Updated: Thursday January 14, 2010/AlKhamis Muharram 29, 1431/Bruhaspathivara Pausa 24, 1931, at

07:05:30 PM

Course Contents:

1.The Companies Ordinance (XLVII of 1984) (as amended upto date).

Books Recommended:

1.The Companies Ordinance, 1984, by P. L. D. Publication.

2.Hand Book of the Company Law by S. Naveed Abbas and S. A. Abid.

3.An Introduction to Company Law by J. A. Hornby.

4.Osborns Concise Law Dictionary, Sixth Edition by John Burke.

5.The Indian Decisions by The Lawyers Companion Office.

Word Company was called earlier Soceetas means society or association of persons. Word Company is derived
from two Latin words Cum and Panis. Cum means with altogether and Panis means bread. Man is social
animal. He needs trade. Earlier shape of trade was barter system, i.e., exchange of goods with goods. People
were gathered in a place to exchange of their goods. Owner of horse buys wheat and person who had sugar
buys wheat. After the transaction is completed they were sat down to take meal and matter of discussion was
trade or business. Even in present age business meetings are ended in dinner. So Company is derived from
former two words. It comes into existence in the middle ages of legislation in France and Italy. It had germs of
partnership and company appeared in modern age.

Now the development of company has started. People have started to specialize in one trade rather than in
single enterprise. Some of them specialized in agriculture, and some in trade etc. This was the age of
mobilization and resources were scarce.

Lord Lindley defined the Company as it is a association of many persons or by a company is meant an
association of many persons who contribute money or moneys worth to a common stock and employ it
(common stock) in some trade or business and who (persons) share the profit and loss as the case may be
arising therefrom.

Main advantage of the company is that liability is limited upto the extent of amount of the investment (limited
to the nominal value of the share). A business is started with a Rs. 10,000/ containing 1,000 share @ Rs. 10/
each as follows:

Shareholders No. of Share Value of Share Total Value of Share (Rs.)

A 1 Rs. 10/ 10/

B 10 Rs. 10/ 100/

C 100 Rs. 10/ 1,000/

What is a registered company: The companies with which we are concern are called Registered Companies
because they are brought into existence by registration of certain documents (of which the most important are
called Memorandum of Association and Articles of Association with a public official (a Registrar of
companies). The most important legal characteristic of a registered company is that it is incorporated and so
what is known as legal personality or an artificial juristic person just as a human being is a person.
This artificial or juristic person can own land and other property, enter into contracts, sue and be sued, have a
bank account in its own name, owe money to others and be a creditor of other people, and employ people to
work for it. The companys money and property belong to the company and not to the members or
shareholders who have incorporated it. (In nearly all registered companies the members are shareholders and
so the terms members and shareholder are virtually synonymous). Similarly, the companys debts are the
debts of the company and the shareholder cannot be compelled to pay them, although if, for example, the
company is being wound up and its assets do not realize a sum sufficient to pay its debts, a shareholder whose
liability is limited by share is liable to contribute to the assets upto the amount, if any, unpaid on his share.
(Persons who contribute capital to a limited company, as members of the company, in return for a share in the
profits made in the companys business are not liable, if the business fail, to loose anything more than the
amount of capital they have undertaken to contribute).

A Company, of course, can only act through human agents, and those who manage its business are called
directors. They are usually appointed by the members at their annual general meetings, have wide powers to
manage the companys business conferred upon them by the articles of association. The directors are agents of
the company and transact business etc. on behalf of the company. The company will be bound by any
transaction entered into on its behalf if the agent is acting within his authority. The company is also liable for
torts and crimes committed by its servants and agents within the scope of their employment.

This concept of the company is as a corporation, i.e.,

(A)A PERSON SEPARATE AND DISTINCT FROM THE OTHER PERSONS WHO ARE ITS MEMBERS AND
DIRECTORS IS THE FUNDAMENTAL PRINCIPLES OF COMPANY LAW.

(B) IT HAS PERPETUAL SUCCESSION, i.e., ITS EXISTENCE IS MAINTAINED BY THE CONSTANT
SUCCESSION OF NEW PERSONS WHO REPLACE THOSE WHO DIE OR ARE IN SOME OTHER
WAY REMOVED. THIS MEANS THAT EVEN THOUGH A MEMBER DIES, GOES BANKRUPT, OR
RETIRES FROM THE COMPANY BY TRANSFERRING HIS SHARE, THE COMPANY CARRIES ON AND
IS NOT DISSOLVED.

A Company must have members, otherwise it would never exist at all, and in the case of a company with a
share capital these members are called shareholders. A shareholders position with regard to the company itself
and to other shareholder is regulated by the act, by the memorandum and article of association. The
memorandum and article vary considerably among different companies, but in every case the shareholders
position is that of the owner of one or more share in the company, which shares usually carry a right of voting
at general meeting, and if profits are made, a right to receive dividends, if declared, on his shares. His shares
are something which he has boughtperhaps from the company, or perhaps from somebody else and
something which he can sell or give away, either in his life time or by his will.

The general rule is that a shareholder cannot get his money back from the company so long as the company is
in existence, because the position is not that of a person who has lent money to the company or has deposited
his money as with a bank. It is that of the owner of property, namely, the share which can only be turned into
money if a buyer can be found to pay for them. Share may be fully paid or partly paid. When the shares are
only partly paid the shareholder can be compelled to pay them up fully if called upon by the company or, if the
company is being wound up and its debts exceed it assets, by the liquidator.

A registered company if decides to retire from business or it may become insolvent, in such a case it is wound
up, i.e., it is put, or it goes into liquidation and a person, called a liquidator, is appointed to windup its affairs.
He sells the companys property and pays as much of its debts as he can do out of the proceed of sale. If there is
a surplus he distributes it among the shareholders. When the liquidation is completed the company is
dissolved and ceased to exist.

Incorporation is a certification to prove contribution in the assets of the company. It is a process by which a
company comes into existence.
Company limited by guarantee means a company, which has not authorized capital, and liability determines
only at the time of distribution of profit or suffering from loss. Kant School Association Limited is an example
of this type of company. There were seven teachers retired from school at a time and thought to begin a school.
They had experience of education but lack the capital. One of them provided the building premises while
otherone provided furniture for school. After all they started the business of education. They were promoters
of the company. All were agreed to guarantee to provide sufficient capital if the company is dissolved or suffer
from loss. The fees of the pupils whatever they paid ran business of the company. Liability determines upon
loss or dissolution.

Subsidiary company is a company in which other company subscribes more than 50% shares and the company
who subscribes the share capital in other company is termed as parent company. Parent company is also called
Holding Company. PIA is the one of example of parent company to PIA Shavers.

One man company was the term, which was used in the case of Saloman and Company. Now this term has
been abolished. A person who constitutes the company remains no more important after the company has been
constituted.

Debenture is the loan, which is given to company even by its creator or some other institution. These are the
secured loans and paid first if company liquidates after the sale proceeds of company assets. If some money left
then other creditors are paid.

Corporation is thus device of the legal system and incorporation is a process or technique by which the legal
system creates new legal entities or bodies. The term incorporation should be confined to those occasions when
the legal system declares that it creating new legal entity and endowing (authorizing) it with the standard
corporate attributes of perpetual (permanent or continuos) succession, a common seal, the ability to own
property, and the capacity to sue and be sued. Registered companies are best examples of corporation.

In a case Nowgong Tea Company which was the partnership was converted into public company with a name
of Kondoli Tea Company which had authorized capital of Pound 43,320/. They conveyed the firms assets to
company and denied applying the requisite stamp duty on the deed. This case was brought in the Court for the
decision whether the old owner may convey the assets to the company or would it be sale or transfer proceed.
It was held that when a firms assets are transferred to company then they are termed as sale to the company
therefore requisite stamp duty is applied on sale deed.

In an another case Saloman v Saloman & Company, Saloman was a cobbler (shoemaker) carrying on his
business as sole proprietorship. Later on he converted his business into company considering safe and secure
and having limited liability. He nominated himself, wife, his daughter, and four sons as directors and allocated
shares one of each. He sanctioned some loan (debenture) by himself to the company (being secured creditor).
Also some other people gave to company loan being unsecured creditors. Later on company suffered from
losses and the liquidator sold out assets of the company and Saloman was paid first. Other creditors demanded
their money first before the payment to its Managing Director. Court held that Saloman had first right being
secured creditor.

