COMPANY LAW

IN PAKISTAN

ASSIGNMENT

SYED MUHAMMAD ALI 11842

L.L.B 3 YEARS (EVENING)
 MEANING OF COMPANY

In common usage, ‘Company’ means an association of persons associated for some

common purpose. The common object may be business, charity, research etc. The
persons are united for achieving a common objective, normally, for earning profits,
which are shared by the investors.

Definition of Company: Section 3 (1) (i) of the Companies ordinance, 1984

defines a company as:

“A company registered and formed under this Act or an existing

company.”

The above definition does not give a clear description of the company. The definition
provided by Haney gives a better view of the essential elements of a company.
According to Haney,

“A company is an incorporated association which is an artificial person

created for by law, having a separate entity, with a perpetual succession
and a common seal.”

The characteristics of the company give a better picture about the essential elements
mentioned in the above definition. Let us discuss those characteristics that describe
the company, comprehensively.

Formation of the company

There are five steps for formation as follows :

1. Preparation of a memorandum of association

2. Preparation of an article of association
3. Execution of pre-incorporation of contracts
4. Registration of the company
5. The issue of the prospectus or in lieu of prospectus.

Preparation of MEMORANDUM OF ASSOCIATION

Public Documents: Memorandum of Association and Articles of Association are
public documents. Anyone who deals with the company is presumed to be aware of
the contents of those documents. Memorandum of Association is a document, which
contains the fundamental conditions regarding constitution, objects or activities and
powers of the company. It is a charter of the company. It is a principal document
without which a company cannot be registered. It is a life-giving document.
Memorandum of Association is a document based on which the relations of the
company is governed by outsides and members of the company.

Purposes: Memorandum of Association serves the following purposes:

A. It contains the fundamental conditions on which the company is formed.

B. It sets the boundaries of the company.

Lord Macmillan has rightly observed that the purpose of Memorandum of

Association is to enable the shareholders, creditors and those who deal with the
company to know the permitted range of the enterprise. (Egyptian Salt and Soda Co.
Ltd. Vs Port Said Salt Association Ltd. -1931).

CONTENTS OF MEMORANDUM OF ASSOCIATION

According to Section 13 of the Act, the Memorandum of Association of every

company should contain the following contents:

A. Name Clause: Once the name of the company is approved and registered by
the Registrar of Companies, the name of the company must be painted or
affixed outside of every office or place of business. The name and address of
registered office of the company have to be mentioned in letter-heads,
business letters, notices and common seal of the company.
B. Registered Office: Every company must have a registered office from the
date of commencement of business, or 30th day of the incorporation date,
whichever is earlier. All the notices have to be sent to this address.
C. Objects Clause: The objects clause of the company indicates the sphere of
activities and powers of the company.

The purpose of the objects clause is two-fold:

i. To inform the members and creditors of the company in what kind of business
their capital and funds may be used, and
ii. To inform the persons dealing with the company what its powers are.
iii. The objects are divided into two parts. Now, it is compulsory to specify in clear
terms the main and other objects of the company.
I. The Main objects to be pursued by the company on its incorporation and the
ancillary objects incidental to the attainment of the main objects. The ancillary
objects must have reasonable proximity or connection with the main objects.
II. Other objects: These are the objects which are not included in the above. A
company is prohibited from commencing any new business, though stated in
the other objects, without passing the special resolution passed in the general
meeting.
The doctrine of Ultra Vires

‘Ultra’ means ‘beyond. ‘Vires’ means ‘powers’. So, the term “Ultra vires” means
‘beyond the powers of the Company’. A company exists only to carry on the objects
which are expressly stated in the objects clause. It means the company can perform
those objects only. It can also do such acts, which are incidental or consequential to
the specific objects of the company. A trading company has implied the power to
borrow and this power need not be stated, separately. This doctrine has been first
explained in the leading case of Ashbury Railway Carriage Co. Ltd. Vs Riche LR HL
653 (1875). The object of the company as contained in the Memorandum of
Association has been “to make, sell or lend on hire, railway carriages and wagons of
all kinds ….. to carry on the business of mechanical engineers and contractors. The
directors of the company, however, have contracted for financing the construction of
a railway line in Belgium. The company has endorsed the act of directors by passing a
special resolution in the general meeting. However, the contract has been held to be
ultra vires of the objects of the company because the word ‘general contractors’ does
not authorize the company to make a contract of every description. The doctrine has
been confirmed by the Supreme Court in Lakshmana Sami Mudaliar Vs LIC of India
1963 AIR Sc 1185. An act done outside the express or implied objects is ultra vires.
The ultra vires acts are null and void ab initio.

