Company

Law

Q 1. What are the basic characteristics of

company?

Following are the characteristics of

company.

1. Legal
Personality

Company has legal personality because the law has granted company status of

separate legal personality. ​Separate ​means it has separate legal personality from

that of its members, shareholders, investors. Because the law has granted this
entity

a separate legal
personality.

Whenever an entity is interested to register itself as a company, the entity would

fulfil certain legal conditions or certain legal formalities. And when that entity

would fulfil those legal formalities the law would grant that entity the status of

legal person ​and that legal person would be known as company. A company

would get the status of legal person at the time of its registration. When the

company would obtain the certificate of registration it would be considered as a

complete legal person. That legal person can do a business like a natural person
but
cannot do certain things like natural person for example contract of marriage
etc.

In law there are two kinds of persons. One is natural person and second one is
legal

person also known as artificial

person.

Principle of Separate Legal

Personality

Principle of separate legal personality was established in 18​th ​century. The most

significant case in the history of company law. The principle of separate legal

personality was fully established in this case that is ​Salomon ​vs ​Salomon and

Company
LTD​.
Case
Law

Salomon was a shoe manufacturer. He was doing a business as a sole trader. He

decided to convert his sole trader ship business into a company. He for this
purpose

register a company. At that time in company law it was a requirement to register a

company that you must had at least seven shareholders. Therefore, to fulfill this

legal requirement Salomon involve his family members to be the part of this

company and to become the shareholder of the

company.
Salomon gave 1 share to each of his family member. The Salomon register a

company and sold his sole trader ship business to the company. Salomon sold that

business to the company for 38000 ponds. For payment of this amount the

company has issued to Salomon the 20000 shares 1 pond per share. 20 thousand

ponds the company paid to Salomon in the form of shares. 8 thousand ponds the

company paid to Salomon in form of cash. The remaining 10 thousand ponds

Salomon gave the loan to the company. From 20 thousand shares Salomon gave 1

share to each of his family member and kept all the remaining shares in his pocket

and became the majority shareholder of that

company.

The company started the business and Salomon was the majority shareholder. All

his family members were also the shareholders. Salomon was also the director of

the company. In coming days, the company also obtain loan from other creditors
as

well. (The loan is of two kinds. Secured and unsecured loan. If there is security

against loan that is secured and if there is no such security against that loan that

would be termed as unsecured loan). After some time, the company face

insolvency or bankruptcy. The creditors ask the company to pay back the loan.
The

company said that we would pay back the loan of Salomon first and then we would

pay back the loan of other creditors because at the time of insolvency the secured
loan always paid before the unsecured loan. Salomon was a secured creditor and
all other creditors were
unsecured.

The unsecured creditors said to the company that the company is nothing but the

Salomon himself because he is the majority shareholder, he is the director and he

has tried to use this medium of business against his financial interest and declared

himself as secured creditor while all other were unsecured creditors. Therefore, the

interest of unsecured should be protected because the Salomon is nothing but the

company himself therefore the payment of loan of Salomon should be paid after

the payment to unsecured

creditors.

Judgme
nt

The company refused to accept, and the unsecured creditors went to court. The

court of first instance at England after looking into mater decided in favor of

unsecured creditors that the Salomon is nothing but the company himself and

therefore the claims of unsecured creditors would be satisfied before the

Salomon.

The Salomon went to the court of appeal against the decision of the court of first

instance. The court of appeal after looking into the matter again decided in the

favor of unsecured creditors that their claims should be satisfied before the claims

of Salomon. Against that decision Salomon further moved to House of Lords. And

House of Lords finally after looking into the matter decided in favor of Salomon
by saying that the day company was registered the company became a separate

legal person from that of its shareholders form that of its members. And now the

company has obtained loan from its shareholder and that is secured loan. All other

loans and creditors are unsecured. Therefore company from the time of its

registration is a separate legal person from that of its member and can validly enter

into a contract with any of its shareholder and the law would protect that contract
because the company is a separate legal person from its member that no one can

say that the Salomon is the Majority shareholder as well as the director of the

company that​’​s why his claims should not be satisfied before the unsecured

creditors. He is a separate person and company is itself separate legal person it has

nothing to do with Salomon. Company can enter into any contract with Salomon

and that contract would completely protected by

law.