History of Saloman case: Saloman was a sole proprietor of leather goods. He sold his business to a firm
Saloman & Company. He became the Managing Director of the company. He allocated shares as follows:

Saloman: 01 Share
Wife: 01 Share
Daughter: 01 Share
Four (4) Sons: 04 Shares
Total: 07 Shares

He issued 20,000 shares of each 1. He also purchased debentures for 10,000/. Later on company wound up.
The amount realized from the assets of the company was very small. It was applied first in the payment of
debentures. There were no funds left for the payment to its ordinary creditors.
Appointment of liquidator: Interest of ordinary creditors was defeated, so they got appointed liquidator for
selling out the company assets and their early payment.

Decision of liquidator: Liquidator alleged that company was mere agent employed to secure Saloman and
vendor was liable to indemnify the company against the claims of ordinary creditors. He also alleged not to
pay the debentureholder. In his opinion ordinary creditors had first right to pay off and then debenture
holder.

Decision of trial Court: The trial Court gave judgement against Saloman being malafide intention on the part
of first payment to debentureholder.

Court of appeal: Saloman made an appeal in the Court of appeal and appeal Court confirmed the decision of
trial Court rather than giving him remedy.

Later on Saloman put this case to House of Lords for determination.

Points considered in House of Lords: Following points were considered in House of Lords to determine the
case:

1.Legal entity: Saloman & Company is the legal entity and came into existence with all formalities of law.

2.Company as agency: It was also considered whether company was employed as an agent and also intent of
Saloman.

3. Appointment of directors: Appointment of family members as director was another point, which was
raised to show malafide intention on the part of Saloman.

4.Usual formalities: It was also gone through that all the formalities were fulfilled to form a company such
as:

(1)Issuance of a Memorandum of Association.

(2)Issuance of Articles of Association.

(3)Registration of company.

(4)Contract with trustee.

(5)Nomination of first directors.

(6)Powers of directors.

Evil days of company: The overall life of the company was much shorter. There was a great period of
depression in the boot and shoe trade. There were also strikes of workmen. Profits were split up.

Misconception of trial Court: Trial Court wrongly conceived that Saloman had employed company as agent to
attract capital. The actual company was Saloman. Appointment of directors from family members was not in
real sense and they were mere dummies. He used the name of company as agent.

Base of decision of House of Lords: While deciding the case Court taken into consideration whether
Memorandum of Association was signed, Articles of Association were prepared, there were seven directors
who subscribed. Matter of signatures whether they were relatives or strangers. When the company, once, was
incorporated, it had powers to borrow money to run the affairs of the company.

Incorporation of companies: Also reasons to incorporate companies were discussed as company is

incorporated to avoid risk of bankruptcy. It also affords increased facility of borrowing money. Trade carries
limited liability. Company may raise money by way of debentures, which an ordinary trader cannot do. Any
member of a company, acting in good faith, is as much entitled to take and hold the companys debentures as
any outside creditor.

Final decision: At last finally Court held that Saloman had a right to pay off first and then ordinary creditors.
Case held in favour of Saloman.

What is difference between partnership and corporation (public limited company): Following the difference
between partnership and corporation:

Corporation or Company Partnership

1.Huge capital 1.Limited Capital

Here huge capital can be arranged by
splitting the huge capital into small
shares, which easily accessible by
common stock holder. Capital is arranged
from public.
2.Limited authority
Here law protects the interest of
stockholders by making their liability
limited. They are only responsible upto
the extent of amount they have
contributed in company in term of share.
3.Legal entity
20 persons can contribute little capital.
Beyond the limited resources they have
no means.
2.Unlimited liability
If the firm suffered into losses,
individuals are responsible to pay debts
even from their personal property. Their
liability is unlimited.
3.Uncertain period of life

Since corporation or company is the Since the partnership is result of

product of law therefore only law can put association of specific persons by an
it an end. Retirement of any shareholder agreement they have made, so this
or director, death, disagreement, agreement may be revoked at any time by
insolvency of one of them cannot put a leaving the firm. Also death, insolvency,
company into end. It is a separate legal retirement, disagreement may put firm
entity from the person who has formed it. into end. No one can be compelled to
Matters of company are run according to remain with the firm. Every one is
the Memorandum of Association independent in his action.
(constitution or principles) and Articles of
Association (rules and regulations or
bylaws made under the Memorandum of
Association.
4.High quality management 4.Limited management abilities

Huge capital can engage the services of Since the capital of a firm is limited so the
highly qualified and highly paid expertise highly paid management cannot be
of the management. engaged to run the affairs of the firm.
5.Easy share transfer 5.Difficulty in share transfer

Any one of shareholder who wants to There is no concept of representation if

retire or leave the company is only
required to seek person who may buy his
share. Hence ownership is easily
transferred. New shareholder represents
old one.
someone wants to retire, dies, or
disagreed. Expulsion of one member put
the firm into an end.
 Corporation or Company
6.Board of Directors
The authorized agents of the company
run affairs of the company. Only
authorized person or director may enter
into agreement. All the agreements
entered into in individual capacity are not
liability of the company except
authorized person makes them.
7.Security of the secrets
Here are many persons who contribute in
the development of the organization so
secrets may keep conceal and secure.
8.Formation
It comes into existence by the process of
law in term of registration.
9.Status at Law
It is perpetual and continues even after
the death of all of its members. Also it is
legal entity thus artificial person. Since it
is creation of law so it can be dissolved by
an operation of law. Leaving or death or
insolvency or bankruptcy of one person
cant affect its legal status.
10.Number of persons
Minimum limit of its members is seven
while there is no restriction on maximum
membership.
11.Management
Minimum number of directors in case of
public limited company is 7 while it is 2
in case of private limited company.
Shareholders elect directors after every
three years in meeting.
Partnership
6.Individual management
Here members of the firm are responsible
in their individual capacity. Any one
member either is authorized or not may
enter into business either directly
concerned or not with the affairs of firm.
Firm is liable.
7.Leakage of secrets
In small size business secrets may not be
concealed and there is greater risk to have
secrets.
8.Formation
It is a relation between persons who have
agreed to share the profit of business
carried on by all or any one of them
acting for all. Persons who have entered
into partnership with one another are
called individually (partner) and
collectively (a firm) and a name under
which business is carried on is Firms
Name.
9.Status at Law
Since it is not creation of law thus it is not
termed as legal person. It comes into
existence upon the agreement of specific
persons therefore leaving or death of one
person dissolves it. Its partners owe
assets. If the person who has formed it
leaves it dissolves. Also separation of one
member is sufficient for its death.
10.Number of persons
In case of banking business its
membership is limited from 2 to 10 while
this membership extends from 2 to 20 for
any other business besides banking.
11.Collective Management
All partners or some of them run the
business of the firm individually as well
as collectively.
 Corporation or Company
12.Easy Transfer of shares
Shareholder not desirous to retain share
of the company merely can transfer his
share to the person who is willing and
able to buy the share.
13.Property vests in Company
Property vests in the name of company.
Company can owe or dispose of the
property.
14.Equal status of Creditors
In the event of liquidation no distinction
between shareholders and creditors is
maintained. They are treated with the
same status.
15.Accounts necessary
Company by law is liable to maintain and
publish the accounts.
16.Compulsion of Audit
The authorized Chartered Accountant
Company must audit accounts of the
company.
17.Agency
All the business is run in the name of
company. Only authorized person can
deal business.
18.Limited liability
Liability of all the shareholders is limited
to the extent of the nominal value of the
share. Once it is paid it discharges from
the liability.
19.Dissolution
Since it is creation of law so only
operation of law can dissolve it.
20.Taxes
Company pays taxes on its net profits
only.
Private limited company is one:
1.Which restricts the right to transfer of shares,
Partnership
12.Nontransfer of Shares
Business is run among the specific
persons by an agreement so it cant be
turned toward the aliens by any act. If
anyone so desires, it would be breach of
contract thus illegal.
13.Property vests to individuals
All property belongs to individuals.
14.Priority of Creditors
In case of liquidation creditors are paid
first while shareholders later.
15.Accounts not necessary
Publication of accounts is no more
necessary.
16.Noncompulsion of Audit
It lacks finance thus doesnt feel to get
audited accounts. Similarly internal audit
is sufficient.
17.Lack of agency
Each and every member is liable due to
agent of the firm.
18.Unlimited liability
Liability is unlimited.
19.Sudden dissolution
In case of death or separation of any one
of the partners, it does not remain firm. If
otherwise agreement upon it would be
called reconstitution.
20.Double taxes
Partners are liable to pay taxes
individually as well as on the profits of
firm.
2.Limits its members to 50,

3.Prohibits any invitation to the members of the public to subscribe to its shares.

