ICAP Question Bank P Business Law First edition published by Emile Woolf Limited Bracknell Enterprise & Innovation Hub Ocean House, 12th Floor, The Ring Bracknell, Berkshire, RG12 1AX United Kingdom Email: info@ewiglobal.com www.emilewoolf.com © Emile Woolf International, November 2013 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf Publishing Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation. You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer. Notice Emile Woolf International has made every effort to ensure that at the time of writing the contents of this study text are accurate, but neither Emile Woolf International nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain. © Emile Woolf International ii The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Business Law C Contents Page Question and Answers Index v Questions Section A Multiple choice questions 1 Section B Part A Mercantile Law - Objective test and long-form questions 11 Part B Company Law - Objective test and long-form questions 21 Answers Section C Multiple choice answers 33 Section D Part A Mercantile Law - Objective test and long-form answers 37 Part B Company Law - Objective test and long-form answers 67 © Emile Woolf International iii The Institute of Chartered Accountants of Pakistan Business Law © Emile Woolf International iv The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Business Law I Index to Objective test and long-form questions and answers Question page Answer page Mercantile Law Chapter 1 - Introduction to the legal system 1 Federal Shariat Court 11 37 2 Courts 11 37 3 Binding precedent 11 38 4 High courts 11 38 5 Civil law and criminal law 11 38 6 Process of legislation 11 39 11 39 Chapter 2 - Introduction to law of contract 7 Essential elements of a contract Chapter 3 - Offer and acceptance 8 Acceptance 12 41 9 Lapse of an offer 12 41 10 Revocation of proposal 12 42 © Emile Woolf International v The Institute of Chartered Accountants of Pakistan Business Law Question page Answer page 12 42 Chapter 4 - Capacity of parties 11 Minor Chapter 5 - Consideration 12 Consideration 12 43 13 Consideration 12 43 Chapter 6 – Free consent 14 Coercion 12 43 15 Fraud 12 44 16 Misrepresentation 12 44 17 Mistake 13 45 Chapter 7 - Legality of Object etc. 18 Legality of object 13 45 19 Opposed to public policy 13 45 Chapter 8 – Void agreement 20 Legality of consideration 13 46 21 Exceptions of void agreements 13 46 Chapter 9 – Contingent contracts 22 Contingent contracts 13 47 23 Rules of contingent contracts 13 47 Chapter 10 – Quasi contracts 24 Quasi contracts 13 48 25 Quasi contracts 14 48 Chapter 11 – Performance of a contract 26 Tender and essentials of tender 14 49 27 Time and place of performance 14 50 28 Devolution of liabilities 14 50 © Emile Woolf International vi The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page 29 Joint promisor and promisee 14 50 30 Reciprocal promises 14 51 31 Appropriation 15 51 Chapter 12 – Discharge of a contract 32 Discharge by mutual agreement 15 51 33 Supervening impossibility 15 51 Chapter 13 – Remedies for breach of contract 34 Remedies for breach of contract 15 52 35 Damages 16 52 Chapter 14 – Indemnity and guarantee 36 Indemnity 16 52 37 Guarantee 16 52 38 Guarantee 16 52 39 Guarantee 16 53 40 Guarantee 16 53 Chapter 15 – Bailment and pledge 41 Duties of bailor 16 54 42 Particular lien 17 54 43 Termination of bailment 17 54 44 Finder of goods 17 54 45 Pledge 17 55 46 Pledge 17 55 47 Rights of pawner 17 56 Chapter 16 - Agency 48 Ratification 17 56 49 Duties of an agent 17 57 © Emile Woolf International vii The Institute of Chartered Accountants of Pakistan Business Law Question page Answer page 50 Duties of agent toward principal 18 57 51 Rights 18 58 52 Misconduct by agent 18 58 53 Substituted agent 18 58 54 Irrevocable agency 18 58 Chapter 17 – Partnership Act 55 Duties of partner 18 59 56 Rights of outgoing partner 18 59 57 Mutual rights and liabilities 18 59 58 Liabilities 19 60 59 Implied authority 19 60 60 Holding out 19 61 61 Transfer of interest 19 61 62 Partnership property 19 62 63 Minor 19 62 Chapter 18 – Negotiable instruments Act 64 Promissory notes 19 62 65 Presumptions of negotiable instrument 20 62 66 Inchoate stamped instrument 20 63 67 Ambiguous Instruments 20 63 68 Payment in due course 20 64 69 Cheque 20 64 70 Bill of Exchange 20 65 71 Holder / Holder in due course / Payment in due course 20 65 72 Material alteration 20 65 © Emile Woolf International viii The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page Company Law Chapter 19 - Company 73 Subsidiary and holding co. 21 67 74 Association NFP 21 67 75 Private company 21 68 76 KRL 21 68 Chapter 20 – Incorporation of company 77 Fajita 22 68 78 Zouk 22 69 79 Company registration exceptions 22 69 80 Commencement of business 22 69 81 MOA – object and registered office 22 70 82 MOA – alteration 22 70 83 Articles of association 23 71 84 MOA – Nil capital 23 71 85 MOA – Alteration (office and objects) 23 72 86 Incorporation 23 72 87 Name 23 73 88 Disallowed name 23 73 Chapter 21 – Share capital – types and variations 89 Increase in authorized capital 23 73 90 Variation of shareholders’ rights 23 73 91 Purchase of own shares 24 74 92 Objections 24 74 24 74 Chapter 22 – Share capital – prospectus 93 © Emile Woolf International Prospectus - consent of expert ix The Institute of Chartered Accountants of Pakistan Business Law Question page Answer page 94 Prospectus – publication and availability 24 75 95 Prospectus – registration 24 75 96 Prospectus – relief from liability 24 75 97 Minimum subscription 25 76 98 Face of prospectus 25 76 Chapter 23 – Mortgages and charges 99 Mortgages and charges 1 25 76 100 Mortgages and charges 2 25 77 Chapter 24 – Meetings 101 AGM timeline 25 77 102 Ordinary vs. special 25 77 103 AGM and EGM 25 78 104 Polling 26 78 105 Minutes 26 78 106 Meetings – commencement and EGM 26 79 107 Quorum 26 79 108 Members and meetings 26 79 109 Circulation 27 80 110 Representation and proxy 27 81 111 EOGM and special business 27 81 112 Special resolutions 27 82 113 Auditor’s certificate 27 82 114 Commission GM 27 82 Chapter 25 – Management 115 Subsequent CEO 27 82 116 CEO – removal and competitors 28 83 © Emile Woolf International x The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page 117 Casual vacancy 28 83 118 Election 28 83 119 Presence 28 84 120 Number, remuneration and assignment 28 84 121 Fresh elections 29 85 122 Loans 29 85 123 Power 29 85 124 Number and casual vacancy 29 86 125 First and subsequent 29 86 126 Removal 30 87 127 Loan repayment 30 87 128 General notice of interest 30 87 Chapter 26 – Investments and dividends 129 Associated company 30 88 130 Dividend restriction 30 88 131 Investment restriction 30 89 132 Payment of dividend 31 89 133 Dividend amendment 31 89 Chapter 27 – Accounts and audit 134 Qualification 31 89 135 Removal – representation 31 89 136 Removal – change of auditor 31 89 137 Books of accounts 31 90 138 Registrar and the director’s report 32 90 139 Signing the accounts 32 91 140 The auditors’ report 32 91 © Emile Woolf International xi The Institute of Chartered Accountants of Pakistan Business Law Question page Answer page 141 Appointment of auditor 32 91 142 Auditor and the AGM 32 92 143 Auditor disqualification 32 92 144 Appointment by SECP 32 93 © Emile Woolf International xii The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law A Multiple choice questions 1 Based on the Legal System of Pakistan, identify the correct answer of the following: (1) (2) (3) District magistrate is appointed by the: (a) President (b) chief justice (c) federal government (d) provincial government The Civil Court does NOT have jurisdiction over: (a) contract and tort claims (b) disputes concerning land (c) blackmailing cases (d) bankruptcy cases Choose the INCORRECT statement: Following must be considered when examining a precedent before it can be applied to a case: (a) the precedent must be a proposition of law (b) the precedent must form part of the obiter dicta of the case (c) the material facts of each case must be the same (d) the preceding court must have had a superior status to the later court, such that its decisions are binding on the later court © Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan Business Law (4) (5) (6) (7) (8) The family courts deal with: (a) divorce cases. (b) family property cases. (c) proceedings relating to wardship, guardianship, adoption, etc. (d) all of the above. The federal Shariat court consists of: (a) at least eight Muslim Judges including the Chief Justice and out of these, not more than three shall be Ulema who should be well versed in Islamic Law. (b) not more than eight Muslim Judges including the Chief Justice who are appointed by the President. Out of the number of Judges not more than three shall be Ulema having at least fifteen years of experience. (c) eight Muslim Judges including the Chief Justice and all of them shall be Ulema who should be well versed in Islamic law. (d) not more than eight Judges including the Chief Justice who are appointed by the President. Out of the number of judges not more than three shall be Ulema who should be well versed in Islamic law. The Federal Shariat court examines and decides the question whether or not any law or provision of law is repugnant to the Injunctions of Islam on: (a) its own motion. (b) the petition of a citizen of Pakistan. (c) the petition of Federal/Provincial Government. (d) initiation from any of the above. A court of first instance is the court: (a) where the case is originally heard in full. (b) which has given its first verdict. (c) where the original decision is reversed. (d) of magistrates. A High Court has a supervisory role over other courts subordinate to it. It may issue a writ of habeas corpus which is an order: (a) to prevent a court or tribunal from exceeding its jurisdiction. (b) to submit the record of the subordinate court’s proceedings to the High Court for review. (c) for the release of a person wrongfully detained. (d) to carry out a public duty. © Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan Section A 2 Question bank: Multiple choice questions In view of the provisions of Contract Act, 1872 identify the correct answer: (1) (2) Wasi, with intent to deceive Tipu, falsely represented that twenty thousand motorcycles are manufactured annually at his factory and induced him to buy the factory. The contract is: (a) void (b) voidable (c) illegal (d) valid The term “Quid pro quo” means: (3) (4) (5) (a) something in return (b) something important (c) something of value (d) something relevant Which of the following is not an essential element of a valid contract: (a) adequacy of consideration (b) capacity to contract (c) free consent (d) none of the above If a contract provides for the payment of a certain amount on breach of a contract, such payment is termed as: (a) special damages (b) nominal damages (c) liquidated damages (d) compensatory damages Karim borrowed Rs. 500,000 from Bashir in 2002. The debt became time-barred under the limitation law. However, Karim met Bashir in 2009 and verbally acknowledged his liability to the extent of Rs. 300,000. Can Bashir hold Karim liable? (a) No, the promise should be for entire debt. (b) Yes, the promise is valid as an exception to agreement without consideration. (c) No, because it is not a written and signed promise. (d) Yes, he admitted his liability partly in satisfaction of whole debt. © Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan Business Law (6) (7) (8) (9) The effect of refusal to accept a properly made offer of performance is that: (a) the promisor is not responsible for non-performance and can sue the promisee for the breach of contract. (b) such offer lapses on rejection by the offeree. (c) the contract is rendered voidable at the option of promisor. (d) the contract is discharged by anticipatory breach. A surety is NOT discharged from his liability: (a) if terms of contract are varied without his consent. (b) if the creditor gives time to the principal debtor without his consent. (c) if the creditor releases the other co-surety. (d) if the creditor releases the principal debtor. Which of the following case is not covered by the concept of supervening impossibility? (a) Destruction of subject matter (b) Death or incapacity of the promisor (c) Outbreak of war (d) Difficulty of performance Abdul Majid contracted to supply a specialized machine at Sultan’s factory in Lahore. Sultan informed him that if the machine does not reach his factory on time, he will incur an average loss of Rs. 20,000 per day. Abdul Majid delivered the machine a week after the agreed time owing to his other commitments. Due to this delay, Sultan lost a contract which could have generated a profit of Rs. 250,000. Sultan is entitled to receive from Abdul Majid a compensation of: (a) Rs. 250,000 (b) Rs. 140,000 (c) Rs. 390,000 (d) any amount which the Court deems fit subject to a maximum of Rs. 390,000 (10) In which of the following circumstances a contract can be treated as discharged under the concept of supervening impossibility? (a) spurt in prices (b) change in import policy (c) non-receipt of raw material from the supplier (d) shortage of working capital © Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan Section A Question bank: Multiple choice questions (11) Under the Contract Act, 1872 a person is said to be of sound mind for the purpose of making a contract if: (a) he is not illiterate and can read and understand the terms of the contract. (b) he is capable of understanding the contract and forming a rational judgement as to its effect upon his interests. (c) he is of the age of majority and is not disqualified from contracting by any law to which he is subject. (d) he is not suffering from any mental disease or distress. (12) Pervaiz contracted with Dilbar, a comedian, for performance in a live show and paid Rs. 200,000 in advance. Before the show, Dilbar had an accident and was hospitalized. He could not appear in the show due to which Pervaiz suffered a loss of Rs. 500,000. Dilbar is liable to pay Pervaiz: (a) Rs. 200,000 (b) Rs. 500,000 (c) Rs. 700,000 (d) nothing as his absence was not wilful. (13) A positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true is said to be a: (a) fraud (b) misrepresentation (c) mistake (d) misinterpretation (14) A minor can: (a) be an agent (b) be a principal (c) both (d) none (15) The consent is said to be free when: (a) two or more persons agree upon same thing in the same sense. (b) all parties to the contract benefit from the contract. (c) it is not the result of coercion or undue influence or fraud or misrepresentation or mistake. (d) all of the above. © Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan Business Law (16) Liquidated damages mean: (a) A sum calculated at the time of breach of contract, equivalent to difference between the contract price and market price, at the place of performance. (b) A sum fixed at the time of entering into a contract which compensates the aggrieved party for direct/indirect loss arising from the breach. (c) A sum fixed as compensation for any loss or damage which the parties knew, when they made the contract, to be the likely result from the breach of contract. (d) None of the above. (17) The fundamental principle of awarding damages is: (A) to punish the guilty party for breach of contract. (B) to compensate the innocent party. (C) to put the innocent party in the same position as if the contract had been carried out correctly. (a) (B) only. (b) (C) only. (c) (B) and (C). (d) (A), (B) and (C). (18) C refused to sell certain goods to D at the previously agreed price of Rs. 240 thousand. D sued C for breach of contract. If identical goods are readily available in the market at a price of Rs. 220 thousand, which one of the following is correct? (a) D is entitled to an order of specific performance, forcing C to carry out the contract. (b) D is entitled to damages of Rs. 20,000. (c) D is entitled to nominal damages only. (d) D is not entitled to damages. (19) A owns some land, part of which is woodland. He sells the land to B who covenants in the contract that he will not cut down the trees. One year later, B prepares to cut down the trees. What remedy can A seek? (a) damages. (b) specific performance. (c) injunction. (d) rescission. © Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan Section A Question bank: Multiple choice questions (20) Which of the following may employ an agent? (a) any person who is capable of understanding the contract and forming a rational judgment as to its effect upon his interest. (b) any person who is engaged in business or profession. (c) any person who is of the age of majority according to the law to which he is subject and who is of sound mind. (d) all of the above. (21) Choose the incorrect statement: To constitute a wager, following elements should be present in the agreement: (a) Uncertain event (b) Each party must pay in a win or lose situation (c) Neither party should have any contract over the event (d) There should be a promise to pay money only 3 In the light of the provisions of Partnership Act, 1932 select the correct answer: (1) Public notice is NOT required to be given in case of: (2) (3) (a) insolvency of a partner (b) retirement of a partner (c) expulsion of a partner (d) dissolution of a registered firm. X and Y formed a partnership firm to undertake construction of a shopping plaza. Such a partnership is called: (a) limited partnership (b) particular partnership (c) partnership at will (d) implied partnership The implied authority of a partner does NOT empower him to: (a) submit a business dispute to arbitration (b) withdraw a suit filed on behalf of the firm (c) open a banking account on behalf of the firm (d) all the above © Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan Business Law (4) Choose the INCORRECT statement: In the absence of a contract to the contrary, (5) (6) (7) (8) (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business (b) the partners are entitled to share profits equally (c) the partners are entitled to interest on capital subscribed by them (d) a partner shall indemnify the firm for any loss caused to it by his wilful neglect Where a partner has paid a premium on entering into partnership for a fixed term and the firm is dissolved before the expiration of that term, such partner shall NOT be entitled to repayment of the premium if the dissolution is: (a) mainly due to his own misconduct (b) in pursuance of an agreement between all the partners, containing no provision for the return of the premium (c) caused by the death of the partner (d) all the above On dissolution of a firm, where there are joint debts due from the firm and also separate debts due from any partner, the separate property of a partner: (a) shall be applied proportionately in the payment of the firm’s debts and his separate debts (b) cannot be used in the payment of the firm’s debts (c) shall be applied, in the first instance, in payment of the firm’s debts and the surplus, if any, in payment of his separate debts (d) shall be applied first in the payment of his separate debts and the surplus, if any, in the payment of the firm’s debts A firm is liable to make good the loss of third party if: (a) one of the partners acting within his apparent authority misapplies the money or property received from a third party. (b) one of the partners misapplies the money or property received from a third party by the firm in the course of its business while it is in the custody of the firm. (c) by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, loss or injury is caused to any third party. (d) all of the above. The conclusive evidence of a partnership is: (a) mutual agency (b) sharing of profit and loss (c) mutual understanding (d) capital contribution © Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan Section A (9) Question bank: Multiple choice questions Subject to contract between the partners, a change may be made in the nature of business of the firm: (a) with the consent of active partners managing the business. (b) with the consent of majority of partners. (c) with the consent of all the partners. (d) with the consent of all the partners and Registrar of Firms. (10) In a ‘partnership at will’, a partner may retire: (a) with the consent of all other partners. (b) in accordance with an express agreement between the partners. (c) by giving notice in writing to all the other partners, of his intention to retire. (d) in any one of the manners described above. (11) Emmad and Faraz are partners in cloth trading business. In the presence of Faraz, his friend Ghalib boasted that he is also a partner in the business, in front of Haroon, a customer. Haroon gave this information to Ismail and on this belief, Ismail supplied cloth on credit to the firm. Can Ismail make Ghalib liable for the unpaid amount in this transaction? (a) No, as Ghalib did not present himself as a partner, in front of Ismail. (b) Yes, as Ismail gave credit to the firm on the faith of Ghalib’s representation. (c) No, as Ghalib is not a partner in the firm. (d) Yes, as Ghalib did it intentionally to deceive others. (12) Partnership is: 4 (a) the relationship between persons who have agreed to share the profits of jointly owned property managed by all or any of them acting for all. (b) the relationship created by an agreement between a banking company and person(s) providing for sharing of profit and loss arising from the finance provided to such person(s). (c) both of the above. (d) the relation between persons arising from a contract who have agreed to share the profits of a business carried on by all or any of them acting for all. In the light of the provisions of Negotiable Instruments Act, 1881 select the correct answer: (1) Which of the following is NOT a material alteration of a negotiable instrument? (a) A new party is added to the instrument. (b) The sum payable is changed in the instrument. (c) The crossing of an uncrossed cheque. (d) Tearing off the material part of the instrument. © Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan Business Law (2) (3) (4) An instrument is said to be ambiguous if: (a) no time for payment is specified in it. (b) it may be construed either as a promissory note or a bill of exchange. (c) the amount in figures differs from the amount in words. (d) all of the above. Sohail issued a cheque of Rs. 500,000 payable to Tanveer at sight. Sohail had sufficient funds at the bank to meet this payment. However, Tanveer presented the cheque at the bank after two weeks by which time the bank had failed. Can Tanveer recover the amount from Shoail? (a) Yes, as the debt is not discharged. (b) Yes, as Sohail has not suffered actual damage through any delay in presenting the cheque. (c) Yes, as Sohail did not advise Tanveer to encash the cheque immediately. (d) No, Sohail is discharged and Tanveer can now claim the amount of cheque from the bank. Ghalib accepted for honour a bill of exchange which has been noted and protested for non-acceptance. If his acceptance does not express for whose honour it is made, then such acceptance is: (a) invalid. (b) deemed to be made for the honour of the drawee. (c) deemed to be made for the honour of the drawer. (d) for the honour of any party to the bill © Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law B Part A - Mercantile Law Objective test and long-form questions CHAPTER 1 – INTRODUCTION TO THE LEGAL SYSTEM 1 Federal Shariat Court Briefly describe the kind of cases handled by the Federal Shariat Court and the procedures followed in the discharge of these cases. (07) 2 3 Courts (a) What is the composition and tenure of Federal Shariat Court? (b) What does court of first instance mean? List the areas of jurisdiction of the High Court. (03) Binding precedent What are the requisites of a binding precedent? 4 (04) High courts How does the High Court exercise its supervisory role over subordinate courts? Describe the three types of prerogative orders that it may issue. 