Corporate and
Business Law
(Pakistan
Fundamentals Level – Skills Module
Time allowed
Writing: 3 hours
ALL TEN questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
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The Association of Chartered Certified Accountants
ALL TEN questions are compulsory and MUST be attempted
1 With reference to Articles 8 and 184 of the Constitution of Pakistan, 1973, discuss the constitutional safeguards
available for the protection of the fundamental rights.
(10 marks)
Solution:
1 The constitutional safeguards available for the protection of the fundamental rights under the Constitution of Pakistan, 1973
(‘Constitution’) are provided in Articles 8 and 184 of the Constitution. These are explained as under:
No Promulgation of Laws that are Violative of the Fundamental Rights
Article 8 states that any law, custom or usage having the force of law, insofar as it is inconsistent with the fundamental rights shall
to the extent of such inconsistency, be void. Further that the state shall not make any law which takes away or abridges the rights
so conferred and any law made in contravention shall to such extent be void.
Thus the underlying principle laid down under Article 8 is that no law will be accepted as a good law which is violative of the
Fundamental Rights of the citizens of Pakistan
law void.
Safeguard of Fundamental Right by Supreme Court
Article 184 provides for the jurisdiction of the Supreme Court of Pakistan to take cognizance (on petition or even suo moto) of any
matter which involves a question of public importance with reference to the enforcement of any of the Fundamental Rights provided
under the Constitution. However, this clause provides two preconditions to invoke the jurisdiction of the Supreme Court. The
pre-conditions are that the petition must show that the grievance relates to violation of a Fundamental Right; secondly, that the
alleged violation is of the nature of public importance.
Fundamental Rights remain intact even during Emergency
Finally, the constitutional limit on promulgation of laws in contravention of the fundamental rights remains intact even by imposition
of emergency under Article 233. As clause (2) of the said Article only provides that during emergency the right to move to any
court for the enforcement of any of the fundamental rights, and any proceeding in any court for the enforcement of such rights,
shall remains suspended.
In conclusion the provisions of Article 8 and 184(3) guarantee the protection of the Fundamental Rights. These provisions not only
prohibit the promulgation of any laws in contravention of the Fundamental Rights but also vest a vast jurisdiction in the Supreme
Court to strike down such laws as unconstitutional.
2 In relation to the law of contract, analyse ‘contingent contracts’.
(10 marks)
Solution:
Definition:
Section 31 of the Contract Act, 1872 (‘1872 Act’) defines a contingent contract as: ‘A contract to do or not to do something, if
some event, collateral to such contract, does or does not happen’.
Explanation – Characteristics of a Contingent Contract
The above definition provides three essential characteristics of a contingent contract, viz:
(a) Its performance depends upon the uncertainty of happening or non-happening in some future event.
(b) Such event must be collateral, i.e. incidental to the contract.
(c) The contingent event should not be mere will of the promisor.
Illustration: Ali contracts to pay Asad Rs. 100,000 if Asad’s house is burnt down.
This is a contingent contract.
Further, a contract shall ripen into an absolute obligation only on the happening of the event or upon fulfilment of the condition
stipulated therein and until then the contract is not enforceable.
Rules Regarding the Performance of Contingent Contracts
The rules regarding the performance of a contingent contract are contained in ss.32 to 36 of the 1872 Act.
(i) The Happening of an Uncertain Future Event
According to s.32, a contract dependent on the happening of an uncertain future event can be enforced only when that event
has happened.
Illustration: A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced by law unless and
until C dies in A’s lifetime.
(ii) The Non-happening of an Uncertain Future Event
According to s.33, a contract dependent on the non-happening of an uncertain future event can be enforced only when the
happening of that event becomes impossible and not before.
Illustration: A undertook insurance worth Rs. 1,000,000, if a certain ship does not return to the Karachi
is sunk en route to the Karachi
(iii) When Event to be Deemed Impossible
According to s.34, if the uncertain event is the future conduct of a third party, such an event shall be considered impossible
if that person does any act due to which the contract cannot be enforced in any definite time. For instance, A agrees to pay
B a sum of money if B marries C, but C marries D. The marriage of B to C must now be considered impossible.
