured by the tortious act of another. The objectof award of damages is to compensate i.e. to put the injured person in the same position as he was before the injury.Further while granting damages the courts are governed by the legal maxim in jure non remote cause and proximaspectator which means that in law the proximate and not the remote cause of any event is regarded and the tortfeasoris not liable for the damages which are too remote but rather is only responsible for the natural or probable loss.

(ii) Injunctions

Injunctions can be granted in respect of torts to prevent the commission of those torts which are threatened oranticipated or to order the doing of an act (mandatory injunction). The grant or refusal of injunction is in the court’sdiscretion and the courts can initially grant a temporary injunction and after hearing the tortfeasor the injunction grantedmay become permanent.

(iii) Specific Restitution of Property

Where damages, if granted, would not be an adequate remedy then the court may grant the specific restitution ofproperty.

4 (a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 (‘Ordinance’) as a company which by itsarticles

(i) restricts the right to transfer its shares;(ii) limits its membership to 50; and(iii) prohibits the public from subscribing to the shares or debentures of the company.

Restriction on the transfer of shares results in the ownership of and interest in the company being confined to a close circleof shareholders. Such restriction may exist in the form that directors have the authority to not allow the transfer of shares topersons whom they do not approve; shares can only be sold at a certain price or by one member to another. Unlike a publiccompany, a private company cannot have more than 50 members and cannot invite the public to subscribe to its shares ordebentures.

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(b) Section 2(1)(36) of the Ordinance describes a special resolution as a resolution which has been passed by a majority of notless than three-quarters of such members entitled to vote as are present in person or by proxy at a general meeting of whichnot less than 21 days notice specifying the intention to propose the resolution as a special resolution has been duly given.Provided that if all the members entitled to attend and vote at any such meeting so agree a resolution may be proposed andpassed as a special resolution at a meeting of which less than 21 days notice has been given.

A special resolution is generally required to conduct such special business for which a special resolution is required by theOrdinance or the articles of association of a company. A company must file a special resolution with the registrar of companieson Form 26 within 14 days of the passing of such special resolution.

(c) The term ‘dividend‘ refers to the profits of the company which is allocated to the holders of shares in the company. Sections 248 to 251 of the Companies Ordinance, 1984 set out the requirements and formalities with respect to dividends.For instance, dividends should only be paid out of the profits of a company (s.249), a company should declare a dividend ina general meeting, no dividend shall exceed the amount recommended by the directors [s.248(1)] and dividend paymentsshould only be made to a registered shareholder or to his order [250(1)].

5 Corporate Governance is described as a system by which companies are directed and controlled. In Pakistan, the Securities andExchange Commission of Pakistan (‘SECP’) has issued a Code of Corporate Governance (‘Code’) and has directed all stockexchanges to make the Code a part of their listing regulations. Therefore, at present the Code’s application is limited to listedcompanies only.

The Code specifies the distribution of rights and responsibilities among different participants in the company, such as its board ofdirectors, managers, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. TheCode aims at professing a transparent management, participation of the minority shareholders in the decision making, appointmentof qualified persons as the chief financial officer (‘CFO’) and company secretary.

As regards the appointment and duties of the directors, the Code sets out that all listed companies shall encourage effectiverepresentation of independent non-executive directors, including those representing minority interests, institutional equity intereston their boards of directors. The Code provides that persons whose names are not borne on the register of national tax payersand/or have been convicted by a court of competent jurisdiction as a defaulter in payment of any loan to any financial institutionshall not be elected or nominated as a director of a listed company.

Directors of listed companies have been required to exercise their powers and fiduciary duties with a sense of objective judgmentand independence in the best interests of the listed company and to prepare a ‘Statement of Ethics and Business Practices’ toestablish a standard of conduct for directors and employees.

The Code provides that the appointment, remuneration and terms and conditions of employment of the CFO, the company secretaryand the head of internal audit of listed companies shall be determined by the chief executive officer with the approval of the boardof directors. The CFO or the company secretary shall not be removed except with the approval of the board of directors. Furtherthe CFO and the company secretary are required to attend meetings of the board of directors.

Another important feature of the Code is the provisions for the external and internal audit of the listed companies. The Codestipulates that no listed company shall appoint as external auditors a firm of auditors which has not been given a satisfactory ratingunder the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan. Moreover, listed companieshave to make a statement of compliance with the Code and the statutory auditors are responsible for reviewing and certifying thisstatement. On internal audit, the Code requires that there shall be an internal audit function in every listed company. The head ofinternal audit shall have access to the chair of the Audit Committee, which shall not comprise of less than three members includingthe chairman. Internal audit reports should be provided for the review of external auditors and any major findings should bereported to the board. Quarterly unaudited financial statements of listed companies shall be published and circulated along with adirectors’ review on the affairs of the listed company for the quarter. Half-yearly financial statements shall be subject to a limitedscope review by the statutory auditors in such manner and according to such terms and conditions as may be determined by theInstitute of Chartered Accountants of Pakistan and approved by SECP.

