Corporate and
Business Law
(Pakistan
2008
The Association of Chartered Certified Accountants
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.
ALL TEN questions are compulsory and MUST be attempted
1 Explain the jurisdiction and powers of the supreme court of Pakistan Pakistan
1973.
(10 marks)
Solution:
1 Under the Constitution of Pakistan, 1973 (the ‘Constitution’), the supreme court enjoys a vast jurisdiction and authority as all
subordinate courts in Pakistan Pakistan
in aid of the supreme court. The jurisdiction of supreme court is set out in Articles 184, 185 and 186 of the Constitution and can
be classified in the following:
(a) original jurisdiction
(b) appellate jurisdiction
(c) advisory jurisdiction
(d) transferring cases
(e) issuing orders
(f) review of its own judgments and
(g) making of internal rules.
(a) Original Jurisdiction
(i) Inter-Government disputes:
Article 184 stipulates that the supreme court shall have original jurisdiction to pronounce declaratory judgments in all
disputes between any two or more governments (Federal and Provincial).
(ii) Enforcement of Fundamental Rights
The supreme court is entitled to take cognisance even suo motu of matters involving questions of public importance with
reference to the enforcement of fundamental rights.
(b) Appellate Jurisdiction
The supreme court has the jurisdiction to hear and determine appeals against judgments, decrees, final orders or sentences
of a high court in certain matters. For instance, if a high court has reversed an order of acquittal of an accused person and
sentenced him to death; in contempt of high court proceedings; and if the high court certifies that the case involves a
substantial question of law as to the interpretation of the Constitution.
(c) Advisory Jurisdiction
The supreme court if requested by the President can give opinion on any question of law of public importance.
(d) Transferring Cases
The supreme court can in its discretion transfer any case, appeal or other proceedings pending before any high court to any
other high court.
(e) Issue Orders
The supreme court can issue orders for securing the attendance of any person or production of any document.
(f) Review
The supreme court has power to review its own judgments and orders, which have apparent on the face of the record error
of fact or law.
(g) Internal Rules
The supreme court has authority to make rules regulating its own practice and procedure.
2 In relation to law of contract, analyse the meaning of an ‘offer’ and explain with illustrations what distinguishes
it from an ‘invitation to treat’.
(10 marks)
Solution:
Section 2(a) of the Contract Act, 1872 (the ‘Act’) defines an ‘offer’ as a proposal by one party to another to do or abstain from
doing anything with a view to obtaining assent of the other to such act or abstinence. The superior courts of Pakistan
that an agreement starts with an offer and completes on the acceptance of that offer by a promisee. For the formation of a valid
contract, an offer made by a proposer must necessarily be accepted by a promisee in unconditional and unqualified terms; any
slight variation or departure from the offer would result in its rejection and amount to counter-proposal/offer (Shaukat Ali v Secretary
Industries and Mineral Development, Government of Punjab Lahore
unconditionally, the same would not consummate into a binding and enforceable contract (Rehmat Ali v Fauqir Muhammad, 2005
YLR 301).
When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when
accepted becomes a promise (s.2-b). An offer in itself is not a ‘promise’, but would become a ‘promise’ only when it has been
accepted. A promise in itself could be equivalent of an agreement, and an agreement enforceable by law is a contract (Habib Bank
Limited v Hussein Corporation Limited, 1994 MLD 2276). An offer is an expression of will in definite terms to create legal relations.
An ‘invitation to treat’, on the other hand, is information conveying one’s readiness to negotiate business with anybody who on
such information would make an offer. The typical illustrations of an invitation to treat are goods displayed in a shop with price
tags; catalogues containing description of goods; and advertisement for auction. In short, an ‘invitation to treat’ is an attempt to
induce offers and is not an offer in itself.
From the foregoing definitions, it is also clear that an ‘offer’ and an ‘invitation to treat’ differ with respect to their fixed terms i.e. in
case of offer the other party just has to convey its assent for the offer to become binding as a promise, whereas in the case of
‘invitation to treat’ there is no intention on the part of person sending out the invitation to obtain the assent of the other person and
the same is only to start negotiations (Abdul Razzak v Karachi Development Authority, 1991 CLC 1591).
3 In relation to the law of torts:
(a) Define the different kinds of ‘torts’; and (5 marks)
(b) State the remedies available for torts. (5 marks)
(10 marks)
Solution:
(a) Tort is 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 ‘tortious act’.