(iv) The Happening of an Event within a Fixed Time
According to s.35, if a promise is to be performed within a specified period of time – provided an event happens, he is bound
to perform his promise if the event happens within the specified time. If the time so specified elapses and the event does not
happen, or the event becomes impossible before the fixed time, the contract becomes void.
Illustration: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the
ship returns within the year and become void if the ship is destroyed within the year.
(v) The Non-happening of an Event within a Fixed Time
According to the second paragraph of s.35, if a promise is to be performed with a specified period of time – provided an event
does not happen, such a promise may be enforced if the event does not happen, within the specified period of time or the
time expires without the event happening.
Illustration: A promised to pay B, a sum of money if a certain ship does not return within a year. The contract may be enforced
if the ship does not return within the year, or is destroyed within the year.
(vi) Impossible Events
According to s.36, a contingent contract to do or not to do anything if an impossible event happens, is void, whether the
impossibility of the event is known or not to the parties to the agreement at the time when it is made. For instance, A agrees
to pay Rs. 10,000 if B will marry A’s daughter C, whereas C was dead at the time of the agreement. The agreement is
therefore void.
In conclusion, a contingency is anything that the contract is dependent upon and that could void the contract if the contingency
is not met.
3 In relation to the law of partnership, describe the essentials of a partnership.
(10 marks)
Solution:
According to Pollock, ‘partnership is a relationship which subsists between persons who have agreed to share the profits of a
business carried on by all or any of them, on behalf of all of them’.
Essentials of a Partnership
According to s.4 of the Partnership Act, 1932 (‘1932 Act’): ‘partnership is the relation between the persons who have agreed to
share the profits of a business carried on by all or any of them acting for all’.
By virtue of the above definition the following are the three essential elements to constitute a partnership.
(a) Partnership Agreement: There must be an agreement entered into by all the persons concerned who may be two or more in
number. Further, s.5 provides that the relationship of partnership arises from contract and not from status; and
(b) Sharing of Profits: The agreement between them must be to share profits of the agreed business which is often taken as prima
facie proof of partnership; whereas, any trade, occupation or profession may qualify as business; and
(c) Mutual Agency: The business must be carried on by all or anyone of the partners, acting for all of the partners.
All these elements must be present to constitute a valid and lawful partnership. Further, s.6 of the 1932 Act provides a mode of
determining partnership as it envisages whether a group of persons is or is not a firm, or whether a person is or is not a partner
in a firm, regard shall be had to the real relationship between the parties, as shown by the relevant facts taken together. For
instance, Explanation 2 of Section 6 provides that ‘the sharing of profit or of gross return arising from property by persons holding
a joint or common interest in that property does not of itself make such persons partners’.
In conclusion if the elements given above are satisfied then the courts will treat such a relationship as a valid and legal partnership.
4 Under the Companies Ordinance, 1984, explain the following:
(i) Memorandum of Association; (5 marks)
(ii) Articles of Association. (5 marks)
(10 marks)
Solution:
(a) Memorandum of Association
The memorandum of association of a company is a document which sets out the constitution of the company and mentions
among others the objects for attainment of which the company has been incorporated (Adamjee Insurance Company Limited
v Muslim Commercial Bank Limited, Islamabad
those who deal with the company to know its permitted range of enterprise. As per ss.16 and 17 of the Companies Ordinance,
1984 the memorandum of a company comprises the following clauses: (i) Name; (ii) Registered Office; (iii) Objects;
(iv) Liability; (v) Capital (Share or Guarantee) and (vi) Association. The importance of the memorandum can be gauged from
the fact that any act of the company in violation of the memorandum is ultra vires and so void that it cannot be ratified.
(b) Articles of Association
The articles of association are rules and regulations framed for the internal management of a company and are subordinate
to the memorandum. Articles define the powers of directors and set out the terms of contract between them (United Liner
Agencies of Pakistan
rights and powers of the governing body, company at large, prescribe the mode by which business of the company is to be
carried on, and changes in the internal regulation of the company may be made from time to time. Further, articles cannot
enlarge the scope of the company’s objects mentioned in the memorandum, however, in case of ambiguity in the
memorandum, articles of association can be referred to for the limited purpose of clarifying such ambiguity.
