7/30/2019 L.7 (Companies Ord) (2)

1/14

COMPANY LAW

Company means a company formed and registered under the CompaniesOrdinance 1984 or an existing company. Sec. 2 (7)

A Company is an artificial person created by law, endowed with a

perpetualsuccession and an entity apart from its members. It signifies its

assent by means of common seal. It is capable of holding property,

incurring debts, and suing and being sued in the same manner as an

individual. It is created for a particular purpose, is managed through agents

and is effected by law.

KINDS OF COMPANY

1: - UNLIMITED COMPANIES

A company having unlimited liability of its members is called an Unlimited

company. Disadvantage of an unlimited company is that its members like

partners are liable for all trade debts without any limit. Advantage is that

such company need not have any share capital.

2: - GUARANTEE COMPANY

The liability of the members of a company may be limited either by shares

or guarantee. The memorandum of a guarantee company gives a guarantee

tat the members shall contribute a fixed sum of money towards the assets of

the company in case of wounding up. Advantages are that they need not

have share capital.

3: -PRIVATE COMPANIES

A private company is one whose article of association contain following

restrictions:i) The number of members is not to be more than 50.

ii) The company must refrain from invitation public to subscribe for its

shares.

iii) There must be some restriction on the members to transfer

their share in the company.

Advantages of private company are:

i) Its formation requires only 2 persons.

7/30/2019 L.7 (Companies Ord) (2)

2/14

ii) It can business immediately after incorporation without

having to obtain a certificate to start business as it does not

need to issue any prospectus or statement in lieu of that.

iii) All the directors can be permanently appointed.

FOREIGN COMPANIES

Foreign Company means a company incorporated outside Pakistan

but which has its place of business in Pakistan. Within 30 days of its

establishment it must submit to registrar of companies the following

documents:

i) Certified copies of its article and memorandum of incorporation.

ii) Full address of its principal place of business.

iii) Names of its directors.

iv) Full address of its registered office.

v) Name or names of persons in Pakistan authorised to accept

documents.

A foreign company is required to prepare and submit its profit and loss

statement just like companies registered in Pakistan.

HOLDING COMPANY AND SUBSIDIARY

Where one company controls over another, it is called the holding

company and the controlled company is the subsidiary company has

control over the other if:

i) It has powers of its own to appoint or remove the majority of its

directors or a person can not be appointed as director without its

support.ii) One company holds majority of shares in the other company.

(more than half the total voting power)iii) The holding companys subsidiary has its own subsidiary it

automatically becomes subsidiary of the former

.

7/30/2019 L.7 (Companies Ord) (2)

3/14

CORPORATE VEIL

A Company has like a natural person; a nationality, domicile,

capacity to enter into a contract, can sue or be sued upon can enter

into partnership. Thus the real owners of the company would bedisregarded once they have formed an association and get it

registered as a company. This is known as a corporate veil i.e. a

line of demarcation between the company and its members. The

members can carry on a business competing with the company and

can enter into contract with the company itself.

DISTINCTION BETWEEN A PATNERSHIP AND COMPANY

1: - Legal Entity

A Company enjoys a separate legal entity but a partnership is not

a separate person. In the eyes of law it is nothing but a collective

name of a group of persons.

2: - Ownership of property

Property of a firm belongs to the partners collectively but that of a

company belongs to it only and not to the members.

3: -Number of members

For a Partnership firm, minimum number of partners is 2 and

maximum number is 20, and for a banking business its 10. In case

of a Public company the min # is 7 and there is no limit onmaximum # but in case of a PVT Company, minimum # is 2 and

maximum # is 50.

4: - Transferability of Shares

A shareholder can usually transfer his share to another person

without the consent of the other shareholders but a partner cannot

transfer his share in the firm without the consent of other partners.

7/30/2019 L.7 (Companies Ord) (2)

4/14

5: - Registration

A firm need not be registered but a company does not come into

existence without registration under the act.

6: -Liability

While the members of a company enjoy limited liability that is

each member is bound to pay the nominal value of the shares held

by him in case of wounding up and his liability ends there. The

partners in a firm however remain liable for the debts until the

debts are discharged.

7: - Right to Contract

A partner cannot enter into a contract with his firm while a

member of a company can do so.

8: - Statutory requirements

A Company is required under the Companies Act to comply with

various formalities like filing the Annual Returns, holding Annual

General Meeting, keeping prescribed registers and books etc. But a

partnership firm is free from such obligations.

9: -Public Documents

While memorandum and article ofAssociation of a company are

public documents and the outsiders are supposed to have aconstructive notice of it, same is not the case with Partnership

DEED.

10: -Perpetual existence

While a firm is dissolved by the death, retirement or insolvency of

its partners, a Company enjoys a perpetual existence. Even if all

the members of a company die the company will continue.