Torts are of the following four kinds:
(i) Torts actionable per se;
(ii) Torts actionable on proof of damage;
(iii) Felonious Torts; and
(iv) Foreign Torts.
(i) Torts Actionable Per Se
These torts are actionable without proof of actual damage. The rationale for this is that such kinds of torts are likely to
result in harm owing to their mischievous nature, therefore the law prohibits them absolutely and presumes damages,
for instance libel, assault, battery, false imprisonment, trespass to land and goods.
(ii) Torts actionable on proof of damage
For these torts there is no presumption and actual damage must be proved. Actual damage is the gist of the action in
the case of such torts i.e. malicious prosecution, seduction, deceit, and negligence.
(iii) Felonious Torts
These relate to the commission of felonious offences like murderous assault.
(iv) Foreign Torts
A foreign tort is one which is committed outside the jurisdiction of Pakistani Courts. For action to be maintained in the
Pakistani courts in respect of such torts the act complained of should be in violation of the law of the country where it
was committed and if the wrong was not actionable in the country of its commission then no action would lie if such
wrong is actionable in Pakistan Pakistan
(b) Remedies available against torts are the following:
(i) Damages;
(ii) Injunction; and
(iii) Specific Restitution of Property.
(i) Damages
Damages are monetary compensation for the loss suffered by a person injured by the tortious act of another. The object
of award of damages is to compensate i.e. to put the injured person in the same position as he was before the injury.
Further while granting damages the courts are governed by the legal maxim in jure non remote cause and proxima
spectator which means that in law the proximate and not the remote cause of any event is regarded and the tortfeasor
is not liable for the damages which are too remote but rather is only responsible for the natural or probable loss.
(ii) Injunctions
Injunctions can be granted in respect of torts to prevent the commission of those torts which are threatened or
anticipated or to order the doing of an act (mandatory injunction). The grant or refusal of injunction is in the court’s
discretion and the courts can initially grant a temporary injunction and after hearing the tortfeasor the injunction granted
may become permanent.
(iii) Specific Restitution of Property
Where damages, if granted, would not be an adequate remedy then the court may grant the specific restitution of
property.
4 Under the Companies Ordinance, 1984, explain:
(a) the main characteristics of a private company; (4 marks)
(b) a special resolution; and, (3 marks)
(c) dividends. (3 marks)
(10 marks)
Solution:
(a) A private company is defined in s.2(1)(28) of the Companies Ordinance, 1984 (‘Ordinance’) as a company which by its
articles
(i) restricts the right to transfer its shares;
(ii) limits its membership to 50; and
(iii) prohibits the public from subscribing to the shares or debentures of the company.
Restriction on the transfer of shares results in the ownership of and interest in the company being confined to a close circle
of shareholders. Such restriction may exist in the form that directors have the authority to not allow the transfer of shares to
persons whom they do not approve; shares can only be sold at a certain price or by one member to another. Unlike a public
company, a private company cannot have more than 50 members and cannot invite the public to subscribe to its shares or
debentures.
(b) Section 2(1)(36) of the Ordinance describes a special resolution as a resolution which has been passed by a majority of not
less than three-quarters of such members entitled to vote as are present in person or by proxy at a general meeting of which
not less than 21 days notice specifying the intention to propose the resolution as a special resolution has been duly given.
Provided that if all the members entitled to attend and vote at any such meeting so agree a resolution may be proposed and
passed as a special resolution at a meeting of which less than 21 days notice has been given.
A special resolution is generally required to conduct such special business for which a special resolution is required by the
Ordinance or the articles of association of a company. A company must file a special resolution with the registrar of companies
on Form 26 within 14 days of the passing of such special resolution.
(c) The term ‘dividend‘ refers to the profits of the company which is allocated to the holders of shares in the company.
Sections 248 to 251 of the Companies Ordinance, 1984 set out the requirements and formalities with respect to dividends.
For instance, dividends should only be paid out of the profits of a company (s.249), a company should declare a dividend in
a general meeting, no dividend shall exceed the amount recommended by the directors [s.248(1)] and dividend payments
should only be made to a registered shareholder or to his order [250(1)].
5 Discuss the salient features of the Code of Corporate Governance. (10 marks)
Solution:
Corporate Governance is described as a system by which companies are directed and controlled. In Pakistan
Exchange Commission of Pakistan (‘SECP’) has issued a Code of Corporate Governance (‘Code’) and has directed all stock
exchanges to make the Code a part of their listing regulations. Therefore, at present the Code’s application is limited to listed
companies only.