5 In relation to the Companies Ordinance, 1984, state the powers and duties of the company’s auditors.
(10 marks)
Solution:
Auditors are responsible for examining the company’s affairs on behalf of the shareholders and are duty bound to honour this
position of trust by giving the shareholders a fair and full account of the company’s accounts and well being. For the discharge of
this responsibility s.255 of the Companies Ordinance, 1984 (‘Ordinance’) gives them the powers and duties which are discussed
below:
Powers of Auditors
(a) Power of Access
Auditors have the power to access at all times the books, papers, accounts and vouchers of the company, whether kept at
the company’s registered office or elsewhere.
(b) Power to Request
Auditors are empowered to require from the company’s directors and officers information necessary for performance of their
duties.
Duties of Auditors
(a) Auditor’s Report
Auditors shall make a report for the shareholders of the company pertaining to the company’s accounts and books of accounts
and the same shall state whether:
(i) all information required had been obtained;
(ii) proper books of accounts as per law were being kept by the company;
(iii) balance-sheet and profit and loss account or the income and expenditure account was according to law and in
agreement with the books of accounts;
(iv) the accounts gave a true and fair view of company’s state; and
(v) whether expenditure incurred was for the purpose of the company’s business;
(vi) Further business conducted, investments made and expenditures incurred were in accordance with the objects of the
company; and
(vii) zakat has been deducted and deposited in the Central Zakat Fund.
In case any of the ingredients of the auditor’s report are missing then the report shall state the reason for the same.
(b) Attend General Meeting
Auditors of a company are entitled to attend general meetings and to receive all notices and communications in this regard.
6 In relation to the law of torts:
(a) Define the term ‘tort’. (2 marks)
(b) Describe the various kinds of ‘tort’. (8 marks)
(10 marks)
Solution:
(a) Definition:
Tort is a private (civil) wrong against a person or his property and the basis of tort liability is the breach of legal duty owed to
another person resulting in some legal recognisable harm to that person for which the primary remedy is an action for
unliquidated damages. The person committing a tort is referred to as the ‘tortfeasor’ and the act of tortfeasor is called a tortious
act.
(b) Classification of Torts
There are three kinds of torts based on the three theories of liability, viz:
(i) Intentional Torts: These are the wrongs in which the persons charged must have acted in such a manner that they either
wanted to harm someone or knew that what they did would result in harm. Instances are: assault, battery, defamation,
false imprisonment, mental distress, invasion of privacy, trespass, conversion, and fraud.
(ii) Negligence: Tort of negligence is based on the concept of fault and it exists where four conditions are met:
(1) First, the defendant must have owed the plaintiff a duty.
(2) Second, the defendant must have breached that duty.
(3) Third, breach of that duty must be the actual as well as the legal cause of injury.
(4) Fourth, the injury must be one for which money damages may be recovered.
(iii) Strict Liability Tort: Strict liability principle finds persons liable even if their conduct was unintentional or non-negligent;
that is, even if it was not their fault, they are liable. Strict liability has its genesis in Ryland v Fletcher, [1868]: that any
person who in the course of non-natural use of his land accumulates thereon for his own purpose anything likely to do
mischief; if it escapes, the person is answerable for all direct damages thereby caused.
There are four kinds of torts based on the theories of remedy, viz:
(i) Torts actionable Per Se: These are torts which are so mischievous in their nature that they are actionable without proof
of actual damages. For instance, assault, battery, false imprisonment, etc.
(ii) Torts actionable on proof of damages: These are torts where the actual damage is necessary to be proved. For instance,
negligence, deceit, malicious prosecution and seduction.
(iii) Felonious Torts: These relate to the commission of felonious offences like murderous assault.
(iv) Foreign Torts: It is a tort committed outside the jurisdiction of the Courts of Pakistan. Further, an action against such a
tort can only be maintained if both the parties are residents of Pakistan
of the law of the country where it was committed.