Preparation of ARTICLES OF ASSOCIATION

Articles of Association lays down the rules and regulations framed for the purpose of
its internal management of the affairs of the company. They facilitate the way for
carrying out the objects, specified in the Memorandum of Association.

The relationship between Memorandum of Association and Articles of

Association.

1. Ranking: Articles of Association is subordinate and controlled by the

Memorandum of Association.
2. Subordinate: The Articles of Association are subordinate to Memorandum
of Association. Articles of Association cannot contain any provision which is
inconsistent with the Memorandum of Association. Articles of Association
may the supplement the Memorandum of Association.
3. Scope: The Memorandum of Association lays down the scope or powers of
the company, while the Articles of Association govern the way in which the
objects of the company can be carried out. As regards the contents, Articles of
Association resembles a partnership deed.
4. Adoption of Table A: A public company limited by shares may have its own
Articles of Association. In the absence of its own Articles of Association, the
company can adopt Table A. In other words, preparation of Articles of
Association is not compulsory. Even if Table A is adopted, if the company’s
 Articles of Association is silent on any matter, provisions of Table A would be
applicable.

Contents of Articles of Association: Some of the contents of Articles of

Association are hereunder:

i. Allotment of shares
ii. Procedure for Transfer of Shares
iii. Powers of Directors
iv. Forfeiture of shares
v. The common seal of the company
vi. Accounts and audit
vii. Voting rights and proxies

The Articles of Association spells out the way the affairs of the company would be
conducted.

Pre Incorporation Contracts

A pre-incorporation contract is one which is purportedly made by or on behalf of a
corporation at a time when the corporation has not yet been incorporated. Because
the corporation named in the promoter's contract has not been formed at the time
the contract is made, the corporation when formed is not bound by the contract.
However, adoption of the contract is anticipated by the parties to the contract. If the
corporation, in fact, adopts the contract, then it will assume those rights and
liabilities set out in the contract. When a promoter enters into a contract on behalf of
a corporation to be formed, the promoter may be considered personally liable to
meet the obligations of the corporation if for some reason the corporation is not
formed or does not adopt the contract. When the pre-incorporation contract is made,
the corporation is not in existence and therefore cannot be a party to the contract.
The promoter thus must be a party to the contract, and, under agency law principles,
the promoter will be personally bound as an agent acting on behalf of a non-existent
principal.

REGISTRATION OF COMPANY
For a public company, the minimum number of members is seven, while it is two in
the case of a private company. The promoter has to gather the required number for
subscribing to the Memorandum of Association.
The following are the steps for the incorporation of a company:

Application for Availability of Name: A company cannot be registered in the name of

an existing company. It also cannot be registered in a name, which is undesirable in
the opinion of the Central Government. Therefore, it is necessary for the promoters
to find out the availability of the name of the company from the Registrar of
Companies. The first step in the formation of a company is the approval of the name
by the Registrar of Companies (ROC) in the State/Union Territory in which the
company is to be registered. This approval is provided subject to certain conditions.
For instance, there should not be an existing company by the same name. Further,
the last words in the name are required to be “Private Ltd.” in the case of a private
company and “Limited” in the case of a Public Company.

1. Finalisation of name: The application for approval of name should

mention at least four suitable names of the proposed company, in order of
preference. The ROC, generally, informs the applicant within seven days from
the date of submission of the application, whether or not any of the names
applied for is available. Once a name is approved, it is valid for a period of six
months, within which time Memorandum of Association and Articles of
Association together with miscellaneous documents should be filed. If one is
unable to do so, an application may be made for renewal of name, by paying
additional fees. After obtaining the name approval, it normally takes
approximately two to three weeks to incorporate a company, depending on
where the company is registered.
2. Filing of Documents: The following three documents are required to be
filed with the Registrar of Companies of the State in which the registered
office of the company is to be situated:
I. Memorandum of Association,
II. Articles of Association, and
III. Agreement with the company for the proposed appointment of the managing
director,whole-time director or manager.

The above documents (i) and (ii) are required to be signed by the seven persons in
the case of the public company and two persons in the case of private company.

