Paper F4 (PKN)
Corporate and
Business Law
(Pakistan
2009
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 Under the Constitution of Pakistan
(a) identify the components of Majlis-e-Shoora (Parliament); (3 marks)
(b) describe the composition of the National Assembly of Pakistan
(10 marks)
Solution:
(a) Article 50 of the Constitution provides that the Majlis-e-Shoora (Parliament) of Pakistan
National Assembly (the lower house); and (iii) the Senate (the upper house).
(b) Article 51 of the Constitution lays down the composition of the National Assembly. According to this Article, the National
Assembly shall consist of 342 members, including seats reserved for women and non-Muslims. The distribution and
allocation of seats of the National Assembly is as under:
General Seats Women Total
The Punjab 148 35 183
The Sindh 61 14 75
The North-West Frontier Province 35 8 43
The Baluchistan 14 3 17
The Federally
Administrated Tribal Area (‘FATA’) 12 – 12
The Federal Capital 2 – 2
–––– ––– ––––
Total 272 60 332
–––– ––– ––––
In addition to the number of seats mentioned above, there are ten seats reserved for non-Muslims. The seats in the National
Assembly are allocated to each Province, the Federally Administered Tribal Areas and the Federal Capital on the basis of
population in accordance with the last preceding census officially published.
The general seats are occupied through direct elections, whereas the seats reserved for women are filled through proportional
representation of the parties’ lists of candidates on the basis of total number of general seats secured by each political party
from the province concerned in the National Assembly. The seats reserved for non-Muslims are also filled through the same
proportional representation system, albeit on the basis of total general seats won by each political party in the National
Assembly (without reference to province-wise party position).
2 Under the Contract Act, 1872:
(a) define a ‘contract of indemnity’ and a ‘contract of guarantee’; (4 marks)
(b) identify and discuss the differences between a ‘contract of indemnity’ and a ‘contract of guarantee’.
(6 marks)
(10 marks)
Solution:
(a) Contracts of indemnity and guarantee are special type of contracts. The Contract Act, 1872 (‘Contract Act’) provides for
specific provisions in relation to indemnity and guarantee.
Section 124 of the Contract Act provides that ‘a contract’, by which one party promises to save the other from loss caused to
him by the conduct of promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity.’ The analysis
of this section shows that a contract of indemnity is essentially a two-party contract namely, (i) indemnifier, and (ii) indemnityholder.
Section 126 of the Act provides that a contract of guarantee is ‘a contract to perform the promise, or discharge the liability,
of a third person in case of his default.’ It further provides that a contract of guarantee is essentially a three-party arrangement
namely (i) the surety; (ii) the principal debtor, and (iii) the creditor.
(b) The following main differences between these two types of contract are noteworthy:
CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE
1. Number of Parties
There are two parties, namely the ‘indemnifier’ and the
‘indemnity-holder’.
There are three parties, namely the ‘principal debtor’, the
‘creditor’, and the ‘surety’.
2. Number of Agreements
There is only one contract between indemnifier and
indemnity-holder.
There are three contracts, (i) between creditor and principal
debtor, (ii) between surety and principal debtor, (iii) between
surety and creditor.
3. Purpose of Agreement
The indemnifier undertakes to save the indemnity-holder
from any loss. It is for reimbursement of loss.
Here, the surety undertakes for payment of the debt of
principal debtor. It is for the security of the creditor for
ensuring his payment.
4. Nature of Liability
The liability of the indemnifier is primary and
unconditional.
Here, in the absence of special circumstances, the liability of
surety is secondary and conditional and it arises only after the
default of principal debtor.
3 Under the provisions of the Partnership Act, 1932:
(a) define the term ‘partnership’; (2 marks)
(b) describe the ways in which partnerships can be dissolved. (8 marks)
(10 marks)
Solution:
(a) Section 4 of the Partnership Act, 1932 (‘Partnership Act’) defines a ‘partnership’ as ‘the relation between persons who have
agreed to share the profits of a business carried on by all or any of them acting for all’. It further provides that the persons
who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’ and the name
under which their business is carried on is called the ‘firm name’.