The Code reinforces the powers, responsibilities and functions of the board of directors, formalises the corporate decision makingprocess and requires adequate documentation of policies, decisions of directors and audit.

6 (a) Statutory Meeting

Also known as the first official general meeting. As per s.157 of the Companies Ordinance, 1984 it is mandatory for everypublic company limited by shares and every company limited by guarantee and having a share capital to hold this meetingwithin a period between three and six months from the date of commencement of business. Private companies, companieslimited by guarantee and unlimited companies need not hold a statutory meeting.

The purpose of holding this meeting is to enable the members to know the financial position and prospects of the company,matters relating to company formation, results of company’s appeal for public subscription to its share capital and to get anidea of assets and properties acquired or to be acquired by the company. In other words, the purpose of a statutory meetingis to inform shareholders about matters relating to incorporation, allotment of shares, details of contracts concluded, etc.

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(b) Annual General Meeting

Section 158 mandates that every company whether public or private, must hold an annual general meeting (‘AGM’) ofshareholders once in every calendar year within four months following the close of its financial year and not more than 15 months after the holding of the preceding annual general meeting, s.158 (1) and the first AGM shall be held within 18 months from the date of incorporation of the company.

AGMs are also referred to as ‘ordinary general meetings’ as they usually deal with ordinary business, for instance in them theperformance of the company for the past year is discussed, annual accounts are adopted, a dividend is declared, directorsand auditors are appointed.

(c) Extraordinary General Meeting

All general meetings of a company, other than the statutory meeting and AGM are referred to as extraordinary generalmeetings (‘EGM’) (s.159(1)). An EGM may be convened by the company at any time as required for conducting suchbusiness that cannot be postponed until the next AGM, for instance, alteration of the memorandum and articles of association;reduction and reorganisation of capital and issue relating to debentures.

An EGM may be convened by the board of directors or upon requisition by members or upon directions of the Securities andExchange Commission of Pakistan.

7 A workman is a person who works for another for hire in a capacity other than managerial or administrative. Under the IndustrialRelations Ordinance, 2002 (‘IRO 2002’) any person who did not fall into the definition of the employer and worked in anestablishment or industry for hire or reward, either directly or through a contractor, whether his terms of employment were expressor implied, is considered a workman.

Earlier, the Industrial Relations Ordinance, 1969 imposed an additional qualification on employees to qualify as workmen i.e. theyshould not be drawing wages exceeding Rs 800 per mensem [s.2(xxviii)]. The supreme court of Pakistan in Muhammad Sadiq vPunjab Labour Court No: 1, Lahore, PLD 1988 SC 633 has held that the ‘real test’ for determining whether a person falls withinthe ambit of a workman or not depends on the nature of the duties performed by him. The nature of work performed by anemployee is to be considered as the true criteria, and the deciding factor and the designation or salary of an employee would notbe the determining factor in deducing whether he is a workman or not.

If a workman performs numerous duties, then it is the majority of his duties which are to be considered. If the majority of his dutiesare of a manual and clerical nature, his designation as building superintendent would not make him an officer (Pakistan HeraldLimited, Karachi v Victor Sunny and Another, 1996 PLC 66). It should also be noted that the initial burden of proving whetherany person falls into the category of workman is on the workman so claiming, and he could discharge the same by showing thenature of his work. In such an eventuality, the employer could not rebut claims of the employee by producing evidence such as ajob description (1997 PLC 239).

8 The relationship between Ayaz and Farhan amounts to that of an ‘agency’. According to s.182 of the Contract Act, 1872 (‘Act’),an agent is simply a person employed to do any act for another or to represent another in dealings with third persons. The requestby Ayaz to Farhan to look after Ayaz’s store in his absence amounts to express authorisation in terms of s.187 of the Act, whichstates that authority can be vested on the agent expressly by words spoken or written and absence of consideration is no bar tothe creation of agency relationship between Ayaz and Farhan as s.185 of the Act provides that presence of consideration is notnecessary for creation of an agency.

Replacement of tampered locks was a legal act on Farhan’s part as Ayaz had requested Farhan to take care of the store and if thesame had not been replaced there could have been theft. This view finds support from s.222 of the Act which provides that anemployer of an agent is bound to indemnify his agent against the consequences of all lawful acts done by such agent in exerciseof the authority conferred on the agent. Further, Farhan can recover from Ayaz the expenses incurred in having the tampered storelocks replaced as the said action was within Farhan’s authority.

However, Farhan’s action of offering customers 20% discount on all items in the store was beyond the authority bestowed uponhim by Ayaz. Ayaz had simply asked Farhan to look after his store in his absence. This authorisation cannot be extended to allowFarhan to take decisions having a commercial impact on the business. In view of this, the act of putting on special offer all itemsin the store can by no means be justified as a legal act on Farhan’s part. This view finds support from s.188 of the Act whichstipulates that an agent having authority to carry on a business has an authority to do every lawful thing necessary for the purpose,or usually done in the course of conducting such business.