From this case it was fully established that after the registration when the law

would grant company a separate legal personality a company would become a

separate legal
personality.

2. Limited
Liability

This is a second important characteristic of a company. Liability is limited when

you are liable up to the extend of your investment. Liability would be unlimited

when you are personally liable like in partnership. When a legal person does a
business at his own name then that person would be liable for his acts like a

company and the people those invested they are not personally liable but the

company itself personally liable because their personalities are separate from the

personality of a company. They are only liable up to the extent of their

investment.

For instance, there is a company ABC private limited company. For a company it

is compulsory to write in its name a word limited. This word tell that the liability

of the investors is limited up to the extent of their investment. If the word limited
is

not written in the title name of the company then it means it is not a company but a

firm or organization or
partnership.

3. Perpetual
Succession

Perpetual succession means people may come and leave the

company,
but the company would stay there. When the company is brought into existence

company got the birth and the company would stay alive as long as the company is

interested to stay alive. No one can kill the company by leaving the company and

no one can kill the company by come in the company. If you are the shareholder of

a company, you can leave the company after 10 years or when you want but

company would stay there. The arrival or departure of the shareholders would not

make any impact on the existence of the company because company is a person
itself. Company would remain there unless it is dissolved by following the legal

procedure
.

4. Common
Seal

The common seal means the stamp of the company. For instance, the ABC private

limited enters into a contract with XYZ private limited that ABC is going to by

such material for one million rupees from XYZ. They enter into a contract and

finally the contract is finalized and there would be a stamp of the company the seal

of the company ABC Pvt Ltd. Company stamp the transactions with its name that

the ABC Pvt Ltd enters in this

transaction.

These four characteristics are for both private and public

companies.

5. Separation of Ownership and

Control

In public companies​’ ​ownership is separated from the control. It means the people

those own the company infect do not control the company. For instance, if you are

shareholder in the company and you have bought certain shares in the company.

When you have bought the shares in the company you would not go and run the

company by yourself even though you are a shareholder, but company would be
run by its directors appointed by shareholders. When the company is own by
someone else and control by someone else that is known as separation of

ownership and
control.

6. Transferability of
Shares

Transferability of the shares is also a characteristic of the company that is relevant

to the public company. You have bought certain shares from stock exchange and

you can sell those shares in stock exchange the very next day if you are interested

to do. No one can stop you from doing that. This a characteristic known as

transferability of shares. You can transfer your shares from one hand to another

hand without the permission of the company whose shares you have bought. This

is only possible in case of public

companies.

Q.2 What are the kinds of

company?

There are two kinds of

companies.

a) Companies by Special Act of

Parliament

These are the companies established by the special act of the parliament. These

companies are managed by rules and regulations provided in those acts. The most
common example of these companies are PIA, Pakistan Railway. These companies

are generally known as

corporation.

b) Companies by General Act of

Parliament

These are the second kind of companies which are established by the general act of

parliament. There are different general acts under which the companies are

registered. In our jurisdiction that general act is known as companies act

2017.

The companies which are registered by the general act (known as companies act

2017) are of ​two types​. Limited and unlimited

companies.
Unlimited
Companies

Unlimited companies are those in which the liability would be unlimited. In other

words, the personal liability. These types of companies are not very
common.

Limited
Companies

Limited companies are those in which liability would be limited. There are two

further kinds of companies which are limited by liability. Companies limited by

shares and companies limited by

guarantee.
a) Companies Limited by
Guarantee

Companies limited by guarantee are those companies where the people those who

are the directors or owners of the company they provide in the constitution of the

company that we guarantee to contribute such and such amount at the time of the

dissolution of the company. These types of companies are known as companies

limited by
guarantee.

Companies limited by guarantee are of two types. It can be for profit or not for

profit
.

b) Companies Limited by
Shares

Companies limited by shares are those in which the liability would be limited up to

the number of shares that you have purchased in the company. You would be
liable

to pay the amount that you have purchased the shares. If the company have

suffered the loss beyond it then you are not liable because your liability is not

personal
.