(b) Under the Partnership Act, 1932 dissolution of a firm may occur in the following instances:
(i) Dissolution by Agreement (s.40)
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
(ii) Compulsory Dissolution (s.41)
A firm is dissolved:
(a) by the adjudication of all the partners or of all the partners but one as an insolvent; or
(b) by the happening of an event which makes it unlawful for the business of the firm to be carried on or for the
partners to carry it on in partnership.
(iii) Dissolution of the happening of certain contingencies (s.42)
This section allows partners to agree that their partnership shall stand dissolved if, amongst others, any of the following
events would occur:
(a) the time for which the partnership firm was constituted expires; and/or
(b) the project for which the partnership was constituted stands accomplished; and/or
(c) by the death of a partner; and/or
(d) by the adjudication of a partner as an insolvent.
(iv) Dissolution by notice of partnership-at-will (s.43)
Where partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his
intention to dissolve the firm. The firm stands dissolved from the date of communication of notice.
(v) Dissolution by the Court (s.44)
Any partner may file a suit before a competent court seeking dissolution of the partnership if any of the following events
have occurred:
(a) a partner has become of unsound mind or has become in any way permanently incapable of performing his duties
as a partner; or
(b) a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business; and/or
(c) the business of the firm cannot be carried on except at a loss; or
(d) any other ground which renders it just and equitable that the firm should be dissolved.
4 In relation to company law, explain the following concepts:
(a) share; (4 marks)
(b) authorised share capital; (3 marks)
(c) issued share capital. (3 marks)
(10 marks)
Solution:
(a) The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares’.
According to s.2(35) of the Companies Ordinance, 1984 (‘Ordinance’), a ‘share’ means share in the share capital of a
company.
It has been held that a ‘share’ is not a sum of money but is the interest of a shareholder in the company measured by a sum
of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual
‘covenants’ entered by all the shareholders inter se in accordance with the constitutive documents and rights granted/conferred
by the relevant company legislation [Borland’s Trustee v Steel Bros & Co Ltd (1901) 1 Ch. 279 (Ch.D.)].
Shares have often been described as ‘choses-in-action’. Shares are recognised in law, as well as in fact, as property capable
of being bought, sold, mortgaged and bequeathed. Section 89 of the Companies Ordinance states that the shares or other
interest of any member in a company shall be moveable property, transferable in the manner provided by the articles of the
company.
(b) Authorised Share Capital
Sections 16(a)(v) and 17(b)(i) of the Companies Ordinance provide that the memorandum of association of a company
limited by shares and a company limited by guarantee but having a share capital, respectively must state the amount of share
capital with which the company proposes to be registered and the division thereof in shares of a fixed amount. This amount
specified in the memorandum is called the authorised share capital. It represents the upper limit of the share capital of the
company at any given time, provided however that if the articles of association so permit the company may raise this limit
from time to time to suit its needs. However, authorised share capital as a concept and a requirement has been criticised
because it serves no identifiable credit-protection role since a company’s authorised capital may be Rs. 1,000,000,000·00
but its actual issued and paid-up capital may be Rs. 100·00 only. There is no legal requirement for a company to have 100%
of its authorised capital issued at all times.
(c) Issued Share Capital
Companies limited by shares have to issue shares to raise the necessary capital for their operations. Such shares form the
part of issued share capital which itself is the part of authorised share capital of a company. These are the shares which have
been actually paid for and allotted to the relevant shareholders. The authorised share capital clause lays down the limit beyond
which the company cannot issue shares without alerting the memorandum. In other words, the issued share capital at any
given time may be equal to or less than the authorised share capital, but it can not exceed the same.
5 In relation to the law of torts:
(a) explain the meaning of ‘intentional torts’ and provide four examples of ‘intentional torts’; (3 marks)
(b) discuss the elements of a cause of action based on negligence and the possible defences against it.