3. Payment of Stamp Duty and Filing Fee: The company has to pay the
necessary stamp duty and filing fee, according to the authorized share capital
of the company.
4. Declaration of Compliance with Act and Rules: A declaration that the
requirements of the Act and the rules framed there under have complied. This
declaration is to be signed by an advocate of the Supreme Court or High Court
or attorney or a pleader having the right to appear before High Court.
Alternatively, this declaration can be signed by a Company Secretary or
Chartered Accountant in the whole time-practice, who is engaged in the
formation of a company or a person named in the articles as a director. This
 declaration is also to be filed with the Registrar of Companies, where the
registered office of the company would be located. - Section 33(2).
5. Additional Requirement, in Case of a Public Company: The following
further requirements are to be complied with:
I. A list of persons who have consented to act as directors.
II. Written consent of the directors to act in that capacity.
III. An undertaking by the directors to take up and pay for the
qualification shares.
6. Certificate of Incorporation or Registration: If the Registrar is satisfied
that the requirements under the Act for the purpose of registration of a
company have been complied with, he shall register the company and issue a
certification of incorporation, under his hand and seal.

Prospectus or in-lieu prospectus

“A prospectus means any document describe or issue as a prospectus
and includes any notice, circular, advertisement or other documents
inviting deposits from the public or inviting offers from the public for the
subscription or purchase of shares in or debentures of a day corporate.”

Introduction:

From the above definition, it is clear that a prospectus is a document that invites the
public to subscribe to the share capital or debentures of a company. If it does not do
that, it cannot be called a prospectus. According to the Companies (Amendment) Act,
1971, an invitation to the public inviting deposits is also deemed to be a prospectus.
Some companies do not directly to the public themselves but allow the entire share
capital to an intermediary, which then offers the shares to the public by an
advertisement of its own. Any document by which such offer for sale to the public is
made is deemed to be a prospectus.

After getting the company incorporated, promoters will raise finances. The public is
invited to purchase shares and debentures of the company through an advertisement.
A document containing detailed information about the company and an invitation to
the public subscribing to the share capital and debentures is issued. This document is
called ‘prospectuses. Private companies cannot issue a prospectus because they are
strictly prohibited from inviting the public to subscribe to their shares. Only public
companies can issue a prospectus. Section 2 (36) of the Companies Act defines
prospectus as, “A prospectus means any document described or issued a
prospectus and includes any notice, circular, advertisement or other
documents invent deposits from public or inviting offers from the public
for the subscription or purchase of any shares in or debentures of a body
corporate.
The prospectus is not an offer in the contractual sense but only an invitation to offer.
A document constructed to be a prospectus should be issued to the public. A
prospectus should have the following essentials.

 There must be an invitation offering to the public.

 The invitation must be made on behalf of the company or intended company.
 The invitation must be subscribed or purchase.
 The invitation must relate to shares or debentures.

A prospectus must be filed with the Registrar of companies before it is issued to the
public. The issue of the prospectus is essential when the company wishes the public
to purchase its shares or debentures.

If the promoters are confident of obtaining the required capital through private
contacts, even a public company may not issue a prospectus. The promoters prepare
a draft prospectus containing the required information and this document is known
as ‘a statement in lieu of prospectus.’ A prospectus duly dated and signed by all the
directors should be a field with Register of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed.
The company tries to convince the public that it offers the best opportunity for their
investment. A prospectus outlines a detail the terms and conditions on which the
shares or debentures have been offered to the public. Every prospectus contains an
application from on which an intending investor can apply for the purchase of shares
or debentures. A company must get minimum subscription within 120 days from the
issue of the prospectus. If it fails to obtain a minimum subscription from the
members of the public within the specified period, then the amount already received
from the public is returned. The company cannot get a certificate of commencement
of business because the public is not interested in that company.