5 (05) Civil law and criminal law Distinguish between civil law and criminal law giving two examples of each. 6 (03) (06) Process of legislation How is a law promulgated when national assembly is not in session? Is such law in any way different from an Act of parliament? What is its tenure? (05) CHAPTER 2 – INTRODUCTION TO LAW OF CONTRACT 7 Essential elements of a contract What are the essential elements of a valid contract? © Emile Woolf International 11 (05) The Institute of Chartered Accountants of Pakistan Business Law CHAPTER 3 – OFFER AND ACCEPTANCE 8 Acceptance Briefly describe the essential conditions for the acceptance of an offer to be valid, under the Contract Act, 1872. (07) 9 Lapse of an offer Discuss the circumstances under which an offer lapses and stands revoked 10 (07) Revocation of proposal Identify the circumstances under which a proposal may be revoked under the Contract Act, 1872. (07) CHAPTER 4 – CAPACITY OF PARTIES 11 Minor Discuss the position of agreements by a minor. (05) CHAPTER 5 - CONSIDERATION 12 Consideration Mohsin promised Ahsan that he will pay his university fee. Later Mohsin suffered losses in his business and refused to pay the fee. Mohisn is of the view that since the agreement was without consideration, it does not constitute a valid contract. However, Ahsan believes that the agreement is enforceable under law as it meets certain other conditions. You are required to narrate the conditions which Ahsan may be referring to. 13 (04) Consideration Describe the circumstances under which an agreement made without consideration is considered valid and binding under the Contract Act, 1872. (07) CHAPTER 6 – FREE CONSENT 14 Coercion Arif told Bano, his wife, that he would divorce her, if she does not transfer her personal assets to him. She agreed to transfer her assets to him. Can Bano avoid the contract? (03) 15 Fraud What constitutes fraud under the provisions of Contract Act, 1872? 16 (04) Misrepresentation Explain the acts which constitute misrepresentation under the contract act, 1872 and describe the circumstances in which the party whose consents is obtained by misrepresentation loses right of rescission of contract? (05) © Emile Woolf International 12 The Institute of Chartered Accountants of Pakistan Section B: Part A - Mercantile Law 17 Question bank: Objective test and long-form questions Mistake Explain what effects following have on the validity of the contract: (a) Unilateral mistake of law in force in Pakistan (b) Unilateral mistake as to matter of fact (c) Mutual mistake of foreign law (05) CHAPTER 7 – LEGALITY OF OBJECT ETC. 18 Legality of object What is an agreement? When is an agreement considered to be void? State the circumstances under which the object of an agreement is considered to be unlawful.(05) 19 Opposed to public policy Enumerate the agreements which are opposed to public policy (05) CHAPTER 8 – VOID AGREEMENT 20 Legality of consideration Asif stole cash and merchandise from the ABC Store. Basit, the owner of store, initiated legal proceedings against him. Asif contacted Basit with an offer to return the stolen cash and merchandise if Basit withdraws the suit. Basit accepted the offer. Is it a valid agreement? Discuss. (02) 21 Exceptions of void agreements Certain agreements have expressly been declared to be void under the Contract Act, 1872. List such agreements along with exceptions, if any. (08) CHAPTER 9 – CONTINGENT CONTRACTS 22 Contingent contracts Asim agreed to construct a bungalow for Ali at a cost of Rs. 50 million. However, it was agreed that payment would only be made on completion of the project. Is this a contingent contract under the Contract Act, 1872? Give reasons. Also list the requisite characteristics of a contingent contract. (03) 23 Rules of contingent contracts Discuss the rules regarding the performance of the contingent contracts (05) CHAPTER 10 – QUASI CONTRACTS 24 Quasi contracts Sami rented his house to Qurban for a period of one year at an agreed sum of Rs. 10,000 per month. After the first two months, Qurban defaulted in making payment of the rent. Baqir, a neighbour, being concerned with the strained relationship between Sami and Qurban, paid the rent with good intention. Subsequently, on Qurban’s refusal to reimburse the amount, Baqir filed a suit against him on the grounds that he © Emile Woolf International 13 The Institute of Chartered Accountants of Pakistan Business Law made the payment to Sami which Qurban was legally bound to make and being a quasi contract Baqir is entitled to the reimbursement. Explain whether Baqir is justified in his suit. 25 (04) Quasi contracts Explain the term “Quasi contract”. Briefly describe different types of relationships commonly referred to as quasi contracts under the Contract Act, 1872. (10) CHAPTER 11 – PERFORMANCE OF A CONTRACT 26 Tender and essentials of tender Mehboob, a promisor and Saulat, a promisee, entered into a valid contract. However, when Mehboob made an offer of performance, Saulat refused to accept the same. Briefly state the rights and responsibility of Mehboob against such refusal. Also state the essentials of a valid offer of performance under the provisions of Contract Act, 1872. (05) 27 Time and place of performance Briefly describe the rules specified in the Contract Act, 1872 in respect of the following. (a) 28 Time and place for performance where these have not been specified in the contract; (03) (b) Order of performance of reciprocal promises; and (02) (c) Effect of release by promisee of one of the joint promisors. (02) Devolution of liabilities Sohail and Afaq lent Rs. 2.0 million to Mohsin, Laila and Faizan jointly. On due date Laila became insolvent. Without informing Sohail, Afaq wants Mohsin to repay the full amount to him. Under the provisions of Contract Act, 1872 explain: 29 (a) whether Mohsin can be compelled to pay the full amount to Afaq. (b) what rights are available to Mohsin, if he repays the full amount. (05) Joint promisor and promisee Binyamin borrowed Rs. 1 million from Hatim and Tahir jointly and promised to repay the amount on March 1, 2011. With reference to the Contract Act, 1872, state who can claim performance in the following situations. 30 (a) Both Hatim and Tahir are alive on due date (b) Hatim dies before due date (c) Both Hatim and Tahir die before the due date (02) Reciprocal promises Maimar promised to manufacture and deliver to Nasir, remote-controlled toy helicopters of agreed specifications in first week of March 2011. Nasir in turn promised to pay for them by second week of March 2011. Maimar did not deliver the toys according to his promise. Should Nasir keep his promise and what remedy, if any, is available to him? (02) © Emile Woolf International 14 The Institute of Chartered Accountants of Pakistan Section B: Part A - Mercantile Law 31 Question bank: Objective test and long-form questions Appropriation (a) Following is the statement on August 4, 2011 of sums payable by Ubaid on account of cloth supplied by Bilal: Date of transaction 01/01/2008 02/03/2009 30/08/2010 28/04/2011 Rupees Remarks 37,000 Time barred under Limitation Act. 20,000 50,000 Guaranteed by Wasim. 63,000 170,000 Ubaid sent a cheque for Rs. 70,000 on August 5, 2011. There being no instructions from Ubaid, Bilal adjusted the payment against the following: Date of transaction 01.1.2008 02.3.2009 28.4.2011 Rupees 37,000 20,000 13,000 70,000 The guarantor (Wasim) objected to such appropriation and claimed that since the amount of Rs. 37,000 was time barred, it should not be adjusted and the full amount guaranteed by him should be fully adjusted. Is the objection of Wasim valid? (05) (b) Discuss how the above payment of Rs. 70,000 should be applied under each of the following independent circumstances, according to the provisions of the Contract Act, 1872: (a) The following words were written on the back of the cheque: (20,000 + 50,000 = 70,000) (b) (02) No instructions about appropriation of payment were given by Ubaid. Bilal did not make any appropriation either. (02) CHAPTER 12 – DISCHARGE OF A CONTRACT 32 Discharge by mutual agreement Talib was indebted to Bashir for Rs. 10,000. On Talib’s request Bashir agreed to accept Jahangir as his debtor, in place of Talib. Jahangir failed to make payment on due date. Under the provisions of Contract Act, 1872 you are required to explain whether Bashir can now demand payment from Talib. (02) 33 Supervening impossibility State the grounds in which a contract is discharged by supervening impossibility. CHAPTER 13 – REMEDIES FOR BREACH OF CONTRACT 34 Remedies for breach of contract Bushra entered into a contract with Akhtar, the manager of a radio programme, to conduct a show, twice a week, during the next three months. Bushra did not appear for the sixth show. She conducted the next show but soon thereafter Akhtar rescinded the contract and informed her that her services were no longer required as she failed to conduct the sixth show. © Emile Woolf International 15 The Institute of Chartered Accountants of Pakistan Business Law Narrate the rights of Akhtar and Bushra in the above situation. 35 (05) Damages Describe the principles of determining compensation for loss or damages caused due to breach of contract. (04) CHAPTER 14 – INDEMNITY AND GUARANTEE 36 Indemnity What is a contract of indemnity as defined under the Contract Act, 1872? 37 (02) Guarantee Bashir supplies goods worth Rs. 100,000 each month to Anwar under a contract which is due to expire on December 31, 2009. Ameen has guaranteed that he will compensate Bashir in case of default by Anwar. On August 29, 2008 the amount due to Bashir is Rs. 325,700. Ameen intends to revoke his guarantee. Can he do so? Discuss. (03) 38 Guarantee Raheel leased a building from Atif, on five years term, for a rent of Rs. 200,000 per annum and the payment was guaranteed by Kamal. Raheel defaulted in payment of the rent in the third year. Atif sued Kamal and recovered the rent from him. Later, Kamal gave a notice to Atif for revoking his guarantee for the remaining period of lease. Under the Contract Act, 1872 discuss whether Kamal is justified in doing so. 39 (04) Guarantee Amin, Imran and Shahid agreed to act as sureties for Emmad to Saleem and agreed to pay Rs. 20,000, Rs. 30,000 and Rs. 40,000 respectively in case of default by Emmad. On such surety Saleem lent Rs. 90,000 to Emmad. Emmad repaid Rs. 6,000 only. Saleem called upon the sureties to pay the balance of Rs. 84,000. Discuss keeping (03) in view the Contract Act, 1872 how much should each surety pay. 40 Guarantee (a) Faiz had sold goods on credit to Gulzar for Rs. 5 million on guarantee of Haseeb. Gulzar has also mortgaged his shop as a security against the above amount. Haseeb was unaware of this mortgage and honoured his guarantee when Gulzar failed to make the payment. What rights are available to Haseeb under the Contract Act, 1872? (04) (b) When and how a continuing guarantee is revoked? (06) CHAPTER 15 – BAILMENT AND PLEDGE 41 Duties of bailor Sara planned to spend her vacations in Islamabad with her parents. She therefore, requested her neighbour, Farha to take care of her pet cat during this period. On her return from vacations, Farha informed Sara that she had to spend Rs. 500 on usual feeding and grooming of the cat and Rs. 1,000 on medical expenses as the cat fell sick, without any negligence on Farha’s part. © Emile Woolf International 16 The Institute of Chartered Accountants of Pakistan Section B: Part A - Mercantile Law Question bank: Objective test and long-form questions You are required to state the amount, if any, which Sara needs to reimburse to Farha in each of the situations given below. Justify your answer with reasons under the provisions of Contract Act, 1872. 42 (a) No remuneration was agreed to be paid to Farha for the safe custody of the pet. (b) Sara had agreed to remunerate Farha for her services. (04) Particular lien Majid gave a piece of fabric to Stylish Suiting for sewing a coat at a consideration of Rs. 5,000. On completion, Majid paid the whole amount; however, Stylish Suiting refused to deliver the coat until the payment of previous dues of Rs. 3,000. Explain under the provisions of Contract Act, 1872, whether Stylish Suiting is justified in refusing to deliver the coat. (02) 43 Termination of bailment Under what circumstances a contract of bailment may be terminated? 44 Finder of goods Discuss the rights of the finder of goods under the Contract Act, 1872. 45 (05) (04) Pledge Explain the term “pledge”. Identify the circumstances under which a pledge made by a non-owner will be considered valid even if the owner has not authorized him to pledge the goods. (07) 46 Pledge Shahid pledged gold with Mehreen against a loan of Rs. 100,000 at a markup of 15% per annum. Being concerned with the growing incidences of burglary in the city, Mehreen insured the gold. At the time of repayment, Mehreen claimed the cost of insurance cover in addition to the principal sum due and interest thereon. In the light of Contract Act, 1872 briefly explain whether Mehreen is justified in her claim. (02) 47 Rights of pawner Ramla borrowed Rs. 100,000 from Ovais for a period of three months and kept her jewellery with Ovais as a security. On due date, Ramla defaulted in repayment. In view of the provisions of Contract Act, 1872 describe the remedies available to Ovais under the circumstances. (04) CHAPTER 16 - AGENCY 48 49 Ratification (a) Explain the term ratification in relation to the contract of agency under the Contract Act, 1872. What is the effect of a valid ratification? (03) (b) List down the conditions necessary for a valid ratification. (04) Duties of an agent Briefly state the duties of an agent towards his principal. © Emile Woolf International 17 (05) The Institute of Chartered Accountants of Pakistan Business Law 50 Duties of agent toward principal Narrate the duties of an agent towards his principal as specified in the Contract Act, 1872. (10) 51 Rights Explain the following as described under the Contract Act, 1872. 52 (a) Agent’s authority in an emergency (b) Agent’s right of retainer (c) Agent’s right of lien (07) Misconduct by agent Aslam appointed Zakir to recover Rs. 7.0 million from Naveed. Zakir misbehaved with Naveed as a result of which Naveed sued Aslam. Later, Aslam sued Zakir claiming reimbursement of the cost incurred by him in defending the suit filed by Naveed. Explain whether Aslam is justified in his claim. (02) 53 Substituted agent Briefly explain the term ‘substituted agent’ in the light of Contract Act, 1872. Is the (original) agent responsible to the principal for the acts of a substituted agent? (05) 54 Irrevocable agency When may an agent’s authority be revoked by the principal under the Contract Act, 1872? Also narrate the exceptions to the above provision. (05) CHAPTER 17 – PARTNERSHIP ACT 55 Duties of partner Sohail, Talha, Umair & Co., a partnership concern is engaged in trading of cloth. The firm bought a plot of land from Shining Star Limited. After some time Talha and Umair on their own account bought three more plots of land in the same locality and made good profits. Sohail on becoming aware of such profits sued Talha and Umair for his share. Under the provisions of Partnership Act 1932, explain whether Talha and Umair are liable to share such profits with Sohail. (04) 56 Rights of outgoing partner Obaid, Raheel and Pervez were partners in a firm. On September 1, 2009 Pervez retired from the partnership. The remaining partners continued the business, with the property of the firm, without final settlement of accounts as between them and Pervez. In the light of the Partnership Act, 1932, describe the rights of Pervez, in the above circumstances. (04) 57 Mutual rights and liabilities Rafiq, Bari and Furqan have decided to establish a partnership business for trading in medical equipments. In the absence of any express contract, advise them of their mutual rights and liabilities under the provisions of the Partnership Act, 1932. (09) © Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan Section B: Part A - Mercantile Law 58 Question bank: Objective test and long-form questions Liabilities Describe the liabilities of: 59 (a) a partner for the acts of the firm. (b) the firm for wrongful acts of a partner. (c) the firm for misapplication of money or property by a partner. (08) Implied authority The authority of a partner to bind the firm is called “Implied Authority.” List the acts which cannot be exercised by a partner as his implied authority. (04) 60 Holding out Explain the concept of “Holding out” as described in the Partnership Act, 1932. 61 (04) Transfer of interest Sameer, Fauzia and Sualat are partners in a firm. Fauzia transferred her interest in the firm absolutely to her son Adil. In the light of the provisions of Partnership Act,1932 would Adil be considered a new partner in the firm? Also describe the rights and restrictions on Adil in view of such transfer. (06) 62 Partnership property Kashif, Irfan and Shujaat are partners in a firm. Irfan bought a shop in his own name. He issued a cheque from the partnership account and debited his account with the purchase price. He rented out the shop and credited the receipts of rent in his capital account. Kashif has objected to this practice and asked Irfan to register the shop in the firm’s name contending that the shop is partnership’s property. Irfan disagrees. Explain what constitutes partnership property under the Partnership Act, 1932 and whether the shop is partnership property or not. (07) 63 Minor A, B and C, partners of a firm, admitted D, a minor to the benefits of the firm. D attained majority on 6th March 2007. He became aware of the fact that he has been admitted to the benefits of the firm on 16th August 2007. Being undecided about the situation he preferred to wait for some time before announcing his decision about joining the firm. On 27th February 2008, the firm suffered heavy losses due to an unforeseen event. A, B and C informed D that on account of such losses, his capital in the firm has been reduced by 40%. Discuss the rights and liabilities of D in the above situation. (06) CHAPTER 18 – NEGOTIABLE INSTRUMENTS ACT 64 Promissory notes Based on the provisions of Negotiable Instruments Act, 1881 briefly explain whether the following are promissory notes or not. (i) I promise to pay Rahat on demand Rs. 5,000 at my convenience. (ii) On demand, I promise to pay Sonu or order Rs. 5,000, for value received. (iii) I promise to pay Adil or order Rs. 5,000 and 500 shares of Sigma Limited. © Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan Business Law (iv) I promise to pay Mahi or order Rs. 5,000 with interest calculated at quarterly rests. (v) I promise to pay you or your successors on demand Rs. 10,000. (vi) I promise to pay Rafi or order Rs. 10,000 seven days after Salik’s death. (vii) I am liable to pay Ahmad Rs. 5,000. 65 (07) Presumptions of negotiable instrument State the presumptions that are applicable to all negotiable instruments unless the contrary is proved. (07) 66 Inchoate stamped instrument In the light of Negotiable Instruments Act, 1881 explain the provisions relating to the enforceability of inchoate stamped instruments. Also discuss the extent to which the person signing the instrument is liable upon such instrument. (06) 67 Ambiguous Instruments Explain the term “ambiguous instruments” giving at least two examples. Can such instruments be negotiated? (04) 68 Payment in due course A cheque is drawn payable to 'B or order'. It is stolen and B's endorsement is forged. The banker pays the cheque in due course. Is the banker discharged from liability? Would it make any difference if the drawer's signature were forged? (03) 69 70 Cheque (a) Explain the term “Cheque” as defined in the Negotiable Instruments Act, 1881 and list down the essential elements of a valid cheque. (07) (b) Who can cross the cheque after its issue? Also describe the manner in which it can be crossed. (04) Bill of Exchange What liabilities does the drawer of a bill of exchange incur under the Negotiable Instruments Act, 1881? 71 (03) Holder / Holder in due course / Payment in due course Explain the following terms as given in the Negotiable Instrument Act, 1881: 72 (a) payment in due course (b) holder (c) holder in due course (08) Material alteration Any material alteration to a negotiable instrument renders the instrument void. What are the exceptions to this rule? (07) © Emile Woolf International 20 The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law B Part B - Company Law Objective test and long-form questions CHAPTER 19 – COMPANY 73 Subsidiary and holding co. Identify the situations specified under the Companies Ordinance, 1984 in which a company shall be considered to be a subsidiary of another company. 74 (04) Association NFP Alfalah Associates is an association of persons. It wants to register itself as a limited company but does not wish to include the word “Limited” in its name. In view of the provisions of the Companies Ordinance, 1984 you are required to explain the conditions: 75 (a) that need to be satisfied before the Commission may issue it a licence and allow it to dispense with the word “Limited” from its name. (07) (b) under which the licence may be revoked and its consequences. (04) Private company State the conditions which make a company a private company or a public company under the Companies Ordinance 1984 (04) 76 KRL Kaghan Resham Limited” (KRL) holds 60 percent shares out of total paid up capital of another public company named “Narran Silk Limited” (NSL). NSL further owns 14 percent shares of “Thandiyani Ice-creams Limited” (TIL). NSL has also entered into an agreement with other shareholders of TIL to appoint four out of seven directors on the board of directors of TIL. Explain their relationships with each other under Companies Ordinance 1984. © Emile Woolf International 21 (04) The Institute of Chartered Accountants of Pakistan Business Law CHAPTER 20 – INCORPORATION OF COMPANY 77 Fajita Fajita Specialists” is a joint family business of Warsi family. The business has grown up in a very short time and there are more than 50 branches of it in the city. You being the corporate advisor, have been approached by the family to give an opinion on whether or not the business is required to get itself registered as a limited liability company. Advise them under the relevant provisions of Companies Ordinance 1984. (05) 78 Zouk Mr. Zouk is an employee in a brokerage house and he wants to prepare some reports on request of some potential investors for a company named as “Arizona Grill Limited”. For the preparation of the report he requires Memorandum & Articles of association of the company. State whether he can obtain such copies of Memorandum & Articles of Association from “Arizona Grill Limited” and explain why? (03) 79 Company registration exceptions Any association, partnership or company consisting of more than twenty persons, cannot be formed for the purpose of carrying on any business for acquisition of gain unless it is registered as a company under the Companies Ordinance, 1984. You are required to list down the exceptions to the above rule. 80 Commencement of business Explain the provisions specified in the Companies Ordinance, 1984 relating to requirements to be completed before the commencement of business by a public company. 81 82 (07) (06) MOA – object and registered office (a) Briefly describe the provisions of Companies Ordinance, 1984 relating to alteration of the objects of a company. (08) (b) In the annual general meeting of Paramount Limited, a shareholder objected to the shifting of the registered office from Multan to Lahore without obtaining confirmation from the Commission. Explain whether the objection is valid. (02) MOA – alteration The alteration in the memorandum shall not take effect until it is confirmed by the Commission. State the conditions a company is required to fulfill in order to obtain confirmation from the Commission and the procedure to be followed on confirmation.