The Code specifies the distribution of rights and responsibilities among different participants in the company, such as its board of
directors, managers, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. The
Code aims at professing a transparent management, participation of the minority shareholders in the decision making, appointment
of qualified persons as the chief financial officer (‘CFO’) and company secretary.
As regards the appointment and duties of the directors, the Code sets out that all listed companies shall encourage effective
representation of independent non-executive directors, including those representing minority interests, institutional equity interest
on their boards of directors. The Code provides that persons whose names are not borne on the register of national tax payers
and/or have been convicted by a court of competent jurisdiction as a defaulter in payment of any loan to any financial institution
shall not be elected or nominated as a director of a listed company.
Directors of listed companies have been required to exercise their powers and fiduciary duties with a sense of objective judgment
and independence in the best interests of the listed company and to prepare a ‘Statement of Ethics and Business Practices’ to
establish a standard of conduct for directors and employees.
The Code provides that the appointment, remuneration and terms and conditions of employment of the CFO, the company secretary
and the head of internal audit of listed companies shall be determined by the chief executive officer with the approval of the board
of directors. The CFO or the company secretary shall not be removed except with the approval of the board of directors. Further
the CFO and the company secretary are required to attend meetings of the board of directors.
Another important feature of the Code is the provisions for the external and internal audit of the listed companies. The Code
stipulates that no listed company shall appoint as external auditors a firm of auditors which has not been given a satisfactory rating
under the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan. Moreover, listed companies
have to make a statement of compliance with the Code and the statutory auditors are responsible for reviewing and certifying this
statement. On internal audit, the Code requires that there shall be an internal audit function in every listed company. The head of
internal audit shall have access to the chair of the Audit Committee, which shall not comprise of less than three members including
the chairman. Internal audit reports should be provided for the review of external auditors and any major findings should be
reported to the board. Quarterly unaudited financial statements of listed companies shall be published and circulated along with a
directors’ review on the affairs of the listed company for the quarter. Half-yearly financial statements shall be subject to a limited
scope review by the statutory auditors in such manner and according to such terms and conditions as may be determined by the
Institute of Chartered Accountants of Pakistan and approved by SECP.
The Code reinforces the powers, responsibilities and functions of the board of directors, formalises the corporate decision making
process and requires adequate documentation of policies, decisions of directors and audit.
6 In relation to Companies Ordinance, 1984, describe the following:
(a) a statutory meeting; (3 marks)
(b) an annual general meeting; and, (3 marks)
(c) an extraordinary general meeting. (4 marks)
(10 marks)
Solution:
(a) Statutory Meeting
Also known as the first official general meeting. As per s.157 of the Companies Ordinance, 1984 it is mandatory for every
public company limited by shares and every company limited by guarantee and having a share capital to hold this meeting
within a period between three and six months from the date of commencement of business. Private companies, companies
limited by guarantee and unlimited companies need not hold a statutory meeting.
The purpose of holding this meeting is to enable the members to know the financial position and prospects of the company,
matters relating to company formation, results of company’s appeal for public subscription to its share capital and to get an
idea of assets and properties acquired or to be acquired by the company. In other words, the purpose of a statutory meeting
is to inform shareholders about matters relating to incorporation, allotment of shares, details of contracts concluded, etc.
(b) Annual General Meeting
Section 158 mandates that every company whether public or private, must hold an annual general meeting (‘AGM’) of
shareholders once in every calendar year within four months following the close of its financial year and not more than
15 months after the holding of the preceding annual general meeting, s.158 (1) and the first AGM shall be held within
18 months from the date of incorporation of the company.
AGMs are also referred to as ‘ordinary general meetings’ as they usually deal with ordinary business, for instance in them the
performance of the company for the past year is discussed, annual accounts are adopted, a dividend is declared, directors
and auditors are appointed.
(c) Extraordinary General Meeting
All general meetings of a company, other than the statutory meeting and AGM are referred to as extraordinary general
meetings (‘EGM’) (s.159(1)). An EGM may be convened by the company at any time as required for conducting such
business that cannot be postponed until the next AGM, for instance, alteration of the memorandum and articles of association;
reduction and reorganisation of capital and issue relating to debentures.
An EGM may be convened by the board of directors or upon requisition by members or upon directions of the Securities and
Exchange Commission of Pakistan
7 In relation to employment laws, describe the position of a workman.
(10 marks)
Solution:
A workman is a person who works for another for hire in a capacity other than managerial or administrative. Under the Industrial
Relations Ordinance, 2002 (‘IRO 2002’) any person who did not fall into the definition of the employer and worked in an
establishment or industry for hire or reward, either directly or through a contractor, whether his terms of employment were express
or implied, is considered a workman.