(7 marks)
(10 marks)
Solution:
(a) Intentional torts are civil wrongs against the person or property in which the perpetrator of the tort must be shown to have
acted in such a manner that he either intended to harm someone or something or knew what he did would result in harm.
These can be contrasted with torts based on carelessness or negligence or torts in which liability would arise regardless of
the mental element (strict liability torts).
Instances of intentional torts are: assault, battery, defamation, nuisance, false imprisonment, invasion of privacy, trespass,
conversion and fraud.
(b) The tort of negligence is based on the concept of fault and carelessness and it exists where four conditions are present:
another, imposing on the one the obligation for the benefit of the other to take reasonable care in dealing with the other
[S. Iqbal Hussain Jaffery v KESC 1994 CLC 1903];
II. the defendant must have breached that duty. Breach is assessed by the standard of a reasonable-and-prudent person,
i.e. whether a reasonable man in the tortfeasor’s place would have acted in such a manner or not;
III. breach of that duty must be the actual as well as the legal cause of injury. The test commonly used is called the ‘but
for test’, i.e. but for the defendant’s breach of duty, the loss and damage would not have been suffered. The loss must
also be not too remote and must be reasonably foreseeable.
IV. the injury must be one that the law recognises and for which money damages may be recovered.
When the above-mentioned elements are present a cause of action based on negligence is established. To be successful, a
plaintiff must overcome any defences to negligence liability that may be raised by the tortfeasor. The usual defences to
negligence are (i) ‘contributory negligence’ – a court may reduce the amount of damages paid to the claimant if the defendant
establishes that they contributed to their own injury or loss; and, (ii) ‘volenti non fit injuria’ – where a defendant’s actions
carry the risk of a tort being committed they will have a defence if they can prove that the claimant consented to the risk.
6 In relation to company law, discuss the concept and effect of the doctrine of ‘limited liability’.
(10 marks)
Solution:
The most important characteristic features of a company are ‘separate legal entity’ of the company and, in most cases, ‘limited
liability’ of its members or shareholders. The liability of the members of a company may be limited either by guarantee or by shares.
If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal value of the shares they
respectively hold, as according to s.2(8) of the Ordinance, ‘company limited by shares’ means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. Further, s.2(9) of
the Ordinance, provides ‘company limited by guarantee’ means a company having the liability of its members limited by the
memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in
the event of its winding up.
The Superior Courts of Pakistan have consistently held that a shareholder cannot be made liable beyond the extent of his
contribution towards the share capital. For any unsettled liability, it is only the assets of the company which can be proceeded
against by an unpaid creditor or claimant [Sakhi Dattar Cotton Industries and Oil Mills v Mahmood (Pvt) Ltd – 2006 CLD 191].
Even if the assets of the company are insufficient to meet all demands or claims, the personal assets of the shareholders or
members cannot be liquidated to meet such demands or claims. However, in case a shareholder or member personally guarantees
the obligations of the company, for instance to secure a loan facility obtained by the company, he/she/it may be liable for the debts
of the company beyond his/her/its contribution towards the share capital. However such liability does not derogate from the
principle of limited liability under company law since it is an independent contractual obligation towards the creditor undertaken
by the relevant shareholder.
It may be noted that in certain jurisdictions, among other scenarios, at the time of winding up of a company the shareholders may
be called upon to pay the unpaid part of their respective share subscription/purchase monies. Section 298(1) (iv) of the Ordinance
dealing with liability of past and present members at the time of winding up states that no contribution shall be required from any
past or present member of a company limited by shares exceeding the amount, if any, unpaid on his shares. Section 298(1) (v)
makes a generally similar provision for members of companies limited by guarantee. It is noteworthy that s.91 of the Companies
Ordinance prohibits companies from issuing partly paid shares and accordingly all shares issued are to be fully paid up. Therefore,
at the time of winding up of companies limited by shares there is generally no issue of such calls being made on the shareholders.
