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.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
ALL TEN questions are compulsory and MUST be attempted
1 In relation to the Pakistan
Constitution of Pakistan
(10 marks)
Solution:
1 Fundamental rights are what have traditionally been known as ‘Natural Rights’ of human beings. These rights as generally
understood today date back to the time when the Magna Carta was introduced in 1215 AD through which an absolute monarch
was made to acknowledge that the subjects possessed certain rights, which could not be violated by an all powerful sovereign.
In Pakistan
and relate to freedom of movement (Article 15); freedom of assembly (Article 16); freedom of association (Article 17); freedom of
trade, business and profession (Article 18); free speech (Article 19); religious rights (Article 20); protection of property rights
(Article 24); equality of citizens (Article 25); non-discrimination in respect of access to public places (Article 26); and safeguards
against discrimination in services (Article 27). The superior Courts of Pakistan
PLD 1965 Lahore
absolute proposition, rather such rights are often encumbered by provisos and qualifying conditions.
Article (8) of the Constitution provides that any law, custom or usage having the force of law, inconsistent with the fundamental
rights shall be void to the extent of such inconsistency and mandates that state shall not make any law, which takes away or
abridges such rights. If any law in contravention of fundamental rights is made then the same shall be void to the extent of such
contravention. This viewpoint has been reinforced by the Supreme Court of Pakistan in Province of East Pakistan
Mehdi Ali Khan, PLD 1959 Supreme Court 378, wherein it has been held that law contravening any of the fundamental rights is
void to the extent of such contravention and is not void ab initio i.e. law would exist and would be applicable to matters not covered
by fundamental rights. Even in a ‘state of emergency’ the superior Courts of Pakistan Bolan Medical College
PLD 1980 Quetta
of the Constitution, the right to move Court for enforcement of such rights can be suspended.
2 In relation to the law of contract, discuss the concept of ‘consideration’.
(10 marks)
Solution:
According to s.2(d) of the Contract Act, 1872 (‘Act’), when at the desire of the promisor the promisee or any other person who has
done or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing something; such act or
abstinence or promise is called consideration. In other words, consideration means some right, interest, and profit or benefit
accruing to one party and some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. The
superior Courts of Pakistan in Abdul Aziz v Mazum Ali, (1914) have held that where the promisee has done nothing there is no
consideration.
Further, anything or any act, can suffice as consideration if the same is not forbidden by law; is not fraudulent; does not involve
injury to the person or property of another and the courts do not regard it as immoral or against public policy (s.23 of the Act).
Following are the elements of the concept of consideration:
At the desire of the Promisor
According to s.2(d) of the Act, consideration implies a situation where the desire of one party and the action of the other have a
casual connection and consideration ought to be performed only at the desire of the promisor.
Consideration given by whom and for whom
Consideration presupposes a situation where the promise needs not necessarily move from the promisee but may move from a
third party. It is not necessary that the promisor should derive any direct benefit from the promise; the benefit can go to a third
party. However, a stranger to a contract cannot sue under it, nor enforce it, even though the contract had been made for his benefit.
Nature of consideration
Words ‘has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing’ denote that
consideration can be past, present or future. The law treats past consideration on the same footing as present consideration or
future consideration. In the case of a promise to do something in future, it should be noted that as long as a future consideration
remains executory, it would not be treated as consideration in the eyes of the law unless it involves a legal obligation which the
promisor could be compelled to perform. Further, promises to do what a person is required by law to do or acts of natural love and
affection or obedience and submission by way of respect, cannot be held to be good consideration or valuable consideration.
Adequacy of consideration
What constitutes an adequate consideration is for the parties to decide at the time of making the agreement. Inadequacy of
consideration is no ground for refusing the performance of the promise. The only requirement of the Act is that there must be some
consideration for the promise and the same can be anything of value in the eyes of the law. However, if any issue arises between
the parties regarding the legality of the contract, the courts consider the adequacy of consideration to judge whether the contract
has been induced by fraud or other illegal means or not.