Distinction between public limited company and private limited company:

Public Limited Company Private Limited Company

1.Its minimum members are 7 in number. It requires only 2 minimum members for
formation.

2. There is no restriction on maximum Maximum limit is restricted upto 50

number of membership. members.

3. Statutory meeting is necessary to hold at It doesnt hold any statutory meeting.

the beginning of business once in a life.

4. It issues shares and public subscribes it. Public issue is prohibited at law.
Law obliges it.

5.There must be minimum capital required Minimum capital is no more important to

to begin the public limited company. begin the private limited company.

6. Upon the public issues institutions

Since there is no public issue therefore
commit underwriting if the shares are not institutions do not need to commit
fully subscribed by the public. underwriting.

7. Minimum number of directors is

Minimum number of directors is
restricted to 7. restricted to 2.

8. Accounts must be published once in a Publication of accounts is not obligatory.

year.

9. The authorized Chartered Accountant Audit is not so necessary.

Firm must audit accounts.

Jurisdiction: In case of disputes, High Court of the province in which Head Office of the concerned company is
situated or where dispute arises, is competent to hold the case. High Court also authorizes District Court to act
on the behalf of the High Court where it is necessary or convenient.

Memorandum of Association of a Company: It is its charter, which contains the fundamental conditions upon
which alone the company is incorporated.

It defines the limitation of the powers of the company, the area beyond which the action of the company cannot
go. Its purpose is to enable the shareholders, the creditors, and all those who deal with the company know
what is its permitted range of enterprise.

It is a document, which sets out the constitution of a company, as such, it is really the foundation on which the
structure of the company is based. It defines its relations with the outside world and the scope of its activities.

In the case of a company limited by shares the Memorandum of Association shall state:

1. The name of the company: Promoters are at liberty to choose any name except the similar to or identical
with the one already in existence. Undesirable names are also not allowed. Last word of the name must be
Limited. Private Company should indicate word (Pvt.) before Limited.
2. Situation clause: Company must state whether its registered office where would be located. It is central
place for contact and documentation. Name of city is not advisable where the Head Office would be
located, but the name of province should be mentioned. It creates convenience to shift office from one
locality to another within the province. A notice must be served to the Registrar concerned.

3. Object clause of the Company: Objective of the incorporated company must be mentioned as it indicates
the extent of the companys powers and the sphere of the activities incidental to or consequential upon the
powers. Company must do the business, which is specified in its object clause alongwith allied matters.
Variation from object clause puts in ultra vires.

4.Liability: It includes the extent of the liability of the promoters and/or shareholders. Company limited by
shares restricts the liability of the investors limited upto the extent of the amount they have contributed in
the company.

5.Capital clause: This clause contains the registered or authorized or nominal capital divided into shares. If
the authorized capital is Rs. 100,000/, it may be divided @ Rs. 10/ per share into 10,000/ shares.
Normally issued capital achieves its subscription, which leaves good gesture on the part of company.
Equation of both issued and subscribed capital increase goodwill of the company. Law does not allow
reduction in capital.

6. Association clause and subscription: Promoters are required to subscribe initially and sign the
Memorandum of Association in the presence of witnesses which are seven in number equally in case of
public limited company. This is also called undertaking.

In what respect alteration in Memorandum of Association can be made: Promoters of the company are at
liberty to alter the each and every clause of the Memorandum of Association except Subscription clause. Thus
no member is bound by any alteration made in the Memorandum of Association after the date on which he
became a member if such alterations requires him to take a subscribe for more shares than the number he holds
already at the date on which the alteration is made.

A Company subject to the provisions of the Ordinance may by special resolution alter the conditions contained
in its memorandum. Company may make following alterations:

1.Name of Company: Name of the company can be altered with new one provided it is neither similar to nor
identical with an existing name and nor it should be undesirable. This alteration requires notifying the
Registrar. Special resolution requires for such alteration. Old name of the company is carried out with new
name for a period of one year as formerly name.

2.Capital clause: Capital clause may be amended as follows:

(a) Consolidate and divide shares in the share of larger amount.

A shareholder has subscribed the investment as follows:

10 shares @ Rs. 10/ per share Totaling amount Rs. 100/

Making one share @ Rs. 100/ may consolidate his ten shares into one.

(b) Subdivide its share into the shares of smaller amount.

Here situation of former case would be reversed.

(c) Canceling shares, which have neither been takenup nor agreed to be takenup at the time of passing the
resolution.
 For example, a company has issued its 100 share out of them only 80 are subscribed. 20 shares are
remained unsubscribed. It may harm the goodwill of the company. Company by passing special
resolution may write off or cancel the remaining left over share. This would not result in reduction of
capital, which is not allowed by law.

3.Situation clause: Passing special resolution it may be altered. Communication of resolution to Registrar is
must.

4.Limitation of liability clause: It also can be altered subject to statutory law.

5. Object clause: Special resolution is required to alter it. Shareholders and Registrar raise objections. After
getting necessary answers and satisfaction, Registrar permits to change object clause. Why need to alter in
object clause becomes necessary? It can be answered as follows:

(a) To carry on its business more economically and more efficiently, e.g., local raw material can be used
instead of imported raw material, which guarantees the economic production and readily availability.

(b) To attain its main purpose by new and improved means, e.g., hand made cloth but later on powers
looms were invented which resulted in reduction of cost and labour and increase in production.

(c) To enlarge or change the local area of operation. Business is carried on within the limits specified and
allowed by Registrar in Memorandum of Association and Articles of Association. Extension in area of
operation requires permission of Registrar. From one province to another or from one country to
another, business can be expanded with due course of time and increasing of demand by taking
permission from Registrar.

(d) To carry on some business which under existing circumstances can advantageously be combines with
the business of the company. Packages Company, is a good instance, which is manufacturer of packing
material. Quite enough wastage of papers was left out which was sold in local market but later on it
was revealed that it could be utilized in making of board. They installed another plant to make board
from such left over wastage of paper. It was advantage to the company. Nowadays many sugar mills
are also manufacturing chipboard with the wastage of sugarcane, which is left over after making the
sugar.

(e) To restrict or abandon any of the objects specified in the Memorandum of Association. Some time
manufacturing cost increases and some time unavoidable circumstances put company to close unit as
whole or as part.

(f) To sell or dispose of the whole or any part of the undertaking of the company. If the new techniques
have been developed or demand has been reduced then part of undertaking or whole is requires to be
sold.

(g) To amalgamate with other company or body of persons. To increase production and reduce cost, it
becomes imperative to merge a company with another having the same object like Galaxo with
Wellcome, Mercedeze with BMW, Ravi Chemicals with Hoechst etc.

Alteration in object clause must be communicated to Registrar within 90 days after passing special resolution.

Right shares increase the capital of the company thus offered to existing members. It requires general
resolution of present majority of members. Capital may be diminution. It is reduction in volume.

Formation of Securities and Exchange Commission of Pakistan: Following criteria is adopted for formation of
Securities and Exchange Commission of Pakistan:

1.Maximum members: Total membership of the Securities and Exchange Commission of Pakistan is seven.
2.Minimum membership: Five is the minimum membership of the commission.

3.Quality of the members: They are expert and their integrity towards the commission is doubtless.

4.Area of selection: In former Corporate Law Authority members were selected from civil service. But now
maximum membership comes from private sector. They are the best persons for holding the membership
of the commission. Government had not knowhow of commerce and industry, which was the
requirement of the authority. But now those people are selected who have knowhow of the commerce
and industry.

5.Title of members: Members are termed as commissioner.

6.Term of holding office: There are two terms of holding of the office. First term expires after two years.
Three commissioners are retired after two years. They are selected in draw.

7. Term A commissioners: Commissioners who are retired after expiry of first two years are called
commissioners of term A.

8.Term B commissioners: Commissioners who survive till six years are called commissioners of term B.

9.Eligibility for reappointment: Commissioners of term A are eligible for reappointment.

10.Fixation of salary: Commission shall decide the salary of the commissioners. Civil Services Rules are not
applied on commissioners.

11. Condition of service: All the commissioners are served till the pleasure of the government. As soon as
government feels better, any commissioner may be removed from his office.

12.Rules and regulations: Board frames the rules and regulations for Securities and Exchange Commission
of Pakistan.

13. Object to form commission: Object of the formation of the Securities and Exchange Commission of
Pakistan is to promote commerce and industry.

Powers and functions of the Securities and Exchange Commission of Pakistan: Following are powers and
functions:

(1) The Commission shall have all such powers as may be necessary to perform its duties and functions
under this Act.