Earlier, the Industrial Relations Ordinance, 1969 imposed an additional qualification on employees to qualify as workmen i.e. they
should not be drawing wages exceeding Rs 800 per mensem [s.2(xxviii)]. The supreme court of Pakistan in Muhammad Sadiq v
Punjab Labour Court No: 1, Lahore, PLD 1988 SC 633 has held that the ‘real test’ for determining whether a person falls within
the ambit of a workman or not depends on the nature of the duties performed by him. The nature of work performed by an
employee is to be considered as the true criteria, and the deciding factor and the designation or salary of an employee would not
be the determining factor in deducing whether he is a workman or not.
If a workman performs numerous duties, then it is the majority of his duties which are to be considered. If the majority of his duties
are of a manual and clerical nature, his designation as building superintendent would not make him an officer (Pakistan
Limited, Karachi v Victor Sunny and Another, 1996 PLC 66). It should also be noted that the initial burden of proving whether
any person falls into the category of workman is on the workman so claiming, and he could discharge the same by showing the
nature of his work. In such an eventuality, the employer could not rebut claims of the employee by producing evidence such as a
job description (1997 PLC 239).
8 Before going out of town for one week, Ayaz asked his friend Farhan to look after his designer clothing store during
his absence. The next morning Farhan noticed that the store locks had been tampered with, so he had them replaced.
In order to boost the sales of Ayaz’s store, Farhan offered to customers a 20% discount on all items in the store. Upon
his return, Ayaz was unhappy with this situation and immediately removed the discount. Disappointed with Farhan’s
handling of the store matters, Ayaz has approached you for advice.
Required:
Analyse the situation from the perspective of the law of agency and explain what rights and remedies Ayaz has
against Farhan.
(10 marks)
Solution:
The relationship between Ayaz and Farhan amounts to that of an ‘agency’. According to s.182 of the Contract Act, 1872 (‘Act’),
an agent is simply a person employed to do any act for another or to represent another in dealings with third persons. The request
by Ayaz to Farhan to look after Ayaz’s store in his absence amounts to express authorisation in terms of s.187 of the Act, which
states that authority can be vested on the agent expressly by words spoken or written and absence of consideration is no bar to
the creation of agency relationship between Ayaz and Farhan as s.185 of the Act provides that presence of consideration is not
necessary for creation of an agency.
Replacement of tampered locks was a legal act on Farhan’s part as Ayaz had requested Farhan to take care of the store and if the
same had not been replaced there could have been theft. This view finds support from s.222 of the Act which provides that an
employer of an agent is bound to indemnify his agent against the consequences of all lawful acts done by such agent in exercise
of the authority conferred on the agent. Further, Farhan can recover from Ayaz the expenses incurred in having the tampered store
locks replaced as the said action was within Farhan’s authority.
However, Farhan’s action of offering customers 20% discount on all items in the store was beyond the authority bestowed upon
him by Ayaz. Ayaz had simply asked Farhan to look after his store in his absence. This authorisation cannot be extended to allow
Farhan to take decisions having a commercial impact on the business. In view of this, the act of putting on special offer all items
in the store can by no means be justified as a legal act on Farhan’s part. This view finds support from s.188 of the Act which
stipulates that an agent having authority to carry on a business has an authority to do every lawful thing necessary for the purpose,
or usually done in the course of conducting such business.
Section 211 of the Act provides that an agent is bound to conduct the business of his principal according to the directions 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. Where the agent acts otherwise if any loss is sustained he must make
it good to his principal and if any profit accrues he must account for it. Resultantly, Ayaz is entitled to recover the loss incurred as
a result of this 20% discount on the price that had been fixed by Ayaz.
9 Best Foods (Private) Limited (‘BFL’) is a company authorised by the objects clause of its memorandum of association
to solely engage in the business of food processing. To enhance the profits of the company, the board of directors of
BFL are considering importing energy drinks and distributing and selling them in Pakistan
asked the board of directors to explain whether the company is authorised to undertake the business of importing,
distributing and selling energy drinks as proposed. The board of directors have approached you for advice.
Required:
In view of the provisions of the Companies Ordinance, 1984, analyse and explain whether BFL can undertake
the proposed business.