3 In relation to the law of torts:
(a) discuss the meaning of ‘torts’; and (5 marks)
(b) state the defences to torts. (5 marks)
(10 marks)
Solution:
(a) The word ‘tort’ is from the French language and its meaning in English is ‘wrong’. The famous jurist Salmond has termed
‘tort’ as a civil wrong for which the remedy is the common law action for unliquidated damages. Tort occurs as a result of
breach of an equitable obligation and not exclusively that of contract or trust. In other words, tort can be termed as a civil
wrong independent of contract for which the appropriate remedy is an action for unliquidated damages. The person
committing the tort is referred to as the ‘tortfeasor’ and the act of the tortfeasor is called the ‘tortuous act’. Instances of tortuous
acts are assault (showing of clenched fists to a passerby), battery (pushing by physical touch) and trespass, which is the entry
on someone’s property without his consent. Further an act would not constitute tort if it would not be complained of by an
ordinary person, for instance the act of a motorist throwing water on passers by on a rainy day shall not constitute tort.
Torts have been classified into three categories by the superior Courts of Pakistan
Insurance Corporation of Pakistan, (1990) MLD 1261 namely:
(i) Tort of Nonfeasance: This relates to the omission of some act which a person by law is bound to do.
(ii) Tort of Misfeasance: This relates to the improper performance of some lawful act.
(iii) Tort of Malfeasance: This relates to the commission of some act which is in itself unlawful.
(b) In certain circumstances, the persons involved cannot be held responsible for the act of committing tort. Such circumstances
are generally referred to as the defences to torts and are set out below:
(i) Act of State and Statutory Authority
Acts of state done under state policy and/or acts authorised by a statute do not constitute tortuous acts.
(ii) Judicial Acts
Words or actions of judges spoken/done while functioning as a judge cannot constitute tortuous acts even if the judge’s
motive is malicious or improper. This exemption exists to encourage the independence of the judiciary
(iii) Quasi Judicial Acts
Acts of persons and bodies like universities, colleges and clubs are protected from tortuous liability if done while
observing rules of natural justice.
(iv) Executive Acts
Acts done by public servants in the performance of their duties, for instances, police officers executing arrest warrants.
(v) Parental and Quasi Parental Authority
Acts of parents and teachers done for the betterment of the child despite involvement of moderate and reasonable
punishment on the child are not considered as tort.
(vi) Acts of Necessity
Acts done by persons, such as, a captain of a ship in dangerous circumstances to ensure safety of the ship and persons
on board.
(vii) Works of Necessity and Public Welfare
Acts done for the welfare of the general public, for instance, the pulling down of houses to prevent fire from spreading.
(viii) Volenti Non Fit Injuria
When a person understands the risk involved and agrees to accept them, for instance, coal miners agreeing to work in
a mine.
(ix) Inevitable Accident
An accident which could not have been avoided despite the exercise of ordinary care and caution.
(x) Private Defence
Every person has the right to defend his own person and property from unlawful harm, for instance setting up of a
protection barrier to divert flood water which damages neighbour’s crops.
4 Under the Companies Ordinance, 1984, explain the role of a:
(a) Company secretary. (5 marks)
(b) Chief executive officer. (5 marks)
(10 marks)
Solution:
(a) Section 2(33) of the Companies Ordinance, 1984 (‘Ordinance’) states that a company secretary is an individual appointed
to perform secretarial, administrative, or other duties aimed to ensure that the affairs of the company are conducted in
accordance with the Ordinance. Appointment of company secretaries is mandatory for listed and single member companies
(s.204-A).
A company secretary acts on behalf of the board of directors and being an officer of the company has extensive duties,
including those of making representations on behalf of the company and, if authorised, entering into contracts which come
within the day-to-day running of the company’s business.
Generally, a company secretary has duties towards (i) directors; (ii) shareholders; (iii) management and administration;
(iv) the company; and (v) law. Duties towards shareholders imply arranging for shareholders’ meetings; keeping minutes of
such meetings; receiving applications for allotment of shares; transferring of shares; and recording dividends paid. Duties
towards directors imply arranging board meetings; keeping records and minutes of such meetings and implementing decisions
taken in the meetings.
