Comprehensive Study Notes: Business Law Dynamics (CAF 4) - Volume II

COMPANY: INTRODUCTION, TYPES AND REGISTRATION

• Nature of a Company:

  • A company is an artificial legal person separate from its owners (members/shareholders).

  • Doctrine of Corporate Personality: The law recognizes a company as a "person" with rights and obligations similar to natural individuals.

  • Characteristics:

    • Contractual Rights: Can enter contracts in its own name.

    • Separate Debts: Owners are not personally liable for company debts.

    • Asset Ownership: The company owns its assets, not the shareholders.

    • Perpetual Succession: Existence is not affected by changes in ownership, death, or bankruptcy of members.

    • Management: Managed by directors.

• Legal Definitions:

  • Company: Formed and registered under the Companies Act, 2017 or previous company laws.

  • Body Corporate: A broader term including companies incorporated outside Pakistan and statutory bodies, but excluding cooperative societies.

  • Foreign Company: Any body corporate incorporated outside Pakistan having a place of business/liaison office or conducting business in Pakistan.

• Types of Companies (Liability):

  • Company Limited by Shares: Member liability is limited to the unpaid amount on shares held.

  • Company Limited by Guarantee: Liability is limited to the amount members undertake to contribute during winding up. May or may not have share capital.

  • Unlimited Company: No limit on the liability of its members.

• Types of Companies (Public vs. Private):

  • Private Company: Restricted right to transfer shares, limited to $50$ members (excluding employees), and prohibits public invitations for shares/debentures.

  • Single Member Company (SMC): A private company with only one member/director.

  • Public Company: Any company that is not private. Includes listed and unlisted.

  • Public Sector Company: Controlled or $51\%$ owned by the Government or statutory bodies.

• Holding and Subsidiary Companies:

  • Subsidiary: A company where the holding company controls the board composition or controls more than $50\%$ of voting securities.

  • Wholly Owned Subsidiary: All shares are owned by the holding company/statutory body.

• Associations Not for Profit (Section 42):

  • Formed for promoting useful objects (art, science, religion, etc.).

  • Prohibits paying dividends to members; profits are applied to company objects.

  • Licensed by the SECP; can omit "Limited" from the name.

  • Revocation of License: SECP can revoke for non-compliance, acting against national interest, fraudulent activities, or if members fall below three.

• Registration Requirements:

  • Mandatory Registration: Any business with more than $20$ persons seeking gain must register as a company.

  • Exceptions: Societies under other laws, joint family businesses, or professional partnerships (e.g., lawyers/accountants) where limited liability is prohibited.

MEMORANDUM AND ARTICLES OF ASSOCIATION

• Memorandum of Association (MoA):

  • The company's constitution focusing on external stakeholders.

  • Essential Clauses:

    • Name Clause: Company name with required suffixes (e.g., "Limited").

    • Registered Office Clause: States the province/territory of the office.

    • Principal Line of Business Clause: The business where substantial assets are held or revenue is earned.

    • Liability Clause: States the extent of member liability.

    • Authorized Capital Clause: The maximum share capital the company can issue.

    • Undertaking Clause: Agreement by subscribers to form the company.

• Articles of Association (AoA):

  • Internal bye-laws governing company procedures.

  • Table A: A model set of articles for companies limited by shares.

  • Alteration: Requires a special resolution ($75\%$ majority). If alteration affects substantive rights of a class, the affected class must also approve by $75\%$ resolution.

• Name Reservation and Change:

  • Name can be reserved for up to $60$ days.

  • Prohibited names: Those identical to existing names, inappropriate, deceptive, or suggesting Government patronage without SECP approval.

  • Change of name: Requires special resolution and Registrar approval. Old name must be mentioned alongside new name for $90$ days.

DIRECTORS

• Eligibility:

  • Only natural persons can be directors.

  • Ineligibility: Minors, persons of unsound mind, undischarged insolvents, those convicted of moral turpitude, and for listed companies, loan defaulters or brokerage-related individuals.

  • Minimum Number: SMC ($1$), Private ($2$), Public Unlisted ($3$), Listed ($7$).

• Election and Term:

  • First directors: Named in incorporation documents; retired at the first AGM.

  • Subsequent directors: Elected for $3$ years.

  • Voting Calculation: $Number\ of\ Shares \times Number\ of\ Directors\ to\ be\ elected$.

• Powers and Duties:

  • Directors act collectively through board meetings.

  • Board Resolution Required: Issuing shares, borrowing money, investing funds, approving accounts, and declaring interim dividends.

  • Shareholder Approval Required: Selling/disposing of the company’s main undertaking or subsidiary.

  • Casual Vacancy: Filled by directors within $90$ days for listed companies.

• Removal of Directors:

  • By resolution in general meeting. For elected directors, they cannot be removed if votes against removal equal or exceed the minimum votes through which a director was elected in the last election.

CHIEF EXECUTIVE AND OTHER OFFICERS

• Chief Executive Officer (CEO):

  • Highest managerial position, subject to board control.