Section 211 of the Act provides that an agent is bound to conduct the business of his principal according to the directions givenby the principal or in the absence of any such directions according to the custom which prevails in doing business of the samekind at the place where the agent conducts such business. Where the agent acts otherwise if any loss is sustained he must makeit good to his principal and if any profit accrues he must account for it. Resultantly, Ayaz is entitled to recover the loss incurred asa result of this 20% discount on the price that had been fixed by Ayaz.

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9 A company cannot engage in a business, which is not fairly incidental or consequential to the business of the company mentionedin the memorandum of association. The objects clause in the memorandum of association of a company sets out the objects forwhich the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad,2003 CLD 463). The superior courts of Pakistan have held that an act of a company in violation of its memorandum is ultra viresand, therefore, void and cannot even be ratified (Munawar Ahmed v Official Liquidator, PLD 1980 Lahore 86). The proper test fordetermining whether an act is ultra vires or not is to see if the power to do a thing arises from necessary implication from theexpressed objects, and, if it does, the act should not be held as ultra vires. The directors are fiduciaries and are bound to exercisetheir powers in good faith for the benefit of the company and for a proper purpose.

Section 305(f)(ii) of the Companies Ordinance, 1984 provides that a company may be wound up by the court if the company iscarrying on business not authorised by its memorandum. The superior courts of Pakistan with regard to winding up have held thata petition for winding up of a company can be made by a shareholder or creditor of the company or by the company itself. Thelocus standi of a person to file such a petition has to be seen on the date of filing (Mohammad Hussein v Dawood Flour Mills,2003 CLD 1429). A joint reading of ss.305 and 306 of the Ordinance suggests that the court has discretion to order or not toorder winding up of a company after taking into consideration all the relevant facts. An order for winding up of a company can besought or made on all or any of the grounds enumerated in s.305 (Habib Bank Limited v Hamza Board Mills, PLD 1996 Lahore633) provided that it is satisfactorily proven and courts should not exercise such discretion on an application which is not bonafide, i.e. aiming to pressurise the company into making payment to an unpaid creditor.

In view of the above, BFL is advised to restrain from importing energy drinks and to restrict its business to food processing asallowed by its memorandum. The business of importing and selling energy drinks is not mentioned in BFL’s memorandum andneither can it qualify as business, incidental or consequential to its business of food processing. The board of directors of BFL doesnot have power under the Ordinance to allow the company to carry out activities not provided for in its memorandum. In view ofs.305(f)(ii) of the Ordinance, a petition for the winding up of BFL may succeed in case BFL indulges in a business which is notcovered by the objects clause of its memorandum.

10 Before announcing the appointment of Mr Yusuf as the chief financial officer (CFO), the chief executive officer (CEO) should obtainthe approval of the board of directors in accordance with the requirement of the Code of Corporate Governance (‘Code’) in Rule (xv), which provides that the appointment, remuneration and terms and conditions of employment of the CFO shall bedetermined by the CEO with the approval of the board of directors.

The Code sets forth a set of qualifications for the position of CFO, which should be met by the candidate for the said post. In thisparticular instance, Mr Yusuf’s MBA degree and six years work experience with National Bank qualifies him for the job of CFO.Rule (xvi)(b) of the Code provides that no person shall be appointed as the CFO of a listed company unless he is a graduate froma recognised university and has at least five years experience in handling corporate affairs of a bank.

Rule (xxiv) of the Code states that no listed company shall circulate its financial statements unless the CEO and the CFO presentthe financial statements, duly endorsed under their respective signatures, for the consideration and approval of the board ofdirectors, and the board of directors, after consideration and approval, authorise the signing of financial statements for issuanceand circulation. Therefore, it would not be possible for just the CFO and the board of directors to approve the financial statementsof the company as the said statements have to be firstly endorsed jointly by the CEO and the CFO and then submitted for approvalof the board.

The CEO should first submit to the board of directors the candidature of Mr Yusuf for the position of CFO. The CEO should alsoinform the board of directors that Mr Yusuf qualifies under the Code for appointment as CFO. However, the CEO should rememberthat the financial statements have to be endorsed both by him and the CFO before they can be approved by the board of directors.

11



Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) June 2008 Marking Scheme

1 This question expects the candidates to discuss the jurisdiction and powers of the supreme court as set out in Articles 184, 185and 186 of the Constitution of Pakistan, 1973 (‘Constitution’).

8–10 Thorough explanation of the jurisdiction and powers of the supreme court.

5–7 Answers show some knowledge of the jurisdictional powers of the supreme court.


2 This question expects the candidates to demonstrate their knowledge of the difference between an ‘offer’ and an ‘invitation to treat’in the context of the law of contract. Explanation through illustrations would be appreciated.

8–10 Thorough explanation of the concept of offer mentioned in s.2(a) of the Contract Act, 1872 (‘Act’) in comparison toinvitation to treat along with illustrations.

5–7 Fair understanding of the concept of offer and invitation to treat but lacking in details and illustrations.

0–4 An unbalanced answer, lacking in understanding.