Question No. 2
What is the importance of prospectus in the formation of the company?
Introduction:

From the above definition, it is clear that a prospectus is a document that invites the
public to subscribe to the share capital or debentures of a company. If it does not do
that, it cannot be called a prospectus. According to the Companies (Amendment) Act,
1971, an invitation to the public inviting deposits is also deemed to be a prospectus.
Some companies do not directly to the public themselves but allow the entire share
capital to an intermediary, which then offers the shares to the public by an
advertisement of its own. Any document by which such offer for sale to the public is
made is deemed to be a prospectus.
After getting the company incorporated, promoters will raise finances. The public is
invited to purchase shares and debentures of the company through an advertisement.
A document containing detailed information about the company and an invitation to
the public subscribing to the share capital and debentures is issued. This document is
called ‘prospectuses. Private companies cannot issue a prospectus because they are
strictly prohibited from inviting the public to subscribe to their shares. Only public
companies can issue a prospectus. Section 2 (36) of the Companies Act defines
prospectus as, “A prospectus means any document described or issued a
prospectus and includes any notice, circular, advertisement or other
documents invent deposits from public or inviting offers from the public
for the subscription or purchase of any shares in or debentures of a body
corporate.

The prospectus is not an offer in the contractual sense but only an invitation to offer.
A document constructed to be a prospectus should be issued to the public. A
prospectus should have the following essentials.

 There must be an invitation offering to the public.

 The invitation must be made on behalf of the company or intended company.
 The invitation must be subscribed or purchase.
 The invitation must relate to shares or debentures.

A prospectus must be filed with the Registrar of companies before it is issued to the
public. The issue of the prospectus is essential when the company wishes the public
to purchase its shares or debentures.

If the promoters are confident of obtaining the required capital through private
contacts, even a public company may not issue a prospectus. The promoters prepare
a draft prospectus containing the required information and this document is known
as ‘a statement in lieu of prospectus.’ A prospectus duly dated and signed by all the
directors should be filed with Register of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed.
The company tries to convince the public that it offers the best opportunity for their
investment. A prospectus outlines a detail the terms and conditions on which the
shares or debentures have been offered to the public. Every prospectus contains an
application form on which an intending investor can apply for the purchase of shares
or debentures. A company must get minimum subscription within 120 days from the
issue of the prospectus. If it fails to obtain a minimum subscription from the
members of the public within the specified period, then the amount already received
from the public is returned. The company cannot get a certificate of commencement
of business because the public is not interested in that company.
The object of a prospectus

The objects of issuing a prospectus are as under:

1. To invite the public to invest in the shares or debenture of a market.

2. To give a bureau of a condition on which the public is invited to invest in
shares and debentures.
3. To make a declaration that the directors of the company are liable for the
condition stated in the prospectus.

Nature of prospectus:

As said earlier that the prospectus is an invitation to the public to invest in the shares
or debentures of a company. But the term public is nowhere defined in the
Companies Act. So, far as it is related to the prospectus, the public is meant to be the
ordinary common people. Whether or not the invitation for investment is made to
the ‘public’ depends upon some situation, such as:

1. How many copies of the prospectus were printed?

2. To how many members of the public were the copies distributed.
3. How many members of the public accepted the copies?
4. Under what conditions did the member of the public accept the prospectus?

When the prospectus need to be issued

In the following situation, there is no need for a prospectus to be issued.

1. When the shares and debentures are to be allotted to the existing holders of
shares and debentures.
2. When the shares and debenture to be allotted are similar to the current
(already issued) shares and debentures that are being traded on a recognized
stock exchange.
3. When the allotment of shares and debenture is not permissible by law as in
the case of a private company.
4. When the invitation is to some such person who has a contract for
underwriting the shares and debentures of the company.

The golden rule in the prospectus

The prospectus is the basis of the contract between the company and the person’s
who invest in the company’s shares or debentures. The officers of the company have
knowledge of the company’s present status and its prospects in future or have the
means to acquire such knowledge. But the potential investor has no such knowledge,
nor the means to acquire it. It, therefore, becomes the duty of those who issue the
prospectus that they not only project the company’s image in the right perspective
but also makes sure that no vital information which could be of interest to the
potential investors in the company’s shares and debentures is left out from the
company’s prospectus. it, therefore, becomes important that the prospectus states
the basic important facts about the company with utmost honesty and good faith and
that no information that is important is twisted or partially presented. That is what it
refers to as the ‘golden rule for making a prospectus’.

In short, the following must be kept in mind when preparing the prospectus of a
company:

1. The prospectus must be an honest statement of the company’s profile; there

must be no misleading, ambiguous or erroneous reference to the company in
its prospectus.
2. Every important aspect of a contract with the company should be clarified.
3. The contents of the prospectus should conform to the provision of the
Companies Act.
4. The restrictions on the appointment of directors must be kept in mind.
5. The conditions of civil liability as laid down must strictly adhere to issue and
registration of prospectus or legal requirement regarding the issue of the
prospectus.