(2)The Commission may having regard to its functions and to exercise its powers efficiently, organizes itself
into divisions, wings, or such other subdivisions, as it may consider expedient.

(3) The Commission may, from time to time, identify the matters requiring the Board to make policy
decisions and may also make recommendations regarding policy to the Board for its consideration.

(4)The Commission shall be responsible for the performance of the following functions:

(a)Regulating the issue of securities

(b)Regulating the business in Stock Exchange and any other securities markets

(c) Supervising and monitoring the activities of any central depository and Stock Exchange clearing
house
 (d)Registering and regulating the working of stock brokers, subbrokers, share transfer agents, bankers
to an issue, trustees of trust deeds, registrars to an issue, underwriters, portfolio managers,
investment advisers, and such other intermediaries who may be associated with the securities
markets in any manner

(e) Proposing regulations for the registration and regulating the working of collective investment
schemes, including unit trust schemes

(f)Promoting and regulating selfregulatory organizations including securities, industry, and related
organizations such as Stock Exchanges and associations of mutual funds, leasing companies, and
other NonBanking Financial Institutions

(g)Prohibiting fraudulent and unfair trade practices relating to securities markets

(h)Promoting investors education and training of intermediaries of securities markets

(i) Conducting investigations in respect of matters related to this Act and the Ordinance and in
particular for the purpose of investigating inside trading in securities and prosecuting offenders

(j)Regulating substantial acquisition of shares and the merger and takeover of companies

(k)Calling for information from, undertaking inspections, conducting inquiries and audits of the Stock
Exchanges and intermediaries, and selfregulatory organizations in the securities market

(l) Considering and suggesting reforms of the law relating to companies and bodies corporate,
securities markets, including changes to the constitution, rules and regulations of companies and
bodies corporate, Stock Exchanges or clearing houses

(m)Encouraging the organized development of the capital market and the corporate sector in Pakistan

(n)Conducting research in respect of any of the matters set out in this subsection

(o) Performing such functions and exercising such powers of the Authority, including any powers of
the Federal Government delegated to the Authority (other than the power to make any rules or
regulations) under the provisions of the Ordinance, and under any other law for the time being in
force under which any function or power has been conferred on the Authority including, but not
limited to, the functions and powers set out in the Schedule to this Act

(p)Performing such functions and exercising such powers (other than the power to make any rules or
regulations) under the Ordinance or any other law for the time being in force as may, after the
commencement of this Act, be delegated to it by the Federal Government and exercising any power
or performing any functions conferred on it by or under any other law for the time being in force
and

(q) Proposing regulations in respect of all or any of the aforesaid matters for the consideration and
approval of the Board.

(5) Without prejudice to the provisions of subsection (4), the approval of the Commission shall be required
by:

(a) All public companies incorporated in Pakistan which intend to issue or offer for sale securities in
markets outside Pakistan or to list such securities on a Stock Exchange outside Pakistan, in each
case, whether directly or through an intermediary

(b)All bodies corporate incorporated outside Pakistan which or persons who intend to issue or offer for
sale, securities to the public in Pakistan or to list such securities on a Stock Exchange and
 (c)All bodies corporate incorporated outside Pakistan, which are already listed on a Stock Exchange,
for the listing of and quotation for any additional securities.

(6)In performing its functions and exercising its power, the commission shall strive:

(a) To maintain facilities and improve the performance of companies and of securities markets, in the
interest of commercial certainty, reducing business costs, and efficiency and development of the
economy

(b) To maintain the confidence of investors in the securities markets by ensuring adequate protection
for such investors

(c)To achieve uniformity in how it performs those functions and exercise those powers

(d)To administer laws effectively but with a minimum of procedural requirements

(e) To receive, process, and store, efficiently and quickly, the documents lodged with, and the
information given to it under this Act, the Ordinance or any other law

(f)To ensure that the documents, and the information referred to in clause (e) are available as soon as
possible for access by the public and

(g)To take whatever action it can take, and is necessary, in order to enforce and give effect to the Act
and the Ordinance or any other law.

Disqualification: No person shall be appointed or continue as a Member or Commissioner if he:

(a)Has been convicted of an offence involving moral turpitude

(b)Has been or is adjudged insolvent

(c)Is incapable of discharging his duties by reasons of physical, psychological, or mental unfitness and has
been so declared by a registered medical practitioner by the Federal Government

(d) Being a Member, absents himself from three consecutive meetings of the Board, without leave of the
Board and, in the case of a Member ex offcio, or fails to appoint another person to act as member under
subsection (5) of S. 12 or

(e)Fails to disclose any conflict of interest at or within the time provided for such disclosure by or under this
Act or contravenes any of the provisions of this Act pertaining to unauthorized disclosure of information.

Removal, resignation, and vacancies:

(1)Subject to subsection (2), appointment of any Member or Commissioner may, at any time, be revoked and
he may be removed from his office by order of the Federal Government if it is found that such person
stands disqualified under S. 18.

(2)Unless a disqualification referred to in S. 18 arises from the judgement or order of a Court or Tribunal of
competent jurisdiction under any relevant provision of applicable law, a member or Commissioner shall
not be removed or his appointment revoked without an enquiry by an impartial person or body of
persons constituted in accordance with such procedure, as may be prescribed by rules made by the
Federal Government, and such rules shall provide for a reasonable opportunity for him to be heard in his
defence.

(3) A Member or a Commissioner may at any time resign his office by a written notice addressed to the
Federal Government.
(4)The office of a Member or Commissioner shall ipso facto (automatically) be vacated if he dies.

Formation of Board: Following is the criteria for the formation of board:

1.Membership: Total membership is seven in number.

2. Exofficio members: Four members are taken from government departments who are called exofficio
members. Exofficio members are the members who are by virtue of the post.

3.Term of service of exofficio members: Exofficio members serve till the expiry of their term of service in
government department.

4. Term of service of private members: They get retirement after four years and are eligible for
reappointment.

5.Private members: Three members are taken from private sector.

6.Quality of the members: They are expert and their integrity towards the commission is doubtless.

7.Casual vacancy: If any casual vacancy is filled in place of private members, new appointee shall serve till
the remaining period of the predecessor member.

8.Casting vote: Presiding officer does not cast his vote till the equation of the votes.

9.Meetings: Board is obliged to hold meetings after three months.

10.Quorum: Quorum for the holding of meeting is four members including chairman.

Functions and powers of the Board: Following are the functions and powers of Board are as follows:

(1)Subject to the provisions of this Act, the Board shall:

(a)When so asked to do and after consultation with the Commission, advise the Federal Government
on all matters relating to:

(i)The securities industry

(ii)Regulation of companies and corporate sector and protection of the interests of investors

(iii) Measures to encourage selfregulation by the Stock Exchange and NonBanking Financial
Institutions by specifying the standards for such selfregulatory organization

(iv)Measures to promote the development of and to regulate the securities market and

(v)Other related matters

(b)Consider and approve (with or without modifications) any regulations proposed to be made by the
Commission under the Act

(c) Consider and approve (with or without modification) the budget for each financial year of the
Commission prepared and submitted to it pursuant to the provisions of subsection (2) of S. 24

(d)Express its opinion in writing on any policy matter referred to it by the Federal Government or the
Commission

(e)Oversee the performance of the Commission to the extent that the purposes of this Act are achieved
 (f)Exercise all such powers and perform all such functions as are conferred or assigned to it under this
Act and

(g) Specify fees, penalties, and other charges chargeable by the Commission for carrying out the
purposes of this Act.

(2) All policy decisions, including any change in previously established policy, in respect of all and any
matters within the jurisdiction of the Commission shall be made only by the Board. The Board may make
policy decisions suo moto or adopt such policy recommendation of the Commission, with or without
modification, as the Board may deem fit in its sole discretion.

Supplementary provisions regarding the functions and powers of the Board:

(1) All guidelines, decisions, and directives whether of the Board or the Commission shall be in writing
expressed by resolutions, orders or in such other form as may be appropriate in the circumstances and
shall be authenticated in the manner prescribed by the Regulations, and where so provided by
regulations, also sealed with the seal of the Commission.

(2)All policy decisions and directives of the Board and the Commission respectively shall be published in the
official Gazette and the Board and the Commission shall make such publications available to the public.

(3)The Commission shall, in adjudicating upon the rights of any person whose application on any matter is
required to consider in the exercise of any power or function under this Act, give the reasons for its
decision after giving the person concerned a personal hearing, in addition to any written applications or
submission which may be required to be made.