(b) According to s.2(1)(6) of the Ordinance a chief executive officer is an individual who is entrusted with the powers of
management of the affairs of the company subject to the control and directions of the directors. A chief executive officer is
the head of the company and it is mandatory for every company other than a company managed by a managing agent to
appoint a chief executive officer (s.198).
A chief executive officer, if not already a director of the company, shall be deemed to be its director and entitled to all rights
and privileges and liabilities of that office. Further, the directors of the company have the right to fix the terms and conditions
of appointment of the chief executive officer if so allowed by the articles, otherwise it shall be fixed in a general meeting
(s.200(1) and (2)).
The term of office of the chief executive officer varies in the cases of the first chief executive officer and those appointed later.
In the case of the first chief executive officer, appointment should be made on the date of commencement of business or not
later than the 15th day after the date of incorporation, whichever is earlier (s.198). The first chief executive officer should
hold office until the first annual general meeting or the term fixed by the directors. All subsequently appointed chief executive
officers can hold office for a term not extending three years (s.199(1)).
For appointment as chief executive officer, a person must qualify to be appointed as director of the company, for instance, he
should not be a minor; should be of sound mind; there should be no insolvency proceedings pending against him; should
not have been convicted by a court of law for an offence involving moral turpitude; nor declared by a court to lack fiduciary
behaviour (s.187 read with 201).
A chief executive officer can be removed from his office by the directors of the company through a resolution passed by not
less than three-quarters of the total number of directors for the time being or by a special resolution in the case of removal
before the expiration of his term notwithstanding anything contained in the articles of association or in an agreement between
the company and the chief executive officer.
5 In relation to company law, explain the doctrine of ‘lifting of the veil of incorporation’.
(10 marks)
Solution:
Upon incorporation a company obtains a legal personality separate from its members and as a result a company may own property,
sue or be sued in its own name and is considered separate from its members thus protecting the latter from the liability of the
former. This legal principle was laid down in Salomon v Salomon, (1897) AC 22 wherein it was held that a company is distinct
in law from persons who are its members i.e. there exists a curtain, veil, or shield between the company and its members.
When this protection is taken away the corporate veil is said to be lifted. It is to be noted that no fixed rule exists for determining
as to when the veil of incorporation should be lifted; rather the Supreme Court of Pakistan
Ali, PLD (1971) SC 585 held that the corporate veil can be lifted where the same is being used merely as a cloak for fraud or for
improper conduct or where it can be established that the corporate personality is merely acting as an agent or trustee for someone
else, or to determine tax liability or quasi-criminal liability, or whether the corporate body is an enemy concern.
Reiterating the separate legal personality doctrine the Supreme Court of Pakistan in Union Council, Ali Wahan, Sukkur v Associated
Cement (Private) Limited, (1993) SCMR 468 held that the corporate veil cannot be lifted as a matter of course but only under
justifiable reasons. The said Court in Fauji Foundation and another v Shamimur Rehman, PLD (1983) SC 457 held the following
circumstances to be justifiable for lifting the corporate veil:
(a) Company’s membership falls below the prescribed minimum;
(b) Company has been used for fraudulent trading; and
(c) To counter fraud, oppression or condone some informality in the affairs of the company.
In short, the corporate veil can be lifted to determine the true relationship of shareholders with regard to their dealings with the
company or to ascertain the true nature of the company itself.
6 State:
(a) the different forms of businesses that a company may undertake as a Non-Banking Finance Company; and
(5 marks)
(b) what steps are required for the establishment of a Non-Banking Finance Company. (5 marks)
(10 marks)
Solution:
(a) Non-Banking Finance Companies (‘NBFC’) and the businesses that NBFCs are permitted to engage in are regulated by the
Companies Ordinance, 1984 (the ‘Ordinance’) and the Non-Banking Finance Companies (Establishment and Regulation)
Rules, 2003 (‘NBFC Rules’).