  • Term: First CEO until first AGM; subsequent up to $3$ years.

  • Removal: By $75\%$ of directors or a special resolution by shareholders.

  • Status: Deemed a director.

• Chairman: Listed companies must appoint a non-executive chairman within $14$ days of director elections.

• Company Secretary: Mandatory for public companies.

• Share Registrar: Mandatory for listed companies.

SHARE CAPITAL AND COMMENCEMENT OF BUSINESS

• Nature of Shares: Moveable property transferable under AoA. Must be fully paid upon allotment.

• Variation of Rights: Requires alteration of Articles via special resolution ($75\%$). Aggrieved members holding $10\%$ of that class can challenge in Court within $30$ days.

• Commencement of Business: Public companies must meet "Minimum Subscription," file a verified declaration, and (if not offering shares to public) file a Statement in Lieu of Prospectus before starting operations.

MORTGAGES AND CHARGES

• Registration: Specified mortgages/charges (immovable property, floating charges, book debts, etc.) must be registered with the Registrar within $30$ days of creation.

• Non-registration: The charge becomes void against a liquidator or creditor, though the underlying debt obligation remains.

• Satisfaction: Company must intimate Registrar within $30$ days of paying off the debt.

MEETINGS AND RESOLUTIONS

• Statutory Meeting: For new public companies with share capital. Held within $180$ days of commencement or $9$ months of incorporation.

• Annual General Meeting (AGM): Held within $16$ months of incorporation, then annually within $120$ days of financial year end.

• Extra-ordinary General Meeting (EGM): Called by directors or requisitionists ($10\%$ voting power).

• Quorum:

  • Listed: $10$ members representing $25\%$ voting power.

  • Public Unlisted/Private: $2$ members representing $25\%$ voting power.

• Resolutions:

  • Ordinary: Simple majority.

  • Special: $75\%$ majority with $21$ days' notice.

DISTRIBUTION OF PROFITS (DIVIDENDS)

• Basis: Must be paid only out of profits. Cannot be paid out of capital gains from asset sales (unless the business involves such sales) or unrealized gains on investment property.

• Approval: Proposed by directors; members can decrease but not increase the amount.

• Payment Time: Within $10$ working days of declaration.

• Manner: Listed companies must pay electronically to bank accounts.

• Withholding: CE is punishable with imprisonment/fines for default unless valid exceptions (operation of law, dispute, member default in providing docs) apply.

INVESTMENTS AND DISCLOSURE OF INTEREST

• Associated Companies: interconnected by $20\%$ common voting power, common control, or subsidiary relationship.

• Investment Rules: Investment in associated companies requires a special resolution. Interest rate must be higher than the investing company's borrowing cost.

• Disclosure of interest: Directors must disclose interest in any contract at the first board meeting where it is discussed. Interested directors cannot vote or count toward quorum.

ACCOUNTS AND ANNUAL RETURN

• Retention: Books of accounts must be kept for at least $10$ financial years.

• Financial Statements: Must give a "true and fair view." Must be audited unless a private company with capital < 1\ million\ PKR.

• Quarterly Accounts: For listed companies ($30$ days for Q1/Q3, $60$ days for Q2 - with cumulative half-year figures and auditor review).

• Annual Return: Filed with Registrar within $30$ days of AGM (Form A for share capital companies; Form B for others).

COMPANY: INTRODUCTION, TYPES AND REGISTRATION

• Nature of a Company:

  • A company is an artificial legal person separate from its owners (members/shareholders).

  • Doctrine of Corporate Personality: Established in Salomon v A Salomon & Co Ltd, the law treats the company as a distinct entity.

  • Lifting the Corporate Veil: Courts may ignore the separate legal entity status if the company is used for fraud, tax evasion, or to circumvent legal obligations.

  • Characteristics:

    • Contractual Rights: Can sue and be sued in its own name.

    • Separate Debts: Shareholders’ liability is restricted to their investment; personal assets are protected.

    • Asset Ownership: Assets are held in the company's name; shareholders only have a right to dividends and a share of surplus in winding up.

    • Perpetual Succession: The company continues to exist even if all members die or transfer shares until it is legally liquidated.

    • Management: Separation of ownership (shareholders) and control (directors).

• Legal Definitions:

  • Company: Formed and registered under the Companies Act, $2017$ or previous laws ($1913, 1984$).

  • Body Corporate: Includes companies incorporated outside Pakistan and statutory bodies established by specific laws. Notable exclusions: cooperative societies and any other entity specified by the Federal Government.

  • Foreign Company: A body corporate incorporated outside Pakistan that sets up a physical or virtual place of business or conducts business activities within Pakistan.

• Types of Companies (Liability):

  • Company Limited by Shares: Member liability is limited to the nominal value of shares taken by them. Once fully paid, no further liability exists.

  • Company Limited by Guarantee: Common for non-profits. Liability is a fixed amount specified in the Memorandum, payable only if the company is wound up while they are a member (or within one year after).

  • Unlimited Company: Members have joint and several liability for all debts, similar to a partnership.