(4) The Commission when exercising its powers under this Act shall have regard, so far as relevant to the
circumstances of the particular case, to:

(a)The viability of the company or body corporate

(b)The quality and capability of the management of the company or body corporate

(c)The suitability for listing of the company or body corporate or a Stock Exchange where applicable

(d)The interest of public investors, existing or potential, in the company or body corporate

(e)Any policy decision or directives of the Board and

(f)The general public interest.

(5)Subject to the compliance of the provisions of subsection (3), S. 24A of the General Clause Act, 1897, (X of
1897), shall apply to any order made or direction given under this Act.

Disqualification, removal, or vacancy of office of board: Following are the reasons of the above:

1. Conviction: If any member of the board has committed any offence involving moral turpitude and
convicted shall vacate the office of the board.

2. Any disability: He incapable of discharging his duties by reasons of physical, psychological, or mental
unfitness and has been so declared by a registered medical practitioner by the Federal Government

3. Absence in meetings: Being a Member, absents himself from three consecutive meetings of the Board,
without leave of the Board and, in the case of a Member exofficio fails to appoint another person to act as
member under subsection (5) of S. 12 or
4. Failure to disclose conflict of interest: He fails to disclose any conflict of interest at or within the time
provided for such disclosure by or under this Act or contravenes any of the provisions of this Act
pertaining to unauthorized disclosure of information.

5.Resignation: He may put his resignation and leave the office of the board.

6. Removal by federal government: Federal government may remove any member of the board. All the
members work till the pleasure of the board. Full opportunity is given to defend the case while
termination or removal.

Articles of Association: They consist upon subordinate legislation of the company, which are made under
Memorandum of Association of the company. It also consists on how the objectives are achieved, quorum,
general and ordinary resolutions, and internal methods to achieve the objectives of the company.

The Memorandum of Association has often been described as the charter of the company, and it is, in fact, the
dominant instrument in the formation of company. But it is necessary that, in addition to the Memorandum of
Association which designates the general scope of the company, there shall be an existence certain rules for the
internal regulations of the business, and these rules are called the Articles of Association. They make provisions
for the issue of shares, transfer of shares, alteration of the share capital, the holding of meetings, voting rights,
the number and qualification of the directors including their appointment and powers, the auditing of
accounts, the payment of dividends etc. in fact they set out or define or describe the mode and form in which
the business of company to be carried on and the mode and form in which changes in the internal regulation of
the company may from time to time be made.

Articles of Association are subordinate of Memorandum of Association. Company cannot go beyond the
parameters of Memorandum of Association. Articles of Association are merely rules and regulations to run the
company. Company is at liberty either to form their own rules or may extract from TableA 85 model rules. If
Articles of Association lacks or silent upon any rule then provision of TableA shall prevail. If our rules are
silent the TableA is applied. Articles of Association must be prepared, published, divided into paragraphs,
and signed.

How the Articles of Association can be altered: Company may at any time alter the Articles of Association by
passing special resolution by 3/4th majority of present members. Minimum number of person required are 3
holding of 25% voting power.

(1) Bonafide (N) in the best interest of company: In a case of Sidehottom v Kershaw, Leese and
Company Limited, majority of shares were held by the directors of the company. They altered the Articles
of Association for compulsory purchase of the shares from the persons who were working against the
interest of company. They filed a lawsuit in Court of law but Court held that decision of the company is
upheld on the base of malafide intention of the minority members.

(2)It should not be unfair and inequitable: In a case of Brown v British Abrasive Wheels Company Limited,
a company was suffering from financial crisis which was in need of further capital. Majority of the
shareholders passed a special resolution for the compulsory purchase of the shares to compel the
minority shareholders. They said that they would contribute if the shares of minority will be sold to them.
Since this intention was not in the interest of company and was based on unfair and inequitable decision
so Court held void the alteration.

(3)It must not oppression or fraud on the minority: In an instance there is a X & Co. and Y & Co. Both have
issued and subscribed capital Rs. 1,000/. 90% shares of both are held by Mian & Co. Y & Co. takes loan
from X & Co. Loan could not be repaid. X & Co. written off the loan being the majority shareholders. It
was fraud thus Court did not allowed. It objects to protect the interest of minority.

(4)It must not increase the liability of the members of the company. Mother legislation must be followed
and not exceeded.
(5) Alteration will be disallowed if it is made for committing breach of contract: It must constitute
compliance of laws. Six of the seven directors of a company were committed with seventh one that he will
be appointed as Chief Executive Officer after the formation of company. It constituted contract. Later on
they refused to do so. It was held breach of contract.

(6)Do not exceed the powers given by the company: Memorandum of Association sets parameters, which
cannot be violated. Its violation is called ultra vires.

(7) It should not be contrary to statute: According to law there must be at least seven directors. Company
has to abide the law. Its violation constitutes offence.

Lien: Apart from securities the law recognizes certain creditors rights over the debtors property which are in
the first place intended to bring pressure, to bear on the debtors to discharge his debt. Such rights are known as
lien. This word is taken from the Latin word LIGAMEN, which means the tie. The debtors property is tied
to the creditors, who need not undo the tie until the debtor has performed his obligation.

Effects of Memorandum of Association and Articles of Association on public: Following are the effects:

(1) They bind the company and its members as if each member has signed them, and contained covenants
(f) on the part of each member to observe all the provisions therein. Members are thus bound to the
company and the company to the members.

(2)Between members interse.

(3)As between the outsiders and company.

ROYAL BRITISH BANK VERSUS TURQUAND 1856 6 & B. 327: The directors of a company had on its
behalf, borrowed money from the Royal British Bank and had affixed the companys seal to a bond for pound
2,000, agreeing to repay the loan. Under the companys deed of settlement (which corresponds to the Articles
of Association of a modern company) borrowing had to be approved by resolution of the members, and the
company through its liquidator, Mr. Turquand claimed that no resolution, had been adopted to cover this
borrowing when the bank sued on the bond, it was agreed that the company should not be liable because the
bank was deemed to be informed of the contents of the companys Articles of Association and should have
inquired whether the appropriate resolution had been passed or adopted. As it had not inquired it should bear
the loss. The Court though this was requiring too many inquiries from person dealing with companies. They
were at the time, as Jevis C. J. said, bound to read the statute and the Articles of Association. But they are not
bound to do more. The Chief Justice explained that:

The party here on reading the Articles of Association would find not a prohibition from borrowing, but a
permission to do so on certain condition. Finding that the Authority might be complete by a resolution, he
would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared
to be legitimately done.

The directors have power and authority to bind the company but certain preliminaries are required to be gone
through on the part of the company before that power can be duly exercised, then the person contracting with
the directors is not bound to see that all the preliminaries have been observed. He is entitled to assume that the
directors are acting lawfully in what they do.

The rule in Turquands case was subsequently developed by the courts as the Indoor management rules,
which was described in the following term by Lord Hatherely.[1]

. All that the directors do with reference to what I may call the indoor management of their own
concern, is a thing now to them and now to them only.
. When there are persons conducting the affairs of the company in a manner which appears to be
perfectly consonant with the Articles of Association, then those so dealing with them, externally are not to be
affected by any irregularity which may take place in the internal management of the company. They are
entitled to presume that of which only they can have knowledge, namely, the external acts, are rightly done,
when those acts purport to be performed in the mode in which they ought to be performed.

Preliminary contracts: In common sense contract cannot be made with nonexistent company. Company is no
more bound for the compliance of the agreements made before the incorporation of the company. Contingent
contract, i.e., conditional contract can be made with a provision that contract will be performed/executed if the
company is incorporated. Promoter can make the agreement on the behalf of company. These contracts are not
binding but company can ratify it to relive the promoter from liability. These certain exceptions under Specific
Relief Act which make binding such types of agreements. Promoter cannot deviate from the contract made on
the behalf of the company. Both parties may compel each other for its compliance.

Who are promoters: Persons who form or float a company. By law the typical promoter, the prompters in the
fullest sense term starts the scheme of the company, negotiates with the vendors, if any, get together the Board
of Directors (BOD), retains brokers, bankers for the company, has the Memorandum of Association and
Articles of Association prepared, drafts the prospectus, pays for the expenses for the issuing it etc., in a word
undertakes to under language of Cockbur Chief Justice to form a company with reference to a given project
and to set it going, and to take the necessary steps to accomplish that purpose.

The best description of the term is to be found in the judgement of Bowen, Learned Justice in Whaby v Green,
where it is stated that it is not a term of law, but of business. Usually summing up in a single word, by which a
company is generally brought into existence. A person who discharges his duties on payment during the
incorporation process of the company cannot be regarded as promoter. A lawyer who drafts the prospectus
against the remuneration is not termed as promoter.