(04) © Emile Woolf International 22 The Institute of Chartered Accountants of Pakistan Section B: Part B - Company Law 83 Question bank: Objective test and long-form questions Articles of association A Malaysian company is interested in incorporating a limited liability company in Pakistan. Discuss provisions of the Companies Ordinance, 1984, relating to the following: 84 (a) Contents, printing and signature of the Articles of Association (05) (b) Registration of the Articles of Association (02) (c) Alteration of the Articles of Association after its registration (04) MOA – Nil capital What are the main clauses of a Memorandum of Association of a company limited by guarantee and not having a share capital? (06) 85 MOA – Alteration (office and objects) What are the main reasons that a company may proceed to alter the conditions of its Memorandum as to the registered office of the company, or as to the objective of the company? (07) 86 Incorporation What are the criteria based on which the registrar shall incorporate any company and grant a certificate of incorporation? (05) 87 Name Certain names cannot be given to the company. Explain what such names are and explain who the final authority is, regarding allowance of disallowance, of any name given to a company. (05) 88 Disallowed name Discuss the powers of registrar when a company is registered with a name not allowed by the Ordinance. (03) CHAPTER 21 – SHARE CAPITAL – TYPES AND VARIATIONS 89 Increase in authorized capital The directors of Sherwani Limited wish to increase the authorized capital of the company from Rs 100 million to Rs 200 million. You are required to inform them about the relevant provisions regarding increase in authorized capital, contained in the Companies Ordinance, 1984. (07) 90 Variation of shareholders’ rights Paradise Limited, upon passing a special resolution on August 20, 20X3 made amendments in its Articles of Association affecting substantial rights associated with class “B” shares of the company. Few aggrieved shareholders having objection on the special resolution intend to file an application in the Court, for the cancellation of the above resolution. Discuss the relevant provisions of the Companies Ordinance, 1984 specifying the following: © Emile Woolf International 23 The Institute of C hartere d Accountants of Pakistan Business Law 91 (a) The conditions which the aggrieved shareholders will have to comply with, to be eligible for filing an application in the court for the cancellation of the above resolution. (02) (b) The matters which the Court would consider while making a decision on the above application. (02) Purchase of own shares Companies are not allowed to purchase their own shares nor the shares of their holding companies - explain. 92 (03) Objections Who has the right to object to resolutions passed for variation in rights of any particular class of the shareholders and what shall the procedure be for lodging such an objection? (05) CHAPTER 22 – SHARE CAPITAL – PROSPECTUS 93 Prospectus – consent of expert Quite often, a prospectus inviting persons to subscribe for shares in a company contains a statement from person(s) who are experts in their respective fields. 94 95 (a) Describe the term “Expert” as explained in Companies Ordinance, 1984 in the above context. (02) (b) Narrate the conditions that a company should comply with if its prospectus contains a statement by an expert. Prospectus – publication and availability (a) Deo Limited (DL) has published a prospectus on March 1, 20X4. The subscription list is due to open on April 5, 20X4. Explain whether the company is in compliance with the provisions of the Companies Ordinance, 1984 regarding the publication of its prospectus. What relaxation can DL avail, in this regard? (03) (b) Identify the places where DL is required to make available the copies of its prospectus. (02) Prospectus - registration The registrar shall not register a prospectus unless certain requirements of the Companies Ordinance, 1984 are complied with. You are required to list such requirements. 96 (03) (06) Prospectus – relief from liability Mr. Zafar a director of Hilltop Limited, a listed company, has received a notice making him responsible for incorrect information contained in the prospectus issued by the company and also on account of the company’s failure to meet certain requirements related to the issue of prospectus. You are required to list the relevant provisions of the Companies Ordinance, 1984 on the basis of which Mr. Zafar can claim relief from any liability. (04) © Emile Woolf International 24 The Institute of Chartered Accountants of Pakistan Section B: Part B - Company Law 97 Question bank: Objective test and long-form questions Minimum subscription Under the second schedule to the Companies Ordinance 1984, what are the contents of the prospectus as regards minimum subscription? (05) 98 Face of prospectus What are the matters to be stated on the face of the prospectus under the Companies Ordinance 1984? (04) CHAPTER 23 – MORTGAGES AND CHARGES 99 Mortgages and charges 1 (a) List the mortgages and charges which, if not registered by the company, shall be considered as void. (06) (b) Explain the circumstances under which the registrar has the power to make entries of satisfaction and release of charge, in the register of mortgages and charges, without intimation from the company. (04) 100 Mortgages and charges 2 Explain the procedure described by the Companies Ordinance, 1984 for registration of payment or satisfaction of mortgage. (05) CHAPTER 24 – MEETINGS 101 AGM timeline Explain the exceptions to the following provisions as specified under the Companies Ordinance, 1984: Every company shall hold its annual general meeting within a period of four months following the close of its financial year and not more than fifteen months after the holding of its last preceding annual general meeting. (03) 102 Ordinary vs. special (a) In a general meeting, ordinary as well as special businesses are put up for consideration of members. Distinguish between ordinary business as opposed to special business. (03) (b) State the requirements that a company needs to satisfy, as regards notice of the meeting, in case a special business is to be transacted at a general meeting of the company. (03) 103 AGM and EGM Briefly explain the exceptions to the following provisions as specified under the Companies Ordinance, 1984. (a) An annual general meeting shall, in the case of a listed company, be held in the town in which the registered office of the company is situated. (02) (b) Notice of an extraordinary general meeting shall be sent to the members at least twenty-one days before the date of the meeting, and in the case of a listed company shall also be published in the prescribed manner. (02) © Emile Woolf International 25 The Institute of Chartered Accountants of Pakistan Business Law 104 Polling Mr. Shakeel has significant shareholdings in various public and private companies. He is not satisfied with some of the resolutions passed by such companies by show of hands. You are required to advise him as regards the following: (a) What conditions would he need to satisfy if Mr. Shakeel wishes to request for a poll? (05) (b) Explain whether a company is required to oblige him if he wishes to satisfy himself about the validity of the results of voting by poll. (02) 105 Minutes Discuss the provisions contained in the Companies Ordinance, 1984 relating to maintenance of minutes of the general meetings of the company. (08) 106 Meetings – commencement and EGM Explain whether or not the following statements are in accordance with the provisions of the Companies Ordinance, 1984 and support your answer with reasons: (a) All limited companies are required to hold statutory meeting within 6 months of incorporation. (03) (b) Notice of an extraordinary general meeting should always be sent to the shareholders, at least 21 days before the date of the meeting. (03) 107 Quorum The Board of Directors of Classic Paints Limited, a public listed company, has called an Extraordinary General Meeting on the requisition of the shareholders holding 10% of the voting power of the company. Approximately twenty minutes before the commencement of the meeting, the Chairman of the Board of Directors informed the Company Secretary of his inability to attend the meeting due to the death of a close relative. Required: (a) What would be the quorum of the above meeting? (b) Mention the latest time by which the quorum of the meeting should be present. What would be the impact if quorum is not present within the prescribed time? (c) Who could chair the meeting in the above situation? (10) 108 Members and meetings (a) (b) Mr. Dinshaw holding 13.5% shares in ABC Limited gave notice of a resolution to the company on May 17, 20X4, proposing to appoint M & T Associates in place of the existing share registrar of the company. The resolution was to be considered at the annual general meeting scheduled for May 30, 20X4. The company could not circulate the proposed resolution among its members. (i) Evaluate the above situation in the light of the provisions of the Companies Ordinance, 1984. (04) (ii) Explain whether Mr. Dinshaw is entitled to inspect and require the minutes of general meeting of the company. (04) What is the legal status of a resolution passed at any adjourned meeting of the creditors of a company? (02) © Emile Woolf International 26 The Institute of Chartered Accountants of Pakistan Section B: Part B - Company Law Question bank: Objective test and long-form questions 109 Circulation The annual general meeting of Iqra Industries Limited (IQL), a listed company, is to be held on October 25, 20X3. In addition to the normal businesses, the company is planning to discuss a strategic business plan for the approval of the shareholders. Explain the requirements of Companies Ordinance, 1984 as regards the circulation of information/documents to various stake holders, prior to the above meeting. (11) 110 Representation and proxy Green Leaf Limited, a listed company, has sent a notice of the forth coming Annual General Meeting, to the Company Secretary of Red Rose Limited which is also a listed company. Red Rose Limited has recently acquired 100,000 shares in Green Leaf Limited and you are required to advise its directors about the following, in the light of Companies Ordinance, 1984: (a) Who can represent Red Rose Limited in the annual general meeting of Green Leaf Limited? (03) (b) What are the essential characteristics of an instrument of proxy to be submitted to Green Leaf Limited and what is the deadline for its submission? (04) 111 EOGM and special business (a) (b) Peach Panther Ltd (PPL) is planning to call an Extra Ordinary General Meeting (EOGM) to transact certain businesses due to an emergency faced by the company. You are required to answer the following: (i) Which meetings are called EOGM? (ii) What is the minimum notice period for calling an EOGM? Can PPL hold such meeting on a shorter notice? (05) Explain the term “special business” with reference to the Companies Ordinance, 1984. Give at least two examples. (06) 112 Special resolutions What do you understand by the term "special resolution" as explained in the Companies Ordinance, 1984? (04) 113 Auditor’s certificate Companies are required to obtain certificates from auditors in regard to the matters contained in a statutory report. You are required to elaborate on the matters for which auditors certificates are required. (04) 114 Commission GM Under what circumstances does the Commission have the power to call a general meeting of the company? (04) CHAPTER 25 – MANAGEMENT 115 Subsequent CEO Explain whether or not the following statements are in accordance with the provisions of the Companies Ordinance, 1984. Support your answer with reasons. © Emile Woolf International 27 The Institute of Chartered Accountants of Pakistan Business Law A chief executive, other than the first chief executive of the company, is appointed by the shareholders in the annual general meeting of the company, for a period up to the next annual general meeting. (03) 116 CEO – removal and competitors (a) Mr. Zameer is the first chief executive of Ryan Industries Limited, a public company. The directors of the company are not satisfied with his performance. In view of the provisions of the Companies Ordinance, 1984 specify the term of office of Mr. Zameer and explain how he can be removed before expiry of the above term. (05) (b) Describe the provisions of the Companies Ordinance, 1984 which restrict the chief executive of a public company from carrying on any business competing with the company’s business. (03) 117 Casual vacancy Abid, Qasim and Tariq were the only members of Alpha Securities Limited, a public company and were elected as directors on 30 June 20X9. Qasim expired on 2 February 20Y4 in a road accident. Briefly describe the provisions of the Companies Ordinance, 1984 relating to the casual vacancy as described above. (05) 118 Election Narrate the provisions of the Companies Ordinance, 1984 relating to a private company in respect of: (a) Appointment of the first directors and their tenure. (03) (b) Procedure for election of subsequent directors. (09) 119 Presence Explain the exception to the following provisions as specified under the Companies Ordinance, 1984. In a meeting of the board of directors, no director shall take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void. (04) 120 Number, remuneration and assignment Explain whether or not the following statements are in accordance with the provisions of the Companies Ordinance, 1984. (a) A company may change the number of directors to be elected at least 21 days before the date of general meeting at which the election is to be held. (04) (c) Directors’ remuneration for performance of extra services including the holding of office of the chairman or attending the board meeting is decided by the chief executive. (04) (d) A director of a listed company cannot assign his office to another person under any circumstances. (03) © Emile Woolf International 28 The Institute of Chartered Accountants of Pakistan Section B: Part B - Company Law Question bank: Objective test and long-form questions 121 Fresh elections Explain the conditions specified in the Companies Ordinance, 1984 under which a person may request a listed company to hold election of directors prior to the end of the term of the present board of directors. (07) 122 Loans In view of the provisions of the Companies Ordinance, 1984 explain the conditions which are required to be complied with, if a company wishes to grant loan to its director. (05) 123 Power At the annual general meeting of Rahbar Refineries Limited (RRL), certain shareholders have raised objections on matters related to the use of the company’s funds. In the opinion of those shareholders the directors have exceeded the authority vested upon them by the Companies Ordinance, 1984. Identify those powers of directors which the shareholders of RRL may be referring to. (05) 124 Number and casual vacancy Lalazar Limited, a pubic unlisted company has a paid up capital of Rs 100 million consisting of shares having face value of Rs 10 each. Last election of its Board of Directors was held on April 15, 20X3 in which eight directors were elected. Four of the directors belonged to the same family. The remaining directors were Mr. Javed, Mr. Bader, Mr. Qasim and Mr. Dawood. They secured 600,000, 350,000, 480,000 and 220,000 votes respectively. The remaining votes were equally distributed among the four directors of the family. Mr. Javed died on May 30, 20X3 and Mr. Aslam was appointed as a director on June 15, 20X3 to fill in the casual vacancy. Explain the following in the light of the provisions of the Companies Ordinance,1984: (a) Is Lalazar Limited in compliance with the requirements of minimum number of directors? Who shall fix the number of directors to be elected and by what time such number should be fixed? Is it possible for the company to change the number of directors once fixed? (04) (b) Who is responsible to fill the casual vacancy in the Board and when would Mr. Aslam’s term of office be completed? (02) 125 First and subsequent Alpha Technologies Limited (ATL) is in the process of being incorporated as a public limited company. Further, ATL has plans to have its stock listed on all the three stock exchanges in the country within a period of one year of its incorporation. Required: Write a letter to the promoters of ATL, on behalf of Best Financial Services who are their consultants, advising them about appointment authority and the terms of holding of office of the following: (i) the first and subsequent directors. (ii) the first and subsequent chief executive. © Emile Woolf International 29 The Institute of Chartered Accountants of Pakistan Business Law 126 Removal Lalazar Limited, a pubic unlisted company has a paid up capital of Rs 100 million consisting of shares having face value of Rs 10 each. Last election of its Board of Directors was held on April 15, 20X3 in which eight directors were elected. Four of the directors belonged to the same family. The remaining directors were Mr. Javed, Mr. Bader, Mr. Qasim and Mr. Dawood. They secured 600,000, 350,000, 480,000 and 220,000 votes respectively. The remaining votes were equally distributed among the four directors of the family. Mr. Javed died on May 30, 20X3 and Mr. Aslam was appointed as a director on June 15, 20X3 to fill in the casual vacancy. Explain the following in the light of the provisions of the Companies Ordinance, 1984: The conditions required to be fulfilled if a person desires to remove the following directors: (i) Mr. Aslam (ii) Mr. Bader (05) 127 Loan repayment The directors of Shahzada Limited, a listed company, have offered Mr. Shams who is presently working as General Manager Operations, to become the Chief Executive of the company. Last year Mr. Shams obtained a loan amounting to Rs 1.2 million in accordance with the company's employment rules, out of which Rs 0.8 million is still outstanding. Mr. Shams has agreed to take the position of Chief Executive but is not in a position to repay the loan immediately. Discuss the requirements of the Companies Ordinance, 1984 which Mr. Shams will need to comply with. (08) 128 General notice of interest What is the procedure for filing a general notice of interest by a director and what would such a general notice include? (06) CHAPTER 26 – INVESTMENTS AND DIVIDENDS 129 Associated company Describe the term “associated company” in accordance with the Companies Ordinance, 1984. (05) 130 Dividend restriction Explain whether or not the following statements are in accordance with the provisions of the Companies Ordinance, 1984. Support your answer with reasons. There is no restriction on the declaration of dividend and the chief executive may declare dividend in the general meeting of the company out of any kind of profit. (04) 131 Investment restriction Describe the restrictions that have been imposed by the Companies Ordinance, 1984 in respect of investment by a company in its associated undertaking. (06) © Emile Woolf International 30 The Institute of Chartered Accountants of Pakistan Section B: Part B - Company Law Question bank: Objective test and long-form questions 132 Payment of dividend Explain the exception to the following provisions as specified under the Companies Ordinance, 1984. Where a dividend is declared by a company but is not paid within the period specified in the Companies Ordinance, 1984, the chief executive of the company shall be punishable with imprisonment for a term which may extend to two years and with fine which may extend to one million rupees. (05) 133 Dividend amendment The board of directors of Dinar Ltd, a listed company, had recommended a final dividend @ 100% for the year ended June 30, 20X3. Just a week after the notice for AGM had been dispatched the company suffered huge losses due to certain unanticipated events and incurred heavy liabilities. The company is now considering the following options: (i) Reducing the dividend to 25%. (ii) Deferring the payment of 75% of the dividend, for six months. Explain whether the company can exercise the above options, under the Companies Ordinance, 1984. (04) CHAPTER 27 – ACCOUNTS AND AUDIT 134 Qualification Explain whether or not the following statements are in accordance with the provisions of the Companies Ordinance, 1984 and support your answer with reasons: A person who holds shares in a company cannot be appointed as the auditor of such company. (03) 135 Removal - representation Briefly explain the exceptions to the following provisions as specified under the Companies Ordinance, 1984. If a copy of the representation received from the retiring auditor is not sent to every member of the company because it was received too late or because of the company’s default, the auditor may, without prejudice to his right to be heard in person, require that the representation shall be read out at the meeting. (03) 136 Removal – change of auditor Narrate the responsibilities of a company or of its directors in the following circumstances: A notice is given to a listed company by a member of the company, 17 days before the annual general meeting, proposing for a change in the auditors of the company. (03) 137 Books of accounts SQL Plastics Limited is a wholly owned subsidiary of a foreign company and has its registered office in Karachi. (a) List the books of account the company is required to maintain. (b) State the conditions which the directors shall be required to comply with if they want to keep the books of account at SQL’s factory located in Peshawar. (02) © Emile Woolf International 31 (04) The Institute of Chartered Accountants of Pakistan Business Law 138 Registrar and the directors’ report (a) Describe the formalities to be completed by an unlisted company, not being a private company having paid up capital of less than Rs. 7.5 million, before and after the annual general meeting, with respect to the annual audited accounts, under the Companies Ordinance, 1984. (05) (b) Describe the contents of the Directors’ Report to be attached with the balance sheet of a public company, as specified under Companies Ordinance, 1984. (10) 139 Signing the accounts The chief executive of Raza Enterprises Limited (REL), a listed company, is out of the country at the time of finalization of annual accounts. Explain the provisions related to signing and authentication of the annual accounts as contained in the Companies Ordinance, 1984 which REL would have to comply with, in the above situation. (03) 140 The auditors’ report Explain the provisions of the Companies Ordinance, 1984 in respect of the following: (a) Reading and inspection of auditors’ report. (02) (b) Signature on the audit report. (03) 141 Appointment of auditor Sahara Pakistan Limited (SPL) is a multinational company listed on the Karachi and Lahore Stock Exchanges. Mr. Brown, a major shareholder of the company, wants to appoint ABC & Company, Chartered Accountants, as the new auditors in place of the retiring auditors of SPL. Narrate the procedure that Mr Brown would have to follow and the responsibilities of the Company in the context of provisions of the Companies Ordinance, 1984 for change of auditors. (12) 142 Auditor and the AGM Discuss the provisions of the Companies Ordinance, 1984 related to the attendance of the auditors in the general meeting of the company. (03) 143 Auditor disqualification On April 30, 20X3 the Board of Directors of MIL informed the CFO that it wishes to change the auditors of the company. The interim audit for the year ended June 30, 20X3 is due to commence shortly. As the CFO of the company, advise the Board about the provisions contained in the Companies Ordinance, 1984 as regards: Restrictions imposed on the appointment of certain persons as auditors of the company. (06) 144 Appointment by SECP Narrate the circumstances in which SECP becomes empowered to appoint auditors under the Companies Ordinance, 1984. (06) © Emile Woolf International 32 The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law C Multiple choice answers © Emile Woolf International 33 The Institute of Chartered Accountants of Pakistan Business Law CHAPTER 1 1 2 (1) (d) (2) (c) (3) (b) (4) (d) (5) (b) (6) (d) (7) (a) (8) (c) (1) (b) (2) (a) (3) (a) (4) (c) (5) (c) (6) (a) (7) (c) (8) (d) (9) (b) (10) (b) (11) (b) (12) (a) (13) (b) (14) (a) (15) (c) (16) (c) (17) (c) (18) (c) (19) (c) (20) (c) (21) (d) 3 (1) (a) (2) (b) (3) (d) (4) (c) (5) (d) (6) (d) © Emile Woolf International 34 The Institute of Chartered Accountants of Pakistan Section C Answer bank: Multiple choice answers (7) (d) (8) (a) (9) (c) (10) (c) (11) (b) (12) (d) 4 (1) (c) (2) (b) (3) (d) (4) (c) © Emile Woolf International 35 The Institute of Chartered Accountants of Pakistan Business Law © Emile Woolf International 36 The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law D Part A - Mercantile Law Objective test and long-form answers 1 2 Federal Shariat Court (a) The Federal Shariah Court may, either of its own motion or on the petition of citizen of Pakistan or the Federal or Provincial Government, examine and decide the question whether or not any law or provision of law is repugnant to the Injunctions of Islam. (b) If the court decides that a particular law is repugnant to the injunctions of Islam, it should specify the extent to which it is so repugnant. (c) Appeal: If any party in any proceedings before the Federal Shariat Court is aggrieved by the final decision of the court, he may prefer an appeal to the Supreme Court. Courts (a) The Federal Shariat Court: The Federal Shariat Court consists of not more than eight Muslim Judges including the Chief Justice which are appointed by the President in accordance with Article 175A. Out of the number not more than three shall be Ulema having at least fifteen years’ experience in Islamic law, research or instruction and not more than four each one of them is or has been or is qualified to be a Judge of High Court. The judges hold office for a period of three years. However, the President may, extend such period. © Emile Woolf International 37 The Institute of Chartered Accountants of Pakistan Business Law (b) Court of first instance: A court of first instance is the court where the case is originally heard in full. Areas of jurisdiction of the High Court: Following are the five areas of jurisdiction of the High Court. 