NBFCs are characterised as public limited companies incorporated pursuant to the permission from the Securities and
Exchange Commission of Pakistan
The businesses mentioned in the said section are:
(i) Investment Finance Services;
(ii) Leasing;
(iii) Housing Finance Services;
(iv) Venture Capital Investment;
(v) Discounting Services;
(vi) Investment Advisory Services;
(vii) Asset Management Services; and
(viii) Any other form of business which the federal government may by notification in the official gazette specify from time to
time.
(b) Steps set forth in the Ordinance and the NBFC Rules for incorporating NBFCs are as follows:
Application to SECP
Section 282C and Rule 4(1) of the NBFC Rules require that persons desirous of forming an NBFC shall submit an application
to the SECP as set out in Form-1 for permission to establish a NBFC. Form-1 requires disclosure of information about the
proposed management of NBFC such as their names, addresses, educational and professional qualifications, financial
standing, evidence of payment of income and wealth tax, names and addresses of business organisations of which these
people have been directors, partners or office holders in the last ten years, proposed capital contribution to be made by each,
and feasibility report along with payment of nonrefundable processing fee of rupees 100,000 only.
SECP’s Approval
Section 282C of the Ordinance provides that an NBFC shall not be incorporated without prior approval of the SECP. Before
granting its approval, the SECP deliberates whether the requirements of Rule 3 of the Rules have been complied with. Rule
3 requires that an NBFC may be established if each of its sponsors, proposed directors, chief executive and chairman of the
board of directors (i) has not been associated with any illegal banking business, deposit taking or financial dealing; (ii)
companies in which he is a director or major shareholder have no overdue loans or instalments outstanding towards any
NBFC or any banking or non-banking financial institution; (iii) companies in which he is a director or major shareholder have
not defaulted in the payment of taxes as on the date of application; (iv) have not been sponsor, director or chief executive of
a defaulting cooperative finance society or finance company; (v) has never been convicted of fraud or breach of trust or of an
offence involving moral turpitude or removed from service for misconduct; (vi) has neither been adjudged as insolvent nor
suspended payment of his debts nor has compounded with his creditors; (vii) his net worth except for the nominee director
as per wealth tax statements submitted with the tax authorities is not less than twice the amount to be subscribed by him
personally.
Only after being satisfied that the formalities of Rule 3 have been complied with, would the SECP through a written order
permit establishment of an NBFC. Such permission granted is valid for six months and during this period the promoters of
the NBFC should get the NBFC incorporated as a public limited company under the Ordinance (Rule 4 sub-Rules (2) and
(3)).
Licence
After grant of permission by the SECP to form an NBFC and incorporation of the company as a public limited company in
accordance with the Rules, the company should apply on Form B to the SECP for grant of a licence to carry on one or more
of the businesses mentioned in s.282A along with a non-refundable fee of rupees 100,000 only. The SECP after considering,
amongst others, whether the promoters are persons of integrity; means and possess knowledge about matters that the
company may have to deal with shall grant the licence (Rule 5(2)). Obtaining a licence from the SECP is imperative as
s.282A(2) provides that an NBFC shall not carry on business unless it holds a licence issued by the SECP and licence issued
may be subject to conditions as the SECP may deem fit to impose.
7 In relation to employment law, describe the scope of the Workmen’s Compensation Act, 1923.
(10 marks)
Solution:
The Workmen’s Compensation Act, 1923 (‘1923 Act’) is part of the vast scheme of labour legislation in Pakistan
safeguard the interests of workmen. According to the preamble of the 1923 Act, it aims to regulate the payment of compensation
by employers to their workmen in cases of personal injury by accident during their performance of duties. The 1923 Act mandates
that compensation for injury related to a worker’s job is the employer’s responsibility.
To further safeguard the interests of workers, the 1923 Act provides that the quantum of compensation varies with the kinds of
injuries, for instance, compensation is different in cases of injury resulting in total disablement and partial disablement. The 1923
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 employers during the same (fixation of expenses of medical examination on
employers). In short, this statute aims to fix responsibility of compensation on employers for injuries arising to their employees in
the course of their employment.