7/30/2019 L.7 (Companies Ord) (2)

5/14

DISTINCTION B/W PRIVATE & PUBLIC COMPANY

1. Maximum number of members. (50 in case of Pvt and unlimited in case

of Public)

2. Minimum number for incorporation. ( 2 in case of Pvt and 7 in case of

Public)

3. Invitation to public to subscribe for shares.

REGISTRATION AND INCORPORATION OF A COMPANY

Registration of a company is obtained by filing an application with the

registrar of companies. The application should be accompanied by the

following documents:

1. Memorandum of association.

2. Articles of association.(if required)

3. A copy of agreement with the person proposed as director or manger.

4. A declaration that all the requirements of the act have been complied

with.

If the registrar of the companies is satisfied he enters the name of the

company in the register, gives a registration number and issues a certificatecalled certificate of incorporation. The Certificate Of Incorporation marks

the birth of the company.

COMMENCEMENT OF BUSINESS

A public company can not commence business right away after the

incorporation. It has also to obtain from the registrar a certificate for

commencement of business, which is issued subject to the following

conditions:

1. Shares payable in cash must have been allotted to the amount of

minimum subscription.

2. Directors must have paid in cash the application and allotment money on

the shares taken by them.

3. Permission from the stock exchange to issue shares.

7/30/2019 L.7 (Companies Ord) (2)

6/14

MEMORANDUM & ARTICLES

OF ASSOCITATION.

Memorandum:

Memorandum of Association of a company is a constitutional document

containing the fundamental conditions upon which alone the company is

allowed to be formed. It lays down the objects and powers of the

company. The memorandum, thus has two-fold functions.

1: - It defines the purpose or object of the company; laying down the

activities that the company shall engage into.

2: - It confines the powers of the company (lying down of boundaries)

The memorandum must contain following clauses:

1. Name clause.

The name of a company should not be undesirable. In case of limited

liability the last word should be limited and Pvt limited in case of

private limited company.

2. Registered Office clause.(situation clause)

3. Object clause.This states the object of the proposed company or the business;

company will be involved into.

4. Liability clause.

Th clause will state whether the liability of the members shall be

limited, and if so, whether limited by share or by guarantee.

5. Capital clause.

This clause states the amount of capital with which company is

registered and the kinds and value of each share.

DOCTRINE OF ULTRA VIRES TRANSACTIONS

The word ultra vires means beyond powers. Any act done by a company for

which the company has no powers i.e as defined by the object clause of

memorandum.

7/30/2019 L.7 (Companies Ord) (2)

7/14

Articles of Association:

The Articles of Association is the set of rules and regulations that govern the

internal administration of a company.

1. Restriction regarding MAX number of members.

2. Borrowing powers.

3. General meetings.

4. Voting at meetings.

5. Appointment, duties and powers of directors.

6. The company seal.

7. Accounts and audit.

8. Serving of notices.

9. Special provisions relating to winding up.

DIFFERENCE B/W MEMORANDUM

AND ARTICLES

1. The memorandum contains the fundamental condition upon which alone

the company is allowed to be incorporated. The articles of association are

internal regulations of the company.

2. The memorandum is the dominant instrument; articles are subordinate to

it. In case of any inconsistency between the two, the articles give way.

3. An action of the company outside the scope of its memorandum is void

and incapable of ratification. Same is not the case with articles.

4. Clauses of memorandum can be altered only with the sanction of the

Security Exchange Commission of Pakistan. Alteration of articles does

not require the sanction of any authority.

5. The memorandum cannot give the company power to do anything

contrary to the provisions of the Companies Ordinance. The articles arenot only limited by the Ordinance, but these are also subsidiary to the

memorandum and cannot exceed the powers contained therein.

6. The memorandum is in the nature of a contract between the company and

the outside world dealing with it; the articles, however, do not create a

contract between the company and the outsider.

7. The memorandum contains the objects and powers of the company. The

articles provide the regulations by which those objects and powers are to

be carried into effect.

7/30/2019 L.7 (Companies Ord) (2)

8/14

DOCTRINE OF CONSTRUCTIVE NOTICE

The memorandum and articles of a company are registered with the

Registrar, and thereby become public documents. They are open to public

inspection. Every person contracting with the company is assumed to haveread their contents and must make sure that his contract is consistent with

them, otherwise he cannot sue the company.

DOCTRINE OF INDOOR MANAGEMENT

As far as the internal proceedings of a company are concerned, the outsider

dealing with the company can assume that everything has been done

correctly and regularly. He will not be affected by any irregularity in the

internal management of the company.

Exceptions:

1. Knowledge of irregularity.

2. Suspicion of irregularity.

3. Forgery.

PROSPECTUS

Any document, which invites offers from the public for subscription or

purchase of any shares, debentures of a company or invitations for deposits.A copy of the prospectus is to be filed for registration with the registrar of

companies on or before the date of its publication and no prospectus is to be

issued unless it has been registered. A Company that does not issue a

prospectus on its formation can only allot shares if it files a certificate in lieu

signed by the director of the company. The intention of the legislature is to

fully safeguard the investors from victimization; everything stated in the

prospectus must therefore be stated with strict and scrupulous accuracy.

The person signing as director has a personal liability as to the correctness of

the prospectus.