(10 marks)
Solution:
A company cannot engage in a business, which is not fairly incidental or consequential to the business of the company mentioned
in the memorandum of association. The objects clause in the memorandum of association of a company sets out the objects for
which the company has been incorporated (Adamjee Insurance Company Limited v Muslim Commercial Bank Limited, Islamabad
2003 CLD 463). The superior courts of Pakistan
and, therefore, void and cannot even be ratified (Munawar Ahmed v Official Liquidator, PLD 1980 Lahore 86). The proper test for
determining whether an act is ultra vires or not is to see if the power to do a thing arises from necessary implication from the
expressed objects, and, if it does, the act should not be held as ultra vires. The directors are fiduciaries and are bound to exercise
their powers in good faith for the benefit of the company and for a proper purpose.
Section 305(f)(ii) of the Companies Ordinance, 1984 provides that a company may be wound up by the court if the company is
carrying on business not authorised by its memorandum. The superior courts of Pakistan
a petition for winding up of a company can be made by a shareholder or creditor of the company or by the company itself. The
locus standi of a person to file such a petition has to be seen on the date of filing (Mohammad Hussein v Dawood Flour Mills,
2003 CLD 1429). A joint reading of ss.305 and 306 of the Ordinance suggests that the court has discretion to order or not to
order winding up of a company after taking into consideration all the relevant facts. An order for winding up of a company can be
sought or made on all or any of the grounds enumerated in s.305 (Habib Bank Limited v Hamza Board Mills, PLD 1996 Lahore
633) provided that it is satisfactorily proven and courts should not exercise such discretion on an application which is not bona
fide, i.e. aiming to pressurise the company into making payment to an unpaid creditor.
In view of the above, BFL is advised to restrain from importing energy drinks and to restrict its business to food processing as
allowed by its memorandum. The business of importing and selling energy drinks is not mentioned in BFL’s memorandum and
neither can it qualify as business, incidental or consequential to its business of food processing. The board of directors of BFL does
not have power under the Ordinance to allow the company to carry out activities not provided for in its memorandum. In view of
s.305(f)(ii) of the Ordinance, a petition for the winding up of BFL may succeed in case BFL indulges in a business which is not
covered by the objects clause of its memorandum.
10 The chief executive officer (‘CEO’) of Shah Sugar Mills Limited, a public listed company, intends to appoint Mr Yusuf
as the company’s chief financial officer (‘CFO’). Mr Yusuf holds an MBA degree from the Lahore University
Management Sciences and has been working for the last six years for the corporate department of National Bank. The
CEO hopes that with this appointment his workload shall be reduced and thereafter the CFO and the board of directors
of Shah Sugar Mills Limited shall approve the financial statements. Before announcing the appointment of Mr Yusuf
as the CFO, the CEO has approached you for advice.
Required:
Analyse the situation from the perspective of company law and the Code of Corporate Governance and advise the
CEO as to whether Mr Yusuf could be appointed as the CFO and what would be his duties in this capacity.
(10 marks)
Solution:
Before announcing the appointment of Mr Yusuf as the chief financial officer (CFO), the chief executive officer (CEO) should obtain
the approval of the board of directors in accordance with the requirement of the Code of Corporate Governance (‘Code’) in
Rule (xv), which provides that the appointment, remuneration and terms and conditions of employment of the CFO shall be
determined by the CEO with the approval of the board of directors.
The Code sets forth a set of qualifications for the position of CFO, which should be met by the candidate for the said post. In this
particular instance, Mr Yusuf’s MBA degree and six years work experience with National Bank qualifies him for the job of CFO.
Rule (xvi)(b) of the Code provides that no person shall be appointed as the CFO of a listed company unless he is a graduate from
a recognised university and has at least five years experience in handling corporate affairs of a bank.
Rule (xxiv) of the Code states that no listed company shall circulate its financial statements unless the CEO and the CFO present
the financial statements, duly endorsed under their respective signatures, for the consideration and approval of the board of
directors, and the board of directors, after consideration and approval, authorise the signing of financial statements for issuance
and circulation. Therefore, it would not be possible for just the CFO and the board of directors to approve the financial statements
of the company as the said statements have to be firstly endorsed jointly by the CEO and the CFO and then submitted for approval
of the board.
The CEO should first submit to the board of directors the candidature of Mr Yusuf for the position of CFO. The CEO should also
inform the board of directors that Mr Yusuf qualifies under the Code for appointment as CFO. However, the CEO should remember
that the financial statements have to be endorsed both by him and the CFO before they can be approved by the board of directors.
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