The superior Courts of Pakistan Lahore
‘penal’ in nature but rather sets out the duties and liabilities of citizens in the position of employers towards other citizens who
happen to be workmen. Further, the 1923 Act being a quasi penal statute its provisions ought not to receive a strained
interpretation in the interest of the beneficiaries thereunder (BombayBurmah Trading Corporation Limited v Ma E. Nan, 1937 Rang
45). The 1923 Act is to be interpreted in a manner so that it advances the purpose of the enactment (Mst Lal Jan v Messers Silver
Paper Tube Company, Karachi Karachi
8 JKB stores (‘JKB’) is a franchisee of Zike International (‘Zike’). Under their franchise agreement, JKB has provided
Zike with a bank guarantee of rupees 2,000,000 issued in favour of Zike by Friendly Bank (‘Bank’). Since then the
following events have occurred:
(a) JKB has defaulted and Zike has requested the Bank for the encashment of the guarantee in its favour.
(b) The Bank has refused on the ground that it did not receive any consideration from Zike for providing the
guarantee, therefore, Zike should approach JKB.
Required:
Analyse the situation from the perspective of contract law and advise Zike as to its future course of action.
(10 marks)
Solution:
This question requires candidates to analyse the concept of a contract of guarantee as envisaged in the Contract Act, 1872 (‘Act’)
and advise Zike on a future course of action.
Section 126 of the Act describes a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third
person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the
guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. In the instant
case, JKB is the principal debtor, Zike is the creditor, and the Bank is the surety.
Refusal by the Bank is not justified as the superior Courts of Pakistan in City Bank v Tariq Mohsin Siddiqi, 1999 PLD 196 have
held that a creditor in an action against a guarantor is merely required to show existence of liability of the principal debtor and
refusal by the guarantor based on technicalities, laws of procedure or the covenants to which the guarantor is not a party are not
valid.
Even otherwise, the Bank’s refusal to encash the guarantee on the pretext that it has not received any consideration is not justified
under the law. As s.127 clearly provides that anything done or any promise made for the benefit of the principal debtor is sufficient
consideration for the surety to give the guarantee. In other words, consideration need not be for the benefit of the surety, it is
sufficient if the benefit goes to the principal debtor. This view is reinforced by the holding of superior Courts of Pakistan
Bank Limited v Shahyar Textile Mills Limited, (1996) CLC 106 stating that the surety himself need not receive some benefit in
return for his guarantee.
Refusal on the ground that Zike should approach JKB is not valid as s.128 mandates that the liability of the surety is co-extensive
with that of the principal debtor unless otherwise provided by contract. This implies that the guarantor (Bank) and principal debtor
(JKB) are jointly and severally liable to pay the guarantee amount of rupees 2,000,000 to Zike, and Zike shall be well within its
rights to file legal proceedings against the guarantor (the Bank) without joining the principal debtor (JKB) as party to the suit (State
Engineering Corporation Limited v National Development Finance Corporation, (2006) SCMR 619 and Hyesons Sugar Mills
(Private) Limited v Consolidated Sugar Mills Limited, (2003) CLD 996).
In view of the above discussion, Zike has a valid case against the Bank and should initiate legal proceedings against the Bank and
JKB for the enforcement of the guarantee.
9 Hassan Textile Mills Limited (‘HTML) is in the process of expansion to finance and has requested a loan facility of
rupees 5,000,000 from Barons Bank (‘Bank’). As a security for the requested loan facility, HTML has offered to create
an unregistered charge in the Bank’s favour on the entire stock of cotton bales in HTML’s warehouse. The extension
of this loan facility is under consideration by the Bank’s management. You have been approached by the Bank’s
management for advice.
Required:
Under the Companies Ordinance, 1984, advise the Bank with regard to the creation of charges over a company’s
assets.
(10 marks)
Solution:
This question requires candidates to understand as to which charges require registration, what are the advantages of registering a
charge and the procedure prescribed in this regard.
Section 121(1)(f) of the Companies Ordinance 1984 (‘Ordinance’) provides that a floating charge on the undertaking or property
of the company including stock-in-trade shall be void if not registered. Stock-in-trade are assets which would in the ordinary course
of business change from time to time.