Contents of Prospectus:

1. The contents of the memorandum, with the name of the members.

2. Name of the directors and managers alongwith addresses.

3. Number and amount of shares or debentures issued during last two years.

4. Names and addresses of Auditors.

5. Number of Shares fixed by the Article.

7/30/2019 L.7 (Companies Ord) (2)

9/14

SHARES

ALLOTMENT OF SHARES

When shares are offered to the public the amount of minimumsubscription (which in the opinion of the directors is enough to

meet purchase of any property, preliminary expenses and working

capital) has to be mentioned in the prospectus. No allotment is to

take place unless so much amount has been subscribed for. If the

minimum subscription has not been received within 120 days of

the issue of prospectus, the money received must be paid back

without interest within 130 days failing which directors become

personally liable.

APPLICATION MONEY

Shares are not to be allotted unless the application money, which

must not be less than 5 % of the nominal value of a share, has been

received in cash.

SHARES TO DEALT IN STOCK EXCHANGE

Every company intending to offer shares by issuing a prospectus has to

make an application to the stock exchange for dealing of the shares at that

particular stock exchange. The names of such stock exchanges must be

mentioned in the prospectus.

ISSUE OF SHARES AT DISCOUNT

Issue of shares for a price less than their face value is called issue at

discount, this can be done only subject to following conditions:

1. Discount can be allowed only on that class of shares, which have

been once issued at their full value.

2. The company must have been entitled to commence business at

least one year before date of issue.

3. A resolution authorising the issue must be passed. Th

resolution must specify the rate of discount, which should

not be more than 10 % except with the approval of

Company Law Board.

7/30/2019 L.7 (Companies Ord) (2)

10/14

ISSUE OF SHARES AT PREMIUM

If the market exists, a company many issue its shares at a price

higher than their nominal value. The issue may be in cash or for

consideration other than cash. The amount received, as premiumhas to be carried to a separate account called The Share

Premium Account.

KINDS OF SHARES

The memorandum of a company has to state the amount of capital

with which the company is proposed to be registered. The capital

so stated becomes the authorised capital of the company. Thewhole any part of it may be issued, and that will be the issued

capital of the company. The part of such capital that has been

allotted is thesubscribed capital. The actual amount received is the

paid up capital.

1. PREFERENCE SHARES

There are two types of preference shares:

a) Cumulative Preference Shares: - Preference Shares may be

cumulative or Non-cumulative. If the arrears of one year

are paid from the profit of the subsequent year the

preference shares are called cumulative, but if the unpaid

dividend lapses they are called as Non-cumulative. They

do not give the holder a right for voting except in a

resolution that directly effects them. The holder of

preference shares is entitled to a fixed rate of dividend andtherefore at a lesser risk than holder of ordinary shares.

b) Participating Preference shares: - If after paying dividends

to ordinary and preference share holders there is surplus

profit, the participating share holders get share therefrom.

7/30/2019 L.7 (Companies Ord) (2)

11/14

c) Ordinary Shares: - They get lower priority in payment of

dividends i.e after the preference shareholders, they

however have a right to vote on all matters effecting the

company.

DEBENTURES

When a company takes any loan it issues a certificate of that loan

calledDebenture. The usual features of a debenture are that it is a

certificate issued under the seal of the company, it generally

acknowledges a loan, it usually provides for the payment o the

principal amount to be paid at a particular time and the amount ofinterest to be paid and it generally creates a charge on the assets of

the company.

DIFFERENCE BETWEEN DEBENTURE AND

SHAREHOLDER

1. A shareholder is a member in the company, whereas a

debenture holder is simply a creditor.2. A shareholder has a voting right, whereas debenture

holder does not have any voting right.

3. Debenture holders are entitled to fixed rate of interest,

whereas shareholders are entitled to participate in the

profit.

4. In case of winding up debenture holders are paid before

anything can be paid to the shareholders.

7/30/2019 L.7 (Companies Ord) (2)

12/14

Quiz No. 3

William Brown is in business as William Brown & Co

and he endorses a cross cheque made out in favour of thebusiness by signing Brown". He then delivers the cheque

to Green. Green cannot be a holder in due course.

Is it true or false? Explain.

7/30/2019 L.7 (Companies Ord) (2)

13/14

Quiz No. 4

A company was incorporated: (1) to manufacture and sell

railway carriages etc., and (2) to act as mechanicalengineers and general contractors. The company contracted

with Pakistan Railways to finance the construction of a

railway line between Karachi and Lahore. The company

subsequently repudiated the contract as one beyond its

powers. Pakistan Railways brought an action for breach of

contract.

Please comment on the legality of repudiation.

7/30/2019 L.7 (Companies Ord) (2)

14/14

Quiz No. 6

The directors of the company borrowed a sum of money

from the plaintiff. The companys regulations provided thatthe directors might borrow on bonds such sums as may

from time to time are authorised by shareholders

resolutions. The shareholders contended that there had been

no such resolution authorising the loan.

Is the company liable? Explain.