The principle of limited liability may be derogated from, for instance, in cases of unlimited companies. Here, a company is formed
without any limit on the liability of its members to contribute. In such cases each member will be liable to contribute the last penny
of his personal fortune to satisfy the company’s liabilities when it is wound up. The Companies Ordinance (ss.111 and 112) also
envisions a scenario where the liability of the directors of a limited liability company may be unlimited. In the winding up of such
a company the relevant director would in addition to his liability, if any, to contribute as an ordinary member, be liable (subject to
certain conditions) to make a further contribution as if he were, at the commencement of the winding up, a member of an unlimited
company (s.299). Limited liability may also be rendered ineffective, in cases where the ‘veil of incorporation’ is lifted.
7 Describe the different classes of ‘workmen’ as stated under the West Pakistan Industrial and Commercial
Employment (Standing Orders) Ordinance, 1968.
(10 marks)
Solution:
The expression ‘workman’ is defined in s.2(i) of the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968
(‘1968 Ordinance’) as ‘any person employed in any industrial or commercial establishment to do any skilled or unskilled, manual
or clerical work for hire or reward’.
The classification of workmen for the purposes of the 1968 Ordinance is given in Standing Order No. 1 (‘S.O.1’) contained in the
Schedule to the 1968 Ordinance. This classification is important because the rights and privileges conferred by the 1968
Ordinance may vary from one class of workmen to another.
S.O.1 lays down the following classes of workmen:
(a) ‘Permanent workman’: is a workman who has been engaged on work of a permanent nature likely to last more than nine
months and has satisfactorily completed a probationary period of three months in the same or another occupation in the
industrial or commercial establishment, and includes a badli, who has been employed for a continuous period of three months
or for one hundred and eighty three days during any period of twelve consecutive months, including breaks due to sickness,
accident, leave, lock-out, strike (not being an illegal lock-out or strike) or involuntary closure of the establishment and includes
a badli who has been employed for a continuous period of three months or for one hundred and eighty-three days during any
period of twelve consecutive months;
(b) ‘Probationer’: is a workman who is provisionally employed to fill a permanent vacancy in a post and has not completed three
months service therein. If a permanent employee is employed as a probationer in a higher post he may, at any time during
the probationary period of three months, be reverted to his old permanent post.
(c) ‘Badli’: is a workman who is appointed in the post of a permanent workman or probationer, who is temporarily absent.
(d) ‘Temporary workman’: is a workman who has been engaged for work which is of an essentially temporary nature likely to
be finished within a period not exceeding nine months.
(e) ‘Apprentice’: is a person who is an apprentice within the meaning of the Apprenticeship Ordinance, 1962 (LVI of 1962).
(f) ‘Contract worker’: means a workman who works on contract basis for a specific period of remuneration to be calculated on
piece rate basis.
8 Danish Textiles (Private) Limited (‘DTL’) is authorised by the objects clause of its memorandum of association to
engage in the business of textile manufacturing. It has been manufacturing textiles since 1995. Sub-clause 20 of the
objects clause of the memorandum of association also authorises DTL to invest its surplus funds not required for the
business of manufacturing textile, in any manner as the board of directors may decide. For the past three years DTL
has been investing such surplus funds in the Stock Market and DTL has made substantial gains on such investments.
The directors are of the view that DTL should invest more funds in the stock market to make more profits. To achieve
this purpose, they are proposing to the shareholders that a new independent provision may be inserted in the objects
clause of the memorandum of association effectively enabling DTL to invest its principal funds in the stock market.
Moreover, they also want to continue with the existing business of textile manufacturing.