3 The question expects the candidates to demonstrate their understanding of the meaning of tort, kinds of torts and the remediesavailable.

8–10 A good explanation of the meaning and kinds of torts and remedies.

5–7 A fair understanding of the kinds and remedies of torts.

2–4 Some understanding of the kinds and remedies of torts but lacking in details.


4 (a) 3–4 A good treatment of the characteristics of a private company in reference to s.2(1) (28) of the Companies Ordinance,1984 (‘Ordinance’).


(b) 2–3 A good treatment of the concept of a special resolution set out in s.2(1) (36) of the Ordinance.


(c) 2–3 A good treatment of the concept of dividends.


5 This question expects the candidates to show a comprehensive understanding of the Code of Corporate Governance with a grip onthe issues addressed by the Code.

8–10 Thorough explanation of the features (concerning directors, the board of directors role, office of chief financial officer andcompany secretary, and audit requirements) of the Code.

5–7 Answers showing some understanding about the features of the Code.

0–4 Answers showing lack of knowledge on the features of the Code.

6 (a) 2–3 A good treatment of the formalities and need of a statutory meeting in reference to s.157 of the Ordinance.


(b) 2–3 A good treatment of the formalities and need of an annual general meeting in reference to s.158 of the Ordinance.


(c) 3–4 A good treatment of the formalities and need of an extraordinary general meeting in reference to s.159 of theOrdinance.


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7 8–10 A complete answer demonstrating understanding of the position of a workman under the Industrial Relations Ordinance,2002 and judicial precedent controlling its operation.

5–7 A sound understanding of the position of a workman and concerned judicial precedent.

2–4 An ability to display some knowledge about the question.

0–1 Very weak answers showing no or very little understanding of the question.

8 8–10 A good analysis of the scenario with a clear explanation of the law relating to agency in particular an agent’s authority andprincipal’s rights.



9 8–10 A complete answer highlighting and dealing with all the issues presented in the problem scenario, it is most likely thatstatutory provisions and cases will be referred to and they will be credited.


2–4 An ability to recognise either of the key issues and suggest appropriate legal responses to them. A recognition of the areaof law but no attempt to apply that law.

0–1 Weak answers showing no or very little understanding of the question.

10 8–10 A good analysis of the scenario with a clear explanation of the law relating to the appointment, qualifications and role ofthe chief financial officer.

5–7 Some understanding of the situation but perhaps lacking in detail or reference to the code.

0–4 Weak answer lacking in knowledge or application, with little or no reference to the code.

14









Pape

r F4

(PK

N)


Tuesday 2 December 2008





1 With reference to Articles 8 and 184 of the Constitution of Pakistan, 1973, discuss the constitutional safeguardsavailable for the protection of the fundamental rights.

(10 marks)

2 In relation to the law of contract, analyse ‘contingent contracts’.

(10 marks)

3 In relation to the law of partnership, describe the essentials of a partnership.

(10 marks)

4 Under the Companies Ordinance, 1984, explain the following:

(i) Memorandum of Association; (5 marks)

(ii) Articles of Association. (5 marks)

(10 marks)

5 In relation to the Companies Ordinance, 1984, state the powers and duties of the company’s auditors.

(10 marks)


(a) Define the term ‘tort’. (2 marks)

(b) Describe the various kinds of ‘tort’. (8 marks)

(10 marks)

7 In relation to employment laws, discuss the scope of:

(i) the Workmen’s Compensation Act, 1923; (5 marks)

(ii) the Industrial Relations Ordinance, 2002. (5 marks)

(10 marks)

2



8 Junaid paid Rs. 50,000 to Wellness Slimming Centre (‘Centre’) for a six weeks’ session of aerobics classes. Duringthe first half of the session the aerobics instructor missed half of the scheduled classes and in the second half noclasses were held due to non-availability of the instructor. Throughout the session Junaid and others complained tothe Centre’s Manager, who promised to arrange classes to make up for the missed classes. However, this did nothappen and the session expired. Thereafter, Junaid served a legal notice on the Centre calling for a refund of the feedeposited along with Rs. 1,000,000 as compensation for the mental anguish and loss of his time; otherwise he wouldinitiate legal proceedings against them for the same. In response, the Centre apologised and offered Junaid theopportunity to join the next six weeks session free of charge.

Required:

Advise Junaid what legal action he can bring against the Centre and what are the chances of its success.

(10 marks)

9 Ali, Asad and Ameer have been carrying out an auto-parts business for the last seven years under a partnershiparrangement in which the initial capital was contributed equally by them. They were jointly responsible for themanagement and all liabilities of the firm were shared equally by them. Now they want to convert their businessarrangement from a partnership to a private company limited by shares in which Ali, Asad and Ameer shall hold 50%,30% and 20% of the shares respectively.

Required:

Advise the three partners whether they can convert their partnership arrangement into a private company limitedby shares and, what effect will this change in the percentage balance of ownership have on their liabilities.