7 In relation to employment laws, discuss the scope of:
(i) the Workmen’s Compensation Act, 1923; (5 marks)
(ii) the Industrial Relations Ordinance, 2002. (5 marks)
(10 marks)
Solution:
(a) Scope of the Workmen’s Compensation Act, 1923
Before analysing the scope of the Workmen’s Compensation Act, 1923 (‘1923 Act’) it should be understood that the superior
Courts of Pakistan Lahore
and liabilities of citizens in the position of employers towards other citizens who happen to be workmen.
It is part of the vast scheme of labour legislation in Pakistan
Act in its preamble mentions that it aims to regulate the payment of compensation by employers to their workmen in cases
of personal injury by accident. The 1923 Act mandates that compensation for injury related to the worker’s job is the
responsibility of the employer. To further safeguard the interests of workers the 1923 Act provides that the quantum of
compensation varies with different kinds of injuries, for instance, compensation is different in cases of injury resulting in total
disablement and partial disablement.
The Act also links the amount of compensation to workers’ wages and prescribes the procedure to be followed (medical
examination) and duties to be observed by both workers and employees (fixation of expenses of medical examination on
employers). In short this statute aims to fix responsibility of compensation on employers for injuries arising out of their
employment.
(b) Scope of Industrial Relations Ordinance, 2002
The scope of the Industrial Relations Ordinance, 2002 (‘IRO’) is to amend, consolidate and rationalise the law relating to the
formation of trade unions, regulation and improvement of relations between employers and workmen and avoidance and
settlement of any differences of disputes arising between them. The superior Courts of Pakistan
v Manzoor Ahmed 2006 SCMR 1751 have held that IRO is a beneficial legislation enacted with the object of ameliorating
the working conditions of workmen by providing necessary safeguards and therefore it is to be construed liberally.
Further that the IRO was a special law, procedural in nature and was promulgated with the object of controlling the formation
of trade unions so as to cultivate better relations/interaction between the employer and employees. Its foremost aim was to
speedily settle the dispute between the workers and employer so that industrial peace could flourish [Mazdoor Union Neelam
8 Junaid paid Rs. 50,000 to Wellness Slimming Centre (‘Centre’) for a six weeks’ session of aerobics classes. During
the first half of the session the aerobics instructor missed half of the scheduled classes and in the second half no
classes were held due to non-availability of the instructor. Throughout the session Junaid and others complained to
the Centre’s Manager, who promised to arrange classes to make up for the missed classes. However, this did not
happen and the session expired. Thereafter, Junaid served a legal notice on the Centre calling for a refund of the fee
deposited along with Rs. 1,000,000 as compensation for the mental anguish and loss of his time; otherwise he would
initiate legal proceedings against them for the same. In response, the Centre apologised and offered Junaid the
opportunity to join the next six weeks session free of charge.
Required:
Advise Junaid what legal action he can bring against the Centre and what are the chances of its success.
(10 marks)
Solution:
Section 73 of the Contract Act, 1872 (‘1872 Act’) provides that when a contract has been broken the party who suffers by such
a breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to him
thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the
contract to be likely to result from the breach of it.
It has been held that by granting damages the law aims to put the plaintiff in the same position as far as possible as he would
have been had the breach not taken place [State Life Insurance Corporation Pakistan v Bibojee Services Ltd 1999 MLD 2750].
Further, before damages can be granted the superior Courts of Pakistan
of contract, must establish the contract, the breach thereof and the extent of damages. Without doing so such a party could not
succeed [Ahmad Saeed Khan v MCB Ltd, Islamabad
In view of the above mentioned legal provision, it can be submitted that the present matter is one of breach of contract by the
Centre as the Centre failed to fulfil its part of the contract i.e. to provide aerobics classes for six weeks and therefore Junaid is
competent to sue the Centre and to claim for damages thereof.
Finally, as regards the quantum of damages, s.73 provides that compensation is not to be given for any remote or indirect loss or
damage sustained by reason of the breach but only for the damages which naturally arose in the usual course of things from such
breach, of which the parties knew when they made the contract to be likely result from the breach of it, should be assessed.