3 (i) Original civil jurisdiction; (ii) Appellate civil jurisdiction; (iii) Appellate criminal jurisdiction; (iv) Supervisory jurisdiction; (v) Constitutional jurisdiction. Binding precedent For a precedent to be binding it must meet the following requirements: (i) The ratio decidendi (reason for judgment) is clearly identified; (ii) The material facts of the case must be similar; (iii) The status of the court which set the precedent must be such as to bind the present court. 4 High court The High Court exercises its supervisory role in the following manner: (i) It may issue a writ of habeas corpus. That is, it may order for the release of a person wrongfully detained by a court subordinate to it or any government agency. (ii) It may issue prerogative orders against sub-ordinate courts, tribunals and other bodies such as local authorities in so far as they have a duty to exercise a decision fairly. There are three types of prerogative orders: Mandamus requires the court or other body to carry out a public duty. Prohibition prevents a court or tribunal from exceeding its jurisdiction. Certiorari is exercised when an inferior court has acted illegally by exceeding its jurisdiction or reached its decision contrary to the principles of natural justice without giving the person concerned the right to know and reply to the case against him. Essentially it is a review of what has been done after it has been done. 5 Civil law and criminal law Civil law regulates the disputes in respect of rights and obligations between persons dealing with each other. The court does not punish the wrong doers but imposes a settlement, either by awarding damages or granting injunctions or other orders. © Emile Woolf International 38 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers Examples of civil laws are: (i) company law (iv) family laws (ii) rent law (iii) commercial law (v) employment law Criminal law is a body of law: defining conduct prohibited by law against the community at large; regulating how suspects are investigated, charged and tried and; establishing punishments for convicted offenders / accused Criminal law deals with crimes such as murder, violence, terrorism, theft, robbery etc. 6 Process of legislation If the President deems necessary to take an immediate action, he has the power to promulgate an ordinance if the Senate or National Assembly is not in session. Such ordinances have the same force and effect as an Act of the Parliament. The Ordinance stands repealed after one hundred twenty days if it is not passed by the National Assembly or by National Assembly and Senate both as the case may be. However, National Assembly may extend it for another period of one hundred twenty days. Thereafter it will stand repealed. 7 Essential elements of a contract Section 10 of the Contract Act 1. Essential elements of a valid contract A valid contract must have following essential elements: a) Offer and acceptance b) There must be an agreement between parties to create a valid contract. An agreement involves a valid offer and acceptance. Legal r elationship c) A contract to become valid must have a legal relationship. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relationship but in commercial or business agreements, the usual presumption is that the parties intend to create legal relationship unless otherwise agreed upon. Competency of parties The parties to an agreement must be competent to contract. In other words, the person must be Major Person of sound mind and Not declared as disqualified from contracting by any law to which he is subject. d) Consideration An agreement must be supported by lawful consideration. Gratuitous promises are not enforceable at law. Consideration requires not only requires presence of consideration but also lawfulness of consideration. © Emile Woolf International 39 The Institute of Chartered Accountants of Pakistan Business Law e) Free Consent An agreement must be made between parties by free consent. In other words, the consent must not be obtained from following: Coercion Undue influence Fraud Misrepresentation Mistake f) Lawful Object The object of an agreement must be lawful. An object is said to be unlawful when: [Section 23] It is forbidden by law Is of such a nature that if permitted would defeat the provisions of any law It is fraudulent It involves an injury to the person or property of another The court regards it as immoral, or opposed to public policy g) Not declared as void An agreement which is not enforceable by law is called void agreement. There are certain agreements which have been expressly declared as void such as: [Section 24 to 30] agreement, the object or consideration of which is unlawful agreement, without consideration is void agreement in restraint of marriage agreement in restraint of legal proceedings agreement in restraint of trade agreement is void if meaning of which is uncertain wagering agreement h) Certainty An agreement may be void on the grounds of uncertainty. The meaning of the agreement must be certain or capable of being certain. [Section 29] i) Possibility of performance The terms of the agreement must be capable of being performed else it is void. [Section 56] j) Legal formalities An oral contract is a perfectly valid contract, except in certain cases where a contract must comply with the necessary formalities as to writing, registration and stamping. © Emile Woolf International 40 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 8 Answer bank: Objective test and long-form answers Acceptance Section 2(b) and 7 of the Contract Act When the person to whom the proposal is made signifies his assent to the offer, the proposal is said to be accepted. 9 (i) Acceptance must be absolute and unqualified. (ii) It must be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner and not otherwise, but if he fails to do so, he accepts the acceptance. (iii) Acceptance must be made by the offeree i.e. by the person(s) to whom offer was made and only such person or a person with his authority must communicate the acceptance to the offeror. (iv) Acceptance must be given within a reasonable time and before the offer lapses and/or is revoked. (v) Acceptance must succeed the offer. Lapse of an offer Section 6 of the Contract Act An offer is lapsed in following ways: Revocation An offer may be revoked before its acceptance by the offeree. Lapse of time An offer will come to an end if it is not accepted within the time specified or within a reasonable time where no time is specified. What is the reasonable time is a question of fact depending upon the subject matter and circumstances. Death or insanity An offer comes to an end by the death or insanity of the offeror if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Non-fulfilment of condition precedent An offer comes to an end when the acceptor fails to fulfil the conditions precedent to the offer. Counter offer An offer comes to an end if the counter offer is made. Non-acceptance according to requirement An offer comes to an end if it is not accepted according to the requirement (if any) of the offeror. Non-acceptance / Rejection An offer comes to an end if it is not accepted by the offeree. An offer is said to be rejected if the offeree expressly rejects. © Emile Woolf International 41 The Institute of Chartered Accountants of Pakistan Business Law Subsequent illegality or destruction An offer comes to an end if it becomes illegal or the subject matter is destroyed before its acceptance. 10 Revocation of proposal Section 5 and 6 of the Contract Act Revocation of a proposal A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. A valid proposal comes to an end upon happening of any one of the following: 11 (a) by communication of notice of revocation by the proposer. (b) by the lapse of time prescribed in such proposal for its acceptance, or if no time is prescribed, by the lapse of a reasonable time, without communication of the acceptance. (c) by failure of the acceptor to fulfill a condition precedent to acceptance. (d) by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of acceptor before acceptance. (e) if a counter proposal is made by the acceptor to the proposer. (f) if the proposal is not accepted in some usual or reasonable manner, where no mode is so prescribed. (g) subsequent illegality or destruction of subject matter. (h) rejection of proposal by the offeree. Minor Section 10, 11 and 68 of the Contract Act Section 30 of the Partnership Act The position of agreements with a minor are given below: An agreement with a minor is void ab-initio. Where an infant / minor represents fraudulently that he is of the age of majority and induces another to enter into a contract with him, he will not be liable Since ratification has a retrospective application it is necessary that the minor must be competent to contract at the time when the contract is entered into. Therefore, an agreement with a minor cannot be ratified subsequently after he attains majority If a minor enters into an agreement jointly with a major person than such agreement can be enforced against the major person who has jointly promised to perform. A minor can be admitted for the benefits of partnership with the consent of all the partners. He cannot be a partner until he attains majority. A minor can be agent but cannot be a principal A minor cannot be declared insolvent because he is incompetent to contract. A minor can file a suit but cannot be sued. © Emile Woolf International 42 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 12 If the guardian or manager of the minor entered into on behalf of a minor being within the scope of the authority and for the benefit of the minor than such agreements can be enforced by or against the minor. A person who supplied necessaries to a minor is entitled to be reimbursed from the property of such minor. Such claim is against the property of the minor but not against the minor personally. Consideration (a) 13 Answer bank: Objective test and long-form answers Section 25 of the Contract Act The conditions under which the said contract is enforceable are: Mohsin and Ahsan stand in near relation to one another. The agreement is out of natural love and affection. The said contract is in writing. The contract is registered. Consideration Section 25 and 185 of the Contract Act Validity of an agreement made without consideration An agreement without consideration is considered valid in any of the following circumstances: 14 (i) it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other. (ii) it is a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do. (iii) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt which is barred by the law for the limitation of suits. (iv) any gift which is actually made as between the donor and the donee. (v) no consideration is necessary to create an agency. (vi) remission by the promisee of the performance of the promise. A creditor can agree to give up either the whole or part of his claim or may agree to extend time for the performance of the promise and no consideration is required for such an agreement. (vii) a promise to contribute to charity, though gratuitous, would be enforceable, provided the promisee on the faith of such promise undertakes a liability not exceeding the amount so promised. Coercion Section 15 and 19 of the Contract Act Yes, Bano can avoid the contract as her consent was caused by coercion. © Emile Woolf International 43 The Institute of Chartered Accountants of Pakistan Business Law 15 Fraud Section 17 of the Contract Act (a) 16 Fraud – Fraud means acts committed by a party to a contract, or with his connivance, or by his agent with intent to deceive another party thereto or his agent, or to induce to enter into the contract and includes any of the following: (i) the suggestion, as a fact of that which is not true by one who does not believe it to be true; (ii) the active concealment of a fact by one having knowledge or belief of the fact; (iii) a promise made without any intention of performing it; (iv) any other act fitted to deceive; (v) any such act or omission as the law specially declares to be fraudulent. Misrepresentation Section 18 of the Contract Act Following are the acts which constitute misrepresentation: (a) Unwarranted statement When a person makes a positive statement that a fact is true when his information does not warrant it to be so, though he believes it to be true this amounts to misrepresentation. (b) Breach of duty Any breach of duty which without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him, by misleading another (c) to his prejudice or to the prejudice of anyone claiming under him. Inducing mistake about subject matter (Innocent misrepresentation) A party to an agreement induces (however innocently) the other party to make a mistake as to the nature or quality of the subject of the agreement. Following are the circumstances were a party whose consent has been obtained by misrepresentation cannot rescind the contract: (i) (ii) (iii) (iv) (v) where the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary diligence; where the party gave the consent in ignorance of misrepresentation; where the party after becoming aware of the misrepresentation, takes a benefit under the contract; where an innocent third party, before the contract is rescinded, acquires for consideration some interest in the property passing under the contract; where the parties cannot be restored to their original position. © Emile Woolf International 44 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 17 Answer bank: Objective test and long-form answers Mistake Section 20 to 22 of the Contract Act The effects on the validity of the contract are given below: 18 (a) In case of unilateral mistake of law in force in Pakistan the contract is not voidable. (b) In case of unilateral mistake of fact the contract is not voidable (c) In case of mutual mistake of foreign law the agreement is void. Legality of object Section 2(e), (g), 23 and 24 of the Contract Act (a) Agreement Every promise and every set of promises, forming the consideration for each other, is an agreement. An agreement not enforceable by law is said to be void. Circumstances in which an object of an agreement is considered unlawful: The object of an agreement is unlawful when: (i) it is forbidden by law; or (ii) is of such a nature that, if permitted, it would defeat the provisions of any law; or (iii) is fraudulent; or (iv) involves or implies injury to the person or property of another; or (v) 19 the court regards it as immoral, or opposed to public policy. Opposed to public policy Section 23 of the Contract Act The agreements which are opposed to public policy are the following: Trading with enemy A person cannot enter into an agreement with an alien enemy during the period of war. Stifling prosecution Criminals should be prosecuted and punished; hence an agreement for stifling prosecution is illegal. Maintenance and champerty Maintenance is an agreement where a person promises to maintain a suit in which he has no interest. Champerty is an agreement whereby one party agrees to assist another in recovering property and in turn is to share in the proceeds of the action. Sale of public offices The agreements of sale of public offices are illegal as they promote corruption. Restraint of parental rights An agreement which prevents a parent to exercise his right of guardianship is void. © Emile Woolf International 45 The Institute of Chartered Accountants of Pakistan Business Law Restraint of personal liberty An agreement which unduly restricts the personal liberty of a person is void. Agreement to create monopoly An agreement to create monopoly is void. Marriage brokerage agreement An agreement in which a person promises for reward to procure marriage for another is void. 20 Legality of consideration Section 23 No, the agreement is void as its object is unlawful. 21 Exceptions of void agreements Section 11, 20, 23 to 30, 36 and 56 of the Contract Act The agreements which have been expressly declared to be void and exception thereto are as follows: 1. Contracts with minor or a person of unsound mind. 2. When both parties to an agreement are under a mistake of fact essential to an agreement. 3. An agreement of which the consideration or object is unlawful: includes any agreement which the court regards as immoral or opposed to public policy. 4. If consideration or object is unlawful in part. 5. An agreement without consideration is unlawful Exceptions: 6. The agreement is in writing and registered and made on account of natural love and affection. It is a promise to compensate for something done. It is a promise written and signed to pay a debt barred by limitation law. Agreements in restraint of marriage of any person. EXCEPTION: Agreement in restraint of marriage of minor. 7. Agreements in restraint of a lawful profession, trade or business; EXCEPTION: When goodwill has been sold, reasonable limits to carry on similar business can be imposed 8. Agreements in restraint of legal proceedings; EXCEPTION: Two parties may agree to refer any dispute to arbitration and avoid legal proceedings © Emile Woolf International 46 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers 9. Agreements, the meaning of which is uncertain or not capable of being made certain; 10. Wagering Agreements; EXCEPTION: Subscription/contribution to horse-racing. 11. Agreements contingent upon impossible events whether known or not at the time of the agreement; 12. Agreements to do impossible acts. EXCEPTION: Where one party knows about an impossible act, he may be liable to compensate the innocent party. 22 Contingent contracts Section 31 of the Contract Act Contingent Contract No, this is not a contingent contract as the condition i.e. construction of a bungalow is not collateral to the contract; but in itself forms a consideration and is thus an integral part of the contract. Essentials of a contingent contract The following are the essential characteristics of a contingent contract: 23 (i) the performance of such a contract depends upon the happening or nonhappening of some future event; (ii) the event must be uncertain; (iii) the event must be collateral i.e. incidental to the contract. Rules of contingent contracts Section 32 to 36 of the Contract Act The rules regarding the performance of the contingent contracts are given below: Contracts contingent upon the happening of an uncertain future event A contract the performance of which is contingent on the happening of an uncertain future event cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. Contracts contingent upon the non-happening of a certain future event A contract of performance of which is contingent on the non-happening of a certain future event can be enforced when the happening of that event becomes impossible and not before. Contracts contingent upon the future conduct of a living person If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies. © Emile Woolf International 47 The Institute of Chartered Accountants of Pakistan Business Law Contracts contingent upon the happening of an uncertain specified event within a fixed time Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed time become void if at the expiration of the time fixed such event has not happened or if before the time fixed happening of such event becomes impossible. Contracts contingent upon the non-happening, of an uncertain specified event within a fixed time A contract of performance of which is contingent on the non-happening of a specified uncertain event within a fixed time may be enforced by law: When the time fixed has expired and such event has not happened or If (before the expiry of the time fixed) it becomes certain that such event will not happen. Agreements contingent upon impossible events Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. 24 Quasi contracts Section 69 of the Contract Act Reimbursement of person paying money due by another, in payment of which he is interested No, however, Baqar may recover the amount, if he has his interest in the payment. To constitute a quasi contract and be entitled for reimbursement, following conditions must be satisfied: (a) the person who made the payment must have his own interest in the payment; and (b) the other person must be bound by law to pay. 25 Quasi contracts Section 68 to 72 of the Contract Act Quasi contract: A quasi contract is a relation resembling to those created by a contract by which one party is bound to pay money in consideration of something done or suffered by the other party, though; no contractual relation exists between the parties. As a result of the above, certain legal rights and obligations are created between the concerned parties. Such type of relations resembles those created by the contract and such a contract is called Quasi contract. It is an obligation based on the principle of equity and justice, which the law creates in the absence of any formal agreement. © Emile Woolf International 48 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers Different types of relationships causing Quasi Contract: There are five kinds of quasi contractual obligations given in Contract Act. These are discussed below: (a) Supply of necessaries: – If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. (b) Payment of lawful dues by interested persons: – A person, who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. (c) Obligation of a person enjoying benefit of a non-gratuitous act / goods Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously and such other person enjoys the benefit of it, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. (d) Responsibility of finder of goods: – A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. (e) Liability of a recipient of goods delivered by mistake or under coercion: – A person to whom money has been paid or anything delivered, by mistake or under coercion, must repay or return it. 26 Tender and essentials of tender Section 38 of the Contract Act (a) Rights and responsibilities of Mehboob Mehboob would not be responsible for non-performance; he will not lose his rights to claim damages under the contract, for instance he will be entitled to compensation and contract will become voidable at his option; in case of performance by Saulat on Mehboob’s demand, Mehboob will be responsible to perform his promise. Essentials of a valid offer of performance: (i) it must be unconditional; (ii) it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do; (iii) if the offer is an offer to deliver anything to the promisee, the promisee must have reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them. © Emile Woolf International 49 The Institute of Chartered Accountants of Pakistan Business Law 27 Time and place of performance (a) Time and place of performance not specified in contract: Section 46 to 50 of the Contract Act If according to the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the promise must be performed within a reasonable time. When a promise is to be performed without application by the promisee, and no place is fixed for the performance, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. The question “what is reasonable time and place” is, in each particular case, a question of fact. (b) Order of performance of reciprocal promises Section 52 of the Contract Act The promises must be performed in the order expressly fixed by the contract, and where the order is not expressly fixed, they must be performed in the order which the nature of transaction requires. (c) Effect of release of one joint promisor Section 44 of the Contract Act Where two or more persons have made a joint promise, release of one such promisor by the promisee does not discharge the other joint promisor(s); neither does it free the joint promisors so released from responsibility to the promisor who was not released. 