(10 marks)

10 On 24 February 2006 Mr Hassan was appointed by the board of directors of XXL Ltd (a listed brokerage company)as the company’s chief executive for a period of two years. Thereafter, the stock exchange boom occurred and Mrs Hassan also set up a brokerage company. This action on part of Mrs Hassan infuriated the board of directors ofXXL Ltd and they passed a resolution by a three-fourths majority removing Mr Hassan from the office of the chiefexecutive. Mr Hassan has threatened to take XXL Ltd to court for removing him from office before the expiration of histwo year period.

Required:

Explain to Mr Hassan whether the board’s act of removing him is valid or not.

(10 marks)


3



Answers



Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) December 2008 Answers

1 The constitutional safeguards available for the protection of the fundamental rights under the Constitution of Pakistan, 1973(‘Constitution’) are provided in Articles 8 and 184 of the Constitution. These are explained as under:

No Promulgation of Laws that are Violative of the Fundamental Rights

Article 8 states that any law, custom or usage having the force of law, insofar as it is inconsistent with the fundamental rights shallto the extent of such inconsistency, be void. Further that the state shall not make any law which takes away or abridges the rightsso conferred and any law made in contravention shall to such extent be void.

Thus the underlying principle laid down under Article 8 is that no law will be accepted as a good law which is violative of theFundamental Rights of the citizens of Pakistan. However, if ever such law is made, the Courts are fully competent to declare suchlaw void.

Safeguard of Fundamental Right by Supreme Court

Article 184 provides for the jurisdiction of the Supreme Court of Pakistan to take cognizance (on petition or even suo moto) of anymatter which involves a question of public importance with reference to the enforcement of any of the Fundamental Rights providedunder the Constitution. However, this clause provides two preconditions to invoke the jurisdiction of the Supreme Court. The pre-conditions are that the petition must show that the grievance relates to violation of a Fundamental Right; secondly, that thealleged violation is of the nature of public importance.

Fundamental Rights remain intact even during Emergency

Finally, the constitutional limit on promulgation of laws in contravention of the fundamental rights remains intact even by impositionof emergency under Article 233. As clause (2) of the said Article only provides that during emergency the right to move to anycourt for the enforcement of any of the fundamental rights, and any proceeding in any court for the enforcement of such rights,shall remains suspended.

In conclusion the provisions of Article 8 and 184(3) guarantee the protection of the Fundamental Rights. These provisions not onlyprohibit the promulgation of any laws in contravention of the Fundamental Rights but also vest a vast jurisdiction in the SupremeCourt to strike down such laws as unconstitutional.

2 Definition:

Section 31 of the Contract Act, 1872 (‘1872 Act’) defines a contingent contract as: ‘A contract to do or not to do something, ifsome event, collateral to such contract, does or does not happen’.

Explanation – Characteristics of a Contingent Contract

The above definition provides three essential characteristics of a contingent contract, viz:

(a) Its performance depends upon the uncertainty of happening or non-happening in some future event. (b) Such event must be collateral, i.e. incidental to the contract.(c) The contingent event should not be mere will of the promisor.

Illustration: Ali contracts to pay Asad Rs. 100,000 if Asad’s house is burnt down.This is a contingent contract.

Further, a contract shall ripen into an absolute obligation only on the happening of the event or upon fulfilment of the conditionstipulated therein and until then the contract is not enforceable.

Rules Regarding the Performance of Contingent Contracts

The rules regarding the performance of a contingent contract are contained in ss.32 to 36 of the 1872 Act.

(i) The Happening of an Uncertain Future EventAccording to s.32, a contract dependent on the happening of an uncertain future event can be enforced only when that eventhas happened.

Illustration: A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced by law unless anduntil C dies in A’s lifetime.

(ii) The Non-happening of an Uncertain Future EventAccording to s.33, a contract dependent on the non-happening of an uncertain future event can be enforced only when thehappening of that event becomes impossible and not before.

Illustration: A undertook insurance worth Rs. 1,000,000, if a certain ship does not return to the Karachi sea port. That shipis sunk en route to the Karachi sea port. A can claim the insurance amount.

(iii) When Event to be Deemed ImpossibleAccording to s.34, if the uncertain event is the future conduct of a third party, such an event shall be considered impossibleif that person does any act due to which the contract cannot be enforced in any definite time. For instance, A agrees to payB a sum of money if B marries C, but C marries D. The marriage of B to C must now be considered impossible.

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(iv) The Happening of an Event within a Fixed TimeAccording to s.35, if a promise is to be performed within a specified period of time – provided an event happens, he is boundto perform his promise if the event happens within the specified time. If the time so specified elapses and the event does nothappen, or the event becomes impossible before the fixed time, the contract becomes void.

Illustration: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if theship returns within the year and become void if the ship is destroyed within the year.

(v) The Non-happening of an Event within a Fixed TimeAccording to the second paragraph of s.35, if a promise is to be performed with a specified period of time – provided an eventdoes not happen, such a promise may be enforced if the event does not happen, within the specified period of time or thetime expires without the event happening.