Duties of the promoter: A promoter has certain duties as follows:

1.Relationship between a promoter and a company floated by him is of a fiduciary nature, and therefore, he
becomes answerable to it for the manner in which he created the company. A promoter is under duty to
disclose fully allmaterial facts relating to the formation of the company. He can take profit if company
ratifies his conduct.

2.He can take benefit if the transaction is made not being the promoter. But if he was acting being promoter,
he has not right to take benefit. If he bought a plot at Rs. 800,000/ market price of which was Rs.
1,000,000/ without an intention to form a company may sell it to company later on at Rs. 1,000,000/ or
greater. But if the intention was formation of company then he cannot sell the plot at the cost more than he
paid.

3.A disclosure must be actual and express. A constructive notice is not enough.

4. Facts must be stated in prospectus that as to what interests of promoters are? They are not allowed to
mislead the public.

Liabilities of promoter: A promoter has certain liabilities as with as duties described as follows:

1)He may acquire a property for company but he cannot sell the property on higher than the actual price.

2) He may purchase property for self but later on he may float an idea to form a company and then he may
decide to sell the property to company on the price higher than an actual.

3) He may acquire property and may resell it on higher price provided he informs to rest of promoters or
directors of the company.
How the promoters are remunerated: There are not hard & fast rules to decide the said matter. It varies case to
case. But in any circumstances they are entitled to a reasonable remuneration.

Prospectus: It is defined any document described or issued as prospectus, and included any notice, circular,
advertisement, or other communication, inviting offers from the public for the subscription or purchase of any
shares in, or debenture of, a body corporate.

Statement in lieu of Prospectus: It may be defined as a public document prepared, in form prescribed, by
every such public company which does not issue a prospectus on its formation, for filing with the Registrar
before allotment of shares or debentures and signed by every person who is named therein as a director or by
his agent duly authorized in writing.

Commencement of business requires issuance of the prospectus for the invitation of shares to general public,
but if company does not want to float shares is required to submit to Registrar a statement in lieu of
prospectus. Business cannot be started unless prospectus is issued and shares are invited and required level of
capital is subscribed.

Objectives of issuance of prospectus: It has four objectives described as follows:

1)To bring to the notice of public that new company has been formed.

2) To convince those who have savings to invest, that proposed company having secured services of honest
and able directors, and also other factors which make for success, offers the best opportunity for gainful
investment.

3)To preserve an authentic record of the terms and allurements on which the public has been invited to buy
its shares and debentures.

4)To secure the directors of the company except responsibility for the statement in the prospectus.

Consents of experts, remuneration, and agreement for company is necessary to describe in prospectus.

Prospectus cannot be issued for invitation to subscribe shares in or debenture of a company without the written
statement and consents of an expert. This statement only covers the legal effects and not the intention of the
promoters and directors. Expert does not mean a legal advisor but he may be an engineer, valuer, an
accountant, and every other person whose profession gives authority to a statement made by him.

Persons who are liable for misstatement in prospectus: Following are persons who are liable in case of any
misstatement in prospectus. In case they have withdrawn their names before issuance of prospectus by public
notice or by writ, they would not be liable, otherwise following persons would be liable:

1.A person who is director at the time of issuance of prospectus.

2.Any person who is named as director in prospectus at its issuance.

3.Every person who is promoter of the company at that time.

4.Every person whose consents are made part of the prospectus u/s 55 and 57 (5).

Defences against misstatement in prospectus: Certain defences are available under law for the persons who
are made liable in case of misstatement in prospectus at its issuance. They may escape liability upon proving
following facts:

1.If the person is director and he has withdrew his name before issuance of prospectus and issue of prospects
is without his consents.
2.Issue of prospectus was without his consents and knowledge and he gave public notice on becoming aware
of it.

3. If it is revealed before allotment of shares that statement contained in prospectus was untrue and he has
withdrew his consents.

4.He had believed and has reasonable grounds to believe at allotment of shares of its truth.

5.If the statement with Registrar was fair and correct.

6.If he believes that expert was competent authority and his consents and statement was in accordance with
law.

How a person becomes shareholder and how he ceases his shareholding? What are various methods? As a
first instance he should be qualified as competent to become shareholder under Contract Act. He should be
major, person of sound mind, solvent, and not declared by law incompetent to make contract.

As for as his liability is concerned, in case of dissolution of company, he is liable to pay full nominal amount he
promised to invest, i.e., face value of his shares, if his name is listed in list A. List A contains the name of
present shareholders while list B contains the names of shareholders upto the first completed year.

A person becomes shareholder or member:

1.By subscription: If his name in prospectus is entered and he has signed the Memorandum of Association,
he has subscribed in company.

2. By application: After the prospectus is issued, he put an application for the allotment of such shares he
wishes. But he cannot become a member unless his name is entered in company books as shareholder. He
may, by Court, compel the company to put his name in the books of company, if company has refused or
negligently fails to put his name in books.

3. By transfer: Share is an asset and is freely transferable. When transferor transfers the shares to transferee,
then transferee becomes shareholder, provided his name is entered in company books. Otherwise
transferor will remain shareholder.

4.By succession: After the death of shareholder his legal heirs become shareholder under Succession Act.

5. By operation of law: Official assignee at the time of liquidation, who is supervisor, is deemed to be
shareholder. He is not member but deemed to be a member.

6.By trust: Guardian of minors as trustee is deemed to be a member until the attainment of age of majority.
Name of trustee in not entered in the company books.

7.By execution: An executor of an estate of the deceased person is deemed to be a member until he executes
the estate/Will of the deceased person.

8.Membership by acquiescence: Silence is an agreement. It is made by impersonation of holding out.

Register of members: Every company is liable to maintain register for its members for the following
information:

1.Full name of shareholder, address, parentage etc.

2.The date at which each person was entered in the register as member.

3.Date of cease of membership.

What is share: A share in a company is the expression of a proprietary relationship the shareholder is the
proportionate owner of the company, but he does not own the company assets, which belong to the company
as a separate legal entity. A share is the interest of a shareholder in the company measured by a sum of money
for the purpose of liability first place and of interest in second, but also consisting of a series of mutually
covenants entered into by all the shareholders intersee in accordance with the term of Articles. The share is
measured by a sum of money, namely the amount of the share and also with the rights and obligations
belonging to it as defined by company.

Allotment of shares: It is an act of company. Shares once issued can never be taken back. It amounts reduction
in capital, which is not allowed under law. Allotment of shares requires an application, acceptance of company,
full payment, and notice of allotment. Minimum subscription as stated in prospectus must be achieved before
allotment. It provides to meet the expenses. Allotment of shares cover:

1.The price of any property to be paid for out of the proceeds of the issue.

2. The preliminary expenses and commission to underwriter payable by the company. Underwriters are
agreed upon to achieve the targets.

3.Repayment of money borrowed for the above purpose.

4.Working capital.

If the requisite subscription is not achieved, the company is bound by law to refund the received money to the
applicant within 50 days after the prospectus is issued with 1% interest for every month.

Return as to allotment: It is provided to register within 30 days of such allotment of the fully paid up shares. A
Company may issue shares on discount. A share having nominal value of Rs. 10/ can be issued @ Rs. 8/. It
requires resolution in general meeting. Maximum 10% shares of total may be offered as discounted shares. This
allotment can be made after one years business. Securities and Exchange Commission of Pakistan sanctions
the allotment within 60 days after passing resolution in general meeting.

Company may also issue shares as commission to:

Underwriters

Motivators

Who takes shares.

Share certificate: It is a formal statement issued by the company under its common seal that the person named
therein is the holder of the number of shares in the company specified in the certificate.

A share certificate is a document issued under the common seal of the company showing the name and address
of the holder, the number of shares, their distinctive numbers and the amount paid up thereon.

Share certificate once issued cannot be denied as to its truth. It is a document on which a common person relies.

Alteration in capital: Company may alter the capital other than reduction. Following measure are applied to
do this:

Increase of capital by new shares: It is subject to the certain conditions such as:

1)It requires approval in general meeting if allowed under Articles of Association. If Articles do not allow,
alteration first is made in Articles as to get such authority.

2)Resolution is sent to the Registrar as to how much increase is going to take place.
 3) Shares are offered first to existing shareholders in proportion to the shares they already hold, and if
they decline to accept the shares so offered, the directors may dispose of them in the manner they think
most beneficial for company.

This increase takes place from the unissued capital. For instance the authorized capital of a company is Rs.
100,000/ out of which issued and subscribed capital is Rs. 75,000/, Rs. 25,000/ remains unissued and may
be issued later.