28 Devolution of liabilities Section 43 and 44 of the Contract Act (a) Afaq alone cannot compel Mohsin to make payment unless a contrary intention appears from the contract. The right to claim performance rests with all the promisees jointly and a single promisee cannot demand performance. (b) Mohsin may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract. Therefore, Faizan must share the loss arising from default of Laila equally with Mohsin. 29 Joint promisor and promisee Section 45 of the Contract Act Unless a contrary intention appears from the contract, the right to claim performance rests: (a) with Hatim and Tahir jointly (b) after the death of Hatim, with the representative of Hatim jointly with Tahir (c) after the death of both Hatim and Tahir, with the representative(s) of both, jointly. © Emile Woolf International 50 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 30 Answer bank: Objective test and long-form answers Reciprocal promises Section 54 of the Contract Act No, Nasir need not perform his promise to pay and Maimar must compensate Nasir for any loss which Nasir may sustain due to Maimar’s non-performance. 31 Appropriation Section 59 to 61 of the Contract Act (a) The payment is correctly applied by Bilal and the objection of Wasim is not valid. In the absence of any intimation from debtor or circumstances indicating to which debt payment is to be applied, the creditor is free to use his discretion and apply it to any lawful debt actually due and payable to him from the debtor whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. (b) (a) The payment should be applied in discharging the following debts: Debt of March 2, 2009 August 30, 2010 Rupees 20,000 50,000 70,000 As Ubaid has written the break-up of payment at the back of the cheque, it implies that payment should be applied to discharge those particular debts. (b) The payment should be applied in discharging the debts in the order in which they became due. It is irrelevant whether the debts are or are not barred by the law in force for the time being as to limitation of suits. 32 Discharge by mutual agreement Section 62 of the Contract Act Effect of alteration of contract If the parties to a contract agree to substitute a new contract for it the original contract need not be performed. Since Bashir accepted Jahangir as his debtor in place of Talib, so now he cannot demand payment from Talib. Consent of all the parties is essential. 33 Supervening impossibility Section 56 of the Contract Act A contract is discharged by supervening impossibility in the following cases: Destruction of subject matter If the subject matter of the contract is destroyed after the formation of the contract without any fault of either party then a contract is said to be discharged. Death or Personal incapacity (Doctrine of Frustration) If a contract is of personal nature then on the death / incapacity / illness of a person a contract is said to be discharged. © Emile Woolf International 51 The Institute of Chartered Accountants of Pakistan Business Law Declaration of war At the time of declaration of war the contracts with alien enemies are either suspended or declared as void. Change of law If the performance of the contract becomes impossible or unlawful due to change in law after the formation of the contract than the contract is said to be discharged. Particular state of things ceases to exist or occur The contract is discharged if that particular state of thing which forms the basis of a contract ceases to exist or occur. 34 Remedies for breach of contract Section 39 of the Contract Act Akhtar cannot rescind the contract as he has affirmed the contract when he allowed Bushra to conduct the seventh show. However, he may be entitled to compensation for damage sustained by him through Bushra’s failure to conduct the sixth show. If Akhtar puts an end to the contract then it will amount to breach of contract and remedies of breach of contract would be available to Bushra. 35 Damages Section 73 of the Contract Act The party who suffers from breach of contract is entitled to receive compensation for any loss or damage caused to it, which naturally arose from the usual course of things from such breach, or which the parties knew, when they made the contract to be likely to result from such breach. Such compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach. 36 Indemnity Section 124 of the Contract Act A contract, by which one party promises to save the other from loss caused to it by the conduct of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”. 37 Guarantee Section 130 of the Contract Act The guarantee given by Ameen is a continuing guarantee. It can be revoked by Ameen (surety) at any time as to future transactions but he will remain liable to Bashir for Rs. 325,700. 38 Guarantee Section 130 of the Contract Act Revocation of a Continuing guarantee: No, Kamal is not competent to revoke his guarantee. Where a guarantee is given for an entire consideration, the contract is not divisible and the guarantee is considered as a specific guarantee. In this case also, the contract is not one of a continuing © Emile Woolf International 52 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers guarantee because “lease for five years” is an entire or indivisible consideration and not a fragmented one. 39 Guarantee Section 146 and 147 of the Contract Act Co-sureties who are bound in different sums are liable to pay equally as far as limits of their respective obligations permit. Therefore, the co-sureties should pay: Rupees 20,000 30,000 34,000 84,000 Amin Imran Shahid 40 Guarantee Section 140, 141 and 145 of the Contract Act (a) Haseeb upon payment of guaranteed amount is invested with all rights which Faiz (the creditor) had against Gulzar (the principal debtor). Haseeb the surety is entitled to the benefit of every security which Faiz (the creditor) has against Gulzar (the principal debtor) at the time when the contract of suretyship is entered into whether Haseeb knows of the existence of such security or not. He is entitled to recover from Gulzar (the principal debtor) whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. (b) Section 62, 130, 131, 133 to 135, 139 and 141 of the Contract Act A continuing guarantee may at any time be revoked by the surety, as to future transactions by notice to the creditor. (i) In the absence of any contract to the contrary, the death of the surety results in the revocation of a continuing guarantee, as regards future transactions. Other modes of revocation of a continuing guarantee: (ii) If the terms of the contract are changed by the creditor and the principal debtor by a contract without the consent of the surety. (iii) When a creditor discharges principal debtor from the liability. (iv) When the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, without the consent of the surety. (v) When a creditor’s act or omission impairs the eventual remedy of a surety. (vi) When a creditor loses security under the contract, the surety gets discharged to the extent of the value of the security. © Emile Woolf International 53 The Institute of Chartered Accountants of Pakistan Business Law 41 Duties of bailor Section 158 of the Contract Act (a) Repayment by bailor of necessary expenses (i) No remuneration is to be paid to Farha for the safe custody of pet: Sara should reimburse Rs. 1,500 to Farha, as where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and the bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred for the purpose of the bailment. (ii) Farha is to be remunerated for her services: Sara should reimburse Rs. 1,000 to Farha, as where, under the terms of the bailment, the bailee is to receive remuneration for his services; it is the duty of the bailor to bear extraordinary expenses only, if any, incurred by the bailee in relation to the thing bailed. 42 Particular lien Section 170 of the Contract Act Stylish Suiting is not justified to refuse delivery of the coat to Majid, because a bailee who renders a service involving the exercise of labour or skill in respect of the goods bailed which improves the value of the article, is entitled to a right of particular lien, and not a general lien until and unless agreed for it. 43 Termination of bailment Section 153, 159 and 162 of the Contract Act (a) A contract of bailment may be terminated under the following circumstances: (i) If the bailee does any act with regard to the goods bailed, which is inconsistent with the terms of bailment, the bailment may be terminated by the bailor even though the term of bailment has not expired or the purpose of bailment has not been accomplished. (ii) If the bailment is gratuitous, and involves lending of goods, it may be terminated by the bailor at any time, even before the specified time or before the purpose is achieved; however, where such termination causes loss in excess of benefit actually derived by the bailee, the bailor must indemnify the bailee. A contract of bailment may also be terminated: (iii) If the bailment is for specific period, on expiry of the stipulated period. (iv) If the bailment is for a specific purpose, on fulfilment of the purpose. (v) If gratuitous, on the death either of the bailor or of the bailee. 44 Finder of goods Section 168 and 169 of the Contract Act Right of Reward The finder of goods may retain the goods for the expenses incurred by him to preserve the goods and to find out the owner, until he receives compensation, and © Emile Woolf International 54 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers where the owner has offered a specific reward for the return of goods lost, the finder may sue for such reward, and may retain the goods until he receives it. The finder of goods may sell the goods if the owner cannot be found or he refuses to pay lawful charges of the finder: 45 (a) and the goods are in danger of perishing or losing the greater part of their value; or (b) when the lawful charges amount to 2/3rd of its value. Pledge Section 172, 178 and 179 of the Contract Act Section 30 of the Sales of Goods Act Pledge The bailment / delivery of goods as security for payment of a debt or performance of a promise is called a pledge. Under the following circumstances a pledge can be made by non-owners: 1. Pledge by mercantile agent If a mercantile agent is in possession of goods or the title documents with the consent of the owner and he pledges the goods while acting in the ordinary course of business of a mercantile agent, the pledge shall be valid, provided that the pawnee acts in good faith. 2. Pledge by person in possession under voidable contract When the pawner has obtained possession of the goods pledged by him under a voidable contract but the contract has not been rescinded at the time of pledge, he can make a valid pledge provided the pledgee acts in good faith. 3. Pledge where pawner has only a limited interest Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. 4. Seller in possession of goods after sale If a seller is, left in possession of the goods sold, a pledge created by him will be valid, provided the pawnee acted in good faith and had no notice of the sale of goods to the buyer. 5. Buyer in possession of goods under an “agreement to sell” Where a buyer has acquired possession of goods under an ‘agreement to sell’ wherein the goods are to become the property of the buyer on fulfillment of certain conditions, a pledge created by him is valid, provided the pledgee acted in good faith. 46 Pledge Section 175 of the Contract Act Right to extra ordinary expenses: The pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged. Therefore, Mehreen is entitled to claim the cost of insurance, in addition to the principal and interest. © Emile Woolf International 55 The Institute of Chartered Accountants of Pakistan Business Law 47 Rights of pawner Section 176 of the Contract Act Pawnee’s right where pawner makes default: On default in payment of debt by Ramla, Ovais may: (a) bring a suit against Ramla upon the debt and retain the goods pledged as a collateral security; or (b) he may sell the jewellery pledged on giving Ramla reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt, Ramla would still be liable to pay the balance. If the proceeds of the sale are greater than the amount so due, Ovais shall pay over the surplus to Ramla. 48 Ratification Section 196 to 200 of the Contract Act (a) Ratification Ratification means the subsequent adoption and acceptance of an act originally done without authority. Where acts are done by one person on behalf of another, but without his authority, he may elect to ratify or to disown such acts. If he accepts them, the same effects will follow as if they had been performed by his authority. (b) Essentials of a valid ratification: A valid ratification must fulfill the following conditions: (i) The agent must purport to act as agent for a principal who is in contemplation and is identifiable at the time of contract. (ii) The principal must be in existence at the time of contract. (iii) The principal must be competent to contract both at the time of the contract and at the time of ratification. (iv) The act to be ratified must not be void, or illegal. (v) Ratification must be made with full knowledge of all material facts. (vi) The principal must signify his unconditional acceptance of the act. (vii) Ratification must be made within a reasonable time. (viii) Ratification must be of whole transaction. (ix) Ratification must be communicated. (x) Ratification must not injure a right of third person. © Emile Woolf International 56 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 49 Answer bank: Objective test and long-form answers Duties of an agent Section 209, 211 to 218 of the Contract Act Duties of an agent towards his principal 1. Duty to follow principal’s directions / instructions / mandate / orders or customs 2. Duty to carry out the work with reasonable skill and diligence 3. Duty to render accounts 4. Duty to communicate with the principal, in cases of difficulty, for obtaining his instructions. 5. Duty not to deal on his own account. 6. If an agent, without the knowledge of his principal, deals in the business on his own account the principal is entitled to claim any benefit which may have resulted to him from the transaction. 7. Duty not to make profit on his own account or to make secret profit. 8. When an agency is terminated on the death of the principal or on his becoming of unsound mind, the agent must take, all reasonable steps for the protection and preservation of the interests of his late principal’s representatives. 9. Duty not to delegate authority subject to certain exceptions. 10. Duty to act with ordinary prudence in case of emergency in order to protect the principal from loss. 50 Duties of agent toward principal Section 209, 211 to 218 of the Contract Act The main duties of an agent towards his principal are: (i) To conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. (ii) To conduct the business with as much skill as is generally possessed by persons engaged in similar business and to act with reasonable diligence. In the absence of any special skill, the agent should use such skill as he possesses. (iii) To render proper accounts to his principal on demand. (iv) In cases of difficulty, to use all reasonable diligence in communicating with his principal and in seeking to obtain his instructions. (v) An agent must not deal on his own account in the business of agency; i.e. he must not himself buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal without obtaining the consent of his principal and after disclosing all material facts to him. (vi) The agent is bound to pay his principal all sums received on his account subject to deductions such as all moneys due to him in respect of advances made or expenses properly incurred and his agreed remuneration. The agent should not make secret profit. © Emile Woolf International 57 The Institute of Chartered Accountants of Pakistan Business Law (vii) When an agency is terminated by the principal dying or becoming of unsound mind, the agent must take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him. (viii) Subject to certain exceptions, an agent must not further delegate his authority to another person, but perform the work of agency himself. 51 Rights Section 189, 217 and 221 of the Contract Act (i) Agent’s authority in an emergency An agent has authority, in an emergency to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. (ii) Agent’s right of retainer An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. (iii) Agent’s right of lien In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. 52 Misconduct by agent Section 212 of the Contract Act It is the duty of an agent to act diligently as a man of ordinary prudence. He must compensate his principal in respect of the direct consequences of his negligence. Zakir being an agent of Aslam is responsible for his misconduct due to which Aslam had to pay Naveed. Therefore, Aslam is justified in his suit. 53 Substituted agent Section 194 and 195 of the Contract Act Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is a substituted agent, and an agent of the principal for such part of the business of the agency as is entrusted to him. The original agent is not responsible to the principal for the acts or negligence of the substituted agent so selected if he has exercised in selecting such agent the same amount of discretion as a man of ordinary prudence would exercise in his own case. 54 Irrevocable agency Section 202 to 204 of the Contract Act The principal may revoke the authority of the agent, at any time before the agent has exercised his authority so as to bind the principal. © Emile Woolf International 58 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers However, the following are the exceptions to the above provision: 55 (a) Where an agent has himself an interest in the property forming subject matter of the agency. (b) Where the agent has partly exercised the authority (c) Where an agent has incurred a personal liability the agency becomes irrevocable. Duties of partner Section 16(a) of the Partnership Act Personal profits earned by partners No, Talha and Umair are not liable to share such profits with Sohail as this transaction was not within the scope of the partnership. Subject to the contract between the partners, the partner shall account for that profit and pay it to the firm, which: 56 (a) he derives for himself, from any transaction of the firm, or from the use of the property or business connection of the firm or the firm’s name; or (b) he made for himself, from carrying on any business of the same nature as and competing with that of the firm. Rights of outgoing partner Section 37 of the Partnership Act Right of Pervez to share subsequent profits In the absence of a contract to the contrary, Pervez has an option either: 57 (a) to claim such share of the profits of the firm, earned after he ceased to be a partner, as may be attributable to the use of his share of the property of the firm; or (b) to claim interest at the rate of six percent per annum on the amount of his share in the property of the firm. Mutual rights and liabilities Section 13 of the Partnership Act Mutual rights and liabilities of partners In the absence of any express contract: (i) every partner has a right to take part in the conduct of the business; (ii) every partner shall have the right to express his opinion before a matter is decided. Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, but no change may be made in the nature of the business without the consent of all the partners; (iii) every partner has a right to have access to and to inspect and copy any of the books of the firm; (iv) a partner is not entitled to receive remuneration for taking part in the conduct of the business; (v) the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm; © Emile Woolf International 59 The Institute of Chartered Accountants of Pakistan Business Law (vi) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of the profits; (vii) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum; (viii) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him: in the ordinary and proper conduct of the business, and in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and (ix) 58 a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm. Liabilities Section 25 to 27 of the Partnership Act (i) Liability of a partner for acts of the firm Every partner is liable jointly with all the other partners and also severally for all acts of the firm done while he is a partner. (ii) Liability of the firm for wrongful acts of a partner Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable to the same extent as the partner. Although the firm is liable to the third party for the loss caused to him (third party) by fraud committed by a partner, but, as between the partners, the same must be borne by the partner committing the fraud and cannot be shared among all the partners. (iii) Liability of firm for misapplication of money or property by a partner The firm is liable to make good the loss where: 59 A partner acting within his apparent authority receives money or property from a third party and misapplies it, or A firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm. Implied authority Section 19 of the Partnership Act Partner’s act not under implied authority In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to: (a) submit a dispute relating to the business of the firm to arbitration, (b) open a banking account on behalf of the firm in his own name, © Emile Woolf International 60 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers (c) compromise or relinquish any claim or portion of a claim by the firm, (d) withdraw a suit or proceeding filed on behalf of the firm, (e) admit any liability in a suit or proceeding against the firm, (f) acquire immovable property on behalf of the firm, (g) transfer immovable property belonging to the firm, or (h) enter into partnership on behalf of the firm. 60 Holding out Section 28 of the Partnership Act If a person represents to the outside world by words spoken or written or by his conduct or by lending his name, that he is a partner in a certain partnership firm, he becomes liable as a partner in that firm to anyone who has on the faith of such representation granted credit to the firm, whether the person representing himself or allowing himself to be so represented does or does not know that the representation has reached the person so giving credit. The doctrine of holding out or estoppel does not extend to: Where after a partner’s death the business is continued in the old firm name the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death. 61 Transfer of interest Section 29 of the Partnership Act Rights of transferee of a partner’s interest Where a partner’s interest is transferred, the transferee does not become a partner and similarly the transferor does not cease to be a partner. Therefore, Adil would not be considered as a partner in the firm. Rights of Adil: Adil would be entitled only to receive the share of the profits of the firm to which Fauzia is entitled. He would be bound to accept the account of profits agreed to by the partners. Upon dissolution of the firm or, in case, if Fauzia ceases to be a partner, Adil would be entitled, as against the remaining partners, to receive the share of the assets of the firm, to which Fauzia was entitled and for the purpose of ascertaining that share he would be entitled to ask for the accounts as from the date of the dissolution. Restrictions on Adil: Adil would not be entitled, during the continuance of the partnership: (i) to interfere in the conduct of the business; or (ii) to require accounts; or (iii) to inspect the books of the firm. © Emile Woolf International 61 The Institute of Chartered Accountants of Pakistan Business Law 62 Partnership property Section 14 of the Partnership Act The property of the firm Subject to the contract between the partners, the property of the firm includes: (i) all property and rights and interests in property originally brought into the stock of the firm or (ii) all property acquired by purchase or otherwise, by or for the firm or for the purposes and in the course of the business of the firm, (iii) the goodwill of the business. (iv) property and rights and interests in property acquired with money belonging to the firm unless the contrary intention appears. The shop is not property of the firm as Irfan has bought it with the firm’s money and by debiting it in his account, he showed his intention of taking the money as loan. 63 Minor Section 30 of the Partnership Act D becomes a partner in the firm after 6 months of the date on which he became aware of the fact that he was entitled to the benefits in the firm i.e. on 16th February 2008. Therefore, he shall be liable to share the losses of the firm, incurred thereafter. His failure to announce his decision will have no bearing on the situation. 