Required:
With reference to the Companies Ordinance, 1984:
(a) Advise the board of directors of DTL regarding the conditions in which the proposed new object may be
added to the memorandum of association, and (7 marks)
(b) Explain the basic procedure for making such an addition to the memorandum of association. (3 marks)
(10 marks)
Solution:
(a) Section 21 of the Companies Ordinance, 1984 (‘Companies Ordinance’) provides that a company may, by special resolution,
alter the provisions of its memorandum of association with respect to the objects of the company as far as may be required
to enable it, among other things, ‘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’ [s.21(1)(d)]. It further provides that the
alteration shall not take effect until and except in so far as it is confirmed by the Securities and Exchange Commission of
From the available facts it appears that the object of investment in the stock market is not an existing object of DTL. Therefore,
the addition of this new object would have to satisfy the requirements of s.21 as quoted above. In this regard, the following
principles have been laid down in judicial precedents pertaining to approval/confirmation of a proposed alteration of the
memorandum to provide for a new business:
(a) If there is no existing business being carried on by the company with which the proposed new business is to be
combined, then s.21(1)(d) may not be availed [In the matter of Standard General Assurance Company Limited AIR
(1965) Cal
(b) The proposed new business may be entirely new and may amount to a departure from the old businesses. The new
business must be a lawful purpose (s.15 of the Companies Ordinance). Investment in the stock market appears to be
a lawful purpose.
(c) The new proposed business must be:
(i) one which can conveniently and advantageously be combined with the existing business of the company;
(ii) the additional business must not be destructive of, inconsistent or incongruous with the existing business; and
(iii) it must leave the existing business substantially what it was before.
On the available facts, the proposed new business may be questioned as being speculative. However, the question whether
any given additional business is one which may conveniently or advantageously be combined with the business of the
company is essentially a business proposition to be determined by the persons engaged in the business of the company, i.e.,
directors and members of a company [In re Parent Tyre Company [1923] 2 Ch.
The alteration of the memorandum will be confirmed only if the SECP finds that: the company is in a sound financial position
to embark upon and carry on the new businesses; the alterations are fair to all classes of members of the company; and, the
rights of creditors are in no way prejudiced – [Industrial Cables (India
Cases 353 (P&H)].
(b) The procedure for making the proposed alteration is as follows:
(a) the board of directors discusses the proposed alteration in the memorandum of association;
(b) a notice of not less than 21-days is issued to the shareholders convening a general meeting. The notice specifies the
text of the proposed alteration and the reasons for the proposed alteration;
(c) at the general meeting the shareholders approve the proposed alteration by a majority of not less than three-fourths of
the members present, subject to the quorum requirements;
(d) an application for confirmation of alteration is filed before the SECP (Company Registration Office) under Rule 3 of the
Companies (General Provisions and Forms) Rules, 1985;
(e) subject to the confirmation by the SECP (Company Registration Office) necessary alterations are made in the
memorandum of association.
In view of the above discussion, it appears that if DTL is able to satisfy the SECP on these grounds the proposed clause to
invest in the stock market may be inserted in the objects clause of its memorandum of association by following the
aforementioned procedure.
9 Mufti Plastics (Private) Limited (‘MPPL’), incorporated in 1999, was promoted by two friends, Mr Zafar and Mr Tariq.
Currently, 60% of the issued shares of MPPL are owned by Mr Zafar (who is the chief executive of MPPL) and his
family members (collectively called the ‘Zafar Group’). The remaining 40% issued shares are owned by Mr Tariq’s
family members (collectively called the ‘Tariq Group’). Mr Tariq died in December 2005. Since January 2006, the
Tariq Group has practically been excluded from the affairs of MPPL. No notice of any general meetings or board
meetings of MPPL has been received by the Tariq Group. No dividend has been declared since 2006. MPPL’s after
tax profit for the financial year ending June 2008 was Rs. 200,000,000·00. MPPL has been making regular
payments to its creditors (including financial institutions). The Tariq Group has tried discussing its grievances with the
Zafar Group, but has not succeeded.
Required:
With reference to the Companies Ordinance, 1984, advise the Tariq Group on the grounds on which it may seek
the winding up of MPPL by the court and its chances of succeeding in such a claim.