Illustration: A promised to pay B, a sum of money if a certain ship does not return within a year. The contract may be enforcedif the ship does not return within the year, or is destroyed within the year.

(vi) Impossible EventsAccording to s.36, a contingent contract to do or not to do anything if an impossible event happens, is void, whether theimpossibility of the event is known or not to the parties to the agreement at the time when it is made. For instance, A agreesto pay Rs. 10,000 if B will marry A’s daughter C, whereas C was dead at the time of the agreement. The agreement istherefore void.

In conclusion, a contingency is anything that the contract is dependent upon and that could void the contract if the contingencyis not met.

3 According to Pollock, ‘partnership is a relationship which subsists between persons who have agreed to share the profits of abusiness carried on by all or any of them, on behalf of all of them’.

Essentials of a PartnershipAccording to s.4 of the Partnership Act, 1932 (‘1932 Act’): ‘partnership is the relation between the persons who have agreed toshare the profits of a business carried on by all or any of them acting for all’.

By virtue of the above definition the following are the three essential elements to constitute a partnership.

(a) Partnership Agreement: There must be an agreement entered into by all the persons concerned who may be two or more innumber. Further, s.5 provides that the relationship of partnership arises from contract and not from status; and

(b) Sharing of Profits: The agreement between them must be to share profits of the agreed business which is often taken as primafacie proof of partnership; whereas, any trade, occupation or profession may qualify as business; and

(c) Mutual Agency: The business must be carried on by all or anyone of the partners, acting for all of the partners.

All these elements must be present to constitute a valid and lawful partnership. Further, s.6 of the 1932 Act provides a mode ofdetermining partnership as it envisages whether a group of persons is or is not a firm, or whether a person is or is not a partnerin a firm, regard shall be had to the real relationship between the parties, as shown by the relevant facts taken together. Forinstance, Explanation 2 of Section 6 provides that ‘the sharing of profit or of gross return arising from property by persons holdinga joint or common interest in that property does not of itself make such persons partners’.

In conclusion if the elements given above are satisfied then the courts will treat such a relationship as a valid and legal partnership.

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

(b) Articles of AssociationThe articles of association are rules and regulations framed for the internal management of a company and are subordinateto the memorandum. Articles define the powers of directors and set out the terms of contract between them (United LinerAgencies of Pakistan (Private) Limited v Miss Maheneau Agha, 2003 SCMR 132). In other words articles define the duties,rights and powers of the governing body, company at large, prescribe the mode by which business of the company is to becarried on, and changes in the internal regulation of the company may be made from time to time. Further, articles cannotenlarge the scope of the company’s objects mentioned in the memorandum, however, in case of ambiguity in thememorandum, articles of association can be referred to for the limited purpose of clarifying such ambiguity.

8



5 Auditors are responsible for examining the company’s affairs on behalf of the shareholders and are duty bound to honour thisposition of trust by giving the shareholders a fair and full account of the company’s accounts and well being. For the discharge ofthis responsibility s.255 of the Companies Ordinance, 1984 (‘Ordinance’) gives them the powers and duties which are discussedbelow:

Powers of Auditors

(a) Power of AccessAuditors have the power to access at all times the books, papers, accounts and vouchers of the company, whether kept atthe company’s registered office or elsewhere.

(b) Power to RequestAuditors are empowered to require from the company’s directors and officers information necessary for performance of theirduties.

Duties of Auditors

(a) Auditor’s ReportAuditors shall make a report for the shareholders of the company pertaining to the company’s accounts and books of accountsand the same shall state whether:

(i) all information required had been obtained; (ii) proper books of accounts as per law were being kept by the company; (iii) balance-sheet and profit and loss account or the income and expenditure account was according to law and in

agreement with the books of accounts;(iv) the accounts gave a true and fair view of company’s state; and(v) whether expenditure incurred was for the purpose of the company’s business;(vi) Further business conducted, investments made and expenditures incurred were in accordance with the objects of the

company; and (vii) zakat has been deducted and deposited in the Central Zakat Fund.

In case any of the ingredients of the auditor’s report are missing then the report shall state the reason for the same.

(b) Attend General MeetingAuditors of a company are entitled to attend general meetings and to receive all notices and communications in this regard.

6 (a) Definition:

Tort is a private (civil) wrong against a person or his property and the basis of tort liability is the breach of legal duty owed toanother person resulting in some legal recognisable harm to that person for which the primary remedy is an action forunliquidated damages. The person committing a tort is referred to as the ‘tortfeasor’ and the act of tortfeasor is called a tortiousact.

(b) Classification of Torts

There are three kinds of torts based on the three theories of liability, viz:

(i) Intentional Torts: These are the wrongs in which the persons charged must have acted in such a manner that they eitherwanted to harm someone or knew that what they did would result in harm. Instances are: assault, battery, defamation,false imprisonment, mental distress, invasion of privacy, trespass, conversion, and fraud.