64 Promissory notes Section 4 of the Negotiable Instruments Act (i) It is not a promissory note as promise to pay is not “unconditional”. (ii) It is a valid promissory note containing all the essential elements. (iii) It is not a promissory note as the payment is not in terms of money only. (iv) It is not a promissory note as the amount payable under it is not certain. (v) It is not a promissory note as the payee in the instrument is not certain. (vi) It is a valid promissory note. It is not considered to be conditional, for it is certain that Salik will die, though the exact time of his death is uncertain. (vii) It is not a promissory note as it lacks unconditional undertaking. There is only an acknowledgement of indebtedness. 65 Presumptions of negotiable instrument Section 118 to 119 of the Negotiable Instruments Act Unless the contrary is proved, the following presumptions shall be assumed in respect of all negotiable instruments: (i) Consideration: that every negotiable instrument whenever made, drawn, accepted, endorsed, negotiated or transferred, was accepted, endorsed or transferred for consideration; (ii) Date: that every negotiable instrument bearing a date was made / drawn on such date; © Emile Woolf International 62 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law Answer bank: Objective test and long-form answers (iii) Time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (iv) Time of transfer: that every transfer of a negotiable bill of exchange was transferred within a reasonable time after its date and before its maturity; (v) Order of endorsements: that the endorsements appearing on a negotiable instrument were made in the order in which they appear thereon; (vi) Stamps: that a lost promissory note, bill of exchange or cheque was duly stamped; (vii) That the holder is a holder in due course; Provided that, where the instrument has been obtained from any person in lawful custody thereof by means of an offence or fraud or for unlawful consideration, the burden of proving that the holder in due course lies upon him (the holder). (viii) Presumption on proof of protest: In a suit upon an instrument which has been dishonoured, the court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved. 66 Inchoate stamped instrument Section 20 of the Negotiable Instruments Act Enforceability of Inchoate stamped instruments If a person becomes a party to an inchoate stamped instruments before its completion, inchoate stamped instrument may on completion, be enforceable against such person provided it is filled up within a reasonable time and strictly in accordance with the authority given. Provided that if any such instrument after completion is negotiated to a holder in due course, it shall be valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up within a reasonable time and strictly in accordance with the authority given. Extent of liability The person so signing shall, subject to the above provisions, be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course, for the amount specified in the instrument or filled upon therein. Provided that no person other than a holder in due course shall receive from the person so signing the paper anything in excess of the amount intended by him to be paid there under. 67 Ambiguous Instruments Section 17 of the Negotiable Instruments Act Where an instrument may be construed either as a promissory note or a bill of exchange, it is called an ambiguous instrument. Yes, ambiguous instruments are negotiable. Examples: (i) Where the drawer and drawee are the same person. (ii) Where the drawee is a fictitious person. (iii) Where the drawee is incompetent to contract. © Emile Woolf International 63 The Institute of Chartered Accountants of Pakistan Business Law 68 Payment in due course Section 85 of the Negotiable Instruments Act Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. Therefore the banker is discharged from liability as a banker is not expected to know the signatures of payees who are not the clients of the bank. On the other hand, a banker paying a cheque on which the drawer's signature is forged is responsible and should bear the loss. 69 Cheque Section 6 of the Negotiable Instruments Act (a) Cheque A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Essential elements of a valid cheque: Following are the essential elements of a valid cheque. (i) It must be in writing, (ii) It must contain an unconditional order to pay, (iii) It must contain an order to pay in terms of money, (iv) It must contain an order to pay a definite amount of money, (v) The parties to the cheque must be certain (real), (vi) It must be signed by the drawer, (vii) It must be drawn on a specified banker, (viii) It must be payable on demand. (b) Who can cross the cheque after issue Section 125 of the Negotiable Instruments Act Following persons can cross the cheque: (i) Holder (ii) Banker Crossing of cheque after issue (i) Where a cheque is uncrossed, the holder may cross it generally or specially. (ii) Where a cheque is crossed generally, the holder may cross it specially. (iii) Where a cheque is crossed generally or specially, the holder may add the words “not negotiable”. (iv) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection. (v) When an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection, he may cross it specially to himself. © Emile Woolf International 64 The Institute of Chartered Accountants of Pakistan Section D: Part A - Mercantile Law 70 Answer bank: Objective test and long-form answers Bill of Exchange Section 30 of the Negotiable Instruments Act The liabilities incurred by the drawer of a bill are as follows: 71 (i) on due presentment, the bill shall be accepted. and paid according to its tenor, and that (ii) if the bill is dishonoured, the drawer shall compensate the holder or any endorser who is compelled to pay it, provided that due notice of dishonour of the bill is given to or received by the drawer. (iii) until acceptance, the drawer is liable thereon as principal debtor. Holder, Holder in due course, Payment in due course (i) Payment in due course Section 10 of the Negotiable Instruments Act Payment in due course implies the following: The payment is in accordance with the apparent tenor of the instrument. The payment is made in good faith and without negligence. The payment is made to a person in possession of the instrument The payment is honestly made in the bonafide belief that the person demanding payment is legally entitled to it. (ii) Holder Section 8 of the Negotiable Instruments Act The ‘holder’ of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties liable thereto. (iii) Holder in due course Section 9 of the Negotiable Instruments Act Holder in due course means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before it becomes overdue, without notice that the title of the person from whom he derived his own title was defective. 72 Material alteration Section 20, 87 and 89 of the Negotiable Instruments Act In the following situations, the alteration does not prejudice the rights and liabilities of the parties to a negotiable instrument : (i) Alteration made for the purpose of correcting a mistake or a clerical error. (ii) Alteration made to carry out the common intention of the original parties. © Emile Woolf International 65 The Institute of Chartered Accountants of Pakistan Business Law (iii) Alteration made with the consent of the parties liable on the instrument. (iv) Conversion of bearer cheque into an order cheque. (v) Crossing of an uncrossed cheque. (vi) Filling blanks in the case of inchoate or incomplete instruments (vii) Conversion of blank endorsement into an endorsement in full. (viii) Making qualified acceptance. (ix) Alteration which is the result of an accident, e.g., mutilation by washing, ravages by white ants, document torn by a child, document burnt in part by the hot end of a cigarette. (x) Alternation made before the instrument is issued. © Emile Woolf International 66 The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Business Law D Part B - Company Law Objective test and long-form answers 73 Subsidiary and holding co. A company shall be deemed to be a subsidiary of another when: (i) that other company directly or indirectly: owns or holds or control more than fifty percent of its voting securities or has power to elect and appoint more than fifty percent of its directors: or (ii) the first mentioned company is a subsidiary of any company or body corporate which is that other’s subsidiary 74 Association NFP (a) The Commission may grant a licence and direct that the Alfalah Associates be registered as a company with limited liability, without the addition of the words "Limited", to its name, if Alfalah Associates satisfies the following conditions: (i) It should be capable of being formed as a limited company. (ii) It should be formed for promoting commerce, art, science, religion, sports, social services, charity or any other useful object. (iii) It applies or intends to apply its profits/income in promoting its objects. (iv) It prohibits the payment of any dividend to its members. (v) A licence may be granted on such conditions and regulations as the Commission thinks fit and those conditions and regulations shall be binding on the association and shall, if the Commission so directs, should be inserted in the memorandum and articles, or in one of those documents. © Emile Woolf International 67 The Institute of Chartered Accountants of Pakistan Business Law (b) 75 The licence may be revoked at any time by the Commission after giving a notice in writing of its intention and shall afford Alfalah Associates an opportunity of submitting a representation in opposition to the revocation. On revocation of the licence, the registrar shall enter the word Limited at the end of the name of the Alfalah Associates in the register, and Alfalah Associates will be required to use the name as entered in the register. Private company A private company is a company which, by its articles of association Restricts the right of members to transfer the shares Restricts the right of members to fifty Prohibits the invitation of subscriptions against its securities from general public. And any company which is not a private company, is a public company 76 KRL Kaghan Resham Limited (KRL) is the holding company of Naran Silk Limited (NSL) as KRL holds more than 50 percent shares of NSL NSL is the holding company of Thandyani Ice-creams Limited (TIL) as NSL can appoint more than fifty percent directors of TIL So as per the definition of the holding and subsidiary company under the Ordinance, KRL is also the holding company of TIL 77 Fajita June 10, 2010 Warsi family Fajita Specialists Subject: Opinion regarding incorporation of “Fajita Specialists” as a Limited Liability Company Respected members of the Warsi family As per company’s ordinance 1984, any association, partnership or company formed for the purpose of carrying on any business shall be required to be registered as a company under the Ordinance if it consists of more than twenty persons. However if the association or company is a joint family carrying on joint family business then they shall not be required to be registered as a Company under the Companies Ordinance 1984. As your business is a joint family business carried on by a joint family, it shall not be required to be registered as a company even if its number of members exceeds twenty. If you require any further information regarding the matter, the undersigned shall be pleased to assist. Kind regards Corporate Advisor © Emile Woolf International 68 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law 78 Answer bank: Objective test and long-form answers Zouk The Companies Ordinance 1984 requires the company to forward a copy of Memorandum of Association and Articles of Association on the request of a member only on payment of certain fixed fee. Any unconcerned person cannot demand such copies from the company. So “Arizona Grill Limited” is not bound to provide such copies to Mr Zouk. 79 Company registration exceptions Any association partnership or company consisting of more than twenty members cannot be formed for the purpose of carrying on any business for acquisition of gain unless it is registered as a company under the Companies Ordinance, 1984, except in the following cases: 80 (i) Any society, body or association other than a partnership, formed or incorporated under any other Pakistani law. (ii) A joint family carrying on joint family business. (iii) A partnership of two or more joint families where the total number of members of such families, excluding the minor members, does not exceed twenty. (iv) Partnership formed to carry on practice of any profession where practice as a limited liability company is not permitted under the relevant laws or regulations for such practice. Commencement of business A company shall not commence any business or exercise any borrowing powers unless: (i) Shares held subject to the payment of the whole amount thereof in cash have been allotted to an amount not less in the whole than the minimum subscription; (ii) Every director of the company has paid to the company full amount on each of the shares taken or contracted to be taken by him; (iii) No money is or may become liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by reason of any failure to apply for or to obtain permission for the shares or debentures to be dealt in on any stock exchange. (iv) There has been filed with the registrar a duly verified declaration by the chief executive or one of the directors and the secretary in the prescribed from that the aforesaid conditions have been complied with and the registrar has issued a certificate of commencement of business; and (v) In the case of a company which has not issued a prospectus inviting the public to subscribe for its shares, a statement in lieu of prospectus has been filed with the registrar. © Emile Woolf International 69 The Institute of Chartered Accountants of Pakistan Business Law 81 MOA – object and registered office (a) (i) (ii) According to the Companies Ordinance, 1984 a company may alter the memorandum with respect to the objects of the company so far as may be required to enable it to: carry on its business more economically or more efficiently; or attain its main purpose by new or improved means; or enlarge or change the local area of its operations; or carry on some business, not being a business specified in its memorandum, which may conveniently or advantageously be combined with the business of the company; or restrict or abandon any of the objects specified in the memorandum; or sell or dispose of the whole or any part of the undertaking of the company; or amalgamate with any other company or body of persons. A Special Resolution authorising the change has to be passed. (iii) The alteration shall not take effect until and except in so far as it is confirmed by the Commission. Before confirming the alteration, the Commission must be satisfied: that sufficient notice has been given to every holder of debentures of the company, and to any person or class of persons whose interest will, in the opinion of the Commission, be affected by the alteration; and that, with respect to every creditor who in the opinion of the Commission is entitled to object and who signifies his objection in manner directed by the Commission, either his consent to the alteration has been obtained or his debt or claim has been discharged or determined, or has been secured to the satisfaction of the Commission. (iv) A certified copy of the order of the commission along with the altered memorandum is required to be filed with the registrar, within 90 days of the order. (b) The shareholder’s objection is not valid, because an alteration to change the place of registered office of a company from one city or town in a province to another does not require confirmation by the Commission. 82 MOA – alteration The commission may confirm the alteration in the memorandum of association of the company if it is satisfied that: (i) Sufficient notice has been given to every debenture holder of the company, and to any person or class of persons whose interest will, in the opinion of the Commission, be affected by the alteration; and (ii) With respect to every creditor who in the opinion of the Commission is entitled to object, and who signifies his objection in the manner directed by the Commission either his consent to the alteration has been obtained or his debt or claim has been discharged or determined, or has been secured to the satisfactions of the Commission. © Emile Woolf International 70 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers On confirmation of the alteration in the memorandum, the company shall file with the registrar, a certified copy of the order confirming the alteration, together with a printed copy of the memorandum as altered, within ninety days, from the date of the order. 83 Articles of association (a) Section 26 & 27,Companies Ordinance, 1984 (i) The company may adopt all or any of the regulations specified in Table A in the First Schedule to the Companies Ordinance, 1984 in its articles of association. (ii) The articles of the company shall be explicit and without ambiguity and also list and enumerate the voting and other rights attached to the different classes of shares and other securities to be issued by it. (iii) The Articles of Association shall be: printed divided into paragraphs numbered consecutively signed by each subscriber dated (b) Section 26, Companies Ordinance, 1984 The articles of association sets out regulations for the company and are required to be registered along with the memorandum, with the registrar. These must be signed by the subscribers to the memorandum. (c) Section 28 & 36, Companies ordinance, 1984 (i) Subject to the conditions of the company’s memorandum the Articles of Association are allowed to be altered after its registration. A company may by passing a special resolution make alteration or addition to its articles. Any alteration or addition made is as valid as if originally contained in the articles. (ii) Where such alteration affects the substantive rights or liabilities of members or of a class of members, the special resolution shall be passed only if a majority of at least three-fourths of the members or of the class of members affected by such alteration, vote for such alteration, personally or through proxy. (iii) When an alteration is made in the articles of a company, such changes are required to be made in every copy of the articles issued after the date of the alteration. 84 MOA – Nil capital The memorandum of association of a company limited by guarantee shall include the following clauses. a. Name clause The first clause of the memorandum is the name clause of the company which contains the name of the company with the addition of the words Guarantee Limited in case of a company limited by guarantee. © Emile Woolf International 71 The Institute of Chartered Accountants of Pakistan Business Law b. Registered office clause For registered office clause the province or the part of Pakistan not forming part of a province, as the case may be, in which the registered office of the company is to be situated. c. Object clause This clause of the memorandum clause contains the objects of the company and, except in the case of a trading corporation the territories to which they extend. d. Liability clause In case of a company limited by guarantee, the liability clause states that ‘the liability of the members is limited’. In case of a company limited by guarantee, the following additional sentences are added, ‘that each member undertakes to contribute to the assets of the company in the event of it being wound up while he is a member or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the contributories among themselves such amount as may be required, not exceeding a specified amount. 85 MOA – Alteration (office and objects) As per the Ordinance a company can alter the object or registered office clause of its memorandum of association only if any of the following can be proved to the satisfaction of the Commission: to carry on its business more economically or more efficiently; or to attain its main purpose by new or improved means; or to enlarge or change the local area of its operations; or to carry on some business, not being a business specified in its memorandum, which may conveniently or advantageously be combined with the business of the company; or to restrict or abandon any of the objects specified in the memorandum; or to sell or dispose of the whole or any part of the undertaking of the company; or to amalgamate with any other company or body of persons. The alteration shall not take effect until and except in so far as it is confirmed by the Commission on petition of the company filed for this purpose. 86 Incorporation Registration of a company is actually registration of the certificate of memorandum of the company as the memorandum is actually a charter of the company. For registration of a memorandum of association, it shall be filed with the registrar of companies. A declaration of compliance (on Form 1) with requirements of the Ordinance in getting the company registered shall be provided to the registrar along with the memorandum. Registrar shall register the memorandum of association only if it is satisfied that: the company is being formed for lawful purposes, none of its objects stated in the memorandum is inappropriate or deceptive or insufficiently expressive and all the requirements of this Ordinance and the rules made thereunder have been complied with in respect of registration. © Emile Woolf International 72 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers If the registrar of companies for any reason refuses the registration of the memorandum, the company may file an appeal before a registrar higher in rank or ultimately to the commission if no relief is received against such a refusal. Order of Commission on such appeal shall be final. 87 Name When selecting the name it should be considered that the name: is not inappropriate or deceptive; is not designed to exploit or offend the religious sentiments of the people; is not a name identical with the name of the company already registered and does not closely resemble with the name of the company already registered under the Ordinance, except where the company in existence, is in the course of being dissolved and signifies its consent in granting its name to the new company in such manner as the registrar requires. Whatever name is proposed, the final authority to decide whether or not a name is in line with the provisions of the Ordinance lies with the Commission. 88 Disallowed name Where a company has, due to any reason, been registered with a name which is not permitted by the Ordinance, the company may, on its own, change the name with the approval of the registrar. The registrar may also direct the company to change its name within thirty (30) days of the receipt of such directions. The registrar cannot issue any direction in this regard after the expiration of three years from the date of registration of the name of the company. The registrar shall give to the company an opportunity of being heard before issuing such direction. 