1. Consolidation of shares into shares of larger amount than its existing shares. It takes place when some
smaller shares are consolidated into one larger share. For example, a person holds 10 shares @ Rs. 10/ per
share, totaling Rs. 100/. These 10 shares may be converted into one share of Rs. 100/. It minimizes the
volume.

2.Sub division of shares into shares of smaller amount: It is reverse effect of the former example. It means
the division of 100 shares into 10 shares @ Rs. 10/ each.

3. Canceling of shares, which have not been takenup or agreed to be takenup at the time of passing of
resolution. The cancellation of unissued shares of a company shall not be deemed to be a reduction of
share capital. It is not diminishing but diminution (lessening) of capital.

Reduction of capital: Reduction in capital may take place if Articles so authorize. Following are methods:

1.By reducing the liability of members for uncalled capital. For instance, a person has shares of Rs. 100/ out
of which he has paid Rs. 80/, company may remit the balance amount of Rs. 20/. Amount once remitted
cannot be demanded again.

2. The cancellation of the paidup share capital, which is lost or under represented by available shares. For
example, company has Rs. 100,000/ paid up capital while its proprietary worth is Rs. 80,000/.
Representation of Rs. 20,000/ has been lost thus it requires writing off.

3. The payment of any paidup shares capital, which is in excess of the needs of the company. For instance,
paid up capital is Rs. 100,000/ while company is in need of is 80,000/. Balance amount may be refunded.
Shareholders may object 1st and 3rd reasons, as their interest is effected.

Transfer of shares: Share has been defined as proportion of capital, which each shareholder is entitled to. It is
issued in cash or against transfer of property, or work, or services, or supply of goods. It is measured by a sum
of money, i. e., the nominal amount of the share and by the rights and obligations belonging to it and Articles
of the company. Its appropriate number called distinctive number distinguishes each share. Issuance of 100
shares does not mean issuance 100 certificates but just one share certificate stating 100 shares and its value
paid. They are deemed assets and transferred as assets. Its transfer requires permission under Articles of
Association.

Procedure of the transfer of shares: The procedure relating to transfer of shares as stated by S. 76 of the
Companies Ordinance is as under:

1.An application for such transfer made by either transferor or transferee.

2.Delivery of instrument of transfer duly stamped and executed by the both transferor and transferee to the
company.

3.An application duly stamped and proof that instrument has been lost/destroyed before its lodgment, may
qualify for registration of the certificate.

Attributes of transfer:
1. Transfer takes place when a member transfers his share to other person on a sale, gift, or mortgage etc.,
during his lifetime.

2.In case of transfer the title to holding and the right to transfer passes to the transferor.

3.Transfer of share takes place by a voluntary/deliberate act of the shareholder.

4. A duly stamped and properly executed instrument of transfer signed by both, i.e., the transferor and the
transferee is necessarily to be lodged with the company for registration.

Director of Company: A company can only act by agents and usually the persons by whom it acts and by
whom the business of company is carried on are termed directors. They are chosen by the shareholders to
conduct and manage business. Individually they are called directors and collectively constitute what is called
Board of Directors (BOD). Director is a person who runs company. He acts as superintendent and responsible
of the affairs of the company. The minimum directors required under law for public limited company is seven
however in case of private limited company, the required number is two. He works either as an agent or
trustee of the company. Company cannot act itself but requires the services of director being natural person.
Concept of managing companies has been demolished/pulled down.

Director as an agent: Company is an artificial person thus it requires natural person to act on its behalf. They
use powers in carrying on business according to the provisions of the Articles of Association and Companies
Ordinance. If a director commits ultra vires while acting as an agent of the company he is not liable unless
otherwise is proved, i.e., an implied breach of authority or warranty.

Director as trustee: In a stricter sense, he is not deemed as trustee but generally he is deemed as agent. As far
as the funds of the company and property are concerned, he is trustee. All the assets, which come in the hands
of director or under his control, make him trustee.

In case of G. E. Railway v Turner, 1872, 8 Chancery Appellate Court, it was decided that director acts in dual
capacities such as agent and trustee. He is deemed as agent when he acts on the behalf of the company. When
he uses the powers vested to him and makes expenses, he acts as trustee.

In another case Lands Allotment Company (Re) 1894, 1 Chancery, 616, it was decided that although he is not
proper trustee but he acts as trustee. When he commits fraud, he is liable and not the company.

We reach on the central conclusion that his position is fiduciary in nature.

Who may be director: U/s 175 of the Companies Ordinance, only a natural person can become a director.
Following are persons who can become directors:

1.Full time working employee.

2.Chief Executive Officer.

3.Representative of government or institution which is member.

4.A person representing a creditor.

Procedure for the election of directors: Following is the procedure stated u/s 178 of the Companies
Ordinance.

1.Deciding numbers of directors: Directors of a company are responsible to decide the required numbers of
directors. But this decision may take place 35 days prior to holding of meeting in which they are to be
elected. Numbers once fixed can be changed but they require prior approval of general meeting.
2.Notice of meeting: Notice of meeting in which directors are to be elected bears expressly statement whether
how much numbers as directors are fixed and the names of the retiring directors.

3.Notice of offer: Any person who intends to contest as director whether he is retiring director or otherwise,
must serve a notice to company within 14 days prior to meeting. Before holding an election, any candidate
may withdraw his name.

4.Transmission of notice to members: Notice to contest is transmitted to the members within 7 days prior to
meeting either:

(1)Personally to individuals or

(2)By the advertisement in two leading English and local language newspapers.

5.Manner of election: Following is the criteria for the election of directors:

(1)A member has such numbers of votes as is equal to the number of voting shares or securities he holds
and the numbers of the directors.

(2)A member may give his all votes to a single candidate or can split to more than one in such a manner as
he may choose.

(3)A person who gets highest numbers of votes, is elected first, then second, third, and so on until the total
numbers of directors to be elected has been so elected.

Term of office of directors: The term of office of director shall be as under:

1.The first directors who are determined by promoters shall hold their office until the election of directors in
first Annual General Meeting.

2. The subsequent director shall hold his office for a period of three years unless he disqualifies or dies or
otherwise cease to hold office.

3.Any director elected on casual vacancy shall hold office for the remaining period.

1.Chief Executive Officer: Every company by law is bound to appoint a Chief Executive Officer.

2.Exception: Any company managed by a managing agent is exempt to hold election for the office of Chief
Executive Officer.

3.Appointment of first Chief Executive Officer: Election for first Chief Executive Officer is to hold within
fifteen days either after commencement of business or after incorporation of the company.

4. Who may be first Chief Executive Officer: Any individual is eligible to be appointed as first Chief
Executive Officer of the company. It is no more necessary the he must be a director of the company.

5.Term of office: Unless he resigns or ceases to hold office due to any reason before expiry of the term, he
holds office either upto the first Annual General Meeting or any other shorter period which directors fixes
at the time of his appointment.

6. Appointment of subsequent Chief Executive Officer: Appointment of subsequent Chief Executive

Officer follows two conditions. Election must be held either within fourteen days after the election of
directors or vacation of the office of Chief Executive Officer either first Chief Executive Officer or
subsequent.
7. Who may contest: Any person or elected director may contest for the appointment of Chief Executive
Officer.

8. Term of subsequent Chief Executive Officer: Subsequent Chief Executive Officer holds office for a
maximum period of three years from the date of such appointment.

9. Reappointment as Chief Executive Officer: Any first or subsequent Chief Executive Officer is eligible
for reappointment after expiry of the term of office.

10.Continuous hold office of Chief Executive Officer: Existing Chief Executive Officer continuously holds
office until his successor is appointed.

11.Terms and conditions of the vacancy: Only directors or the company in general meeting may decide the
terms and conditions for the appointment of a Chief Executive Officer. In any case provisions of the
Articles of Association must be taken into consideration.

12.Status: Since any individual may contest for the appointment of Chief Executive Officer, so if he does not
previously hold the position of director, shall enjoy the status of director with all rights and privileges
and subject to all liabilities of the office.

13. Restriction on the appointment of Chief Executive Officer: Person so contesting for the office of Chief
Executive Officer must be qualified to elect as a director of the company.

14. Removal of Chief Executive Officer: Chief Executive Officer may be removed from his office by three
ways as follows:

(1)Resolution passed by existing directors with 3/4th majority.

(2)Company by passing special resolution.

(3)Any agreement between the company and Chief Executive Officer.

15.Engagement in the business competing with company: Chief Executive Officer is not allowed to engage
himself directly or indirectly in any business, which is of the same nature and competes with company. If
spouse of Chief Executive Officer, his partners, children, brothers, or sisters hold any business competing
with company, he has to disclose such fact and interest in written soon after his appointment.