(ii) Negligence: Tort of negligence is based on the concept of fault and it exists where four conditions are met:

(1) First, the defendant must have owed the plaintiff a duty.(2) Second, the defendant must have breached that duty.(3) Third, breach of that duty must be the actual as well as the legal cause of injury.(4) Fourth, the injury must be one for which money damages may be recovered.

(iii) Strict Liability Tort: Strict liability principle finds persons liable even if their conduct was unintentional or non-negligent;that is, even if it was not their fault, they are liable. Strict liability has its genesis in Ryland v Fletcher, [1868]: that anyperson who in the course of non-natural use of his land accumulates thereon for his own purpose anything likely to domischief; if it escapes, the person is answerable for all direct damages thereby caused.

There are four kinds of torts based on the theories of remedy, viz:

(i) Torts actionable Per Se: These are torts which are so mischievous in their nature that they are actionable without proofof actual damages. For instance, assault, battery, false imprisonment, etc.

(ii) Torts actionable on proof of damages: These are torts where the actual damage is necessary to be proved. For instance,negligence, deceit, malicious prosecution and seduction.

(iii) Felonious Torts: These relate to the commission of felonious offences like murderous assault.

(iv) Foreign Torts: It is a tort committed outside the jurisdiction of the Courts of Pakistan. Further, an action against such atort can only be maintained if both the parties are residents of Pakistan and an act complained of should be in violationof the law of the country where it was committed.

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7 (a) Scope of the Workmen’s Compensation Act, 1923

Before analysing the scope of the Workmen’s Compensation Act, 1923 (‘1923 Act’) it should be understood that the superiorCourts of Pakistan in PLD 1975 Lahore 244, have held that this statute is not ‘penal’ in nature but rather sets out the dutiesand liabilities of citizens in the position of employers towards other citizens who happen to be workmen.

It is part of the vast scheme of labour legislation in Pakistan which aims to safeguard the interests of workmen. The 1923Act in its preamble mentions that it aims to regulate the payment of compensation by employers to their workmen in casesof personal injury by accident. The 1923 Act mandates that compensation for injury related to the worker’s job is theresponsibility of the employer. To further safeguard the interests of workers the 1923 Act provides that the quantum ofcompensation varies with different kinds of injuries, for instance, compensation is different in cases of injury resulting in totaldisablement and partial disablement.

The Act also links the amount of compensation to workers’ wages and prescribes the procedure to be followed (medicalexamination) and duties to be observed by both workers and employees (fixation of expenses of medical examination onemployers). In short this statute aims to fix responsibility of compensation on employers for injuries arising out of theiremployment.

(b) Scope of Industrial Relations Ordinance, 2002

The scope of the Industrial Relations Ordinance, 2002 (‘IRO’) is to amend, consolidate and rationalise the law relating to theformation of trade unions, regulation and improvement of relations between employers and workmen and avoidance andsettlement of any differences of disputes arising between them. The superior Courts of Pakistan in Ashraf Sugar Mills Limitedv Manzoor Ahmed 2006 SCMR 1751 have held that IRO is a beneficial legislation enacted with the object of amelioratingthe working conditions of workmen by providing necessary safeguards and therefore it is to be construed liberally.

Further that the IRO was a special law, procedural in nature and was promulgated with the object of controlling the formationof trade unions so as to cultivate better relations/interaction between the employer and employees. Its foremost aim was tospeedily settle the dispute between the workers and employer so that industrial peace could flourish [Mazdoor Union NeelamGlass Industries Limited through General Secretary v Neelam Glass Industries Limited, Hassan Abdal 2005 PLC 219].

8 Section 73 of the Contract Act, 1872 (‘1872 Act’) provides that when a contract has been broken the party who suffers by sucha breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to himthereby which naturally arose in the usual course of things from such breach or which the parties knew when they made thecontract to be likely to result from the breach of it.

It has been held that by granting damages the law aims to put the plaintiff in the same position as far as possible as he wouldhave been had the breach not taken place [State Life Insurance Corporation Pakistan v Bibojee Services Ltd 1999 MLD 2750].

Further, before damages can be granted the superior Courts of Pakistan have held that a party claiming damages due to a breachof contract, must establish the contract, the breach thereof and the extent of damages. Without doing so such a party could notsucceed [Ahmad Saeed Khan v MCB Ltd, Islamabad 1993 SCMR 441].

In view of the above mentioned legal provision, it can be submitted that the present matter is one of breach of contract by theCentre as the Centre failed to fulfil its part of the contract i.e. to provide aerobics classes for six weeks and therefore Junaid iscompetent to sue the Centre and to claim for damages thereof.

Finally, as regards the quantum of damages, s.73 provides that compensation is not to be given for any remote or indirect loss ordamage sustained by reason of the breach but only for the damages which naturally arose in the usual course of things from suchbreach, of which the parties knew when they made the contract to be likely result from the breach of it, should be assessed.

In conclusion, in the view of above discussed law, it can be concluded that a claim against the Centre has bright chances ofsucceeding.