Legal requirement regarding the issue of prospectus:

The Companies Act has defined some legal requirements about the issue and
registration of a prospectus. The issue of the prospectus would be deemed to be legal
only if the requirements are met.

1. Issue after the incorporation: As a rule, the prospectus of a company can only
be issued after its incorporation. A prospectus issued by, or on behalf of a
company, or in relation to an intended company, shall be dated, and that date
shall be taken as the date of publication of the prospectus.
2. Registration of prospectus: it is mandatory to get the prospectus registered
with the Registrar of Companies before it is issued to the public. The
procedure of getting the prospectus registered is as under:

A. A copy of the prospectus, duly signed by every person who is named therein as
a director or a proposed director of the company must be filed with Registrar
of Companies before the prospectus is issued to the public.
B. The following document must be attached thereto:

i. Consent to the issue of the prospectus required by any person as an expert

confirming his written consent to the issue thereof, and that he has not
withdrawn his consent as aforesaid appears in the prospectus.
 ii. Copies of all contracts entered into with respect to the appointment of the
managing director, directors and other officers of the company must also be
filed with Registrar.
iii. If the auditor or accountant of the company has made any adjustments in the
company’s account, the said adjustments and the reasons thereof must be
filed with the documents.
iv. There must be a copy of the application which is to be filled for the issue of the
company’s shares and debentures attached with the prospectus.
v. The prospectus must have the written consent of all the persons who have
been named as auditors, solicitors, bankers, brokers, etc.

C. Every prospectus must have, on the face of it, a statement that:

i. A copy of the prospectus has been delivered to the Registrar for registration.
ii. Specifies that any documents required to be endorsed by this section have
been delivered to the Registrar.

D. A copy of the prospectus must be filed with the Registrar of Companies. The
Registrar should register the prospectus only when:

i. The prospectus is dated. The date shall, unless the contrary is proved, be taken
as the date of publication of the prospectus.
ii. The contents of prospectus conform to Section 56 of the Act.
iii. The consent of the expert, if it is necessary, has been obtained. But such expert
should not be engaged or interested in the formation or promotion of the
company.
iv. The written consent of the expert with respect to the issue of his statement
included in the prospectus has been obtained.

If the above provision of law has been fulfilled, or the necessary documents have not
been attached, the Registrar can refuse to register the company’s prospectus.

E. According to the Section 60(4), no prospectus shall be issued more than ninety
days after the date on which a copy thereof is delivered for registration. Of the
prospectus is so issued. It shall be deemed to be a prospectus a copy of which has not
been delivered to the Registrar.

If a prospectus issued in contravention of the above –stated provisions, then the

company and every person who knows a party to the issue of the prospectus shall be
punishable by a fine.
Contents of prospectus

The main contents of a prospectus are:

1. The main object of the company with the names, addresses, description and
occupation of signatories to the memorandum and the number of shares
subscribed for by them.
2. Number and classes of shares and the nature and extent of the interest of
holders thereof in the property and profits of the company.
3. The number of redeemable preference shares intended to be issued and the
date of redemption or where no date is fixed; the period of notice required for
redeeming the share sand proposed method of redemption.
4. The number of shares. If any, fixed by the Article as the qualification of a
director and the remuneration of the directors for the service.
5. The names, occupation and addresses of directors, managing director and
manager together with any provision in the Articles or a contract regarding
their appointment remuneration or compensation for loss of office.
6. The time of opening of the subscription list should be given in the prospectus.
7. The amount payable on application and allotment on each share should be
stated. If any prospectus is issued within two years, the details of the shares
subscribed for any allotted.
8. The particular about any option or preferential right to be given to any person
to subscribe for shares or debentures of the company.
9. The number of shares or debentures which within the two preceding year been
issued for a consideration other than cash.
10. Particulars about premium received on shares within two preceding years or
to be received.
11. The amount or rate of underwriting commission.
12. Preliminary expenses.
13. The names and addresses of auditors, if any, of the company.
14. Where the shares are of more than one class, the rights of voting and rights as
to capital and dividend attached to several classes of shares.
15. If any reserve or profits of the company have been capitalized, particulars of
capitalizations and particulars of the surplus arising from any revaluation of
the assets of the company.
16. A reasonable time and place at which copies of all accounts on which the
report of auditors is based may be inspected.