Companies limited by shares are of three types. Single member company, private

company and public company. There is no need for second person. The single
member company was introduced in Pakistan in 2002. Before 2002 there was no

such kind of
company.

1. Single member
company

Single member company is a kind of company in which one person can establish a

company. There is no need for second person. It is also considered as private

company we can say that it is further subclause of private

company.

2. Private
Companies

Section 2(49) of Companies act defines private company ​―private company

means a company which, by its

articles-

(a) restricts the right to transfer its

shares;

(b) limits the number of its members to fifty not including persons who are in the

employment of the company;

and

(c) prohibits any invitation to the public to subscribe for the shares, if any, or

debentures or redeemable capital of the

company.
For private companies we need minimum two persons or two shareholders. Private

companies are more like partnership. In private companies all the shareholders

most of the time know one another very well because these companies are mostly

family companies. In private companies​’ ​maximum there can be 50 shareholders.

3. Public
Companies

Section 2(52) defines​―public company means a company which is not a

private

company
.

There is no limit to the number of shareholders in public companies. In public

companies you may transfer your shares to anyone else without the consent of any
shareholder as well as without the consent of the company or without informing

the company. For instance, you have bought the shares in stock

exchange now you can transfer your shares to anyone on the stock exchange. You

can invite the public to buy shares in your company but with one condition that is

registration of company. Your company must be registered and listed in the stock

exchange
.

Q.3 What is the Registration of

Company?
Registration of the company has three
stages.

1. Promotion

2. Registration/ Incorporation

3. Commencement of business

1.
Promotion

Promotion is a stage in company law before the registration of a company. It

means to promote something. Promotion is not a legal term it is a kind of business

term. Promotion of the company is a comprehensive term meaning the process by

which a company is brought into existence as a corporate body. Promotion begin

when someone gives serious consideration to the formulation of the ideas upon

which the business is based. When the company is organized and ready for

business the promotion comes to an end. Anyone who is involved in the stage of

promotion of the company is called ​promoter​. Any person can be the promoter,
or

any company can be the promoter of any other company. Promoter is a person who

originates a scheme for the formation of the company. Promotions starts when an
idea comes to your mind that you should start such and such business in the

medium of
company.

Function of
Promoter

At the stage of promotion, the function of the promoter is to register the company.

When you consider idea that you should start such and such business then you

collect all the required information for starting that business. Then as a promoter

you arrange the required capital and you would prepare the required documents for

registration of the company. Then you would submit all these documents to the

registrar office for registration. This is known as stage of promotion and when the

company would be registered the stage of promotion would be comes to an

end.

Legal Nature of the

Promoters

Promoters are not the shareholders or directors or managers or agents because

there is no company in existence at this stage. Promoters are in a fiduciary

relationship with the proposed company at the stage of promotion. This

relationship at the stage of promotion is known as relationship of trust. They would

be liable if they do anything which is against the interest of the proposed

company

Liability of
Promoters

When the company is at the stage of promotion the company might need entering

into different contracts for the benefit of the company or in the interest of the

company. At the stage of promotion, the promoters may enter into different
contracts that might be in the interest of the proposed company when the company

is not registered yet and they would be liable for those contracts. These contracts

are known as ​preliminary or pre-incorporation contracts​. For instance, A,

B

and C are the promoters and they enter into a contract with M to buy leather from

M and M has sold the leather to A, B and C in February. A, B and C obtained the
leather and promised to pay M in June. In March the company is registered but the

company couldn​’​t prove to be successful and was closed before June. In this case

the promoters would be liable because they enter into those contracts in their

personal capacity. We know that the company is not in existence at the stage of

promotion therefore the company cannot be liable for those contracts. Company

would be liable for those contracts only when company would re-enter into those

contracts
.

2. Registration or incorporation of the

Company

At the stage of promotion, the function of the promoter is to register the company.