89 Increase in authorized capital Section 92 and 94 The company may increase the authorized capital subject to the following conditions: 90 (i) Increase is allowed under the articles of association. (ii) Alter the capital clause of memorandum of association. (iii) Pass a special resolution. (iv) File a notice of the increase of capital along with the special resolution with the registrar within 15 days of passing of resolution. The notice shall include particulars of the shares to be affected and the conditions, if any, subject to which the new shares are issued. Variation of shareholders’ rights (a) Following conditions would have to be complied with by the aggrieved shareholders. (i) Their holding should be at least ten percent of the total class ‘B’ shares. (ii) Application must be filed within thirty days of the date of passing of special resolution. © Emile Woolf International 73 The Institute of Chartered Accountants of Pakistan Business Law (b) 91 The Court shall pass an order for cancellation of the resolution only if it is satisfied that some facts having impact on the decision of the shareholders were withheld by the company in getting the special resolution passed or, the variation in rights would unfairly prejudice the shareholders of the class represented by the applicant. Purchase of own shares Company is not entitled to buy its shares from the members. Further, company is also forbidden to buy the shares of its holding company. However as an exception, If subsidiary carries on a bona fide business of brokerage, then company can deal in the shares of its holding company but in this case as well, the company shall not exercise voting rights on the shares of the holding company held by it. As a further exception, if a subsidiary company provides service of a trustee for shares and people buy the shares and place them in the subsidiary company as trustee then such subsidiary, while acting as a subsidiary can hold the shares of the holding company in trust as well but beneficial ownership of those shares should not be in the name of the subsidiary company itself or the holding company. 92 Objections The resolution to vary the rights of the members needs approval by three fourth majority of the members of the particular class affected by the variation. However, r any member or members of the affected class representing at least ten percent shareholding of that class may apply to the court for an order against the resolution varying their rights. The court has got the powers to declare the resolution null and void if it feels that either; the company withheld certain facts while getting the resolution passed. Had the members been in knowledge of those facts, they would not have passed the resolution varying the rights of a particular class; or the change is otherwise prejudicial to the interest of members. Such application for getting an order against the resolution should be filed by the persons aggrieved by the change within 30 days of the date of resolution. The decision of the court on such matter shall be final and appeal cannot be filed against such decision and the company is required to file a copy of the order of the court to the registrar within fourteen days of receipt of the order. 93 Prospectus – consent of expert (a) "Expert" includes an engineer, a valuer, an accountant and every other person whose profession gives authority to a statement made by him. (b) A prospectus which includes a statement made by an expert shall not be issued, unless: (i) The expert has given his written consent to the issue thereof with the statement included in the form and context in which it is included and has not withdrawn such consent before the delivery of a copy of the prospectus. for registration; and (ii) A statement that he has given and has not withdrawn his consent as aforesaid appears in the prospectus. © Emile Woolf International 74 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law 94 Answer bank: Objective test and long-form answers Prospectus – publication and availability (a) Section 53(2), Companies Ordinance,1984 The advertisement of a prospectus is required to be published in a newspaper not less than seven days and not more than thirty days before the subscription list, is due to open. Since, Deo Limited published the prospectus on March 1, 20X4, which is more than 30 days before the subscription list was due to open i.e. April 5, 20X4. The Company is in violation of the requirements of above provision of Law. However, the Commission may, for special reasons, allow the company to publish the prospectus more than thirty days before the subscription list is due to open. (b) Section 53 (1A),Companies Ordinance,1984 Deo Limited is required to make available sufficient number of copies of its prospectus at the following places: 95 (i) registered office of the company, (ii) with the stock exchange at which the company is listed or proposed to be listed; and, (iii) with the bankers to the issue, Prospectus - registration Section 52, 53 , 54, 55, 57 The registrar shall not register a prospectus unless the following requirements have been complied with: i) Prospectus is dated. ii) It shall state the matters and reports specified in the Second Schedule. iii) Experts whose statements are included have not been connected with the formation, promotion or management of the company. iv) Experts whose statements are included in the prospectus have given written consent for issue of such statements. v) All requirements regarding approval, issue and registration have been complied with. vi) The prospectus is accompanied by the written consent of the auditor, legal adviser, attorney, solicitor, banker and the broker who have agreed to act in that capacity. 96 Prospectus – relief from liability Mr. Zafar shall not incur any liability by reason of any non-compliance with, or contravention of, any of the requirements of Companies Ordinance, 1984 related to the prospectus, if (a) he proves that he had no knowledge regarding the matter not disclosed. (b) he proves that the non-compliance or contravention arose from an honest mistake of fact on his part; or (c) that non-compliance or contravention was in respect of matters which, in the © Emile Woolf International 75 The Institute of Chartered Accountants of Pakistan Business Law opinion of the registrar or officer dealing with the case, were immaterial, or was otherwise such as ought, in the opinion of that registrar or officer, as the case may be, having regard to all the circumstances of the case, reasonably to be excused. 97 Minimum subscription The amount of minimum subscription must be stated in the prospectus. This includes: 98 Purchase price of property to be purchased. Preliminary expenses including underwriting commissions etc. Repayment of any money borrowed for above matters. Working capital. Any other expenditure. If the company intends to meet all or any of the above needs from any source other than the issue of shares, such source shall be disclosed. Face of prospectus Following matters shall be stated on the face of the prospectus: 99 That a copy of this prospectus has been filed with the registrar for registration purpose. List of documents or a reference to any note in the prospectus containing the list of documents that were filed with the registrar along with the copy of the prospectus when it was filed for registration. That an application for listing of the shares or debentures offered under the prospectus has been filed or shall be filed with the stock exchange. Mortgages and charges 1 (a) The following mortgages and charges, if not registered, would be treated as void: (i) for the purpose of securing any issue of debentures. (ii) on uncalled share capital of the company. (iii) on any immovable property wherever situated, or any interest therein. (iv) on any book debts of the company. (v) on any movable property of the company (not being a pledge). (vi) on a ship or any share in a ship. (vii) on goodwill, on a patent or licence under a patent, on trade mark, or copyright or licence under a copyright. © Emile Woolf International 76 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers (viii) or other interest based on agreement for the issue of any instrument in the nature of redeemable capital. (b) (ix) or other interest based on a Musharika agreement. (x) or other interest based on a hire-purchase or leasing agreement for acquisition of fixed assets. (xi) floating charge on the undertaking or property of the company, including stock-in-trade. The registrar can enter in the register of mortgages and charges a memorandum of satisfaction or release of charge without receiving any intimation from the Company, on evidence being given to his satisfaction with respect to any registered charge, that the: (i) debt for which the charge was given has been paid or satisfied in whole or in part, or (ii) part of the property or undertaking charged has been released from the charge or has ceased to form part of the company's property or undertaking; 100 Mortgages and charges 2 Procedure for registration of the payment or satisfaction of mortgage (i) A company must give intimation to the registrar of the payment or satisfaction, in full, of any mortgage created by the company and requiring registration, within twenty-one days from the date of the payment or satisfaction, in full, thereof. (ii) The registrar, on receiving such intimation, will send a notice to the holder of the mortgage, calling upon him to show-cause, within fourteen days of the notice, as to why the payment or satisfaction of the charge or mortgage should not be recorded. (iii) If no objection is raised by the holder of the charge, the registrar shall order that a memorandum of satisfaction be entered in the register. (iv) If any objection is received, the registrar shall record a note to that effect in the register, and shall inform the company about the same 101 AGM timeline In the case of a listed company, the Commission and in any other case, the registrar, may for any special reason extend the time within which any annual general meeting, not being the first such meeting, shall be held, by a period not exceeding thirty days. 102 Ordinary vs. special (a) The following businesses transacted at a general meeting are considered as ordinary businesses: (i) consideration of the accounts and balance-sheets (ii) the presentation of the reports of the directors and auditors, (iii) declaration of a dividend, (iv) appointment and fixation of remuneration of auditors © Emile Woolf International 77 The Institute of Chartered Accountants of Pakistan Business Law (v) election or appointment of directors Any business other than those specified above is termed as special business. (b) Where any special business is to be transacted at a general meeting, a statement setting out all material facts concerning such business, including, the nature and extent of interest, whether directly or indirectly, therein of every director, must be annexed to the notice of the meeting. Further, where any business transaction requires an approval to any document by the meeting, the time when and the place where the document may be inspected must be specified in the statement annexed to the notice. 103 AGM and EGM The exception to the statements given in the question are as under: (a) The Commission for any special reason may on the application of such company allow the company to hold a particular meeting at any other places. (b) In the case of an emergency affecting the business of the company the registrar may on the application of the directors authorize such meeting to be held at such shorter notice as he may specify. 104 Polling (a) (b) If Mr. Shakeel intends to make a request for a poll, the chairman of the meeting would be required to accept his request provided the request is supported: (i) in the case of a public company, by at least five members having the right to vote on the resolution and present in person or by proxy; (ii) in the case of a private company, by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present, and by two such members present in person or by proxy if more than seven such members are personally present. (iii) by any member or members present in person or by proxy and having not less than one-tenth of the total voting power in respect of the resolution. (iv) by any member or members present in person or by proxy and holding shares in the company conferring a right to vote on the resolution, being shares on which an aggregate sum has been paid up which is not less than one-tenth of the total sum paid up on all the shares conferring that right. When a poll is taken, the chairman or his nominee and a representative of the members demanding the poll i.e. Mr.Shakeel and members requesting the poll, shall scrutinize the votes given on the poll. However, the results of the poll shall be announced by the chairman of the meeting. 105 Minutes Every company shall enter a fair and accurate summary of the minutes of all proceedings of general meetings in the properly maintained minute book along with the names of those participating in the meetings. Minute are required to be signed by the chairman of the general meeting or by © Emile Woolf International 78 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers the chairman of the next succeeding meeting, in order to be evidence of the proceedings. The books containing minutes of proceedings of the general meetings must be kept at the registered office of the company The minute’s book may be allowed/open for inspection of members without charge for not less than two business hours in each day Subject to reasonable restrictions imposed through its articles of association or in general meeting. Any member shall at any time after seven days from the meeting be entitled to be furnished, with a certified copy of the minutes of any general meeting at such charge not exceeding the prescribed amount as may be fixed by the company. The company shall provide, within seven days after member has made a request in this respect, a certified copy of the minutes. 106 Meetings – commencement and EGM (a) The statement is incorrect because private companies are not required to hold statutory meetings. Moreover, the statutory meeting is to be held within a period of not less than three months, or more than six months, from the date at which the company is entitled to commence business. (b) In the case of an emergency affecting the business of the company, the registrar may, on the application of the directors, authorize EOGM to be held at such shorter notice as he may specify. 107 Quorum (a) Being a public listed company, the quorum of the meeting is not less than 10 members present personally who represent not less than 25% of the total voting power, either of their own account or as proxies, unless the articles provide for a larger number. (b) The quorum of the meeting should be present within half an hour from the time for the meeting otherwise the meeting shall be dissolved as it has been called on the requisition of members. (c) Since chairman of the board of directors cannot attend the meeting therefore, any one of the directors present may be elected to be chairman. (d) However, if none of the directors is present or is unwilling to act as chairman, the members present shall choose one of the members to be the chairman. 108 Members and meetings (a) (i) Section 164 (1) & (2),Companies Ordinance,1984 Any member having not less than ten percent voting power in the company may give notice of a resolution and such resolution together with the supporting statement, if any, is required to be forwarded in such a way so as to reach the company at least fifteen days before the meeting. Mr. Dinshaw holds 13.5% shares in the company i.e. more than 10% hence he is entitled to submit the resolution to the company. However, since the notice given by Mr. Dinshaw did not reach the company in the prescribed time, the company cannot be held liable for its failure to circulate the resolution. © Emile Woolf International 79 The Institute of Chartered Accountants of Pakistan Business Law (ii) Section 173 (6) & (7),Companies Ordinance,1984 The books containing the minutes of proceedings of the general meetings shall be open to inspection by members without charge during business hours, subject to such reasonable restrictions as imposed by the company through its articles of association or in the general meeting, but not less than two hours in each day be allowed for inspection. Any member shall at any time after seven days from the meeting be entitled to obtain a certified copy of the minutes of any general meeting, which shall be provided to him within seven days after he has made a request to the company, at charges not exceeding the amount fixed by the company. Therefore, Mr. Dinshaw is entitled to inspect and receive the certified copy of the minutes of the general meeting. (iii) Section 173 (1) & (4),Companies Ordinance,1984 A fair and accurate summary of the minutes of all proceedings of general meetings and meetings of its directors and committee of directors is required to be maintained by every company. The names of the participants of the meetings should also be entered in properly maintained books. The minutes book of the proceedings of the general meetings and directors’ meetings of the company are required to be kept at the registered office of the company. (b) Resolution passed at adjourned meeting-Section 169, Companies Ordinance, 1984 Where a resolution is passed at an adjourned meeting of the creditors of a company, the resolution shall, for all purposes, be treated as having been passed on the date on which it was in fact passed, and shall not be deemed to have been passed on any earlier date. 109 Circulation Following information/ documents are required to be circulated to various stake holders at least twenty one days prior to the meeting. (i) Notice of meeting specifying the place and the day and hour of the meeting along with a statement of the business to be transacted at the meeting and in respect of the special business, statement setting out all material facts concerning the business, including, in particular the nature and extent of the interest therein, if any, of every director Every notice of a meeting of a company shall be accompanied by a proxy form. The notice shall be sent to the following: (ii) All the members; Any person entitled to a share in consequence of death of a member if the interest of such person is known to the company; The auditor or auditors of the company. Being a listed company, such notice shall also be published at least in one daily newspaper in English language and a daily newspaper in Urdu language having circulation in the Province in which the stock exchange on which the © Emile Woolf International 80 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers company is listed is situated. (iii) Copies of draft resolutions, which are proposed for consideration in the meeting. (iv) Every company shall also send: copy of audited balance sheet and Profit and loss account copy of auditors report Directors report The above should be sent to the following: the registered address of every member of the company Securities & Exchange Commission Stock exchange Registrar. Section 158, 160, 161 and 164 110 Representation and proxy (a) A company which is a member of another company may by resolution of the directors, authorize any of its officials or any other person to act as its representative at the meeting of that other company. Representation of corporation at meetings of companies (Section 162) (b) The instrument appointing a proxy shall: be in writing and be under company seal or be signed by an officer or an attorney duly authorized. The proxy shall be lodged with the company not later than forty-eight hours before the time of the meeting. Proxies Section 161 (3b & 5) 111 EOGM and special business (a) (i) All general meetings of a company other than Annual General Meeting and Statutory Meeting shall be called EOGM. (ii) The minimum notice period for calling an EOGM is 21 days. In case of emergency affecting the business of the company, the registrar may on the application of the directors, authorize such meeting to be held at such shorter notice as he may specify. Calling of extra ordinary general meeting, (Section 159-7) (b) All businesses transacted at an extraordinary general meeting or annual general meeting, shall be treated as “special business” except the following: declaration of dividend, consideration of the accounts, balance sheet and the reports of the directors and auditors, © Emile Woolf International 81 The Institute of Chartered Accountants of Pakistan Business Law election of directors, appointment and fixing of the remuneration of auditors. Examples: (i) Disposal of a significant business segment of company. (ii) Investment in associated undertaking. Provisions as to the meetings and votes, (Section 160 - b) 112 Special resolutions Section 2 Special resolution means a resolution which has been passed by a majority of not less than three-fourths of such members at a general meeting of which not less than twenty-one days’ notice specifying the intention to propose the resolution as a special resolution has been duly given. If all the members entitled to attend and vote at any such meeting so agree, a resolution may be proposed and passed as a special resolution at a meeting of which less than twenty-one days’ notice has been given. 113 Auditor’s certificate Auditors’ certificates on statutory report The statutory report should be accompanied by an auditor’s certificate in respect of correctness or otherwise of: allotment of shares cash received against share allotted and receipts and payments account of the company. 114 Commission GM Commission has got the powers to call general meetings of the company if the company fails to a) Call a general meeting b) Call a statutory meeting or c) Call an extraordinary general meeting on the requisition of the members. 115 Subsequent CEO The statement is incorrect. Any chief executive (first or subsequent) is appointed by the directors within fourteen days from the date of their election or within fourteen days of the office of the chief executive falling vacant. The chief executive, other than the first chief executive of the company, is appointed for a period not exceeding three years. © Emile Woolf International 82 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers 116 CEO – removal and competitors (a) Mr. Zameer being appointed as the first chief executive of Ryan Industries Limited, will hold office up to the first annual general meeting of the company or if a shorter period is fixed by the directors at the time of his appointment, on expiry of such period unless he earlier resigns or ceases to hold office. Since the directors are not satisfied with the performance of Mr. Zameer they can remove him by a resolution passed by not less than three-fourths of the total number of directors for the time being, or by passing a special resolution in the general meeting of the company, notwithstanding anything contained in the articles or in any agreement between the company and Mr. Zameer. (b) Chief executive of a public company shall not directly or indirectly engage in any business which is of the same nature as and directly competes with the business carried on by the company of which he is the chief executive or by a subsidiary of such company. A business shall be deemed to be carried on indirectly by the chief executive if the same is carried on by his spouse or any of his minor children. Every person who is appointed as chief executive of a public company shall forthwith on such appointment disclose to the company in writing the nature of such business and interest therein. 117 Casual vacancy Alpha Securities Limited (ASL) is a public company and is required to have at least three members as well as three directors On the death of Qasim, the number of members and directors of ASL has been reduced to two which is in contravention of the provisions of the Companies Ordinance 1984. The casual vacancy arising due to the death of Qasim may be filled up by Abid and Tariq and the person so appointed would hold office for the remainder of the term of Qasim in whose place he is appointed. 