16.Penalty: Whoever contravenes or fails to comply with the provisions of 198 to 203 as wholly or partly
shall be fined upto Rs. 10,000/ and disqualified to be a director or Chief Executive Officer for a
maximum period of three years.

Meetings: There are three types of company meetings such as,

1.The Statutory Meeting.

2.Annual General Meeting.

3.Extra Ordinary General Meeting.

Statutory Meeting: This is the only one meeting which is held once in the life of public limited company. Every
public or guarantee limited company has to hold such meeting within 3 to 6 months after the commencement
of business of the company. Agenda is delivered to all shareholders prior to 21 days of holding such meeting.

Following are contents of agenda:

1.The numbers of share allotted against each distinguishing those allotted for consideration other than cash.
2. The abstracts of receipts and payments made upto a date within 7 days from the holding of the meeting
under distinctive headings and estimate of the preliminary expenses.

3.The names and addresses of the directors, managers, secretaries, and other officers of the company.

4. If any contract is required modifications, the particulars of such contract with those of the proposed
modifications.

5.The extent to which underwriting contracts, if any have been carried out.

6.The particulars of any commission or brokerage paid on the sale of shares.

7.The details about the formation of the company.

8.To discuss above referred matters and any other matters raised by the members.

Annual General Meeting: It must be held with in 18 months after the holding of statutory meeting. Only
directors are competent to call the Annual General Meeting and not individual shareholders. It requires notice
prior to 21 days. Company bears the cost of meeting. Its notice is served to each shareholder prior to 21 days.
Its notice is published in one daily English newspaper and one in Urdu or in vernacular language must be
given. Nondelivery of individual call may not put company in invalidating the proceedings of meeting. Notice
in newspapers is sufficient to give effect call.

Extra Ordinary General Meeting: All meetings are extraordinary meetings apart from statutory and annual
general meetings. Company bears the cost of expenses so incurred.

Special resolution is required in following cases. It requires 3/4th majority of present members.

1.To change the name of company.

2.To alter the Memorandum of Association.

3.To alter the Articles of Association.

4.To reduce capital.

5.To appoint inspectors.

6.For winding up the company.

Auditor: Auditing by independent persons has acquired professional status and has become increasing by
popular with a rise of large business units and the separation of ownership and from control. The auditors
perform sufficient tests and examinations to determine whether the management statements fairly presents the
business financial position and operating results, unbiased, independent evaluation of management reports
are of interest to actual and prospective shareholders.

Appointment of auditor: Following is the law regarding the appointment of an auditor:

1.Every company is bound by law to appoint auditor in its Annual General Meeting till its next holding.

2.Appointment of partnership can be made all persons of whom shall be deemed partners in the firm at the
time of appointment.

3.Directors appoint first auditor who holds the office until the conclusion of first Annual General Meeting.

4.Company may remove or appoint any auditor in Annual General Meeting.

5.Upon the failure of directors to appoint first auditor, company may appoint auditor in general meeting.

6.Directors may fill any casual vacancy, which shall continue till the holding of next Annual General Meeting.

7.Surviving or continuing auditor may act if casual vacancy of auditor rests unfilled.

8.Securities and Exchange Commission of Pakistan may appoint a person to fill the vacancy:

1.Where first auditor is not appointed within 4 months after the incorporation of company.

2.Where Annual General Meeting fails to do so.

3.Where so appointed auditor remains unwilling to act.

4.Where casual vacancy remains unfilled till 30 days after such occurrence.

Remuneration of auditor: Following is rule regarding the fixation of remuneration of an auditor:

1.Directors fix remuneration where they appoint auditor.

2.Authority fixes remuneration where she appoints auditor.

3.In all other cases Annual General Meeting determines the remuneration.

Qualification of an auditor: Auditor is appointed subject to certain qualifications such as:

1.He must be Chartered Accountant qualified.

2. Associated of Cost & Management Accountant (ACMA) is also eligible for appointment in certain
condition.

3.A firm having all partners Chartered Accountant may be appointed in its firm name.

Disqualification of an auditor: Following persons shall not be appointed as an auditor:

1.Director either existing or retired after three years of his retirement.

2.Partner or employee of director, officer, or employee of the company.

3.Spouse of companys director.

4.Debtor of the company.

5.A body corporate.

6.One whom does subsidiary or holding company disqualifies.

7.Any auditor who becomes disqualified after appointment.

Power and duties of auditor u/s 255: Companies Ordinance provides the following powers and duties of an
auditor:

1. He at all time has right of access to the books, papers, accounts, and vouchers of the company kept at
anywhere.

2. He may require any relevant information and explanation as thinks necessary for the performance of his
duties from the company, director, and other officers.
3.He may access the transmissions reached from the office situated outside Pakistan, either copies or extracts
from books or papers.

4.He shall make report to members in general meeting during his tenure of office, on the accounts, books of
accounts, balance sheet, and all its related statements.

5.Factual position of above report.

6.Auditors report shall include a statement which government specifies.

7.He can attend all the concerned general meetings.

Winding up or liquidation: It is the process by which the management of a companys affairs is taken out of its
directors hands, its assets are realized by a liquidator and its debts are paid, out of the proceeds of realization
and any balance remaining is returned to its members or shareholders. At the end of winding up, the company
will have no assets or liabilities, and it will therefore be simply a formal step for it to be dissolved, that is, for its
legal personality as a corporation to be brought to an end. The existence of a company can be terminated by
means of winding up.

The winding up of a company is a proceeding in which all its affairs are wound up, its rights and liabilities
ascertained, and the claims of its creditors paid off out of the assets of the company including the contributions
by its members to the extent to which they may be necessary.

Modes of winding up: There are three modes of winding up as follows:

1.Compulsory or winding up by Court: Where majority of members passes a special resolution for winding
up by Court. Other reasons which put company in compulsory winding up are as follows:

1.Statutory meeting is not held within stipulated time period.

2.Default in delivering statutory report to the Registrar.

3.Company commits default in holding any two consecutive Annual General Meetings.

4.Company does not commence business within a year after its incorporation.

5.Company suspends business for whole of year.

6.Membership is so reduced than seven in case of public limited company.

7.Membership is so reduced than two, in case of private limited company.

8.Company becomes unable to pay its debts.

9.Company carries unlawful or fraudulent business.

10.Company carries business not so authorized in Memorandum of Association.

11.Conducting business to injure the minority shareholders.

12.Failure of company to maintain its true and proper accounts and commission of fraud or misfeasance
or malfeasance.

13. Failure in management of business in accordance with Memorandum of Association, Articles of

Association, and Companies Ordinance.
 14.Company ceases to be a listed company.

2.Voluntary winding up: The object of a voluntary winding up is that the company and its creditors shall be
left to settle their affairs without going to Court, but they may apply to the Court for any directions and
orders if and when necessary. A voluntary winding up can be effected:

1. When the period, if any, fixed for the duration of the company has to come an end or an event upon
which the company is to be dissolved has occurred and the company has in general meeting passed an
ordinary resolution to wind up the company.

2.If Company passes special resolution for voluntary winding up for any reason whatsoever.

3. Extra ordinary resolution declares that due to liabilities company becomes unable to carry on its
business.

Voluntarily winding up has further its two kinds such as members winding up and creditors winding up.

1.Members winding up: It takes place when the company is solvent. Members entirely manage it and
appoint liquidator. Creditors meeting is neither held nor committee of inspection is held. Special
resolution is required to do so.

2.Creditors voluntary meeting: A winding up in case of which a declaration of solvency has not been
made and delivered to the Registrar is known as creditors voluntary winding up.

The company must summon a meeting of the creditors for the day, or the day next following the
day, on which the resolution for winding up is to be proposed. Notices of the meeting of the
creditors must be sent by post to the creditors at the same time as notices of the meeting of the
company are sent to the members.

Notice of the meeting of the creditors must be advertised in two local newspapers (English and
Urdu) circulating in the province in which the companys registered office is situated.

3. Winding up subject to supervision of Court: When a company has passed resolution for voluntary
winding up, the Court may order that the winding up shall continue subject to the supervision of Court. It
includes such liberty for creditors, contributors, or others to apply to the Court and generally on such terms
and conditions, as the Court thinks just.

The Court may ascertain the wishes of the creditors and contributors while making the order on the
application for supervision in case of voluntary winding up.

[1]
Mahony Vs. East Holy Ford Mining Co. Limited 1875 LR 7 HL 869 at Page 94.

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