9 Under the Companies Ordinance, 1984 (‘Ordinance’) an incorporated company has a separate existence and the law recognisesit as a legal person separate and distinct from its members. This distinct legal personality emerges from the moment ofincorporation. Incorporation gives the company legal personality, separate from its members, with the result that the company mayown property, sue and be sued in its own corporate name and does not die when its shareholders die. Further, under the provisionsof Ordinance the minimum of two persons are required to get a private limited company incorporated. [s.2(228)]

Whereas under the Partnership Act, 1932 (‘1932 Act’) a partnership is not a legal person or entity distinct and separate from thepartners; rather every partner is liable jointly with all the other partners and also severally for all the acts of the firm done while heis a partner (s.25).

In other words the distinction between the company and its members should be maintained as an incorporated company’s legalentity and its actions, assets, rights and liabilities on one hand, and the individual shareholders and their actions, assets, rightsand liabilities on the other, are distinct.

Whereas in a partnership every partner is liable for all acts of the firm done while he is a partner and this liability is joint as wellas several. Further, partners are liable to contribute equally to the losses sustained by the firm (s.13-b of the 1932 Act).

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In view of the above mentioned legal position, it is to be informed to Ali, Asad and Ameer that they are competent to get a privatelimited company incorporated. Whereas, under the partnership arrangement they were all liable individually as well as collectivelyfor the partnership debts, but in a private limited company limited by shares the liability of each shareholder (Ali, Asad and Ameer)shall be maximum to the extent of shares held by them.

10 Yes, the board’s act of removing Mr Hassan from his post as XXL’s chief executive is valid.

With respect to the ground of removal, it should be noted that s.203(1) of the Ordinance restricts the chief executive of a publiccompany from directly or indirectly engaging in any business which is of the same nature as and directly competes with thebusiness carried on by the public company. Further it deems business to be carried on by the chief executive, if the same, is carriedon by his spouse or any of his minor children.

The board’s act of removing Mr Hassan occurred when Mrs Hassan set up a brokerage firm i.e. a business same as XXL’s. As pers.203(1) this is a valid ground for removing Mr Hassan from the post of XXL’s chief executive.

As regards the procedure of removal, s.202 of the Ordinance provides that the directors of a company by resolution passed by notless than three-fourths of the total number of directors for the time being or the company by a special resolution may remove achief executive before the expiration of his term of office; notwithstanding anything contained in the articles or in agreementbetween the company and such chief executive.

In view of the above provision, the board has the authority to remove the chief executive irrespective of any agreement to thecontrary between the company and the chief executive provided a resolution to this effect is passed with three-fourths majority. Asin the case of Mr Hassan, the said formality of board resolution passed with three-fourths majority has been complied withtherefore, the removal process is also valid.

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Fundamentals Level – Skills Module, Paper F4 (PKN)Corporate and Business Law (Pakistan) December 2008 Marking Scheme

1 This question expects candidates to discuss the constitutional safeguards available for the protection of fundamental rights asmentioned in Articles 8 and 184 of the Constitution of Pakistan, 1973 (‘Constitution’).

8–10 Thorough explanation of the constitutional safeguards available for the protection of fundamental rights.

5–7 Answers show some knowledge of the constitutional safeguards available.


2 8–10 Thorough explanation of the concept of contingent contracts as provided in ss.31 and 36 of the Contract Act, 1872.

5–7 Sound understanding of the concept of contingent contracts but lacking in detail.

0–4 Very unbalanced answer, lacking in detailed understanding.

3 8–10 A good explanation of the essentials to constitute a valid partnership as envisaged under ss.4, 5, and 6 of the 1932 Act.

5–7 Answers shows some knowledge of the essential elements to constitute a partnership.


4 (a) 3–5 A good treatment of the concept of memorandum of association in view of ss.(16) and (17) of the CompaniesOrdinance, 1984 and decisions of the superior Courts.


(b) 3–5 A good treatment of the concept of articles of association.


5 8–10 A good explanation of the powers and duties of the auditors as mandated by s.255 of the Ordinance.

5–7 A sound understanding of the powers and duties of the auditors.

2–4 Displays some understanding of the powers and duties of the auditors but lacks details.


6 (a) 1–2 A good explanation of the meaning of tort.

0 No knowledge of the area.

(b) 6–8 A sound understanding of kinds of torts.

3–5 Displays some understanding of kinds of torts but lacks details.


7 (a) 3–5 A sound understanding of the scope of the Workmen’s Compensation Act, 1923.


(b) 3–5 A sound understanding of the scope of the Industrial Relations Ordinance, 2002.


8 8–10 A complete answer highlighting and dealing with all the issues presented in the problem scenario. It is most likely thatstatutory provisions and cases will be referred to and they will be credited.


2–4 An ability to recognise either of the key issues and suggest appropriate legal responses to them. A recognition of the areaof law but no attempt to apply that law.


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9 8–10 A good analysis of the scenario with reference to laws relating to company and partnership in particular liability aspect.



10 8–10 A good analysis of the scenario with a clear explanation of the law relating to grounds and procedure of dismissal.



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acca | f4 - corporate and business law solved past papers

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