The promoters need to submit certain documents with the registrar office for the

registration of the company. The registrar office is located at the (SECP) Securities

and Exchange Commission of Pakistan. The companies are required to be

registered at SECP. Documents which are required to be submit with the registrar

office at the time of registration are the ​Constitutional documents ​of the
company. There are two main constitutional documents of the company. One is

Memorandum of Association and second one is Article of Association. They both

have a different nature and different

functions.

Requiremen
ts

Promoters need to submit the statutory declaration in which the statement of

promoter is written that we as promoters have fulfilled all the legal formalities for

the registration of the company. Another requirement is the registration fee that

you need to deposit. These requirements are for both private as well as public

companies.
For public companies​, the pubic companies need to provide with the registrar
the

consent of directors. The persons who are interested to act as director of this future

company they need to provide their consent to the

registrar.

Another condition for the public company is the submission of the prospectus to

the registrar. The promoters need to submit a document known as ​prospectus​.

Prospectus is a document that has all the details regarding the financial position

and the future plans of the company. This document is required to be submitted

with the registrar to tell the general public that what this company is going to do in

future. The public companies who are not interested to obtain the capital from the
general public they would submit a ​statement in lieu of prospectus​. These
are

documents that the promoters need to submit at the time of registration with the

office of registrar for company to get

register.

After submission of these documents the registrar would examine all the

documents if the documents are completed and all the legal formalities have been

fulfilled then the registrar would accept those documents and would issue a

certificate of incorporation​. This certificate of incorporation is just like the

birth

certificate of the company. The name of the company and the date on which this

certificate is issued is mentioned on this certificate. This certificate of

incorporation is the conclusive evidence of the incorporation of the company.

After

obtaining the certificate of incorporation no one can challenge the existence of the

company. By obtaining the certificate of incorporation the company is declared as

a registered company having separate legal personality of its own. This is called

registration of the
company.

3. Commencement of
Business
After obtaining the certificate of incorporation a private company may start the

business any time. But the public company needs to obtain another certificate
known as ​certificate of commencement ​of business. This certificate is
required

only for the public companies. For instance, they need to provide how much
capital

they have or if not then how would they arrange that

capital.

There might be need of entering into different contracts after obtaining the

certificate of incorporation but before obtaining the certificate of commencement.

These contracts are known as ​provisional contracts​. These contracts are not

binding on the company if the company would not obtain the certificate of

commencement of business. If the company would obtain the certificate of

commencement of business, then these contracts would automatically be binding

upon the company. There would be no need of further ratification and

acknowledgement. After obtaining the certificate of commencement of business a

public company can start the

business.

Q.4 What are the Constitutional Documents of the

Company?

There are two main documents known as the constitutional documents of the

company. We need to submit these two documents with the registrar office. These

are Memorandum of Association (MOA) and Articles of Association (AOA). Both

of these two constitutional documents are completely different from one another
because their function is
different.

Basic difference of these two documents is that the memorandum of association

provides certain significant information about the external world of the company

whereas the article of association regulates the relationship of the internal

world.

Memorandum of
Association
Memorandum of association that provides certain significant information about the

external world of the company. It contains Six

Clauses.

1. The Name
Clause

First clause the MOA is the name clause. Name clause of the MOA provides

the official name of the company. Except in a few rare cases, the last word

of the name will be ​“​Limited (Ltd)​” ​or in the case of a private company

“​(Pvt) Limited​”​.

2. Registered office
Clause

Second clause of the MOA is the registered office clause. It provides where

the registered office or the head office of the company is situated. Wherever

the registered office of the company is situated generally company is

registered in that
 jurisdiction.

3. The Object
Clause

Third clause of the MOA is the object clause. In this clause the object of the

company is provided. It governs the relationship between the company and

the outside world. It defines the purpose which the company is formed to

achieve or the kind of activities or business which it is to carry on. It

provides what the company can do. There are two theories about this
clause.

According the first theory a company can do only those acts which is

provided in its object clause. If the company would do anything which is not

provided in its object clause that would be considered as ​ultra vires​.

According to the second theory a company can do whatever company wants

as long as it is legal or specifically not prohibited in its object clause. In

companies act 2017 sec 26 the second theory was adopted in which it is

provided that now the companies would only mention their principle line of

the business and they can do anything which is legal, or they are in need of
in that business unless or until it is specifically prohibited. Principle line of

the Business is generally provided in the start of the object

clause.