A registered charge serves as a notice to third parties to the effect that the registered charge would have precedence or priority over
charges registered later, which would rank secondary to a prior registered charge (Re: Hamilton Windsor Iron Works, (1879)
12 Ch D 707). Section 121(2) provides that when a charge is registered over certain assets, any person acquiring such assets or
any part thereof or any share or interest therein shall be deemed to have notice of the said charge as from the date of registration.
In view of the above legal provisions, the charge to be created in favour of the Bank on the entire stock of cotton bales in the
warehouse of HTML should be registered with the concerned Registrar of Companies. This is imperative as judicial precedents
suggest that if a charge is not duly registered, the security created becomes void against the creditor (CF. Official Liquidator v Union
Bank of India
Further, the Bank should ensure that HTML for creating a charge on its entire stock of cotton bales in favour of the Bank follows
the procedure set forth in the Ordinance and the Companies (General Provisions and Forms) Rules, 1985 (‘1985 Rules’). HTML
should create a charge on its assets against loans by executing an agreement with the Bank. Before execution of such instrument
creating a charge over its assets, HTML should have the approval of its board of directors and HTML’s seal should also be affixed
on the agreement. Copies of the charge documents should be made and attested as per requirement of Rule 13 of the 1985 Rules
and documents such as Form 10 containing particulars of the charge and the prescribed fee should be paid in the manner set out
in the 1985 Rules. The application should be filed with the concerned Registrar of Companies within 21 days of the creation of
the charge failing which the company shall have to approach the Securities and Exchange Commission of Pakistan
of time. After issuance of the certificate of registration of charge by the registrar, HTML should maintain a register of the charge in
accordance with Form 15 prescribed in the 1985 Rules and keep the same at HTML’s registered office.
In conclusion: to legally safeguard the Bank’s interest the charge to be created on HTML’s stock should be registered.
10 The board of directors of Sunrise Limited (‘SL’), a public limited company, in their next board meeting plan on
authorising:
(a) The appointment of TAQ International as its sole distributor for Karachi
partner of TAQ International and a director of SL, is the moving spirit behind this.
(b) Extension of the repayment time for a loan extended to Mr Kamal Dawood.
Required:
With reference to company law, explain to the board of directors of SL the procedures for adopting the above
plans.
(10 marks)
This question requires candidates to understand the limitations imposed on public limited companies regarding execution of
contracts with its own members/directors.
Section 196(2)(g) of the Companies Ordinance, 1984 (the ‘Ordinance’) mentions the procedure that companies, desirous of
entering into business dealings with a business organisation of which any of its directors is a stakeholder (member, partner or
director), should observe. The said section provides that directors of a company shall by means of a resolution passed at their
meeting authorise a director or the firm of which he is a partner or any partner of such firm or a private company of which he is
a member or director to enter into any contract with the company for making sale, purchase or supply of goods or rendering services
with the company. Therefore, the board of directors of SL should pass a resolution in their meeting for the implementation of its plan of appointing
TAQ International as its sole distributor for Karachi
As regards the directors’ plan for extending the repayment time for a loan extended to Mr Kamal Dawood, it is noted that SL is a
public limited company, therefore, its directors can only authorise this act after obtaining consent in its general meeting. This
requirement is set forth in s.196(3)(b) of the Ordinance, which provides that the directors of a public company shall not except
with the consent of the general meeting either specifically or by way of an authorisation remit, give any relief or give extension of
time for the repayment of any debt outstanding against any person.
SL should observe the procedural requirements mentioned in the Ordinance regarding the holding of a general meeting in this
respect. For instance, the general meeting should be held in the town in which the registered office of SL is situated. Notice of the
general meeting should be sent to the shareholders of SL at least 21 days before the date fixed for the meeting and such notice
should in addition to it being despatched in the normal course, be published in at least one issue each of a daily newspaper in
English and Urdu languages having circulation in the province in which the stock exchange on which SL shares are listed is
situated (s.158 (2) and (3)).
In conclusion: the board of directors of SL can implement its mentioned plans after observing the procedures mentioned above.
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