• Types of Companies (Public vs. Private):

  • Private Company:

    • Restricted right to transfer shares.

    • Maximum $50$ members (joint holders count as one; employees/ex-employees are excluded).

    • Prohibits public invitations to subscribe for shares or debentures.

  • Single Member Company (SMC): Identifiable by the suffix "(SMC-Private) Limited." Requires a "Nominee Director" to take over in case of the sole member's death.

  • Public Company: Minimum $3$ members for unlisted and $7$ for listed. Can be listed on the Pakistan Stock Exchange (PSX) or remain unlisted.

  • Public Sector Company: Controlled by Government (Federal or Provincial) holding $51\%$ or more of voting power or the right to appoint a majority of directors.

• Holding and Subsidiary Companies:

  • Subsidiary: A company where the holding company controls the composition of the Board (right to appoint/remove majority) or holds more than $50\%$ of the total voting power.

  • Wholly Owned Subsidiary: An entity where all shares are owned by the holding company or its nominees.

• Associations Not for Profit (Section 42):

  • Licensed by SECP to promote commerce, art, science, education, charity, etc.

  • Profits must be reinvested; dividends are strictly prohibited.

  • Privileges: Can omit "Limited" or "(Pvt) Limited" from its name.

  • Revocation: If the license is revoked, the company must transfer its remaining assets to another Section $42$ company within $90$ days.

• Registration Requirements:

  • Mandatory Registration: Any association of more than $20$ persons carrying on business for gain must be registered.

  • Sanctions: An unregistered large association is an "Illegal Association," and members are personally liable and subject to fines.

MEMORANDUM AND ARTICLES OF ASSOCIATION

• Memorandum of Association (MoA):

  • Functions as the company's external charter. Any act outside the MoA is ultra vires (beyond powers) and void.

  • Clauses:

    • Name Clause: Ending with "Limited" or "(Private) Limited."

    • Registered Office: Defines the jurisdiction (e.g., Province of Punjab).

    • Principal Line of Business: Must match the company name. Any change requires SECP notification within $30$ days.

    • Liability Clause: Mandatory for limited companies.

    • Authorized Capital: The ceiling of shares that can be issued.

• Articles of Association (AoA):

  • Internal regulations. In case of conflict, the MoA prevails over the AoA.

  • Table A: If a limited company does not register its own articles, the regulations in Table A of the First Schedule of the Act apply automatically.

  • Binding Effect: The MoA and AoA bind the company and members as if they had signed a contract.

• Name Reservation:

  • Requested via the Registrar. Prohibited if "Inappropriate," "Deceptive," or suggests "Patronage" of a foreign government/Head of State without prior approval.

DIRECTORS

• Eligibility and Election:

  • Qualifications: Only natural persons. Must have a valid NTN/CUIN.

  • Cumulative Voting: Designed to protect minority shareholders. Each member has votes equal to ($Shares \times Seats$) and can give all votes to one candidate.

  • Term: Fixed at $3$ years. Directors remain in office until successors are elected.

• Duties:

  • Fiduciary Duties: Act in good faith to promote the company's success. Avoid conflicts of interest.

  • Duty of Care: Exercise reasonable care, skill, and diligence.

• Board Meetings:

  • Must meet at least once every quarter (for listed companies).

  • Quorum: For listed companies, it is $1/3$ of total directors or $4$, whichever is higher.

MEETINGS AND RESOLUTIONS

• Statutory Meeting:

  • Mandatory only for public companies. A "Statutory Report" must be sent to members $21$ days before the meeting, certified by at least $3$ directors (including CEO).

• Annual General Meeting (AGM):

  • First AGM: Within $16$ months of incorporation.

  • Subsequent: Once every calendar year, within $120$ days of the financial year close.

  • Business: Ordinary business includes adopting accounts, declaring dividends, electing directors, and appointing auditors.

• Quorum for General Meeting:

  • Listed: $10$ members physically present holding $25\%$ voting power.

  • Private (with share capital): $2$ members physically present holding $25\%$ voting power (unless AoA states otherwise).

• Proxy: A member can appoint another person (who may or may not be a member) to attend and vote on their behalf. Proxy forms must be submitted $48$ hours before the meeting.

DISTRIBUTION OF PROFITS (DIVIDENDS)

• Restrictions: Dividends cannot be paid out of capital. They must be paid in cash (except for bonus shares).

• Types:

  • Interim: Declared by directors between two AGMs.

  • Final: Recommended by directors and approved by shareholders in the AGM.

• Unpaid Dividend Account: If a dividend is not claimed within $30$ days, it must be placed in a separate account and eventually transferred to the Federal Government (after $3$ years of non-claim).

ACCOUNTS AND AUDIT

• Books of Accounts: Must be kept at the Registered Office. Directors have the right to inspect them during business hours.

• Financial Reporting: Must comply with International Financial Reporting Standards (IFRS) as notified by the SECP.

• Audit: Every company must appoint an auditor. For public companies and large private companies ($Paid-up Capital \geq 3 million PKR$), the auditor must be a Chartered Accountant.