118 Election (a) The number and names of the first directors of the company shall be determined in writing by the majority of subscribers of the memorandum of the company and until so determined, all the subscribers of the memorandum, who are natural persons, shall be deemed to be the directors of the company. The first directors shall hold office until the election of directors in the first annual general meeting of the company. (b) The following procedure should be followed by a private company while holding its election of directors: (i) The existing directors of a company must fix the number of elected directors of the company at least thirty-five days before the convening of the general meeting at which directors are to be elected. The number of directors so fixed cannot be changed except, with the prior approval of a general meeting of the company. (ii) The notice of the general meeting at which election of directors is to be held must state: the number of elected directors fixed for election. the names of the retiring directors. © Emile Woolf International 83 The Institute of Chartered Accountants of Pakistan Business Law (iii) The company must receive a notice of intention to offer themselves for election as a director, from the persons who seek to contest an election, whether they are a retiring director or otherwise, at least 14 days before the date of the general meeting at which elections are to be held. Any such person may at any time before the holding of election withdraw such notice. (iv) All notices received by the company must be circulated among the members, not later than seven days before the date of the general meeting in the manner provided by the company for sending of a notice of general meeting. (v) The directors of the company having a share capital shall, unless the number of persons who offer themselves to be elected is not more than the number of directors fixed, be elected by the members of the company in general meeting in the following manner, A member shall have such number of votes as is equal to the product of the number of voting shares or securities held by him and the number of directors to be elected. A member may give all his votes to a single candidate or divide them between more than one of the candidates in such manner as he may choose; and The candidate who gets the highest number of votes shall be declared elected as director and then the candidate who gets the next highest number of votes shall be so declared and so on until the total number of directors to be elected has been so elected. 119 Presence This rule is not applicable to: (i) a private company which is neither a subsidiary nor a holding company of a public company; (ii) any contract of indemnity against any loss which the directors, or any one or more of them, may suffer by reason of becoming or being sureties or a surety for the company; (iii) any contract or arrangement entered into or to be entered into with a public company, in which the interest of the director aforesaid consists solely in his being a director of such company and the holder of no more than such shares therein as are requisite to qualify him for appointment as a director thereof, he on being nominated as such director by the sending company. 120 Number, remuneration and assignment (a) The statement is not in accordance with the provisions of the Companies Ordinance 1984 because the directors shall fix the number of directors to be elected not later than thirty-five days before the convening of the general meeting at which directors are to be elected, and the number so fixed shall not be changed except with the prior approval of a general meeting of the company. © Emile Woolf International 84 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers (b) The statement is not in accordance with the provisions of the Companies Ordinance 1984. The directors’ remuneration for performing extra services, including the holding of the office of chairman, is determined by the directors or the company in general meeting in accordance with the provisions in the articles of association of the company. (c) The statement is not in accordance with the provisions of the Companies Ordinance 1984. The assignment of office is possible provided it is allowed under the articles of association of the company and assignment is approved by a special resolution passed by the shareholders at the general meeting of the company. 121 Fresh elections Any person own name, election of Companies company. who is holding not less than 12.5% voting shares of the company, in his may apply to the Commission for requiring the company to hold fresh directors in accordance with the procedure laid down under the Ordinance, 1984 in the forthcoming annual general meeting of the The Commission may, if it deems appropriate in the interest of the company, its minority shareholders or the capital markets generally, direct the company to hold the election of directors in the manner provided under section 178, and the company shall comply with such direction. The person on whose request such elections are held shall not sell or otherwise dispose of the shares acquired by him for at least one year from the date of election of directors. 122 Loans The company may grant loan to a director if he is in the whole time employment of the company. Such loan may be granted after getting prior approval from the Commission. The purpose for which a company may grant the loan are as follows: (a) For acquisition or construction of a dwelling house or land therefore (b) For defraying the cost of any conveyance for personal use or household effects (c) For defraying any expense on his medical treatment or the medical treatment of any relative as are ordinarily made or provided by the company to its employees. 123 Power Powers of Directors. The shareholders seem to be referring to the following powers of the directors of RRL: (i) Make calls on shareholders in respect of moneys unpaid on their shares. (ii) Borrow moneys otherwise than on debentures. (iii) Invest the funds of the company. (iv) Make loans. © Emile Woolf International 85 The Institute of Chartered Accountants of Pakistan Business Law (v) Incur capital expenditure on any single item or dispose of a fixed asset, in accordance with the limits prescribed. (vi) Undertake obligations under leasing contracts exceeding one million rupees. (vii) Issue shares (viii) Issue debentures or any other instrument in the nature of redeemable capital. (ix) Declare interim dividend (x) Write off bad debts, advances and receivables (xi) Write off inventories and other assets of the company (xii) To authorize sale, purchase or supply contracts with interested companies and firms (xiii) To approve annual, half yearly or other periodical accounts to be circulated to members. (xiv) To approve bonus to employees 124 Number and casual vacancy (a) Section 174 & 178(1),Companies Ordinance,1984 Every public company other than a listed company shall not have less than three directors. As Lalazar Limited has eight directors on their board, therefore they are in compliance with the requirements of law. The directors of a company shall fix the number of elected directors of the company not later than 35 days before the convening of the general meeting at which directors are to be elected. The number of directors so fixed shall not be changed except with the prior approval of a general meeting of the company. (b) Section 180(2),Companies Ordinance,1984 Any casual vacancy occurring among the directors may be filled up by the directors. Mr. Aslam shall hold office for the remainder of the term of the director Mr. Javed in whose place he has been appointed. 125 First and subsequent First Directors The names of the first directors shall be determined in writing by a majority of the subscribers of the memorandum until so determined; all the subscribers of the memorandum shall be deemed to be the directors of the company. The first directors shall hold office until the election of directors in the first annual general meeting. Subsequent directors are elected in the first general meeting of the company. The directors so elected, hold office for a period of three years. First Chief executive The directors shall appoint any individual to be the chief executive of the Company who shall hold office up to the first annual general meeting of the company or, if a shorter period is fixed by the directors as the time of his appointment, for such period. © Emile Woolf International 86 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers Subsequent Chief Executive Subsequent CEO is also appointed by the Directors, but such appointment shall not be for a period exceeding three years from the date of appointment. 126 Removal Removal of Directors-Section 181,Companies Ordinance,1984 A company may by resolution in a general meeting remove a director appointed to fill in the casual vacancy or a director appointed by members in a general meeting of the company. (i) The situation relates to the removal of director appointed to fill in the casual vacancy. Therefore, the number of votes cast against the resolution should not be equal to or exceed the total number of votes for the time being computed in a manner similar to the method used for directors’ election divided by the number of directors, which in this case would be 10,000,000 x 8 ÷ 8 = 10,000,000. (ii) Mr. Badar can be removed from his office only when the votes cast against the resolution are less than 220,000 i.e. the minimum number of votes through which the director was elected in the immediately preceding election of directors. 127 Loan repayment Section 184(1) and Section 195(4) If the loan is obtained for the purpose of: acquisition or construction of dwelling house; defraying the cost of any conveyance; defraying the cost of any household; defraying any expense on his medical treatment; defraying any expense on his relative’s medical treatment. Then Mr. Shams shall within fourteen days of his appointment as chief executive of the company file with the registrar the particular of the loan taken, prior to his becoming chief executive which could not have been taken without the prior approval of the Commission. If the loan is not obtained for the above purposes, then he will be required to repay the loan before the acceptance of the position of CEO. 128 General notice of interest General notice of ownerships and directorships Instead of making a disclosure at separate intervals on transaction by transaction basis, the director may give a general notice regarding his directorships in other body corporate or partnership in firms so that he may be considered as interested in any transaction, contract or arrangement entered into with these businesses. Such notice should be given at the directors' meeting or the concerned director may take reasonable steps to ensure that the notice is read by the other directors. This general notice shall expire at the end of the financial year in which it is given and may be replaced by fresh notice to be given in last month of financial year. © Emile Woolf International 87 The Institute of Chartered Accountants of Pakistan Business Law 129 Associated company “Associated companies” mean any two or more companies or a company and an undertaking, interconnected with each other in the following manner, namely: (a) If a person who is the owner or a partner or director of a company or undertakings, or who, directly or indirectly, holds or controls shares carrying not less than twenty percent of the voting power in such company or undertaking, is also the owner or partner or director of another company or undertaking, or directly or indirectly, holds or controls shares carrying not less than twenty percent of the voting power in that company or undertaking; or (b) If the companies or undertakings are under common management or control or one is the subsidiary of another; or (c) If the undertaking is a modaraba managed by the company; and a person who is the owner of or a partner or director in a company or undertaking or, who also holds or controls shares carrying not less than ten percent of the voting power in a company or undertakings, shall be deemed to be an “associated person” of every such other person and of the person who is the owner of or a partner or director in such other company or undertaking, or who so holds or controls such shares in such other company or undertaking. Provided that shares shall be deemed to be owned, held or controlled by a person if they are owned, held or controlled by that person or by the spouse or minor children of the person. Provided further that (i) Directorship of a person or persons by virtue of nomination by the Federal Government or a Provincial Government or a financial institution directly or indirectly owned or controlled by such Government; or (ii) Shares owned by the National Investment Trust or the Investment Corporation of Pakistan or a financial institution directly or indirectly owned or controlled by the Federal Government or a Provincial Government or shares registered in the name of a central depository, where such shares are beneficially owned by the central depository; Shall not be taken into account for determining the status of a company, undertaking or person as an associated company, associated undertaking or associated person. 130 Dividend restriction The statement is incorrect and contains the following errors. The chief executive of the company does not declare the dividend. He informs the shareholders about the percentage/amount of the dividend as recommended by the directors. The dividend is approved by the members but the dividend so approved shall not exceed the amount as recommended by the directors. No dividend shall be declared or paid by a company out of the profits of the company made from the sale or disposal of any immovable property or assets of a capital nature comprised in the undertaking(s), unless the business of the company consists, whether wholly or partly, of selling and purchasing any such property or assets, except after such profits are set off or adjusted against losses arising from the sale of any such immovable property or assets of a capital nature. © Emile Woolf International 88 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers 131 Investment restriction A company shall not make any investment in any of its associated companies or associated undertakings except under the authority of a special resolution which shall indicate the nature, period and amount of investment and terms and conditions attached thereto. Provided that the return on investment in the form of loan shall not be less than the borrowing cost of investing company. No change in the nature of an investment or the terms and conditions attached thereto shall be made except under the authority of a special resolution. 132 Payment of dividend The Chief Executive will not be punishable in the following cases: (i) where the dividend could not be paid by reason of the operation of any law. (ii) where a shareholder has given directions to the company regarding the payment of the dividend and those directions could not be complied with. (iii) where there is a dispute regarding the right to receive the dividend. (iv) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder. (v) where for any other reason the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company. And the commission has allowed the company to withhold or defer the payment of dividend against an application made by the company within 45 days from the date of declaration of dividend. 133 Dividend amendment (i) (ii) Once the dividend is recommended by the Board of Directors, it may be reduced by approval of members, in the AGM. Certain restrictions on declaration of dividend Section 248(1) When a dividend has been declared, it shall not be lawful for the directors to defer its payment for more than 30 days. Hence the company cannot defer it for six months. 134 Qualification The statement is correct however, if a person holds shares prior to his appointment as auditor, he can still be appointed as auditor provided he disinvests such shares within ninety days of his appointment. 135 Removal - representation It shall not be necessary to read out the representation received from the retiring auditor, at the meeting if on the application either of the company or of any other aggrieved person the registrar is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; 136 Removal – change of auditor The Company shall forthwith send a copy of such notice to the retiring auditor and shall also give thereof to its members not less than seven days before the date fixed © Emile Woolf International 89 The Institute of Chartered Accountants of Pakistan Business Law for the annual general meeting and shall also publish it at least in one issue each of a daily newspaper in English Language and a daily newspaper in Urdu Language having circulation in the Province in which the stock exchange on which the company is listed is situated. 137 Books of accounts (a) SQL Plastic Limited must keep proper books of account with respect to: (i) all sums of money received and expended by the company; (ii) all sales and purchases of goods by the company; (iii) all assets of the company; (iv) all liabilities of the company; and (v) in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or other inputs or items of cost, or any other particulars as required by the Commission through a general or special order to be included in the books of accounts. (b) As the directors of SQL Plastic Limited intend to keep the books of account at a place other than the registered office, SQL Plastic Limited must file with the registrar a notice in writing within seven days of the decision, giving the full address of the other place. 138 Registrar and the directors’ report (a) An unlisted company not being a private company having a paid up capital of less than Rs. 7.5 million, must complete the following necessary formalities before and after the AGM: (i) Before the AGM: Notice of an annual general meeting must be sent to every shareholder at least 21 days before the date of AGM along with a copy of such balancesheet and profit and loss account so audited together with a copy of the auditor’s report and the director’s report and shall keep a copy at the registered office of the company for the inspection of the members of the company during a period of at least twenty-one days before that meeting. (ii) After the AGM: The company must file with the registrar two copies of the balance-sheet and profit and loss account that have been laid before the company at the annual general meeting and signed by the chief executive, directors, chairman of directors or the auditors of the company in the prescribed manner, within thirty days from the date of AGM. (b) The contents of the directors’ report of a public company, as specified in the Companies Ordinance, 1984 are as follows: (i) report on the company’s affairs; (ii) the amount of recommended dividend; (iii) amount proposed to be carried to the Reserve Fund, General Reserve or Reserve Account; (iv) disclosure of material changes and commitments affecting the financial position of the company since the end of the financial year to which the © Emile Woolf International 90 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers balance-sheet relates and the date of the report; (v) any changes concerning the nature of the business of the company or of its subsidiaries, or in the classes of business in which the company has interest; (vi) fullest information and explanation regarding any reservation, observation, qualification or adverse remarks contained in the auditor’s report; (vii) the pattern of shareholding; (viii) name and country of incorporation of its holding company, if any, where such holding company is established outside Pakistan; (ix) earnings per share; (x) reasons for incurring loss and a reasonable indication of future prospects of profit, if any; (xi) information about defaults in payment of debts, if any, and reasons thereof. 139 Signing the accounts When the chief executive is for the time being not in Pakistan, then the balancesheet and profit and loss account or income and expenditure account of the company shall be signed by not less than two directors for the time being in Pakistan, but in such a case there shall be subjoined to the balance-sheet and profit and loss account or income and expenditure account a statement signed by such directors explaining the reasons on account of which the accounts could not be signed by the Chief Executive. 140 The auditors’ report (a) The auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company. (b) The auditor’s report shall only be signed, by the person appointed as auditor of the company, or where a firm is so appointed, by the partner in the firm practicing in Pakistan. The auditor’s report shall be dated and indicate the place, at which it is signed. 141 Appointment of auditor Procedure for change of auditor and company’s responsibilities (i) Mr. Brown (the proposer of the change) shall give a notice to SPL not less than fourteen days before the annual general meeting for passing a resolution at the company’s annual general meeting for appointment of ABC & Co. Chartered Accountants as the auditor in place of the retiring auditor. (ii) The company shall forthwith send a copy of notice not less than seven days before the date fixed for the annual general meeting to the following: (iii) retiring auditor its members and being a listed company, SPL shall also publish notice at least in one issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the Provinces (Sind & Punjab) in which the © Emile Woolf International 91 The Institute of Chartered Accountants of Pakistan Business Law stock exchanges on which the company is listed are situated. (iv) (v) (vi) Where retiring auditor makes with respect thereto a representation in writing to the company and requests its communication to the members of the company, the company shall, in any notice of the resolution given to members of the company, state the fact of the representation having been made; and send a copy of the representation to every member of the company to whom notice of the meeting is sent by the company and if copy is not sent as aforesaid because it was received too late or because of a company’s default, the auditor may require that the representation shall be read out at the meeting. The company shall, within fourteen days from the date of appointment of the auditor, send to the registrar the following: intimation of such appointment, consent in writing of the auditor concerned. The company shall, within fourteen days from the date of retirement of the previous auditor send intimation thereof to the registrar. 142 Auditor and the AGM The auditor of a company shall be entitled to attend any general meeting of the company. However, in the case of a listed company, it is mandatory for an auditor or a person authorized by him in writing, to be present in the general meeting in which the balance-sheet and profit and loss account and the auditor’s report are to be considered. 143 Auditor disqualification Following persons shall not be appointed as auditor of a company. A person who is or at any time during the preceding 3 years was a director, other officer or employee of the company. Partner or employee of a director, officer or employee of the company. The spouse of a director of the company. A person who is indebted to the company. A body corporate. A person or his spouse or minor children or in case of audit firm, all partners of such firm who hold shares of the company or any of its associated companies. Powers and duties of auditors Section 254(3) © Emile Woolf International 92 The Institute of Chartered Accountants of Pakistan Section D: Part B - Company Law Answer bank: Objective test and long-form answers 144 Appointment by SECP Section 252(6) In the following circumstances SECP becomes authorized to appoint the auditors of a company: (i) The first auditors are not appointed within one hundred and twenty days of the date of incorporation of the company, or (ii) No auditors are appointed at an annual general meeting, or (iii) Auditors appointed at an annual general meeting are unwilling to act as auditors of the company. or (iv) A casual vacancy in the office of an auditor is not filled within thirty days after the occurrence of the vacancy, or (v) Auditors are removed by the company before the expiry of their term. © Emile Woolf International 93 The Institute of Chartered Accountants of Pakistan Business Law © Emile Woolf International 94 The Institute of Chartered Accountants of Pakistan