4. Liability
Clause

Forth clause of the MOA is the liability clause. Liability clause simply

provides the liability of the company would be limited to extent of their

 shares.

5. Capital
Clause

Fifth clause of MOA is the capital clause. It provides what would be the

capital of the company. Capital of the company is money or assets available

for investment. A company cannot invest the capital more than that which is

provided in the capital clause. For instance, the capital of the company is

500,000 Rs divided into 500 shares of 1000 Rs each. Company cannot do

the

business which is beyond 500,000

Rs.

6. Association
Clause

This is the last clause of MOA. This clause states that the persons

subscribing their signatures at the end of the Memorandum are desirous of

forming themselves into an association in pursuance of the

Memorandum.

Memorandum of Association must be signed by seven or more persons in

the case of a public company and by two or more persons in the case of a

private company. Signatures shall be attested by

witnesses.

Alteration of the Memorandum of

Association
If there would be any need of change in the clauses of MOA for instance, if the

company is interested to increase its capital or to change its principle line of

business for this purpose company is interested to alter the MOA that is known the

alteration to the memorandum of association. The company needs to pass the

special resolution ​for making any kind of alteration in the

MOA.
There are two types of resolution in the company law. Ordinary resolution and

special
resolution.

1. Ordinary
Resolution

Ordinary resolution is a resolution which is passed by the simple majority

that is 51%.

2. Special
Resolution

Special resolution is a resolution that is passed by the special majority that is

3/4 of the members of the company. 75% of the members can pass the

special
resolution.

After passing the special resolution company need to inform the SECP by a

responsible officer not later than sixty days from the date on which the

special resolution was passed for alteration that. After that SECP would

recommend the change and would alter the MOA accordingly only then
 alteration would be considered as valid
alteration.

Articles of
Association

Legal
nature

MOA and AOA both are constitutional documents of the company, but the MOA

always has some kind of preference over AOA. If there is any conflict between the

provisions of MOA and the provisions of AOA, the provisions of MOA would

prevail. AOA provides the regulations to control the internal management of the

company
.

Registration of Articles ​(sec

36)

For registration purposes you need to register a company by providing the

documents known as MOA and AOA signed by the members whose names are
mentioned in the association clause of the MOA and the AOA must provide the

regulations of the
company.

{36(2)} ​Articles of association of a company limited by shares may adopt all or

any

of the regulations contained in Table A in the First Schedule to this Act. It

means at the time of registration if you would not provide your own AOA of the

company then this table A would be applicable which is the ​default articles of

association ​of the company. If you have provided your own articles of
association

but those articles of association don​’​t deal with any of the matter that is provided in

the table A then regarding that matter table A of first schedule will be applicable.

Table A provides certain regulations for the management of internal matters of the

company
.

Sec 2(49) ​Private company means a company which, by its article, restricts the

right to transfer its shares, limit the number of its member to 50 and prohibit any

invitation to the public to subscribe for shares. These are restriction for private

companies limited by shares and this restriction would automatically be added in

the AOA of a company unless specifically excluded. These restrictions would be

in

addition to the table

A.

Alteration to the Articles of

Association

For the alteration of AOA firstly a company need to pass a special resolution. At

least 75% of the members of the company should be in favor of that change. But

further there are restrictions which are imposed for

alteration.
 ➢ ​Alteration to the Articles of Association must not be in against the

provisions of the company​’s​ ordinance.

➢ ​Alteration must not attempt to legalize something which is illegal.

(gambling).
➢ ​Alteration must not operate against the substantive rights of minority

shareholders
.

➢ ​Alteration must not increase the liability of the existing

shareholders.

➢ ​Alteration must not amount to the breach of contract with an

outsider.

➢ ​No alteration can be made in bad faith.

If the alteration is made special resolution and it has no harm with in the scope of

any of the restriction, then that alteration must be informed to the registrar of the

companies and he would confirm that alteration. if there would be no objection he

would endorse that alteration and AOA would be altered accordingly. Those

alteration would also be added to the official copy of the

AOA.