(10 marks)
Solution:
Under the Companies Ordinance, 1984 (‘Companies Ordinance’) a company may be wound up by the court on the grounds laid
down in s.305. In this regard, the grounds most relevant to factual situations regarding MPPL are:
(a) the company is conducting its business in a manner oppressive to any of its members or persons concerned with the
formation of the company or the minority shareholders – s.305(f)(iii);
(b) the company is managed by persons who refuse to act according to the requirements of the memorandum or articles or the
provisions of the Companies Ordinance or fail to carry out the directions or decisions of the court or the registrar or the SECP
given in the exercise of powers under the Companies Ordinance – s.305(f)(v);
(c) if the court is of the opinion that it is just and equitable that the company should be wound up – s.305(h).
The available facts indicate that MPPL is a private company in the mould of a partnership between two family groups. The Superior
Courts have held that in cases of companies like MPPL, which are in the mould of partnerships, a state of deadlock and complete
lack of faith and confidence between the parties whereby the business of the company cannot be conducted in harmony, winding
up may be the just and equitable solution [Ladli Prasad Jaiswal v Karnal Distillery Co Ltd PLD (1965) SC 221; Qamar Loan v
Kashmirian (Pvt) Ltd PLD (1997) Karachi
of MPPL and the Zafar Group seems unwilling to co-operate. In such circumstances it may not be possible for both groups to carry
on together in accordance with applicable laws.
Further, notices of general and board meetings have not been given to the Tariq Group. These are breaches of the requirements of
the Companies Ordinance and may constitute one of the grounds for seeking winding up of MPPL. However, on its own this single
ground may not warrant winding up.
It is also apparent from the available facts that MPPL is a going concern which has shown a healthy profit. The Superior Courts
have also held that winding up of going concerns which are commercially viable should not be ordered [Platinum Insurance
Company Limited v Daewoo Corporation PLD (1999) SC 1]. The winding up of MPPL may be resisted on this ground. However,
in view of the deadlock, the court may also be inclined to order a buy-out of the Tariq Group’s shareholding by the Zafar Group.
In view of the foregoing discussion, it is advised to the Tariq Group that a strong case for winding up may be made to the court,
however, it can not be said with certainty whether winding up would be ordered.
10 Ahmed contracted with Ali to sell and deliver to him his Toyota Corolla for Rs 800,000. Ali paid Rs 800,000 to Ahmed
on Monday. The car was to be delivered to Ali on Wednesday. However, on Tuesday there was a sudden riot in the
city centre and the car was set on fire by an angry mob resulting in its complete destruction.
Required:
In relation to the law of contract, advise Ahmed and Ali on the impact of this event on their contract.
(10 marks)
Solution:
The second paragraph of s.56 of the Contract Act, 1872 (‘Contract Act’) provides that a contract to do an act which, after the
contract is made, becomes impossible, becomes void when the act becomes impossible. Section 56 gives statutory recognition to
the doctrine of frustration of contract. Frustration signifies a certain set of circumstances arising after the formation of contract, the
occurrence of which is due to no fault of either party and which render the performance of the contract by one or both parties
physically impossible. The courts regard these sets of circumstances as releasing or discharging the parties from any further
obligations.
One of the set of circumstances in which the doctrine of frustration of contract has been held to apply is the destruction of the
subject matter of the contract, for example, a music hall where a performance was to be given [Taylor Caldwell
ER Rep 24].
On the available facts, the contract was for the sale and delivery of a car. At the time of entering into the contract it was possible
to sell and deliver the car. However, subsequently the car had been destroyed in a fire started by an angry mob. Ahmed may argue
that due to the sudden event, which was beyond his control, the subject matter of the contract has been completely destroyed.
Therefore, it is physically impossible for him to perform his contractual obligations and accordingly he may be discharged from his
contractual obligations. If this line of argument is successful, Ahmed will be discharged accordingly, but he will be required to return
the benefit obtained under the contract, i.e. refund the Rs 800,000 received from Ali.
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