In conclusion, in the view of above discussed law, it can be concluded that a claim against the Centre has bright chances of
succeeding.
9 Ali, Asad and Ameer have been carrying out an auto-parts business for the last seven years under a partnership
arrangement in which the initial capital was contributed equally by them. They were jointly responsible for the
management and all liabilities of the firm were shared equally by them. Now they want to convert their business
arrangement from a partnership to a private company limited by shares in which Ali, Asad and Ameer shall hold 50%,
30% and 20% of the shares respectively.
Required:
Advise the three partners whether they can convert their partnership arrangement into a private company limited
by shares and, what effect will this change in the percentage balance of ownership have on their liabilities.
(10 marks)
Solution:
Under the Companies Ordinance, 1984 (‘Ordinance’) an incorporated company has a separate existence and the law recognises
it as a legal person separate and distinct from its members. This distinct legal personality emerges from the moment of
incorporation. Incorporation gives the company legal personality, separate from its members, with the result that the company may
own property, sue and be sued in its own corporate name and does not die when its shareholders die. Further, under the provisions
of Ordinance the minimum of two persons are required to get a private limited company incorporated. [s.2(228)]
Whereas under the Partnership Act, 1932 (‘1932 Act’) a partnership is not a legal person or entity distinct and separate from the
partners; rather every partner is liable jointly with all the other partners and also severally for all the acts of the firm done while he
is a partner (s.25).
In other words the distinction between the company and its members should be maintained as an incorporated company’s legal
entity and its actions, assets, rights and liabilities on one hand, and the individual shareholders and their actions, assets, rights
and liabilities on the other, are distinct.
Whereas in a partnership every partner is liable for all acts of the firm done while he is a partner and this liability is joint as well
as several. Further, partners are liable to contribute equally to the losses sustained by the firm (s.13-b of the 1932 Act).
In view of the above mentioned legal position, it is to be informed to Ali, Asad and Ameer that they are competent to get a private
limited company incorporated. Whereas, under the partnership arrangement they were all liable individually as well as collectively
for the partnership debts, but in a private limited company limited by shares the liability of each shareholder (Ali, Asad and Ameer)
shall be maximum to the extent of shares held by them.
10 On 24 February 2006 Mr Hassan was appointed by the board of directors of XXL Ltd (a listed brokerage company)
as the company’s chief executive for a period of two years. Thereafter, the stock exchange boom occurred and
Mrs Hassan also set up a brokerage company. This action on part of Mrs Hassan infuriated the board of directors of
XXL Ltd and they passed a resolution by a three-fourths majority removing Mr Hassan from the office of the chief
executive. Mr Hassan has threatened to take XXL Ltd to court for removing him from office before the expiration of his
two year period.
Required:
Explain to Mr Hassan whether the board’s act of removing him is valid or not.
(10 marks)
Solution:
Yes, the board’s act of removing Mr Hassan from his post as XXL’s chief executive is valid.
With respect to the ground of removal, it should be noted that s.203(1) of the Ordinance restricts the chief executive of a public
company from directly or indirectly engaging in any business which is of the same nature as and directly competes with the
business carried on by the public company. Further it deems business to be carried on by the chief executive, if the same, is carried
on by his spouse or any of his minor children.
The board’s act of removing Mr Hassan occurred when Mrs Hassan set up a brokerage firm i.e. a business same as XXL’s. As per
s.203(1) this is a valid ground for removing Mr Hassan from the post of XXL’s chief executive.
As regards the procedure of removal, s.202 of the Ordinance provides that the directors of a company by resolution passed by not
less than three-fourths of the total number of directors for the time being or the company by a special resolution may remove a
chief executive before the expiration of his term of office; notwithstanding anything contained in the articles or in agreement
between the company and such chief executive.
In view of the above provision, the board has the authority to remove the chief executive irrespective of any agreement to the
contrary between the company and the chief executive provided a resolution to this effect is passed with three-fourths majority. As
in the case of Mr Hassan, the said formality of board resolution passed with three-fourths majority has been complied with
therefore, the removal process is also valid.
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